internal_revenue_service appeals_office market st suite philadelphia pa release number release date date date a b uil - certified mail dear department of the treasury person to contact employee d number tel fax refer reply to in re eo determination tax period s ended uil form required to be filed employer_identification_number last day to file a petition with the united_states tax_court not applicable jun this is a final adverse determination as to your exempt status under sec_501 of the internal_revenue_code irc from federal_income_tax under sec_501 our adverse determination was made for the following reason s is determined that you do not qualify as exempt c effective date it you have not demonstrated that you are organized and operated exclusively for charitable educational or other exempt purposes as required by section ode your operation of bingo_games and sale c of the internal revenue c these activities are conducted regularly of pull-tabs is your primary activity d your education activities are insubstantial several times a week and year-roun and conducted on an irregular and infrequent basis and participated in by only a very small number of your members therefore you are not an organization which operates exclusively for one or more of the exempt purposes which would qualify it as an exempt_organization contributions to your organization are not deductible under code sec_170 you are required to file federal inco should file these returns within da me tax returns on the form indicated above you ys from the date of this letter unless a request for an extension of time is granted file the returns in accordance with their instructions and do not send them tc this office you have waived your right to contest this determination under the declaratory_judgment provisions of sec_7428 of the code by your execution of form_906 closing_agreement concerning specific matters an executed copy of which is being sent to you under separate cover you also have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures formal appeals process etc the taxpayer_advocate is not able to reverse legally correct_tax determinations nor extend the time fixed by law that you have to file a petition in 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 if you want taxpayer_advocate assistance please contact the taxpayer_advocate for the irs office that issued this letter see the enclosed notice helpful contacts for your notice_of_deficiency for taxpayer_advocate telephone numbers and addresses if you have any questions please contact the person whose name and telephone number are shown above sincerely charles fisher team manager enclosure notice - helpful contacts for your ‘deficiency notice’ aia a e c i t e f t a sever e o j d n g defartment of the treasury internal_revenue_service washington d c tax exempt anc government entities civision date legend m society n camp x veterans y combatant z war dear contact person identification_number contact number fax number employer_identification_number uil we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 the basis for our conclusion is set forth below issue does the applicant m qualify for exemption under sec_501 of the code or is exemption precluded by the fact that applicant’s primary activity is the conduct_of_a_trade_or_business for profit facts you m were incorporated in june that you were originally chartered in as a nonprofit corporation under the name n you stated and operated as an unincorporated association before originally you were funded largely by membership dues however you decided to start using bingo as a means of fund-raising in x which holds a group exemption under code sec_501 you stated however that your that you cannot be covered under their group exemption parent organization advised you in due to your involvement in bingo you state that x has several other chapters in your state but that you are the only chapter using bingo for fundraising in you filed an amendment with the state of you indicated that you are an official chapter of the that changed your name to m page you are membership_organization wnose membership is limited to male descendants of members of y military or governmentai organizations you also have an associate member’ category whicn does not require such descent according to the jaws of your state governing bingo and raffles no person except an active member of the organization to which the license is issued or an auxiliary organization is allowed to hold operate or conduct any games of chance under this license the only exception is for persons who are bookkeepers or accountants you advised that you have one life member regular members and two associate members however you have also associate members are usually persons researching their y lineage classified an unspecified number of persons who work as paid employees in your bingo operations as associate members you stated that these individuals hold membership strictly for bingo operations that they cannot vote or hold office and that you are unable to provide specific information on the number of such associate members over the years due to frequent turnover letter sent with form_1023 that you usually have around among bingo workers you stated in a workers per bingo session working on a rotating basis according to a copy of a state report that you provided for one monthin associate member category in addition to a non-member bookkeeper one of your officers serves as bingo manager of your organization for one year or less you sponsor bingo_games three nights per week year-round except on certain holidays you also sell pull-tabs during bingo sessions these games are held in a commercial bingo hall also used by other organizations that sponsor bingo you also purchase or rent bingo and pull-tab supplies and equipment from the owner of the bingo hall you pay a fixed rate per session for use of these premises around half of your bingo workers at that time had been members at that time you had bingo workers in the according to income statements sent after form_1023 was filed during the years ended bingo and pull- through tabs totaling dollar_figure _ of this amount payments identified as sonsisting of dollar_figure averaging around your total expenditures over this period totaled dollar_figure charity or charity donations totaled dollar_figure there were no charity payments in or payments for bingo and pull-tabs prizes totaled dollar_figure relating to gaming rent security bingo workers’ salaries supplies and equipment etc totaled dollar_figure sufficiently identified to determine whether they related to gaming or to your stated educational_purposes your net_income after all expenses including charity payout averaged around dollar_figure per year you indicated in your application that you had no physical assets and less than dollar_figure cash when you filed form_1023 substantially_all other expenses either related to gaming operations or were not of gross_receipts each year other expenses identified as anddollar_figure in in20 in revenues from pull-tabs accounted for workers selling pull-tabs varies from session to session not provided any breakdown of expenses relating to pull-tabs operations in and pull-tab supplies and equipment rental were listed but all salaries were reported as the financial information you provided did of gross_receipts you indicated that the number of or in in form_7023 vou characterizec al of your gaming revenues as receipts from activities bingo relating to your exempt purposes page in through ‘alone net_income from pull-tabs was over dollar_figure although you did not provide sufficient information to determine completely accurate allocation of expenses between bingo and pull-tabs the available information tends to indicate that your pull- tabs sales require minimal additional resources since you use the same premises and workers as for your bingo_games after subtracting prize payout and expenses specifically identified as relating to pull-tab operations your net_income from pull-tabs constituted almost year period 20' appears that you have not been paying taxes on any of your income you reported no sources of income other than bingo and pull-tabs in your financial statements you either in form_1023 or in subsequent correspondence stated that you had a separate membership account to collect dues from your members and that a portion of these dues is remitted to your national organization however you did not provide any income and expense information for this account website you stated that dues are currentlydollar_figure that these dues are used in part to provide a subscription to a bi-monthly magazine the information you provided concerning the number of members you have it appears that membership dues would produce no more than a few hundred dollars a year accordingly omission of this income does not materially affect the above computations per year after a one-time dollar_figure registration fee and based on on your page on your state organization’s in your letter dated july over the four- it _ based on the figures you provided at least _ activities over the last four years representing most unclassified expenses such as funds were documented as having been used for charity accounting fees bank charges and returned check fees also appeared to relate primarily to your gaming activities of your gross_receipts less than was spent in the conduct of gaming of your you did not provide a specific narrative description of your activities in your initial application form copy of a you provided only copies of your articles of incorporation and bylaws and a amendment stating that funds raised from bingo were to be used for donations to persons organizations training education re-enactment events insurances for re-enactors per_diem travel and cultural events you stated in a letter sent with form_1023 that you promote z education to the general populace food to the needy and assistance to y and other