t c memo united_states tax_court city wide transit inc petitioner v commissioner of internal revenue respondent docket no 406-09l filed date gary d hoppe and herbert c kantor for petitioner marc l caine for respondent memorandum opinion vasquez judge pursuant to sec_6330 petitioner seeks review of respondent’s determination to proceed with a proposed levy to collect its outstanding employment_tax unless otherwise indicated all section references are to the internal_revenue_code code and all rule references are to the tax_court rules_of_practice and procedure liabilities for the taxable periods ending date date march june and date and march and date collectively the periods at issue the issue is whether the statute_of_limitations barred the assessments of petitioner’s additional employment_taxes for the periods at issue background the parties submitted this case fully stipulated under rule the stipulations of facts and the attached exhibits are incorporated herein by this reference petitioner’s principal_place_of_business was in new york at the time the petition was filed petitioner transports handicapped children throughout new york city on school buses operating under a contract with the new york city office of pupil transportation ray fouche ms fouche is petitioner’s president and sole shareholder ms fouche hired brand’s paycheck inc the payroll company to prepare petitioner’s form sec_941 employer’s quarterly federal tax_return for all relevant periods employers are liable for deducting and withholding from their employees’ salaries or wages the employees’ shares of federal income and federal_insurance_contributions_act fica_taxes sec_3102 sec_3402 sec_3403 the withheld federal income and fica_taxes are reported quarterly on form_941 sec_31_6011_a_-1 sec_31_6011_a_-4 employment_tax regs during the relevant periods employers also reported on form continued in or ms fouche on behalf of petitioner retained manzoor beg mr beg an accountant for the sole purpose of negotiating with respondent a reduction in petitioner’s outstanding employment_tax liabilities for periods unrelated to those at issue as requested by mr beg ms fouche signed a blank power_of_attorney form and gave it to him ms fouche never requested that mr beg prepare any of petitioner’s form sec_941 mr beg’s false quarterly return scheme a form sec_941 for the original covered periods the payroll company prepared petitioner’s returns for the periods ending march june and date and march and date original covered periods and continued advance earned_income_credit eic payments made to employees eligible individuals could elect to receive part of the eic in their regular pay by filing with their employers form_w-5 earned_income_credit advance_payment certificate employers reduced their employment_tax owed by the amount of advance eic payments made to employees see sec_3507 mr beg was not a certified_public_accountant although he told ms fouche that he was in addition to petitioner ms fouche owned a number of other bus companies that had outstanding employment_tax liabilities for periods unrelated to those at issue ms fouche hired mr beg to negotiate with the internal_revenue_service irs a reduction in the unrelated outstanding employment_tax liabilities of all the companies the power_of_attorney form is not part of the record but we assume it was a form_2848 power_of_attorney and declaration of representative delivered them to ms fouche ms fouche signed the returns on petitioner’s behalf the returns the payroll company prepared did not claim advance earned_income_credit eic payments made to employees and the parties agree that the returns prepared by the payroll company and signed by ms fouche were not false or fraudulent as part of mr beg’s scheme he convinced ms fouche that he had reached an agreement with the irs that would allow her to pay off petitioner’s unrelated employment_tax liabilities and as a result he needed to deliver petitioner’s returns as they came due and certified checks made out to the irs to the revenue_officer with whom he was negotiating as requested ms fouche gave mr beg the returns for the original periods that the payroll company had prepared and she had signed as well as certified checks made out to the irs in the amounts of petitioner’s employment_tax liabilities determined by the payroll company so that he could deliver them to the revenue_officer mr beg never gave the revenue_officer the checks ms fouche had made out to the irs or the form sec_941 for the original covered periods that the payroll company had prepared and ms fouche had signed instead mr beg altered the checks ms fouche had made payable to the irs by changing the payee to himalayan hanoi craft the name on a bank account mr beg held at habib american bank himalayan account and cashed or deposited the checks for his own use then to cover up his embezzlement mr beg prepared signed and filed different form sec_941 for the original covered periods on which he falsely claimed that petitioner had made advance eic payments to employees the claimed advance eic payments made to employees reduced petitioner’s employment_tax liability for each period and mr beg paid the irs the reduced amounts using checks from his himalayan account during the ms fouche had no knowledge of mr beg’s himalayan account mr beg claimed false advance eic payments made to employees on petitioner’s form sec_941 for the original covered periods in the following amounts dollar_figure for the period ending date received by the irs on date dollar_figure for the period ending date received on date dollar_figure for the period ending date received on date dollar_figure for the period ending date received on date and dollar_figure for the period ending date received on date for example petitioner’s form_941 for the period ending date as prepared by the payroll company reported that petitioner owed dollar_figure in employment_tax for that quarter petitioner issued the irs a certified check for that amount and gave the form_941 and check to mr beg the return that mr beg prepared and filed for the period ending date reported that petitioner had made advance eic payments of dollar_figure during the quarter and showed a total balance due of dollar_figure ie petitioner’s correct_tax liability of dollar_figure - mr beg’s falsely claimed advance eic payments of dollar_figure mr beg issued a check to the irs for dollar_figure and altered the certified check petitioner had given him by changing the payee from the irs to himalayan hanoi craft the results are similar for the other original covered periods although the account transcripts for those periods do not show that mr beg paid the irs the exact amount of the remaining reduced liability as he did for the period ending date course of his scheme mr beg converted more than dollar_figure of petitioner’s intended payments to the irs into his own funds by altering the checks petitioner had made out to the irs the parties agree that the form sec_941 mr beg prepared for the original covered periods are false or fraudulent_returns within the meaning of sec_6501 respondent does not allege that ms fouche petitioner or the payroll company intended to evade tax or willfully attempted to defeat or evade tax respondent does allege however that mr beg intended to evade tax within the meaning of sec_6501 and or willfully attempted to defeat or evade taxes within the meaning of sec_6501 when he filed fraudulent form sec_941 for the original covered periods petitioner disagrees b mr beg filed amended form sec_941 for the periods ending date and date the payroll company prepared petitioner’s form sec_941 for the periods ending date and date and ms generally the commissioner must assess a tax within years after the return is filed sec_6501 an exception to the general_rule is found in sec_6501 in the case of a false_or_fraudulent_return with the intent to evade tax the tax may be assessed or a proceeding in court for collection of such tax may be begun without assessment at any time sec_6501 provides in case of a willful attempt in any manner to defeat or evade tax imposed by this title other than tax imposed by subtitle a or b the tax may be assessed or a proceeding in court for the collection of such tax may be begun without assessment at any time while sec_6501 applies to any_tax imposed under the code sec_6501 applies only to employment_and_excise_taxes fouche filed them without including payments of the balances due on date and date respectivelydollar_figure the returns the payroll company prepared did not claim advance eic payments made to employees and the parties agree that these returns were not false or fraudulent unbeknownst to ms fouche mr beg prepared signed and filed amended form sec_941 for the periods ending date and date on the amended_return for the period ending date mr beg claimed false advance eic payments made to employees of dollar_figure the irs applied a refundable_credit to petitioner’s account in the amount of the false advance eic payments and this reduced its date employment_tax liability to dollar_figure petitioner’s account transcript shows that shortly after mr beg filed the amended_return two payments totaling dollar_figure were made at least one of which the record shows was in the form of a check from mr beg’s himalayan account the irs applied overpayment credits from petitioner’ sec_11 respondent assessed tax of dollar_figure for the period ending date and tax of dollar_figure for the period ending date mr beg filed the amended_return for the period ending date before filing the amended_return for the period ending date periods unrelated to those at issue to cover the remainder of the date period’s balancedollar_figure on the amended_return for the period ending date mr beg claimed false advance eic payments made to employees of dollar_figure the false advance eic payments reduced petitioner’s balance due for the period from dollar_figure to dollar_figure and mr beg paid the reduced balance by check from his himalayan accountdollar_figure it is not clear whether or how mr beg benefited from the filing of the amended returns or whether he filed the amended returns with the intention of covering up the fraudulent_returns that he had previously filed for the periods ending march june and december dollar_figure mr beg’s criminal case on date the united_states filed a complaint against mr beg alleging among other crimes that he knowingly and intentionally made uttered and possessed forged securities of petitioner and the other bus companies in violation the irs later received from petitioner the full amount of its date employment_tax liability the irs later received from petitioner the full amount of its date employment_tax liability mr beg filed the amended_return for the period ending date after he had filed the fraudulent return for the period ending date and he filed the amended_return for the period ending date after he had