internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc intl br1-plr-102048-03 date date ty a year country b year date c dear this is in response to a letter dated date requesting a ruling that a’s loss of lawful permanent resident status expatriation did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code additional information was submitted in a letter dated date the information submitted for consideration is substantially as set forth below the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination a was born in year in country b in year a obtained a green card a is a citizen and resident of country b where he now lives on date c a relinquished his green card a will be subject_to country b tax in the same manner as all other country b citizens and residents on the date of a's expatriation his net_worth exceeded the applicable_amount set forth in sec_877 plr-102048-03 sec_877 generally provides that a citizen who loses u s citizenship or a u s long-term_resident who ceases to be taxed as a lawful permanent resident individuals who expatriate within the 10-year period immediately preceding the close of the taxable_year will be subject_to the special rules of sec_877 for such taxable_year unless such loss did not have for one of its principal purposes the avoidance of u s taxes sec_2107 and sec_2501 provide special estate and gift_tax regimes respectively for individuals who expatriate with a principal purpose to avoid u s taxes a former u s citizen or former u s long-term_resident will be treated as having expatriated with a principal purpose to avoid u s taxes for purposes of sec_877 sec_2107 and sec_2501 if the individual's average income_tax_liability or the individual's net_worth on the date of expatriation exceed certain thresholds see sec_877 sec_2107 and sec_2501 a former u s citizen whose net_worth or average tax_liability exceeds these thresholds however will not be presumed to have a principal purpose of tax_avoidance if that former citizen is described within certain statutory categories and submits a request for a ruling within one year of the date of loss of u s citizenship for the secretary's determination as to whether such loss had for one of its principal purposes the avoidance of u s taxes see sec_877 sec_2107 and sec_2501 under notice_98_34 1998_2_cb_29 modifying notice_97_19 1997_1_cb_394 a former long-term_resident whose net_worth or average tax_liability exceeds the applicable thresholds will not be presumed to have a principal purpose of tax_avoidance if that former resident is described within certain categories and submits a complete and good_faith request for a ruling as to whether such loss had for one of its principal purposes the avoidance of u s taxes notice_98_34 requires that certain information be submitted with a request for a ruling that an individual's expatriation did not have for one of its principal purposes the avoidance of u s taxes a is eligible to request a ruling pursuant to notice_98_34 because he is a citizen and resident fully subject_to tax in country b the country in which he was born a submitted all of the information required to be submitted by notice_97_19 as modified by notice_98_34 including additional information requested by the service after review of the submission accordingly based solely on the facts submitted and the representations made we conclude that a has made a complete and good_faith submission in accordance with sec_877 and notice_98_34 therefore a will not be presumed under sec_877 to have had as one of his principal purposes for expatriating the avoidance of u s taxes we further conclude that a will not be treated under sec_877 as plr-102048-03 having had as one of his principal purposes for expatriating the avoidance of u s taxes because the information submitted clearly establishes the lack of a principal purpose to avoid taxes under subtitle a or b of the code except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition no opinion is expressed as to a's u s tax_liability for the taxable years prior to or after his expatriation under sections of the code other than sec_877 sec_2107 and sec_2501 a copy of this letter must be attached to a's u s income_tax return for the year in which a obtained the ruling whether or not a is otherwise required to file a return this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file in this office a copy of this letter will be sent to a sincerely w edward williams senior technical reviewer cc intl br1 cc


department of the treasury internal_revenue_service washington d c contact person identification_number telephone number employer_identification_number tax_exempt_and_government_entities_division release number release date date date uniform issue list numbers 1234a legend university state trust a_trust b foundation dear this is in response to your letter dated date in which you request rulings regarding the application of the unrelated_business_income_tax provisions of part ill subchapter_f chapter and the capital_gains provisions of subchapter_p chapter of the internal_revenue_code the code to the transaction described below facts the university is a legal entity formed pursuant to the state constitution and incorporated under state law for the purposes of teaching research and public service purposes the university provides educational instruction to students at campuses throughout the state the university is exempt from federal_income_tax under sec_501 of the code as an organization described in sec_501 in furtherance of those the university manages gift assets held as endowment in its general endowment pool the pool the pool is invested in a highly diversified portfolio of u s and foreign stocks bonds and other investments each year a portion of each endowment fund invested in the pool is severed from the pool and distributed to university campuses and programs to be spent for the purposes set forth by the donors the university uses a unit concept with respect to the various endowments that are invested in the pool each endowment is assigned a certain number of pool units the value of a pool unit is set monthly and is based on the value of the underlying pool investments pool units may be redeemed for value each endowment is entitled to an annual distribution in an amount equal to the spending policy rate per pool unit times the number of pool units it holds a spending policy distribution the spending policy rate determined from time to time by the university is a percentage of the market_value of the investments in the pool calculated on a sixty-month rolling average the university is the trustee of a number of charitable_remainder trusts including trust a and trust b together the trusts the trusts are charitable_remainder unitrusts within the meaning of sec_664 of the code the sole charitable_remainder beneficiary of trust a is the university the sole charitable_remainder beneficiary of trust b is the foundation the foundation is exempt from federal_income_tax under sec_501 of the code as an organization described under sec_501 the foundation was established to provide financial assistance to one of the university’s campuses while the university does not legally control the foundation the foundation is organized and operated to support the university through the campus's operations and upon the foundation’s dissolution its assets will be distributed to the university thus the university is the indirect charitable_remainder beneficiary of trust b through the trust's support for the foundation to date the trusts’ assets have been invested primarily in income and index funds the investment return experienced by the pool has outperformed the return experienced by the trusts since their creation to achieve greater economies of scale in the management of the trusts a potentially higher investment return for the trusts and increased diversification of the trusts’ investments the university would like the trusts to participate in the return that the pool experiences to that end the university proposes to enter into a contract with itself acting in its capacity as trustee of the trusts under which the university will issue and the university as trustee will purchase pool units the contract the value of a pool unit would be based on the value of all underlying investment_assets held in the pool and would have the same value as the units that the university uses for internal accounting purposes each investment by the trusts in pool units will be transacted at the appropriate unit value the trusts will receive a spending policy distribution based on the number of pool units owned to the same extent and at the same spending policy rate as any of the various endowments of the university with funds held in the pool except that spending policy distributions with respect to pool units held by the trusts will be made to the trusts quarterly the trusts will treat spending policy distributions as ordinary_income regardless of the character of the underlying income of the pool whether capital_gain ordinary_income or return_of_capital the university acting as trustee may elect to have all or part of a spending policy distribution reinvested in pool units at the then-current valuation in addition on a quarterly basis the university may purchase additional pool units on a trust’s behalf or may have part or all of the pool units owned by a_trust redeemed for cash in either case at the then-current value of pool units the university receives reimbursement for all of its costs with respect to the pool and also retains investment managers who receive compensation including incentive compensation through charges against the pool these charges are thereby borne by all university funds and by any trusts holding pool units the pool also bears such costs as brokerage expenses the university will not charge the trusts a fee for management of the trusts or in connection with the investment by the trusts in pool units the university will not manage funds for any third parties other than entities related to the university if the pool’s earnings exceed the amount calculated according to the annual spending policy rate declared by the university any return exceeding the spending policy amounts will increase the principal of the pool thus increasing the value of each pool unit the university will not reserve or segregate any part of the pool’s earnings from inclusion in the value of the poo units held by the trusts the contract will provide that an investment