internal_revenue_service department of the treasury index number number release date washington dc person to contact telephone number refer reply to cc intl plr-100547-00 date date legend taxpayer date a date b individual a dear sir this replies to your letter dated date in which taxpayer requests an extension of time under sec_301_9100-3 to file form_8279 election to be treated as a fsc or as a small_fsc pursuant to temp sec_1_921-1t q a effective for the tax_year beginning on date a the information submitted for consideration is substantially as set forth below the ruling contained in this letter is predicated upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as a part of the audit process taxpayer should have filed form_8279 on or before date b after date b individual a a director of taxpayer became aware of taxpayer’s obligation to file form_8279 taxpayer is requesting an extension of time to file form_8279 before its failure_to_file form_8279 is discovered by the irs sec_301_9100-1 provides that the commissioner may grant a taxpayer a reasonable extension of time to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i under the standards set forth in sec_301_9100-3 sec_301 -1 b defines a regulatory election as an election whose due in re plr-100547-00 date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement sec_301_9100-3 provides standards for extensions of time for making regulatory elections sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government in the present situation sec_1_921-1t q a fixes the time to elect treatment as an fsc or small_fsc thus the commissioner has discretionary authority pursuant to sec_301_9100-1 to grant taxpayer an extension of time provided that taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government based on the facts and circumstances of this case we conclude that taxpayer satisfies sec_301_9100-3 accordingly taxpayer is granted an extension of time until days from the date of this ruling letter to file form_8279 effective for the tax_year beginning on date a the granting of an extension of time to file form_8279 is not a determination that taxpayer is otherwise eligible to make the election sec_301 a this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent no ruling has been requested and none is expressed as to the application of any other section of the code or regulations to the facts presented pursuant to a power_of_attorney on file in this office a copy of this ruling letter is being sent to your authorized representative sincerely allen goldstein reviewer office of the associate chief_counsel international


id office uilc cca-921549-08 -------------- number release date from ------------------- sent tue pm to -------------- cc --------------------------------------------------------------------------------------------------------------------------- ------------------------- subject re guaranteed debt as basis a tefra item you are covered by the form 872-p under dakota hills v commissioner the note guarantee and the resulting allocation of debt are partnership items affecting the taxability of the distribution


internal_revenue_service national_office technical_advice_memorandum february third party communication none date of communication not applicable tam-141434-05 cc intl b06 number release date index uil no case-mis no ------------------------------------------------------------------ -------- ------------------------ ----------------------------------- taxpayer's name taxpayer's address taxpayer's identification no year s involved date of conference legend ------------------------------------- -------------------------- --------------------------------------------------------------- ----------- ------------------------------------ --------------------------- ----------------------------- ---------------- -------------------------------- -------------------------- taxpayer customer firm1 industryq industry assocationa taxable year1 taxable year2 taxable year3 ------------------------------------- ----------------------------- ---------------------------------- ---------------------- --------------------------------------------------- ------- ------- ------- ------- -------------------------- ---------------------------- --------------------------- ----------- --------------------- ----------- ------------------------- --------- ----------------------------------- ---------------- -------------------------- ------------------------------------------------------- tam-141434-05 taxable year4 ------------------------------------------------------------------------ componentx ------------------------------------------------------------------------------------------------------------------- componentxx supercomponentx final productx subcomponent1 subcomponent2 subcomponent3 subcomponent4 subcomponent5 ---------------------------------------------------- subcomponent6 subcomponent7 subcomponent8 subcomponent9 fastener1 fastener2 fastener3 fastener4 fastener5 part1 part2 part4 part3 location1 ------------------------------------------------------------------------------------------------------------------ location2 amount1 amount2 amount3 amount4 amount5 customer’s facility ------ -------------- ---------------------- --------------- --------------------------------------------------- ----------------------- ---------------------- ------------------------------------------------- -------------------- ------------------------------------------------------------------------ --- ----- ----------- -- --- ------------------------------------------ --------------------------------------- ----------------------------------------------------------------------- agreementa ---------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- tam-141434-05 ---------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- agreementb ------------------------------------------------------------------------ -------------- i issue whether taxpayer’s component part described in this memorandum is precluded by temp sec_1_927_a_-1t from qualifying as export_property ii conclusion yes taxpayer’s component part described in this memorandum is precluded by temp sec_1_927_a_-1t from qualifying as export_property iii facts taxpayer is a domestic_corporation that manufactures and sells componentx to customer for installation and use as a component of final productx taxpayer manufactures componentx in the united_states and customer installs componentx in final productx in the united_states before customer delivers final productx to end- users outside the united_states one componentxx1 consists of amount12 subcomponents to summarize taxpayer makes and sells the componentx which consists of a number of subcomponents and is itself a component of the final productx made and sold by customer a sale terms taxpayer and customer entered into a purchase agreement that as we understand it consists of at least two documents one of which agreementa incorporates the other agreementb by reference see agreementa ------ under the purchase agreement customer agreed to purchase a minimum of amount2 componentxx from taxpayer for dollar_figureamount3 per componentxx id at ---- componentxx consists of types of subcomponents -- subcomponent sec_1 through componentx and componentxx are alternate depending on the context ways of referring to the integrated system of subcomponents that is the subject of this memorandum we understand that some versions of a componentxx consist of more or fewer than amount1 subcomponents and that all versions are materially similar for purposes of the legal question addressed in this memorandum ------------------------------------------------------------------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------- tam-141434-05 id at -----------------------the purchase agreement lists the price for each subcomponent of one componentxx totaling dollar_figureamount3 in the aggregate and also specifies the dollar_figureamount3 total sale price for each componentxx id at -------------------------------------- --------------------------------------------------------------------------------------------------------------- in addition to the minimum amount2 componentxx initial order customer may also purchase additional componentxx and componentx subcomponents under the purchase agreement section -----of agreementa states an initial order will be placed -------------------------------------------- section --------------------------provides in part ---------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- --------------------------------------------- section -----of agreementa which is under the -------------------------- provision states --------------------------------------------------------------------------------------- ------------------------------------------------------------------ section -----of agreementa provides ------------------------------------------------------------------------------------ -------------------------------------------------------- for example ------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ----------------------------------------------------------------------- agreementa ---- we understand that buyer issues invoices pays and accounts for each componentx subcomponent separately the purchase agreement also contains terms regarding orders and shipments ------------------------------------------------------------------------ ---------------------------------------------------------------------- ----------------------------------------------------------------- ---------------------------------------------------------------------- but see also -------------------------------------------------- ----------------------------------------------------------------- tam-141434-05 the purchase agreement refers to componentx as ---------- and -------------- - ------------ of agreementa defines ---------- as componentx other provisions of agreementa refer to the ------------------------------------------- section -----of agreementb defines ------------ in relevant part as ---------------------------------------------------------------- -------------------- section ------ of agreementb provides ---------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ------------------------------------------------------ a ------------------------------------------------------------------------- --------------------------------------------------------------- b ------------------------------------------------------------------------- ------------------------------------ c ------------------------------------------------------------------------- --------- d ---------------------------------------------------------- e ---------------------------------- f ------------------------------------------------------------------------- ------------------------------------------ in other words if the terms in agreementa and agreementb are inconsistent the agreementa terms control the purchase agreement requires customer to purchase amount2 ------------ ie complete final productx and provides for the purchase of additional componentx and componentx subcomponents taxpayer claims that it warrants each componentx subcomponent to the end- user and that the parts are turned in to taxpayer for warranty servicing however section ------- of agreementa states ----------------------------------------------------------------------------- ------- ------------------------------------------------------------------ ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- ------------------------------------------- ------- means --------------------------------------- tam-141434-05 generally taxpayer directs its marketing negotiating and soliciting activities with respect to componentx towards customers rather than towards the end-users of final productx and other products that incorporate taxpayer-made component parts such as componentx taxpayer claims that it directs some marketing activities toward end-users in that taxpayer attempts to generate interest in its products among end- users that might then pressure manufacturers such as customer to include taxpayer- made components in their final products however taxpayer provided no evidence that it performed such purported marketing activities in connection with the sales at issue in this case taxpayer does not claim that it solicited contracts or negotiated terms of sale regarding componentxx with the end-users in fact taxpayer did not engage in such activities b installation some componentx subcomponents are installed in the location1 of the final productx the rest are installed in the location2 of the final productx amount4 subcomponent1 are installed in the location1 secured_by fastener1 after subcomponent1 is installed part1 supplied by customer are installed and connected to subcomponent1 no tools are required to install or remove subcomponent2 up to amount5 subcomponent2 slide into the front of each subcomponent1 each subcomponent2 is secured to subcomponent1 by part2 customer’s personnel who install subcomponent sec_1 and and attach part1 ---------------------------------- some subcomponent9 are installed in the subcomponent2 at taxpayer’s plant before shipment to customer’s facility additional subcomponent9 are usually installed in componentx during or after installation of the other componentx subcomponents in final productx the remainder of the componentx is installed in the location2 subcomponent3 are installed by matching fastener2 with part3 and then securing the subcomponent3 with part4 and using fastener3 to secure subcomponent3 in place part4 aid in installation and extraction of the subcomponent3 subcomponent4 a subcomponent7 and subcomponent8 are secured with fastener4 the subcomponent sec_5 and are secured using fastener5 like most or all components and subcomponents of final productx the componentx subcomponents can be removed and replaced without damaging or destroying final productx such design ensures that a failure of componentx does not render final productx unusable taxpayer was able only to make the unsupported claim that manufacturers such as customer are sometimes annoyed by taxpayer’s attempts to influence their component-purchasing practices by generating interest in taxpayer’s component parts among end-users taxpayer asserts generally that the ------------------------------------------------------------ c ---------------------------legal factors identified by taxpayer tam-141434-05 regulations in ---------------------------------support its assertion that ------------------------------- ---------------------------------------------------------------------------------------------------------------- such as componentx is treated ----------------as legally separate -------------------------------- -------------------------- similar to the engines in ge relying on ------------------------ taxpayer asserts specifically in its position paper that each componentx subcomponent is --------------------------------------------------------------------------------------------- ------------------------ in taxpayer’s view such treatment is necessary because the componentx subcomponents are not associated with just one final productx but rather in general are likely to spend the majority of their lives on a final productx other than the one into which they are installed as original equipment see taxpayer’s supplemental factual memorandum for the internal_revenue_service p taxpayer also cites some service publications in support of its argument that componentx is legally separate and distinct from final productx d taxpayer’s position on its original income_tax returns for taxable_year sec_1 through taxpayer did not claim foreign_sales_corporation fsc benefits with respect to sales of componentx because taxpayer believed that componentx did not qualify as export_property under temp sec_1_927_a_-1t following the decision in 245_f3d_149 2nd cir acq in result aod c b xxiii aod lexi sec_1 and based on advice from firm1 taxpayer amended its returns for those years claiming fsc benefits on its sales of componentxx covered by the purchase agreement iv law a the component parts test sec_921 sec_923 and sec_924 of the fsc provisions provide a partial income_tax exemption with respect to sales of export_property property constitutes export_property only if among other things it is held primarily for sale lease or rental in the ordinary course of trade_or_business by or to a fsc for direct use consumption or disposition outside the united_states sec_927 property is deemed to be sold for use outside the united_states under sec_927 if it satisfies among other requirements the destination test temp sec_1_927_a_-1t generally the destination test requires that sold or leased property be delivered outside the united_states in a specified manner within a specified time period following the sale or lease temp sec_1_927_a_-1t a limitation on the destination test known as the component parts test further provides in no event is the destination test of this paragraph satisfied with respect to property which is subject_to any use other than a resale or sublease manufacture assembly or other processing other than packaging by any person between the time of the sale or lease by such seller and the delivery or ultimate delivery outside the united_states described in this paragraph d tam-141434-05 temp sec_1_927_a_-1t the applicability of the component parts test to sales of engines as equipment on commercial aircraft was litigated in ge 245_f3d_149 described below makers hired contractors to attach the engines to the airframes the airframe-makers then sold the completed aircraft to airlines for use outside the united_states at issue in ge was a single legal question whether engine attachment activities performed after sale but before delivery outside the united_states constituted assembly and thus whether the component parts test was violated if engine attachment activities constituted assembly the engines would not qualify as export_property b the ge case ge manufactured engines and sold them to airframe-makers the airframe- the second circuit_court of appeals held that engine attachment activities did not constitute assembly within the meaning of the component parts test ge f 3d pincite the court reasoned that because engines and airframes are separate and distinct from one another legally physically and contractually the attachment of an engine to an airframe constitutes mere affixing of one item of export_property to another legal separateness is reflected in the federal aviation administration faa regulations and service decisions id pincite physical separateness as compared with mere interchangeability is embodied by the fact that engines are routinely removed from the airframe and placed in another airframe id contractual separateness is exemplified by the fact that ge marketed its products directly to the airlines rather than the airframe-makers and negotiated all material terms of sale with the airlines only id pincite as a result the court determined that ge’s engines were not subject_to assembly after sale did not violate the component parts test and thus constituted export_property ge involved the domestic_international_sales_corporation component parts test in sec_1 d iii which is the materially similar predecessor of the fsc component parts test therefore the analysis of sec_1_993-3 in ge applies to the fsc component parts test in temp sec_1_927_a_-1t see also aod the second circuit_court of appeals did not address the issue of whether the attachment of thrust reversers to an airframe also violates the component parts test tam-141434-05 the service acquiesced only in the result of ge in an action on decision ge aod which provides in relevant part t he service will not challenge the position that aircraft engines may constitute export_property under sec_993 as well as sec_927 and sec_943 in circumstances similar to the general electric fact pattern with respect to aircraft engines and other products in circumstances different from the general electric fact pattern the service will maintain that treas reg ' d iii and temp treas reg ' a -1t d iii deny export_property status to a product that is incorporated into another product after sale but prior to delivery for use outside the united_states c non-tax rules aod p ----------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------- -------------------------------------------------------------------------------- ------------------------ --------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ ---------------------------------------------------------------------------------- ------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ----------------------------------------- -------------------- ------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- the application of the component parts test requires a one- or two-step analysis tam-141434-05 --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------- ------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------------- v analysis depending on the facts of the case the first step is a determination of whether the component was subject_to assembly within the united_states after sale but prior to delivery outside the united_states in violation of the component parts test if such assembly did not occur the inquiry is finished because the component parts test does not bar the property from qualifying as export_property under sec_927 and the destination test however if such assembly did occur then a second step of the analysis is required - a determination of whether for purposes of the component parts test a component is treated as not subject_to assembly if it remains separate and distinct from the product into which it is installed as described in the ge appellate opinion in the remainder of this memorandum we apply this analysis to taxpayer’s facts and conclude that under the component parts test as illuminated by ge neither componentx nor its subcomponents constitute export_property for purposes of the fsc provisions a step one in relevant part that property does not constitute export_property if it is subject_to assembly after sale but prior to delivery outside the united_states this rule standing alone would prevent componentx from qualifying as export_property because each subcomponent of componentx is subject_to assembly in customer’s facility after sale to customer but before delivery outside the united_states componentx subcomponents do not constitute assembly and that such activities are similar to the activities at issue in a private_letter_ruling ------------------------------------------- -------------------------------------------------------------------------------------------------------------------- ---------------------------- the plr in addition taxpayer claims that the plr ----------- ---- taxpayer asserts that installation activities performed with respect to the component parts test of temp sec_1_927_a_-1t provides we disagree with this argument for several reasons first the plr is not tam-141434-05 --------------------------------------------- ----------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- - ------------------------componentx or its individual subcomponents is --------------------------- ---------- based on those assertions taxpayer argues that the installation of componentx does not constitute assembly under the component parts test precedential it is a taxpayer- and case-specific written_determination that to the best of our knowledge does not apply to taxpayer see sec_6110 a written_determination may not be used or cited as precedent and revproc_2006_1 2006_1_irb_1 dollar_figure a taxpayer may not rely on a letter_ruling issued to another taxpayer second the installation activities in taxpayer’s case satisfy any reasonable notion of assembly componentx consists of amount1 subcomponents and is sold to another manufacturer which installs all subcomponents into final productx and then sells final productx including componentx to an end-user each subcomponent other than subcomponent2 must be attached or secured to final productx with fastener1 part1 fastener4 fasterner5 or other connecting devices in short componentx is subject_to assembly within final productx under the plain language of the component parts test and in some instances componentx subcomponents are even assembled into one another in particular subcomponent sec_1 and were not sales of componentxx in the aggregate but instead the separate sales of each subcomponent of each componentxx therefore the argument goes each subcomponent standing alone would not be considered subject_to assembly because the installation activities for each individual subcomponent were relatively insubstantial third taxpayer contends that the relevant sales under the purchase agreement taxpayer and field counsel disagree whether the sales at issue here and covered by the purchase agreement were sales of complete componentxx or sales of the individual subcomponents of componentxx taxpayer contends that because it issued invoices made shipments and accounted for componentx sales on a subcomponent-by-subcomponent basis and because customer issued purchase orders and paid taxpayer on a subcomponent-by-subcomponent basis and because the purchase agreement itemizes the componentxx total purchase_price each complete componentx corresponded to amount2 separate sales of amount2 separate items of export_property taxpayer also emphasizes the fact that it sells componentx subcomponents separately as spare parts that is suppose taxpayer receives an order for a subcomponent5 to replace one that failed in that case the relevant property would be subcomponent5 not a componentx therefore taxpayer argues a sale of a componentx must consist of multiple sales including a sale of a subcomponent5 tam-141434-05 field counsel argues that the purchase agreement applies on its face to the we also believe that the agreementb references to ------------ are generally we agree with field counsel the purchase agreement required customer to purchase of complete componentx field counsel contends that customer agreed to purchase componentx subcomponents on a complete componentxx basis not on a subcomponent-by-subcomponent basis under this view the presence of itemized prices in ------------------ of the agreementa does not change the fact that taxpayer and customer agreed to a sale of amount2 complete componentxx at a price of dollar_figureamount3 per componentxx purchase amount2 componentxx -- no more and no less agreementa seems to contemplate that customer may purchase spare parts and additional componentxx in addition to the required amount2 componentxx the purchase agreement also contemplates that each purchase order may specify either a single componentxx or multiple componentxx in short the references throughout agreementa to ---------- in some instances and to -------------- in other instances are entirely consistent with a contract that covers an initial sale of complete componentxx subject_to multiple purchase orders of varying size as well as potential additional sales of componentxx and componentx subcomponents consistent with the usage of similar terms in agreementa nonetheless to the extent that such references in agreementa may be viewed as inconsistent with corresponding references in agreementb agreementa controls see agreementb ------ we believe the agreementb definition of ---------- supports field counsel’s reading of the purchase agreement that is ---------- generally refers to a componentxx but may also under certain circumstances such as an order for a spare componentx subcomponent refer to an individual componentx subcomponent this case involves only the initial sale of amount2 componentxx in short we believe that the plain language of taxpayer’s terms of sale demonstrates that taxpayer sold componentxx rather than subcomponents of componentx subcomponent also we disagree with taxpayer’s spare part example the determination of the property that is the subject of a sale depends on the terms of that particular sale not the terms of some other sale the fact that taxpayer also sells spare subcomponents does not support taxpayer’s conclusion that the sale of a componentx consists of separate sales of each subcomponent on the contrary that conclusion would require us to disregard the terms of sale ie sales of complete componentxx contained in the purchase agreement specifically we believe the purchase agreement describes a single initial transaction - a single sale of amount2 componentxx -- but may also give rise to additional transactions depending on customer’s requirements the component parts test applies to componentxx in the aggregate not to each b step two the second circuit’s ge opinion states that for purposes of the component parts assuming it were possible to disregard the economics of the transaction and tam-141434-05 apply the component parts test to each subcomponent taxpayer’s position is still flawed only some of the subcomponents namely subcomponent2 of componentx involve minimal installation activities even then subcomponent2 can be installed only after subcomponent1 have been installed the other subcomponents are not installed in the same manner as subcomponent2 the installation of the other subcomponents involves a variety of attachment procedures and connecting devices and in the case of subcomponent1 involves attachment to the final productx to part1 and to subcomponent2 moreover subcomponent9 are usually or always installed into subcomponent2 during or after installation of the rest of componentx in the final productx test a component is not subject_to assembly or other processing if it remains separate and distinct from the product into which it is installed specifically the component must remain separate and distinct physically for example routine removal and replacement legally for example under faa regulations and government determinations and contractually for example separate marketing and negotiations between the component-maker and the end-user of the final product as explained in the ge aod although the service will no longer challenge the position that aircraft engines may constitute export_property under sec_927 in circumstances similar to the ge fact pattern the service will continue to maintain that the component parts test denies export_property status to a product that is incorporated into another product after sale but before delivery outside the united_states with respect to aircraft engines and other products in circumstances different from the ge fact pattern aod assembly under the component parts test first componentx does not remain physically separate from final productx into which it is installed the facts do not support a conclusion that the componentx subcomponents are routinely removed and replaced in other final productx in fact the installation of subcomponent1 in final productx is what makes the installation of subcomponent2 possible in other words the process of assembling subcomponent1 and subcomponent2 is an integral step of the process of assembling componentx in final productx unlike the ge engines which were fully assembled by ge before shipment to the airframe-maker each the ge factors do not justify a determination that componentx is not subject_to we also note taxpayer’s assertion during the adverse conference that the subject_to assembly language in the component parts