internal_revenue_service number release date index number -------------------- ----------------------------------- -------------------------- re private_letter_ruling request department of the treasury washington dc person to contact -------------------------- id ------------- telephone number --------------------- refer reply to cc psi b09 - plr-101786-03 date date date daughter taxpayer trust legend dear mr ---------- date year dollar_figurea accountant --------------------------- -------------------- ------------------------------------------- ------------------------ ----------- ----------------- ------- --------------------- this is in response to your authorized representative s letter dated date and subsequent correspondence requesting an extension of time under ' of the procedure and administration regulations and ' g of the internal_revenue_code to make an allocation of taxpayer s generation-skipping_transfer gst_exemption the facts and representations submitted are summarized as follows on date taxpayer created trust for daughter and her descendants and funded trust with assets valued at dollar_figurea on date the trust’s advisory committee amended trust in order to remove daughter as a beneficiary plr-101786-03 under the terms of trust as amended on date the trustee is directed to segregate the trust estate into eight separate trusts with one share to be held for each of taxpayer’s seven grandchildren and the remaining share to be held for the husband of one of taxpayer’s granddaughters with regard to each separate trust the trustee is permitted to accumulate the net_income and add it to principal or to pay to or apply for the benefit of the beneficiary for whom the trust was created so much of the income and principal of the trust to the as the trustee deems necessary to provide for the beneficiary’s health support maintenance and education alternatively the trustee may distribute so much of the income and principal of each trust to or for the benefit of one or more organizations described in sec_170 sec_2055 and sec_2522 as the trustee deems advisable the trustee is also permitted to sever any beneficiary’s trust into a gst-exempt trust and a gst nonexempt trust taxpayer who was not a tax professional relied upon accountant for advice regarding income and transfer_tax matters accountant erroneously believed that taxpayer did not need to allocate any of his gst_exemption to the date1 transfer to trust because the transfer was excluded from gift_tax pursuant to sec_2503 consequently no form_709 united_states gift and generation-skipping_transfer_tax return was filed for year and no allocation of taxpayer’s gst_exemption was made for the date transfer to trust taxpayer represents that no additions have been made to trust since date and that he currently has sufficient gst_exemption available to make an allocation of dollar_figurea to the date transfer to trust taxpayer now requests an extension of time under sec_2642 and sec_301_9100-1 and sec_301_9100-3 to make an allocation of his gst_exemption with respect to the assets transferred to trust on date based on the date value of the assets sec_2601 imposes a tax on every generation-skipping_transfer a generation- skipping transfer is defined under ' a as a taxable_distribution a taxable_termination and a direct_skip sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under ' c that may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2632 provides that any allocation by an individual of his or her gst_exemption under ' a may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual s estate determined with regard to extensions regardless of whether such a return is required to be filed plr-101786-03 sec_2642 provides that except as provided in ' f if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by ' b for such transfer or is deemed to be made under ' b or c - a the value of such property for purposes of ' a shall be its value as finally determined for purposes of chapter within the meaning of ' f or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period its value at the time of the close of the estate_tax_inclusion_period and b such allocation shall be effective on and after the date of such transfer or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period on and after the close of such estate_tax_inclusion_period sec_2642 provides generally that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in ' b or and an election under ' b or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of ' g which was enacted into law on date sec_2642 provides that in determining whether to grant relief under this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_34_irb_189 provides that under ' g b the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a generation-skipping_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in ' b or b or an election described in ' b or c under the provisions of ' sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in and 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_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute under ' b a regulatory election includes an election whose due_date is prescribed by a notice published in the internal plr-101786-03 revenue bulletin in accordance with ' g b and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in ' b or b or an election described in ' b or c under the provisions of ' requests for relief under ' will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of ' have been satisfied therefore taxpayer is granted an extension of time of days from the date of this letter to make an allocation of taxpayer s available gst_exemption with respect to taxpayer s transfer to trust on date the allocation will be effective as of the date of the transfer to trust and the gift_tax value of the transfer will be used in determining the amount of gst_exemption to be allocated to the trusts therefore the gst_exemption allocation will be based on the value of the transfer to trust as of the date of the original transfer the allocation should be made on a form_709 and filed with the internal_revenue_service center cincinnati oh a copy of this letter should be attached to the form_709 a copy is enclosed for this purpose the rulings contained in this letter are based upon information and except as expressly provided herein no opinion is expressed or implied 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 concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition we express or imply no opinion regarding the value of the property transferred to trust provides that it may not be used or cited as precedent letter is being sent to your authorized representative in accordance with the power_of_attorney on file with this office a copy of this this ruling is directed only to the taxpayer requesting it sec_6110 the rulings contained in this letter are based upon information and plr-101786-03 representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely heather c maloy heather c maloy associate chief_counsel passthroughs and special industries copy for sec_6110 purposes copy of this letter enclosures


tcmemo_1996_38 united_states tax_court anna ruth french petitioner v commissioner of internal revenue respondent docket no filed date jerold k nussbaum for petitioner helen f rogers for respondent memorandum findings_of_fact and opinion wright judge respondent determined a deficiency in petitioner’s federal_income_tax for taxable_year in the amount of dollar_figure respondent further determined that petitioner is liable for an addition_to_tax in the amount of dollar_figure pursuant to section for a substantial_understatement_of_income_tax the issues for decision are 1unless otherwise indicated all section references are to the internal_revenue_code in effect during the year in issue and all rule references are to the tax_court rules_of_practice and procedure whether petitioner qualifies for innocent spouse relief under sec_6013 we hold that she does not whether petitioner is liable for the addition_to_tax for a substantial_understatement_of_income_tax under sec_6661 for the taxable_year at issue we hold that she is findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein petitioner resided in frederica delaware at the time the petition was filed in this case for each of the taxable years ending in petitioner and her husband mr french filed joint federal_income_tax returns the return for taxable_year was filed in date and contained a net_operating_loss nol of dollar_figure the nol was derived from several entrepreneurial undertakings by mr french on date petitioner signed a form_1045 application_for tentative refund requesting that dollar_figure of the nol from be carried back to taxable_year concurrently petitioner and mr french filed related form sec_1040x with respect to taxable years and on or about date petitioner and mr french received a refund check in the approximate amount of dollar_figure for taxable_year following an audit respondent disallowed part of the nol which was carried back to respondent now seeks to recapture the corresponding portion of the refund a petitioner and mr french petitioner graduated from high school in and was married to george french mr french in petitioner received no further formal education shortly after graduating from high school petitioner was employed as a clerk typist petitioner left the labor force in approximately after deciding to raise a family in petitioner obtained employment with b f w scientific bfw while with bfw petitioner performed the duties of an accounts_receivable clerk in petitioner accepted