filed the fraudulent_returns for the periods ending june and date of u s c sec_513 knowingly deposited into his himalayan account approximately dollar_figure derived from the making and possessing of forged securities of petitioner and the other bus companies in violation of u s c sec a and b money laundering signed false tax returns in violation of sec_7206 and prepared and presented false tax returns in violation of sec_7206dollar_figure in the complaint the united_states by sworn statement of a special_agent of respondent’s criminal_investigation_division alleged that mr beg knowingly and willfully prepared and subscribed to false form sec_941 in petitioner’s name fraudulently claimed that petitioner’s employees had received advance eic payments forged checks drawn on petitioner’s account and received from ms fouche checks made payable to the irs which he later altered to appear as if they were made payable to himalayan hanoi craft ms fouche had no knowledge of mr beg’s criminal activity before his arrest on date mr beg pleaded guilty to charges of money laundering knowingly and willfully signing false tax returns and knowingly and willfully preparing and presenting false tax returns in he passed away before being sentenced for his crimes the violation of sec_7206 relates to mr beg’s fraudulent preparation of form sec_1040 u s individual_income_tax_return for taxpayers unrelated to petitioner petitioner’s civil examination on or about date respondent on the basis of the guilty plea entered in mr beg’s criminal trial commenced a civil examination of petitioner’s form sec_941 for the periods at issue the examination concerned the recovery_of petitioner’s employment_taxes that respondent had failed to collect because of mr beg’s filing of the fraudulent form sec_941 on date laurie greenberg ms greenberg a certified_public_accountant representing petitioner during the examination signed form sec_2504 agreement to assessment and collection of additional tax and acceptance of overassessment consenting to the assessment and collection of additional employment_taxes for the periods at issuedollar_figure pursuant to the signed form sec_2504 respondent assessed additional taxes as follows taxable_period ending additional tax_assessment date date dollar_figure date big_number date big_number date big_number date big_number date big_number date big_number date date date date date date date by date the 3-year period of limitations on assessment and collection under sec_6501 had expired for all periods at issue thus ms greenberg signed the form sec_2504 more than years after the limitations periods under sec_6501 had expired respondent did not determine a fraud_penalty pursuant to sec_6663 against petitioner the parties agree that respondent assessed the additional employment_taxes for the periods at issue more than years after mr beg filed petitioner’s form sec_941 petitioner’s challenge to the timeliness of the assessments on or about date ms greenberg informed respondent that petitioner believed the assessments were made outside the limitations periods in early date respondent mailed to petitioner a final notice_of_intent_to_levy and notice of your right to a hearing concerning petitioner’s unpaid additional tax on date respondent received petitioner’s form request for a collection_due_process_hearing cdp request petitioner alleged the following in its cdp request the irs relied on the fraud_penalty to assess the taxes however we eliminated not only the fraud_penalty but all penalties therefore the assessment should not stand initially the irs determined that petitioner was liable for failure to timely file additions to tax under sec_6651 failure to timely pay additions to tax under sec_6651 failure to make deposit of taxes penalties under sec_6656 and civil_fraud penalties under sec_6663 however after investigation the irs concluded that petitioner’s reliance on mr beg to file the form sec_941 and pay the taxes owed constituted reasonable_cause and therefore it was not liable for the additions to tax and failure to deposit penalties the irs also concluded that neither petitioner nor ms fouche had had any role in the claiming of the false advance eics and therefore the civil_fraud penalties should not be determined against petitioner they assessed over years after the return was filed the statute was only for years on date ms greenberg met with gerard ohrtman mr ohrtman a settlement officer with the irs appeals_office appeals to discuss the assessments against petitioner and the issue petitioner raised in the cdp request mr ohrtman explained that in his opinion the assessments were valid on date appeals issued petitioner a notice_of_determination sustaining the proposed levy petitioner then filed a petition with the court discussion i standard of review sec_6330 provides that no levy may be made on any property of a taxpayer unless the secretary has first notified the taxpayer in writing of his right to a hearing if the taxpayer properly requests a hearing under sec_6330 the taxpayer is entitled to a hearing before an impartial officer of appeals cdp hearing sec_6330 at the cdp hearing the taxpayer may challenge the underlying tax_liability only if the taxpayer did not receive a statutory_notice_of_deficiency or otherwise have a prior opportunity to dispute the tax_liability sec_6330 a taxpayer’s claim that the commissioner is time barred from collecting its federal tax_liability constitutes a challenge to the underlying tax_liability 117_tc_127 this court has jurisdiction to review appeals’ determination under sec_6330 where the taxpayer’s underlying liability was properly at issue we review appeals’ determination de novo 114_tc_604 because petitioner did not receive a statutory_notice_of_deficiency or otherwise have a prior opportunity to dispute the tax_liabilities the underlying tax_liabilities were properly at issue at the cdp hearing accordingly we will review appeals’ determination that the statute_of_limitations remained open de novo ii statute_of_limitations the commissioner generally must assess any_tax imposed by the code within a 3-year period after a taxpayer files his or her return sec_6501 one exception to this general_rule exists however for the filing of a false_or_fraudulent_return with the intent to evade tax sec_6501dollar_figure another exception exists for a willful attempt in any manner to defeat or respondent does not argue and nothing in the record indicates that petitioner had the opportunity to challenge its employment_tax liabilities at any time during respondent’s examination of petitioner’s form sec_941 or before ms greenberg’s signing the form sec_2504 see supra note evade taxdollar_figure sec_6501 in either of those situations the commissioner may assess the tax or commence a proceeding in court for the collection of the tax at any time sec_6501 in 128_tc_37 we held that for purposes of sec_6501 the limitations_period remains open indefinitely regardless of whether it was the taxpayer or the taxpayer’s tax_return_preparer who had the intent to evade tax sec_6501 however was not at issue in allen respondent relying on allen argues that the limitations periods remain open for the original covered periods because petitioner’s returns filed for those periods were false or fraudulent with the intent to evade tax even though it was mr beg not ms fouche petitioner or the payroll company whom respondent argues had the intent to evade tax respondent also argues that the limitations periods remain open for the original covered periods because mr beg willfully attempted to defeat or evade tax in this regard respondent asks us to conclude that sec_6501 extends the limitations_period for a willful_attempt_to_evade_tax in any manner even though it may not be the taxpayer who makes the willful attempt respondent relies exclusively on sec_6501 to keep open the limitations periods for the periods ending date and date see supra note petitioner argues that respondent has not proved by clear_and_convincing evidence that mr beg intended to evade tax or willfully attempted to defeat or evade tax for any of the periods at issuedollar_figure therefore according to petitioner respondent cannot rely on sec_6501 or and respondent is time barred from assessing and collecting the employment_taxes for the periods at issue iii whether respondent proved by clear_and_convincing evidence that mr beg intended to evade tax or willfully attempted to defeat or evade tax for any of the periods at issue to keep open the limitations periods under sec_6501 or respondent must show by clear_and_convincing evidence that mr beg intended to evade tax or willfully attempted to defeat or evade tax respectively when he filed petitioner’s false form sec_941 for the periods at issue sec_7454 sec_6501 and rule b the burden of proving fraud remains on respondent despite the parties’ decision to submit this case fully stipulated under rule see rule b 95_tc_82 affd 943_f2d_22 8th cir petitioner also argues that respondent cannot rely on sec_6501 or to extend the limitations periods because 128_tc_37 is not controlling and neither petitioner nor the payroll company intended to evade tax or willfully attempted to defeat or evade tax thus petitioner argues that the 3-year limitations_period of sec_6501 controls and respondent is time barred from assessing and collecting the employment_taxes for the periods at issue to prove fraudulent intent respondent must show by clear_and_convincing evidence that mr beg had the specific intent to evade taxes known to be owing by conduct intended to conceal mislead or otherwise prevent the collection_of_taxes allen v commissioner supra 94_tc_654 61_tc_249 affd 519_f2d_1121 5th cir christians v commissioner tcmemo_2003_130 although the court has not expounded on what constitutes a willful attempt to defeat or evade tax under sec_6501 we have said that there is little meaningful distinction between a ‘false or fraudulent return with the intent to evade tax’ and a willful attempt in any manner to defeat or evade tax ’ carl v commissioner tcmemo_1981_ the existence of fraud is a question of fact to be resolved upon consideration of the entire record 96_tc_858 affd 959_f2d_16 2d cir respondent argues that the record clearly and convincingly shows that mr beg intended to evade tax and or willfully attempted to defeat or evade employment_taxes for all of the periods at issue specifically respondent points out that mr beg filed fraudulent form sec_941 and amended form sec_941 pleaded guilty to violating sec_7206 and had the knowledge and experience to know that his actions would result in the evasion of petitioner’s employment taxesdollar_figure petitioner counters that the stipulated facts and incorporated exhibits show that mr beg intended to embezzle from petitioner and that he filed the form sec_941 and amended form sec_941 solely to cover up his embezzlement not to defeat or evade petitioner’s