in pool units gives the trusts neither an ownership_interest in the underlying assets of the pool nor any rights with respect to any other trust that invests in pool units moreover the trusts will have no right to veto or opt_out of any of the pool’s underlying investments and no power or right to control direct supervise recommend or review the university’s business activities operations or decisions with respect to the pool except the right to review their individual spending policy distribution computations the contract will also provide that with respect to the issuance and holding of pool units the university is neither a partner nor an agent of the trusts other than in its capacity as trustee and the trusts will never be liable for any cost expense or payment incurred or due by the university for which the university is liable relating to the pool or the underlying investment_assets the university represents that it will pay any unrelated_business_income_tax generated by any of the investment_assets in the pool with no deduction taken against unrelated_business_taxable_income for any payments made to the trusts if the foundation ever changed its organizational structure so that either i it is no longer organized and operated for the benefit of the university or ii its assets would go to some entity other than the university upon dissolution trust b would no longer be permitted to participate in the pool unit investment program and all pool units held by trust b would be redeemed for cash at the then current value of pool units rulings requested you have requested the following rulings- the issuance of pool units by the university to the trusts the making or receipt of payments with respect to the pool units and the holding or redemption of the pool units will not generate unrelated_business_taxable_income to the university or to the trusts pool units held by the trusts will be treated as capital assets for purposes of sec_1221 of the code and sec_1234a will apply to treat gain_or_loss from the cancellation lapse expiration or other termination of a pool unit as gain_or_loss from the sale of a capital_asset the redemption of pool units by the trusts will generate short-term or long-term_capital_gain or loss to the trusts depending on the holding_period of the pool unit as set forth in sec_1222 of the code issue whether the issuance of pool units by the university to the trusts the making or receipt of spending policy distributions with respect to the pool units or the holding or redemption of pool units will generate unrelated_business_taxable_income within the meaning of sec_512 of the code to the university or to the trusts law sec_511 of the code imposes a tax for each taxable_year on the unrelated_business_taxable_income of every organization which is exempt from taxation by reason of sec_501 as well as any college or university which is an agency_or_instrumentality of any government or any political_subdivision thereof or which is owned or operated by a government or any political_subdivision thereof sec_512 of the code defines the term unrelated_business_taxable_income as the gross_income derived from any unrelated_trade_or_business regularly carried on less the allowable deductions that are directly connected with the carrying on of the trade_or_business computed with the modifications set forth in sec_512 sec_512 of the code excludes from unrelated_business_taxable_income all dividends interest payments_with_respect_to_securities_loans amounts received or accrued as consideration for entering into agreements to make loans and annuities and all deductions directly connected with such income sec_1_512_b_-1 of the income_tax regulations the regulations provides that dividends interest payments_with_respect_to_securities_loans annuities income from notional_principal_contracts other substantially_similar income from ordinary and routine investments and all deductions directly connected with any of the foregoing items of income shall be excluded in computing unrelated_business_taxable_income sec_513 of the code defines the term unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of an organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its charitable educational or other purpose or function constituting the basis for its exemption under sec_501 or in the case of an organization described in sec_511 to the exercise or performance of any purpose or function described in sec_501 sec_513 of the code provides that the term trade_or_business includes any activity which is carried on for the production_of_income from the sale_of_goods or the performance of services sec_1_513-1 of the regulations states that congress’s primary objective in adopting the unrelated_business_income_tax was to eliminate a source of unfair competition by placing the unrelated business activities of exempt_organizations upon the same tax basis as the nonexempt business endeavors with which they compete on the other hand where an activity does not possess the characteristics of a trade_or_business within the meaning of sec_162 the unrelated_business_income_tax does not apply since the organization is not in competition with taxable organizations accordingly for purposes of sec_513 the term trade_or_business has the same meaning it has in sec_162 and generally includes any activity carried on for the production_of_income from the sale_of_goods or performance of services sec_1_513-1 of the regulations provides that gross_income derives from unrelated trade or business’ if the conduct of the trade_or_business which produces the income is not substantially related other than through the production of funds to the purposes for which exemption is granted sec_1_513-1 of the regulations provides that trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has causal relationship to the achievement of exempt purposes other than through the production_of_income and it is substantially related for purposes of sec_513 only if the causal relationship is a substantial one thus for the conduct of trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes where the production or distribution of the goods or the performance of the services does not contribute importantly to the accomplishment of the exempt purposes of an organization the income from the sale of the goods or the performance of the services does not derive from the conduct of related trade_or_business whether activities productive of gross_income contribute importantly to the accomplishment of any purpose for which an organization is granted exemption depends in each case upon the facts and circumstances involved sec_664 of the code imposes an excise_tax on the unrelated_business_taxable_income as defined in sec_512 for a taxable_year of a charitable_remainder_annuity_trust or charitable_remainder_unitrust determined as if part iil of subchapter_f applied to such trust in the amount of the unrelated_business_taxable_income revrul_69_528 1969_2_cb_127 concerns an organization that was formed to provide investment services on a fee basis exclusively to organizations exempt under sec_501 of the code it receives funds from the participating exempt_organizations invests in common stocks reinvests income and realized appreciation and upon request liquidates a participant's interest and distributes the proceeds to the participant the ruling states that providing investment services on a regular basis for a fee is a trade_or_business ordinarily carried on for profit exempt_organizations such activity would constitute unrelated_trade_or_business consequently the organization described in the ruling is not exempt under sec_501 if the services were regularly provided by one tax-exempt_organization for other tax- analysis a as to the university under the reasoning of revrul_69_528 an organization that otherwise qualifies for recognition of exemption under sec_501 of the code and provides investment services on a regular basis for a fee to other exempt or nonexempt organizations would be engaged in an unrelated_trade_or_business within the meaning of sec_513 such activity would constitute a trade_or_business under sec_513 of the code and sec_1_513-1 of the regulations and the conduct of such trade_or_business would not be substantially related within the meaning of sec_1_513-1 of the regulations to the exercise or performance of any purpose or function described in sec_501 thus if the university charged a fee for investment management services provided to organizations unrelated to it or generated income from the management of the funds invested by such organizations such activities could result in unrelated_business_taxable_income within the meaning of sec_512 here however the university is not charging the trusts a fee for its services and not otherwise receiving income from the services it provides to the trusts thus under these circumstances the university will not receive unrelated_business_taxable_income within the meaning of sec_512 the fact that the university will engage in the investment activity for the benefit of individuals who are co-beneficiaries of the trusts at the same time that it engages in investment activity for its own benefit as the direct or indirect remainder beneficiary limits the scope of the service provided to others and distinguishes it from a commercial venture b as to the trusts the investment of the trusts’ assets in pool units would be an investment activity and the receipt of spending policy distributions with respect to those units would be income from ordinary and routine investments of the type that is excludible from unrelated_business_taxable_income by reason of sec_512 of the code and sec_1_512_b_-1 of the regulations thus neither the spending policy distributions nor the holding or redemption of the pool units themselves would result in the receipt of unrelated_business_taxable_income within the meaning of sec_512 of the code by the trusts on which the trusts would owe an excise_tax under sec_664 for although some of the pool’s other investments might generate unrelated_business_taxable_income no portion of such income would be attributed or assigned to the trusts merely because their assets are invested in pool units the holding of pool units does not give the trusts beneficial_ownership in the pool rather a pool unit represents a mere contractual right to receive spending policy distributions as determined by the university furthermore the commingling of the trusts’ assets with other_property