department of the treasury internal_revenue_service washington d c date number release date uil cc tege eoeg et2jrichards spr-119681-01 wli memorandum for steven t miller director t eo from mary oppenheimer assistant chief_counsel cc tege eoeg subject medical resident fica refund claims this memorandum supplements our memorandum to you dated date in which we discussed the handling of federal_insurance_contributions_act fica refund claims that have been filed nation-wide involving medical residents because this advice will be distributed to the field offices it constitutes conduit chief_counsel_advice subject_to disclosure under sec_6110 of the internal_revenue_code you have asked for our advice on whether a hospital that is a sponsoring or participating institution in a graduate medical education gme program a teaching hospital is a school_college_or_university s c u for purposes of the student fica exception under sec_3121 of the code the accreditation council for graduate medical education acgme currently recognizes approximately big_number institutions as teaching institutions the centers for medicare and medicaid cms formerly the health care financing administration provides graduate medical education cost reimbursement to approximately big_number institutions which it describes as teaching hospitals cms reimburses teaching hospitals approximately dollar_figure billion per year for gme costs these teaching institutions vary greatly in their involvement in gme some teaching institutions sponsor residency programs in many different specialities and employ many residents others sponsor or merely participate in residency programs employing only a handful of residents some teaching hospitals are closely affiliated with a university medical school whereas other teaching hospitals are more loosely affiliated with a medical school or may not be affiliated at all with a 1american medical association’s graduate medical education directory page commonly referred to as the green book medical school institutions that are closely associated with a university are commonly referred to as academic health centers under sec_3121 the student fica exception is available only with respect to services performed in the employ of a s c u or a related sec_509 organization sec_31_3121_b_10_-2 of the employment_tax regulations provides that the term s c u for purposes of the student fica exception is to be construed in its commonly or generally accepted sense a medical school clearly qualifies as a s c u however if a hospital where services are performed is the common_law employer but is not part of a medical school the question arises whether the hospital qualifies as a s c u or a related sec_509 organization with respect to a s c u the following discusses the existing guidance on whether an institution is a s c u within the meaning of sec_3121 of the code next this memo looks to code sections other than sec_3121 for assistance in determining the meaning of the term s c u for purposes of the student fica exception although these provisions do not deal with the employment_taxes directly we believe these definitions are instructive in determining the commonly or generally accepted meaning of the term s c u for purposes of the student fica exception specifically we believe that authorities interpreting the terms educational_organization or educational_institution under sec_151 sec_170 sec_117 sec_119 and sec_221 are helpful in defining the appropriate boundaries in interpreting the term s c u we believe authorities under these sections are instructive because they demonstrate the distinction between an institution that is a school versus an institution that merely engages in educational activities such as on the job training this memo next addresses whether a division or segment of a teaching hospital could qualify as a s c u finally this memo then discusses the legislative_history to the social_security amendments of which suggests that congress did not contemplate that institutions providing on the job training would be considered schools revproc_98_16 revproc_98_16 1998_5_irb_19 sets forth generally applicable standards for determining whether services performed by students in the employ of certain institutions of higher education qualify for the exception from fica tax provided under sec_3121 for purposes of revproc_98_16 the term institution_of_higher_education includes any public or private nonprofit school 2in our advice to you dated date we advised that a hospital that is part of the same legal entity as a university meets the s c u requirement that memo also provides a discussion on determining whether a hospital is a related sec_509 organization to a s c u college university or affiliated organization described in sec_509 of the code that meets the requirements set forth in department of education doe regulations pincite c f_r these regulations define an institution_of_higher_education in relevant part as an institution that is in a state admits only high school graduates is authorized by the state to provide a post-secondary educational program and is accredited or preaccredited by a nationally recognized accrediting agency as defined in the doe regulations pincite c f_r the revenue_procedure at dollar_figure provides that the standards contained in it do not apply to the treatment of postdoctoral students postdoctoral fellows medical residents or medical interns because services performed by these employees cannot be presumed to be for the purpose of pursuing a course of study thus whether a hospital is a s c u for medical residents or fellows must be considered in light of the commonly or generally accepted sense test set forth in the regulations while the tests under the doe regulations may be helpful in determining whether a hospital is a s c u for purposes of sec_3121 they are not the controlling standard in the case of a teaching hospital employing medical residents the dictionary is logical starting place to look in determining the meaning of the term school unfortunately it provides little help according to dictionaries the term school can cover a broad range of organizations webster’s defines the word school broadly as any place or means of learning or discipline as the school of experience but it also defines the term more narrowly as a faculty or institution for specialized higher education usually with a university as a medical school or law school similarly the random house college dictionary defines school as any place situation etc that instructs or indoctrinates but also defines the term as an institution or academic department for teaching in a particular field thus based upon dictionary definitions the term school could be construed so broadly as to encompass virtually any organization where educational activities are carried on for example any employer that provides on the job training or even continuing education for its employees might be considered a school under the term’s broadest dictionary definition indeed an employer that provides no training would qualify as webster’s school of experience however we believe that such a broad definition conflicts with the legislative_history to 3we note that the acgme is not a nationally recognized accrediting agency within the meaning of the regulations pincite cfr it is our understanding however that the acgme has not sought recognition