office_of_chief_counsel internal_revenue_service memorandum number release date cc pa camcgreevy postf-117060-10 uilc date december to ----------------------- ---------------------------------------------------------------- large business international from james coffey gibbons branch chief procedure administration subject cca request postf-117060-10 this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent issues is taxpayer’s ------- refund claim filed --------------------timely under either sec_6511 or sec_6511 where the claim results from a carryback of foreign tax_credits ftcs from ------- which in turn resulted from a net_operating_loss nol_carryback from ------- to ------- which nol was generated by a timely election to claim deductions rather than credits for foreign_income_taxes paid_or_accrued in ------- does taxpayer’s ------- protective claim ------- pc filed in -------------------- constitute an election within sec_1_901-1 and sec_901 and subject_to sec_6511 to claim credits rather than deductions for foreign_income_taxes paid_or_accrued in ------- effectively reversing the election made in ------- to convert previously-claimed ftcs to deductions is taxpayer’s ------- pc a valid protective claim in general if so should the service delay action on the claim pending final disposition of the ----------------- cycle postf-117060-10 conclusions no sec_6511 governs the applicable refund period since the ------- refund claim is attributable to a claimed credit for foreign_income_taxes paid_or_accrued in ----- ------- and carried back to ------- since the ------- refund claim was filed more than years after the due_date without extensions of taxpayer’s ------- tax_return the claim is untimely moreover even if the --------refund claim were considered to relate to the nol_carryback from ------- that freed up the --------ftcs the claim would be untimely under sec_6511 since it was filed more than three years after the due_date including extensions of the return for ------- the year in which the nol_carryback arose taxpayer has not cited any authority in support of its attenuated argument that the ------- refund claim relates to an overpayment attributable to foreign_income_taxes paid in ----- ------- no the ------- pc does not constitute a final election to claim credits rather than deductions for foreign_income_taxes paid_or_accrued in ------- and was ineffective to extend the statutory deadline for taxpayer to make this choice no the ------- pc is not a valid protective claim in general it does not contain a claim that is contingent it merely informs the service that taxpayer wants to reserve the right to make a claim in the future facts carrybacks of nols and ftcs in ---------------------- taxpayer filed a form 1120x amended u s_corporation income_tax return for the taxable_year ------- to change its election from credits under sec_901 to deductions under sec_164 for foreign_income_taxes paid_or_accrued in --- ------- the ------- form 1120x generated no refund for taxable_year ------- instead taxpayer stated that the effect of the change in election was to increase the ------- nol by dollar_figure--------------- the ------- form 1120x was dated -------------------------- and was posted at the irs service_center on -------------------------- in ---------------- taxpayer filed a form 1120x for taxable_year ------- in which the increased nol generated by the --------form 1120x was carried back and allocated to respective subgroups subject_to limitations per sec_1_1502-21 after limitation dollar_figure----------------was available to be carried back and of that amount dollar_figure------------- -----------------was utilized to reduce ------- taxable_income to ------ this utilization of nol carrybacks freed up ftcs for foreign_income_taxes paid_or_accrued in ------- that were originally utilized in ------- the ------- form 1120x generated no refund for that year the --------form 1120x was dated ------------------- and was posted at the irs service_center on --------------------- postf-117060-10 around the same time taxpayer filed a form 1120x for the taxable_year ------- in which the ------- freed up ftcs totaling dollar_figure--------------were carried back to generate a requested refund of dollar_figure------------- taxpayer cited sec_6511 as authority for the requested refund the ------- form 1120x was dated ------------------- and was posted at the irs service_center on --------------------- protective claim taxpayer then filed a form 1120x for taxable_year ------- with the label protective claim on the front the ------- pc had no numbers on the face of the return and requested ------ refund the ------- pc was dated --------------------- there is no posting date on the irs’ integrated data retrieval system idrs per the bmfol transcript for the ------- pc on part ii explanation of changes taxpayer stated that t he purpose of this amended_return is to attach a protective_election only this election is being made to protect taxpayer’s right to claim the effect of foreign taxes as a credit for the year ------- this election is not immediately effective and does not now replace a prior election to deduct such foreign taxes rather effectiveness will be contingent on future events which will not occur with the period of limitations attached to the ------- pc taxpayer provided the following statement in accordance with sec_1_901-1 a protective_election only is made for the taxable_year --------to claim the benefits of a credit for foreign taxes paid_or_accrued under sec_901 of the internal_revenue_code for that year this protective_election is made within the period prescribed by sec_1_901-1 and sec_6511 this election is protective only on --------------------taxpayer made an election to claim as a deduction under sec_164 the total foreign taxes paid_or_accrued and to reduce the total income by sec_78 gross- up amounts previously reported for the tax_year ended -------------------------- -------- and filed refund claims to affected years resulting from that election those claims and other years which would affect the advisability of electing a deduction or credit for the ------- foreign taxes are currently under or still subject_to examination by the internal_revenue_service because those examinations are not completed and will not be completed by the period prescribed in sec_1_901-1 and sec_6511 this protective_election should not be given effect pending the conclusion and resolution of the examination only at that time dependent upon a final_determination of the income_tax liabilities for several years can it be finally determined whether the previous election postf-117060-10 for deduction treatment under sec_164 or this election for credit treatment under sec_901 should be given effect the amount of allowable credits and support therefore have previously been provided taxpayer statement attached to ------- pc relevant dates the due_date of the ------- tax_return without extensions was --------------------- the ten-year period for filing a claim_for_refund attributable to foreign_income_taxes paid_or_accrued in ------- under sec_6511 or for changing the election to claim a credit or deduction for such taxes in accordance with sec_901 expired on ----------------- ------- ten years after the due_date without extension of the ------- return the periods of limitation for assessment or refund as extended by agreement under sec_6501 and sec_6511 for the relevant taxable years are as follows ------- - -------------------------- --------- -------------------------- ------- - -------------------------- law and analysis what is the applicable_period of limitation for filing a claim_for_refund for ------- arising from ftcs carried back from ------- to ------- which were freed up by an nol carried back from ------- to ------- which in turn arose from a timely change in election to deduct rather than credit foreign_income_taxes paid_or_accrued in ------- a limitation periods in general the limitation periods for filing claims for refund are set out in sec_6511 under sec_6511 the general period of limitation for a credit or refund is three years from the time the return was filed or two years from the time the tax was paid whichever period expires later there are special rules extending the periods of limitation for various situations however including special rules for nols and ftcs the special rules for nols and ftcs are found in sec_6511 and sec_6511 respectively postf-117060-10 sec_6511 provides that if any claim_for_refund relates to an overpayment attributable to an nol_carryback then the limitation period shall instead be that period which extends three years after the time prescribed by law for filing the return including extensions thereof for the taxable_year of the nol that resulted in the carryback sec_6511 provides that if the allowance of a refund of an overpayment_of_tax attributable to an nol is otherwise prevented by the operation of any law or rule_of law other than sec_7122 relating to compromises such refund may be allowed or made if the claim is filed within the period provided in sec_6511 sec_6511 provides that if a claim_for_refund relates to an overpayment attributable to any taxes paid_or_accrued to any foreign_country for which a credit is allowed against the tax imposed by subtitle a in accordance with the provisions of sec_901 in lieu of the three-year period prescribed in section a the period shall be ten years from the date prescribed by law for filing the return for the year in which such taxes were actually paid_or_accrued sec_301_6511_d_-3 confirms that for purposes of the ftc 10-year refund statute the due_date of the return is determined without regard to extensions compare sec_6511 and sec_6511 b cascading carrybacks instigating event v independent examination as noted sec_6511 applies to determine the applicable refund period for claims relating to an overpayment of u s tax attributable to foreign taxes for which credit is allowed under sec_901 sec_6511 and the regulations thereunder specify that the period is ten years from the return deadline without extensions for the year in which the foreign