employment_taxes therefore according to petitioner the record does not show by clear_and_convincing evidence that mr beg had the specific intent to evade tax or willfully attempted to defeat or evade tax and respondent has failed to carry his burden_of_proof on the record before us we do not find that respondent has proved by clear_and_convincing evidence that mr beg had the specific intent to evade tax or willfully attempted to defeat or evade tax when he filed false form sec_941 and amended form sec_941 for the periods at issue respondent points to a number of egregiou sec_23 courts have developed a nonexclusive list of factors or badges_of_fraud that demonstrate fraudulent intent 99_tc_202 these badges_of_fraud include understatement of income inadequate records implausible or inconsistent explanations of behavior concealment of income or assets failure to cooperate with tax authorities filing false documents failure to make estimated_tax payments dealing in cash engaging in illegal activities and engaging in a pattern of behavior that indicates an intent to mislead vogt v commissioner tcmemo_2007_209 affd 336_fedappx_758 9th cir no single factor is necessarily sufficient to establish fraud however a combination of several of these factors may constitute persuasive evidence of fraud niedringhaus v commissioner supra pincite acts mr beg performed that led to the irs’ failing to collect the full amount of petitioner’s employment_taxes however we cannot say that respondent has proved by clear_and_convincing evidence that mr beg’s filing of the form sec_941 and amended form sec_941 shows conduct intended to defeat or evade petitioner’s taxes and not an incidental consequence or secondary effect of his embezzlement scheme petitioner argues that mr beg intended only to cover up his embezzlement scheme and not defeat or evade petitioner’s taxes respondent cannot point to anything in the record that leads us to believe petitioner’s argument is meritless additionally while respondent argues that mr beg’s conviction under sec_7206 shows that he intended to evade tax we note that a conviction under sec_7206 is a factor to be considered and is not dispositive see 84_tc_636 wickersham v commissioner tcmemo_1999_276 this is because the intent to evade tax is not an element of the crime charged under sec_7206 see wright v commissioner supra pincite accordingly we find that respondent has not proved by clear_and_convincing evidence that mr beg intended to evade tax or willfully attempted to defeat or evade tax for the periods at issue iv conclusion because respondent did not show by clear_and_convincing evidence that mr beg filed fraudulent_returns with the intent to evade tax or willfully attempted to defeat or evade tax the limitations periods for assessment are not extended under either sec_6501 or thus the 3-year limitations_period of sec_6501 controls the timeliness of respondent’s assessments of petitioner’s additional taxes respondent concedes that the assessments of petitioner’s additional taxes occurred more than years after mr beg filed petitioner’s returns accordingly respondent is time barred from assessing the additional tax for all periods at issue and appeals erred as a matter of law in determining that collection activity should proceed to collect petitioner’s additional tax for the periods at issue we have considered all arguments made by the parties and to the extent not discussed above we conclude that those arguments are irrelevant moot or without merit to reflect the foregoing decision will be entered for petitioner


internal_revenue_service number release date index number ------------------------------------------- ---------------------------------------------- ------------------------------------------ --------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-150198-08 date date legend x -------------------------------------------------- ---------------------------------------------- y ---------------------------------- ----------------------- z -------------------------------------------------- ----------------------------------------------------- state date date ------------- ------------------- ------------------------- dear ------------------ this letter responds to a request dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election to be treated as a disregarded_entity for federal tax purposes under sec_301_7701-3 based on the information submitted and representations made within the relevant facts are as follows x is an entity organized on date under the laws of state at the time of formation y was the percent owner of x x timely filed a form_8832 to elect to be treated as an association_taxable_as_a_corporation effective on date plr-150198-08 as part of a restructuring x became percent owned by z a member of y’s consolidated_group x intended as part of the restructuring to change its entity classification election from an association_taxable_as_a_corporation to a disregarded_entity for federal tax purposes effective date however x inadvertently failed to timely file a form_8832 entity classification election sec_301_7701-3 of the income_tax regulations provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301_7701-3 unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in plr-150198-08 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 based solely on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly x is granted an extension of time of sixty days from the date of this letter to elect to be treated as a disregarded_entity for federal tax purposes effective date the election should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the election except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 of the internal_revenue_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 will be sent to your authorized representatives sincerely curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


id office uilc cca-851350-11 ---------------------------- number release date from ------------------- sent tuesday may pm to --------------- cc -------------------------------------------------------------- subject re ---------- ---- rebuttal review hi --------- attached is the rebuttal with our recommended changes tracked please look it over and let me know if you agree disagree with the changes or if you have questions thanks for your patience also there is one minor general comment from ----- which isn’t reflected in the rebuttal document i am posting this comment below two minor comments on the sec_165 issue the taxpayer argues that the losses were evidenced by closed and completed transactions and fixed by an identifiable_event this concerns the timing of a loss deduction see reg sec_1_165-1 but the issue here is not timing -- the taxpayer is not entitled to a loss deduction at all on the sec_162 issue the taxpayer quibbles with the statement in the nopa that transaction costs paid to achieve planned tax benefits do not constitute ordinary and necessary business_expenses under sec_162 it is true that transaction costs paid in connection with legitimate business transactions are deductible even though the transactions have legitimate tax benefits however this is not true with respect to transactions that have no business purposes and are designed solely to obtain fictitious tax losses see winn-dixie cited in the nopa attachment redacted


department of the treasury int ernal revenue service washington d c o f f i c e o f c h i e f c o u n s e l date number release date cc tege eb ec tl-n-317-01 uilc internal_revenue_service national_office chief_counsel_advice memorandum for area_counsel te_ge pacific coast central mountain area attention kirk paxson from acting assistant chief_counsel tax exempt and government entities subject application of sec_162 of the internal_revenue_code this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent legend corporation executive stock incentive plan_year a year b date date date date date tl-n-317-01 date date m n p issue whether the compensation attributable to options issued subject_to shareholder approval on date under the stock incentive plan and exercised by the executive in year a and year b meet the exception for performance-based compensation under sec_162 of the internal_revenue_code conclusion the compensation attributable to options issued subject_to shareholder approval on date under the stock incentive plan and exercised by the executive in year a and year b meets the exception for performance-based compensation under sec_162 of the code facts the facts as we understand them are as follows corporation established a stock incentive plan under which it had granted options for corporation stock to various officers key employees and independent contractors the stock incentive plan was established prior to the enactment of sec_162 of the code as originally approved by corporation’s board_of directors and shareholders the stock incentive plan was limited to the issuance of options to acquire m shares of stock the stock incentive plan did not state the maximum number of shares with respect to which options could be granted to any employee on date following the enactment of sec_162 but prior to its effective date the compensation committee of corporation’s board_of directors granted executive nonstautory options to purchase n shares of common_stock similar grants were made to the other executive officers at the time of the option grant there were insufficient options available under the stock incentive plan therefore the option grant was subject_to shareholder approval to amend the stock incentive plan to increase the number of options that could be issued under the stock incentive plan from m to p prior to requesting shareholder approval to increase the number of options available to be issued under the stock incentive plan proposed_regulations were issued under sec_162 on date corporation provided its shareholders with a proxy statement containing information related to the proposed stock incentive plan amendment the material stated that executive had been conditionally granted additional stock tl-n-317-01 options but that the grant was subject_to the approval by the shareholders of the proposed amendment to the stock incentive plan to increase the number of options available to be granted under the stock incentive plan on date corporation’s shareholders approved the amendment to the stock incentive plan the stock incentive plan was not amended to state the maximum number of shares with respect to which options could be granted during a specified period to any person the exercise price of the options granted to executive was equal to the fair_market_value of the stock on the date of grant one half of the options vested on date and were exercised on date both in year a the remaining options vested on date and were exercised on date both in year b executive was a covered_employee under sec_162 for both year a and year