by the doe as a nationally recognized accrediting agency 4webster’s new international dictionary 2d ed 5the random house college dictionary 1st ed sec_3121 with the standards of interpretation prescribed by the supreme court and with the commonly or generally accepted sense of the term s c u the role of statutory context the supreme court has stated that the first criterion in legislative interpretation is a natural reading of the full text 519_us_482 the meaning of a term in a statutory provision is determined by carefully considering the context in which the term is used 140_f3d_240 4th cir the statutory context in which the term s c u appears provides some assistance in narrowing the boundaries of the term s c u for purposes of the student fica exception sec_3121 of the code excepts from employment service performed in the employ of a school_college_or_university if such service is performed by a student who is enrolled and regularly attending classes at such school_college_or_university sec_31_3121_b_10_-2 of the regulations provides that an employee who performs services in the employ of a s c u as an incident to and for the purpose of pursuing a course of study has the status of student the language enrolled and regularly attending classes and pursuing a course of study suggest that something more formal than the school of experience or on the job training is required be a s c u for purposes of sec_3121 the primary purpose of an institution determines its character sec_170 of the code provides that the deduction provided in sec_170 shall be limited inter alia to charitable_contributions to an educational_organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on sec_1_170a-9 of the income_tax regulations provides that an organization is described in sec_170 if its primary function is the presentation of formal instruction and it normally maintains a regular faculty and curriculum and normally has a regularly 6in construing a statute courts generally seek the plain and literal meaning of its language 471_us_84 more specifically words in a revenue act generally are interpreted in their ‘ordinary everyday senses ’ 506_us_168 quoting malat v riddell 382_us_669 quoting 331_us_1 see also 311_us_112 c ommon understanding and experience are the touchstones for the interpretation of revenue laws enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on the term includes institutions such as primary secondary preparatory or high schools and colleges and universities it includes federal state and other public-supported schools which otherwise come within the definition it does not include organizations engaged in both educational and noneducational activities unless the latter are merely incidental to the educational activities a recognized university for example which incidentally operates a museum or sponsors concerts is an educational_organization within the meaning of sec_170 however the operation of a school by a museum does not necessarily qualify the museum as an educational_organization within the meaning of this subparagraph thus in order to qualify as an educational_organization under sec_170 it is not enough that the organization carries on educational activities instead the organization’s primary purpose must be to carry on educational activities thus for purposes of sec_170 of the code and regulations thereunder organizations are classified based upon their primary purpose we note that the regulations use the terms school college and university in describing an educational_organization we believe that the primary_purpose_standard reaches a result consistent with the commonly or generally accepted sense standard and with a natural reading of the full text for purposes of determining whether a teaching hospital is a s c u the primary purpose of a teaching hospital is patient care courts in several cases have considered whether a teaching hospital is an educational_organization under the standard described in sec_170 these cases have arisen in context of sec_151 dependency_exemptions and qualified scholarships both of these provisions incorporate the sec_170 standard in determining whether an institution is an educational_organization sec_151 sec_151 of the code dealing with deductions for dependency_exemptions defines educational_organization this section provides a dependency_exemption for a taxpayer’s child who is a full-time_student at an educational_organization described in sec_170 of the code or pursuing a full-time course of institutional on-farm training under the supervision of an accredited agent of an educational_organization described in sec_170 of the code or of a state or political_subdivision of a state sec_151 was amended in to specifically incorporate the sec_170 standard before this provision was in effect substantially the same sec_1_151-3 of the regulations promulgated before provides that an educational_institution is a school maintaining a regular faculty and established curriculum and having an organized body of students in attendance it includes primary and secondary schools colleges and universities normal schools technical schools mechanical schools and similar organizations but does not include noneducational institutions on the job training correspondence schools night schools and so forth this language is based upon the legislative_history to sec_151 which states an ‘educational institution’ is one which normally maintains a regular faculty and curriculum and normally has a regularly organized body of students in attendance at the place where its educational activities are carried on this excludes correspondence schools employee training courses and similar institutions and programs the term educational_institution means a school maintaining a regular faculty and established curriculum and having an organized body of students in attendance it means primary and secondary schools preparatory schools colleges universities normal schools technical and mechanical schools and the like but does not include noneducational institutions on the job training night schools and the like s rep no 83rd cong 2d sess pp emphasis added 7the definitions of educational_institution under sec_151 and sec_117 discussed infra before amendment and educational_organization under sec_170 are in substance nearly identical before amendment sec_151 provided for purposes of this paragraph the term ‘educational institution’ means only an educational_institution which normally maintains a regular faculty and curriculum and normally has an organized body of students in attendance at the place where its educational activities are carried on and sec_117 merely cross-referenced sec_151 similarly sec_170 defines educational_organization as an educational_organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on there is little legislative_history to the amendments to sec_151 and sec_117 because congress included these changes in the deadwood provisions of p l no a this suggests that congress did not view these changes as substantive changes the service views these changes as nonsubstantive see the discussion of revrul_81_79 c b infra under the heading can a division or segment of a hospital be a school the tax_court considered whether a teaching hospital is an educational_institution within the meaning of sec_151 in bayley v commissioner 35_tc_288 in bayley the issue was whether the