re-enactors inaletterdated however you provided only a copy of your lease for bingo operations in response to another inquiry concerning compensation you stated that all salaries paid are for work related to bingo you were asked where your administrative activities are conducted letter you were also asked to provide more detail concerning your overall in our activities especially those activities related to your stated charitable and educational functions you to widows of your members that you make stated that you make one-time cash payments of as an example you mentioned a shooting club donations to other organizations of up to dollar_figure a year to the lodge where we hold our meetings that you may pay up to that you pay up to dollar_figure for accident insurance for organizations involved in re-enactments that you provide funds dollar_figure for supplies lodging and per_diem costs for individuals involved in re-enactment events and that you provide monies to the hospitals the sick for z monuments and y graves page you were askec how many of your members generally participate in our letter datec july on regular basis in activities that you conduct otner than bingo how often you hold membership meetings or other functions for your members anc where such activities are held we also asked you to indicate how much of your funds were usec for these activities in the last three years and to show where these expenditures were reflected in your financial statements you stated that three of your members are re-enactors and that you are assisted by others in re- enactment events living history events and other unspecified cultural events you stated that you also provide data to the state concerning soldiers killed in other wars and that you aid in locating z graves in your state and provide research services through your website however you have only a webpage on your state organization's website and this indicates that research services are actually provided by the state organization you stated that in most cases you hold monthly meetings either at members’ homes or at the facilities of another organization where your commander is in your state or in other states you did not indicate how many of your members generally participate in the different activities or how often these activities are typically conducted and did not provide any of the information we requested concerning funds used for these purposes you stated that your other activities may take place at various locations a member you hold membership meetings you host bingo_games three nights a week throughout the year at most once a month and participate in other educational and historical functions on an irregular it is unclear how many of your full members regularly participate in these activities however basis several members are regularly and actively involved in the conduct of gaming and administrative most of your associate members who account for around functions relating to gaming activities half of your total membership are bingo workers who are not otherwise involved in your activities and presumably do not meet your regular membership requirements law sec_501 of the code provides in part for the exemption of corporations organized and operated exclusively for charitable or educational_purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the income_tax regulations provides that to be exempt under sec_501 of the code an organization must be organized and operated exclusively for one or more of the exempt purposes described in sec_501 of the code sec_1_501_c_3_-1 of the income_tax regulations provides that an organization will be it engages primarily in regarded as operated exclusively for one or more exempt_purpose only if activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more that an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_a_-1 of the regulations provides that an organization described in sec_501 shall submit with and as a part of an application filed after date a detailed statement of its activities in sec_4 provides that the internal_revenue_service will revproc_2008_9 r b recognize the tax-exempt status of an organization only if its application and supporting documents rage establish that it meets the particular requirements of the section uncer which exemption from federa income_tax ts claimed sec_1_501_c_3_-1 provides that a sec_501 organization may not be operated for the primary purpose of carrying_on_a_trade_or_business regulation sec_1_501_c_3_-1 provides that a trade_or_business is substantially related to exempt purposes when the business activity has a substantial causal relationship to the achievement of the exempt purposes moreover the conduct of the trade_or_business from which income is derived must contribute importantly to the accomplishment of the organization’s exempt_purpose regulation sec_1_513-1 provides that 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 the performance of services code sec_513 states in part for purposes of this section 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 for purposes of the preceding sentence an activity does not lose identity as a trade_or_business merely because it is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which may or may not be related to the exempt purposes of the organization code sec_513 provides that certain bingo_games are excluded from the definition of unrelated_trade_or_business for purposes of imposition of tax game of chance played with cards that are generally printed with five rows of five squares each participants place markers over randomly called numbers on the cards in an attempt to form a preselected pattern such as a horizontal vertical or diagonal line or all four corners the first participant to form the preselected pattern wins the game as used in this section bingo_game means any game of bingo of the type described above in which wagers are placed winners distributed in the presence of all persons placing wagers in that game this exception does not apply to pull tabs or similar games of chance regs d defines a bingo_game as a code sec_513 describes certain exceptions that indicate what is not considered an unrelated_trade_or_business these provisions state in relevant part the term does not include any trade or business- in which substantially_all the work is performed without compensation 71_tc_102 provides in part that the word exclusively does not mean solely or without exception an organization which engages in nonexempt activities can obtain and maintain exempt status so long as such activities are only incidental and insubstantial world family corp v commissioner t c neither the code regulations nor case law provide a general definition of insubstantial for purposes of c this is an issue of fact to be determined under the facts and circumstances of each particular case page inc v commissioner 26_tc_1126 the court held that the organization in hele the children was primarily operated to engage in commercial binge activities for profit furthermore the major portion of its contributions were for noncharitable purposes therefore the organization did not qualify for exemption under code sec_501 in p l l scholarship fund v commissioner t c the tax_court held that an organization that operated bingo_games to provide funds for scholarships did not qualify for exemption under code sec_501 the organization's bingo_games produced minimal net profits for scholarships and served as a means of attracting patrons to a business operated by its founders in make a joyful noise inc v commissioner t c memo 56_tcm_1003 the court held that operating regularly scheduled bingo_games on behalf of other exempt_organizations was a trade_or_business unrelated to the organization’s exempt purposes the court held that the organization had failed to carry its burden of proving that its participation in bingo_games was an insubstantial part of its activities 326_us_279 holds that an organization that educates the public and local businesses about honest business practices has a purpose to advance the members’ business as well as an educational purpose when an organization carries out a non-exempt purpose substantial in nature it will destroy the exemption regardless of the number and importance of the truly exempt purposes in revrul_73_127 1973_1_cb_221 it was held that an organization operating a cut-rate grocery store serving residents of a poverty area in which some employees were disadvantaged persons undergoing job training did not qualify for exemption while the job-training phase of the operation was held to be charitable it was concluded that the primary purpose of the organization was the operation of a trade_or_business notwithstanding the absence of profit application of law while your stated purposes are educational within the meaning of code sec_501 and you do engage in activities that further these educational_purposes you have not demonstrated that either the time or funds devoted to such activities are sufficient to support a conclusion that you are operated exclusively for exempt purposes even if one adopts a best case scenario and assumes that all expenditures not clearly connected to gaming activities are exempt_function expenditures less than of your gross_receipts were used for exempt purposes over the last four years the actual figure appears to be closer to you were asked several times to provide more detailed information and documentation concerning the amount of both time and funds spent in educational activities and how many of your members participate in these activities but provided your classification of bingo workers as associate members also appears no specific information to be an attempt to circumvent state law regulating bingo operations you are similar to the organizations described in make a joyful noise inc v commissioner help the children inc v commissioner and p l l scholarship fund v commissioner these cases involved organizations