b law and analysis sec_162 of the code provides that there will be allowed as a deduction all ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business including a reasonable allowance for salaries or other compensation_for_personal_services actually rendered sec_162 provides that in the case of any publicly_held_corporation no deduction shall be allowed under this chapter for applicable_employee_remuneration with respect to any covered_employee to the extent that the amount of such remuneration for the taxable_year with respect to such employee exceeds dollar_figure million sec_162 applies to amounts which would otherwise be deductible for taxable years beginning on or after date sec_162 provides that applicable_employee_remuneration does not include any remuneration payable solely on account of the attainment of one or more performance goals but only if i the performance goals are determined by a compensation committee of the board_of directors of the taxpayer which is comprised solely of or more outside directors ii the material terms under which the remuneration is to be paid including the performance goals are disclosed to the shareholders and approved by a majority of the vote in a separate shareholder vote before the payment of such remuneration and iii before any payment of such remuneration the compensation committee referred to in clause i certifies that the performance goals and any other material terms were in fact certified 1as provided in the legislative_history the sec_162 limitation applies when the deduction would otherwise be taken which would be the year of exercise in this case see h_r conf_rep no 103rd cong 1st sess reprinted in u s c c a n tl-n-317-01 on date proposed income_tax regulations under sec_162 were issued fr sec_1_162-27 of the proposed_regulations provided that qualified_performance-based_compensation must be paid solely on account of the attainment of one or more preestablished objective performance goals sec_1_162-27 further provided that a performance_goal does not include the mere continued employment of the covered_employee thus a vesting provision based solely on continued employment would not constitute a performance_goal sec_1_162-27 of the proposed_regulations provided that compensation attributable to a stock_option is deemed to satisfy the requirements of e if the grant or award is made by the compensation committee the plan under which the option is granted states the maximum number of shares with respect to which options may be granted during a specified period to any employee and under the terms of the option or right the amount of compensation the employee could receive is based solely on an increase in the value of the stock after the date of the grant or award the preamble to the notice of proposed rulemaking containing the proposed_regulations under sec_162 provides some have questioned why it would be necessary for the regulations to require an individual employee limit on the number of shares for which options or stock appreciation rights may be granted where shareholder approval of an aggregate limit is obtained for securities law purposes the regulations follow the legislative_history which suggests that a per-employee limit be required under the terms of the plan the irs and treasury believe that a limit on the maximum number of shares for which individual employees may receive options or other rights is appropriate because it is consistent with the broader requirement that a performance_goal include an objective formula for determining the maximum amount of compensation that an individual employee could receive if the performance_goal were satisfied a third party attempting to make this determination with respect to a stock_option plan would need to know both the exercise price and the number of options that could be granted fr the legislative_history for the performance-based compensation exception to sec_162 provides amendments were made to the proposed_regulations on date final regulations were published on date t d fr the changes made to the proposed_regulations by the final regulations are not relevant to the issue considered in this memorandum tl-n-317-01 stock_options or other stock appreciation rights generally are treated as meeting the exception for performance-based compensation provided that the requirements for outside director and shareholder approval are met without the need for certification that the performance standards have been met because the amount of compensation attributable to the options or other rights received by the executive would be based solely on an increase in the corporation’s stock price in the case of stock_options it is intended that the directors may retain discretion as to the exact number of options that are granted to an executive provided that the maximum number of options that the individual executive may receive during a specified period is predetermined h_r conf_rep no 103rd cong 1st sess reprinted in u s c c a n in the case of a stock_option plan the shareholders generally must approve the specific terms of the plan the class of executives to which it applies the option_price or formula under which the price is determined and the maximum number of shares subject_to option that can be awarded under the plan to any executive h_r conf_rep no 103rd cong 1st sess reprinted in u s c c a n it is clear that the system under which performance-based options could be granted envisioned by the regulations and the legislative_history is one where the compensation committee would determine how many options could be granted to each covered_employee during a specified period under a plan the exercise price of the option would be equal to the fair_market_value of the stock as of the date of the grant the information would be disclosed to the shareholders and the shareholders would vote whether or not to approve the grants the compensation committee would have the discretion to determine how many options it would actually grant within the limit specified in the approval vote if it stayed within the limit approved by the shareholders the grants under the specified limit would be performance-based if the compensation committee granted options exceeding that specified limit grants in excess of the limit would not be performance-based we note that the term plan in our view should not be read so literally that the use of employment agreements or other documents is precluded or that a plan may not be supplemented with other agreements the regulations contemplate that both performance-based and non-performance-based compensation may be paid from a single_plan see sec_1_162-27 of the final regulations example thus when dealing with an omnibus plan other agreements are often necessary to spell out the specifics of each grant tl-n-317-01 in this case prior to seeking shareholder approval the compensation committee granted options to executive conditioned upon shareholder approval the exercise price of the options was equal to the fair_market_value of the stock as of the date of grant corporation then disclosed to its shareholders how many shares it had conditionally granted to executive and informed them that those grants would be approved with their vote to increase the number of shares available in the stock incentive plan this procedure in effect specified the maximum number of options that could be granted during a specified period date and the shareholders approved such grant thus this system is effectively the same as that specified in the regulations except that the compensation committee does not have discretion to grant a lesser amount of options than that specified in the disclosure to the shareholders accordingly the options issued on date and exercised in year a and year b were performance-based compensation we note that if additional option grants were made to executive or other covered employees such option grants would not be considered to be performance-based unless the shareholders approved the grants if you have any further questions please call by acting assistant chief_counsel tax exempt and government entities robert b misner assistant chief office of the division counsel associate chief_counsel tax exempt and government entities


department of the treasury internal_revenue_service se eh ra z uniform issue list eee legend ira x amount a date date company a dear ak kkk kak ke wee this is in response to a request submitted on your behalf by your authorized representative dated date as supplemented by correspondence dated date in which you request a waiver of the 60-day rollover requirement contained in sec_408 d of the internal_revenue_code the code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested you have not attained age ira x which was maintained by company a you represent that a distribution was made from ira x and that the distributed_amount was not invested in an ira as you intended this distribution was made on date and totaled amount a you had an individual_retirement_arrangement ira you assert that your failure to accomplish a rollover of amount a within the 60-day period prescribed by sec_408 d was due to the actions of a financial representative of company a and your lack of knowledge regarding the investment of the distribution a financial representative of company a effectuated a distribution on date company a discovered the distribution on or before date company a notified you when they discovered that the above-referenced financial representative had used the distributed funds for his own benefit and contrary to your intention that amount a remain in an ira you and company a have entered into a settlement agreement pursuant to which company a is holding funds totaling amount a for your benefit cea page pending the service's response to this ruling_request you seek a ruling waiving the day period to roll over amount a based on the facts and representations stated above the following rulings are requested you request a ruling that the internal_revenue_service waive the 60-day rollover requirement contained in sec_408 d of the code regarding amount a you request a ruling the internal_revenue_service allow a reasonable amount of to be rolled over interest accrued during the distributed period related to amount a sec_408 d of the code provides that except as otherwise provided in sec_408 d any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 d of the code defines and provides the rules applicable to ira_rollovers sec_408 d a of the code provides that sec_408 d of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if-- i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 d sec_408 d b of the code provides that sec_408 d does not apply to any amount described in sec_408 d a i received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 d a i from an ira which was not includible in gross_income because of the application of sec_408 d sec_408 d d of the code provides