taxes were actually paid_or_accrued sec_6511 provides that a claim_for_refund relating to an overpayment attributable to an nol_carryback is three years from the return deadline including extensions for the year in which the nol arose as a result of the taxpayer’s timely ------- election to deduct rather than credit foreign taxes paid_or_accrued in -------- the increased --------nol was carried back to ------ sec_6511 was amended in effective for foreign taxes paid_or_accrued in taxable years beginning after date prior to amendment the statute provided that the period was years from the date prescribed by law for filing the return for the year with respect to which the claim is made instead of the current language of for the year in which such taxes were actually paid_or_accrued publaw_105_34 the amendment was enacted to clarify that the limitations_period attributable to refund claims that result from foreign_tax_credit carryovers runs from the due_date of the return for the year in which the foreign taxes were paid_or_accrued and not the earlier or later year to which the foreign taxes were carried and claimed as a credit h_r rep cong 1st sess date pincite the amendment reversed the result in 620_f2d_853 ct_cl which held that the period ran from the carryover year the service does not follow the ampex decision postf-117060-10 which freed up ftcs for foreign taxes paid_or_accrued in ------- which the taxpayer seeks to carry back to ------- under a plain reading of sec_6511 taking an independent examination of the ------- refund claim the claim was untimely because the claimed overpayment is in the most direct sense attributable to credits for foreign taxes paid_or_accrued in ------- which were carried back and claimed as a credit in ------- the ten-year period for claiming a credit or refund attributable to foreign taxes paid_or_accrued in ------- expired on --------------------- two years before the ------- refund claim was filed revrul_71_533 1971_2_cb_413 addressed the interaction of the nol and ftc refund statutes in a case similar to that presented here the taxpayer in the ruling incurred an nol in that was carried back to reduce its taxable_income in to zero the nol_carryback freed up foreign taxes paid_or_accrued in which the taxpayer sought to carry back and claim as a foreign_tax_credit in the ruling concludes that the applicable refund statute is the ftc refund statute of sec_6511 not the nol refund statute of sec_6511 the analysis underlying the ruling is equally applicable here but even if the --------refund claim were considered to be attributable to the nol carried back from ------- rather than to the ftcs carried back from ------- the ------- refund claim was untimely because under sec_6511 the refund period for claims attributable to the ------- nol expired on ----- --------------------- three years from the due_date of the return for ------- and -------- years before the ------- refund claim was filed however a refund claim for any year attributable to foreign taxes paid_or_accrued in ----- ------- could be made at any point up to and including --------------------- therefore if the ------- refund claim for excess ftcs carried back from ------- can be considered attributable to the ------- foreign taxes that claim would be timely under sec_6511 for this argument to succeed all of the cascading carrybacks would have to be deemed to be attributable to the ------- foreign taxes so that the sec_6511 period for refund claims attributable to the --------foreign taxes serves to extend the limitation periods for the ------- claim based on the cascading ------- nol and ------- ftcs this approach would effectively look through the adjustment to the character of the instigating event which in this instance is the deduction for foreign taxes paid_or_accrued in ------- c prior analysi sec_2 under the claims court’s opinion in ampex described in note above interpreting the prior version of sec_6511 that applied with respect to foreign taxes paid_or_accrued in and earlier years the refund period for a ------- claim based on ftc carrybacks from ------- would have expired two years earlier on --------------------- postf-117060-10 although this exact issue has not been addressed similar issues have been considered administratively judicial decisions that address similar issues are discussed briefly herein judicial decisions although limitations statutes barring the collection_of_taxes must be strictly construed in favor of the government 464_us_386 the few courts that have addressed this issue have favored the instigating event approach the tax_court has defined attributable to to mean traced directly to 65_tc_506 allowing an otherwise untimely refund for because a timely nol_carryback to released a previously allowed investment_credit see also 374_us_65 defining attributable to as caused or generated by in 742_f2d_1102 7th cir the seventh circuit adopted the instigating event approach when determining the effect of capital_loss and investment_credit carrybacks on the service’s ability to assess an otherwise untimely deficiency specifically the appellate court reversed a tax_court decision 80_tc_648 and adopted the dissenters’ position that the reduction in the carryover amount of taxpayer’s income_tax to was ‘attributable to the application to the taxpayer of’ the capital_loss and investment_credit carrybacks both of which were effective to reduce its tax_liability and to result in a deficiency first chicago f 2d pincite the adopted tax_court dissenting opinion held that any deficiency that could be traced back to the carryback would be attributable to that carryback first chicago t c pincite the tax_court dissenters had relied on specific language in the legislative_history of the refund claim procedure to determine that the commissioner should recompute every tax including those of any prior year affected by the carryback id pincite the southern district of iowa also adopted the instigating event approach when it faced similar issues in marshalltown savings loan ass’n v united_states ustc p50 s d iowa in marshalltown the taxpayer filed a form_1139 and a form 1120x for based on the carryback of a net_operating_loss from to and a resultant carryforward of investment tax_credits from to the court held that although the general refund limitations_period had expired for the taxpayer’s refund claim was timely under sec_6511 because the overpayment wa sec_3 the service has considered similar issues on several occasions in written nonprecedential fact specific advice but has not taken a position with respect to the issues in any formal guidance chief_counsel_advice and field_service_advice are nonprecedential and should not be relied upon be either taxpayers or the service we note however that factual variations in the existing ccas and fsas and the potentially inconsistent results that may not be readily identifiable demonstrate hazards that should be considered when dealing with this case postf-117060-10 attributable to the nol_carryback as the instigating event was the nol_carryback the limitation period for that carryback was to be used for all the cascading results d current analysis the issue of which limitations_period is applicable when there are cascading nol and ftc carrybacks is unsettled which has caused the service’s analysis to be somewhat inconsistent in the past although the courts that have addressed this issue have tended to follow the instigating event approach the only decision that we have identified that actually deals with the effect on refunds - as opposed to assessments - is an unpublished order from the southern district of iowa see marshalltown ustc p50 thus the issue is not yet settled under the instigating event approach claims would be timely if they could be traced however remotely to any attribute in another year that could directly give rise to a refund claim even if the statute were closed with respect to the attribute directly claimed on the amended_return in our view the better interpretation is that the need for certainty and finality dictates an interpretation in which each carryback is looked at individually and the applicable statute is that relating to the proximate cause of the claim does taxpayer’s ------- protective claim ------- pc filed in ----------------------------- -----------------------------------------------------------------------------------------------constitute an election within sec_1_901-1 and sec_901 subject_to sec_6511 to claim credits rather than deductions for foreign_income_taxes paid_or_accrued in -------- thus reversing the election made in ------- to convert previously-claimed ftcs to deductions sec_901 provides that for any taxable_year a taxpayer may make or change an election to claim credits or deductions for foreign_income_taxes paid_or_accrued at any time before the expiration of the period prescribed for making a claim for credit or refund of u s tax for such taxable_year sec_1_901-1 clarifies that the applicable refund period is the 10-year period prescribed by sec_6511 rather than the three-year period prescribed by sec_6511 thus the applicable deadline for making or changing an election to credit or deduct creditable_foreign_taxes is ten years from the due_date of the return without extensions for the year in which the foreign taxes are paid_or_accrued in ------- taxpayer filed a form 1120x for the taxable_year ------- to change its election from credits under sec_901 to deductions under sec_164 for its foreign taxes paid_or_accrued in ------- the ------- form 1120x was dated -------------------------- and was posted at the irs service_center on ------------------------- the due_date of the ------- -------------------------------------------------------------------------------------------------------------------- tax_return without extensions was --------------------- because the ten-year period under sec_6511 would have expired on --------------------- ten years after the due_date without extensions of the ------- return this election was timely made postf-117060-10 on --------------------- taxpayer executed a form 1120x for taxable_year ------- with