internal_revenue_service number release date index number -------------------------- -------------------------- ------------------------------------------ --------------------------------- in re ------------------------------ ----------------------- ------------------------------ department of the treasury washington dc person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc intl br2 - plr-131651-03 date february ---------------------------- ---------------------------------------- legend a -------------------------------------------------- b -------------------------------------------------- c1 c2 c3 d e f firm x firm y firm z country w country x country y country z w percent x percent y percent z percent date a amount m dear ------------------- this is in response to your letter dated date requesting an extension of time to file a qualified_electing_fund qef election on behalf of a with respect to a’s investments in c1 c2 c3 and d ---------------------------------- ---------------------------------- ---------------------------------- ------------- --------------------------------------- --------------- -------------------------------- ---------------------- -------------------------- --------------------- ---------- ----------------- ----- ------------ ----------------- ----------------- ----------------- ----------------- --------------- the rulings contained in this letter are based upon information and a is a u s limited_liability_company with members of whom are u s c1 c2 and c3 are country y entities that are classified as corporations for u s 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 this request_for_ruling such material is subject_to verification upon examination facts citizens or residents a is the sole general_partner of b a country w limited_partnership a owns approximately w percent of b tax law each was formed by b on date a to serve as a holding_company for investment in certain active companies b made an equity contribution to c2 in exchange for a interest in c2 c2 contributed the same amount to its direct wholly-owned subsidiary c3 and c3 contributed the same amount to its direct wholly- owned subsidiary c1 c1 c2 and c3 have been passive foreign investment companies pfics under sec_1297 since the date of their formation company prior to this acquisition in date the advice of firm x a law firm competent to render international tax_advice was sought concerning the potential investment in f firm x had previously been involved in the formation of both a and b and therefore was aware of a’s ownership_interest in b firm x was consulted whether the investment in f could be made directly through the country y entities c1 c2 and c3 or whether the investment needed to be made though a holding_company organized in the u s or elsewhere firm x focused on b’s ownership of the country y entities and failed to recall that the country y entities were indirectly owned by a through b and therefore failed to advise a that c1 c2 and c3 qualified as pfics with regard to a a was therefore not advised to make a qef election for c1 c2 and c3 and made no qef election for c1 c2 or c3 for the tax_year country x holding_company and d acquired z percent of the common equity of e a country x operating company and approximately amount m of convertible_bonds of e prior to these acquisitions in date firm x was consulted concerning the potential investment in e firm x was informed that the investment in e would be made through d firm x failed to advise that investing in e through d would cause d to qualify as a pfic with regard to a and therefore failed to advise a to make a qef election for d in date c1 obtained a y percent interest in the common equity of d a in date c1 obtained an x percent interest in f a country z operating in date while rendering advice with respect to the consequences of a a requests the consent of the commissioner of the internal_revenue_service to firm y an accounting firm also provided tax_advice with respect to the formation and structuring of a and b and prepared a and b’s tax returns since their formation including the and tax returns firm z was hired in to complete the preparation of a and b’ sec_2001 tax returns neither firm y nor firm z advised a and b about the potential status of c1 c2 c3 or d as a pfic or the availability of the qef election redemption by e of the convertible_bonds held by d firm x reviewed the overall organizational structure and realized that a held indirect interests in four pfics c1 c2 c3 and d at this time firm x noted for the first time the fact that these entities were pfics and recommended the submission of a ruling_request to make retroactive qef elections under sec_1_1295-3 ruling requested make a retroactive qef election under sec_1_1295-3 with respect to c1 c2 c3 for a’s tax_year and with respect to d for a’ sec_2001 tax_year law and analysis a taxpayer if an election by the taxpayer under sec_1295 applies to such company for the taxable_year and the company complies with such requirements as the secretary may prescribe for purposes of determining the ordinary_earnings and net capital_gains of such company under sec_1295 a qef election may be made for any taxable_year at any time on or before the due_date determined with regard to extensions for filing the return for such taxable_year to the extent provided in regulations such an election may be made after such due_date if the taxpayer failed to make an election by the due_date because the taxpayer reasonably believed the company was not a pfic commissioner to make a retroactive qef election for a taxable_year the commissioner will grant relief under sec_1_1295-3 only if four conditions are satisfied the first requirement is that the shareholder reasonably relied on a qualified_tax professional who failed to identify the foreign_corporation as a pfic or failed to advise the shareholder of the consequences of making or failing to make a sec_1295 election sec_1_1295-3 provides that a shareholder will not be considered to have reasonably relied on a qualified_tax professional if the shareholder sec_1295 provides that any pfic shall be treated as a qef with respect to under sec_1_1295-3 the taxpayer may request the consent of the during the years at issue a sought u s tax_advice from its regular outside tax the second requirement of sec_1_1295-3 is that granting consent will knew or reasonably should have known that the foreign_corporation was a pfic and knew of the availability of a sec_1295 election in addition a shareholder cannot claim reliance upon a tax professional if he knew or reasonably should have known that the qualified_tax professional was not competent to render tax_advice with respect to the ownership of shares of a foreign_corporation or did not have access to all relevant facts and circumstances counsel firm x prior to the formation of and investment in c1 c2 c3 and d firm x’s tax department was competent to render tax_advice with respect to stock ownership of a foreign_corporation and had access to all the relevant facts and circumstances firm x’s tax department failed to identify c1 c2 c3 and d as pfics and therefore failed to advise a of the consequences of making or failing to make a qef election thus a reasonably relied on a qualified_tax professional within the meaning of sec_1_1295-3 and for the taxable years at issue not prejudice the interests of the u s government under sec_1 f i the interests of the u s government are prejudiced if granting relief would result in the shareholder having a lower tax_liability taking into account applicable_interest charges in the aggregate for all years affected by the retroactive election other than by a de_minimis amount than the shareholder would have had if the shareholder had made the sec_1295 election by the election due_date the time_value_of_money is taken into account for purposes of this computation if granting relief would prejudice the interests of the u s government the commissioner may in his sole discretion grant consent to make the election provided the shareholder enters into a closing_agreement with the commissioner that requires the shareholder to pay an amount sufficient to eliminate any prejudice to the u s government as a consequence of the shareholder’s inability to file amended returns for closed taxable years sec_1_1295-3 open and a has already reported the amounts owed for through on its partnership return and on the schedules k-1 for its members the third requirement of sec_1_1295-3 is that the request must be made before a representative of the internal_revenue_service raises upon audit the pfic status of the corporation for any taxable_year of the shareholder sec_1_1295-3 in this case the pfic status of the c1 c2 c3 and d has not been raised upon audit this requirement is met in this case because all of the affected years are still the final requirement of sec_1_1295-3 is that the procedural requirements set forth in sec_1_1295-3 must be met these include filing a request for consent to make a retroactive election with and submitting a user_fee to the office of the associate chief_counsel international sec_1 f i additionally affidavits signed under penalties of perjury must be submitted by the shareholder and any qualified_tax professional upon whose advice the shareholder relied sec_1_1295-3 iii these affidavits must describe the events that led to the failure to make a qef election by the election due_date the discovery of such failure and the engagement and responsibilities of the qualified_tax professional and the extent to which the shareholder relied on such professional here affidavits meeting the requirements set forth in sec_1_1295-3 and iii as to the failure of firm x to inform a of its need to make qef elections have been submitted and a has otherwise satisfied the procedural requirements of sec_1_1295-3 consent is granted to a to make retroactive elections for a’s taxable_year with respect to c1 c2 and c3 and for a’ sec_2001 taxable_year with respect to d under sec_1_1295-3 provided that a complies with the rules under sec_1_1295-3 regarding the time and manner for making the retroactive qef election based on the information submitted and representations made this private_letter_ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this ruling must be attached to any_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this ruling is being sent to the taxpayer sincerely valerie a mark lippe senior technician reviewer cc intl br2 office of associate chief_counsel international