a similar 60-day rollover period for partial rollovers sec_408 d e of the code provides that the rollover provisions of sec_408 d do not apply to any amount required to be distributed under sec_408 a kkk page sec_408 d i of the code provides that the secretary may waive the 60-day requirement under sec_408 d a and d d of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 d i of the code revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 d i of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred with respect to your first ruling_request the information presented and documentation you submitted is consistent with your assertion that your failure to accomplish a timely rollover was caused by the unauthorized use of the ira x distribution totaling amount a therefore pursuant to sec_408 d i of the code the service hereby waives the 60-day rollover requirement with respect to distribution totaling amount a from ira x you are granted a period of days from the issuance of this ruling letter to contribute amount a into a rollover ira provided all other requirements of sec_408 d of the code except the 60-day requirement are met with respect to such contribution contributing amount a into one or more iras described in code sec_408 will be considered a rollover_contribution within the meaning of sec_408 d of the code with respect to your second ruling_request waiver of the 60-day requirement allows for a rollover of the amount distributed from the qualified_plan or qualified retirement account but does not allow for the rollover of interest accrued during the distributed period therefore pursuant to sec_408 d a of the code in response to your second ruling_request the service concludes as follows a reasonable amount of interest accrued during the distributed period with respect to amount a may not be rolled over and the contribution of said interest into one or more iras described in code sec_408 will not constitute a tax-deferred rollover within the meaning of code sec_408 no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter expresses no opinion as to whether ira x satisfied the requirements of sec_408 of the code this letter is directed only to the taxpayer who requested it sec_6110 k of the code provides that it may not be used or cited as precedent page pursuant to a power_of_attorney on file with this office a copy of this letter_ruling is being sent to your authorized representative if you wish to inquire about this ruling please contact please address all correspondence to se t ep ra t3 sincerely yours frances v sloan manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose cc hak


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 fip b04 plr-137925-12 date march legend insurance fund --------------------------------------------------------------------- trust state ------------------------------------------- --------------------------------------------------- manager ------------------------------------------------------------ x ----------------------------------------------- dear ------------------- this is in response to your request for a ruling that insurance fund’s investment in the central fund will not cause contract holders to be treated as the owners of the shares of the insurance fund for federal_income_tax purposes facts insurance fund is registered with the securities_and_exchange_commission sec as a series of trust and its shares are registered with the sec under the securities act of as amended the securities act trust is a business_trust formed under the laws of state and is registered under the investment_company act of as amended the act as an open-end management investment_company pursuant to sec_851 of the internal_revenue_code the code insurance fund is treated as a separate corporation insurance fund has elected to be treated as a regulated_investment_company ric under subchapter_m part of the code and plr-137925-12 intends to qualify for the tax treatment afforded rics under the code for each of its taxable years shares of insurance fund are offered to insurance_company segregated_asset accounts collectively separate_accounts to serve as investment vehicles for variable life_insurance policies and variable_annuity contracts purchased by individuals collectively variable_contracts and the individuals holding the variable_contracts the contract holders except as otherwise permitted by sec_1_817-5 of the income_tax regulations all of the shares of insurance fund are held directly or indirectly by one or more separate_accounts of one or more insurance_companies and public access to insurance fund is available exclusively through the purchase of a variable_contract within the meaning of sec_817 currently the sole owners of the insurance fund shares are these separate_accounts however from time to time shares of insurance fund may also be offered to and held by i other permitted holders described in sec_1 f or ii one or more investment companies registered under the act that are funds of funds the shares of which except as otherwise permitted by sec_1_817-5 are offered exclusive to separate_accounts of insurance_companies each separate_account that holds or will hold shares of insurance fund will be a separate_account registered with the sec as a unit_investment_trust under the act or is exempt from registration under the act although the terms of each variable_contract may differ the applicable insurance_company generally will hold the premiums_paid by a contract holder net of any fees or commissions and any income earned on the net_premiums in a separate_account a contract holder generally is able to allocate amounts held in the separate_account among several different subaccounts that correspond to the variable investment options under his or her variable_contract at least one subaccount will correspond to an investment in insurance fund insurance fund is managed by manager a registered investment adviser under the investment advisers act of as amended subject_to the supervision of trust’s board_of trustees manager is responsible for managing insurance fund’s investments by executing transactions in accordance with insurance fund’s investment objectives policies and restrictions which are set forth in insurance fund’s prospectus and statement of additional information as filed periodically with the sec and providing related administrative services and facilities under an investment advisory agreement between insurance fund and manager insurance fund seeks to achieve its investment objective by investing primarily in various types of debt instruments in addition insurance fund may invest from time to time in an affiliated market fund for purposes of investing any cash that remains uninvested by manager on any given day eg due to investor purchases and receipt of interest on portfolio securities or for temporary defensive purposes in response to adverse market political economic or other conditions plr-137925-12 manager currently proposes to establish a pooled investment vehicle that would invest in x a particular segment of the debt markets the central fund insurance fund will invest a portion of its assets in the central fund in place of investing such assets directly in x the central fund is organized as a series of a business_trust formed under the laws of state and such trust is registered under the act as an open-end management investment_company the shares of the central fund will be registered with the sec under the securities act pursuant to sec_851 of the code the central fund will be treated for federal_income_tax purposes as a separate corporation the central fund will elect to be treated as a ric under subchapter_m part of the code and intends to qualify for the tax treatment afforded rics under the code for each of its taxable years manager will act as the investment adviser to the central fund similar to insurance fund subject_to the supervision of the applicable trust’s board_of trustees manager will be responsible for managing the central fund’s investments by executing transactions in accordance with the central fund’s investment objectives policies and restrictions which are set forth in the central fund’s prospectus and statements of additional information as will be filed periodically with the sec and providing related administrative services and facilities under an investment advisory agreement between the central fund and manager the central fund will be established for exclusive use by certain entities and accounts for which manager acts as investment adviser therefore shares of the central fund will be available for purchase only by certain manager-advised entities and accounts including without limitation insurance fund some of these entities and accounts that will invest in the central fund are directly available to investors other than through the purchase of variable_contracts including certain publicly available manager-advised mutual funds that are treated as rics subchapter_m part of the code for federal_income_tax purposes in this respect public access to the central fund is available indirectly to investors other than contract holders initially insurance fund expects to set an internal target allocation for its investment in the central fund any such target allocation will not be set out in insurance fund’s registration_statement or otherwise made available to insurance fund shareholders rather the registration_statement will indicate only that insurance fund can achieve exposure to certain debt securities either directly or indirectly through another mutual_fund advised by manager accordingly insurance fund would not provide notice to insurance fund shareholders of a change in an internal target allocation manager in its capacity as investment adviser to insurance fund and subject_to the supervision of trust’s board_of trustees may determine to change insurance fund’s internal target allocation to the central fund from time to time in its sole and absolute discretion depending on among other factors insurance fund’s investment strategy changes in market conditions and manager fund’s market outlook as such the percentage of insurance fund’s assets invested in central fund will not be plr-137925-12 fixed in advance of any contract holder’s investment and could be changed at any time by manager fund insurance fund represents that its investment in the central fund will be made in accordance with the investment diversification requirements of sec_817 of the code and the income_tax regulations thereunder the central fund is not eligible for the look- through treatment provided for certain investment companies partnerships and trusts under sec_1_817-5 because not all beneficial interests in the central fund will be held by one or more segregated accounts of one or more insurance_companies or other permitted holders under sec_1 817-f f thus for purposes of these requirements insurance fund’s investment in the central fund will