employment with international office machines iom where she performed a variety of duties including those of an accounts_receivable clerk petitioner remained employed by iom until sometime in after leaving iom petitioner was not employed again until late when she accepted a job with ocean plaza mall opm throughout the course of the years that petitioner was employed by opm she performed a variety of managerial functions in early petitioner and mr french separated in date after leaving the marital home located in annapolis maryland petitioner moved into the family condominium located in ocean city maryland the ocean city condominium was jointly owned by petitioner and mr french and had been purchased sometime prior to in mr french left the marital home in annapolis maryland and moved to the state of florida petitioner and mr french were divorced in petitioner admits that her family maintained a comfortable lifestyle during and she estimates that her personal and family living_expenses for equaled dollar_figure the majority of these expenses were paid_by checks drawn against mr french’s personal account some expenses however were paid_by petitioner on their tax_return for petitioner and mr french reported dollar_figure in gross rental receipts and dollar_figure in salaries and wages the following year petitioner and mr french reported dollar_figure in gross rental receipts and dollar_figure in salaries and wages the correct amount of gross rental receipts for is dollar_figure it has been stipulated that mr french was not aware of the discrepancy between the actual and reported amounts of gross rental receipts for the couple reported dollar_figure of interest_income in and dollar_figure of interest_income in b mr french’s business activities during the 5-year period ending with mr french was the sole shareholder in a number of s_corporations including arundel housing components inc ahc in furtherance of its corporate objectives ahc leased several parcels of real_estate from mr french substantially_all of the rental payments made by ahc were deposited directly into mr french’s personal bank account mr french’s secretary managed this account but she failed to keep complete and accurate records regarding the rental deposits sometime prior to ahc began experiencing financial distress in date ahc’s controller quit because of the company’s deteriorating financial condition ahc hired a new controller but this replacement quit months later for similar reasons shortly thereafter ahc sought the services of an accounting firm to evaluate its corporate records for taxable_year the accounting firm determined that ahc’s corporate records were in poor condition and many required reconstruction in date ahc filed a chapter bankruptcy petition the petition was subsequently converted to a chapter petition during the pendency of the bankruptcy proceedings a creditors committee filed suit against ahc alleging improper transfers and fraudulent_conveyances the creditors committee hired piper marbury a law firm to represent it in the bankruptcy proceedings piper marbury hired the accounting firm of ernst young to evaluate ahc’s financial records in date before the process of reconstructing ahc’s financial records for had been completed the creditors committee obtained possession of such records sometime after date the creditors committee returned the records to ahc upon receipt of the records ahc discovered that some records were missing consequently neither petitioner nor mr french was in possession of ahc’s financial records for taxable_year at the time their return was prepared c refund check and certificates of deposit in date petitioner and mr french received a refund check in the approximate amount of dollar_figure from the internal_revenue_service irs the refund was for taxable_year and resulted from the nol_carryback which occurred in petitioner and mr french also received two refund checks from the state of maryland totaling dollar_figure in date in date petitioner and mr french used the proceeds from the three refund checks to purchase three certificates of deposit two of the three certificates of deposit were in the amount of dollar_figure and the third was in the amount of dollar_figure each of these certificates of deposit was issued jointly to petitioner and mr french sometime thereafter a portion of these certificates of deposit was cashed and petitioner used some of the proceeds for personal and family living_expenses mr french also retained some of the proceeds for use in a business venture he was undertaking in florida in date the remaining portion of the three certificates of deposit purchased in date was rolled over into two new certificates of deposit one in the amount of dollar_figure and the other in the amount of dollar_figure both of these certificates of deposit were issued solely in petitioner’s name in date petitioner and mr french sold their marital home located in annapolis maryland the net_proceeds from this sale amounted to approximately dollar_figure these proceeds were used to purchase a certificate of deposit in the approximate amount of dollar_figure this certificate of deposit was issued solely in petitioner’s name in early petitioner cashed the certificate of deposit in order to aid mr french with the purchase of a condominium in pompano beach florida the pompano beach condominium was subsequently sold pursuant to the couple’s divorce decree petitioner received dollar_figure from the sale of the pompano beach condominium as a division of her marital rights issue innocent spouse opinion a husband and wife who file a joint_return are jointly and severally liable for the tax due sec_6013 an innocent spouse however is relieved of liability if he or she proves the following that a joint_return has been made for a taxable_year that on such return there is a substantial_understatement of tax attributable to grossly_erroneous_items of the other spouse that he or she did not know and had no reason to know of such substantial_understatement when he or she signed the return and that after consideration of all the facts and circumstances it would be inequitable to hold him or her liable for the deficiency in income_tax attributable to such substantial_understatement sec_6013 as amended by the deficit_reduction_act_of_1984 publaw_98_369 stat 86_tc_228 affd 826_f2d_470 6th cir petitioner bears the burden of establishing that each of the four requirements of sec_6013 has been satisfied purcell v commissioner f 2d pincite 57_tc_373 the requirements of sec_6013 are conjunctive rather than alternative a failure to meet any of the requirements prevents a spouse from qualifying for relief under sec_6013 cohen v commissioner tcmemo_1987_537 estate of killian v commissioner tcmemo_1987_365 levin v commissioner tcmemo_1987_67 the parties agree that petitioner and mr french filed a joint_return for the taxable_year in issue the parties also agree and we find that there is a substantial_understatement of tax attributable to a grossly erroneous item of mr french’s for the taxable_year in issue whether petitioner fulfilled the remaining requirements of sec_6013 however is disputed sec_6013 d --inequitable petitioner must prove that given the facts and circumstances it would be inequitable to hold her liable for the deficiency attributable to mr french’s substantial_understatement sec_6013 sec_1 b income_tax regs sec_6013 as amended no longer requires us to determine whether a spouse significantly benefited from the erroneous item however this factor is still considered in determining whether it is inequitable to hold a spouse liable purcell v commissioner t c pincite johnson v commissioner tcmemo_1993_227 normal support is not a significant benefit for purposes of determining whether denial of innocent spouse relief would be inequitable under sec_6013 72_tc_1164 sec_1 b income_tax regs normal support is measured by the circumstances of the parties see 509_f2d_162 5th cir petitioner bears the burden of proving that she received no significant benefit from the understatements other than normal support and this burden must be satisfied with specific facts regarding lifestyle expenditures asset acquisitions and dispositions of the benefits of the understatements 93_tc_672 respondent contends that it would not be inequitable to hold petitioner liable for the deficiency attributable to the understatement because petitioner significantly benefited from the omitted income during respondent further argues that it would not be inequitable to hold petitioner liable because she received significant benefits from the refund check received in contrast petitioner contends that she experienced no significant benefit with respect to either the omitted income during or the refund check received in petitioner maintains that any benefit that she received from either the omitted income or the refund check amounted to nothing more than normal support we disagree even assuming that petitioner received nothing more than normal support from the omitted income in we do not accept petitioner’s contention with respect to the refund check as explained above normal support is not a significant benefit for purposes of determining whether denial of innocent spouse relief would be inequitable under sec_6013 terzian v commissioner supra pincite sec_1 b income_tax regs we believe however that the refund check provided petitioner with more than normal support in using the funds obtained from the refund check petitioner and mr french jointly purchased several certificates of deposit in large denominations a portion of the money represented by these