department of the treasury i n t e r n al r e v e n u e s e r v i c e w as h i n g t o n d c date cc dom it a offic e of c h ief c o u n sel uil number release date memorandum for kathy kozakiewicz office_audit group manager phoenix district from george baker assistant to branch chief branch subject per_diem rates this is in response to your request for information regarding the use of per_diem rates to substantiate travel_expenses particularly with regards to the use by independent contractors of the federal lodging rate to substantiate deductions i hope you find this information helpful please be aware that this chief_counsel_advice is for your general information and is advisory only it is not intended to be conclusive as to the tax consequences of this matter to any specific taxpayer sec_274 of the internal_revenue_code provides in part that no deduction shall be allowed under sec_162 for any traveling expense including meals_and_lodging while away from home unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement the amount of the expense the time and place of the travel and the business_purpose of the expense sec_274 further provides that regulations may prescribe that some or all of the substantiation requirements do not apply to an expense that does not exceed an amount prescribed by such regulations sec_1_274-5t of the income_tax regulations provides the rules of substantiation by adequate_records to meet the adequate_records requirement taxpayers must maintain a contemporaneous account book diary log statement of expense trip sheets or certain similar record and documentary_evidence that in combination are sufficient to establish each element of a travel expenditure sec_1 5t c iii a provides that in the case of expenditures_for lodging while traveling away from home taxpayers must provide documentary_evidence such as receipts paid bills or similar evidence sufficient to support the expenditure sec_1 d -1t a in part grants the commissioner the authority to prescribe rules relating to substantiating the amount of expenses reimbursed under reimbursement arrangements including per_diem allowances for ordinary and necessary expenses paid_or_incurred while traveling away from home for meals while traveling away from home sec_1_274-5t grants the commissioner the authority to establish a method under which a taxpayer may elect to use a specified amount in lieu of substantiating the actual cost of meals pursuant to these two separate sources of authority the internal_revenue_service provides a revenue_procedure for_the_use_of per_diem rates to substantiate traveling expenses most recently published as revproc_98_64 1998_52_irb_32 sections dollar_figure and dollar_figure of the revenue_procedure implement sec_1 d -1t a by allowing employers to treat as substantiated certain traveling expenses_incurred by employees that are reimbursed under an accountable_plan section dollar_figure of the revenue_procedure implements sec_1_274-5t by allowing employees and self-employed individuals to use the federal m ie rate to substantiate meal expense deductions however the revenue_procedure does not provide a method whereby the federal lodging rate may be used to substantiate deductions for lodging_expenses in fact the regulations do not authorize the service to provide such a substantiation method rather as noted sec_1_274-5t requires that taxpayers provide documentary_evidence such as receipts paid bills or similar evidence sufficient to support an expenditure for lodging while traveling away from home accordingly if a taxpayer wishes to deduct unreimbursed lodging_expenses the taxpayer must substantiate the expenses as required under sec_1_274-5t the taxpayer may not treat the expenses as substantiated by relying on the federal lodging rate if you need further assistance in this matter please contact my office at


department of the treasury internal_revenue_service washington d c date cc dom fs corp uilc number release date internal_revenue_service national_office field_service_advice memorandum for deborah a butler assistant chief_counsel field service cc dom fs from subject reduction of tax_attributes under code sec_108 this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend p b c d jurisdiction y year x dollar_figurer dollar_figures dollar_figuret issue whether a consolidated_group that excludes cancellation of indebtedness cod income under sec_108 must pursuant to sec_108 reduce the group’s consolidated_net_operating_loss cnol as a tax attribute even if no portion of the cnol is attributable to the member having the excluded income conclusion a consolidated_group that excludes cancellation of indebtedness cod income under sec_108 must pursuant to sec_108 reduce the group’s consolidated_net_operating_loss cnol as a tax attribute even if no portion of the cnol is attributable to the member having the excluded income facts p is the parent of b b owned d of c p filed consolidated_returns that included b and c as well as other group members several years before the years at issue a number of substantial loans were made from p to b and to a lesser extent from b to c thereafter p b and c were among the debtors in a chapter bankruptcy petition filed in jurisdiction y late in year x a plan_of_reorganization was filed on behalf of the debtors and approved by the court under the plan b and c merged into p additionally the members’ substantial intercompany debts were canceled at issue is taxpayer's treatment of the cancellation of indebtedness effected by the plan_of_reorganization the treatment was as follows since b and c were insolvent b and c excluded approximately dollar_figurer of cod income under sec_108 second p reduced the tax_attributes of b by approximately dollar_figures in accordance with sec_108 finally p and b ie the creditor members claimed bad_debt deductions of approximately dollar_figuret which ultimately increased the group’s cnol carryforward by a like amount law and analysis gross_income includes income from the discharge_of_indebtedness sec_61 gross_income does not include discharge_of_indebtedness income where the taxpayer is insolvent sec_108 the amount of indebtedness excluded from gross_income is applied to reduce the taxpayer’s tax_attributes as follows a nol - any net_operating_loss for the taxable_year of the discharge and any net_operating_loss_carryover to such taxable_year 1the facts are unclear concerning why b and c had dollar_figurer amount of cod income rather than dollar_figuret amount of cod income however because the difference between dollar_figuret and dollar_figurer is minimal we will assume for purposes of our discussion that b and c had dollar_figuret amount of cod income rather than dollar_figurer amount of cod income b general_business_credit - any carryover to or from the taxable_year of a discharge of an amount for purposes for determining the amount allowable as a credit under sec_38 relating to general_business_credit c minimum_tax_credit - the amount of the minimum_tax_credit available under sec_53 as of the beginning of the taxable_year immediately following the taxable_year of the discharge d capital_loss carryovers - any net_capital_loss for the taxable_year of the discharge and any capital_loss_carryover to such taxable_year under sec_1212 e basis_reduction - i in general - the basis of the property of the taxpayer sec_108 p apparently contends that the cnol which is attributable to p and b ie the creditor members of the group is not a tax attribute of b and c respectively ie the debtor members of the group and is not subject_to sec_108 attribute reduction based on the items listed in sec_108 and b eg nol general_business_credit minimum_tax_credit capital_loss carryovers basis_reduction etc the definition of a tax attribute is an item that could serve to reduce the tax_liability of a taxpayer each member of a consolidated_group has separate taxpayer status see 73_tc_589 aff'd 659_f2d_059 2d cir moreover sec_1_1502-6 expressly provides that each member of the group is severally liable for the tax of the entire group additionally pursuant to sec_1_1502-11 and sec_1_1502-21 the only nol that any group member has that can reduce the consolidated_tax_liability of the group for a carryback or carryover year is the cnol since each member is liable for the consolidated tax a cnol deduction reduces the tax_liability of every member of the group regardless of to which group member the cnol was attributable the group’s cnol regardless of which member’s deductions generated that cnol is available as a carryover to offset the consolidated_taxable_income of the entire group regardless of which member’s income generated that consolidated_taxable_income furthermore the part of a cnol attributable to a member is not apportioned to the member for the carryback_year unless a specific rule such as sec_1_1502-79 relating to carryover and carryback of cnols to separate_return years provides for that apportionment and in the instant case no rule provides for that apportionment in short a cnol is a tax attribute potentially usable by every member of a consolidated_group therefore a cnol attributable to p and b is an available tax attribute of b and c as well as p which should be subject_to sec_108 attribute reduction from a broader