in the pool for investment purposes cannot be characterized as a partnership for federal_income_tax purposes the university and the trusts do not hold themselves out as partners and show no intention to join together in the present conduct of an enterprise on the contrary the contract will specifically state that the university is not a partner or an agent of the trusts with respect to the issuance and holding of pool units furthermore the proposed arrangement between the university and the trusts has none of the characteristics that are commonly associated with a partnership the commingling of the trusts’ assets with other assets in the pool does not give the trusts a capital interest in the pool or any other ownership_interest or rights in the other assets in the pool an investment in pool units does not give the trusts any power or right to control direct supervise recommend or review the university’s business activities operations or decisions with respect to the pool nor does it give the trusts a right to veto or opt_out of any underlying investment in the pool likewise an investment in pool units does not give the trusts a proprietor’s interest in the profits and losses of the pool but only a right to spending policy distributions since the relationship between the university and the trusts is not in the nature of a partnership or agency the spending policy distributions reflect ordinary_income and do not take on the character of the income of the underlying assets the university would pay any_tax owed on the unrelated_business_taxable_income earned by the pool with no deduction taken against unrelated_business_taxable_income for any payments made to the trusts issue sec_2 and whether pool units will be treated as capital assets for purposes of sec_1221 of the code and whether sec_1234a will apply to treat gain_or_loss from the cancellation lapse expiration or other termination of a pool unit as a gain_or_loss from the sale of a capital_asset whether the redemption of pool units will generate short-term or long-term_capital_gain or loss to the trusts depending on the holding_period of the pool unit as set forth in sec_1222 of the code law sec_1222 of the code provides that capital_gain or loss is generated upon the sale_or_exchange of a capital_asset sec_1234a of the code provides that gain_or_loss attributable to the cancellation lapse expiration or other termination of a right or obligation with respect to property which is or on acquisition would be a capital_asset in the hands of the taxpayer shall be treated as gain_or_loss of a capital_asset sec_1221 of the code defines the term capital_asset as property held by the taxpayer regardless of whether it is connected with the taxpayer’s trade_or_business unless the property meets one of eight listed exceptions inventory property of a character which is subject_to the allowance for depreciation provided in sec_167 or real_property used in a trade_or_business certain intangible_property accounts_receivable acquired in the ordinary course of a trade_or_business certain publications of the united_states government certain commodities financial derivatives certain hedging_transactions and supplies of a type regularly consumed by the taxpayer in the ordinary course of a trade_or_business none of these listed exceptions applies to a pool unit but although sec_1221 appears to give broad meaning to the term capital_asset the supreme court has said that not everything which can be called property in the ordinary sense and which is outside the statutory exclusions of sec_1221 qualifies as a capital_asset rather the term ‘capital asset’ is to be construed narrowly in accordance with the purpose of congress to afford capital-gains treatment only in situations involving the realization of appreciation in value accrued over a substantial period of time 364_us_130 citing 287_us_103 accordingly the court has held that certain interests that concededly are property in the ordinary sense are not capital assets for instance capital_gain treatment has been denied for transactions involving payments in return for interests carved out of or related to an interest retained by the taxpayer see eg 356_us_260 denying capital_gain treatment on the disposition of certain mineral payments carved out of established oil_and_gas interests 313_us_28 denying capital_gain treatment on the disposition of a term of years carved out from a fee simple the supreme court has also denied capital_gain treatment for transactions on the grounds that the payments at issue were a substitute_for_ordinary_income in hort for example a tenant cancelled its lease in the taxpayer’s building and paid the taxpayer a cancellation fee the court held that the cancellation fee was ordinary_income because the cancellation of the lease involved nothing more than relinquishment of the right to future rental payments in return for a present substitute payment and possession of the leased premises hort u s pincite the court reinforced this substitute-for-ordinary-income doctrine in p g lake stating that the lump sum consideration seems essentially a substitute for what would otherwise be received at a future time as ordinary_income p g lake u s pincite consistent with the substitute-for-ordinary-income doctrine courts have denied capital_gain treatment for transactions involving interests related to compensation_for past or future personal services see eg 455_f2d_1146 cir lump sum representing unpaid commissions due under an employment contract 431_f2d_1149 cir lump sum paid for the surrender of right to future sales commissions 303_f2d_687 cir payment for interest in films to be produced by taxpayer similarly courts have denied capital_gain treatment for interests relating to income already earned or about to be earned see eg 381_us_54 earned original_issue_discount 437_f3d_399 3d cir lump sum payment for annual installments of lottery prize 131_f2d_50 cir right to dividend that was already declared on the other hand simply because the property transferred will produce ordinary_income and such income is a major factor in determining the value of the property does not necessarily mean that the amount received for the property is essentially a lump-sum substitute_for_ordinary_income 46_tc_559 in guggenheim the court focused on whether the taxpayer transferred substantial investment risks in the sale of undivided interests in a stallion the court noted that if the value of the stallion subsequently increased the taxpayer would not share in that increase with regard to the interests transferred instead the new owners would receive all the benefits of an increase in the value of the stallion and all the burdens of a decrease in value therefore the court found that the taxpayer had transferred substantial investment risks and was entitled to capital_gain treatment on the sale of the interests in 324_f2d_56 cir the court distinguished between proceeds from the present sale of the future right to earn income which is capital_gain and the present sale of the future right to earned_income which is ordinary_income the court found that the sale of an income-producing asset was not merely the sale of the right to income already earned because the taxpayer had an asset that would produce income in the future noting that there is in law and fact a vast difference between the present sale of the future right to earn income and the present sale of the future right to earned_income the court held that the taxpayer’s sale of the asset generated capital_gain id pincite similarly in 304_f2d_125 2d cir the court held that the taxpayer's surrender of the lease of a play constituted the sale_or_exchange of a capital_asset despite the fact that receipts from the play would have been ordinary_income id pincite government’s argument against capital_gain treatment the court noted that there was no equivalence between amounts paid for the surrender of the lease and the income that would have been realized by its retention id pincite in rejecting the analysis the bundle of contract rights represented by a pool unit is property and may be treated as a capital_asset for purposes of sec_1221 of the code the most important characteristic of the pool unit is that significant investment risks are associated with and included in each unit with respect to each pool unit there is an opportunity for appreciation as well as a risk of loss each unit represents a substantial investment by the trust and each unit has an ascertainable basis the value of each unit is directly tied to the pool’s investment performance poor performance will result in a decrease in the value of each unit while performance above the spending policy rate set by the university will increase the value of each unit the opportunity for appreciation risk of loss and basis in each unit are characteristics of other contract rights that are treated as capital assets for example financial derivatives notional_principal_contracts mutual_fund shares and corporate stock furthermore the benefits and burdens associated with each unit are similar to those associated with the property judged to be capital assets in guggenheim dresser and ferrer in addition although the trusts will receive ordinary_income in the form of the quarterly spending policy distributions that are based on the number of pool units owned by the trusts consideration received upon a redemption of a pool unit is not a substitute for what would otherwise be received as an ordinary_income payout whether due and payable or about to be due and payable to the trust under the terms of the contract rather the amount_paid for a poo unit upon a redemption is equal to the value of the unit on the date of redemption unit value on any given date is equal to overall asset value of the pool divided by the number of units outstanding in addition a pool unit is not an interest related to compensation_for past or future personal services instead the unit is an asset that will produce income in the future finally a pool unit does not represent a carve-out of a larger estate retained by the trust the appreciation of each unit is attributable to overall pool property appreciation much of which in turn is attributable to increases in the value of capital assets in the pool the contract specifically provides that the trust has no ownership_interest or rights to the pool thus we conclude that a pool unit is a capital_asset for purposes of sec_1221 of the code furthermore sec_1234a will apply