certificates of deposit was used for the direct and individual benefit of petitioner the remainder less some amount used personally by mr french was rolled over into two certificates of deposit owned individually by petitioner although the record is not entirely clear as to what petitioner did with these two certificates of deposit which totaled dollar_figure we are not persuaded by petitioner’s argument that such funds merely amounted to normal support allotted to her by mr french in fact the dollar_figure exceeds petitioner’s estimated family_expenses by nearly percent moreover this dollar_figure was in addition to all other support petitioner received during accordingly we find that it is not inequitable to hold petitioner liable for the deficiency attributable to mr french’s substantial_understatement we therefore hold that petitioner has not met all the conjunctive requirements of sec_6013 and she is not entitled to relief as an innocent spouse as a result of this holding it is unnecessary for us to consider whether petitioner knew or had reason to know of mr french’s substantial_understatement issue addition_to_tax sec_6661 respondent determined that petitioner is liable for the addition_to_tax pursuant to sec_6661 for taxable_year due to a substantial_understatement_of_income_tax respondent's determination carries the presumption of correctness rule a the addition_to_tax i sec_25 percent of any underpayment attributable to a substantial_understatement sec_6661 90_tc_498 a substantial_understatement is one which exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6661 petitioner has not shown that the understatement for taxable_year is subject_to reduction pursuant to sec_6661 or ii accordingly respondent's determination as to this issue is sustained to reflect the foregoing decision will be entered for respondent


internal_revenue_service number release date index number ---------------------- -------------------------- ---------------------------- ---------------------------------------- ty ------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact --------------------- id no ----------------- telephone number --------------------- refer reply to cc intl b03 plr-128124-15 date date corp x date date -------------------------------------------------------------------------------------------------- -------------------------------- -------------- ------------------- dear ----------------- this is in response to your letter dated date requesting a ruling that corp x and its subsidiaries be permitted to change from the fair_market_value_method to the tax_book_value_method of asset valuation for purposes of apportioning interest_expense the rulings contained in this letter are based upon information and representations submitted by corp x and accompanied by the penalty of perjury statement which you executed 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 corp x a domestic_corporation is a fiscal_year taxpayer that uses the accrual_method as its overall_method_of_accounting corp x is the common parent of a group of affiliated corporations that files a consolidated u s federal_income_tax return corp x has used the fair_market_value_method of asset valuation for several years since tax_year ended date corp x wishes to change to the tax_book_value_method because complying with the fair_market_value_method requirements has resulted in corp x incurring significant costs both in terms of professional fees and costs related to the time incurred by company personnel to gather data and perform calculations in addition changing to the tax_book_value_method provides less variability of results for corp x and the service plr-128124-15 sec_864 provides that all allocations and apportionments of interest_expense shall be made on the basis of assets rather than gross_income sec_1_861-8 through and temp sec_1_861-8t through 861-13t set forth the rules specific to the allocation and apportionment of interest_expense temp sec_1_861-9t provides that a taxpayer may elect to determine the value of its assets on the basis of either tax book_value or the fair_market_value of its assets temp sec_1_861-8t provides that once a taxpayer uses the fair_market_value_method the taxpayer and all related_persons must continue to use such method unless expressly authorized by the commissioner to change methods based solely on the information submitted and the representations made corp x may use the tax_book_value_method of assets valuation for purposes of apportioning interest_expense pursuant to temp sec_1_861-8t and sec_1_861-9t starting from tax_year beginning on date and for all subsequent taxable years and for all operative sections including sec_199 and sec_904 of the code pursuant to sec_1_861-8 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 corp x and its subsidiaries sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely richard l chewning senior counsel branch office of associate chief_counsel international cc


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-115351-16 plr-115352-16 plr-115353-16 date date legend trust adviser portfolio a portfolio b portfolio c state a state b d e f g h i j k l m n o p q -------------------------------------------------- ---------------------------------------------------------------------------------------- ------------------------------------------ ---------------------------------------------------------------------------------------- ---------------------------- ---------------------------------------------------------------------------------------- ------------------------------------- ---------------------------------------------------------------------------------------- -------------------------------------- -------------- ------------------- ---- ---- ---- ---- - ---- ---- ---- ---- ---- - ---- ---- ---- plr-115351-16 plr-115352-16 plr-115353-16 dear ------------- this is in response to the letter submitted by your authorized representative dated date requesting a ruling that the investment_assets of the portfolios will not cause a variable_contract holder to be considered the tax owner of the portfolios and that each portfolio will be eligible for the exception from the excise_tax imposed by sec_4982 of the internal_revenue_code the code trust facts trust is a state a statutory trust which is registered with the securities_and_exchange_commission sec as an open-end management investment_company under the investment_company act of act and currently has multiple series each with a different investment objective and strategy each series of trust is or will be an insurance dedicated fund that is offered exclusively to insurance_company segregated_asset accounts to serve as an investment vehicle for life_insurance and variable_annuity contracts purchased by individuals the life_insurance_companies whose segregated_asset accounts hold shares of the series of trust are life_insurance_companies within the meaning of sec_816 portfolio a portfolio b and portfolio c portfolio a portfolio b and portfolio c collectively the portfolios are existing series of trust the shares of portfolios are registered with the sec under the securities act of as amended portfolio a portfolio b and portfolio c have made or intend to make elections to be treated and intend to continue to qualify as regulated_investment_companies under subchapter_m of the code each portfolio has a specific investment objective portfolios a and b intend to invest in equity and fixed income passive index regulated_investment_companies these investments will be both series of the trust and publicly available funds portfolio c intends to invest in fixed income securities through series of the trust and publicly available funds portfolio a proposes to allocate assets as follows large cap u s stocks - d percent u s fixed income securities - e percent non-u s stocks - f percent non- u s fixed income securities - g percent and small- and mid-cap u s stocks - h percent portfolio plr-115351-16 plr-115352-16 plr-115353-16 a will allocate approximately i percent of its assets to publicly available underlying funds portfolio b proposes to allocate assets as follows large cap u s stocks - j percent u s fixed income securities - k percent non - u s stocks - l percent non-u s fixed income securities - m percent and small- and mid-cap u s stocks - n percent portfolio b will allocate approximately o percent of its assets to publicly available underlying funds portfolio c intends to invest in a mix of global fixed income securities upon commencement of operations portfolio c intends to invest approximately p percent of its assets in u s fixed income securities and approximately q percent of its assets in non-u s fixed income securities portfolio c intends to obtain this asset exposure by investing in underlying insurance dedicated funds or publicly available funds that seek to sample but not replicate the performance of third-party indices ownership of portfolios the portfolios are insurance dedicated funds that serve as investment vehicles for life_insurance and variable_annuity contracts purchased by individuals variable_contracts except as otherwise permitted by sec_1_817-5 of the income_tax regulations all shares of the portfolios and of the portfolio investments that are series of the trust are held by segregated_asset accounts underlying variable_contracts of one or more life_insurance_companies each segregated_asset_account that will hold shares of a portfolio will be a separate_account registered with the sec as a unit_investment_trust under the act or will be exempt from registration under the act the