test refers only to assembly of the component part itself and not to assembly of the component part into a larger product taxpayer argues that because componentx and its subcomponents were fully assembled before installation in final productx they could not have been subject_to assembly first we note that componentx was not fully assembled before installation in final productx second ge accepted the government’s position that subject_to assembly includes assembly of fully assembled component parts into a finished product 245_f3d_149 therefore we do not address this argument further like many perhaps all other final productx components componentx is tam-141434-05 componentx was shipped in amount1 separate subcomponent pieces and then assembled into final productx interchangeable and therefore is designed to be easily removed when necessary but as an integrated system and even at the subcomponent level is not routinely removed and replaced in ge the engines were routinely removed and replaced in accordance with a strict maintenance schedule t c memo in contrast taxpayer has provided no evidence other than vague statements and assertions that any of the subcomponents are subject_to scheduled maintenance or other routine activities that require removal and replacement of componentx on a predictable basis taxpayer’s affidavit regarding removal of subcomponents that fail is unpersuasive because it merely confirms that componentx like most or all final productx components can be removed if it fails the -------regulations generally do not apply to the individual components that comprise final productx the -------regulations generally distinguish between -------------------------- --------------------------------------------------------------------------------------------------------------------- ------------ although taxpayer cited the ------ regulations taxpayer was unable to identify any provisions that support its claim that componentx or any of its subcomponents are treated specially under those regulations in a manner similar to the special treatment of ge’s engines under the faa regulations as we understand them the ------ regulations require ------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- ------------ --------- the -------regulations do not support taxpayer’s claim that componentx is legally separate and distinct from final productx into which it is incorporateddollar_figure supercomponentx11 and points to the definition of supercomponentx adopted by industry associationa of which taxpayer is a member furthermore taxpayer argues that because componentx is separate from the supercomponentx it must also be separate from final productx industry associationa defines supercomponentx as taxpayer also claims that the industryq regards componentx as separate from second componentx is not legally separate and distinct from final productx ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------- taxpayer also asserted that some service publications support its claim that componentx is legally separate and distinct see eg ------------------------------------------------------------------------------------------------ --------- we view those documents as inapposite and irrelevant because they addressed ---------------------- -------- and ----------------- issues roughly years ago not the component parts test as illuminated by ge in addition in the case of the ruling it would have no precedential value even if it were relevant supercomponentx is a component of final productx that includes componentx as one of its subcomponents tam-141434-05 ---------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- see -------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------ emphasis added in other words industry associationa defines supercomponentx as the ------------------------ -------------------------------------------------------------------------------------------------------------------- of final productx industry associationa defines ----------- equipment as ------------------- ---------------------------------------------------------------------------- the industry associationa definition of supercomponentx is inconsistent with both the ------ definition and the standard dictionary definition the ------ regulations define supercomponentx as the -------------------------------------------------------------------- ----------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------ ------------------------------------------------------------------------- --------------------- emphasis added in addition the dictionary definition of ----------------- -------------------------------------------------webster’s ii new riverside dictionary a - ------------------------------------------------------------------------------------------------------------------- ---------------------------thus the dictionary definition consistent with the ---------------------- ------------------------------------------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------- significantly the ------ definition of supercomponentx specifically includes ---------------- --------------------------------- and the industry associationa defines ----------------------------- ---------------------------------------------------------------- in short we reject taxpayer’s assertion based in part on an artificially narrow definition of supercomponentx that componentx are legally separate and distinct from the final productx into which they are incorporated components in ge componentx was not the subject of separate marketing solicitation and negotiations between taxpayer and the end-user nonetheless taxpayer argues that it warranted and marketed componentx to end-users not to customer and that this proves taxpayer contracted directly with end-users similar to the ge factor agreement indicates that the warranty is between taxpayer and customer unless and third componentx is not contractually separate and distinct unlike the taxpayer’s assertion regarding the warranty is incorrect the purchase nor is taxpayer’s marketing analogous to the activities described in ge we note that our analysis of taxpayer’s claims regarding its marketing and tam-141434-05 until customer at its option allows the end-user to obtain warranty benefits therefore although taxpayer’s warranty eventually may pass from customer to the end-users as a matter of practice it does so only at customer’s option taxpayer provided no evidence that it engages in negotiation solicitation or marketing activities directly with the end-user on the contrary all such activities occur strictly between taxpayer and customer at best taxpayer claimed that it indirectly markets to end-users by attempting to encourage end-users to encourage taxpayer’s customers to use taxpayer’s products even if we were to accept this assertion taxpayer provided no evidence that its indirect marketing efforts had an effect on the sales at issue the facts regarding taxpayer’s alleged indirect marketing activities are markedly different from the ge case which involved marketing followed by solicitation and contract negotiation directly to the airline end-user warranty activities should not be construed as implying that our conclusion would be different if taxpayer had in fact performed the sort of indirect marketing described above or had in fact negotiated warranty terms directly with the end-users taxpayer further argues that the concept of related_and_subsidiary_services in temp sec_1 a -1t d is meaningless if installation activities like those in this case are considered prohibited assembly under the component parts test temp sec_1 a -1t d defines related_services as certain services including installation services performed by the taxpayer with respect to export_property that the taxpayer sells or leases such services may be performed either within or outside the united_states temp sec_1 a -1t d taxpayer claims that denial of export_property status under the component parts test on account of prohibited assembly activities would mean that installation services performed within the united_states could never qualify as related_and_subsidiary_services a threshold matter related_and_subsidiary_services may be present only if property satisfies the component parts test as explained below a taxpayer is treated as performing a related and subsidiary service only if a number of prerequisites including a sale or lease of export_property by the taxpayer are satisfied a taxpayer must have export_property to have a sale or lease of export_property to have export_property a taxpayer must have property that passes the tests described in sec_927 and the regulations thereunder including the component parts test the component parts test denies export_property status to property that is subject_to assembly after sale but prior to delivery outside the united_states therefore if prohibited assembly occurs the question of whether related_and_subsidiary_services are present is moot taxpayer’s related_and_subsidiary_services argument is not persuasive first as c taxpayer’s related_and_subsidiary_services argument second our interpretation of the component parts test in this case does not tam-141434-05 mean that domestic installation services cannot constitute related_and_subsidiary_services consider a taxpayer that sells defective export_property a subcomponent and later pursuant to the sale agreement and warranty replaces the defective subcomponent and installs a new subcomponent at its facility in the united_states the sale involved export_property and the installation service performed within the united_states constitutes a related service under temp sec_1 a -1t d taxpayer incorrectly claims that the service’s position makes it impossible for domestic installation to qualify as a related and subsidiary servicedollar_figure in connection with its related_and_subsidiary_services argument taxpayer relies t he regulations on this point are less expansive as sic they appear because assembly that does not constitute manufacturing is not prohibited see s rept no 1972_1_cb_559 on a written_determination fsa lexis date the fsa and sec_1_954-3 as support for its position that the sort of installation activities at issue here do not constitute assembly within the meaning of the component parts test the fsa applies the component parts test to a heavily redacted fact pattern and discusses the definition of manufacturing under the disc fsc and subpart_f regulations taxpayer focuses in particular