be treated as a single investment pursuant to sec_817 and sec_1_817-5 no more than of the value of insurance fund’s total assets will be represented by any one investment no more than of the value of insurance fund’s total assets will be represented by any two investments no more than of the value of insurance fund’s total assets will be represented by any three investments and no more than of the value of insurance fund’s assets will be represented by any four investments other than a contract holder’s ability to allocate the variable_contract premiums and transfer amounts in a separate_account to and from the insurance_company subaccount corresponding to insurance fund all investment decisions concerning insurance fund are made by manager in its sole and absolute discretion subject_to supervision by trust’s board_of trustees the contract holders do not have and will not have any current knowledge of insurance fund’s specific assets or insurance fund’s specific allocation to the central fund insurance fund’s portfolio holdings however are made available on a delayed basis in monthly postings on manager’s website in quarterly filings with the sec and in annual and semi-annual reports to shareholders the contract holders cannot and will not be able to direct insurance fund’s investment in any particular asset or recommend a particular investment or investment strategy and there is not and will not be any agreement or plan between manager and a contract holder regarding a particular investment of insurance fund no contract holder can or will be able to communicate directly or indirectly with manager concerning the selection quality or rate of return on any specific investment or group of investments held by insurance fund the contract holders do not have and will not have any legal equitable direct or indirect ownership_interest in any of insurance fund’s assets rather the contract holders have and will have only a contractual claim against the insurance_companies offering the variable_contract to collect from the insurance_companies under the terms of their specific variable_contracts insurance fund represents that the foregoing statements in this paragraph will remain true as it invests in the central fund except as otherwise permitted by sec_4982 all shares of insurance fund will be held directly or indirectly by the separate_accounts of life_insurance_companies that are held in connection with variable_contracts and insurance fund therefore will qualify for plr-137925-12 the exception from federal excise_tax provided by sec_4982 unless a contract holder is treated as a shareholder of insurance fund pursuant to the investor_control requirements of revrul_81_225 1981_2_cb_12 and revrul_82_54 1982_1_cb_11 requested ruling insurance fund a ric that is offered to separate_accounts and other permitted holders under sec_1_817-5 requests the service to rule that its investment in the central fund a publicly available ric will not cause the contract holders to be treated as the owners of the shares of insurance fund for federal_income_tax purposes law and analysis sec_61 of the code provides that the term gross_income means all income from whatever source derived including gains derived from dealings in property interest and dividends sec_817 and sec_1 set forth diversification requirements for segregated_asset accounts on which variable_contracts are based sec_817 and sec_1 f provide a look-through_rule for determining whether the diversification requirements are met the look-through_rule applies to a regulated_investment_company partnership or trust but only if a all the beneficial interests in the investment_company partnership or trust are held by one or more segregated_asset accounts of one or more insurance_companies and b public access to the investment_company partnership or trust is available exclusively through the purchase of a variable_contract under sec_1 f the following four categories of beneficial_interest are ignored for purposes of determining whether these two requirements are satisfied interests held by the general account of a life_insurance_company or a corporation related to a life_insurance_company but only if the return of such interest is computed in the same manner as the return on an interest held by a segregated_asset_account is computed there is not intent to sell such interests to the public and a segregated_asset_account of such life_insurance_company also holds or will hold a beneficial_interest in the investment_company partnership or trust interest held by a manager or a corporation related to the manager of the investment_company partnership or trust the return on such interest is computed in the same manner as the return on an interest held by a segregated_asset_account is computed and there is not intent to sell such interests to the public plr-137925-12 interests held by the trustee of a qualified_pension or retirement_plan or interests held by the public or treated as owned by the policyholders pursuant to revrul_81_225 but only if a the investment_company partnership or trust was closed to the public in accordance with revrul_82_55 1982_1_cb_12 or b all the assets of the segregated_asset_account are attributable to premium payments made by policyholders before date to premium payments made in connection with a qualified_pension or retirement_plan or to any combination of such premium payments a long standing doctrine_of taxation provides that taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed-the actual benefit for which the tax is paid 281_us_376 the incidence of taxation attributable to ownership of property is not shifted if the transferor continues to retain significant control_over the property transferred without regard to whether such control is exercised through specific retention of legal_title the creation of a new equitable but controlled interest or the maintenance of effective benefit through the interposition of a subservient agency 435_us_561 333_us_591 309_us_331 749_f2d_513 8th cir reversing 578_fsupp_398 n d iowa revrul_77_85 1977_1_cb_12 considers a situation in which the individual purchaser of a variable_annuity contract retains the right to direct the custodian of the account supporting that variable_annuity to sell purchase and exchange securities or other assets held in the custodial_account the purchaser also is able to exercise an owner’s right to vote account securities either through the custodian or individually the service concludes that the purchaser possesses significant incidents_of_ownership over the assets held in the custodial_account the service reasons that if a purchaser of an investment annuity_contract can select and control the investment_assets in the separate_account of the life_insurance_company issuing the contract then the purchaser is treated as the owner of those assets for federal_income_tax purposes thus any interest dividends or other income derived from the investment_assets is included in the purchaser’s gross_income in revrul_80_274 1980_2_cb_27 the service applying revrul_77_85 concludes that if a purchaser of an annuity_contract can select and control the certificates of deposit supporting the contract then the purchaser is considered the owner of the certificates of deposit for federal_income_tax purposes similarly revrul_81_225 1981_2_cb_12 concludes that investments in mutual_fund shares to fund annuity_contracts are considered to be owned by the purchaser of the annuity if the mutual_fund shares are available for purchase by the general_public revrul_81_225 also concludes that if the mutual_fund shares are available only through the purchase of plr-137925-12 an annuity_contract then the sole function of the fund is to provide an investment vehicle that allows the issuing insurance_company to meet its obligations under its annuity_contracts and the mutual_fund shares are considered to be owned by the insurance_company in revrul_82_54 1982_1_cb_11 the purchaser of certain annuity_contracts can allocate premium payments among three funds and has an unlimited right to reallocate contract value among the funds prior to the maturity_date of the annuity_contract interests in the funds are not available for purchase by the general_public but are instead only available through purchase of an annuity_contract the service concludes that the purchaser’s ability to choose among general investment strategies for example between stock bonds or money market instruments either at the time of the initial purchase or subsequent thereto does not constitute control sufficient to cause the contract holders to be treated as the owners of the mutual_fund shares in christoffersen v u s the eighth circuit considered the federal_income_tax consequences of the ownership of the assets supporting a segregated_asset_account the taxpayers in christoffersen purchased a variable_annuity contract that reflected the investment return and market_value of assets held in an account that was segregated from the general_asset_account of the issuing insurance_company the taxpayers had the right to direct that their premium payments be invested in any one of six publicly traded mutual funds the taxpayers could reallocate their investment among the funds at any time the taxpayers also had the right upon seven days notice to withdraw funds surrender the contract or apply the accumulated value under the contract to provide annuity payments the court_of_appeals held that the taxpayer not the insurance_company that issued the annuity_contract owned the mutual_fund shares for federal_income_tax purposes thus the taxpayers were required to include in gross_income any gains dividends or other income derived from the mutual_fund shares in revrul_2003_91 2003_2_cb_347 a variable_contract holder does not have control_over segregated account assets sufficient to be deemed the owner of the assets the variable_contracts at issue are funded by a separate_account that is divided into sub-accounts the issuing insurance_company can increase or decrease the number of sub-accounts at any time but there will never be more than sub-accounts available under the contracts each sub-account offers a different investment strategy interests in the sub-accounts are available solely through the purchase of a contract the investment activities of each sub-account are managed by an independent investment_advisor there is no arrangement plan contract or agreement between the contract holder and the issuing insurance_company or between the contract holder and the independent investment_advisor regarding the availability of a particular sub account the investment strategy of any sub-account or the assets to be held by a particular sub- account other than a contract holder’s right to allocate premiums and transfer funds among the available sub-accounts all investment decisions concerning the sub- accounts are made by the issuing insurance_company or the independent