life_insurance_companies whose segregated_asset accounts hold shares of portfolio are life_insurance_companies within the meaning of sec_816 except as otherwise permitted by sec_1_817-5 public access to the portfolios and to the portfolio investments that are series of the trust will be available exclusively through the purchase of a variable_contract within the meaning of sec_817 adviser adviser provides investment advisory services to trust adviser is a state b corporation engaged in business as an investment manager adviser is a registered investment adviser under the investment advisers act of as amended variable_contracts the variable_contracts are variable_contracts within the meaning of sec_817 although the terms of each variable_contract may vary various insurance_companies will generally hold the premiums_paid by a variable_contract holder net of any fees or plr-115351-16 plr-115352-16 plr-115353-16 commissions and any income earned on the net_premiums in a segregated_asset_account a variable_contract holder will be able to allocate variable_contract premiums and amounts held in the segregated_asset_account among several different investment options or subaccounts that correspond to the variable investment options under his or her variable_contract at least one subaccount will correspond to an investment in a particular portfolio variable_contract holders all investment decisions concerning each portfolio will be made solely by adviser a variable_contract holder will not be able to direct a portfolio’s investment in any particular asset or asset class or recommend a particular investment or investment strategy and there will not be any agreement or plan between adviser and a variable_contract holder regarding a particular investment of any portfolio the percentage of a portfolio's assets invested in a particular fund will not be legally fixed in advance of any variable_contract holder investment and will be subject_to change by the portfolio’s board at any time a variable_contract holder will have no current knowledge of a portfolio’s specific asset composition a portfolio’s holdings however will be available as permitted by the sec including in quarterly filings with the sec and annual and semi-annual report to shareholders a variable_contract holder will have no legal equitable direct or indirect interest in any portfolio_asset rather a variable_contract holder will have only a contractual claim against the insurance_company offering the contract to receive cash from the insurance_company pursuant to the terms of the specific variable_contract the portfolios’ diversification the portfolios will comply with the diversifications requirements of sec_817 and sec_1_817-5 ruling requested the investment_assets of the portfolios will not cause a variable_contract holder to be considered the tax owner of such portfolios and each portfolio will be eligible for the exception from the excise_tax imposed by sec_4982 investor_control rules law plr-115351-16 plr-115352-16 plr-115353-16 if the separate_account assets underlying the variable_contract are considered the assets of the life_insurance_company that issues the contract and not the property of the contract holder sec_817 governs the tax treatment of the contract if the separate_account assets underlying the contract are considered the assets of the contract of the contract holder the contract holder is taxed on the income derived from the investment_assets under sec_61 in general the holder of legal_title is the owner of the property and is taxed on the income derived from the property however if a person other than the holder of legal_title possesses the benefits_and_burdens_of_ownership that person is attributed ownership of property for tax purposes see eg frank lyon company v united_states u s 309_us_331 the supreme court summarized this principle in corliss v bowers 381_us_376 stating 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 the service applied these general tax_ownership principles in a series of investor_control rulings revrul_77_85 1977_1_cb_12 revrul_80_274 1980_2_cb_27 revrul_81_225 c b revrul_82_54 1982_1_cb_11 revrul_2003_91 2003_2_cb_347 and revrul_2003_92 2003_2_cb_350 the rulings stand for the proposition that contract holders possessing control_over the investment of the separate_account assets in addition to the other_benefits and burdens of the contract ownership are the owners of separate asset assets for federal_income_tax purposes even if the insurance_company retains possession of and legal_title to those assets in revrul_77_85 the service concluded that if the contract holder of an investment annuity_contract may select and control the investment_assets in the separate_account of the life_insurance_company the contract holder is treated as the owner of those assets for federal_income_tax purposes and is taxed on the income derived from the investment_assets in the ruling the individual_contract holder of a variable_annuity contract retained the right to direct the custodian of the account supporting that variable_annuity to sell purchase and exchange securities and other assets held in the custodial_account the contract holder also was able to exercise an owner’s right to vote account securities either through the custodian or individually the service found that the contract holder possessed significant incidents_of_ownership over the assets held in the custodial_account and thus concluded that the policyholder was the owner of those assets for federal_income_tax purposes in revrul_80_274 the contract holder transferred existing investment to an insurance_company in return for an annuity_contract and could withdraw all or a portion of the cash_surrender_value of the contract at any time prior to the annuity stating date the service applying revrul_77_85 concluded that the contract holder’s position was plr-115351-16 plr-115352-16 plr-115353-16 substantially identical to what it would have been had the investment been directly maintained and established and thus the contract holder was the owner of the investment for federal_income_tax purposes in revrul_81_225 the service described four situations in which the contract holder is considered the owner of mutual portfolio shares held by insurance_companies in connection with annuity_contracts and one situation in which the insurance_company is the owner of the mutual portfolio shares for federal_income_tax purposes in the four situations in which the contract holder is considered the owner of the mutual portfolio shares the shares are available for purchase other than through the purchase of an annuity_contract in those situations the service concluded that the contract holder has investment control_over the mutual portfolio shares and that the contract holder’s position in each situation was substantially identical to what it would have been had the mutual portfolio shares been purchased directly by contract holders conversely in the situation in which the mutual portfolio shares were only available through the purchase of an annuity_contract the insurance_company was the owner for federal_income_tax purposes in revrul_82_54 the contract holder of certain annuity_contracts could allocate premium payments among three portfolios and had an unlimited right to change those allocations prior to the maturity_date of the annuity_contract interests in the portfolios were not available for purchase by the general_public but instead were only available through the purchase of an annuity_contract the service concluded 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 did not constitute control sufficient to cause the contract holders to be treated as the owners of the mutual portfolio shares for federal_income_tax purposes in the eighth circuit addressed the tax_ownership issue in the context of a variable_annuity contract 749_f2d_513 8th cir the taxpayers upon purchasing the contract could allocate premiums among mutual portfolios and could change the allocation at any time the taxpayers bore the full investment risk and could withdraw any and all of the investment upon seven days’ notice in addition the taxpayer was not required to exercise the annuity feature of the contract the eighth circuit concluded that the taxpayers surrendered few of the rights of ownership or control_over assets of the subaccount id pincite the court held for federal_income_tax purposes the taxpayers not the issuing insurance_company owned the mutual portfolio shares that funded the variable_annuity and thus the taxpayers were required to include in gross_income any gains dividends or other income derived from the mutual portfolio shares plr-115351-16 plr-115352-16 plr-115353-16 in revrul_2003_91 the service concluded that the variable_contract holder did not have sufficient contract over segregated account assets to be deemed the owner of the assets the variable_contract was funded by a separate_account that was divided into twelve subaccounts each subaccount offered a different investment strategy interests in the subaccounts were available solely through the purchase of a variable life or variable_annuity contract that qualified under sec_817 the investment activities of each subaccount were managed by an independent investment adviser there was no arrangement plan contract or agreement between the contract holder and the issuing insurance_company or between the contract holder and the independent investment adviser regarding the availability of a particular subaccount the investment strategy of any subaccount or the assets to be held by a particular subaccount other than a contract