petitioner’s son was a dependent under sec_151 petitioner’s son was a medical student at the university of tennessee during the first four months of and an intern at jackson memorial hospital hospital in miami florida from date through date since date the hospital had been a teaching hospital of the university of miami school of medicine the faculty of the medical school was responsible for training the interns the court noted that the interns were appointed and employed by the hospital the court found that there was no question that the son was a student at an educational_institution during the first four months of when he was a medical school student the question was thus narrowed to whether the son was a full time student at an educational_institution when he was an intern at the hospital the court concluded that the hospital was not an educational_institution and moreover the son was not a student at an educational_institution while working at the hospital the court emphasized the legislative_history to sec_151 which excludes employee training courses and on the job training from the definition of educational_institution the court held that the hospital’s status as a teaching hospital did not mean it was an educational_institution even though the faculty of the medical school became responsible for the ‘training’ of the residents there was no evidence of the effect this had on the duties or services incident to the son’s employment in addition the court found there to be no evidence that the hospital maintained a regular faculty and curriculum normally had a body of students in attendance or carried on educational activities for any such regularly organized body of students id pincite several revenue rulings applying the standards set forth under sec_151 and sec_170 have also concluded that teaching hospitals are not educational institutions revrul_68_604 1968_2_cb_63 considers whether a hospital that provides training programs for medical students interns and residents qualifies as an educational_institution for purposes of sec_151 the hospital at issue has a bed capacity of approximately big_number and is primarily concerned and charged with medical_care for the indigent of the county that it serves it operates both in-patient and out-patient facilities normally associated with a large hospital in a metropolitan area the hospital is actively engaged in graduate medical education for physicians and dentists through its fully accredited programs for internships and residencies and is one of the undergraduate teaching hospitals of an adjacent medical school the hospital has a full time director of medical 8university of miami-jackson memorial medical center is considered a teaching institution by the acgme education and a staff of physicians who spend a large portion of their time teaching interns and residents under the ruling’s facts interns and residents spend about and hours per week respectively in class discussion lectures and laboratories in addition to their supervised clinical training in wards and clinics third and fourth year medical students spend their full time in pursuit of their clinical clerkship and attend at least one class daily the clinical clerkships consist of training in development of patient history examination and diagnosis second year medical students devote three hours per week to instruction in physical diagnosis and one hour per week to instruction in gross pathology the ruling cites the legislative_history which provides that the term educational_institution means primary and secondary schools preparatory schools colleges and universities normal schools technical and mechanical schools and the like but does not include noneducational institutions correspondence schools on the job training night schools and the like s rep no p the ruling concludes that because the primary purpose of the hospital is to provide medical_care for the sick and injured it does not qualify as an educational_institution under sec_151 however the ruling states that a division or segment of a hospital could be an educational_institution if it normally maintains a regular faculty and curriculum and has an organized body of students who regularly attend classes provided the division or segment does not engage in on the job training revrul_77_175 1973_1_cb_630 considers whether a teaching hospital is an educational_institution for purposes of the united states-japan income_tax convention in general the convention exempts from federal_income_tax compensation that a resident of japan receives for teaching or research at an american educational_institution when the resident is temporarily present in the united_states at the invitation of the united_states government or of a university or other accredited educational_institution the convention provides that the term educational_institution will be interpreted to have the meaning given this term under sec_151 of the code under the ruling’s facts a japan resident is employed as a research fellow by a university hospital the university hospital has many administrative and functional ties to the university but is a separate corporation controlled by its own board_of trustees the hospital serves as one of the principal teaching hospitals for the university’s school of medicine most members of the hospital’s staff are members of the medical school faculty in addition some medical school classes are taught 9see the discussion infra under the heading can a division or segment of a hospital be a school at the hospital however the hospital does not maintain a regular faculty nor does it have a regularly organized body of students the ruling cites the regulations at sec_1_151-3 which provide that the term educational_institution does not include noneducational institutions on the job training correspondence schools night schools and so forth since the hospital is a separate legal entity the ruling holds that the hospital must qualify on its own as an educational_institution it cannot rely on the medical school’s status the service concluded that the hospital’s basic objective as a member of the medical center is to provide an integrated program of education research and health services for the primary purpose of providing better health care and thus is not an educational_institution finally the ruling holds that the result is the same after the amendment to sec_151 by the tax reform act of because the definition under sec_170 is very similar to the definition under the regulations at sec_1_151-3 in that both require a regular faculty and curriculum and a regularly enrolled body of students in attendance at the place where educational activities are regularly carried on revrul_74_484 1974_2_cb_342 performs a similar analysis in holding that a veterans administration hospital is not an educational_institution the service found that the hospital has as its primary function the care and service of patients admitted therein in addition although the hospital has substantial activity in the area of education and maintains an association with a state university and is responsible for the teaching of interns an residents in postgraduate training and medical students enrolled at the university it does not maintain a regular faculty or curriculum or have a regularly organized student body the service therefore concludes that the va hospital is not an