perspective the bad_debt deductions of p and b and the excluded corresponding cod income benefitted all group members the dollar_figuret amount of bad_debt deductions which were not offset by dollar_figuret amount of cod income inclusion reduced the tax_liability of the entire group however even though the group ie all members benefitted by these bad_debt deductions p apparently asserts that the group should look only to the tax_attributes of b and c the specific group members that had the cod income excluded from income since b and c apparently had only dollar_figures of tax_attributes to reduce the petitioners in essence assert that the group should reap the significant tax benefits associated with claiming dollar_figuret amount of bad_debt deductions as well as excluding dollar_figuret amount of cod income from gross_income but then bear a significantly lesser amount of increased tax burden associated with reducing tax_attributes furthermore sec_1_1502-11 which provides that the cnol deduction is a consolidated item supports treating the cnol as a tax attribute of each member of the group at least to the extent the loss carryover is not being carried as it is not in the instant case to a separate_return_year additionally the fact that the group’s cnol was generated by bad_debt deductions taken by creditor members on the same debt on which debtor members had the excluded cod income as are the facts in the instant case further supports treating the cnol as a tax attribute subject_to reduction under sec_108 concerning priv ltr rul plr we believe plr is incorrect to the extent it indicates that in sec_108 congress used the term taxpayer to limit tax attribute reduction for a consolidated_group just to the amount of tax_attributes of the particular member that generated the cancellation_of_indebtedness_income as already indicated although each member of a consolidated_group has separate taxpayer status each member of the group is severally liable for the tax of the group under the approach of the consolidated_return_regulations a cnol carryover attributable to one group member is available to offset the income of the other group members in the consolidated carryover year since the cnol attributable to one member is available to reduce the tax_liability of all members it is inappropriate to limit sec_108 attribute reduction within a consolidated_group to the amount of tax_attributes of just the particular group member having the cod income as you are aware plr may not be cited as precedent see sec_6110 moreover even if plr could be cited as precedent the plr could be distinguished from the instant case in various ways not addressed in this memorandum if you have any questions please call deborah a butler assistant chief_counsel field service field service division by steven j hankin branch chief corporate branch


department of the treasury internal_revenue_service washington d c c h ief c o u n sel number info release date dear conex-117594-02 date this is in response to your letter dated date in which you requested information regarding the amount that is exempt from federal estate_tax in the case of decedents dying in the economic_growth_and_tax_relief_reconciliation_act_of_2001 amended the estate_tax provisions to provide for an increase in the amount that is exempt from estate_tax beginning in the estate_tax exemption will be as follows estates of decedents exemption dying in -2003 dollar_figure - dollar_figure 2007and dollar_figure dollar_figure under the current legislation the estate_tax is repealed for the year and is reinstated in we hope this information is helpful if you have any questions please contact me at sincerely george masnik chief branch office of passthroughs and special industries


internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc psi b9-plr-126012-00 date date number release date index numbers 1234a legend decedent trust trustee x a b b1 b2 c cc c1 c2 d e plr-126012-00 f contingent remaindermen plr-126012-00 contingent remaindermen continued plr-126012-00 contingent remaindermen continued modification agreement date date date plr-126012-00 date a b c d e f state state supreme court court special master state statute state statute dear sir or madam this is in response to your authorized representative’s letter dated date and subsequent submissions requesting rulings on the income_tax gift_tax and generation-skipping_transfer_tax gstt consequences of the modification of a_trust the facts as represented are as follows decedent died on date pursuant to item of decedent’s will the residue of decedent’s estate was transferred to trust low-yield closely-held stock in decedent’s company x constitutes approximately e percent of the assets of trust the remaining trust assets include cash and marketable_securities item a of decedent’s will directs the trustee to retain all investment properties so long as in its discretion it is advisable so to do regardless of whether or not such investments or property fall within the classes of investments in which fiduciaries are or may be authorized by a statute or case or rule_of court to invest trust funds item a further directs that the stock of x should if possible be held as part of trust corpus until trust’s termination item b of decedent’s will directs that the net_income of trust is to be paid to six income beneficiaries upon the death of any income_beneficiary and the death of e one of the income beneficiaries such beneficiary’s share of net_income is to be accumulated and added to trust corpus four of the income beneficiaries predeceased decedent and e died within one year of decedent’s death a the only surviving income plr-126012-00 beneficiary is entitled under item b to receive a percent of trust annual net_income trust was irrevocable on date and no additions actual or constructive have been made to trust since date item of decedent’s will provides that trust will cease and determine upon the death of all of the income beneficiaries pursuant to item of the will trust corpus is to be divided and distributed at termination as follows one-fourth to b if living if b is not living then b’s share is to be divided equally among b’s children b1 and b2 or their heirs one-fourth to c if c is living married to and living with cc if c is not living or if living and not married to cc or if cc predeceases c then c’s share is to be divided equally among their children c1and c2 or their heirs one-fourth to d or d’s heirs and one-fourth to f or f’s heirs in a case addressing trust state supreme court held that trust could not terminate until the death of a the last surviving income_beneficiary and that the beneficiaries listed in item of decedent’s will possess contingent_remainder interests in trust contingent remaindermen that will not vest until trust terminates on date a and several of the contingent remaindermen instituted a lawsuit the litigation in court requesting modification of trust under state law under state statute a court may modify a_trust in any manner for good cause shown if the court finds that the modification will neither materially impair the accomplishment of the trust purposes nor adversely affect the interests of any beneficiary or if made materially benefit the trust or any beneficiary the parties sought commutation of the life income_interest of a and reformation of trust to include as beneficiaries individuals in family lines that were expressly excluded in decedent’s will as remaindermen a subsequent cross bill for relief sought authorization for modest interim distributions of income to certain adults who were either named remaindermen or heirs presumptive of named remaindermen and to remote infant claimants and those who may become remote infant claimants the cross bill abandoned the request for reformation relief that would have included the additional family lines among named remaindermen during the course of the litigation state enacted state statute authorizing a trustee to make adjustments between principal and income in a_trust under a prudent investor standard following the enactment of state statute a alleged that the trustee failed to invest trust assets in a manner consistent with his interest as a life_tenant and to apportion trust receipts and expenses between income and principal in the manner required_by_law all greatly to his detriment the contingent remaindermen became concerned that a would continually demand that trustee transfer some of the principal of trust to income pursuant to state statute and or influence trustee by such demands to invest trust assets in a way that might harm their long-term interests on date the parties filed an amended complaint requesting modification of trust pursuant to state statute or pursuant to the equitable approximation doctrine allowing a court to alter the terms of a testamentary_trust to ensure that the intent of the testator is not frustrated the amended complaint alleged that the terms of trust when examined in context including decedent’s family situation and the value of trust plr-126012-00 assets clearly express a general or broad intent to substantially and generously benefit decedent’s cousins who are named or alternate remaindermen after adequate provision for designated income beneficiaries the amended complaint further alleged that disagreements had arisen between a and trustee regarding investment policies and practices and allocations between income and principal these differences were in part due to the fact that the contingent remaindermen were interested in corpus growth and reduced income_taxation and a was interested in maximizing income the parties alleged that these disagreements threatened the orderly administration of the trust the parties requested that court i allow a to commute his interest in trust for a fair price taking into account the interests of the parties ii approve and order implementation of the