to treat gain_or_loss from the cancellation lapse expiration or other termination of a pool unit as gain_or_loss from the sale of a capital_asset consequently in general the redemption of a pool unit will generate short-term or long-term_capital_gain or loss to the trusts depending on the holding_period of the unit conclusion accordingly based on the information submitted in your ruling_request we rule as follows the issuance of pool units by the university to the trusts the making or receipt of spending policy distributions with respect to pool units and the holding or redemption of pool units will not generate unrelated_business_taxable_income within the meaning of sec_512 of the code to the university or the trusts a pool unit will be treated as a capital_asset for purposes of sec_1221 of the code and sec_1234a will apply to treat gain_or_loss from the cancellation lapse expiration or other termination of a pool unit as gain_or_loss from the sale of a capital_asset the redemption of a pool unit will generate short-term or long-term_capital_gain or loss to the trusts as set forth in sec_1222 of the code depending on the holding_period of the pool unit this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice f you disagree with our proposed deletions you should follow the instructions in notice this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because it could help resolve questions concerning your federal_income_tax status this ruling should be kept in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative sincerely theodore r lieber manager exempt_organizations technical group enclosure notice department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date contact person identification_number uniform issue list numbers telephone number employer_identification_number 1234a legend university state trust a_trust b foundation dear this is in response to your letter dated date in which you request rulings regarding the application of the unrelated_business_income_tax provisions of part ill subchapter_f chapter and the capital_gains provisions of subchapter_p chapter of the internal_revenue_code the code’ to the transaction described below facts the university is a legal entity formed pursuant to the state constitution and incorporated under state law for the purposes of teaching research and public service in furtherance of those purposes the university provides educational instruction to students at campuses throughout the state the university is exempt from federal_income_tax under sec_501 of the code as an organization described in sec_501 the university manages gift assets held as endowment in its general endowment pool the pool the pool is invested in a highly diversified portfolio of u s and foreign stocks bonds and other investments each year a portion of each endowment fund invested in the pool is severed from the pool and distributed to university campuses and programs to be spent for the purposes set forth by the donors the university uses a unit concept with respect to the various endowments that are invested in the pool each endowment is assigned a certain number of pool units the value of a pool unit is set monthly and is based on the value of the underlying pool investments pool units may be redeemed for value each endowment is entitled to an annual distribution in an amount equal to the spending policy rate per pool unit times the number of pool units it holds a spending policy distribution the spending policy rate determined from time to time by the university is a percentage of the market_value of the investments in the pool calculated on a sixty-month rolling average the university is the trustee of a number of charitable_remainder trusts including trust a and trust b together the trusts the trusts are charitable_remainder unitrusts within the meaning of sec_664 of the code the sole charitable_remainder beneficiary of trust a is the university the sole charitable_remainder beneficiary of trust b is the foundation the foundation is exempt from federal_income_tax under sec_501 of the code as an organization described under sec_501 the foundation was established to provide financial assistance to one of the university’s campuses while the university does not legally control the foundation the foundation is organized and operated to support the university through the campus's operations and upon the foundation’s dissolution its assets will be distributed to the university thus the university is the indirect charitable_remainder beneficiary of trust b through the trust’s support for the foundation to date the trusts’ assets have been invested primarily in income and index funds the investment return experienced by the pool has outperformed the return experienced by the trusts since their creation to achieve greater economies of scale in the management of the trusts a potentially higher investment return for the trusts and increased diversification of the trusts’ investments the university would like the trusts to participate in the return that the pool experiences to that end the university proposes to enter into a contract with itself acting in its capacity as trustee of the trusts under which the university will issue and the university as trustee will purchase pool units the contract the value of a pool unit would be based on the value of all underlying investment_assets held in the pool and would have the same value as the units that the university uses for internal accounting purposes each investment by the trusts in pool units will be transacted at the appropriate unit value the trusts will receive a spending policy distribution based on the number of pool units owned to the same extent and at the same spending policy rate as any of the various endowments of the university with funds held in the pool except that spending policy distributions with respect to pool units held by the trusts will be made to the trusts quarterly the trusts will treat spending policy distributions as ordinary_income regardless of the character of the underlying income of the pool whether capital_gain ordinary_income or return_of_capital the university acting as trustee may elect to have all or part of a spending policy distribution reinvested in pool units at the then-current valuation in addition on a quarterly basis the university may purchase additional pool units on a trust’s behalf or may have part or all of the pool units owned by a_trust redeemed for cash in either case at the then-current value of pool units the university receives reimbursement for all of its costs with respect to the pool and also retains investment managers who receive compensation including incentive compensation through charges against the pool these charges are thereby borne by all university funds and by any trusts holding pool units the pool also bears such costs as brokerage expenses the university will not charge the trusts a fee for management of the trusts or in connection with the investment by the trusts in pool units the university will not manage funds for any third parties other than entities related to the university if the pool’s earnings exceed the amount calculated according to the annual spending policy rate declared by the university any return exceeding the spending policy amounts will increase the principal of the pool thus increasing the value of each pool unit the university will not reserve or segregate any part of the pool’s earnings from inclusion in the value of the pool units held by the trusts the contract will provide that an investment in pool units gives the trusts neither an ownership_interest in the underlying assets of the pool nor any rights with respect to any other trust that invests in pool units moreover the trusts will have no right to veto or opt_out of any of the pool’s underlying investments and no power or right to control direct supervise recommend or review the university’s business activities operations or decisions with respect to the pool except the right to review their individual spending policy distribution computations the contract will also provide that with respect to the issuance and holding of pool units the university is neither a partner nor an agent of the trusts other than in its capacity as trustee and the trusts will never be liable for any cost expense or payment incurred or due by the university for which the university is liable relating to the pool or the underlying investment_assets the university represents that it will pay any unrelated_business_income_tax generated by any of the investment_assets in the pool with no deduction taken against unrelated_business_taxable_income for any payments made to the trusts if the foundation ever changed its organizational structure so that either i it is no longer organized and operated for the benefit of the university or ii its assets would go to some entity other than the university upon dissolution trust b would no longer be permitted to participate in the pool unit investment program and all pool units held by trust b would be redeemed for cash at the then current value of pool units rulings requested you have requested the following rulings- the issuance of pool units by the university to the trusts the making or receipt of payments with respect to the pool units and the holding or redemption of the pool units will not generate unrelated_business_taxable_income to the university or to the trusts pool units held by the trusts will be treated as capital assets for purposes of sec_1221 of the code and sec_1234a will apply to treat gain_or_loss from the cancellation lapse expiration or other termination of a pool unit as gain_or_loss from the sale of a capital_asset the redemption of pool units by the trusts will generate short-term or long-term_capital_gain or loss to the trusts depending on the holding_period of the pool unit as set forth in sec_1222 of the code issue whether the issuance of pool units by the university to the trusts the making or receipt of spending policy distributions with respect to the pool units or the holding or redemption of pool units will generate unrelated_business_taxable_income within the meaning of sec_512 of the code to the university or to the trusts law sec_511 of the code imposes a tax for each taxable_year on the unrelated_business_taxable_income of every organization which is exempt from taxation by reason of sec_501 as well as any college or university which is an agency_or_instrumentality of any government or any