educational_institution sec_117 authorities interpreting the sec_117 exclusion provision are also helpful in determining the meaning of the term school for purposes of the student fica exception sec_117 provides that g ross income does not include any amount received as a qualified_scholarship by an individual who is a candidate_for_a_degree at an educational_organization described in sec_170 before the tra of this section excluded qualified scholarships at an educational_institution as defined in sec_151 the regulations at sec_1_117-3 cross- reference the regulations under sec_151 the legislative_history to the tax_reform_act_of_1986 describes an educational_organization for purposes of sec_117 as follows an educational_institution is described in sec_170 if it normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on this definition encompasses primary and secondary schools colleges and universities and technical schools mechanical schools and similar institutions but not noneducational institutions on-the-job training correspondence schools night schools and so forth reg sec_1 b c h conf_rep no 99th cong 2d sess ii-15 thus congress did not consider an institution providing on the job training to be an educational_organization described under sec_170 several tax_court cases interpreting the exclusion provision under sec_117 have also concluded that teaching hospitals are not educational organizations in 51_tc_918 the tax_court considered whether stipends received by a resident at university hospital university of michigan constituted a fellowship_grant excludable under dollar_figure in order to determine whether university hospital was an educational_organization the court considered whether the hospital’s primary purpose was education or whether it was patient care the court noted that in approximately big_number patients were hospitalized at university hospital annually for big_number patient days in addition the court noted there were approximately permanent staff physicians at the hospital all of whom were faculty members at the university of michigan medical school and the hospital employed residents during that year the court noted the formal educational program carried on by the hospital the court concluded that the primary purpose of the university hospital was not teaching and research but instead was the care and treatment of its patients in so concluding the court noted the level of patient care activity at the hospital in addition the court found that a more important indicator that the taxpayer’s activities were not for the purpose of study but rather to fulfill the operational needs of the university hospital was the broad scope of the services he was required to perform the court noted that the resident handbook required many day to day activities serving the operational needs of the hospital not the educational pursuits of the taxpayer id pincite in response to the taxpayer’s argument that his principal objective was to obtain training in his profession the court stated v irtually all work as an apprentice whether in medicine or law carpentry or masonry provides valuable training nothing in sec_117 requires that an amount_paid as compensation_for services rendered be treated as a non-taxable fellowship_grant merely because the recipient is learning a trade business or profession whatever training petitioner received during the years of his residency - and we 10the university of michigan hospitals are considered teaching institutions by the acgme do not doubt that it was substantial - was merely incidental to and for the purpose of facilitating the raison d’etre of the hospital namely the care of its patients id pincite in bharmota v commissioner t c memo the tax_court considered whether compensation received by the taxpayer as a medical resident during the years and was excludable from gross_income under sec_117 during part of and the taxpayer was an intern at harper hospital in detroit michigan the taxpayer was thereafter appointed to the residency program in pathology sponsored by the wayne state university school of medicine and affiliated hospitalsdollar_figure the taxpayer rotated through four hospitals over the two year period the taxpayer spent about five hours per week in didactic instruction and conferences the court considered whether the hospitals were educational institutions the court referred to sec_151 which defined an educational_institution as being only an educational_institution which normally maintains a regular faculty and curriculum and normally has a regularly organized body of students in the place where educational activities are carried on the court held that none of the institutions were educational institutions the court found that evidenced showed that the hospitals were working hospitals whose primary purpose was to heal and care for the sick--not educate students the court noted that the taxpayer was not a degree_candidate the court distinguished the candidates for a masters degree in pathology offered by the medical school by noting that they were released from their regularly scheduled duties to attend classes the court held that although the taxpayer may have received five hours pers week in didactic instruction and conferences these conferences cannot render a hospital into something that it is not namely an educational_institution the tax_court also considered whether a teaching hospital was an educational_institution in hanson v commissioner t c memo at issue in hanson was whether compensation received by the taxpayer who was a medical resident during the years and was excludable from gross_income under sec_117 during the years and the taxpayer was a resident at the doctors hospital family practice residency program the program was an approved program by the american medical association the program was based at the doctors hospital in seattle washington and was affiliated with the university of washington school of medicine the residents in the program were 11harper hospital and wayne state university detroit medical center are considered teaching institutions by the acgme also assigned to several other hospitals or clinics including the university hospitaldollar_figure the court found that these hospitals were working hospitals whose primary purpose was to heal and care for the sick not to educate students the court concluded that none of the hospitals or clinics in which the taxpayer worked qualify as a educational_institution the tax_court in thakkar v commissioner t c memo moffit v commissioner and moore v commissioner t c memo found that the primary purpose of the teachings hospitals involved was the care and treatment of patients see also 608_f2d_368 9th cir the hospital did not have as its primary purpose the teaching of interns 321_f2d_721 10th cir t he tax_court expressly found that the adoption of the resident trainee program and the appointment of persons such as the taxpayer to the residencies was for the purpose of facilitating the care and treatment of patients in other words the instruction and training was primarily for the benefit of the va in operating the hospital dollar_figure in cases considering whether residents’ stipends are excludable under sec_117 the courts have nearly uniformly concluded that medical residents are compensated for the valuable services they provide to teaching hospitals see for example meek