the label protective claim on the front of the form the ------- pc which was dated --------- ------------ purports to amend its ------- return to claim the effect of foreign taxes as a credit for the year ------- but according to the attached statement is not immediately effective and does not now replace a prior election to deduct such foreign taxes the statement provides that the ------- pc was not intended to be effective until the completion of all examinations by the internal_revenue_service of other years which would affect the advisability of electing a deduction or credit for the ------- foreign taxes only at the conclusion and resolution of the examination sic d ependent upon a final_determination of the income_tax liabilities for several years can it be finally determined whether the previous -------- election or this election should be given effect finally according to the statement t he amount of allowable credits and support have previously been provided the ------- pc was signed on --------------------- for purposes of this analysis it will be assumed that it was filed before the expiration of the applicable ten-year election_period under sec_901 for foreign taxes paid_or_accrued in ------- which was -------------------- ------- since the ------- pc is later in time than the -----------------------election to change from ftcs to deductions for ------- the ------- pc generally would supersede the ------- election but only if the ------- pc was a valid election under sec_1_901-1 however by filing the ------- pc taxpayer did not elect to claim credits for foreign taxes paid_or_accrued in ------- to the contrary the --------pc expressly states that taxpayer did not intend at that time to change its previous election to deduct rather than credit foreign taxes paid_or_accrued in -------- indeed taxpayer continues to press its claim that the --------foreign tax deductions gave rise to an nol that in turn gave rise to its disputed --------refund claim rather than reflecting a timely change in election the ------ --------pc reflects taxpayer’s attempt unilaterally to extend the statutory deadline for changing its election provided in sec_901 which expired on --------------------- thus the --------pc does not supersede the taxpayer’s last timely election made in-------- to convert previously-claimed ftcs to deductions for ------- and the time for taxpayer to make further changes to its choice has now expired in 436_f3d_644 6th cir the court affirmed the tax court’s holding that the taxpayer’s attempt to change its election from deductions to credits was untimely because it was made more than years after the due_date of the return for the year in which the foreign taxes were paid_or_accrued the court rejected the taxpayer’s argument that the election_period should be construed to run from the later year to which the taxpayer sought to carry forward excess foreign taxes from the election_year noting that the taxpayer retained the benefit of deductions for the foreign taxes and that statutes granting deductions should be construed strictly in favor of the government the court held that the plain meaning of sec_901 there is no posting date on the irs’ idrs for the ------- pc postf-117060-10 establishes a 10-year window for the taxpayer to choose between credits and deductions for foreign taxes paid in this case the taxpayer’s 10-year window expired on --------------------- taxpayer’s attempt indefinitely to extend the statutory 10-year period by filing the ------- pc on that date was ineffective is taxpayer’s ------- pc a valid protective claim generally if so should the service delay action on the claim pending final disposition of the ---------------cycle the concept of a protective claim is not used in the code or regulations but is established by case law a valid protective claim need not state a particular dollar amount or demand an immediate refund however the claim must have a written component must identify and describe the contingencies affecting the claim must be sufficiently clear and definite to alert the service as to the essential nature of the claim and must identify a specific year or years for which a refund is sought see eg 314_us_186 a protective claim is a present claim contingent upon a future event it is a statement that upon the happening of the contingency the claim will be prosecuted the delay in resolving the contingency does not create any inconsistency with the present assertion of the claim see kales u s pincite a claim cannot be viewed as a protective claim merely because a taxpayer labels it as such in general a protective claim is based on an expected change in the tax law other legislation regulations or case law taxpayers seeking certain determinations from the service or another tax authority also may submit protective claims while the determination is pending see 234_f3d_873 8th cir the court stated the taxpayer could have filed a protective claim while the service was considering a request for a determination that a plan was qualified as a tax-exempt profit sharing plan for example a taxpayer requesting assistance from the u s competent_authority under the provisions of an income estate or gift_tax treaty to which the united_states is a party is advised to file a protective claim along with their related parties before the expiration of the period of limitations see revproc_2006_54 at section also an estate that has not paid certain claims or expenses at the time the estate return is filed may file a protective claim_for_refund under sec_20_2053-1 see also revrul_77_274 1977_2_cb_326 providing that where a suit for damages for wrongful death has been filed but there has been no recovery at the time the return is filed the fiduciary is advised to file a protective claim_for_refund as indicated above a protective claim_for_refund is recognized by the service and the courts as a method of filing a claim satisfying sec_6402 within the applicable_period of limitation even though the taxpayer’s right to make the claim is presently contingent and must await resolution of a pending enactment or determination to fully establish the taxpayer’s right that is a valid protective claim contains a present claim that the service may immediately allow or disallow once the contingency is resolved in this case taxpayer’s ------- pc is a writing but it does not make a present claim or even postf-117060-10 identify a year or years for which a refund is sought taxpayer stated that only after the conclusion of the examination of other unidentified years will it know whether or not it wants to change its foreign tax election for ------ and whether or for what years it might then file a refund claim the pending examinations of other years however did not prevent taxpayer from making an sec_901 election for the --------taxable year the examination is not similar to the request for a determination that was pending with the service in pala inc in this case taxpayer could have made an election for the --------- taxable_year instead of filing the ------- pc in fact taxpayer previously did make the election but then revoked it via form 1120x in ---------------------- also the ------- pc does not present the sec_901 election as an alternative to the deduction under sec_164 that would come into effect upon the resolution of a contingency regarding the ------- tax_year the ------- pc contains no present claim to be allowed or disallowed immediately upon the completion of an examination it only informs the service of a course of action taxpayer may or may not take after the examination of various unspecified years are concluded which may or may not give rise to a refund claim in other years in contrast to making a present claim taxpayer is attempting to reserve the right to make a claim based on a change to its sec_901 election for ------- if the results of the examination of other years later show it would be beneficial the ------- pc lacks the elements required for a valid protective refund claim this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions


office_of_chief_counsel internal_revenue_service memorandum number release date cc tege eoeg et2 ------------ filen-105224-08 uilc date may to technical advisor air transportation lmsb pftg ta2 from lynne a camillo chief employment_tax branch office of division counsel associate chief_counsel tax exempt and government entities cc tege eoeg et2 subject employee claims for refund of fica_taxes paid on amounts deferred under now defunct nonqualified_deferred_compensation_plans this chief_counsel_advice responds to your request for assistance dated date this advice may not be used or cited as precedent issues are the retired employees described below entitled to a refund of federal_insurance_contributions_act fica_taxes paid on the reasonably ascertainable value of nonqualified_deferred_compensation_plan benefits based on the fact that a portion of the valued benefits will never be distributed to the retired employees due to the nonqualified_deferred_compensation plan’s termination what is the applicable statute of limitation period under sec_6511 with respect to the employee’s share of fica_taxes paid on amounts deferred under nonqualified_deferred_compensation_plans conclusions the retired employees are not entitled to a refund of fica_taxes paid on the reasonably ascertainable value of nonqualified_deferred_compensation_plan benefits when a portion of the valued benefits will never ultimately be distributed to the retired employees due to the nonqualified_deferred_compensation plan’s termination filen-105224-08 for purposes of determining the period of limitations under sec_6511 for a retired employee’s claim_for_refund of fica_taxes the applicable three-year period begins on april 15th of the year following the year in which the employee retired and the employer filed the fica tax_return and remitted the appropriate fica_taxes to the internal_revenue_service service with respect to the reasonably ascertainable value of nonqualified_deferred_compensation_plan benefits facts several similarly-situated employers established nonqualified_deferred_compensation_plans