political_subdivision thereof or which is owned or operated by a government or any political_subdivision thereof sec_512 of the code defines the term unrelated_business_taxable_income as the gross_income derived from any unrelated_trade_or_business regularly carried on less the allowable deductions that are directly connected with the carrying on of the trade_or_business computed with the modifications set forth in sec_512 sec_512 of the code excludes from unrelated_business_taxable_income all dividends interest payments_with_respect_to_securities_loans amounts received or accrued as consideration for entering into agreements to make loans and annuities and all deductions directly connected with such income sec_1_512_b_-1 of the income_tax regulations the regulations provides that dividends interest payments_with_respect_to_securities_loans annuities income from notional_principal_contracts other substantially_similar income from ordinary and routine investments and all deductions directly connected with any of the foregoing items of income shall be excluded in computing unrelated_business_taxable_income sec_513 of the code defines the term unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of an organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its charitable educational or other purpose or function constituting the basis for its exemption under sec_501 or in the case of an organization described in sec_511 to the exercise or performance of any purpose or function described in sec_501 sec_513 of the code provides that the term trade_or_business includes any activity which is carried on for the production_of_income from the sale_of_goods or the performance of services sec_1_513-1 of the regulations states that congress’s primary objective in adopting the unrelated_business_income_tax was to eliminate a source of unfair competition by placing the unrelated business activities of exempt_organizations upon the same tax basis as the nonexempt business endeavors with which they compete on the other hand where an activity does not possess the characteristics of a trade_or_business within the meaning of sec_162 the unrelated_business_income_tax does not apply since the organization is not in competition with taxable organizations accordingly for purposes of sec_513 the term trade_or_business has the same meaning it has in sec_162 and generally includes any activity carried on for the production_of_income from the sale_of_goods or performance of services sec_1_513-1 of the regulations provides that gross_income derives from unrelated trade or business’ if the conduct of the trade_or_business which produces the income is not substantially related other than through the production of funds to the purposes for which exemption is granted sec_1_513-1 of the regulations provides that trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has causal relationship to the achievement of exempt purposes other than through the production_of_income and it is substantially related for purposes of sec_513 only if the causal relationship is a substantial one thus for the conduct of trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes where the production or distribution of the goods or the performance of the services does not contribute importantly to the accomplishment of the exempt purposes of an organization the income from the sale of the goods or the performance of the services does not derive from the conduct of related trade_or_business whether activities productive of gross_income contribute importantly to the accomplishment of any purpose for which an organization is granted exemption depends in each case upon the facts and circumstances involved sec_664 of the code imposes an excise_tax on the unrelated_business_taxable_income as defined in sec_512 for a taxable_year of a charitable_remainder_annuity_trust or charitable_remainder_unitrust determined as if part iii of subchapter_f applied to such trust in the amount of the unrelated_business_taxable_income revrul_69_528 1969_2_cb_127 concerns an organization that was formed to provide investment services on a fee basis exclusively to organizations exempt under sec_501 of the code it receives funds from the participating exempt_organizations invests in common stocks reinvests income and realized appreciation and upon request liquidates a participant's interest and distributes the proceeds to the participant the ruling states that providing investment services on a regular basis for a fee is a trade_or_business ordinarily carried on for profit exempt_organizations such activity would constitute unrelated_trade_or_business consequently the organization described in the ruling is not exempt under sec_501 if the services were regularly provided by one tax-exempt_organization for other tax- analysis a as to the university under the reasoning of revrul_69_528 an organization that otherwise qualifies for recognition of exemption under sec_501 of the code and provides investment services on a regular basis for a fee to other exempt or nonexempt organizations would be engaged in an unrelated_trade_or_business within the meaning of sec_513 such activity would constitute a trade_or_business under sec_513 of the code and sec_1_513-1 of the regulations and the conduct of such trade_or_business would not be substantially related within the meaning of sec_1_513-1 of the regulations to the exercise or performance of any purpose or function described in sec_501 thus if the university charged a fee for investment management services provided to organizations unrelated to it or generated income from the management of the funds invested by such organizations such activities could result in unrelated_business_taxable_income within the meaning of sec_512 here however the university is not charging the trusts a fee for its services and not otherwise receiving income from the services it provides to the trusts thus under these circumstances the university will not receive unrelated_business_taxable_income within the meaning of sec_512 the fact that the university will engage in the investment activity for the benefit of individuals who are co-beneficiaries of the trusts at the same time that it engages in investment activity for its own benefit as the direct or indirect remainder beneficiary limits the scope of the service provided to others and distinguishes it from a commercial venture b as to the trusts the investment of the trusts’ assets in pool units would be an investment activity and the receipt of spending policy distributions with respect to those units would be income from ordinary and routine investments of the type that is excludible from unrelated_business_taxable_income by reason of sec_512 of the code and sec_1_512_b_-1 of the regulations thus neither the spending policy distributions nor the holding or redemption of the pool units themselves would result in the receipt of unrelated_business_taxable_income within the meaning of sec_512 of the code by the trusts on which the trusts would owe an excise_tax under sec_664 for although some of the pool’s other investments might generate unrelated_business_taxable_income no portion of such income would be attributed or assigned to the trusts merely because their assets are invested in poo units the holding of pool units does not give the trusts beneficial_ownership in the pool rather a pool unit represents a mere contractual right to receive spending policy distributions as determined by the university furthermore the commingling of the trusts’ assets with other_property in the pool for investment purposes cannot be characterized as a partnership for federal_income_tax purposes the university and the trusts do not hold themselves out as partners and show no intention to join together in the present conduct of an enterprise on the contrary the contract will specifically state that the university is not a partner or an agent of the trusts with respect to the issuance and holding of pool units furthermore the proposed arrangement between the university and the trusts has none of the characteristics that are commonly associated with a partnership the commingling of the trusts’ assets with other assets in the pool does not give the trusts a capital interest in the pool or any other ownership_interest or rights in the other assets in the pool an investment in pool units does not give the trusts any power or right to control direct supervise recommend or review the university’s business activities operations or decisions with respect to the pool nor does it give the trusts a right to veto or opt_out of any underlying investment in the pool likewise an investment in pool units does not give the trusts a proprietors interest in the profits and losses of the pool but only a right to spending policy distributions since the relationship between the university and the trusts is not in the nature of a partnership or agency the spending policy distributions reflect ordinary_income and do not take on the character of the income of the underlying assets the university would pay any_tax owed on the unrelated_business_taxable_income earned by the pool with no deduction taken against unrelated_business_taxable_income for any payments made to the trusts issue sec_2 and whether pool units will be treated as capital assets for purposes of sec_1221 of the code and whether sec_1234a will apply to treat gain_or_loss from the cancellation lapse expiration or other termination of a pool unit as a gain_or_loss from the sale of a capital_asset whether the redemption of pool units will generate short-term or long-term_capital_gain or loss to the trusts depending on the holding_period of the pool unit as set forth in sec_1222 of the code law sec_1222 of the code provides that capital_gain or loss is generated upon the sale_or_exchange of a capital_asset sec_1234a of the code provides that gain_or_loss attributable to the cancellation lapse expiration or other termination of a right or obligation with respect to property which is or on acquisition would be a capital_asset in the hands of the taxpayer shall be treated as gain_or_loss of a capital_asset sec_1221 of the code defines the term capital_asset as property held by the taxpayer regardless of whether it is connected with the taxpayer’s trade_or_business unless the property meets one of eight listed exceptions inventory property of a character which is subject_to the allowance for depreciation provided in sec_167 or real_property used in a