modification agreement iii find that the interests of the infants and unborn parties are properly represented iv find that the modification agreement is in the interests of all infants and unborn parties v find that good cause has been shown to modify trust in accordance with the modification agreement vi find that a modification to trust in accordance with the modification agreement will neither materially impair the accomplishment of trust purposes nor adversely affect the interest of any beneficiary vii order all infant and unborn parties to be bound by the terms of the modification agreement and viii order that trust be modified in accordance with the modification agreement the modification agreement states that the agreement is the culmination of arm’s length negotiations between the parties for the settlement of a bona_fide controversy relating to the administration and construction of trust the parties were all represented by counsel and consulted experts in the field of medicine actuarial statistics finance and law in order to perfect a settlement that is within the range of reasonable outcomes under decedent’s will and state law the modification agreement states further that those persons who would receive corpus in the event of the death of a at this time are among decedent’s nearest living relatives and are persons whom he must be deemed to have wished to benefit from the extraordinary wealth now contained in trust the agreement provides a’s income_interest will be commuted for a one-time payment from trust of dollar_figureb trust then will be partitioned into trusts a and b trust b will be funded with dollar_figurec in cash and securities from trust no stock in x will be transferred to trust b net_income will be paid quarterly to those persons to whom it is believed that the corpus of trust would be paid if a were to have died immediately prior to each quarterly distribution under item of decedent’s will and state law of descent and distribution the quarterly distributions of net_income shall cease upon a’s death to protect the interest of infant parties and unknown parties and in the event the establishment of and the income distributions from trust b diminish the amounts an infant remainderman would otherwise receive upon a’s death a makeup amount shall plr-126012-00 be paid to such infant remaindermen from the corpus of trust b without regard to the percentage distributions mandated by item sec_12 and of decedent’s will the parties agree to make a similar restoration from the corpus of trust b to unknown parties who become vested remaindermen upon the death of a the makeup amount shall be determined at a’s death pursuant to a calculation described in the modification agreement trust a will be funded with the remaining assets of trust governed by the same terms as trust and administered in the same manner as trust trust a income will be accumulated and added to corpus and the trustees of trusts a and b shall be the same as the trustee of trust the court appointed special master to receive evidence and consult the parties’ experts and to recommend to the court whether the proposed modifications would materially impair the accomplishment of trust purposes or would adversely affect the interests of any beneficiary special master reviewed the fairness of the proposed commutation of a’s interest and the probability of infant and unborn potential remaindermen coming to possess vested interests in trust experts had concluded that the proposed dollar_figureb commutation settlement amount to be paid to a is within the range that can be considered financially fair these opinions were based on factors including state statute the nature of trust assets trust’s historical earnings values generally earned by trusts the expected future growth of the value of trust and of a’s income from trust and a’s life expectancy another expert determined that the expected share of infant or unborn remaindermen will be approximately percent and that the probability that the makeup amount will be inadequate approaches zero special master found the finding that modification of the trust to establish trust b will not materially impair accomplishment of trust purposes is based on an understanding of trust purposes as inferred from the provisions in the testator’s will and from an analysis of the effect of proposed trust b on distributees and potential remaindermen all in the context of assumptions in the absence of evidence to the contrary that the testator possessed reasonable intellect and customary values from an analysis of the provisions in the will considered in the context of circumstances at the time of execution and time of death one can infer that the testator in establishing trust had a primary purpose of providing defined life income interests to six relatives who were closest in relationship or affection and a secondary purpose of providing deferred or remainder interests to other close relatives living at the death of the last surviving income_beneficiary all with respect to enjoyment of a comparatively modest initial trust estate of d although the will provides for an accumulation of income with respect to plr-126012-00 expired income interests it would appear unlikely that the testator anticipated that five of the six life income beneficiaries would be dead within a year of his death and that f percent of the income from the trust would be accumulated for more than years or perhaps longer without direct present benefit to the relatives who are the closest natural objects of his bounty in context the provision for accumulation appears more a mechanism for defining administratively the extent of respective income and corpus interests than an expression of a material purpose that remaindermen for whose benefit income is accumulated for distribution be refused opportunities for earlier enjoyment following his review special master reported that all the necessary parties were before the court and the interests of the infant unborn and unknown parties were properly represented that all the adult parties and trustee had executed the modification agreement that the modification agreement was within the prayer for relief that the commutation amount to be paid to a was a fair equivalent of his interest in trust was fair to the beneficiaries of trust and was prudent from the standpoint of the remaindermen in trust that good cause had been shown to modify trust to commute the lifetime interest in a that commutation of a’s interest would neither materially impair accomplishment of trust purposes nor adversely affect the interests of any beneficiary that good cause had been shown to establish trust b as set forth in the modification agreement that establishment of trust b would neither materially impair the accomplishment of trust purposes nor adversely affect the interest of any beneficiary and that the compromise and settlement set forth in the modification agreement was in the interests of all infant and unborn parties on date the court entered an interlocutory_order adopting special master’s findings approving the modification agreement and the settlement of the matters in controversy in the litigation and modifying trust in accordance with the modification agreement subject_to any conditions precedent including obtaining this private_letter_ruling it is represented that trust b will be created as a result of the settlement agreement reached by the parties to the litigation and that there is no tax purpose for the existence of trust b as a separate trust the following rulings are requested none of the transactions contemplated by the modification agreement will result in a taxable gift by any party to the litigation for purposes of chapter of the internal_revenue_code the partition of dollar_figurec of cash and marketable_securities from trust into trust b pursuant to the modification agreement will not effect the exempt status of the partitioned trusts for generation-skipping_transfer_tax purposes under chapter plr-126012-00 the commutation of a’s income_interest in trust will not result in trust trust a or trust b or any distribution therefrom becoming subject_to the generation-skipping_transfer_tax under chapter distributions of income from trust b contemplated by the modification agreement will not result in trust trust a or trust b or any distribution therefrom becoming subject_to the generation-skipping_transfer_tax under chapter trust a and trust b will be treated as separate trusts for federal_income_tax purposes no gain shall be recognized to any party to the modification agreement or to trust trust a or trust b on the partition of assets no party to the modification agreement will be taxable as the grantor or owner of trust a or trust b for purposes of sec_671 through commutation of the life_estate of a will result in long-term_capital_gain to a to the extent that the dollar_figureb exceeds his basis if any ruling_request law and analysis sec_2501 provides that a tax computed as provided in sec_2502 is imposed for each calendar_year on the transfer of property by gift during such calendar_year by any individual resident or nonresident sec_2511 provides in pertinent part that subject_to the limitations contained in this chapter the tax imposed by sec_2501 shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible whether a transfer pursuant to a compromise settling a dispute between members_of_a_family results in a taxable gift depends on whether the compromise is based on valid claims and on whether the result is economically fair thus state law must be examined to ascertain the relative value of each party’s claim if it is determined that each party has a valid claim it must next be determined that the distribution under the settlement reflects the result that would apply under state law see 387_us_456 cf 674_f2d_761 9th cir if there is a difference it is necessary to consider