holder’s right to allocate premiums and transfer funds among the available subaccounts all investment decisions concerning the subaccounts were made by the issuing insurance_company or the independent investment adviser in their sole and absolute discretion a contract holder had no legal equitable direct or indirect interest in any of the assets held by a subaccount but had 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 concluded that based on all of the facts and circumstances the contract holder did not have direct or indirect control_over the separate_account or any subaccount asset and therefore the contract holder did 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 the purchasers of variable_annuity and variable life_insurance contracts were able to allocate their premiums among ten different subaccounts each sub-account invested in a partnership in the factual scenario in which the partnership interests were available other than through the purchase of a variable_annuity or life_insurance_contract the service concluded that the contract holders were the owners of the interests in the partnerships in contrast if the partnership interests were only available through the purchase of a variable or life_insurance_contract the service concluded that the insurance_company was the owner of the interests in the partnerships sec_4982 sec_4982 imposes a tax on every regulated_investment_company for each calendar_year equal to percent of the excess if any of - the required_distribution for such calendar_year over the distributed_amount for such calendar_year sec_4982 and f provides exemptions from the excise_tax for any calendar_year if at all times during such calendar_year each shareholder in such company was a segregated_asset_account of a life_insurance_company held in connection with variable plr-115351-16 plr-115352-16 plr-115353-16 contracts as defined in sec_817 or another regulated_investment_company described in sec_4982 analysis in the revenue rulings and the cases discussed above the service took the position that if the holder of a variable life_insurance_policy or variable_annuity contract possesses sufficient incidents_of_ownership over the assets supporting the policy or contract the contract holder is viewed for federal_income_tax purposes as the owner of the underlying assets and as a result is currently taxed on any income and gains attributable to the underlying assets the determination of whether the holder of a variable life_insurance_policy or variable_annuity contract possesses sufficient incidents_of_ownership over the assets of the separate_account underlying the variable life_insurance_contract or variable_annuity contract depends on all the relevant facts and circumstances see revrul_2003_91 in the present case the variable_contract holders do not have any control of the investments of the portfolios including the respective portfolio’s investment in public available funds the investment decisions of the portfolios are made by adviser in its sole and absolute discretion and are subject_to change without notice to or approval by the variable_contracts holders the variable_contract holders in this case do not have any more control_over the assets held under their contract than was the case in revrul_82_54 or revrul_2003_91 the portfolios are not an indirect means of allowing a variable_contract holder to invest in public funds conclusion based on the representations and facts presented each of portfolio a b and c’s investments will not cause the variable_contract holders to be treated as the owners of a portfolio for federal income assets purposes and each portfolio will be eligible for the exception from the excise_tax imposed by sec_4982 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 letter is directed only to the taxpayers who requested 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 submitted by the taxpayers and accompanied by a penalty or perjury statement executed by an appropriate party this office has not verified any of the material plr-115351-16 plr-115352-16 plr-115353-16 submitted in support of the request for rulings and it is subject_to verification on examination in accordance with a power_of_attorney on file in the office copies of this letter are being sent to your authorized representatives sincerely james a polfer senior technician reviewer branch financial institutions products cc


department of the treasury internal_revenue_service tege eo examinations mail stop dal commerce st dallas texas tax_exempt_and_government_entities_division release number release date date date legend org organization name xx date address address org address taxpayer_identification_number person to contact employee identification_number employee telephone number phone fax last date to file a petition in tax_court july 20xx certified mail - return receipt dear this is a final adverse determination regarding your exempt status under sec_501 of the internal_revenue_code the code our favorable determination_letter to you dated february 19xx is hereby revoked and you are no longer exempt under sec_501 of the code effective january 20xx the revocation of your exempt status was made for the following reason s organizations described in sec_501 of the code and exempt under sec_501 must be both organized and operated exclusively for exempt purposes you are not operated exclusively for exempt purposes because you engaged in the illegal diversion of prizes and proceeds from raffle ticket sales for the personal_use of your officers employees and or other private individuals your net_income inured to the benefit of your founder and president moreover you failed to respond to repeated reasonable requests to allow the internal_revenue_service to examine your records regarding your receipts expenditures or activities as required by sec_6001 and sec_6033 of the code and revrul_59_95 1959_1_cb_627 contributions to your organization are no longer deductible under sec_170 of the code after january 20xx you are required to file income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the tax_year ending december 20xx and for all tax years thereafter in accordance with the instructions of the return processing of income_tax returns and assessments of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the code if you decide to contest this determination under the declaratory_judgment provisions of sec_7428 of the code a petition to the united_states tax_court the united_states claims_court or the district_court of the united_states for the district of columbia must be filed before the day after the date this determination was mailed to you please contact the clerk of the appropriate court for rules regarding filing petitions for declaratory judgments by referring to the enclosed publication you may write to the united_states tax_court at the following address you also have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely nanette m downing acting director eo examinations enclosures publication internal_revenue_service tax_exempt_and_government_entities_division commerce street mc4915 dal department of the treasury dallas tx date date legend org - organization name address address _ xx date org address certified mail - return receipt requested dear taxpayer_identification_number form tax_year s ended person to contact iid number contact telephone number contact fax number we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code c is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code letter rev catalog number 34809f you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter contact you if you write please provide a telephone number and the most convenient time to call if we need to thank you for your cooperation sincerely larry clevenger eo revenue_agent enclosures publication publication report of examination letter rev catalog number 34809f form_886 a name of taxpayer org schedule no or exhibit year period ended december explanation of items department of the treasury - internal_revenue_service 20xx legend org organization name secretary members president president xx date co-1 company bm-1 bm-2 bm-3 secretary board issue should the exempt status of org under sec_501 of the internal_revenue_code irc as an organization described in sec_501 be revoked for the year beginning on january 20xx due to inurement private benefit and violations of state and local law facts a state certificate of incorporation was issued to co-1 on january 19xx name was changed to org in 19xx according to state records the address of org is address city state the last registered agent of org was bm-1 deceased only officers listed are secretary as secretary and director and president as president all addresses on the annual report are the same as the organization bm-2 and bm-3 are also listed as directors of org the state of state terminated the certificate of incorporation on december 20xx for failure to maintain a registered agent based on records from the internal_revenue_service org received its non-profit determination_letter internal_revenue_code sec_501 ruling in 19xx as a a entity in march 20xx the united_states attorney’s office of eastern district of state indicted president founder president and director of org on charges of fraud in connection with four raffles conducted by president under the name of org according to the indictment from january 20xx through may 20xx president operated and managed org the raffles were promoted as charitable_contributions with substantial prizes for the winners and substantial monies to charities the first raffle was the grand giveaway in