on two points first the fsa states that in other words taxpayer evidently equates the term assembly in the component parts test with manufacture second taxpayer focuses on the discussion of the definition of manufacture in sec_1_954-3 taxpayer asserts that sec_1_954-3 generally requires substantial transformation of property to be considered manufacturing see taxpayer’s legal memorandum for the internal_revenue_service p taxpayer then concludes that the installation activities in the present case do not constitute manufacturing under sec_1_954-3 and therefore do not constitute assembly for purposes of the component parts test id is not precedential and as such does not represent the service’s official position regarding the component parts test see sec_6110 second taxpayer is incorrect that the component parts test is concerned with assembly only if such we reject taxpayer’s manufacture argument for several reasons first the fsa we note that even if taxpayer were correct regarding installation services that would not support a different conclusion regarding the component parts test we also note that neither installation services nor any other potential related_and_subsidiary_services are at issue in this case to our knowledge taxpayer performed no installation services with respect to componentx the issue raised by taxpayer is entirely hypothetical fourth the definition of manufacture under sec_1_954-3 is not tam-141434-05 assembly amounts to manufacture the component parts test lists four separate and distinct activities that can violate the destination test - use manufacture assembly and other processing nothing in the language of the component parts test suggests that assembly is disregarded if it does not also constitute manufacture third the relationship between manufacture and assembly as described alternatively in the definitions of manufacture in temp sec_1_993-3 and sec_1 a - 1t c does not obligate us to reach the conclusion in the component parts test context where manufacture and assembly are listed separately that assembly is relevant only if it amounts to manufacture relevant to the definition of assembly under temp sec_1_927_a_-1t sec_1_954-3 is helpful in determining whether manufacture has occurred it is not helpful in determining whether assembly has occurred the issue here is the definition of assembly not manufacture fifth taxpayer mischaracterizes sec_1_954-3 as a definition that generally requires substantial transformation of property to be considered manufacturing see taxpayer’s legal memorandum for the internal_revenue_service p in fact sec_1_954-3 contains three alternate tests for determining whether property has been manufactured for subpart_f purposes only one of those tests requires substantial transformation none of the tests defines assembly to manufacture and assembly in the component parts test should be read to mean manufacture plus assembly that constitutes manufacture moreover sec_1_954-3 is inapplicable as a technical matter it applies for the purpose of defining manufacture not assembly as a practical matter it does not define assembly and as a matter of logic the component parts test views manufacture and assembly separately in summary the activities performed to install componentx in final productx constitute assembly within the meaning of the component parts test in temp sec_1_927_a_-1t moreover the second circuit’s holding in ge - regarding component parts that retain their status as articles separate and distinct from the product into which they are installed - does not apply to componentx therefore componentx does not qualify as export_property that generates fsc benefits in short we see no support for taxpayer’s position that the separate references caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent temp sec_1_927_a_-1t incorporates a modified version of the rules in sec_1_954-3 which defines manufacture and refers to assembly


number release date id office uilc cca_2010110515504133 ---------------------------- from -------------------- sent friday november pm to ----------------- cc -------------------------------------------- subject nod sent to poa ------------------------ hi ------- -- the answers below were drafted in response to your questions these answers also incorporate the suggested answers which you provided if you have any questions or would like to discuss please do not hesitate to give me a call if the notice_of_deficiency nod was mailed to the taxpayer’s last_known_address but the taxpayer did not receive it however a copy of the nod was received by the authorized power_of_attorney poa is the taxpayer entitled to raise challenges to the underlying liability during a collection_due_process cdp hearing receipt of a notice_of_deficiency by a taxpayer's power_of_attorney can be imputed to the taxpayer cf calderone v commissioner tcmemo_2004_240 if you can prove that the poa notified the taxpayer with time to petition the court this would constitute a prior opportunity to dispute the liability ordinarily a properly represented taxpayer may be presumed to have received notice based on his representation however the facts of calderone demonstrate that there can be exceptions to this when the taxpayer is not properly represented ultimately the answer to the question is highly fact dependent and each case would need to be looked into individually to determine whether the taxpayer will be allowed to raise challenges to the underlying liability during a cdp hearing note the above answer assumes that the representative's address in not also the taxpayer's last_known_address when a taxpayer executes a power_of_attorney that directs that original correspondence be sent to their representative's address that address becomes a last_known_address 385_f2d_402 3d cir under these circumstances sending the notice_of_deficiency to the poa would constitute a prior opprtunity for the taxpayer if the nod was not mailed to the taxpayer’s last_known_address but a copy was mailed to his poa is the sec_6212 requirement met for making a valid assessment generally a notice_of_deficiency must be mailed to the taxpayer at the taxpayer's last_known_address in order to be valid sec_6212 sending a copy of the notice_of_deficiency to a poa does not satisfy the last_known_address requirement unless the petitioner receives actual notice of the deficiencies determined against him within sufficient time to file a timely petition with the tax_court 89_tc_1063 in mckay the representative gave the copy to petitioner within days of receiving the copy each case would need to be looked into individually to determine if the notice was valid note the above answer assumes that the representative's address in not also the taxpayer's last_known_address when a taxpayer executes a power_of_attorney that directs that original correspondence be sent to the attorney's address that address becomes a last_known_address for purposes of sec_6212 385_f2d_402 3d cir under these circumstances sending the notice_of_deficiency to the poa would satisfy the last_known_address requirement of a best regards -------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- ------------------


department of the treasury internal_revenue_service washington d c tak exempt and overament entities number release date date date uil egend i contact person identification_number telephone number employer_identification_number e e z o l d e s e k s i s i y r q dear this is in reply to your letter dated date requesting a ruling on a proposed transaction involving a_trust m that is a tax-exempt voluntary employees’ beneficiary association veba under sec_501 of the internal_revenue_code you the employer n propose to transfer assets held in m’s retired lives code reserve that are attributable to contributions made prior to the effective date of defra to a post-retirement health account within m to pay post-retirement health benefits m seeks the following rulings the proposed transaction will not adversely affect its tax-exempt status under sec_501 of the internal_revenue_code code the proposed transaction will not cause n to include any amount in gross_income under sec_61 the proposed transaction will not result in the provision of any disqualified_benefit within the meaning of sec_4976 of the code and consequently will not cause n to be liable for the tax imposed by sec_4976 n will not recognize unrelated_business_taxable_income solely as a result of the proposed transaction the purpose of m is to provide retiree life_insurance and other currently provides post-retirement life_insurance benefits to its eligible retired facts mis a veba that is exempt from federal_income_tax under sec_501 of the code ‘n employees through m post-retirement benefits however to date only life_insurance benefits have been provided mis successor to a veba maintained by its former parent_corporation that provided post-retirement life_insurance benafits to its eligible retired employees n was spun off from q in date and m was created by transferring assets from o's veba the amount of assets transferred to m was proportionate to the post-retirement life_insurance_benefit obligation of employees transferred to n at the time of the spin-off from o n proposes to transfer assets held in m's retired_lives_reserve that are attributable to contributions prior to the effective date of the deficit_reduction_act_of_1984 defra to a post-retirement health account within m to pay post-retirement health benefits all of the contributions in o's veba that were made prior to the effective date of defra were deducted under sec_162 of the code the portion of m's retired_lives_reserve that is attributable to o's contributions made prior to the effective date of defra constitute m’s pre-defra reserve n did nat make any contributions to m or take any deductions for contributions made to m thus all of the assets in m contributions made by o's veba to m are aitributable to m's pre-defra reserve has been determined in accordance with the methodology set forth in sec_1_512_a_-5t q a-4 of the regulations however in applying this methodology the term pre-defra reserve was substituted for the regulations’ existing reserve for post-retirement medical of life_insurance benefits and the date date ie the date after which sec_419 became effective was substituted for the date date appearing in those regulations furthermore n assumed that the asset transfer from o's veba to m included a ratable portion of the transferor’s pre-defra reserve