whether the difference may be justified because of the uncertainty of the result if the question were litigated there is no decision by state supreme court addressing a dispute involving state statute that results in a settlement under which a_trust is modified accordingly plr-126012-00 we must apply what we find to be state law after giving proper regard to the court’s determination and to relevant rulings of other courts of state see bosch supra we have examined the modification agreement in this context the modification agreement provides a result that is within the range of reasonable settlements considering the fairness opinions of the experts the findings of the special master and the findings of state court in its interlocutory_order in applying these standards we have determined that the terms of the modification agreement fairly reflect the relative merits of the contentions of the respective parties to the dispute accordingly we conclude that none of the transactions contemplated by the modification agreement will result in a taxable gift by any party to litigation under chapter ruling requests and sec_2601 imposes a tax on every generation-skipping_transfer pursuant to section a of the tax_reform_act_of_1986 the generation- skipping transfer_tax generally is applicable to generation-skipping transfers made after date pursuant to section b a of the tax reform act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the tax does not apply to a transfer from a_trust if the trust was irrevocable on date and no addition actual or constructive was made to the trust after that date sec_26_2601-1 provides that unless otherwise provided in either paragraph b ii b or c of this section pertaining to trusts includible in the gross_estate of the settlor under sec_2038 or sec_2042 if the settlor had died on date any trust as defined in sec_2652 in existence on date is considered an irrevocable_trust sec_26_2601-1 provides rules for determining whether a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax will not cause the trust to lose its exempt status sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy sec_26_2601-1 b or c by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a generation-skipping_transfer or the creation of a new generation-skipping_transfer plr-126012-00 sec_2611 defines the term generation-skipping_transfer to mean a taxable_distribution a taxable_termination or a direct_skip sec_2651 provides generally that the generation to which any person other than the transferor belongs shall be determined in accordance with the rules in this section the generation-skipping_transfer_tax would not generally apply to trust or distributions from trust because trust was irrevocable on date and no additions actual or constructive have been made to trust since that date the proposed modifications under the modification agreement will not shift a beneficial_interest in trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the proposed modifications do not extend the time for vesting of any beneficial_interest in trust beyond the period originally provided for in trust accordingly based upon the facts submitted and the representations made and pursuant to sec_26_2601-1 we conclude that the partition of dollar_figurec in cash and marketable_securities from trust into trust b pursuant to the modification agreement will not affect the exempt status of the partitioned trusts for generation- skipping transfer_tax purposes similarly the commutation of a’s income_interest in trust will not result in trust trust a or trust b or any distribution therefrom becoming subject_to the generation-skipping_transfer_tax finally distributions of income from trust b contemplated by the modification agreement will not result in trust trust a or trust b or any distribution therefrom becoming subject_to the generation-skipping_transfer_tax ruling_request sec_643 provides that under regulations prescribed by the secretary or more trusts shall be treated a sec_1 trust if such trusts have substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries and a principal purpose of such trusts is the avoidance of federal_income_tax a primary purpose of establishing trust a and trust b is the need to eliminate the dispute that has arisen among the beneficiaries concerning investment strategies it is represented that avoidance of income_tax is not a primary purpose of trust a and trust b within the meaning of sec_643 determining whether avoidance of income_tax is a primary purpose of trust a and trust b is a question of fact the determination of which must be deferred until the federal income returns of the parties involved have been examined by the office having examination jurisdiction over the income_tax returns therefore provided that trust a and trust b are separately managed and administered and it is determined that tax_avoidance is not a primary purpose of trust a and trust b each will be treated as a separate trust for federal_income_tax purposes plr-126012-00 ruling_request sec_61 provides that income includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property will be the excess of the amount_realized therefrom over the adjusted_basis as provided in sec_1011 for determining gain sec_1_1001-1 of the income_tax regulations provides that except as otherwise stated in subtitle a the gain of loss realized from the exchange of property for other_property differing materially either in_kind or extent is treated as income or as loss sustained 499_us_554 concerns when a sale_or_exchange has taken place that results in a realization of gain_or_loss under sec_1001 in cottage savings a financial_institution exchanged its interests in one group of residential mortgage loans for another lender’s interests in a different group of residential mortgage loans the two groups of mortgages were considered substantially identical by the agency that regulated the financial_institution the supreme court in cottage savings u s pincite concluded that sec_1_1001-1 reasonably interprets sec_1001 and stated that the exchange of property is a realization event under sec_1001 if the properties exchanged are materially different in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as they embody legal entitlements that are different in_kind or extent cottage savings u s pincite in 313_us_247 the supreme court held that where a taxpayer received insurance proceeds as compensation_for the loss of a building there was no sale_or_exchange the court reasoned that neither of these terms was appropriate to characterize the demolition and subsequent compensation by the insurance_company plainly the pair of events was not a sale nor could they be regarded as an exchange since exchange implies a reciprocal transfer of capital assets not a single transfer to compensate for the demolition of the taxpayer’s asset thus in order for a transaction to result in a sec_1001 taxable_event the transaction must be a sale exchange or other_disposition and if an exchange the exchange must result in the receipt of property that is materially different from the property that was given up in this case as to the contingent remaindermen the first element will not be present because the beneficiaries do not acquire their interests in trust a or trust b as the result of an exchange of their interests in trust trust a is a continuation of trust without the distribution of income to a there is no exchange of plr-126012-00 trust interests by the beneficiaries since the trust a interests are the same interests they had in trust as to their receipt of trust b interests there is no exchange because there is no reciprocal transfer of property the beneficiaries do not give up interests in trust to get their interests in trust b without the reciprocal transfer of capital assets there can be no realization event here there is a single transfer of trust b interests as part of the modification agreement the modification agreement itself is the result of a proceeding under state statue seeking modification of trust it construes whether the income accumulation provision of trust precludes early enjoyment by the contingent remaindermen special master found the finding that modification of the trust to establish trust b will not materially impair accomplishment of trust purposes is based on an understanding of trust purposes as inferred from the provisions in the testator’s will and from an analysis of the effect of proposed trust b on distributees and potential remaindermen all in the context of assumptions in the absence of evidence to the contrary that the testator possessed reasonable intellect and customary values from an analysis of the provisions in the will considered in the context of circumstances at the time of execution and time of death one can infer that the testator in establishing trust had a primary purpose of providing defined life income interests to six relatives who were closest in relationship or affection and a secondary purpose of providing deferred or remainder interests to other close relatives living at the death of the last surviving income_beneficiary all with respect to enjoyment of a comparatively modest initial trust estate of d although the will provides for an accumulation of income with respect to expired income interests it would appear unlikely that the testator anticipated that five of the six life income beneficiaries would be dead within a year of his death and that f percent of the income from the trust would be accumulated for more that years or perhaps longer without direct present benefit to the relatives who are the closest natural objects of his bounty in context the provision for accumulation appears more a mechanism for defining administratively the extent of respective income and corpus interests than an expression of a material purpose that remaindermen for whose benefit income is accumulated distribution