or nonqualified retirement plans to pay covered employees compensation amounts at a future date these nonqualified_deferred_compensation_plans were established to supplement the qualified_retirement_plans of highly compensated employees with this type of unfunded arrangement an employer’s promise to pay the deferred_compensation benefit is unsecured therefore these deferred_compensation amounts are subject_to claims by an employer’s creditors which could potentially result in an employee not receiving his or her full deferred_compensation benefits in general an employee participating in the nonqualified_deferred_compensation_plan was issued a letter at retirement which provided among other information the employee’s accrued value in the plan and the fica tax rules pertaining to the employee’s accrued value in the plan in addition the employer specifically informed the retired employee that the benefits paid from the nonqualified_deferred_compensation_plan were subject_to fica_taxes and that any applicable fica_taxes were due in the year in which the employee retired at retirement the employer also notified the retired employee of the present_value of their accrued plan benefit and the fica_taxes owed on the present_value of their plan benefit the present_value of the plan benefit was the discounted_present_value of the retired employee’s gross monthly plan benefits that were expected to be paid during the retired employee’s life expectancy in the employee’s year of retirement the employer paid to the service on behalf of the retired employee all of the fica_taxes that were due on the present_value of the retired employee’s expected plan benefits the employer informed the retired employee that the employer would recoup the fica_taxes paid to the service on the retired employee’s behalf by withholding a portion of the fica_taxes paid from the retired employee’s monthly gross benefits these withheld amounts were paid to the employer the employer would cease this withholding from the retired employee’s monthly benefits when all of the applicable retired employee’s fica_taxes had been repaid in full to the employer prior to the retired employee receiving all of their benefits under the nonqualified_deferred_compensation_plan the employer filed for chapter bankruptcy as a result of the bankruptcy proceedings the employer was allowed to terminate their nonqualified filen-105224-08 deterred compensation plan accordingly the retired employee’s monthly benefits under the nonqualified_deferred_compensation_plan ceased as of the date of the plan’s termination following the termination of the nonqualified_deferred_compensation_plans the employer informed each retired employee that they would not be requesting a refund of either the employer’s or employee’s fica_taxes previously paid on the nonqualified_deferred_compensation benefits a large number of the retired employees have filed claims for a refund of a portion of the employee’s fica_taxes previously paid on the nonqualified_deferred_compensation benefits the claim refund amount is based on the difference between the fica_taxes paid on the retired employee’s original accrued deferred plan benefit and the fica_taxes that would have been assessed on the actual deferred_compensation benefit received by the retiree the majority of the claims relate to the medicare_tax law and analysis issue sec_3101 and sec_3111 impose fica_taxes on wages as that term is defined in sec_3121 fica_taxes consist of the old-age_survivors_and_disability_insurance_tax social_security_tax and the hospital_insurance_tax medicare_tax these taxes are imposed on both the employer under sec_3111 and b and on the employee under sec_3101 and b sec_3102 provides that the employer must collect the employee portion of fica tax by deducting the amount of the tax from the wages as and when paid sec_3121 defines wages for fica purposes as all remuneration for employment including the cash_value of all remuneration including benefits paid in any medium other than cash with certain specific exceptions sec_31_3121_a_-1 of the employment_tax regulations provides that remuneration for employment unless such remuneration is specifically excepted constitutes wages even though at the time paid the relationship of employer and employee no longer exists between the person in whose employ the services were performed and the individual who performed the services sec_3121 provides for the maximum wage limitation on the_amount_of_wages paid to any one employee by an employer during a calendar_year that are subject_to the social_security_tax portion of fica tax the term wages for social_security_tax purposes does not include that part of the remuneration paid_by an employer to an employee within any calendar_year which exceeds the applicable wage_base generally wages are subject_to fica tax when they are actually or constructively paid see sec_31_3121_a_-2 however sec_3121 provides a special timing rule for filen-105224-08 nonqualified_deferred_compensation sec_3121 provides that any amount deferred under a nonqualified_deferred_compensation_plan must be taken into account as wages for fica purposes as of the later of when the services are performed or when there is no substantial_risk_of_forfeiture of the rights to such amount sec_3121 states that once nonqualified_deferred_compensation is taken into account as wages under the special timing rule then neither that amount nor the income attributable to that amount will be again treated as fica wages sec_3121 provides that the term nonqualified_deferred_compensation_plan means any plan or other arrangement for deferral of compensation other than a plan described in sec_3121 sec_31_3121_v_2_-1 provides that the term nonqualified_deferred_compensation_plan means any plan or other arrangement other than a plan described in sec_3121 that is established within the meaning of paragraph b of this section by an employer for one or more of its employees and that provides for the deferral of compensation within the meaning of paragraph b of this section sec_31_3121_v_2_-1 states that a plan provides for the deferral of compensation with respect to an employee only if under the terms of the plan and the relevant facts and circumstances the employee has a legally binding right during a calendar_year to compensation that has not been actually or constructively received and that pursuant to the terms of the plan is payable in a later year an employee does not have a legally binding right to compensation if that compensation may be unilaterally reduced or eliminated by the employer after the services creating the right to the compensation have been performed for this purpose compensation is not considered subject_to unilateral reduction or elimination merely because it may be reduced or eliminated by operation of the objective terms of the plan such as the application of an objective provision creating a substantial_risk_of_forfeiture within the meaning of sec_83 sec_31_3121_v_2_-1 defines an account_balance_plan as a nonqualified_deferred_compensation_plan under the terms of which a principal_amount or amounts is credited to an individual_account for an employee the income attributable to each principal payment is credited or debited to the individual_account and the benefits payable to the employee are based solely on the balance credited to the individual_account sec_3121 -1 c i provides that if the benefits for an employee are provided under a nonqualified_deferred_compensation account that is not an account_balance_plan a nonaccount balance plan the amount deferred for a period equals the present_value of the additional future payment or payments to which the employee has obtained a legally binding right during that period sec_31_3121_v_2_-1 provides that for purposes of sec_31_3121_v_2_-1 the term present_value means the value as of a specified date of an amount or series of amounts due thereafter where each amount is multiplied by the probability that the filen-105224-08 condition or conditions on which the payment of the amount is contingent will be satisfied and is discounted according to the assumed rate of interest to reflect the time_value_of_money for purposes of this section the present_value must be determined as of the date the amount deferred is required to be taken into account as wages under paragraph e of this section using the actuarial assumptions and methods that are reasonable as of that date the present_value cannot be discounted for the probability that payments will not be made or will be reduced because of the unfunded status of the plan the risk associated with any deemed or actual investment of amounts deferred under the plan the risk that the employer the trustee or another party will be unwilling or unable to pay the possibility of future plan amendments the possibility of a future change in the law or similar risks or contingencies sec_31_3121_v_2_-1 provides that except as otherwise provided in this paragraph e an amount deferred under a nonqualified_deferred_compensation_plan must be taken into account as wages for fica tax purposes as of the later of the date on which the services creating the right to the amount deferred are performed within the meaning of paragraph e of this section or the date on which the right to the amount deferred is no longer subject_to a substantial_risk_of_forfeiture sec_31_3121_v_2_-1 provides that for purposes of this section services creating the right to an amount deferred under a nonqualified_deferred_compensation_plan are considered to be performed as of the date on which under the terms of the plan and all the facts and circumstances the employee has performed all of the services necessary to obtain a legally binding right as described in paragraph b i of this section to the amount deferred sec_31_3121_v_2_-1 provides that for purposes of this section the determination of whether a substantial_risk_of_forfeiture exists must be made in accordance with the principles of sec_83 and the regulations thereunder sec_1_83-3 of the income_tax regulations provides that for purposes of sec_83 and the regulations thereunder whether a risk