supra pincite 9th cir although the hospital evidently could continue to provide medical_care without the services of interns the interns did perform valuable services which if the interns were excused from performance would have to be performed by others hales v commissioner t c memo y oung physicians are continually seeking ‘scholarship’ exclusions for their salaries and press in case after case identical contentions upon this court - all to no avail o ne fact which has always been fatal to a taxpayer’s claim for ‘scholarship’ treatment - the providing of extensive valuable services which materially benefit the grantor - is once again present in the instant case the primary purpose of teaching hospitals is patient care thus sec_170 sec_151 and sec_117 each incorporate the same standard for determining what is an educational_institution the courts and the service in its rulings have consistently held that the primary purpose of a teaching hospital is patient care these authorities conclude that teaching hospitals do not normally maintain a 12the university of washington medical center is considered a teaching institution by the acgme 13the teaching hospitals involved in these cases were the allegheny general hospital pittsburgh pennsylvania jackson memorial hospital miami florida the university hospital in birmingham alabama part of the medical center of the university of alabama in birmingham and the va hospital in topeka kansas the acgme considers each of these institutions to be teaching institutions regular faculty and curriculum and normally do not have a regularly enrolled body of pupils the authorities consistently found gme programs to be akin to on the job training or apprenticeship programs in addition the authorities have concluded that an affiliation agreement with a medical school does not mean a teaching hospital has the status of a school rather the teaching hospital itself must qualify as a school moreover the fact that hospital staff have faculty appointments at a medical school does not mean the hospital is a school although the authorities cited are several years old respected writers on graduate medical education have suggested that in the era of managed care teaching hospitals in general have become less education-orienteddollar_figure support for this position is found in other quarters as well for example implicit in medicare’s reimbursement of gme costs is congress’ belief that gme enhances the quality of patient care in a teaching hospital the legislative_history to the social_security amendments of states that educational activities enhance the quality of patient care in an institution and therefore it is appropriate for medicare to reimburse the gme costs of teaching hospitals s rep no part i 85th cong 1st sess dollar_figure on a broader level the acgme states that its mission is to improve the quality of health in the united_states by ensuring and improving the quality of graduate medical education experience for physicians in training not only is the primary purpose of teaching hospitals medical_care not education there is also evidence that suggests that gme programs allow teaching hospitals to provide patient care at a lower cost than if residents’ services were performed by other health care professionals this fact at least suggests another incentive for gme other that the desire to train young doctors academics have estimated the substantial costs a teaching hospital would incur in replacing the services of medical residents a study concluded that the services of up to big_number additional health care professionals at a cost of dollar_figure to dollar_figure million annually would be required to replace the lost patient care services by medical residents in new 14see kenneth m ludmerer m d time to heal american medical education from the turn of the century to the era of managed care p as a result of the era of managed care a s the end of the century approached academic health centers were rapidly losing their academic qualities-even as many medical educators proudly congratulated themselves on their ‘proactive’ behavior in the changed marketplace 15under general medicare reimbursement principles costs incurred by a hospital must be related to patient care in order to be reimbursed by medicare see cfr sec_413 teaching hospitals receive approximately dollar_figure billion per year in reimbursement for the costs associated with graduate medical education including residents’ stipends green book at page york due to the reforms implemented in the wake of the libby zion incidentdollar_figure recently testimony was received by the district of columbia city council subcommittee on health and human services that the cost of replacing resident physicians at d c general hospital would be in excess of dollar_figure million annuallydollar_figure we believe these findings support our contention that the primary purpose of teaching hospitals is patient care and gme programs are a means by which teaching hospitals can more economically carry out that mission we note that teaching hospitals may dispute these findings abc news recently reported on a petition filed by the committee for interns and residents cir and the american medical student association amsa with the occupational safety and health administration osha requesting that certain regulations be implemented to improve the working conditions of medical residents in response to peter jenning’s question on what role money plays in residents’ long working hours doctor timothy johnson replied that’s probably the most complicated controversial question hospitals get paid about a dollar_figure a year by the federal government for each resident but they only pay residents in salary about dollar_figure a year it looks like they’re making a lot of money off cheap labor they say of course they have to spend a lot of money on staff to supervise and train these residents but if they were to replace residents with actual labor it would cost them a lot of moneydollar_figure thus whether the use of medical residents to fulfill the operational needs of a teaching hospital results in an economic net_loss to a teaching hospital is a disputed question 17these regulations set forth at sec_405 of the new york health code nycrr require that a hospital establish certain limits and monitor the working hours of medical residents to ensure that medical residents are not fatigued when performing patient care services for example the reforms limited residents work schedules to hours per week the additional patient care costs estimated in the study were in part due to those services necessary to make up for the patient care services that residents were providing during hours worked in excess of hours per week the study entitled a revolution in graduate medical education the implications of regulatory reform in new york state was conducted by kenneth e thorpe director program on health care financing harvard university school of public health date 18the report entitled d c general hospital should be renewed not closed or converted date was prepared by alan sager ph d professor of health services boston university school of public health 19reported on abc world news tonight date transcript available on lexis or from burrelle’s information services we believe the primary_purpose_standard that has been applied for purposes of sec_170 