m's pre-defra reserve as of date2 was dollar_figure the totat retired_lives_reserve as of date2 was dollar_figure at present no retired_lives_reserve assets may be used for purposes other than providing life_insurance so long as any current covered_employee remains alive proposes to amend the trust agreement to provide that the pre-defra reserve held in the retired_lives_reserve may be used to provide post-retirement health benefits for n’s retirees n plans to establish a separate health account within m n will determine the amount of the pre-defra reserve that may potentially be transferred from the retired_lives_reserve in any taxable_year of n on any day during such year that is on or before the transfer date an amount of pre-defra reserve as determined by n will be transferred from the retired_lives_reserve to the health account within m to transfer any of the pre-defra reserve to the health account during a particular taxable_year then the applicable retired_lives_reserve assets will be used to provide only post-retirement life_insurance benefits during the year if n elects not n m will provide that no amounts other than a pre-defra reserve will be transferred to the health account for the purpose of providing post-retirement heaith benefits will be transferred from the retired_lives_reserve to provide post-retirement health benefits unless the amount of the pre-defra reserve is at least as great as the amount to be released only an amount that n reasonably determines would otherwise be currently deductible under sec_419a of the code as a contribution to fund post-retirement health benefits may be transferred in any taxable_year to provide post- retirement health benefits if funds and eamings thereon in the health account have not been exhausted by the end of any taxable_year of n then the remaining funds and earings thereon will remain in the health account and will continue to be available to fund post-retirement health benefits in future years no funds m will only receive future contributions from n to the extent that such contributions do not excead the amount permitted under section to fund post-retirement fife insurance benefits this amount will be the sum of amounts reasonably and actuarially necessary to fund claims incurred but unpaid for post-retirement life_insurance for the covered retiree population administrative costs with respect to such claims and contributions reasonably and actuarially necessary to fund a reserve that provides post-retirement life_insurance benefits for the current retirees and the employees who may become retirees covered by m and that is actuarially determines on a level basis using assumptions that are reasonable in the aggregate over the working lives of such individuals n represents that it will not have the right to receive the assets of m or the retired_lives_reserve at any time law sec_61 of the internal_revenue_code provides that except as otherwise provided gross_income means all income from whatever source derived sec_11 a of the code provides that gross_income does not include income attributable to the recovery during the taxable_year of any amount deducted in any prior taxable_year to the extent such amount did not reduce the amount of tax_imposed_by_chapter_1 of the code generally the tax_benefit_rule requires a taxpayer who received a tax_benefit fram a deduction in an earlier year to recognize income in a later year if there occurs an event that is fundamentally inconsistent with the premise on which the deduction was initially based the term tax_benefit_rule encompasses two concepts an inclusionary part and an exclusionary part the inclusionary part has been developed in the courts and requires a taxpayer to include a previously deducted amount in the current year’s income when a fundamentally_inconsistent_event has ocourred currently codified at sec_111 and permits a taxpayer to exclude an amount that did not previously provide a tax_benefit when it was deducted the exclusionary part is inc 460_us_370 the tax_benefit_rule allays some of the inflexibilities of the annual accounting system under specific circumstances hillsboro national bank v commissioner and united_states v bliss dairy lts purpose is to approximate the tesults produced by a tax system based on transactional rather than annual accounting id pincite the tax_benefit_rule will cancel out an earlier deduction when the later event is fundamentally inconsistent with the premise on which the deduction was initially based even if there is no actual recovery_of funds id the facts and circumstances of each case in light of the purpose and function of the pincite although it is usually helpful to determine provisions granting the deductions id whether the later event would have foreclosed the deduction if it had occurred within the same tax_year that inquiry is not an exciusive test see american mutual life nsurance pincite one must consider v united_states 287_f3d_1344 fed cir contributions to a welfare_benefit_fund are deductible when paid but only if they qualify as ordinary and necessary business_expenses under sec_162 of the code and only to the extent allowable under sec_419 and sec_419a those sections impose strict limits ‘on the amount of tax-deductible prefunding permitted for contributions to a welfare_benefit_fund the deduction limitations imposed by sec_419 and sec_419a apply to contributions paid_or_accrued with respect to a welfare_benefit_fund after date prior to this date deductions for contributions paid to a welfare_benefit_fund were controlled by sec_162 sec_419 of the code states that an employer's contributions to a welfare_benefit_fund are deductible only if they would otherwise be deductible under chapter of the code and the amount of the deduction is limited to the welfare_benefit fund's qualified_cost for the taxable_year one component of qualified_cost is a fund's qualified_direct_cost for the year which is the amount including administrative expenses that would have been allowable as a deduction to the employer with respect to the benefits provided during the year if those benefits had been provided directly by the employer and the employer had used the cash_receipts_and_disbursements_method of accounting a second component of qualified_cost is any addition to a qualified_asset_account for the taxable_year but only to the extent the addition does not exceed specified limits further the qualified_cost for the taxable_year is reduced by the fund's after-tax_income for the year sec_419a of the code states that the term qualified_asset_account means any account consisting of assets set_aside to provide for the payment of disability benefits medical benefits supplemental unemployment benefits or severance_pay benefits or life_insurance benefits sec_419a and sec_419a c of the code generally limit the additions to a qualified_asset_account to an amount that is reasonably and actuarially necessary to fund claims incurred but unpaid as of the close of the taxable_year for the benefits referred to above plus administrative costs with respect to those claims sec_419a c of the code states that the account limit for any year may also include a reserve funded over the working lives of the covered employees and actuarially determined on a level basis as nacessary for a post-retirement medical benefits to be provided to covered employees or b post-retirement life_insurance beneiits to be provided to covered employees sec_601 c of the code describes a voluntary employees’ beneficiary association providing for the payment of life sick accident or other_benefits to its members or their dependents or designated beneficiaries and in which no part of its net eamings inures other than through such payments to the benefit of any private_shareholder_or_individual sec_511 of the gode imposes a tax on the unrelated_business_taxable_income defined in sec_512 of organizations exempt from tax under sec_501 sec_512 a of the cade defines the term unrelated_business_taxable_income to mean the gross_income derived by any organization from any unrelated_trade_or_business defined in sec_513 regularly carried on by it less the allowable deductions which are directly connected with the carrying on of such trade_or_business both computed with the modifications provided in subsection b sec_4976 a of the code imposes an excise_tax in the amount of percent of the amount of any disqualified_benefit provided by a welfare_benefit_fund under sec_4976 the term disqualified_benefit includes any reversion to the employer of any part of a welfare_benefit_fund sec_4976 of the code provides that paragraph b c of sec_4976 does not apply to any amount attributable to a contribution to the fund which is not allowable as a deduction under sec_419 for the taxable_year or any prior taxable_year sec_1_162-10 of the treasury regulations in effect prior to the effective date of sections and 419a provides in part that amounts paid_or_accrued within the taxable_year for a sickness accident hospitalization medical expense or similar benefit plan are deductible under sec_162 of the code if they are ordinary and necessary expenses of the trade_or_business sec_1 -3 c of the regulations provides the payment of medical insurance premiums for active employees is a permissible benefit sec_1 c9 -4 a of the regulations provides that no part of the net eamings of an employee's association may inure to the benefit of any shareholder or individual other than through the payment of permissible benefits whether prohibited inurement has occurred is a question to be determined with regard to all the facts and circumstances of a particular case sec_1_512_a_-5t q a-4 a of the regulations states that an existing reserve for post-retirement medical or life_insurance benefits as defined in sec_512tiii in is the total amount of assets actually set_aside in a veba cn date calculated in the manner set forth in q a-3 of the regulation and adjusted under paragraph c of q a-11 of sec_1_419-1t reduced by employer contributions to the fund on or before such date to the extent such contributions are not deductible for the taxable_year of the employer containing date and for any prior taxable_year of the employer for purposes of providing such post-retirement benefits revrul_69_382 1969_2_cb_28 holds that for taxable years ending on or before date premiums_paid or incurred by an employer policyholder under contracts providing group term life and health and accident coverage for its active and retired employees are