city state the raffle stared in 20xx and the drawing was held on february 20xx approximately big_number tickets were sold resulting in dollar_figure in proceeds the winner of the raffle a house accepted a substantial cash prize instead of the house a second raffle started in october 20xx and yielded proceeds of dollar_figure the drawing was never held and prizes were not awarded form 886-a rev department of the treasury - internal_revenue_service page -1- form_886 a name of taxpayer org schedule no or exhibit year period ended december explanation of items department of the treasury - internal_revenue_service 20xx third raffle started in may 20xx and had ticket sales of dollar_figure again the drawing was never held and no prizes awarded fourth raffle was located in city state the raffle started may 20xx tickets sales resulted in proceeds of dollar_figuredollar_figure and a drawing was never held and none of the prizes were awarded during the period of the four raffles org raised approximately dollar_figure dollars with dollar_figuredollar_figure going to charitable purposes president spent dollar_figuredollar_figure of the money on personal credit cards and dollar_figuredollar_figure on mortgage payments and wrote himself dollar_figuredollar_figure in checks while testifying at the trial president stated that the had purchased several hundred raffle tickets for two of the raffles and had won the grand prize he stated that he used fictions name to purchase the tickets he also admitted to lying to an internal_revenue_service auditor who askes about the charity’s operations the charity was audited by a revenue_agent for the years 20xx through 20xx and resulted in backup withholding taxes due of dollar_figuredollar_figure in november 20xx president was found dead of an apparent suicide as the jury was deliberating his fate in the federal trial in january 20xx a city county judge ordered the charity to pay more than as restitution to the people who bought raffle tickets and to pay the state more than dollar_figure in penalties law all organizations seeking exemption under internal_revenue_code sec_501 must conform to certain fundamental legal principles applicable to all charitable organizations one of these basic charitable principles is that charitable organizations may not engage in behavior that is illegal or violates public policy the illegality doctrine derives from english charitable_trust law the legal foundation on which internal_revenue_code sec_501 was established under charitable_trust law trusts violating law or public policy cannot qualify for charitable status the law of charity provides no basis for weighing or evaluating the objective merits of specific activities carried on in furtherance of a charitable purpose if those activities are reasonably related to the accomplishment of the charitable purpose and are not illegal or contrary to public policy see restatement second of trusts sec_374 comment form 886-a crev department of the treasury - internal_revenue_service page -2- form_8 a name of taxpayer org schedule no or exhibit year period ended december explanation of items department of the treasury - internal_revenue_service 20xx internal_revenue_code sec_501 allows organizations described in sub sec_501 to be exempt from taxation internal_revenue_code sec_501 exempts from federal_income_tax corporations and any community chest fund or foundation organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes or to foster national or international amateur sports competition but only if no part of its activities involve the provision of athletic_facilities or equipment or for the prevention of cruelty to children or animals no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation except as otherwise provided in subsection i and which does not participate in or intervene in including the publishing or distributing of statements any political campaign on behalf of any candidate for public_office internal_revenue_code sec_6033 requires that except as provided in sec_6033 every organization exempt from tax under sec_501 shall file an annual return stating specifically the items of gross_income receipts and disbursements and such other information for the purposes of carrying out the internal revenue laws as the secretary may by forms or regulations prescribe and keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary may from time to time prescribe sec_1_501_c_3_-1 of the income_tax regulations provides that an organization cannot be exempt under sec_501 of the code unless it meets both an organizational and operational_test that is the organization must be both organized and operated exclusively for charitable purposes in determining whether an organization meets the operational_test the issue is whether the particular activity undertaken by the organization is appropriately in furtherance of the organization's exempt_purpose not whether that particular activity in and of itself would be considered charitable moreover the fact that the activity reflects a particular viewpoint or opinion on a controversial issue does not preclude the organization from qualifying for exemption under sec_501 of the code see sec_1 c - d of the regulations sec_1_501_c_3_-1 requires that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt form 886-aev department of the treasury - internal_revenue_service page -3- form_886 a name of taxpayer org schedule no or exhibit year period ended december explanation of items department of the treasury - internal_revenue_service 20xx sec_1_501_c_3_-1 provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 states that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1_501_a_-1 defines private_shareholder_or_individual as persons having a personal and private interest in the activities of the organization sec_1_501_c_3_-1 provides that the operational_test is not satisfied where any part of the organization's earnings inure to the benefit of private shareholders or individuals and where the organization serves a private rather than a public interest sec_1_501_c_3_-1 provides that an organization may be exempt as an organization described in sec_501 if it is organized and operated exclusively for one or more of the following purposes a religious b charitable c scientific d testing for public safety e literary f educational or g prevention of cruelty to children or animals sec_1_501_c_3_-1 provides that an organization is not organized or operated exclusively for one or more of the purposes specified in sec_501 unless it services a public rather than a private interest sec_1_501_c_3_-1 includes in the definition of charitable or charity the following form 886-a crev department of the treasury - internal_revenue_service page -4- form_886 a name of taxpayer org schedule no or exhibit year period ended december explanation of items department of the treasury - internal_revenue_service 20xx a b c d e f relief of the poor and distressed or of the underprivileged advancement of religion advancement of education or science erection or maintenance of public buildings monuments or works lessening of the burdens of government and promotion of social welfare by organization designed to accomplish any of the above purposes or i ii iii iv to lessen neighborhood tensions to eliminate prejudice and discrimination to combat community deterioration and juvenile delinquency to defend human and civil rights secured_by law or therefore in making the determination of whether an organization's activities are consistent with exemption under sec_501 of the code the service will rely on a three-part test as stated in revrul_80_278 i r b accordingly the organization's activities will be considered permissible under sec_501 if the purpose of the organization is charitable the activities are not illegal contrary to a clearly defined and established public policy or in conflict with express statutory restrictions and the activities are in furtherance of the organization's exempt_purpose and are reasonably related to the accomplishment of that purpose revrul_71_447 c b in interpreting sec_501 of the code concluded that an organization is not operated exclusively for charitable purposes if its activities are carried on in a manner that can be reasonably classified as contrary to well-established federal public policy revrul_59_95 c b concerns an exempt_organization that was requested to produce a financial statement and a statement of its operations for a certain year however its records were so incomplete that the organization was unable to furnish such statements the service held that the failure or inability to file the required information_return or otherwise to comply with the provisions of sec_6033 of the code and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status form 886-acrev department of the treasury - internal_revenue_service page -5- form_886 a name of taxpayer org schedule no or exhibit year period ended december explanation of items department of the treasury - internal_revenue_service 20xx in arlie foundation inc v united_states of america d d c f_supp the district_court upheld the revocation of arlie foundation’s tax- exempt status the district_court upheld the revocation because arlie foundation operated for non-exempt purposes and for private_inurement in dr murdock head the founder and executive director of afi was convicted in the eastern district of virginia of conspiracy to commit tax_fraud and to bribe public officials the fourth circuit reversed the conviction based on an improper jury instruction 641_f2d_174 4th cir dr head was retried and again convicted in the