engaged primarily in fund-raising activities through bingo_games fage7 the courts held that none of these organizations qualified for exemption under sec_501 of the internal_revenue_code because they were noi cperatec exclusively for exempt purposes as in the better business bureau case your non-exempt activities of conducting bingo_games are more than an incidental and insubstantial part of your overall activities discussed in revrul_73_127 your business activities exceed the scope of being merely an adjunct to your educational and charitable activities like the organization applicant’s position you contend that your purposes and activities are exclusively educational and that your bingo operations are merely a means of raising funds for your exempt_function activities such as participating in reenactments research and supporting and participating in your parent organization's educational projects service response to applicant’s position your gaming operations are not merely incidental to your exempt functions bingo and other gaming activities are conducted several times a week year-round by a paid staff that substantially exceeds your active bona_fide membership in contrast your educational activities are for the most part conducted on an irregular and infrequent basis and participated in by only a small number of your members the available information indicates that operation of bingo_games and associated sale of pull-tabs is your primary activity and that gaming activities are not primarily conducted as a means of raising funds for educational functions this is evidenced by the fact that bingo_games have produced minimal net profits and that you were unable to show that any significant amount of bingo proceeds were used for exempt purposes in several years yet you have continued to operate bingo_games for more than ten years conclusion we conclude that you m do not qualify for exemption under code sec_501 on the grounds that you are primarily operating a trade_or_business page appeal rights you have the right tc file a protest if you believe this determination ts incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination if your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues types of information that should be included in your appeal can be found on page of publication under the heading regional_office appeal accompanied by the following declaration the statement of facts item must be under penalties of perjury declare that have examined the statement of facts presented in this appeal and in any accompanying schedules and statements and to the best of my knowledge and belief they are true correct and complete the declaration must be signed by an officer or trustee of the organization who has personal knowledge of the facts your appeal will be considered incomplete without this statement if an organization's representative submits the appeal a substitute declaration must be included stating that the representative prepared the appeal and accompanying documents and whether the representative knows personally that the statements of facts contained in the appeal and accompanying documents are true and correct an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process if you want representation during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to appeal as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if we if you do not intend to protest this determination you do not need to take any further action do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters page please send your protest statement form_2848 and any supporting documents to the applicable address mail to deliver to internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh if you fax you may fax your statement using the fax number shown in the heading of this letter your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely enclosure publication robert s choi director exempt_organizations rulings agreements


t c memo united_states tax_court alumni association of the university of oregon inc petitioner v commissioner of internal revenue respondent docket no filed date philip n jones carolyn w miller and stephen j klarquist for petitioner brenda m fitzgerald for respondent memorandum findings_of_fact and opinion colvin judge respondent determined deficiencies in petitioner's federal_income_tax of dollar_figure for and dollar_figure for the issue for decision is whether petitioner's income from an affinity credit card program is a royalty excluded by sec_512 from the tax on unrelated_business_income we hold that it is section references are to the internal_revenue_code in effect for the years in issue rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and are so found a petitioner petitioner alumni association of the university of oregon inc is an oregon nonprofit corporation exempt from federal_income_tax under sec_501 petitioner's principal_place_of_business is eugene oregon petitioner was established to advance the cause of higher education promote the interests and increase the usefulness of the university of oregon and encourage good fellowship of its members to further its purposes petitioner fulfilled its purposes by communicating with alumni and sponsoring continuing educational activities and social events during the years at issue petitioner had a staff of or employees b history of the university of oregon alumni association affinity credit card program in and petitioner became aware of affinity credit card programs through news articles and discussions with representatives from other organizations petitioner received unsolicited proposals regarding the affinity credit card program from the united_states national bank of oregon usnb and another financial_institution petitioner's then executive director philip super super rejected both proposals super contacted donald wirth wirth the executive director of the oregon state university alumni association osuaa to discuss the affinity credit card program wirth and super wanted their organizations to develop an affinity credit card program petitioner and the osuaa formed a committee to solicit proposals from several banks and to select a plan petitioner and the osuaa formed the committee to increase their bargaining power and to avoid duplication of effort the committee was headed by wirth and super its members were volunteers from both organizations after reviewing to plans the committee chose usnb's plan after negotiations the parties signed an affinity credit card agreement2 the agreement on date philip super was petitioner's executive director when petitioner negotiated and implemented the affinity credit card program dan rodriguez rodriguez became petitioner's executive director starting in date rodriguez was petitioner's executive director during the years in issue the agreement was amended on date the parties changed the word fees to royalties in par of the agreement neither party contends that the amendment affects any issue in dispute on date usnb held a press conference and issued a news_release announcing the affinity credit card program one of petitioner's representatives gave a brief speech at the press conference petitioner did not otherwise inform the news media of the affinity credit card program usnb entered into the agreement primarily to make money its objectives in signing the affinity credit card agreement were to gain access to petitioner's mailing list and to obtain petitioner's endorsement usnb believed that it would be easier to market credit cards through an affinity credit card program than to market credit cards otherwise petitioner established the affinity credit card program to keep alumni aware of their ties to the university of oregon and to keep the university of oregon's name before the public to provide a low-cost credit card to alumni and other university of oregon supporters and to provide revenue for its programs without placing undue demands on its staff c the affinity credit card agreement usnb agreed to prepare and mail at its expense promotional materials and credit card applications to petitioner's members usnb also agreed to announce petitioner's activities and alumni news four times each year at usnb's expense on periodic statements mailed to alumni credit card holders and to place a full-page color advertisement in petitioner's publication at the standard rate at least twice annually during the term of the agreement petitioner agreed to give usnb the names addresses and graduation dates of its members to license the use of its name logo and official seal of the university of oregon to usnb and to inform its members of the affinity credit card program at its expense at least once per year the agreement did not require petitioner to mail any solicitation materials to alumni petitioner could prepare at its discretion materials containing announcements of its activities and alumni news four times annually to accompany usnb's periodic statements usnb agreed to pay petitioner dollar_figure for each new account dollar_figure for renewal of a classic visa card dollar_figure for renewal of a premier visa card and percent of all authorized cash purchases and advances the agreement was for years and was automatically renewable for 1-year periods unless terminated by either party d list of alumni usnb asked petitioner for the list of alumni about once a year usnb was to solicit credit card applications from those members and issue a card to approved applicants the data base of alumni was kept on a computer owned and possessed by the university of oregon foundation petitioner forwarded usnb's requests to the university of oregon foundation the university of oregon foundation prepared a magnetic tape for usnb's use employees of the university of oregon foundation spent no more than hour preparing the tape the university of oregon foundation processed the information and delivered the magnetic tape to petitioner at no charge petitioner sent the tape