deductible in full even thaugh a portion of the premium is credited to a retired lives reserva if the balance in the reserve is held by the insurance_company solely for the purpose of providing insurance coverage on active or retired lives so long as any active or retired employees remain alive and the amount added to the retired_lives_reserve is not greater than an amount which would be required to fairly allocate the cost of the insurance coverage provided aver the working lives of the employees involved this revenue_ruling also stated that for taxable years ending after date such premiums_paid or incurred are deductible if requirements the insurance_contract states that the employer policyholder has no right to recapture any portion of the reserve so long as any active or retired employee remains alive in addition to the two rey rul 1969_2_cb_29 holds that a taxpayer's nonrefundable contribution to an employee's trust to provide group health and life_insurance for both active and retired employees is deductible under sec_162 of the code when contributions are actuarially determined and made by the employer on a level basis so that at the time of an employee's retirement there is enough money in the fund to enable the trustee to continue te make the premium payments on the contracted insurance rev_rul 1973_2_cb_40 holds that the annual contributions by the taxpayer to the fund maintained by the trustee for retired lives are business_expenses deductible under sec_162 of the code in the taxable_year paid_or_incurred but only to the extent that such contributions are actuarially determined and made on a level basis analysis sec_501 with respect to ruling_request n represents that m will continue to provide permissible benefits ie the payment of postretirement life_insurance premiums as well as health benefits for active and retired employses accordingly the transfer of assets to m and the proposed use of m assets will not result in prohibited inurement or otherwise affect the exempt status of m under sec_501 c tax_benefit_rule with respect to ruling_request as stated above the tax_benefit_rule is implicated when a taxpayer has taken a deduction in a prior year and in a subsequent year an the event occurs that is fundamentally inconsistent with the premise of the deduction facts and circumstances of each case must be considered in light of the purpose and function of the provisions granting the deductions hillsboro national bank u s at the proposed transactions invalve using assets attributable to amounts contributed prior to the applicability of sec_419 of the code contributions would have been taken under sec_162 for ordinary and necessary business_expenses limited by the rules set out in revrul_69_382 revrul_69_478 and revrul_73_589 as such deductions for these for the deduction taken under sec_162 of the code for a contribution to a welfare_benefit_fund prior to the applicability of sec_419 no distinction was made between the types of post-retirement welfare benefits provided through the fund thus the original deductions would not have been foreciased merely because the reserve amounts could be used for post-retirement health benefits as proposed however the deduction for those post-retirement benefits was not unlimited - the contributions had to be for ordinary and necessary business_expenses and the deductible amount was subject_to the rules set out in rev_rul revrul_69_478 and revrul_73_599 n has represented that all of the contributions to the retired_lives_reserve would have been fully deductible under sec_162 if the contributions had in fact been made to provide post-retirement health benefits based on n's representation as described in the preceding paragraph that all contributions to the retired_lives_reserve would have been fully deductible under sec_162 if the contributions to the retired tives reserve had in fact been made to provide post- retirement health benefits the original deductions would not have been foreclosed had the proposed transactions occurred in the taxable_year of the deductions moreover this approach is in accord with the purpose and function of the law prior to the enactment of sec_419 accordingly transferring funds from the retired_lives_reserve attributable to pre-defra amounts that were originally contributed to fund post-retirement life_insurance in order to now fund post-retirement health benefits is nat fundamentally inconsistent with the deductions taken in previous years with respect to those assets and therefore the inclusionary part of the tax_benefit_rule will not apply of the sec_4976 with respect to ruling_request n represents that the pre-defra reserve is solely attributable to contributions paid_or_accrued prior to date the effective date of sec_41 thus sec_4976 does not apply with respect to the amounts proposed to be transferred from the pre-defra reserve to the health account because those amounts are attributable to contributions to m which were not allowable as a deduction under sec_419 for the taxable_year or any prior taxable_year within the meaning of sec_4976 accordingly the proposed transfers will not result in the provision of a disqualified benefit’ within the meaning of sec_4976 and consequently will not cause n to be liable for the tax imposed by sec_4976 unrelated_business_income with respect to ruling_request n represents that the assets in m will consist solely of an existing reserve for postretirement health or life_insurance benefits within the meaning of sec_512 a e ii accordingly m will not recognize unrelated_business_taxable_income solely as result of the transfer of assets from the retired_lives_reserve to pay postretirement health benefits based on the foregoing we rule as requested as follows the proposed transaction will not adversely affect m's tax-exempt status under sec_501 of the code the proposed transaction will not cause n to recognize taxable_income under the tax_benefit_rule the proposed transaction will not cause n to incur excise_tax under sec_4976 the proposed transaction will nat cause m taxable_income to recognize unrelated business this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent except as specifically ruled above no opinion is expressed as to the federal tax consequences of the transaction described above under any provision of the code is based any understanding there wilt be no material changes in the facts upon which it changes that may have a bearing on your tax status should be reported to the service please keep a copy of this ruling in your organization's permanent records this ruling is based on the this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice ifyou have any questions about this ruling please contact the person whose name and telaphone number are shown in the heading of this letter sincerely ronald shoemaker manager exempt_organizations technical group enclosure notice


id office uilc cca-990841-08 -------------- number release date from ------------------- sent tue am to ---------------- cc --------------------------------------------------------------------------------------------------------------------------- ------------------------- subject re question re large corp t p holding in essence entire_interest in tefra partnership if the taxpayer files a timely form_8082 request_for_administrative_adjustment we can grant the request for partnership_item adjustments or convert the partnership items for the corporate group under sec_6227 and del_order


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si plr-114399-99 date date re legend testator wife trust i trust ii daughter a daughter b daughter c granddaughter a granddaughter b grandson year year year year year year year court date a plr-114399-99 date b dear we received a letter dated august from your authorized representative requesting rulings concerning the application of the generation-skipping_transfer gst tax imposed by sec_2601 of the internal_revenue_code to the proposed division of a_trust according to the facts submitted in year testator and testator’s wife created an inter_vivos_trust trust i for the benefit of testator’s daughters daughter a daughter b and daughter c paragraph of the trust directs the trustee to pay the net_income of the trust in equal shares to the daughters for their respective lives paragraph authorizes the trustee to apply such amounts for any beneficiary up to and including the whole thereof of the principal of the trust estate or if the trust estate has been divided into shares or departments of the principal of the respective share or department if the trustee believes that the net_income is insufficient to provide for the proper support maintenance comfort and education of any beneficiary in the discretion of the trustee any payment of principal to a beneficiary may be treated as an advance on the share of the particular beneficiary trust i terminates on the death of the last surviving daughter each daughter was given a testamentary limited power to appoint her share of the income and corpus for both the period prior to the termination of the trust and with respect to distributions when the trust terminates pursuant to this power a daughter could designate whom of her issue would receive income and corpus during the period prior to termination however all distributions would continue to be subject_to the trustee’s discretion under the terms of the trust instrument if a daughter died during the trust term without appointing her share of the income at her death her share of the income was to be paid to her issue per stirpes if she had no issue surviving her share of the income was to be paid to the survivor or survivors of the daughters or to their issue per stirpes for the duration of the trust term as noted above trust i was to terminate on the death of the last surviving daughter unless otherwise appointed by a daughter pursuant to her testamentary limited power to appoint among her issue the trust corpus was to be distributed among the issue of the daughters per stirpes testator died testate in year his will created several trusts for different beneficiaries article ix of the will established another trust trust ii for the benefit of the three daughters the terms of trust ii are identical to the terms of trust i with respect to income distributions the testamentary limited_power_of_appointment given to each daughter and termination at the death of the last surviving daughter however article xiv of testator’s will provides with respect to distributions