conviction was affirmed in 697_f2d_1200 4th cir cert_denied 462_us_1132 103_sct_3113 77_led_1367 following the criminal case the internal_revenue_service initiated an investigation of arlie foundation’s tax- exempt status for the years through at the conclusion of the investigation the internal_revenue_service determined that the arlie foundation did not operate exclusively for exempt purposes because it operated for the private benefit of dr head in the internal_revenue_service issued a notice_of_determination which revoked effective date arlie foundation’s tax-exempt status as a sec_501 c organization in 588_fsupp_693 the court had to determine if the exempt_organization operated exclusively for tax-exempt purposes in accordance to sec_501 that no part of its net_earnings inured to the benefit of any private individual and and if the revocation should be imposed retroactively with regard to the first requirement of sec_501 ie that an organization must be operated exclusively for an exempt_purpose the applicable regulations state as follows c operational_test -- primary activities an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose based on similar court cases the court wrote that if the nonexempt activities of the plaintiff are more than incidental or insubstantial it is not entitled to continuing qualification as an exempt_organization the presence of a single noneducational purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly educational_purposes if there is present in an organization's operations a single noncharitable purpose substantial in nature though it may have other truly and important charitable purposes it is not entitled to be exempt the court examined the documents presented by freedom church and determined that the plaintiff did not operate exclusively for religious charitable or educational_purposes plaintiff has failed to provide any financial records to buttress its claims that it is organized primarily for form 886-a cev department of the treasury - internal_revenue_service page -6- form_886 a name of taxpayer org schedule no or exhibit year period ended december explanation of items department of the treasury - internal_revenue_service 20xx exempt purposes under sec_501 moreover the united_states has presented evidence which has not been refuted that a substantial activity engaged in by plaintiff was the promotion of tax-avoidance schemes sec_501 clearly states that an organization must be operating exclusively for religious charitable educational or other exempt purposes tax_avoidance schemes do not qualify as other exempt purposes because more than an insubstantial part of its activities is not in furtherance of an exempt_purpose plaintiff has not met the operational_test therefore the court finds that plaintiff has failed to meet the first requirement of sec_501 that it be operated exclusively for one or more exempt purposes the court also concluded that even if the plaintiff did meet its burden of proving that it is operated exclusively for an exempt_purpose plaintiff fails to meet the second requirement of sec_501 ie that its assets do not inure to the private benefit of private shareholders or individuals a ‘private shareholder or individual’ refer s to persons having a personal and private interest in the activities of the organization and includes the creator of the organization and his family the requirement that there be no private_inurement overlaps the requirement that an organization must operate exclusively for exempt purposes clearly if part of an organization's earnings inure to the benefit of private individuals the organization cannot be operating exclusively for exempt purposes the court was shown documents which substantiated that a total of dollar_figure by check from two freedom church accounts to various debtors all personal in nature in the absence of any evidence submitted by plaintiff to explain how the funds in these church accounts were used for legitimate church purposes the court must conclude that the funds in these accounts inured to the founder’s personal benefit under any standard of proof plaintiff has not established that its earnings did not inure to private individuals as required under sec_501 of the code because plaintiff has failed to meet the requirements of sec_501 the court finds that it is not entitled to continuing qualification as an exempt_organization was disbursed finally the court had to determine whether the revocation should be imposed retroactively title_26 code_of_federal_regulations sec_601_201 provides in pertinent part except in rare or unusual circumstances the revocation or modification of a ruling will not be applied retroactively with respect to the gateweay to a cure to whom the ruling was originally issued or to a taxpayer whose tax_liability was directly involved in such ruling if there has been no misstatement or omission of material facts ii the facts subsequently developed are not materially different from the facts on which the ruling was based iii there has been no change in the applicable law iv the ruling was originally issued with respect to a prospective or proposed transaction and v the taxpayer directly involved in the ruling acted in good_faith in reliance upon the ruling and the retroactive revocation would be to his detriment form 886-a rev department of the treasury - internal_revenue_service page -7- form_886 a name of taxpayer org schedule no or exhibit year period ended december explanation of items department of the treasury - internal_revenue_service 20xx the court determined that the plaintiff does not meet all of the requirements set forth in this regulation thus it cannot avoid retroactive application of this revocation the facts upon which the revocation is based are materially different from the representations made in plaintiff's original application_for exemption upon which an exemption was granted in it was only after the irs granted a tax exemption to plaintiff pursuant to sec_501 that the irs found out that freedom church was actively promoting tax-avoidance methods and that its earnings were inuring to private individuals including its leaders clearly these facts as subsequently developed differ materially from the facts on which the original ruling was based accordingly the court sustained the retroactive application of the revocation of plaintiff's tax- exempt status - government’s position president of org had properly incorporated the organization in accordance with state regulations however from january 20xx to may of 20xx president willfully and specifically violated internal_revenue_code sec_501 by diverting the proceeds from the raffles for his own personal_use he admitted to using part of the proceeds to repay personal loans credit cards and other cash items these willful acts of diversion are clearly inurement that benefited president since the officer of org knowingly and willingly carried out activities in a manner that are contrary to state and federal public policy the internal_revenue_service is proposing that the exempt status of the organization be revoked following acts president admitted their participation in the e e e president admitted to having made payments to individuals who won prizes at raffles and not filing forms with the internal_revenue_service and that these prizes were worth substantially more than dollar_figure dollars president admitted that he used monies from org to make payments on his personal credit cards to make his mortgage payments and to write checks to himself president admitted that he purchased several hundred-raffle tickets in false names and won the grand prize on two separate occasions in consideration of all the previously reported illegalities which occurred during the operation of org from january 20xx to may 20xx and which were willfully and purposely incurred by the officers of the organization the internal_revenue_service has determined that the organization does not meet the three-part activities test as referenced in revenue_ruling form 886-a rev department of the treasury - internal_revenue_service page -8- department of the treasury - internal_revenue_service form_8 a name of taxpayer org schedule no or exhibit year period ended december explanation of items 20xx i r b and thus ineligible to be tax exempt under internal_revenue_code sec_501 taxpayer’s position the secretary of the organization per annual report filed with secretary of state will not response to telephone calls conclusion due to the determination that org has conducted activities that are in violation of internal_revenue_code sec_501 the internal_revenue_service is proposing that the tax exempt status of this organization be revoked for the year beginning on january 20xx form 886-a kev department of the treasury - internal_revenue_service page -9-