of forfeiture is substantial or not depends upon the facts and circumstances a substantial_risk_of_forfeiture exists where the rights in property that are transferred are conditioned directly or indirectly upon the future performance or refraining from performance of substantial services by any person or the occurrence of a condition related to a purpose of the transfer and the possibility of forfeiture is substantial if such condition is not satisfied the risk that the value of the property will decline during a certain period of time does not constitute a substantial_risk_of_forfeiture sec_31_3121_v_2_-1 provides that notwithstanding any other provision of this paragraph e an amount deferred under a nonaccount balance plan is not required to be taken into account as wages under the special timing rule_of sec_31 v -1 a until the first date on which all of the amount deferred is reasonably ascertainable the resolution date in this case the amount required to be filen-105224-08 taken into account as of the resolution date is determined in accordance with sec_31_3121_v_2_-1 sec_31_3121_v_2_-1 provides that for purposes of paragraph e an amount deferred is considered reasonably ascertainable on the first date on which the amount form and commencement_date of the benefit payments attributable to the amount deferred are known and the only actuarial or other assumptions regarding future events or circumstances needed to determine the amount deferred are interest and mortality for this purpose the form and commencement_date of the benefit payments attributable to the amount deferred are treated as known if the requirements of paragraph c iii b of this section under which payments are treated as being made in the normal form of benefit commencing at normal commencement_date are satisfied the nonqualified_deferred_compensation_plan at issue is a nonaccount balance plan as such fica_taxes became due and payable when the amount deferred was reasonably ascertainable ie the date of the employee’s retirement at that time the present_value of that amount became subject_to fica_taxes there is no provision allowing for a refund of properly paid fica_taxes in cases where the benefits are not ultimately paid thus fica_taxes imposed on amounts deferred under a nonqualified_deferred_compensation_plan are not refundable merely because the total benefits are not ultimately distributed due to the termination of the plan sec_3121 was added to the internal_revenue_code as part of the social_security amendments of pub_l_no 97_stat_65 the legislative_history pertinent to sec_3121 indicates that congress was attempting to create parity between the fica tax treatment of cash employees receive and then choose to use for personal savings which is subject_to income_tax and subject_to fica and other nonqualified for tax purposes arrangements whereby employers or employees defer an amount of the employee’s remuneration for employment that is not subject_to income_tax when deferred but is also a type of individual savings arrangement failure to subject such deferral amounts to fica may enable individuals to in effect control which portion of their compensation was to be included in the social_security_wage_base this would make the system partially elective and would undermine the fica tax_base senate report no date thus under sec_3121 nonqualified_deferred_compensation generally is includible in the fica wage_base upon the later of when the employee has performed the services or when the employee’s right to the compensation is not subject_to a substantial_risk_of_forfeiture an employee must pay fica_taxes on the full amount of cash actually received from his or her employer even if the employee invests the cash and the value of the investments later declines as a result of poor investment choices similarly because the intent of sec_3121 is to impose fica taxation on amounts deferred under a nonqualified_deferred_compensation arrangement when the amounts become vested in the employee ie not subject_to a substantial_risk_of_forfeiture the fact that the filen-105224-08 employee later receives less than the amount originally deferred or ultimately receives nothing at all as a result of an employer’s bankruptcy does not give rise to a right to a refund of the fica_taxes paid on amounts deferred issue a taxpayer has a limited time period within which to file a claim for a credit or refund of overpaid taxes sec_6511 provides that a taxpayer must file a claim for credit or refund within three years from the time the return was filed or two years from the time the tax was paid whichever is later there are only limited exceptions to the general_rule found in sec_6511 sec_6511 provides that if the taxpayer and the service agree to extend the period for making an assessment pursuant to sec_6501 and such agreement is made within the period set forth in sec_6511 then the period for filing a claim for credit or refund shall not expire prior to months after the expiration of the period within which an assessment may be made pursuant to the agreement or any extension thereof under sec_6501 sec_6511 also suspends the running of the periods of limitations specified in sec_6511 during the period that an individual is financially disabled with respect to the credit or refund of fica_taxes sec_6513 provides a return for any quarterly period ending with or within a calendar_year which is filed before april of the following calendar_year is considered filed on april of the following calendar_year and a tax paid with respect to remuneration or other amount_paid during any period ending with or within a calendar_year which tax is paid before april of the succeeding calendar_year is considered paid on april of the succeeding calendar_year under the facts presented the employer files the appropriate fica tax returns and pays all of the required fica_taxes on behalf of the retired employee on the amount taken into account as wages for fica tax purposes in the year of the employee’s retirement if the employer has filed all returns and paid all fica_taxes properly and timely as required_by_law for purposes of the statute_of_limitations under sec_6511 the fica tax returns would be deemed filed and the fica_taxes would be deemed paid on april of the subsequent year under sec_6513 therefore any overpayment of fica_taxes will relate to the actual year in which fica_taxes were paid on the plan wages according to the facts provided the employer remitted the applicable fica_taxes and filed the appropriate fica tax returns on behalf of a retired employee in the year the employee retired these fica tax returns would be deemed filed and the fica_taxes would be deemed paid on april of the subsequent year since there is no applicable exception to the period of limitations sec_6511 provides that a claim_for_refund must be made within three years from the date the employer filed the fica tax returns after this limitation period has expired no adjustment or refund is possible filen-105224-08 case development hazards and other considerations this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions


department of the treasury internal_revenue_service washington d c jun tax exempt ando government entities oivision u i l legend taxpayer a ira x company m amount d bank b account g fund v amount e bank c account k amount f dear this is in response to your letter dated date as supplemented by correspondence dated date submitted on your behalf by your authorized representative in which you request a waiver of the day rollover requirement contained in sec_408 of the internal_revenue_code the code the following facts and representation have been submitted under penalties of perjury in support of your request taxpayer a’s husband a retirement annuity ira x with company m taxpayer a’s husband died on taxpayer a was a co-primary beneficiary of ira x as _ __ years old individual maintained an individual evidenced by company w’s letter submitted with your request taxpayer a received a check in the amount of amount b from ‘in company m representing her interest in ira x a deposit slip submitted with your ruling_request indicates that on of amount d was made to account g at bank b additional documentation submitted with your request indicate that a portion of amount d was used to purchase shares in fund v amount e and that the balance was used to purchase four certificates of deposit held in account k at bank c amount f amount e and amount f equal amount d taxpayer a submitted an account statement representing that the certificates of deposit are now held in a money market account also at bank c a deposit in the amount taxpayer a asserts that her financial adviser did not advise her that amount d could be rolled over to her ira account taxpayer a further asserts that due to the stress and grief of her husband’s death she did not realize that the funds could be transferred to her ira taxpayer a asserts that she did not know that the day rollover period had expired until she met with her accountant in to prepare her tax_return for the _tax year company m issued a form 1099-r to taxpayer a indicating that a taxable_distribution from ira x in the amount of amount d was made to her in you further assert that there have not been any withdrawals from account k or redemption of shares from fund v and that amount d continues to be held with fund v and in account k based upon the foregoing facts and representation you request that the service waive the day rollover requirement with respect to the distribution of amount d from ira x sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if- i gi the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual received the payment or distribution or the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 - sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at the time during the 1-year period ending in the day of such receipt such individual received any other amount described in sec_408 from an ira which was not included in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the secretary may waive the day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity and good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occur after date are eligible for the waiver under sec_408 of the code revproc_2003_16 2003_4_irb_359 provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability or hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred _ documentation submitted the information submitted in this case indicates that a distribution in the amount of amount d was made to you from ira x in also indicates that a deposit in the amount of amount d was made to account g at bank b further taxpayer a has submitted documentation that indicates that a portion of amount d was used to purchase shares with fund f amount e and that the balance amount f was deposited into account k at bank c amount e and amount f equal amount d taxpayer a also submitted a recent account statement representing that the certificates of deposit held in account k are now invested in a money market account also with bank c taxpayer a asserts that there have been no withdrawals from account k or redemption of shares h ld by fund v and that amount d continues to be held with fund v and bank c therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount d from ira x taxpayer a is granted a period of sixty days from the issuance of this ruling letter to rollover amount d to an ira provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contribution this amount will be considered a valid rollover_contribution within the meaning of sec_408 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this ruling does not authorize the rollover of amounts that are required to be distributed by code sec_401 this ruling assumes that ira x meets the requirements of code sec_408 at all times relevant to this transaction 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 a copy of this ruling has been sent to your authorized representative pursuant to the provisions of a power_of_attorney on file in this office if vou have anv questions about this ruling please contact se t ep ra t2 at sincerely yours signed joyce e floyd joyce e floyd manager employee_plans technical group r enclosures deleted copy of ruling letter notice of intention to disclose cc _


internal_revenue_service number release date index number --------------------------------------------------------- -------------- ------------------------------ --------------------------------------- --------------------------------------------- --------------------------------------------- ------------------------- --------------------------- --------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ----------------- telephone number -------- ------------- refer reply to cc psi plr-121966-15 et al date september x date country ---------------------- ---------------------- ----------------- dear --------------------------------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting that the service grant x extensions of time under sec_301_9100-3 of the procedure and administration regulations to make entity classification elections to be classified as an association_taxable_as_a_corporation for federal tax purposes the information submitted states that x were formed under the laws of country x represents that as of date x were foreign entities eligible to elect to be treated as associations taxable as a corporation for federal tax purposes however x inadvertently failed to timely file valid forms entity classification election electing to treat x as an association_taxable_as_a_corporation effective date sec_301_7701-3 provides that a business_entity with at least two members can elect to be classified either as an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner plr-112966-15 et al sec_301_7701-3 further provides that so long as a business_entity is not classified as a corporation under b or - an eligible_entity it may elect its classification for federal tax purposes sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal_income_tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise sec_301_7701-3 provides that to elect to be classified other than as provided in sec_301_7701-3 an eligible_entity must file form_8832 with the designated service_center and that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to twelve months after the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as 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_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that 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 granting relief will not prejudice the interests of the government based solely on the information submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x are granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect to be treated as an association_taxable_as_a_corporation effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose this ruling is contingent on x having filed all relevant tax and information returns consistent with the granted relief with the appropriate service_center within days of the date of this ruling a copy of this letter should be attached to any such late or amended returns if x fail to comply with this requirement this letter_ruling will be null and void plr-112966-15 et al except as expressly provided herein we express or imply no opinion concerning the federal 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 of the code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representatives sincerely associate chief_counsel passthroughs and special industries by _______________ bradford r poston 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 ----------------------------------- ----------------------------------------- ----------------------------- -------------------------- - department of the treasury washington dc person to contact ------------------ id no ------------- telephone number --------------------- refer reply to cc psi b04 - plr-139028-03 date april re ---------------------------------------------------------------------------------------------- ----------------------------------------------------------------- legend grandparent a ------------------------ grandparent b ----------------- child a -------------------- child b ------------------------ grandchild a -------------------------- grandchild b ---------------------------- grandchild c ---------------------- great-grandchild a ------------------ great-grandchild b ----------------------- great-grandchild c ------------------------ great-grandchild d ---------------------- great-grandchild e -------------------------- great-grandchild f -------------------- great-grandchild g ------------------------------ great-grandchild h -------------------- great-grandchild i ---------------------------- trust a ------------------------------------------------------- grandchild a’s trust a ------------------------------------------------------------------ ------------------------------- grandchild b’s trust a ------------------------------------------------------------------- ------------------------------- grandchild c’s trust a ------------------------------------------------------------- ------------------------------- trust b ------------------------------------------------------------- plr-139028-03 ------------------------------------------------------------------------------------------------- ------------------------------- grandchild b’s trust b ------------------------------------------------------------------- ------------------------------- grandchild c’s trust b ------------------------------------------------------------- ------------------------------- corporate trustee ----------------------------------------- individual trustee a ---------------------- individual trustee b -------------------------- bank ---------------------------------------- fund ------------------------------------------- date ------------------------ date ---------------------------- date ------------------------ date -------------------- date ------------------------- state --------- statute -------------------------------------------------------------------------------- court ------------------------------------------------ dear -------------- this responds to a letter from your authorized representative dated date and prior correspondence requesting rulings regarding the federal income and generation-skipping_transfer gst tax consequences of a proposed severance of certain trusts facts grandparent a died on date survived by his spouse grandparent b who subsequently died on date grandparent a and grandparent b had two children child a and child b child a had three children grandchild a grandchild b and grandchild c child a died on date child b never married and never had children date date and date are prior to date paragraph a_trust a was to be held for the benefit of grandparent b during her life pursuant to article iii paragraph b on grandparent b’s death trust a was divided into equal shares for the benefit of each child of child a then living therefore following the death of grandparent b on date trust a was divided into grandchild a’s trust a grandchild b’s trust a and grandchild c’s trust a each share has been administered as a separate trust grandparent a’s will provided for the creation of trust a under article iii the facts submitted and representations made are as follows under article iii paragraph e of trust a the trustees may distribute such under article iii paragraph d until the complete distribution of a grandchild’s plr-139028-03 trust or until the grandchild’s prior death so much of the net_income is to be distributed to that grandchild as the trustees in their absolute discretion deem reasonably necessary for the grandchild’s comfortable support education and welfare the remaining income may be distributed to any one or more of grandparent a’s descendants except child a and child b and their spouses as the trustees in their absolute discretion deem advisable any remaining income is to be added to the principal of the share principal of a grandchild’s trust only to that grandchild in their absolute discretion as the trustees deem advisable each grandchild has a limited testamentary_power_of_appointment under