sec_151 and sec_117 is the appropriate standard to apply in determining whether an institution is a school within the commonly or generally accepted sense of that term thus there is a difference between an educational_institution a s c u and an institution that merely carries on certain educational activities consistent with the authorities discussed supra our position is that a teaching hospital’s primary purpose is patient care we believe that a teaching hospital’s gme program is generally incidental to and intended to further the hospital’s primary purpose namely patient care although teaching hospitals undoubtedly engage in substantial educational activities these activities do not change the nature of the institution we note however that this question is made somewhat more complex by sec_170 of the code this section provides that a deduction under sec_170 is limited to charitable_contributions to an organization the principal purpose or functions for which are the providing of medical or hospital care or medical education or medical_research regulations sec_1_170a-9 provides that an organization is described in sec_170 if i t is a hospital and its principal purpose or function is the providing of medical or hospital care or medical education or medical_research this section further provides an organization whose principal purpose or function is the providing of medical education or medical_research will not be considered a hospital within the meaning of this paragraph unless it is also actively engaged in providing medical_care or hospital care to patients on its premises or in its facilities as an integral part of its medical education or medical_research function the regulations provide that the existence of educational activities will not jeopardize an institution’s status as a hospital under sec_170 the regulations recognize that a significant activity of a teaching hospital might be gme but the existence of educational activities will not transform a hospital providing patient care into an educational_institution can a division or segment of a hospital be a school the issue arises whether s c u status is properly determined with reference to the character of the legal entity or whether the character of a segment or division of a legal entity may be examined to determine whether the employer has the status of a s c u sec_31_3121_d_-2 of the regulations provides that every person is an employer if he employs one or more employees sec_7701 provides that the term person means any individual trust estate association corporation sec_31_3121_b_10_-2 of the regulations provides that t he statutory tests are the character of the organization in the employ of which the services are performed as a s c u thus the character of the legal entity not the character of a division or segment of the employer determines the character of the employer for purposes of the student fica exception by contrast for certain other purposes the character of the taxpayer is determined at the functional level prior to the service had taken the position that for certain purposes whether an entity is an educational_institution may be determined at the functional level for example revrul_58_338 1958_2_cb_54 holds that an accredited school of nursing maintained by a hospital and approved and registered by a state board for registration is an educational_institution for purposes of sec_117 revrul_58_338 addressed whether room and board provided to student nurses at a hospital were excludable under sec_117 as scholarships similarly for purposes of the qualified_tuition_reduction exception under sec_117 an activity or function of a sec_501 organization may qualify as an educational_organization for purposes of sec_117 even though it is part of organization that is not a sec_170 organization for example a church school that is not separately organized may qualify as an educational_organization for purposes of sec_117 even though sec_117 incorporates the sec_170 standard the reasoning behind this position is that the amendment incorporating the sec_170 standard was not intended by congress to be a substantive change see revrul_81_79 1981_1_cb_605 the amendment did not affect the definition of the term ‘educational institution’ developed under sec_151 of the code thus a division or segment of an organization can be an educational_institution note however that the activity would have the primary purpose of education were the activity separately organized the excise_tax provisions under sec_4041 sec_4221 and sec_4253 also serve as an instructive contrast to the employment_tax provisions these provisions exempt from excise_taxes sales of certain goods and services to nonprofit educational organizations these sections define a nonprofit_educational_organization as an educational_organization described in sec_170 however the definition of nonprofit educational_institution for purposes of these sections is broadened to include a school operated as an activity of an organization described in sec_501 if such school normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where educational activities are regularly carried on thus congress recognized that the term educational_organization for purposes of sec_170 is based upon the character of the organization and deemed it necessary to look beyond the entity level to the functional level for purposes of these excise_tax provisions here too we note that the activity in question is one that would have the primary purpose of education were it a separate organization in contrast congress has not provided that a division or segment of an employer can constitute a s c u for purposes of sec_3121 the employment_tax regulations provide that whether an employer has the status of a s c u is determined by the character of the organization moreover the employment_tax provisions are generally applied on an employer-by-employer basis for example the service could not divide a legal entity into multiple divisions and apply a separate fica wage_base with respect to services performed by an employee for each segment conversely multiple legal entities generally cannot be combined for purposes of applying a single wage_base consistent with this position our date memo advises that a hospital that is part of the same legal entity as a university meets the s c u requirement finally even assuming for the sake of argument that a gme department of a teaching hospital could be considered a school the s c u requirement still may not be met residents are compensated for the patient care services they provide as numerous sec_117 cases have held see discussion supra thus even if a legal entity could be bifurcated for employment_tax purposes and the primary purpose of each separately examined the service could determine that residents are not employed by a gme program but rather are employed by the remaining division whose primary purpose is patient care congress has not expanded the definition of school for purposes of sec_3121 congress has chosen for purposes of certain code provisions to expand the definition of educational_institution to include teaching hospitals and other employers engaged in on the job training however it has not expanded the definition of s c u for purposes of the student fica exception for example sec_119 provides that qualified_campus_lodging is excluded from gross_income qualified_campus_lodging