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 corp br postf-151723-01 uilc internal_revenue_service national_office legal advice memorandum for associate area_counsel large and mid-size business cc lm hmt new from william d alexander acting associate chief_counsel cc corp subject sec_351 control 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 target year date a b c state a busine sec_1 busine sec_2 postf-151723-01 issue whether the target acquisitions by acquiring as well as the related ipo of acquiring stock meet the control requirement of sec_351 facts acquirer was founded in year as a state a corporation its goal was to become a leading consolidator and operator of busine sec_1 and busine sec_2 pursuant to a plan of acquisition contained in its date sec prospectus acquirer sought to engage in a series of transactions whereby target and eleven other independent busine sec_1 and related companies would through reorganization become subsidiaries of acquirer the consummation of an ipo was to be contemporaneous and contingent upon the closing of twelve separate merger agreements between temporary transitory subsidiaries of acquirer formed for the purpose of this reorganization and the twelve operating companies including target the subsidiaries would merge into the operating target companies with the targets surviving as twelve separate subsidiaries of acquirer the approximate values of the eleven other companies all smaller than target ranged from a to b none of the above transactions qualified under sec_368 because or more of the consideration each target received from acquiring consisted of boot acquirer transferred cash and nearly c of its equity in the ipo and mergers to the underwriters public and target owners in exchange for cash and stock of the targets transfer of this amount of stock to the various transferors constituted control under the provisions of sec_368 law and analysis you have stated that none of the above acquisitions by acquiring of targets through the use of merger subsidiaries qualify under sec_368 because or more of the consideration each target received from acquiring consisted of boot we agree with this conclusion in addition you state that the above mentioned target acquisitions by acquiring as well as the related ipo of acquiring stock meet the control requirement of sec_351 under sec_351 the shareholders of targets will be treated as transferring all their stock in targets and the public investors in the ipo would be treated as transferring cash in exchange for stock of the acquiring_corporation and cash since at least c of the stock of acquiring was acquired by the postf-151723-01 transferors the individual investors in the ipo and the shareholders of targets the transaction will meet the control requirement of sec_351 in addition we agree that the public investors in the ipo of acquiring stock will be treated as if they transferred cash directly to acquiring in exchange for acquiring stock the underwriter will be disregarded for purposes of sec_351 see sec_1 a further when the transferors in a transaction qualifying under sec_351 obtain control in the transferee as defined in sec_368 no additional continuity of shareholder interest is required see revrul_84_71 1984_1_cb_106 continuity_of_interest is unnecessary in order for a transaction to qualify under sec_351 if it meets the other requirements of sec_351 please call if you have any further questions by william d alexander acting associate chief_counsel alfred bishop jr branch chief corporate branch


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 ----------------------- badge ----------------- --------------------------------------------------- telephone number --------------------- refer reply to cc tege eb ec plr-161420-04 date date -------------------------- company plan ----------------------------------------------------------------------------------- -------------------------------------------------------------------- ----------------------------------------------- broker -------------------------- this is in response to your ruling_request dated date on behalf of company requesting a ruling under sec_83 of the internal_revenue_code that the private_placement of certain warrants by company will not cause options issued to company’s employees under the plan to be viewed as actively_traded on an established market within the meaning of sec_1_83-7 of the income_tax regulations company is planning to offer for sale warrants and the concurrent grant of nonqualified options to its employees under the plan to purchase shares of its common_stock through -------------- to be conducted by broker company states that this offering of warrants will be a private_placement governed by sec_4 of the securities act of securities act under the private_placement the company will not register the warrants or the stock issued on exercise of the warrants under the securities act company will not apply to list the warrants on any securities exchange or to include the warrants on any automated quotation system the warrants will be sold to the -------------------------------------------------------------------------- -------------------------- institutional buyers within the meaning of rule 144a the securities act ------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- plr-161420-04 --------------------------------------------------------------------------------------------------------------------- -------------------------- the offer of the warrants is only to persons to whom broker delivers the offer and is not made to anyone else including employees of company or to the public generally company and broker may reject any offer to purchase for any reason the buyer of the warrants must agree as a condition to bidding on the warrants not to offer sell assign pledge or otherwise transfer the warrants the warrants will be represented by certificates issues in definitive form the warrants will contain the transfer restrictions there are also hedging restrictions in place and if the restrictions are violated company is allowed to cancel the warrants with no payment or other obligation at the same time that the warrants are issued company will grant to employees nonqualified options under the plan the nonqualified options are not transferable or exercisable immediately the vesting of the nonqualified options depends on the employee’s performance of services for company whereas the vesting of the warrants does not depend on the holder’s performance of services thus the warrants are not issued in_connection_with_the_performance_of_services the period over which the warrants vest and the number of warrants that vest in each month corresponds generally to the vesting schedule of the nonqualified options if the nonqualified options are forfeited cancelled or exercised the warrants can be terminated or early automatic exercised sec_83 of the code provides that if in_connection_with_the_performance_of_services property is transferred to any person other than the person for whom the services are performed the excess of the fair_market_value of the property determined without regard to any restriction which by their terms will never lapse at the first time the rights of the person having a beneficial_interest in the property are transferable or are not subject_to a substantial_risk_of_forfeiture which ever occurs earlier over the amount if any paid for the property will be included in the gross_income of the person performing the services in the first taxable_year in which the rights of the person having the beneficial_interest in the property are transferable or are not subject_to a substantial_risk_of_forfeiture whichever is applicable sec_1_83-7 of the regulations provides that if there is granted to an employee or beneficiary in_connection_with_the_performance_of_services an option to which sec_421 does not apply sec_83 shall apply to the grant if the option has a readily_ascertainable_fair_market_value at the time the option is granted sec_1_83-7 provides that sec_83 will not apply to the transfer of an option without a readily_ascertainable_fair_market_value sec_1_83-7 of the regulations provides that options are considered to have a readily_ascertainable_fair_market_value if they are actively_traded on an established market when an option is not actively_traded on an established market it does not have a readily_ascertainable_fair_market_value unless its fair_market_value can otherwise plr-161420-04 be measured with reasonable accuracy an option is not considered to have a readily_ascertainable_fair_market_value unless the taxpayer can show that all the conditions listed in sec_1_83-7 exist if sec_83 does not apply at the time an option is granted because the option does not have a readily_ascertainable_fair_market_value then sec_83 will not apply until the option is exercised or otherwise_disposed_of even if the fair_market_value of the option becomes readily ascertainable before then if the option is exercised sec_83 and sec_83 apply to the transfer of property pursuant to such exercise if the options are sold or otherwise_disposed_of in an arms length transaction sec_83 and sec_83 apply to the transfer of money or other_property received in the same manner as sec_83 and sec_83 would have applied to the transfer of property pursuant to an exercise of the option sec_1_83-7 based on the information provided we rule as follows the private_placement of the warrants as described above does not create an established market for the active trading of the warrants and thus does not cause the options to be viewed as being actively_traded on an established market with the meaning of sec_1_83-7 of the regulations except as specifically ruled on above no opinion is expressed or implied concerning the tax consequences of any item of any transaction or item discussed above this ruling is provided only to the taxpayers who requested it sec_6110 of the code provides that it may not be used or cited as precedent the taxpayer should attach a copy of this ruling to any income_tax return to which it is relevant in accordance with the power_of_attorney on file a copy of this letter is being sent to your authorized representative sincerely enclosure copy for purposes robert b misner senior technician reviewer executive compensation branch office of the division counsel associate chief_counsel tax exempt and government entities