to usnb usnb returned the tape to petitioner after using it for a particular mailing the university of oregon foundation is not owned or financed by petitioner the data base was not available on the open market petitioner updated this list and recorded pre- and post- graduation information about each alumnus usnb gave petitioner a list of alumni cardholders each quarter petitioner's employees spent about hours each quarter entering data regarding the cardholders e postagreement activities by usnb usnb mailings to petitioner's members usnb hired and paid an advertising agency and direct mail house to write design print and mail solicitation materials to petitioner's members these mailings cost about dollar_figure per item petitioner gave signatures of its president to usnb to duplicate on promotional materials an employee of petitioner spent about hour reviewing the material for each mailing and occasionally suggested minor changes or made corrections petitioner might suggest that usnb tone down the pitch of the solicitation or correct the spelling of a name petitioner had no authority to finally approve usnb's materials usnb's advertising in old oregon and the alumni insider petitioner's primary means of communicating with its alumni is through old oregon and the alumni insider old oregon is published by the university of oregon and is not connected with or controlled by petitioner petitioner had no publication before usnb advertised the affinity card program in old oregon old oregon accepted no other advertising the record does not show whether old oregon charged usnb to advertise petitioner began its own publication the alumni insider in the alumni insider was published quarterly and had a circulation of about big_number the alumni insider was mailed to petitioner's dues-paying members the alumni insider published two advertisements each year about the affinity credit card program the advertisements were designed by a professional advertising agency at usnb's request usnb paid for the design of all advertisements published in the alumni insider petitioner did not bill usnb for the advertisements until petitioner charged usnb dollar_figure per year to publish the two advertisements beginning in late the dollar_figure charge was an estimate of petitioner's cost to produce the advertisements petitioner's employees do not know why usnb was not charged for the first few advertisements petitioner occasionally published advertisements for the affinity credit card program in the alumni insider when it had space available petitioner used a camera-ready copy provided by usnb for prior advertisements petitioner did not charge usnb for these advertisements usnb gave petitioner a copy of each advertisement to review and approve it took one or two of petitioner's employees about minutes to examine the advertisements petitioner's employees examined the advertisements for typographical errors and content design of the credit cards usnb designed the cards issued under the program the classic visa card had a photograph of a university of oregon building easily recognizable by university of oregon alumni and the words university of oregon alumni association printed on it the premier card had the same written notation as the classic card but had no photograph f postagreement activities by petitioner petitioner's solicitations of alumni the university of oregon printing department printed and mailed solicitation materials three times from to two of these mailings preceded the years at issue and one wa sec_3 petitioner's logo is a roof of a building with the letters u and o on separate sides and the words alumni association on the bottom half of the roof petitioner's logo is a registered trademark petitioner in its proposed findings_of_fact asserts that it sent out promotional materials twice petitioner stipulated that it mailed promotional materials three times from to date because there is no evidence that the stipulation is wrong we accept it as correct during the years at issue the university of oregon printing department a printed and mailed a letter and brochure supplied by usnb to big_number alumni in b printed and mailed a letter prepared and supplied by usnb to about big_number university of oregon students in and c printed and mailed a letter and brochure supplied by usnb to big_number university of oregon alumni in usnb fully reimbursed petitioner for all costs associated with these mailings petitioner was not obligated by the agreement to print and mail these materials but did so because it cost less than the direct mail house usnb hired usnb did not have enough in-house printing and mailing capacity and the university of oregon printing department was convenient to the parties both usnb and petitioner hoped to benefit from the mailings petitioner's mailings were not as sophisticated as usnb's because the cardholder's accounts were not preapproved they did not contain some material recommended by professional marketers they were not in full color and they were of ordinary size usnb received more positive responses from its mailings than it did from petitioner's mailings ninety-five percent of the cardholders became cardholders because of usnb's marketing efforts petitioner included information about the affinity credit card program in its membership application materials petitioner published information about the affinity credit card program in its annual report the report went to petitioner's members usnb did not expect or require petitioner to mail direct solicitation materials to satisfy its duty to inform members about the affinity credit card program petitioner's occasional assistance to alumni after the affinity credit card program began petitioner occasionally received requests from alumni for credit card applications in each case petitioner sent a brochure to the person making the request petitioner received a few complaints from alumni who had been denied a credit card petitioner referred these complaints to usnb and asked usnb to look into the problem usnb decided whether to issue a credit card on each occasion usnb told petitioner that the alumni member was contacted and the matter handled appropriately petitioner occasionally received requests for credit cards from persons who were connected with the university of oregon but who were not alumni petitioner forwarded each request to usnb usnb's number for affinity credit card holders all advertisements and solicitations asked the recipient to contact usnb directly the promotional materials listed usnb's number it was expected that alumni would contact usnb petitioner maintained a list of usnb employees and their areas of service petitioner kept this list so it could refer alumni who contacted its office to the appropriate usnb employee involvement of petitioner's executive director in the affinity credit card program petitioner allocated percent of super's salary to develop and implement the affinity credit card program for fiscal years and and from july to date petitioner allocated percent of super's salary to the affinity credit card program from date to date petitioner did not allocate any salary to the affinity credit card program for the years in issue and petitioner's executive director from date to present dan rodriguez rodriguez met with usnb and a representative from the osuaa once a year to review the performance of the affinity credit card program these meetings lasted about 1-½ to hours rodriguez worked approximately hour per month on the affinity credit card program g petitioner's travel program petitioner arranged trips for its members through two travel agencies petitioner earned dollar_figure in fiscal_year and dollar_figure in fiscal_year from its travel program these figures do not include costs for travel to bowl games for bowl games petitioner incurred net losses of dollar_figure for fiscal_year and dollar_figure for fiscal_year h watches and rings petitioner entered into an agreement with wayneco enterprises inc wayneco wayneco agreed to provide class rings and commemorative watches to alumni wayneco paid petitioner dollar_figure for each item purchased i petitioner's income from the affinity credit card program petitioner grossed dollar_figure in and dollar_figure in from the affinity credit card program opinion a taxation of unrelated_business_income sec_511 imposes a tax on the unrelated_business_taxable_income ubti of certain tax-exempt organizations petitioner is subject_to tax on its unrelated_business_income under sec_511 because it is tax exempt under sec_501 income is ubti if the income arises from a trade_or_business the trade_or_business is regularly carried on and the trade_or_business is not substantially related to the organization's tax-exempt purpose sec_512 89_tc_7 b royalty income royalty income is excluded from ubti sec_512 a royalty is a payment to use valuable intangible_property rights 94_tc_60 revd on other grounds 942_f2d_309 6th cir whether income is a royalty is decided based on the facts and circumstances sec_1_512_b_-1 income_tax regs respondent contends that usnb's payments are not royalties because usnb did not pay petitioner to use a valuable intangible_property right petitioner did not use its own mailing list the payments to petitioner were for services rendered by petitioner and the enactment of sec_513 precludes royalty treatment whether usnb paid petitioner to use a valuable intangible_property right respondent contends that usnb did not pay petitioner to use valuable intangible_property rights because usnb did not display petitioner's logo on the cards we disagree the classic visa card bore a photograph of an easily recognizable building on the university of oregon's campus and the words university of oregon alumni association the premier card also had those words but had no photograph usnb's failure to depict the building on the premier card does not show that petitioner failed to exchange a valuable intangible right in