is lodging which is located on or in the proximity of a campus of the educational_institution the term educational_institution means an institution described in sec_170 of the code or an academic_health_center the former of course is a s c u and was so described by congress in the legislative_history to the in the legislative_history to the tax reform act of tra ‘86 dollar_figure the term academic_health_center however 20by way of background before enactment of sec_119 congress in the deficit_reduction_act_of_1984 defra ‘84 pub_l_no sec_531 established a moratorium on the issuance of treasury regulations relating to the income_tax treatment of qualified campus housing until date sec_531 of defra ‘84 provided that qualified campus housing means lodging which is located on or in close proximity to a campus of an educational_institution described in sec_170 of the code in sec_119 was enacted by the tax_reform_act_of_1986 tra of ‘86 pub_l_no a under the tra of ‘86 congress added sec_119 to exclude from gross means an entity which is described in sec_170 that receives during the calendar_year in which the taxable_year of the taxpayer begins payments under subsection d b or h of of the social_security act relating to graduate medical education and that has as one of its principal purposes or functions the providing and teaching of basic and clinical medical science and research with the entity’s own faculty the second half of the definition was added by the small_business job protection act of sbjpa ‘96 which enacted sec_119 to expand the definition of educational_institution beyond organizations described in sec_170 the conference_report provides the senate amendment treats as ‘educational institutions’ for purposes of sec_119 certain medical_research institutions ‘academic health centers’ that engage in basic and clinical research have a regular faculty and teach a curriculum in basic and clinical research to students in attendance at the institution h_r conf_rep no 104th cong 2d sess the joint_committee on taxation print provides the sbjpa treats as educational institutions for purposes of code sec_119 certain medical_research institutions referred to as academic health centers that have as one of their principal purposes or functions the providing and teaching of basic and clinical medical science and research with the entity’s own faculty regardless of the income the value of qualified_campus_lodging at an educational_institution consistent with the definition of educational_institution used for purposes of the moratorium sec_119 provided that the term ‘educational institution’ means an institution described in sec_170 the conference_report to tra ‘86 described the moratorium as covering lodging furnished by a school_college_or_university to any of its employees h_r conf_rep no 99th cong 2d sess ii-544 emphasis added the joint_committee on taxation print summarizing the conference agreement provides that for federal tax purposes the fair_market_value of the use of qualified_campus_lodging furnished by or on behalf of a school_college_or_university is to be treated as not greater than five percent of the appraised value joint_committee on taxation staff summary of conf agreement on h_r 99th cong 2d sess jcs-16-86 emphasis added thus congress used the term s c u to describe an educational_institution under sec_170 congress’ use of the term s c u in referring to a sec_170 educational_organization provides some evidence that it views the term s c u in its commonly or generally accepted sense as being described by the standards under sec_170 21medicare payments comprise two elements first under h of the social_security act medicare makes direct payments which are determined based upon the number of residents employed by the hospital see cfr sec_413 second under d b of the social_security act medicare makes indirect payments in the form of increases to the teaching hospital’s basic diagnostic related group drg operating payments see cfr sec_412 medicare reimbursement payments are made only to accredited graduate medical education programs recognized accrediting bodies include the accreditation council for graduate medical education and the american osteopathic association fact that the students formally matriculate at another educational_institution joint_committee on taxation staff general explanation of tax legislation enacted in the 104th congress 104th cong 2d sess jcs taken against the background that the qualified_campus_lodging rules already applied to sec_170 s c us this separate inclusion indicates that academic health centers are not s c us similarly congress broadly defined eligible education institution for purposes of sec_221 of the code which deals with the deductibility of interest on student loans to include certain teaching hospitals sec_221 provides that the term eligible_educational_institution is defined generally by reference to sec_25a of the code which in turn references sec_481 of the higher education act of u s c higher education institutions and certain vocational institutions this section goes on to provide except that such term shall also include an institution conducting an internship or residency program leading to a degree or certificate awarded by an institution_of_higher_education a hospital or a health_care_facility which offers postgraduate training thus for purposes of certain code sections congress has deemed it appropriate to define the terms educational_institution or educational_organization more broadly than under sec_170 to include certain teaching hospitals congress has not specifically broadened the definition of s c u under sec_3121 to include certain teaching hospitals expansion of the student fica exception to include on the job training is contrary to congress’ intent when it enacted sec_3121 in congress contemplated that the student fica exception would be limited in scope the house report provides in order to eliminate the nuisance of inconsequential tax_payments the bill excludes certain services performed for fraternal_benefit_societies and other nonprofit institutions exempt from income_tax and certain other groups while the earnings_of a substantial number of persons are excluded by this recommendation the total amount of earnings involved is undoubtedly very small the intent of this exclusion is to exclude those persons and those organizations in which the employment is part-time or intermittent and the total amount of earnings is only nominal and the payment of tax is inconsequential or a nuisance the benefit rights that are built up are also inconsequential many of those affected such as students and the secretaries of lodges will have other employment which will enable them to build up insurance benefits this amendment therefore should simplify the administration for the worker the employer and the government h_r rep no 76th cong 1st sess 1939_2_cb_538 the senate report uses similar language s rep no 76th cong 1st sess 1939_2_cb_565 expansion of the s c u language to include on the job training would have far greater effects than suggested by this legislative_history it would reach people earning meaningful wages for substantial periods thus lowering both benefits and coverage the social_security administration ssa has reported to the general accounting office gao that b ecause many residents are married and have children