investment_advisor in their sole and absolute discretion a contract holder has no legal equitable plr-137925-12 direct or indirect interest in any of the assets held by a sub-account but has only a contractual claim against the issuing insurance_company to collect cash in the form of death_benefits or cash surrender values under the contract the service concludes that based on all the facts and circumstances the contract holder does not have direct or indirect control_over the separate_account or any sub-account asset and therefore the contract holder does not possess sufficient incidents_of_ownership over the assets supporting the variable_contracts to be deemed the owner of the assets for federal_income_tax purposes in revrul_2003_92 2003_2_cb_350 the purchasers of variable_annuity and variable life_insurance contracts are able to allocate their premiums among different sub-accounts each sub-account invests in a partnership none of the partnerships is a publicly_traded_partnership under sec_7704 of the code and all the partnerships are exempt from registration under the federal securities laws interests in each partnership are sold in private_placement offerings and are sold only to qualified purchasers that are accredited investors or to no more than accredited investors in the ruling the service holds that the purchasers of the variable_annuity and variable life_insurance contracts are the owners for federal_income_tax purposes of the partnership interests that fund the variable_contracts if interests in the partnerships are available for purchase by the general_public the service further holds that if the purchasers of the variable_annuity and variable life_insurance_contract are considered the owners of the partnership_interest that fund the variable_contracts the contract purchasers must include any interest dividends or other income derived from the partnership_interest in gross_income in the year in which the income is earned in revrul_2007_7 2007_1_cb_468 which clarified and amplified revrul_81_225 and revrul_2003_92 the service held that the holder of a variable_contract is not treated as the owner of an interest in a ric that funds the variable_contract solely because interest in the same ric are also available to investors described in sec_1 f analysis the determination of whether the contract holders have sufficient incidents_of_ownership over insurance fund’s shares to be deemed the owners of those shares depends on all of the relevant facts and circumstances except as otherwise permitted by sec_1_817-5 shares of insurance fund are available exclusively through the purchase of variable_contracts a contract holder cannot and will not be able to direct insurance fund’s investment in any particular asset or recommend a particular investment or investment strategy other than a contract holder’s ability to allocate the variable_contract premiums and transfer amounts in the applicable separate_account to and from the plr-137925-12 insurance_company subaccount corresponding to insurance fund all investment decisions concerning insurance fund are and will be made by manager in its sole and absolute discretion subject_to supervision by trust’s board_of trustees there is not and there will not be any arrangement plan contract or agreement between manager and a contract holder regarding the availability of insurance fund through a subaccount available under the contract holder’s variable_contract or the specific assets to be held by insurance fund no contract holder can or will be able to communicate directly or indirectly with manager concerning the selection quality or rate of return on any specific investment or group of investments held by insurance fund a contract holder does not have and will not have any legal equitable direct or indirect ownership_interest in any of the assets of the insurance fund but rather has and will have only a contractual claim against the life_insurance_company offering the variable_contract to receive cash from the insurance_company under the terms of his or her variable_contract the investment strategy of insurance fund is sufficiently broad to prevent the contract holders from making particular investment decisions through investment in insurance fund the percentage of insurance fund’s assets invested in the central fund will not be fixed in advance of any contract holder’s investment and will be subject_to change by manager at any time in addition a contract holder does not have and will not have any current knowledge of insurance fund’s specific assets or insurance fund’s specific allocation to the central fund ruling based on all the facts and circumstances insurance fund’s investment in the central fund will not give rise to an impermissible level of investor_control by the contract holders of variable_contracts that are funded by separate_accounts that invest in insurance fund and will not cause the contract holders to be treated as owners of the shares of insurance fund for federal_income_tax purposes 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 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-137925-12 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely donald j drees jr senior technician reviewer branch financial institutions products


internal_revenue_service department of the treasury number release date index number person to contact telephone number refer reply to cc tege eoeg eo2 plr-103614-03 date date do legend corporation parent state section w section x dollar_figurey dollar_figurez dear this is in response to a letter dated date from your authorized representative requesting a ruling that the income of the corporation will be excludable from gross_income under sec_115 of the internal_revenue_code code and that the corporation is not required to file annual information returns facts corporation is incorporated under the laws of state and is a wholly-owned subsidiary of parent_corporation represents that pursuant to a letter from the internal_revenue_service parent’s income is excludable from tax under sec_115 of the code parent was formed by counties of state for the purpose of providing the counties the opportunity to pool certain liability risks parent is governed by a board_of directors elected from member counties upon dissolution of parent all of its assets remaining after payment of liabilities will be distributed to the member counties in proportion to their financial contribution corporation was formed for the purpose of engaging in the insurance_business by providing insurance solely to state’s municipalities as defined in w and x of state statutes the insurance protects state municipalities and other state governmental entities from liability incident to carrying out their essential governmental functions in addition state statutes require municipalities to defend and indemnify law enforcement officers and other public officials who may be found liable to third parties while acting in their official duties corporation is organized under state law and has been issued a certificate of authority by the state commissioner of insurance corporation has been authorized by the state commissioner of insurance to provide the following types of insurance to state municipalities and other state government entities liability and incidental medical expense insurance automobile and aircraft insurance and worker’s compensation insurance corporation has one share of common_stock without par_value that is owned by parent the share was issued in consideration of payment to corporation by parent of dollar_figurey which is maintained by corporation as paid in capital in addition parent has contributed dollar_figurez to corporation as expendable surplus under the corporation’s articles of incorporation parent is the only permitted shareholder and has the sole right to receive the net assets of corporation upon dissolution each of corporation’s five directors is an elected official of a county in state the board_of directors will be increased to add two directors who will represent municipalities these directors will be elected by parent_corporation will collect premiums from state municipal and state governmental entity policyholders and will pay claims from those funds and any investment earnings on those funds the policies will be nonassessable after paying claims and expenses and providing for required capital and claim reserves all remaining funds will remain as capital of corporation or will be paid to parent as dividends no private parties may receive any of corporation’s income law and analysis sec_115 of the code provides that gross_income does not include income derived from any public_utility or the exercise of any essential_governmental_function and accruing to a state or political_subdivision of a state when determining if sec_115 of the code applies the service considers all the facts and circumstances relating to the organization to determine whether the organization performs an essential_governmental_function and whether the income of the organization accrues to a state or political_subdivision of a state the determination whether a function is an essential_governmental_function depends on the facts and circumstances of each case revrul_90_74 1990_2_cb_34 concerns an organization formed operated plr-103614-03 and funded by political subdivisions to pool their casualty risks and other risks arising from their obligations concerning public liability workers’ compensation or employees’ health obligations the ruling states that the income of such an organization is excluded from gross_income under sec_115 of the code so long as private interests do not participate in the organization or benefit more than incidentally from the organization the benefit to the employees of the insurance coverage obtained by the member political subdivisions was deemed incidental to the public benefit revrul_77_261 1977_1_cb_45 holds that income from a fund established under a written declaration of trust by a state for the temporary investment of positive case balances of a state and its political subdivisions is excludable from gross_income under sec_115 of the code the ruling reasons that the investment of positive cash balances by a state or political_subdivision in order to receive some yield on the funds until needed to meet expenses is a necessary incident of the power of the state or political_subdivision to collect taxes and raise revenue corporation was established to provide insurance against liabilities arising from the conduct of governmental functions by state municipalities and their employees by providing insurance coverage on a pooled basis the municipalities are fulfilling their obligation to protect their financial integrity further corporation provides the means for municipalities to fulfill their statutory requirement to provide for insurance coverage for third party claims against employees while acting within their