the agreement petitioner gave usnb access to valuable intangible_property rights the agreement gave usnb permission to use the university of oregon seal with petitioner's logo petitioner's logo is a registered trademark petitioner maintained all rights to the logo which it did not specifically give to usnb usnb could not use petitioner's name or logo after the agreement terminated usnb's objectives in signing the agreement were to gain access to petitioner's mailing list and to obtain petitioner's endorsement those are valuable intangible_property rights 103_tc_307 we find respondent's contention about how usnb designed the credit cards unconvincing we conclude that petitioner's income from the affinity credit card program was received in exchange for_the_use_of valuable intangible_property rights whether petitioner's use of its mailing list is inconsistent with royalty treatment respondent contends that petitioner's income from its mailing list is not a royalty because petitioner's use of its mailing list was a trade_or_business in 650_f2d_1178 the court of claims held that the disabled american veterans dav conducted the trade_or_business of renting its mailing list from to dav rented parts of its donor list times disabled am veterans v commissioner f 2d pincite dav continuously rented names on its list during the years in issue disabled am veterans v united_states f 2d pincite in renting its donor list dav followed the usual practice of the direct mail industry id dav prepared rate cards showing the rates it charged to customers id it was widely known among list brokers that dav's mailing list was available for rental id pincite dav employed two full-time employees to administer its list rentals disabled am veterans v commissioner f 2d pincite petitioner's mailing list rental_activity is unlike dav's rental_activity petitioner received income from the use of its mailing list only for a alumni trips in and b alumni class rings and commemorative watches and c the affinity credit card program at issue here unlike dav petitioner did not regularly rent its mailing list petitioner was not involved in the direct mail industry petitioner did not issue rate cards petitioner used minimal staff time to administer its rentals petitioner allocated percent of super's salary to develop and implement the affinity credit card program for fiscal_year and from date to date petitioner allocated percent of super's salary to the affinity credit card program from date to date the record does not indicate that petitioner allocated any salary to the affinity credit card program for the years in issue we conclude that petitioner's use of its mailing list is entirely consistent with classifying the resulting income as a royalty whether usnb's payments were for services extent of petitioner's role respondent contends that usnb paid to obtain petitioner's cooperation and assistance a petitioner's solicitation of its members respondent contends that petitioner's solicitation of its members for the credit card program precludes royalty treatment for the resulting income because petitioner mailed some solicitation materials once during the years in issue and and twice during prior years we disagree petitioner's activities were de_minimis and intended to bolster petitioner's relationship with university of oregon alumni petitioner agreed to inform its members of the existence of the affinity credit card program at least once per year but was not required to mail any solicitation materials to alumni usnb developed all marketing materials petitioner reviewed those materials but usnb retained final decision-making authority petitioner might have asked usnb to tone down the solicitation materials or to correct the spelling of a name usnb agreed to prepare and mail promotional materials petitioner's one mailing during the years at issue and included a letter and brochure designed by usnb ninety- five percent of the cardholders became cardholders due to usnb's marketing efforts petitioner included information about the program in its application materials petitioner apparently was using the credit card program in part to encourage alumni to join the alumni association of the university of oregon in sierra club inc v commissioner t c pincite a provider of financial services american bankcard services inc abs and not the sierra club was responsible for developing promotional materials abs submitted a proposed marketing plan which the sierra club reviewed id pincite abs placed advertisements in the sierra club's magazine and paid for them on the same terms that applied to unrelated advertisers id the sierra club could pay for direct mail or other solicitations id pincite if the sierra club did so any royalties payable by abs were adjusted id abs was responsible for soliciting members id pincite abs was obligated to develop all promotional materials if the sierra club paid production and mailing costs abs would compensate it for those costs id pincite the agreement in sierra club required that the sierra club fully cooperate with abs by encouraging its members to acquire and use the services id pincite petitioner's activities are substantially_similar to those of the sierra club petitioner's solicitation activities were de_minimis and were intended primarily to protect petitioner's relationship with its members and to keep its alumni aware of their ties to the university of oregon b petitioner's providing of services to promote the affinity credit card program respondent contends that petitioner's income from the credit card activity was not a royalty because petitioner assisted usnb in making solicitations made its own solicitations and provided personal services to cardholders and prospective cardholders we disagree petitioner's activities were de_minimis and were done to protect petitioner's goodwill with its members in sierra club inc v commissioner supra abs promised the cardholders that they would receive a rebate of the annual fee if they participated in the program for a second year id pincite abs breached that agreement id the sierra club helped arrange refunds to members id we found that the sierra club's actions were done to protect its good name id similarly petitioner was acting to preserve its good name with alumni in oregon state univ alumni association inc v commissioner tcmemo_1996_34 we held that the taxpayer engaged in de_minimis activity where it referred occasional requests for credit card applications or complaints about the denial of a credit card application told about alumni to contact its offices if they needed further assistance and requested that usnb send preapproved applications to certain alumni expedite about eight applications and establish some credit limits above the standard here petitioner has engaged in less activity than the taxpayer in oregon state we hold that usnb's payments to petitioner were not compensation_for services rendered and that petitioner's activities are compatible with the treatment of those payments as royalty income petitioner's financial risks and rewards in deciding whether income a taxpayer receives is royalty income we may consider the taxpayer's financial risks and rewards including whether the taxpayer has a net profits and gross_profits interest see sierra club inc v commissioner supra pincite in sierra club the taxpayer did not have a net_profits_interest in the royalty payments because its income was based on a percentage of the total charges id pincite instead it had a gross_profits interest a gross_profits interest is the right to share in the gross_profits without bearing the risk of loss id gross_profits are the difference between sales and the cost_of_goods_sold black's law dictionary 6th ed petitioner had a gross_profits interest in the credit card program not a net_profits_interest petitioner received a fixed percentage of all of the authorized cash purchases and advances and a fixed amount for new_accounts regardless of whether usnb had losses from the affinity credit card program here as in sierra club no provision was made to periodically compute net_income or loss from the credit card program the fact that petitioner did not have a net_profits_interest supports petitioner's contention that its income from the program was a royalty petitioner's desire to make money from the affinity credit card program respondent points out that petitioner entered into the affinity credit card agreement in part to make money this however is not a basis for us to conclude that petitioner's income from the affinity credit card program was not a royalty nor does a desire to make money standing alone establish that petitioner is engaged in a trade_or_business see 480_us_23 not every income- producing endeavor is a trade_or_business 373_us_193 the income_tax law distinguishes between a trade_or_business and transactions entered into for profit but not connected with a trade_or_business not all activity conducted with the expectation of gain is a trade_or_business for purposes of ubti disabled am veterans v united_states f 2d pincite to be engaged in a trade_or_business petitioner must be involved in the activity with continuity and regularity and the primary purpose for engaging in the activity must be for profit commissioner v groetzinger supra pincite whether the enactment of sec_513 prevents treatment of usnb's payments to petitioner as royalties respondent argues that the enactment of sec_513 shows that congress intended to treat income earned from mailing list rentals as income from a trade_or_business sec_513 exempts from tax amounts earned by certain tax-exempt organizations from the trade_or_business of exchanging or renting mailing lists to other tax-exempt organizations sec_513 is effective for exchanges and rentals of member lists after date respondent contends that the enactment of sec_513 implies that renting mailing lists is generally a trade_or_business as in 103_tc_307 respondent asks us to infer from the