be refused opportunities for earlier enjoyment the creation of trust b should not be viewed as deviating from the intent of decedent rather it should be seen as carrying out his intent by means of the modification agreement as such it is a clarification of the original intent and not an exchange of interests by the beneficiaries therefore it is consistent with sec_1001 to conclude that the modifications will not constitute a sale or disposition under sec_1001 with respect to trust trust a_trust b or the parties to the modification agreement neither trust trust a_trust b nor the parties to the modification agreement will realize gain_or_loss under sec_61 and sec_1001 as a result of the plr-126012-00 modifications ruling_request sec_671 through provide rules for determining when the grantor or another person is treated as the owner of any portion of all of a_trust sec_1_671-2 of the income_tax regulations provides that a grantor includes any person to the extent such person either creates a_trust or directly or indirectly makes a gratuitous transfer within the meaning of sec_1_671-2 of property to a_trust sec_1_671-2 provides that a gratuitous transfer is any transfer other than a transfer for fair_market_value a transfer of property to a_trust may be considered a gratuitous transfer without regard to whether the transfer is treated as a gift_for gift_tax purposes sec_1_671-2 provides that for purposes of paragraph e a transfer is for fair_market_value only to the extent of the value of property received from the trust services rendered by the trust or the right to use property of the trust sec_1_671-2 provides that if a_trust makes a gratuitous transfer of property to another trust the grantor of the transferor trust generally will be treated as the grantor of the transferee trust sec_678 provides that a person other than the grantor is treated as the owner of any portion of a_trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income therefrom in such person or such person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would within the principles of sec_671 to inclusive subject a grantor of a_trust to treatment as the owner thereof decedent was the grantor of trust and the beneficiaries of trust had no powers with respect to the income or corpus of trust as directed by a court order trustee will transfer all of trust’s assets to trust a and trust b after payment of a's commutation amount the transfer is a gratuitous transfer within the meaning of sec_1_671-2 the contingent remaindermen had no right to possession of or dominion over trust assets and did not transfer assets to trusts a and b and the beneficiaries of trust a and trust b have no powers with respect to the income or corpus of trusts a and b accordingly the beneficiaries of trust trust a and trust b will not be treated as owners of trust a and trust b for purposes of sec_671 through ruling_request sec_1234a provides that gain_or_loss attributable to the cancellation lapse plr-126012-00 expiration or other termination of a right or obligation with respect to property which is a capital_asset in the hands of the taxpayer will be treated as gain_or_loss from the sale of a capital_asset sec_1222 provides that the term long-term_capital_gain means gain from the sale_or_exchange of a capital_asset held for more than year revrul_72_243 1972_1_cb_233 holds that a life tenant’s sale of her entire life interest in a testamentary_trust is the sale of a capital_asset the revenue_ruling states that the internal_revenue_service will follow the case of 157_f2d_235 2d cir cert_denied 330_us_826 which held that the proceeds received by the life_tenant of a testamentary_trust in consideration of her transfer of her entire_interest in the trust to the remainderman are to be treated as an amount_realized from the sale_or_exchange of a capital_asset under sec_1222 the revenue_ruling further states that the life tenant's basis attributable to her life interest at the time of the sale is considered to be zero see sec_1_1001-1 if a’s surrender of his life_estate is characterized as a sale it results in capital_gain or loss under revrul_72_243 and the rationale of mcallister if it is treated as an extinguishment or other termination it results in capital_gain or loss under revrul_72_243 mcallister and sec_1234a except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any federal tax_return to which it is relevant sincerely lorraine e gardner acting senior technical reviewer branch office of associate chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes


office_of_chief_counsel internal_revenue_service memorandum number release date cc tege eoeg ----------- postn-154364-07 uilc date date to tax exempt and government entities group manager --------------------------- from marie cashman special counsel exempt_organizations employment_tax government entities tax exempt government entities subject refund claim this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend taxpayer -------------------------------------- -------- state ---------------------------- ------------- a b c d ------------------------------------------------------------------------ ------------------------------------------------------------------------ ---------------------------------------------------------------------------- ------------------------------------------------------------------------ postn-154364-07 ----------------------------------------------------------------------------- ------------------------------------------------------------------------ ------------------------------------------------------------------------------ ----------------------------------------------------------------------------- ------------------------------------------------------------------------------ e f g h i issue whether the internal_revenue_service service should approve the federal unemployment tax futa_tax refund claim filed by the taxpayer a staffing company - ------------------------------------------ for futa taxes it paid with respect to wages paid to workers performing services for the taxpayer’s clients conclusion no the service should not approve taxpayer’s refund claim the futa exemption in internal_revenue_code the code sec_3306 c ---- applies to service performed in the employ of an---------------- the fact that under state law the employees are considered to perform services for taxpayer for state unemployment insurance purposes has no effect on whether they are in the employ of taxpayer or taxpayer’s clients for futa purposes similarly even if taxpayer is the statutory employer of its clients’ employees within the meaning of sec_3401 the futa liability including the exception from futa provided under sec_3306 c ---- when wages are paid for service performed in the employ of an --------------- is determined by reference to the common_law employer and not the sec_3401 employer taxpayer has staked its argument on its status for state unemployment insurance purposes and alternatively its status under sec_3401 during the course of the examination taxpayer has not claimed to be the common_law employer of its clients’ workers the facts provided with respect to how taxpayer initiates its relationship with clients the range of businesses conducted by the clients and the geographic dispersion of the clients weigh against viewing taxpayer as the common_law employer absent compelling factual information to support a conclusion that taxpayer is the common_law employer of its clients’ workers taxpayer’s refund claims should be denied facts the taxpayer was established by the --------in ------------- taxpayer describes its business as a staffing company however taxpayer operates in a like manner to businesses commonly called employee_leasing companies or professional employer organizations taxpayer offers client businesses multiple employee benefit and payroll services including withholding depositing and reporting all applicable employment related taxes both state and federal generally clients authorize taxpayer to perform postn-154364-07 payroll and other administrative functions on their behalf for employees performing services for the clients typically clients pay taxpayer a monthly rate equal to total payroll plus a specified percentage of payroll the percentage varies based upon the services the client purchases from taxpayer the clients are mainly-------------------------- -------------------------------------------------- taxpayer aggregates all of its clients and files form sec_941 employer’s quarterly federal tax_return and form_940 employer’s annual federal unemployment futa_tax return reporting wages_income_tax_withholding fica and futa for all of its clients on an aggregate basis under taxpayer’s name and employer_identification_number for ------- and ------- taxpayer paid futa with respect to the wages paid on behalf of its clients taxpayer claimed a credit against futa based on its payments into the state unemployment insurance system determination of taxpayer’s employer status for purposes of state unemployment insurance on -------------------- taxpayer registered with the state and --------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ under e ----------- --------------------------------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------------for which services are performed that do constitute employment under section d may finance its liability using any of the methods provided under f ------------------------------------------------ ------------------------------------------------------------------------------- initially the state granted the application subsequently the state reversed its position concluding that taxpayer’s employees were not performing services directly for the --------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------- in turn the state assessed taxpayer for several quarters of sui