of principal from trust ii and other trusts created under the will that if at any time any beneficiary while entitled to receive income should be in need of funds in excess of the income then plr-114399-99 being paid to him or her in order to provide for his or her reasonable care maintenance support and education or on account of any illness infirmity or other emergency then the trustees in the trustees’ absolute discretion may make advancements to such beneficiary out of the corpus of the trust from which such beneficiary is receiving income daughter c died in year leaving no issue surviving her and under the terms of both trusts her interests vested in her sisters daughter a and daughter b daughter b died in year having exercised her power_of_appointment over trust i and trust ii for both the period prior to termination of the trusts and with respect to distributions of the trusts on termination in favor of her three children granddaughter a granddaughter b and grandson and their issue in year trust i and trust ii merged the merger agreement was approved by court and provided that the proportionate part of the assets received from trust i continued to be subject_to its distribution standards and the proportionate part of the assets received from trust ii continued to be subject_to its distribution standards at the time of the merger a favorable private_letter_ruling was obtained from the internal_revenue_service that the merger would not cause the generation-skipping_transfer_tax under sec_2601 to apply to the merged trust in year the merged trust was divided into two trusts one trust for daughter a and her issue and one trust for daughter b’s issue the division was also approved by court and a favorable private_letter_ruling was again obtained in year granddaughter a died survived by two children the beneficiaries of the trust for daughter b’s issue now propose to further divide their trust into three separate shares one for the benefit of granddaughter a’s issue one for the benefit of granddaughter b and her issue and one for the benefit of grandson and his issue on date a all of the beneficiaries including a guardian ad litem on behalf of the unborn issue of daughter b petitioned court for approval of the division pursuant to a plan of administration under the plan once the three separate shares are created the proportionate part of each share that is attributable to the original trust i will be subject_to the standard for principal distributions set forth in trust i and the proportionate part of each share that is attributable to the original trust ii will be subject_to the standard for principal distributions set forth in trust ii court held a hearing on the petition and reviewed the history of the trust and the proposed plan of administration on date b court issued its findings_of_fact conclusions of law and judgment which approved the division of the trust and the plan of administration plr-114399-99 it is represented that trust i and trust ii were irrevocable prior to date and that no additions of assets constructive or otherwise have been made to any of the trusts subsequent to date in addition no modifications or amendments other than those described above for which private letter rulings were issued have been made to any of the trusts you have requested a ruling that the proposed division will not cause the generation-skipping_transfer_tax imposed by sec_2601 to apply to the existing trust created for daughter b or to the separate shares created for granddaughter a’s issue granddaughter b and her issue and grandson and his issue provided there are no additions to the trusts after date for this purpose appreciation in value of the corpus will not be considered to constitute an addition sec_2601 provides that a tax is imposed on every generation-skipping_transfer sec_2611 defines the term generation-skipping_transfer to mean a taxable_termination a taxable_distribution or a direct_skip sec_2612 defines the term taxable_distribution to mean any distribution from a_trust to a skip_person other than a taxable_termination or a direct_skip sec_2613 defines the term skip_person as including a natural_person assigned to a generation that is two or more generations below the generation assignment of the transferor trust i and trust ii in this case are generation-skipping trusts because they provide for distributions to persons that are two or more generations below the transferors’ generation thus unless excepted from the gst tax provisions by reason of b a of the tax_reform_act_of_1986 act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations they would be subject_to the gst tax section b a of the act and sec_26_2601-1 of the regulations provide that the gst tax shall not apply to any gst under a_trust that was irrevocable on date but only to the extent that such transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added a modification of a generation-skipping_trust that is otherwise exempt under the act and the regulations will generally result in a loss of its exempt or grandfathered status if the modification changes the quality value or timing of any powers beneficial_interest rights or expectancies originally provided for under the terms of the trust at the present time pursuant to daughter b’s exercise of her limited_power_of_appointment over the income and principal of her trust the income from the trust is being paid in one-third equal shares to grandson granddaughter b and the two surviving children of granddaughter a after the division of the trust into three separate shares pursuant to the plan of administration these same beneficiaries will continue to plr-114399-99 receive the income from their one-third separate share until the death of daughter a when pursuant to the terms of trust i and trust ii the trust for daughter a and the trust for daughter b’s issue will terminate therefore the division of the trust into three separate shares will not change the quality value or timing of any beneficiary’s income_interest in the trust as it is presently being administered the trust for the benefit of daughter b’s issue consists of two parts distributions of principal from that part of the trust which is allocable to trust i assets are governed by the provisions of trust i distributions of principal from that part of the trust may be made to an income_beneficiary any time the trustee in its absolute discretion deems that the net_income is insufficient to provide for that beneficiary’s proper support maintenance comfort and education these distributions may consist of any part up to and including the whole thereof of the principal of the trust estate or if the trust estate has been divided into shares or departments any part up to an including the whole thereof of the principal of the respective share or department the trustee of the trust for daughter b’s issue and trust beneficiaries interpret the quoted language in trust i as evidencing the testator’s expectation that trust i might be divided into separate shares first for each of his three daughters and later for the issue of each daughter court approved this interpretation in its judgment entered on date b we believe this is a reasonable interpretation of the language of trust i following the division of the trust for daughter b’s issue into three separate shares the distribution of principal from that part of a separate share which is allocable to trust i assets will continue to be governed by the trust i distribution provisions therefore the division of the trust into three separate shares will not change the quality value or timing of any beneficiary’s interest in that part of the trust principal which is allocable to trust i as the trust for daughter b’s issue is presently being administered distributions of principal from that part of the trust which is allocable to trust ii assets are governed by the provisions of trust ii distributions of principal from that part of the trust may be made to an income_beneficiary in such amounts as the trustee in its absolute discretion determined necessary in order to provide for that beneficiary’s reasonable care maintenance support and education or on account of any illness infirmity or other emergency these distributions are to be treated as advancements of that beneficiary’s share of the corpus the trustee of the trust for daughter b’s issue and the trust beneficiaries interpret advancement to mean that the testator intended each beneficiary to be entitled to only his or her proportionate share of the principal court approved this interpretation in its judgment entered on date b we believe this is a reasonable interpretation of the testator’s intent with respect to distributions of principal from trust ii following the division of the trust for daughter b’s issue into three separate shares the distribution of principal from that part of a separate share which is allocable to trust ii assets will continue to be governed by the trust ii distribution provisions therefore the division of the trust into three separate shares will not change the quality value or timing of any beneficiary’s interest in that part of the trust principal which is allocable to trust ii plr-114399-99 based on the facts presented and representations made we conclude that the proposed division of daughter b’s trust into three separate shares one for the benefit of granddaughter a’s issue one for the benefit of granddaughter b and her issue and one for grandson and his issue will not result in any change in the quality value or timing of any powers or beneficial interests rights or expectancies originally provided for under the terms of trust i or trust ii accordingly court’s order dividing daughter b’s trust into the three separate shares will not affect the exempt status of the trusts for gst purposes therefore provided there are no additions constructive or otherwise to the trusts neither distributions from nor the termination of the trusts will be subject_to the gst tax under sec_2601 for this purpose appreciation in value of the corpus is not considered an addition to a_trust except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under the cited provisions or any other provisions of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office a copy of this ruling is being sent to your authorized representative sincerely assistant chief_counsel passthroughs and special industries by katherine a mellody senior technician reviewer branch enclosure copy for sec_6110 purposes