enactment of sec_513 that congress generally views gross_income from the licensing of mailing lists as ubti unless excepted by sec_513 we do not draw that inference it is at best hazardous to infer the intent of an earlier congress from a later one see 489_us_101 united_states v price sec_513 provides in general --in the case of an organization which is described in sec_501 and contributions to which are deductible under paragraph or of sec_170 the term unrelated_trade_or_business does not include-- b any trade_or_business which consists of-- i exchanging with another such organization names and addresses of donors to or members of such organization or ii renting such names and addresses to another such organization tax_reform_act_of_1986 publaw_99_514 sec a 100_stat_2085 u s the inference asserted by respondent is rejected in the legislative_history of sec_513 a colloquy between congressmen daniel rostenkowski d-ill chairman of the ways_and_means_committee and john duncan r-tenn ranking republican member of the ways_and_means_committee occurred in the house of representatives on the day that the conference_report which included sec_513 was passed congressman rostenkowski’s comments were as follows i also have discussed with congressman duncan the issue of whether the provision of the bill which excludes certain income from unrelated_trade_or_business income creates any inference under present law we have reached a common understanding regarding the following specific issue the question relates to section of the bill which excludes from unrelated_trade_or_business income revenues from the use of a tax-exempt organization's mailing list by another such organization section of the bill which specifically exempts certain such revenues from the tax on unrelated_business_income in the future carries no inference whatever that mailing list revenues beyond its scope or prior to its effective date should be considered taxable to an exempt_organization cong rec date we conclude that sec_513 does not apply here see sierra club inc v commissioner tcmemo_1993_199 whether royalty treatment is consistent with the role of the tax on unrelated_business_income the unrelated_business_income_tax ubit was enacted to prevent tax-exempt organizations from unfairly using their tax- exempt status to compete with commercial businesses 475_us_834 respondent contends that petitioner's participation in the affinity credit card program is the type of unfair competition between tax-exempt organizations and taxable businesses that congress intended to subject_to the ubit we disagree petitioner's activity was de_minimis usnb was competing with other credit card issuers but petitioner was not respondent cites 477_us_105 in american bar endowment the supreme court found that the taxpayer's activity created the kind of unfair competition that led to the enactment of sec_512 id pincite the american bar endowment abe raised money by providing group_insurance policies to its members id pincite abe bought a group policy for its members and paid a negotiated premium to the insurance_company id pincite if the insurance company's cost of providing insurance to the group was lower than the premium the company refunded the excess id pincite the excess amounts were called dividends id abe required all members to agree as a condition of participating in the group_insurance program that abe and not the members would keep the dividends id abe told its members that the members' share of the dividends less abe's administrative costs was a tax-deductible contribution from the members to abe id abe actively administered the group_insurance program id abe's activities included choosing insurers negotiating premium rates with insurers compiling lists of its members soliciting and collecting premiums from its members sending premiums to the insurer keeping files on each policyholder answering members' questions about insurance policies and screening claims for benefits id the court held that abe was engaged in a trade_or_business id pincite the court found that this arrangement created unfair competition because abe's members could deduct part of their premium payment as a charitable_contribution this deduction lowered the cost of abe's insurance to its members id pincite nonexempt businesses would be disadvantaged if abe were not taxed on its earnings from the insurance program because abe would not need to be as profitable to receive the same return on its investment id pincite this case is not like american bar endowment abe paid premiums to insurance carriers petitioner did not make payments to usnb abe required members to assign any amounts paid in excess of the cost of the insurance to abe petitioner imposed no similar obligation on its members abe members could deduct excess payments assigned to abe as charitable_contributions petitioner's members could not deduct their payments to usnb abe collected premiums and screened claims for benefits petitioner did not bill cardholders collect payments or decide who was eligible to receive a credit card we disagree with respondent's contention that petitioner was unfairly competing with taxed businesses c conclusion for the foregoing reasons we hold that petitioner's income from the affinity credit card program is a royalty for purposes of sec_511 to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number ------------------------------ ------------------------------------- ------------------------------------ -------------------------------------------- --------------------- --------------------------------------- in re --------------------------------------------- ------------------ department of the treasury washington dc third party communication date of communication month dd yyyy person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b09 plr-140210-04 date date legend legend child grantor spouse college trust --------------------------- ------------------------------ ---------------------------------- ----------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------- ---------------- ------------- -------------------------------------- ------------------------------------------ ------------------------------------------ --------------------------- -------------------------- ------- state state partnership statute statute date date year dear ---------- this is in response to your letter dated date requesting rulings on the income gift and generation-skipping_transfer gst tax consequences of certain proposed modifications to a_trust the facts submitted and the representations made are as follows during his life grantor created nine trusts trust is one of the nine trusts and is the subject of this ruling_request trust was created on date for the benefit of grantor’s spouse plr-140210-04 spouse grantor’s son child and grantor’s issue currently child is the sole income_beneficiary of trust article third subparagraph a of trust provides that after date all of trust’s net_income is to be paid to child upon child’s death the net_income is to be paid to child’s issue per stirpes if any if none the net_income is to be paid to spouse if she is living if not the net_income is to be paid to grantor’s issue per stirpes upon the termination of trust the trust estate is to be distributed to child’s issue per stirpes if living if not to grantor’s issue per stirpes if living if not to the trustee of a named trust if in existence if not to college article third subparagraph b provides that after date the trustees have the discretion to distribute trust principal to the income_beneficiary of trust to provide for the beneficiary’s support maintenance and education article third subparagraph e provides that trust will terminate at the earlier of the following events the death of the last survivor of certain named persons and the death of the last survivor of spouse and all of grantor’s issue including child and his issue article seventh provides that trust is to be governed under the laws of state article eighth provides that the governing law of trust may be changed to another state in year the nine trusts entered into a partnership partnership with three other trusts to coordinate investment activities under the partnership_agreement partnership is required to distribute annually to the partner trusts an amount equal to the net accounting_income determined by applying the broadest definition of net_income under the laws of the states whose laws govern the administration of each of the trusts respectively currently the laws of five different states govern the nine different trusts due to the administrative complexity and high costs involved in determining the proper distribution amount under the respective state laws of each separate trust it was suggested that each of the partner trusts be amended to change governing local law to state the trustees of trust intend to change the governing law of trust to state effective as of date state amended its laws governing the administration of trusts by enacting legislation that adopts a new uniform principal and income act statute it also enacted statute which permits a trustee of a_trust that is subject_to state’s prudent investor rule to make adjustments between income and principal under specified circumstances statute statute provides in part that a trustee has a duty to invest and manage property held in a fiduciary capacity in accordance with the prudent investor standard defined therein plr-140210-04 statute also provides that where statute applies to a_trust and the terms of the trust describe the amount that may or must be distributed to a beneficiary by referring to the trust's income the prudent investor standard also authorizes the trustee to adjust between principal and income to the extent the trustee considers it advisable to enable the trustee to make appropriate present and future distributions if the trustee determines after applying the rules in statute that such an adjustment would