contributions from ------------- taxpayer filed a petition for a reassessment following a hearing a state administrative law judge provided a written decision on ----------------concluding that under the state unemployment insurance code taxpayer was entitled to pay its sui taxes ---------------- ------------------ the judge analyzed whether the workers being paid_by taxpayer were performing services for taxpayer that constituted employment under section d in reaching the conclusion that the workers were indeed performing services for taxpayer that constituted employment the opinion relied on the conclusion that the workers were employees of taxpayer under section i section i provides that if an entity contracts to supply an employee to perform services for a client and the entity is a leasing employer or a temporary services employer the entity is the employer of the employee who performs the services section i is an exception to the general_rule under section g for determining who is an employer the general_rule follows the common_law standard postn-154364-07 section h defines a temporary services employer and a leasing employer as an employing unit that contracts with clients or customers to supply workers to perform services for the client or customers and performs all of the following functions ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- ------------- --------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- ------------------------------------------------------------------- -------------------------------------------------------------- the judge concluded that taxpayer met the criteria to be considered a leasing company or temporary services company and consequently was the employer of its clients’ workers for purposes of state unemployment insurance law specifically the judge wrote -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- ----------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ in other words because taxpayer was the employer pursuant to section i all services performed were performed for taxpayer regardless of whether the services were conducted under taxpayer’s direction and control or whether the services had any effect on taxpayer thus the opinion ruled in taxpayer’s favor granting taxpayer’s request to pay sui -----------------------------------for the years --------------- and going forward refund claim postn-154364-07 on -------------------------- the taxpayer filed claims for refund for futa taxes paid for ---- ------- and-------- taxpayer asserts that it does not owe futa taxes because it is eligible for the exemption from futa provided by sec_3306 c ---- the amount of the refund claim is dollar_figure----------------for the ------- tax_year and dollar_figure------------------for the ------- tax_year -------------------------------------------------- examined the claims for refund although the refund claims do not provide a detailed explanation of the basis for the claims subsequent examination of the claim indicates that taxpayer takes the position that its clients’ employees were in the employ of taxpayer for purposes of the futa exemption because taxpayer was held to be the employer of the workers for purposes of state unemployment insurance requirements also taxpayer’s representative has submitted a memorandum claiming that taxpayer’s clients’ employees were in the employ of taxpayer for purposes of the futa exemption because taxpayer was the statutory employer of those workers under sec_3401 of the code factual assumptions for purposes of this memorandum for purposes of providing this legal advice we have assumed that ---------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---------------------------1 based on the facts we have we also believe it is a fair assumption that taxpayer is not the common_law employer of the individuals performing services for taxpayer’s clients a common_law employer employee relationship exists between an entity and individuals when the entity has the right to direct and control the performance of services by the individuals factors considered in determining whether an entity has an employer employee relationship with workers include the nature and degree of financial control and behavioral control the entity has and the relationship of the parties including the relationship the parties believe they are creating taxpayer operates in form not uncommon for employee_leasing companies when a business hires the taxpayer it fires its employees one day and the next day leases those same employees from taxpayer from the affected employees’ perspective there is no change in their relationship with the client company the client company continues to control the daily performance of its workers’ duties taxpayer does not provide employees with any specific instructions as to when where or how the work will be done taxpayer has hundreds of clients spread across multiple states a review of taxpayer’s client list shows that its clients are not limited to a particular industry and include small and large employers engaged in a range of businesses including retail this assumption is based on a review of taxpayer’s ------- and ------- client lists in response to an inquiry from the service a client of taxpayer stated that it fired all of its workers who were then hired by taxpayer however after taxpayer hired the workers the client continued to assign specific duties to the workers provide the necessary training for the workers set work hours for the workers and determine the workers’ rate of pay postn-154364-07 service businesses and restaurants taxpayer has expertise and capacity to provide payroll benefits and human resource functions but there is no indication it has the capacity to direct and control workers in such diverse workplaces that are so geographically dispersed thus absent additional information on the nature of taxpayer’s interaction with the workers and the clients it is most likely that taxpayer is not the common_law employer of the workers performing services for client companies law and analysis sec_3301 of the code imposes a tax under futa on every employer equal to a certain percentage of the wages paid_by it with respect to employment sec_3306 provides that for purposes of futa the term wages means all remuneration for employment with certain specified exceptions sec_3306 defines employment in relevant part as any service of whatever nature performed by an employee for the person employing him therefore unless amounts paid are excepted from wages or the services performed are excepted from employment futa_tax will apply for futa purposes the term employer is generally defined in sec_3306 as any person who a during any calendar_quarter in the calendar_year or the preceding calendar_year paid wages of dollar_figure or more or b on each of some days during the calendar_year or during the preceding calendar_year each day being in a different calendar_week employed at least one individual in employment for some portion of the day employment_tax regulation sec_31_3306_i_-1 provides that an individual is an employee if the relationship between him and the person for whom he performs services is the legal relationship of employer and employee the regulation provides that such a relationship exists if the person for whom the services are performed has the right to direct and control the individual who performs the services thus the test applied is the same as the test applied under the common_law the regulation further provides that whether the relationship of employer and employee exists is determined upon an examination of the particular facts of each case --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- this definition of employer was enacted as an amendment to sec_3306 in by the employment security amendments of pub_l_no this amended language however does not alter the legal principle that the employer for purposes of computing futa liability is the common-law employer the legislative_history of sec_3306 indicates that sec_3306 was intended merely to extend futa liability to any employer with a payroll of a certain amount there is no indication that it was intended to substitute a third party handling of payroll for the common_law employer for purposes of determining futa liability postn-154364-07 --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------- 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--------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- sec_3401 provides that for purposes of income_tax_withholding the term employer means the person for whom an individual performs or performed any service of whatever nature as the employee of such person except that if the person for whom the individual performs or performed the services does not have control of the payment of the wages for such services the term employer except for purposes of the definition of wages means the person having control of the payment of such wages neither the fica nor the futa contains a definition of employer similar to the definition contained in sec_3401 relating to income_tax_withholding however 419_us_43 holds that a person who is an employer under sec_3401 relating to income_tax_withholding is also an employer for purposes of fica withholding under sec_3102 otte involved a trustee in bankruptcy who was an employer under sec_3401 by virtue of having control_over the payment of wages owed by the bankrupt the court stated the fact that the fica withholding provisions of the code do not define employer is of no significance for that term is not to be given a narrower postn-154364-07 construction for fica withholding than for income_tax_withholding u s pincite the otte decision has been extended to provide that the person having control of the payment of wages is also an employer for purposes of sec_3111 which imposes a fica excise_tax on employers and for purposes of sec_3301 