paragraph e to direct distribution of that grandchild’s trust share among the grandchild’s lawful descendants in such proportions and subject_to such trusts and conditions as such grandchild directs in default thereof upon a grandchild’s death the trustee is directed to distribute the grandchild’s share per stirpes to grandparent a’s lawful descendants with a special provision for the widow of either grandchild a and grandchild b who should die without leaving a lawful descendant who survives such grandchild paragraph h of article iii contains a provision mandating the termination and distribution of each grandchild’s trust no later than years after the death of the last survivor of a listed class of individuals living at the death of grandparent a and in what proportions any receipts or disbursements shall be credited charged to or apportioned between income and principal date under trust b a separate trust was created for each grandchild of grandparent b grandchild a’s trust b grandchild b’s trust b and grandchild c’s trust b pursuant to paragraph c of article i of trust b until the death of the grandchild the trustee may distribute so much of the net_income to that grandchild as the trustee in its absolute discretion deems advisable for the grandchild’s comfortable support education welfare and happiness the trustee may either accumulate the remaining net_income or distribute so much of it to any one or more of grandparent b’s lawful descendants and their spouses in such proportions as the trustee deems advisable paragraph c also provides that the trustee may only distribute principal to the grandchild of such share under paragraph d the trustee may add undistributed_net_income to principal or may retain such income in an accumulated income account for possible future distribution to beneficiaries from time to time eligible to receive current distributions of net_income grandparent b created trust b an irrevocable_trust on date date is prior to paragraph n of article iii authorizes the trustee inter alia to determine whether pursuant to the terms of trust b each grandchild has a limited testamentary paragraph g of article i contains a provision mandating the termination and plr-139028-03 power_of_appointment under paragraph e of article i to direct distribution of such grandchild’s trust among grandparent b’s lawful descendants in such proportions and subject_to such trusts and conditions as such grandchild directs in default of appointment upon the grandchild’s death the trustee is directed to distribute the trust per stirpes to the primary beneficiary’s lawful descendants or if none per stirpes to grandchild b’s lawful descendants with a special provision for the widow of either of grandchild a and grandchild b who should die without leaving a lawful descendant who survives such grandchild provided however that if the trustee deems any descendants of grandparent b to be incapable of using to good advantage the share otherwise to be so received the trustee may allocate such trust among any of the other descendants of grandparent b in such proportions as the trustee deems proper distributions of each trust under trust b no later than years after the death of the last survivor of a listed class of individuals living at the date of execution of the agreement creating trust b to determine whether and in what proportions any receipts or disbursements shall be credited charged or apportioned between income and principal trust b a significant portion of the assets of each of the current trusts consists of interests in common trust funds ctfs as defined in sec_584 maintained by bank rulings concluding that the entry by court of an order authorizing the trustee to allocate capital_gain receipts to income and charge certain income expenses to corpus and the trustees’ exercise of discretion in accordance with that court order will not adversely affect the status of grandchild a’s trust a grandchild a’s trust b grandchild b’s trust a grandchild b’s trust b grandchild c’s trust a and grandchild c’s trust b as exempt from gst tax each grandchild has three children the great-grandchildren of grandparent a and grandparent b the parties propose to divide each grandchild’s separate trust under trust a and trust b into three equal separate new trusts collectively known as the new trusts the parties propose to name each of the nine new trusts for one of the nine great-grandchildren specifically the trusts will be severed as follows the trustees of trust a are bank and two individuals bank is the sole trustee of paragraph l of article i provides that the trustee shall have the power inter alia on date the internal_revenue_service issued private letter rulings the prior grandchild a’s trust a will be divided into three equal trusts one each for great-grandchild a great-grandchild b and great-grandchild c grandchild a’s trust b will also be divided into three equal trusts one each for great-grandchild a great-grandchild b and great-grandchild c plr-139028-03 grandchild b’s trust a will be divided into three equal trusts one each for great-grandchild d great-grandchild e and great-grandchild f grandchild b’s trust b will also be divided into three equal trusts one each for great-grandchild d great-grandchild e and great-grandchild f grandchild c’s trust a will be divided into three equal trusts one each for great-grandchild g great-grandchild h and great-grandchild i grandchild c’s trust b will also be divided into three equal trusts one each for great-grandchild g great-grandchild h and great-grandchild i the trustees represent that each new trust will be separately managed and all of the trust provisions of each new trust will remain identical to the terms of the original trust from which it was derived prior to the severance the primary beneficiary of each new trust will still be the grandchild who was the original primary beneficiary prior to severance and who will also be the only eligible recipient of principal during that grandchild’s life the trustees’ discretionary powers with respect to undistributed_income will be unchanged including the permissible beneficiaries the trust term and the provisions regarding disposition of trust assets at termination will also be the same administered the assets of each new trust will be invested separately and titled solely in the name of that trust the new trusts will each file separate_income tax returns separately track state law accounting_income and keep separate trust records the trustees represent that the principal purposes of severing the trusts are to accommodate the differing income distribution needs and differing investment objectives of the descendants of the grandchildren and that there is no tax_avoidance purpose to the proposed severance to make the discretionary income distributions only to the grandchild and to the great- grandchild for whom the new trust is named and that great-grandchild’s family you represent that there have been no additions to trust a or trust b since date the trusts are governed by the laws of state you also represent that statute of state law gives the trustees the power to sever the trusts as proposed rulings requested into the new trusts under state law will not adversely affect the trusts’ status as exempt from the gst tax under chapter and each new trust created as a result of the severance will remain exempt from the gst tax the exercise of the trustee’s power to sever each trust on a fractional basis into the new trusts in accordance with state law will not cause the original trusts the the trustee subject_to asset availability and fiduciary duties intends to continue the exercise of the trustee’s power to sever each trust on a fractional basi sec_3 the exercise of the trustee’s power to sever each trust and transfer the trusts’ plr-139028-03 new trusts or their beneficiaries to realize gain_or_loss from the sale_or_other_disposition of property under sec_1001 units of participation in fund on a fractional in-kind basis into the new trusts in accordance with state law will not cause the current trusts the new trusts or their beneficiaries to realize gain_or_loss from the sale_or_exchange of a participating interest in a common_trust_fund under sec_584 as a result of such severance or transfer_tax purposes exercise of fiduciary discretion by the trustee of a new trust to credit realized capital_gains of that trust to income and to charge income expenses of that trust to principal in a manner consistent with the prior rulings will not adversely affect that trust’s status as exempt from the gst tax under chapter ruling_request no - gst tax the holding of the prior rulings will apply to each of the new trusts and the each of the new trusts will be treated as a separate trust for federal income sec_2601 imposes a tax on every generation-skipping_transfer under ' a of the tax_reform_act_of_1986 act the gst tax is generally applicable to generation-skipping transfers made after date however under ' b a of the act and ' b i of the generation-skipping_transfer_tax regulations the tax does not apply to any generation-skipping_transfer from a_trust if the trust was irrevocable on date and no addition actual or constructive was made to the trust after that date under ' b ii 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 ' or sec_2042 if the settlor had died on date under sec_2602 the amount of tax imposed under sec_2601 is determined by multiplying the taxable_amount by the applicable_rate the taxable_amount of a taxable_distribution is the amount received by the transferee sec_2621 of a taxable_termination is the amount of property with respect to which there was a termination sec_2622 and of a direct_skip is the amount received by the transferee sec_2623 under sec_2641 the term applicable_rate means the product of the maximum_federal_estate_tax_rate in the year that the generation-skipping_transfer occurs and the inclusion_ratio under sec_2642 the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer i sec_1 minus the applicable_fraction under sec_2642 in general the numerator of the applicable_fraction is the gst_exemption amount plr-139028-03 allocated