be fair and reasonable to all of the beneficiaries so that current beneficiaries may be given the use of the trust property as is consistent with preservation of its value the trustee has represented that trust was irrevocable on date and there were no additions to trust after date trustee is requesting the following three rulings the proposed amendment of trust to change its governing law and the administration of trust under the new governing law will not result in trust or any beneficiary of trust being treated as having made a taxable_exchange for federal_income_tax purposes the proposed amendment of trust to change its governing law and the administration of trust under the new governing law will not be treated as a modification of trust within the meaning of sec_26_2601-1 of the generation-skipping_transfer_tax regulations that will cause trust to lose its exemption from the application of chapter of the internal_revenue_code and that after the proposed amendment distributions from trust and terminations with respect to trust will continue to be exempt from chapter pursuant to sec_26_2601-1 the proposed amendment of trust to change its governing law and the administration of trust under the new governing law will not result in any beneficiary of trust being treated as having made a taxable gift_for federal gift_tax purposes law and analysis ruling sec_61 of the code provides that gross_income includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized sec_1001 states that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the plr-140210-04 property other than money received under sec_1001 except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained the supreme court of the united_states in 499_us_554 concluded that sec_1_1001-1 reasonably interprets sec_1001 and stated that an exchange of property gives rise to a realization event under sec_1001 if the properties exchanged are materially different in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent cottage savings u s pincite the court held that mortgage loans made to different obligors and secured_by different homes did embody distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans cottage savings u s pincite in the present case it is consistent with the supreme court's opinion in cottage savings to find that the interests of the beneficiaries in trust after the modification will not differ materially from their current interests under the proposed modification trust will be amended to change governing local law however trust possesses the authority to make this change see article eighth of trust therefore the proposed modification will not result in a material difference in_kind or extent of the legal entitlements enjoyed by the beneficiaries accordingly based upon the facts submitted and the representations made a change in governing local law will not cause trust or trust beneficiaries to be treated as having a taxable_exchange and no gain_or_loss is recognized for purposes of sec_1001 ruling sec_2 and sec_2501 imposes a tax on the transfer of property by gift by an individual sec_2511 provides that the tax imposed by ' applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2512 provides that if a gift is made in property the value thereof at the date of the gift shall be considered the amount_of_the_gift plr-140210-04 sec_2601 imposes a tax on every gst made after date a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2612 provides that the term taxable_termination means a termination by death lapse of time release of a power or otherwise of an interest_in_property_held_in_trust where the property passes to a skip_person with respect to the transferor of the property sec_2612 provides that the term taxable_distribution means any distribution from a_trust to a skip_person other than a taxable_termination or a direct_skip under sec_2612 a direct_skip is a transfer subject_to federal estate or gift_tax made by a transferor to a skip_person under a of the tax_reform_act_of_1986 act and sec_26_2601-1 the gst is generally applicable to gsts made after date however under b a of the act and sec_26_2601-1 the gst does not apply to a transfer under a_trust that was irrevocable on date but only to the extent that such transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added under sec_26_2601-1 any trust in existence on date will be considered irrevocable unless the settlor had a power that would have caused inclusion of the trust in his or her gross_estate under sec_2038 or sec_2042 if the settlor had died on date sec_26_2601-1 provides that in general this paragraph b provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under paragraph b or of this section hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status in general unless specifically provided otherwise the rules contained in this paragraph are applicable only for purposes of determining whether an exempt trust retains its exempt status for gst tax purposes thus unless specifically noted the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of gain for purposes of sec_1001 sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy paragraph b i a b or c of this section by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust sec_26_2601-1 provides that for purposes of this section a plr-140210-04 modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer to determine whether a modification of an irrevocable_trust will shift a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification if the effect of the modification cannot be immediately determined it is deemed to shift a beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust in addition administration of a_trust in conformance with applicable local law that defines the term income as a unitrust_amount or permits a right to income to be satisfied by such an amount or that permits the trustee to adjust between principal and income to fulfill the trustee's duty_of impartiality between income and principal beneficiaries will not be considered to shift a beneficial_interest in the trust if applicable local law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust and meets the requirements of sec_1_643_b_-1 of this chapter sec_26_2601-1 example provides as follows in grantor who was domiciled in state x executed an irrevocable_trust for the benefit of grantor's issue naming a state x bank as trustee under the terms of the trust the trust is to terminate in all events no later than years after the death of the last to die of certain designated individuals living at the time the trust was executed the provisions of the trust do not specify that any particular state law is to govern the administration and construction of the trust in state x the common_law rule_against_perpetuities applies to trusts in a state y bank is named as sole trustee the effect of changing trustees is that the situs of the trust changes to state y and the laws of state y govern the administration and construction of the trust state y law contains no rule_against_perpetuities in this case however in view of the terms of the trust instrument the trust will terminate at the same time before and after the change in situs accordingly the change in situs does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the transfer furthermore the change in situs does not extend the time for vesting of any beneficial_interest in the trust beyond that provided for in the original trust therefore the trust will not be subject_to the provisions of chapter if in this example as a result of the change in situs state y law governed such that the time for vesting was extended beyond the period prescribed under the terms of the original trust instrument the trust would not retain exempt status sec_26_2601-1 example provides as follows in grantor a resident of state x established an irrevocable_trust for the benefit of grantor's child a and a's issue the trust provides that trust income is payable to a for life and upon a's plr-140210-04 death the remainder is to pass to a's issue per stirpes in state x amends its income and principal statute to define income as a unitrust_amount of percent of the fair_market_value of the trust assets valued annually for a_trust established prior to the statute provides that the new definition of income will apply only if all the beneficiaries who have an interest in the trust consent to the change within two years after the effective date of the statute the statute provides specific procedures to establish the consent of the beneficiaries a and a's issue consent to the change in the definition of income within the time period and in accordance with the procedures prescribed by the state statute the administration of the trust in accordance with the state statute defining income to be a percent unitrust_amount will not be considered to shift any beneficial_interest in the trust therefore the trust will not be subject_to the provisions of chapter further under these facts no trust_beneficiary will be treated as having made a gift_for federal gift_tax purposes and neither the trust nor any trust_beneficiary will be treated as having made a taxable_exchange for federal_income_tax purposes similarly the conclusions in this example would be the same if the beneficiaries' consent was not required or if the change in administration of the trust occurred because the situs of the trust was changed to state x from a state whose statute does not define income as a unitrust_amount or if the situs was changed to such a state from state x sec_26_2601-1 example provides as follows the facts are the same as in example except that in state x amends its income and principal statute to permit the trustee to make adjustments between income and principal when the trustee invests and manages the trust assets under the state's prudent investor standard the trust describes the amount that shall or must be distributed to a beneficiary by referring to the trust's income