trade_or_business certain intangible_property accounts_receivable acquired in the ordinary course of a trade_or_business certain publications of the united_states government certain commodities financial derivatives certain hedging_transactions and supplies of a type regularly consumed by the taxpayer in the ordinary course of a trade_or_business none of these listed exceptions applies to a pool unit but although sec_1221 appears to give broad meaning to the term capital_asset the supreme court has said that not everything which can be called property in the ordinary sense and which is outside the statutory exclusions of sec_1221 qualifies as a capital_asset rather the term ‘capital asset’ is to be construed narrowly in accordance with the purpose of congress to afford capital-gains treatment only in situations involving the realization of appreciation in value accrued over a substantial period of time 364_us_130 citing 287_us_103 accordingly the court has held that certain interests that concededly are property in the ordinary sense are not capital assets for instance capital_gain treatment has been denied for transactions involving payments in return for interests carved out of or related to an interest retained by the taxpayer see eg 356_us_260 denying capital_gain treatment on the disposition of certain mineral payments carved out of established oil_and_gas interests 313_us_28 denying capital_gain treatment on the disposition of a term of years carved out from a fee simple the supreme court has also denied capital_gain treatment for transactions on the grounds that the payments at issue were a substitute_for_ordinary_income in hort for example a tenant cancelled its lease in the taxpayer’s building and paid the taxpayer a cancellation fee the court held that the cancellation fee was ordinary_income because the cancellation of the lease involved nothing more than relinquishment of the right to future rental payments in return for a present substitute payment and possession of the leased premises hort u s pincite the court reinforced this substitute-for-ordinary-income doctrine in p g lake stating that the lump sum consideration seems essentially a substitute for what would otherwise be received at a future time as ordinary_income p g lake u s pincite consistent with the substitute-for-ordinary-income doctrine courts have denied capital_gain treatment for transactions involving interests related to compensation_for past or future personal services see eg 455_f2d_1146 cir lump sum representing unpaid commissions due under an employment contract 431_f2d_1149 cir lump sum paid for the surrender of right to future sales commissions 303_f2d_687 cir payment for interest in films to be produced by taxpayer similarly courts have denied capital_gain treatment for interests relating to income already earned or about to be earned see eg 381_us_54 earned original_issue_discount 437_f3d_399 3d cir lump sum payne comm'r 131_f2d_50 for annual installments of lottery prize rhodes’ estate v cir right to dividend that was already declared on the other hand simply because the property transferred will produce ordinary_income and such income is a major factor in determining the value of the property does not necessarily mean that the amount received for the property is essentially a lump-sum substitute_for_ordinary_income 46_tc_559 in guggenheim the court focused on whether the taxpayer transferred substantial investment risks in the sale of undivided interests in a stallion the court noted that if the value of the stallion subsequently increased the taxpayer would not share in that increase with regard to the interests transferred instead the new owners would receive all the benefits of an increase in the value of the stallion and all the burdens of a decrease in value therefore the court found that the taxpayer had transferred substantial investment risks and was entitled to capital_gain treatment on the sale of the interests in 324_f2d_56 between proceeds from the present sale of the future right to earn income which is capital_gain and the present sale of the future right to earned_income which is ordinary_income the court found that the sale of an income-producing asset was not merely the sale of the right to income already earned because the taxpayer had an asset that would produce income in the future noting that there is in law and fact a vast difference between the present sale of the future right to earn income and the present sale of the future right to earned_income the court held that the taxpayer’s sale of the asset generated capital_gain id pincite cir the court distinguished similarly in 304_f2d_125 2d cir the court held that the taxpayer's surrender of the lease of a play constituted the sale_or_exchange of a capital_asset despite the fact that receipts from the play would have been ordinary_income id pincite government's argument against capital_gain treatment the court noted that there was no equivalence between amounts paid for the surrender of the lease and the income that would have been realized by its retention id pincite in rejecting the analysis the bundle of contract rights represented by a pool unit is property and may be treated as a capital_asset for purposes of sec_1221 of the code the most important characteristic of the pool unit is that significant investment risks are associated with and included in each unit with respect to each pool unit there is an opportunity for appreciation as well as a risk of loss each unit represents a substantial investment by the trust and each unit has an ascertainable basis the value of each unit is directly tied to the pool’s investment performance poor performance will result in a decrease in the value of each unit while performance above the spending policy rate set by the university will increase the value of each unit the opportunity for appreciation risk of loss and basis in each unit are characteristics of other contract rights that are treated as capital assets for example financial derivatives notional_principal_contracts mutual_fund shares and corporate stock furthermore the benefits and burdens associated with each unit are similar to those associated with the property judged to be capital assets in guggenheim dresser and ferrer in addition although the trusts will receive ordinary_income in the form of the quarterly spending policy distributions that are based on the number of pool units owned by the trusts consideration received upon a redemption of a pool unit is not a substitute for what would otherwise be received as an ordinary_income payout whether due and payable or about to be due and payable to the trust under the terms of the contract rather the amount_paid for a pool unit upon a redemption is equal to the value of the unit on the date of redemption unit value on any given date is equal to overall asset value of the pool divided by the number of units outstanding in addition a pool unit is not an interest related to compensation_for past or future personal services instead the unit is an asset that will produce income in the future finally a pool unit does not represent a carve-out of a larger estate retained by the trust the appreciation of each unit is attributable to overall pool property appreciation much of which in turn is attributable to increases in the value of capital assets in the pool the contract specifically provides that the trust has no ownership_interest or rights to the pool thus we conclude that a poo unit is a capital_asset for purposes of sec_1221 of the code furthermore sec_1234a will apply to treat gain_or_loss from the cancellation lapse expiration or other termination of a pool unit as gain_or_loss from the sale of a capital_asset consequently in general the redemption of a pool unit will generate short-term or long-term_capital_gain or loss to the trusts depending on the holding_period of the unit conclusion accordingly based on the information submitted in your ruling_request we rule as follows the issuance of pool units by the university to the trusts the making or receipt of spending policy distributions with respect to pool units and the holding or redemption of pool units will not generate unrelated_business_taxable_income within the meaning of sec_512 of the code to the university or the trusts a pool unit will be treated as a capital_asset for purposes of sec_1221 of the code and sec_1234a will apply to treat gain_or_loss from the cancellation lapse expiration or other termination of a pool unit as gain_or_loss from the sale of a capital_asset the redemption of a pool unit will generate short-term or long-term_capital_gain or loss to the trusts as set forth in sec_1222 of the code depending on the holding_period of the pool unit this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make if you disagree with our proposed available for public inspection is attached to notice deletions you should follow the instructions in notice this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because it could help resolve questions concerning your federal_income_tax status this ruling should be kept in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative sincerely theodore r lieber manager exempt_organizations technical group enclosure notice