official duties any private benefit to employees from insuring against these various risks is incidental to the public benefit corporation was created to further the legitimate governmental public functions of state’s municipalities based on revrul_90_74 and revrul_77_261 corporation performs an essential government function within the meaning of sec_115 of the code in addition to the performance of an essential_governmental_function for corporation to qualify to exclude its income from gross_income under sec_115 of the code income of corporation must accrue to state or a political_subdivision of state corporation is wholly-owned by parent an entity the income of which corporation represents is excluded from income_tax under sec_115 no part of the net_earnings of either corporation or parent insures to the benefit of or is distributed to any private entity or individual upon dissolution of corporation all of its net assets will be distributed to parent which is controlled by political subdivisions of state in addition after paying claims and expenses as well as providing required capital and claim reserves all funds not remaining in corporation as capital will be paid to parent accordingly the income of corporation is excludible from gross_income under sec_115 of the code plr-103614-03 conclusion based on the information and representations submitted by corporation we hold that the income of corporation is excludible from gross_income for federal_income_tax purposes under sec_115 of the code no opinion is expressed or implied as to the federal tax consequences of the transaction described above under any other provision of the code 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 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely elizabeth purcell chief exempt_organizations branch office of division counsel associate chief_counsel tax exempt and government entities


internal_revenue_service number release date index number ---------------------------- ------------------------ ---------------------- ------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-147431-09 date date legend x country date ---------------------------- ------ ---------------- ------------ ------------------- dear ----------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting that the service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect to be treated as a disregarded_entity the information submitted states that x was formed as a company under the laws of country x was eligible to elect to be treated as a disregarded_entity effective date however x inadvertently failed to timely file form_8832 entity classification election sec_301_7701-3 of the income_tax regulations provides that an eligible_entity with at least two members may elect to be classified as either an association and thus a corporation under sec_301_7701-2 or as a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 further provides that so long as a business_entity is not classified as a corporation under sec_301_7701-2 or an eligible_entity it may elect its classification for federal tax purposes plr-147431-09 sec_301_7701-3 provides that except as provided in sec_301_7701-3 unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides that for purposes of sec_301_7701-3 a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to seventy-five days prior to the date the form is filed or up to twelve months after the date on which the form is filed sec_301_9100-1 provides that 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 internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of sixty days following the date of this letter to file form_8832 and to elect to be treated as a disregarded_entity for federal tax purposes effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose 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 plr-147431-09 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


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 ita plr-140322-09 date date in re ---------------------------------------------------------------- legend act ------------------------------------------------------------------------------------------- agency ---------------------------------------------------- agreement ------------------------------------------ b --------------------------------- court ------------------------------------------------------------------------------ department ---------------------------------------------------------------------------- entity1 ---------------------------------------------------------- entity2 --------------------------------- entity2 claimants ------------------- incident ------------------------------------------------------------------------------------------------------- ------- t -------------------------------------- plr-140322-09 z ------------------------------------------------ c ------------ date -------------------- date ---------------------- year ------- year ------- year ------- f ---------------------- dollar_figureq dollar_figure----------------- dollar_figurer dollar_figure--------------- dollar_figuret dollar_figure--------------------- dollar_figurev dollar_figure------------------- w ----- dollar_figurey dollar_figure--------------- dear ----------------- this is in reply to your request for a ruling that any payment the estate of b estate receives from department for the wrongful death of b’s c is excludable from estate’s gross_income under sec_104 of the internal_revenue_code you are the personal representative of estate facts b’s c was one of w individuals killed in incident in year the estates of those killed and their survivors including estate entered into a joint prosecution agreement jpa to pursue claims for damages against entity1 and its officials who were responsible for incident the jpa sets forth how the plaintiffs will divide any amounts they recover in litigation or settlement of their claims plr-140322-09 initial litigation the estates of those killed and their survivors initially sued entity1 in court in year the causes of action included claims for wrongful death and intentional infliction of emotional distress as personal representative of estate you sought recovery for wrongful death and intentional infliction of emotional distress caused by the death of b’s c in year court granted summary_judgment for plaintiffs on the issue of liability in year court awarded the plaintiffs an aggregate recovery_of dollar_figurev for compensatory_damages prejudgment_interest and punitive_damages estate was awarded an aggregate of dollar_figurey dollar_figurer against t and dollar_figureq against z legislative settlement subsequently on date entity2 passed the act to provide fair compensation to all entity2 claimants who have f claims for wrongful death and physical injury including claims for emotional distress against entity1 through a comprehensive settlement of those claims upon entity1’s payment to entity2 the act voided all prior court proceedings and judgments for f claims by entity2 claimants against entity1 or its officials and permanently precluded entity2 claimants from asserting f claims against entity1 or its officials on date entity1 and entity2 entered into the agreement to resolve all f claims against entity1 entity1 then transferred dollar_figuret to entity2 which will be paid to claimants covered by the agreement thus pursuant to the act court award of damages to the plaintiffs was voided and has been vacated agency has established procedures to compensate victims pursuant to the agreement as the personal representative of estate you must file a claim with department to recover damages for claims of wrongful death based on the death of b’s c you represent that department’s payment will not include interest or punitive_damages law and analysis sec_104 provides that except in the case of amounts attributable to and not in excess of deductions allowed under sec_213 relating to medical etc expenses for any prior taxable_year gross_income does not include the amount of any damages received whether by suit or agreement on account of personal physical injuries or physical sickness sec_1_104-1 of the income_tax regulations provides that the term damages received whether by suit or agreement means an amount received through prosecution of a legal suit or action based upon tort or tort type rights or through a settlement agreement entered into in lieu of such prosecution section of the small_business job protection act of limits the exclusion_from_gross_income provided by sec_104 to amounts received on account of personal physical injuries or physical sickness subject_to one exception in h_r conf_rep no pincite congress expressed its intent concerning the treatment of wrongful death damages and emotional distress damages attributable to a physical injury plr-140322-09 d amages other than punitive_damages received on account of a claim of wrongful death continue to be excludable from taxable_income as under present law because all damages received on account of physical injury or physical sickness are excludable from gross_income the exclusion_from_gross_income applies to any damages received based on a claim of emotional distress that is attributable to physical injury or physical sickness the action estate brought in court and the claim estate files with department each seek recovery_of damages for wrongful death and intentional infliction of emotional distress attributable to a personal physical injury these claims are based in tort under sec_1_104-1 under the act any recovery_of compensatory_damages that department awards estate is for the wrongful death of b’s c this wrongful death recovery as adjusted by the jpa is received on account of a personal physical injury under sec_104 conclusion based strictly on the information submitted and the representations made we conclude that the amount estate receives from department as adjusted by the jpa for the wrongful death of b’s c is excludable from estate’s gross_income under sec_104 except for any amounts attributable to medical_expenses that b in fact deducted on a prior year s ’ federal_income_tax return we do not express or imply an opinion on the federal tax consequences of any aspect of these transactions other than those expressed in the conclusion above this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent the rulings contained in this letter are based upon information and representations that you submitted under penalties of perjury 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 you must attach to any income_tax return to which it is relevant a copy of this letter or if estate files its returns electronically a statement providing the date and control number of this letter_ruling in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to estate’s authorized representative plr-140322-09 sincerely michael j montemurro branch chief office of associate chief_counsel income_tax accounting