and the trustee after applying the state statutory rules regarding allocation of receipts between income and principal is unable to administer the trust impartially the provision permitting the trustees to make these adjustments is effective in for trusts created at any time the trustee invests and manages the trust assets under the state's prudent investor standard and pursuant to authorization in the state statute the trustee allocates receipts between the income and principal accounts in a manner to ensure the impartial administration of the trust the administration of the trust in accordance with the state statute will not be considered to shift any beneficial_interest in the trust therefore the trust will not be subject_to the provisions of chapter further under these facts no trust_beneficiary will be treated as having made a gift_for federal gift_tax purposes and neither the trust nor any trust_beneficiary will be treated as having made a taxable_exchange for federal_income_tax purposes similarly the conclusions in this example would be the same if the change in administration of the trust occurred because the situs of the trust was changed to state x from a state whose statute does not authorize the trustee to make adjustments between income and principal or if the situs was changed to such a state from state x in this case trust was irrevocable on date and there were no additions to trust after date pursuant to the terms of article eighth of trust trust will be amended to change governing law from state to state the law plr-140210-04 governing trusts in state permits a trustee of a_trust to make adjustments between income and principal to enable the trustee to make appropriate present and future distributions that are fair and reasonable to all of the beneficiaries of the trust this situation is similar to the situation set forth in example in sec_26_2601-1 which concludes that a change similar to the one that the trustees propose to make to the trust will not be considered to shift any beneficial_interest in a_trust and therefore will not be subject_to the provisions of chapter in addition under article third subparagraph e of the trust agreement trust will terminate at the earlier of the following events the death of the last survivor of certain named persons and the death of the last survivor of spouse and all of grantor’s issue including child and his issue because the termination_date is specifically provided for in the trust instrument the change in governing law from state to state will not change the termination_date of trust this situation is similar to the situation set forth in sec_26_2601-1 example in this case the date the trust will terminate before and after the change in governing law will be the same and therefore the change will not extend the time for vesting of any beneficial_interest in the trust finally as noted above the facts in this case are similar to those set forth in example in sec_26_2601-1 in addition to the conclusions relating to chapter example concludes that no trust_beneficiary will be treated as having made a gift_for federal gift_tax purposes and neither the trust nor any trust_beneficiary will be treated as having made a taxable_exchange for federal_income_tax purposes accordingly based upon the facts submitted and the representation made we conclude that the change in the trust’s governing law from state to state and the administration of trust under the new governing law will not be treated as a modification of trust within the meaning of sec_26_2601-1 that will cause trust to lose its exemption from the application of chapter and that the change will not cause distributions from trust and terminations with respect to trust to not be exempt from chapter pursuant to sec_26_2601-1 we also conclude that the change in governing law and the administration of trust under the new governing law will not result in any beneficiary of trust being treated as having made a taxable gift_for federal gift_tax purposes except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative plr-140210-04 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 sincerely james f hogan senior technician reviewer branch passthroughs special industries enclosures copy for ' purposes


internal_revenue_service national_office technical_advice_memorandum number release date third party contact none index no control no tam-114662-99 cc dom p si b8 district_director taxpayer’s name taxpayer’s address taxpayer’s identification no years involved no conference held issue whether a self-unloading automobile truck body sold by the taxpayer is subject_to the retailers tax on truck bodies imposed by sec_4051 of the internal_revenue_code conclusion the self-unloading automobile truck body sold by the taxpayer is subject_to the retailers tax on truck bodies imposed by sec_4051 this technical_advice_memorandum revokes the technical_advice_memorandum issued to the taxpayer dated date tam this technical_advice_memorandum is effective from the date of its issuance see dollar_figure of revproc_99_2 1999_1_irb_73 facts the taxpayer is a farm equipment dealer that sells self-unloading automobile truck bodies at retail the bodies in question haul seed potatoes sugar beets grain and other farm products each body has a full-length variable speed conveyor belt that is designed to support and unload the cargo a hydraulically-operated rear district_director discharge door to control the discharge rate of the cargo and a hydraulic unit that is capable of powering the unloading system and which is activated by a power take-off unit the support and unloading system of the body is elaborate and considerably more expensive than the stationary bed of a standard body the sales literature emphasizes the versatility of the body for uses such as transporting crops to market the taxpayer received a technical_advice_memorandum dated date tam that held that these bodies were exempt under sec_4053 law and analysis sec_4051 imposes a tax on the first_retail_sale of automobile truck bodies sec_4053 provides that the tax imposed by sec_4051 shall not be imposed on any body primarily designed a b c d e to process seed feed or fertilizer for use on farms to haul feed seed or fertilizer to and on farms to spread feed seed or fertilizer on farms to load or unload feed seed or fertilizer on farms or for any combination of the foregoing revrul_69_579 1969_2_cb_200 holds that certain automotive truck bodies equipped with heavy-duty unloading equipment and used primarily for hauling feed seed or fertilizer to and on farms are exempt from the manufacturers tax under sec_4063 now sec_4053 the ruling states that the elaborate and expensive unloading equipment built into the bodies and the modifications required to accommodate the unloading systems make it impractical to purchase the bodies for use other than in hauling seed feed or fertilizer to and unloading it on farms the equipment included heavy duty mechanical or pneumatic unloading equipment that formed an integral part of the bodies the mechanical system employed conveyors or augurs that unloaded from the top of the bodies the pneumatic system employed blowers and a hose and usually unloaded from the bottom and rear of the body revrul_75_462 1975_2_cb_419 holds that a dump truck designed for and primarily used in hauling grain sugar and beets from the field to points on or off the district_director farm and that may also be used to haul fertilizer over the highway to the farm is not exempt from tax under the provisions of sec_4063 the ruling states that highway bodies used for general hauling of feed seed or fertilizer over the highway are subject_to the manufacturers excise_tax unless they have specific features that indicate they are primarily designed to haul those items to and on farms the ruling further states that although the bodies carry feed and fertilizer they do not have specific features that indicate they are primarily designed to haul feed and fertilizer to and on farms section dollar_figure of revproc_99_2 provides that a holding that modifies or revokes a prior technical_advice_memorandum will be applied retroactively with one exception if the new holding is less favorable to the taxpayer than the earlier one it is generally not applied to the period when the taxpayer relied on the prior holding in situations involving continuing transactions the exemption from tax provided by sec_4053 does not extend to truck bodies designed for general use even though the bodies may be capable of hauling feed seed or fertilizer to and on farms and or performing a combination of the other purposes described in sec_4053 to be exempt a body must be primarily designed for one or a combination of the purposes described in sec_4053 unlike the bodies described in revrul_69_579 which would not be purchased for use other than in hauling feed seed or fertilizer the bodies here are designed for general hauling of farm cargo such as potatoes beets and grain in this connection the bodies' multipurpose design is emphasized in the taxpayer's literature the mere presence of a conveyor belt and powered rear discharge door to facilitate unloading does not establish that a body was primarily designed for an exempt_purpose under sec_4053 these features are equally useful for unloading a crop at market as emphasized in the sales literature and for other purposes in this respect we note that these bodies do not have built into them substantial integrated features relating to an exempt_purpose under sec_4053 thus the bodies are functionally similar to the bodies described in revrul_75_462 in that they are not primarily designed to haul feed seed or fertilizer accordingly the bodies are not exempt from tax under sec_4053 caveat a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 provides that it shall not be used or cited as precedent in accordance with sec_6110 names addresses and other identifying numbers have been deleted - e n d -