internal_revenue_service number release date index number ------------------------------------------------------------ ------------------------------ ---------------------------- re ------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no --------------- ------------------ telephone number ---------------------- refer reply to cc psi b04 plr-129977-16 date date legend decedent spouse date date ------------------------------------------------- ----------------------- -------------------------- --------------------------------- dear ------------------- this letter responds to your personal representative’s letter of date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election under sec_2010 of the internal_revenue_code portability election to allow a decedent’s surviving_spouse to take into account that decedent’s deceased spousal unused exclusion dsue amount the facts and representations are as follows decedent died on date survived by spouse date is a date after the effective date of the amendment to sec_2010 which provides for portability of a dsue amount to a surviving_spouse to obtain the benefit of portability of decedent’s dsue amount to spouse decedent’s estate was required to file form_706 united_states estate and generation-skipping_transfer_tax return on or before the date that is nine months after decedent’s date of death or the last day of the period covered by an extension decedent’s form_706 was due on date but the estate did not file a form_706 to make the portability election the estate discovered its failure to elect portability after the due_date for making the election it is represented that the value of decedent’s gross_estate is less than the basic exclusion amount in the year of decedent’s death including any taxable_gifts made during his lifetime plr-129977-16 you request an extension of time pursuant to sec_301_9100-3 to elect portability of decedent’s dsue amount pursuant to sec_2010 law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2010 provides that a credit of the applicable credit_amount shall be allowed to the estate of every decedent against the tax imposed by sec_2001 sec_2010 provides that the applicable credit_amount is the amount of the tentative_tax that would be determined under sec_2001 if the amount with respect to which such tentative_tax is to be computed were equal to the applicable_exclusion_amount on date congress amended sec_2010 effective for estates of decedents dying and gifts made after date to allow portability of a decedent’s unused applicable_exclusion_amount between spouses tax relief unemployment insurance reauthorization and job creation act of pub_l_no sec_303 124_stat_3296 sec_2010 provides that the applicable_exclusion_amount is the sum of the basic exclusion amount and in the case of a surviving_spouse the dsue amount sec_2010 generally provides that the basic exclusion amount is dollar_figure to be adjusted for inflation annually after calendar_year sec_2010 defines the dsue amount to mean the lesser_of a the basic exclusion amount or b the excess of -- i the applicable_exclusion_amount of the last deceased spouse of the surviving_spouse over ii the amount with respect to which the tentative_tax is determined under sec_2001 on the estate of such deceased spouse sec_2010 provides that a dsue amount may not be taken into account by a surviving_spouse under sec_2010 unless the executor of the estate of the deceased spouse files an estate_tax_return on which such amount is computed and makes an election on such return that such amount may be so taken into account the election once made shall be irrevocable no election may be made if such return is filed after the time prescribed by law including extensions for filing such return sec_2010 provides that the secretary shall prescribe regulations as may be necessary or appropriate to implement sec_2010 plr-129977-16 sec_20_2010-2t a of the estate_tax regulations as in effect on date provides that to allow a decedent’s surviving_spouse to take into account that decedent’s dsue amount the executor of the decedent’s estate must elect portability of the dsue amount on a timely-filed form_706 under sec_20_2010-2t a the due_date of an estate_tax_return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been granted under sec_20_2010-2t a the portability election is made by timely filing a complete and properly prepared estate_tax_return unless the executor satisfies the requirements for the election not to apply in sec_20_2010-2t a i sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that the term statutory election means an election whose due_date is prescribed by statute the term regulatory election means an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 provides the standards the commissioner will use 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 a request for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and 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 failed to make the election because after exercising reasonable diligence taking into account the taxpayer’s experience and the complexity of the return or issue the taxpayer was unaware of the necessity for the election the due_date for the portability election is prescribed by statute in the case of an estate required to file an estate_tax_return under sec_6018 see sec_2010 sec_6075 and sec_6018 in the case of an estate that is not required to file an estate_tax_return under sec_6018 the due_date is prescribed by regulation see sec_20_2010-2t a see also sec_20_2010-2 and revproc_2014_18 2014_7_irb_513 sec_2 accordingly in the latter case a taxpayer may seek an extension of time to elect portability under the provisions of sec_301_9100-3 plr-129977-16 sec_6018 requires the filing of an estate_tax_return in all cases where the gross_estate exceeds the basic exclusion amount in effect under sec_2010 for the calendar_year which includes the date of death for purposes of this determination under sec_6018 the basic exclusion amount is reduced but not below zero by the sum of -- a the amount of the adjusted_taxable_gifts within the meaning of sec_2001 made by the decedent after date plus b the aggregate amount allowed as a specific exemption under sec_2521 as in effect before its repeal by the tax reform act of with respect to gifts made by the decedent after date it is represented that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is not required to file an estate_tax_return under sec_6018 under these facts the commissioner has discretionary authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly we grant an extension of time of days from the date of this letter in which to elect portability under sec_2010 the election should be made by filing a complete and properly-prepared form_706 and a copy of this letter within days from the date of this letter to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center stop cincinnati oh for purposes of electing portability a form_706 filed by decedent’s estate within days from the date of this letter will be considered to be timely filed the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination if it is later determined that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is required to file an estate_tax_return pursuant to sec_6018 the commissioner is without authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-129977-16 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely associate chief_counsel passthroughs special industries by lorraine e gardner ______________________________ lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number --------------------------------------- ------------------------------------------- -------------------- --------------------------------- legend legend department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------- id no ----------------- telephone number --------------------- refer reply to cc psi b01 plr-148893-11 date april x -------------------------------------------------- ----------------------------------------- d state ------------------ ------------------- dear -------------- this responds to the letter dated date and related correspondence submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts corporation x was incorporated on d under the laws of state x’s shareholders intended that x be treated as an s_corporation for federal tax purposes effective d but the form_2553 election by a small_business_corporation was not timely filed law and analysis sec_1362 provides that a small_business_corporation may elect to be an s sec_1362 provides the rule on when an s election will be effective if an s election is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made if the election is made after the first two and one-half months of a plr-148893-11 corporation’s taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if no election is made pursuant to sec_1362 or if made the election is made after the date prescribed for making such an election and the secretary determines there was reasonable_cause for the failure to timely make the election then the secretary may treat such an election as timely made for such taxable_year and effective as of the first day of that tax_year x did not file a timely election to be treated as an s_corporation under sec_1362 effective d x has however established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be recognized as an s_corporation effective d within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center 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 who requested it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter_ruling will be sent to your authorized representative sincerely laura c fields senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


a ve - t r g has es - e es department of the treasury internal_revenue_service te_ge eo examinations commerce street ms dal dallas tx tax_exempt_and_government_entities_division release number release date legend org organization name uil code org address date address address xx date taxpayer_identification_number person to contact id number contact numbers telephone fax internal_revenue_code sec_501 certified mail return receipt required dear last date for filing a petition with the tax_court _ february 20xx this is a final adverse determination as to your exempt status under sec_501 of the internal_revenue_code on september 20xx you signed form_6018 in agreement with the proposed revocation our adverse determination was made for the following reasons failure to provide records of the organization and failure to meet the reporting requirements under sec_6001 and sec_6033 of the internal_revenue_code exemption from income_tax is a matter of legislative grace and taxpayers have the burden of establishing their entitlement to exemptions sec_6033 requires organizations exempt from tax to keep such records and render such statements as are required by such rules and regulations as the secretary may prescribe sec_1_6033-2 h requires organizations exempt from tax to submit such additional information as may be required by the internal_revenue_service for the purpose of inquiring into the organization’s exempt status despite numerous requests to you to provide information to conduct an examination of your form_990 for the year ended december 20xx no requested information has been provided to us in addition the organization has not filed any prior form_990 returns based on the above we are revoking your organization's exemption from federal_income_tax under sec_501 of the internal_revenue_code effective october 20xx you are required to file form_1041 and form_990-pf these returns should be filed with the appropriate service_center december 20xx and all