which imposes the futa_tax on employers it has been further extended to apply equally to the employer’s fica tax and to futa_tax in re armadillo corp 410_fsupp_407 d col aff'd 561_f2d_1382 10th cir in re laub baking co 642_f2d_196 6th cir and sta of baltimore --ila container royalty fund v united 621_fsupp_1567 d c md aff'd 804_f2d_296 4th cir reached similar conclusions revrul_54_471 1954_2_cb_348 sets forth the service’s position that the common_law relationship of the parties determines whether an employment_tax liability exists even when a third party is involved in the payment of wages in revrul_54_471 the service considered the application of employment_taxes to individuals who performed demonstrations on citrus products on behalf of a state commission the individuals were paid_by a third party advertising agency the revenue_ruling concludes that the agency controlled the payment of wages under the income_tax_withholding provisions but further held that the state commission was the common-law employer of the individuals and the determination of fica and futa_tax liability is made with respect to the common-law employment relationship also see revrul_57_145 1957_1_cb_332 concluding that although architectural firms controlled the payment of wages and were therefore liable for withholding reporting and paying over federal income taxes other corporations were found to remain the common_law employers the determination of fica and futa_tax liabilities was determined with respect to the corporation’s employment relationship the same conclusion was reached in revrul_57_315 1957_2_cb_626 taxpayer’s counsel takes the position that taxpayer is a sec_3401 employer and as such is the employer eligible for the futa exception in sec_3306 c ------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------- the determination of whether amounts are wages under sec_3306 the determination of whether services performed are employment for purposes of sec_3306 and the determination of whether workers are employees under sec_3306 in sum the determination of whether a futa liability exists is made with reference to the common_law employer the common_law test which is the standard for finding an employer employee relationship is applied to determine which entity is the common_law employer 62_fedclaims_159 the same common_law standard applies for determining what is wages and what is employment for purposes of income_tax_withholding and fica postn-154364-07 although sec_3401 provides an exception to the common_law rule for purposes of assigning liability for income_tax_withholding the parenthetical in sec_3401 provides that the person who is in control of the payment of wages is the employer except for purposes of subsection a which is the subsection containing the definition of wages for income_tax_withholding purposes thus for purposes of determining whether payments are wages and whether exceptions apply that depend on the identity of the employer the employer is the common_law employer not the sec_3401 statutory employer the court of claims agreed with the service’s interpretation of how sec_3401 applies when determining wages under sec_3306 in its recent decision in cencast in cencast the court considered whether a sec_3401 employer paying wages to employees performing services for various common_law employers was entitled to use the same wage_base for purposes of the futa as the common_law employers in cencast the government argued that when defining the term wages under sec_3306 the only employer to be considered is the person for whom the individual performs or performed any services thus the government argued that while otte and the cases that followed otte have incorporated the sec_3401 definition of employer into fica and futa this definition has been incorporated only for purposes of withholding with respect to the employees’ share of fica and accounting for reporting and paying fica and futa taxes the court in cencast agreed and held that the sec_3401 employer could not be considered the employer for purposes of calculating fica and futa taxable wage bases under sec_3121 and sec_3306 and thus the statutory employer could not aggregate the wages paid to employees by all the common_law employers for which they performed services for purposes of such calculations notwithstanding the payor’s status as a sec_3401 employer if under cencast and its underlying rationale a sec_3401 employer is not the employer for purposes of the definition of wages then a sec_3401 employer is also not the employer for purposes of the definition of employment wages are defined as remuneration for employment otte and its progeny extend the definition of employer contained in sec_3401 to fica and futa cencast demonstrates that the parenthetical exception contained in sec_3401 signals that the statutory employer is the employer solely for purposes of withholding reporting and payment and that the common_law employer remains the employer for purposes of determining whether there is a liability for employment_tax and if so how much tax is owed there is nothing in the statute or legislative_history to suggest that the exception to employment provided in sec_3306 c ---- should be read contrary to this general principle to hold otherwise would permit taxpayers to manipulate application of exceptions intended to favor entities that create employment opportunities or direct and when considering whether the determination of wages should be made at the common_law or sec_3401 level the court in cencast thoroughly reviewed and considered legislative_history beginning with the social_security act of irs pronouncements and the applicable court cases including otte armadillo and in re laub baking co postn-154364-07 control the performance of certain services if the taxpayer’s argument were accepted then any employer could receive an exemption from futa simply by running its payroll through ---------------------------------------------------------------------------------- in a fashion that would allow ----------------------------- to claim it was a sec_3401 statutory employer the fact that the state treated taxpayer as the employer for sui purposes has no bearing on the application of the code to this case the decision was based on language in state unemployment insurance code that treats temporary services employers or leasing employers as employers of individuals who are common_law employees of a third party for purposes of state unemployment insurance coverage --- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- taxpayer contends that its status as an ---------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------ and a sec_3401 employer allows it to use the exemption under sec_3306 c ---- taxpayer’s representative cites several private letter rulings plrs and a technical_advice_memorandum tam to support its theory that the futa exemption can be pegged to the sec_3401 employer private letter rulings and tams are not precedential and may be relied upon only by the parties to which they were issued a taxpayer may not rely on a letter_ruling issued to another taxpayer see sec_6110 and sec_11 of revproc_2008_1 the plrs taxpayer cite sec_5 were issued in response to form ss-8 determination of worker status for purposes of federal employment_taxes and income_tax_withholding requests submitted by individuals the rulings address factual situations involving three parties and conclude that one party is the common_law employer of the worker and without any analysis conclude that the other is a sec_3401 statutory employer the rulings also conclude that the sec_3401 employer is responsible for the federal employment_taxes none of the rulings are directly on point as they do not address or analyze the issue of whether a sec_3401 employer is the employer for purposes of determining whether an employment_tax liability exists taxpayers also cite tam date which addressed whether an engineer custodian a public_school_employee was the employer of helpers engaged by him to perform maintenance services for the school the pivotal question in the tam was whether the engineer was serving the school as both an employee and an independent_contractor the tam concluded that the engineer custodian was an employee of the school for all purposes it further concluded that the helpers were ltr date ltr date ltr date ltr date ltr date and plr date postn-154364-07 employees of the school and that the school was the party that had legal control of the payment of wages to the helpers there is no legal analysis to support the conclusion that the school was both the common_law and statutory employer with respect to the helpers the conclusion ensured that federal_income_tax was withheld from the helpers’ wages there was no analysis of how fica or futa would be calculated because the school was a government_entity exempt from those taxes thus the tam does not answer the question raised by the refund claim consistent with the position set forth in revrul_54_471 and supported by the cencast court whether there is employment that gives rise to wages under sec_3306 which in turn give rise to a liability for futa depends upon the existence of a common_law employment relationship assuming taxpayer is a sec_3401 employer it is required to pay the futa_tax liability existing with respect to its clients for --------and ------- based on the facts as we have them it appears the code sec_3306 c ---- exception does not apply because the workers in question do not appear to be the common_law employees of the taxpayer accordingly in the absence of additional facts demonstrating that a common_law employment relationship does exist between the taxpayer and the workers the service should deny the refund claims case development hazards and other considerations --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- 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