to the property transferred and the denominator is the value of the property transferred under sec_2631 every individual is allowed a gst_exemption amount which may be allocated by the individual or the individual’s executor to any property with respect to which the individual is the transferor sec_26_2601-1 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 will not cause the trust to lose its exempt status sec_26_2601-1 provides that a modification 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 ' than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer sec_26_2601-1 example illustrates a situation where a_trust that is otherwise exempt from the gst tax authorizes the trustee to distribute income and principal at the trustee s discretion for the benefit of a and b and their respective issue on the death of the last to die of a and b the corpus is to be distributed to the issue of a and b per stirpes pursuant to a court order the trust is divided equally into two trusts one for the benefit of a and a s issue and one for the benefit of b and b s issue the example concludes that under the facts presented the division of the trust into two trusts does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in ' than the person or persons who held the beneficial_interest prior to the division and the division does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust accordingly the two partitioned trusts will not be subject_to the provisions of chapter trust created under trust a and trust b into three equal separate new trusts with one trust named for each great-grandchild all of the trust provisions of each new trust will remain identical to the terms of the original trust from which it was derived prior to the severance the primary beneficiary of each new trust will still be a grandchild for whom the original trust was established and that grandchild will also be the only eligible recipient of principal during that grandchild’s life the trustees’ discretionary powers with respect to undistributed_income will be unchanged including the permissible beneficiaries the trust term and the provisions regarding disposition of trust assets at termination will also be the same therefore the proposed division will not shift a in the present case the parties propose to divide each grandchild’s separate sec_1001 provides that the gain from the sale_or_other_disposition of accordingly based on the facts submitted and the representations made we sec_61 provides that gross_income includes gains derived from dealings plr-139028-03 beneficial_interest in the trusts to any beneficiary who occupies a lower generation than the person or persons who held the beneficial_interest prior to the division in addition the division does not extend the time for vesting of any beneficial_interest beyond the period provided for in the original trusts conclude that the exercise of the trustee’s power to sever the trusts on a fractional basis into the new trusts under state law will not adversely affect the trusts’ status as exempt from the gst tax under chapter and each new trust created as a result of the severance will remain exempt from the gst tax ruling_request no -gain or loss in property and under sec_61 from an interest in trust 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 such section for determining loss over the amount_realized of property shall be the sum of any money received plus the fair_market_value of the property other than money received under c except as otherwise provided in subtitle a the entire amount of the gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations 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 as loss sustained a partition of jointly owned property is not a sale_or_other_disposition of property where the co-owners of the joint property sever their joint_interests but do not acquire a new or additional interest as a result of the transaction thus neither gain nor loss is realized on a partition see revrul_56_437 1956_2_cb_507 issue of when a sale_or_exchange has taken place that results in a realization of gain_or_loss under sec_1001 in cottage savings a financial_institution exchanged its interest in one group of residential mortgage loans for another lender’s interests in a different group of residential mortgage loans the two groups of mortgages were considered substantially identical by the agency that regulated the financial_institution sec_1001 states that the amount_realized from the sale_or_other_disposition 499_us_554 concerns the under state law the trustee has the power to sever any trust estate on a in cottage savings u s pincite the court concluded that sec_1_1001-1 it is consistent with the supreme court’s opinion in cottage savings to find that plr-139028-03 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 fractional basis into or more separate trusts for any reason a separate_account or trust created by severance or segregation shall be treated as a separate trust for all purposes from and after the date on which the severance or segregation is effective and shall be held on terms and conditions that are substantially equivalent to the terms of the trust from which it was severed or segregated so that the aggregate interests of each beneficiary in the severed trusts are substantially equivalent to the beneficiary’s interests in the trust before severance see statute the interests of the beneficiaries of the new trusts will not differ materially from their interests in the original grandchild trusts in the proposed transaction the original trusts will be severed in accordance with state law on a pro_rata basis except for the changes described above all other provisions of the new trusts will remain unchanged accordingly the proposed transaction will not result in a material difference in_kind or extent of the legal entitlements enjoyed by the beneficiaries and no gain_or_loss is recognized on the partition of the trusts for purposes of sec_1001 ruling_request no - common_trust_fund trust fund ctf means a fund maintained by a bank exclusively for the collective investment and reinvestment of moneys contributed thereto by the bank in its capacity as a trustee executor administrator or guardian admission or withdrawal of a participant the admission of a participant shall be treated with respect to the participant as the purchase of or an exchange for the participating interest the withdrawal of any participating interest by a participant shall be treated as a sale_or_exchange of such interest by the participant in a ctf from one trust of which the taxpayer is the sole beneficiary to another trust of which the taxpayer is also the sole beneficiary does not constitute a withdrawal of a sec_584 provides that for purposes of subtitle a the term common revrul_60_256 1960_2_cb_193 holds that a transfer of units of participation sec_584 provides that no gain_or_loss shall be realized by the ctf by the based solely on the facts and representations submitted we conclude that the sec_643 provides that under regulations prescribed by the secretary two the primary purposes of establishing the new trusts are represented as being to plr-139028-03 participating interest within the meaning of sec_584 provided that no funds change hands there is no surrender of indicia of ownership nothing is received by the taxpayer and the trustee of the two trusts is the same under such circumstances the basis of the participating units in the hands of the transferee trust is the same as it was in the hands of the transferor trust on the date of transfer transfer of the ctf participating interests from the current trusts to the new trusts does not constitute a withdrawal therefore no gain_or_loss will be realized by the ctf the current trusts the new trusts or any trust_beneficiary under sec_584 ruling_request no - sec_643 or more trusts shall be treated as one trust if such trusts have substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries and a principal purpose of such trusts is the avoidance of federal_income_tax accommodate the differing income distribution needs and investment objectives of the descendants of the grandchildren it is further represented that there is no tax_avoidance purpose in the establishment of the new trusts within the meaning of sec_643 determining whether avoidance of income_tax is a primary purpose of the establishment of the new trusts is a question of fact the determination of which must be deferred until the federal_income_tax returns of the parties involved have been examined by the office having examination jurisdiction over those income_tax returns administered and it is determined that tax_avoidance is not a primary purpose of the establishment of the new trusts each of the new trusts will be treated as a separate trust for federal_income_tax purposes ruling_request no - prior rulings sec_6110 provides that a taxpayer may not rely on a private_letter_ruling issued to another taxpayer see also dollar_figure of revproc_2004_1 2004_1_cb_1 in this case after the severance all trust provisions will remain identical to the terms of the original trust from which it was derived prior to the severance including paragraph n of article iii of trust a and paragraph l of article i of trust b the provisions subject_to the court order considered in the prior rulings accordingly based on the facts and representations we conclude that the holdings in the prior rulings will apply to each of the new trusts therefore the exercise of fiduciary discretion by the trustee of a new trust to credit realized capital_gains of that trust to income and to charge income expenses of that trust to principal in a manner consistent therefore provided that the new trusts are separately managed and plr-139028-03 with the prior rulings and the court orders upon which those rulings were based will not adversely affect that trust’s status as exempt from the gst tax under chapter except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely yours by_________________________ george l masnik branch chief branch office of the associate chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes cc