years thereafter processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or if you prefer you may contact the local taxpayer_advocate at taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling a petition in the united_states tax_court if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours sunita lough director eo examinations department of the treasury internal_revenue_service mail stop po box ogden ut tax_exempt_and_government_entities_division date of this notice contact person id number contact telephone numbers toll free long distance fax org address employer_identification_number tax period s form s certified mail - return receipt requested dear 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 irc is necessary if you accept our findings take no further action we will issue a final revocation letter lf 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 if we issue a determination_letter to you based on technical_advice no publication further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809zf 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 irc 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 irc 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 the most convenient time to call if we need to contact you if you write please provide a telephone number and telephone number ___ hours sincerely sunita lough director eo examinations ar enclosures publication publication form 886a report of examination letter catalog number 34809zf form 886a department of the treasury - internal_revenue_service name of taxpayer org 20xx12 explanation of items schedule no or exhibit year period ended legend org organization name xx date state state tco tco cpa cpa director director issue whether org qualifies for exemption under sec_501 of the internal_revenue_code facts october 20xx the organization incorporated as the org in the state of state october 20xx the organization filed form_1023 application_for recognition of exemption under sec_501 the service further determined the organization is a private_foundation within the meaning of sec_509 the determination_letter also specified that you are required to file forms 990-pf return of private_foundation or sec_4947 a trust treated as a private_foundation form_990-pf must be filed by the 15th day of the fifth month after the end of your annual_accounting_period the organization did not file forms 990-pf for any_tax periods as required september 20xx case assigned to ra for examination no contact was made with the organization completed dummy form_990-pf and processed for tax_year 20xx and closed for completion july 20xx case assigned to tax compliance officer tco for re-examination researched all documents and module and found no current information as to filing forms 990-pf as required or dissolution information_letter sent requesting forms 990_pf for tax years 20xx and 20xx august 20xx no information had been received called to discuss the issue with poa cpa and left voicemail october 20xx no response again called and left voice message with cpa researched and found no other contact number november 20xx faxed request and copy of letters sent to cpa for research and verification form 886-a crev department of the treasury - internal_revenue_service page -1- department of the ‘treasury - internal_revenue_service een 886a name of taxpayer org schedule no or exhibit year period ended explanation of items 20xx12 december 20xx received phone call from cpa cpa and after his researching the information the organization is liable for filing 990-pf forms as stated request for extension to complete forms 990pf allowed days january 20xx no response per phone conversation requesting follow-up on there filing forms 990-pf with cpa he stated that he had completely forgotten about the request and will work on it february 20xx no response called and left a voice message march 20xx no response 886-a draft notice prepared for revocation consideration april 20xx received phone call from cpa poa requesting day extension june 20xx received form 990ez but required forms 990pf cpa indicated that the organization should not have applied for exemption as this was a one time event fund raiser to help the employees and family in need from the hurricane katrina disaster august 20xx received and explained the situation to revenue_agent in charge for resolution of revocation called and talked with cpa requesting a signed form_6018 for revocation the organization will have to reapply for exemption if they ever choose to be exempt in the future september 20xx received signed document as agreed for exemption org has failed to respond to the internal_revenue_service correspondence or file the forms 990pf for the tax period ending december 20xx law sec_6001 provides that every person liable for any_tax imposed by the irc or for the collection thereof shall keep adequate_records as the secretary_of_the_treasury or_his_delegate may from time to time prescribe sec_1_6001-1 in conjunction with sec_1_6001-1 provides that every organization exempt from tax under sec_501 and subject_to the tax imposed by sec_511 on its unrelated_business_income must keep such permanent books or accounts or records including inventories as are sufficient to establish the amount of gross_income deduction credits or other matters required to be shown by such person in any return of such tax such organization shall also keep such books_and_records as are required to substantiate the information required by sec_6033 form 886-a rev department of the treasury - internal_revenue_service page -2- eee 886a department of the ‘i'reasury - internal_revenue_service name of taxpayer explanation of items org 20x x12 schedule no or exhibit year period ended sec_1_6001-1 states that the books_or_records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law sec_6033 provides 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_6033-1 provides that every organization which has established its right to exemption from tax whether or not it is required to file an annual return of information shall submit such additional information as may be required by the district_director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter_f sec_501 and the following chapter of the code and sec_6033 revrul_59_95 1959_1_cb_627 concerns an exempt_organization that was requested to produce a financial statement and 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 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 government's position sec_6033 requires every organization exempt from tax under sec_501 to file an annual return the service has prescribed form_990-pf as the annual return for recognized private_foundations the organization has failed to meet this requirement for the 20xx and 20xx filing periods sec_1_6033-1 of the treas regs requires organizations which have established their right to exemption form tax to submit such additional information as may be required to inquire further into its exempt status such a request was made by the service on july 20xx by failing to provide the requested information and failing to file the prescribed tax returns the organization is not observing the conditions required for the continuation of exempt status such actions result in the form 886-a rev department of the treasury - internal_revenue_service page -3- department of the ‘l’reasury - internal_revenue_service reva 886a name of taxpayer org schedule no or exhibit year period ended explanation of items 20xx12 termination of exempt status this position is supported by revrul_59_95 the service cannot meet the burden necessary to terminate private_foundation_status per sec_507 as such the organization’s private_foundation_status will continue per sec_509 and shall hereafter be a taxable private_foundation as such the organization will be subject_to all federal_income_tax provisions as well as continue to be subject_to the tax provisions of chapter unless the organization terminates their private_foundation_status per sec_507 this examination does not dispute the service’s determination on november 20xx regarding tax exempt status rather it is the organization’s activities or lack thereof that warrant revocation of exempt status as such the service holds that the relief provisions of sec_7805 are not applicable organization’s position cpa cpa states that the organization filed a form for exemption in error the fund raiser was only a one time event to help the employees of org due to hurricane katrina in 20xx no activity has taken place since 20xx leaving little to no money in the account rather than completing forms 990pf a request from both the foundation and cpa has been made to revoke the status of the foundation as it is was done in error form_6018 has been signed as agreed for revocation by director director conclusion the org has failed to meet the necessary requirements for exemption from federal_income_tax as such the organization’s exempt status is revoked effective as of january 20xx the organization is liable for all applicable federal_income_tax provision prescribed by internal revenue law and must file form_1120 for all future tax periods commencing with the year ending december 20xx in addition the organization will continue to be subject_to chapter taxes and must file form pf as a taxable private_foundation form 886-a rev department of the treasury - internal_revenue_service page -4-


number release date id office uilc cca_2012113008373237 --------- from -------------------- sent friday date am to --------------- cc ------------ subject re fpaa review question under estate of quick and sente investment club the passive loss determination is bifurcated with the status of the partnership activity as trade_or_business rental or portfolio_income being determined in the partnership a level an a level proceeding would also determine the status of the direct partners as limited partners that status determination is binding on the direct and indirect partners including partnership b in the absence of an a proceeding we are bound by how the forgoing items are reflected on partnership a's return and books_and_records see 94_tc_853 pincite -------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------- ultimately in order to disallow losses to the ultimate partners based on a passive loss characterization we would have to issue affected_item notices of deficiency determining that they did not materially participate call me at ------------------- if you want to discuss