and work as residents for up to years an exemption from social_security coverage could have a very significant effect on their potential disability benefits or their family’s survivor benefits moreover ssa reports that if medical residents were determined to be students for purposes of the student fica exception big_number medical residents would lose some coverage over the next ten years and the trust fund would lose dollar_figure billion over the next ten yearsdollar_figure thus an expansive reading on the term s c u to include employers providing on the job training such as teaching hospitals would expand the student fica exception beyond what congress had intended finally interpreting the term school to include teaching hospitals would be contrary to the general_rule that exceptions to social_security coverage are narrowly construed in 327_us_358 the supreme court stated the very words ‘any service performed for his employer ’ with the purpose of the social_security act in mind import a breadth of coverage the ninth circuit has held that exceptions from employment under sec_3121 should be narrowly construed 774_f2d_936 given the purpose of the social_security act we do not believe that the term s c u should be interpreted more broadly for purposes of the student fica exception than the term educational_organization for purposes of sec_170 sec_151 and sec_117 in 503_us_318 the supreme court has cautioned that the common meaning of terms should not be expanded without some congressional direction see also 341_us_322 if congress intended terms to have other than their ordinary accepted meaning it would 22gao report b-284947 health education and human services division social_security coverage for medical residents date and should have given them special meaning by definition similarly in bayley supra pincite the tax_court considered whether the expansion of the term educational_organization to cover certain on-farm training should by analogy be extended to other types of on the job training such as medical resident training the court stated we believe that if congress had intended to extend the benefits of the statute to other types of on-the-job training it would have specifically so provided as congress has not chosen to expand the definition of s c u for purposes of sec_3121 beyond what that term means in its common sense it would be inappropriate for the service to do sodollar_figure conclusion instead we believe a natural reading of the full text suggests application of the primary_purpose_standard described in the regulations under sec_170 under this standard the primary purpose of a teaching hospital generally is patient care not education thus teaching hospitals that are not part of medical schools should not be treated as s c us for purposes of sec_3121 23indeed we believe there is compelling evidence that congress specifically intended to cover medical residents under social_security see the discussion of the social_security amendments of that was included as an appendix to our memorandum issued to you dated date


number release date internal_revenue_service 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-142016-05 date date -------------------------------------------------------------------------------- ----------------------------------------------------------------- ----------------------------------------------------- -------------------------------------------------- --------------------------------------------------------------------- legend h w trust ---------------------------------------------------------- trust ---------------------------------------------------------- trust ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------- date date grandchild grandchild grandchild year year year year dear ------------------------------------------ ------------------ -------------------------- ------------------------ -------------------- ------------------------------ ------- ------- ------- ------- plr-142016-05 this is in response to your letter dated date submitted on your behalf by your authorized representative and other correspondence regarding the gift_tax and generation-skipping_transfer gst tax consequences of certain transfers to trusts the facts and representations submitted are summarized as follows on date h and w established two separate irrevocable trusts trust and trust for the benefit of grandchild and grandchild respectively on date h and w established a third irrevocable_trust trust for the benefit of grandchild the terms of trusts are substantially identical but for the identity of the grandchild for whom the trust was established the primary beneficiary under the terms of each trust the trustee may distribute any part or all of the income and principal of the trust to or for the benefit of the primary beneficiary during the primary beneficiary’s lifetime if the primary beneficiary is not living then to the extent the trust corpus is not appointed by the primary beneficiary as discussed below the trustee may distribute any part or all of the income and corpus to the primary beneficiary’s descendants or if none then to the primary beneficiary’s siblings and their descendants or if none then to other beneficiaries who may include non-skip persons as defined in sec_2613 each trust provides that the trustee is to make distributions as the trustee shall deem to be in the best interest of the beneficiary or beneficiaries grantor does not intend that such distributions be limited to the amounts necessary for maintenance education and support with respect to trust sec_1 and if the primary beneficiary dies prior to reaching age the corpus is to be distributed pursuant to the primary beneficiary’s exercise of a testamentary general power to appoint the accumulated income and corpus of trust to certain person’s and entities including the primary beneficiary’s estate with respect to trust if the primary beneficiary dies prior to reaching age the primary beneficiary may with the consent of a trustee who is not an adverse_party by written instrument delivered to the trustee appoint the accumulated income and corpus of trust to the primary beneficiary’s estate a trustee who is not an adverse_party is defined in trust as a trustee who is a person not having a substantial interest in the trust estate which is adverse to the exercise of the power in favor of the primary beneficiary if there is no such trustee then acting trust provides a procedure for designating such trustee upon reaching age the primary beneficiary has the right to terminate their respective trust if the primary beneficiary exercises this right the trust assets will be distributed to the primary beneficiary in fee simple and free of trust if the primary beneficiary does not exercise this right within days after receiving notice the right to terminate will lapse if the primary beneficiary does not exercise the termination power then each trust continues after the primary beneficiary reaches age the trustee’s authority to plr-142016-05 make discretionary distributions to the primary beneficiary continues as described above upon the primary beneficiary’s death the trust corpus is to be distributed pursuant to the primary beneficiary’s exercise of a testamentary special power to appoint trust income and corpus to h and w’s descendants after the primary beneficiary reaches age any person may make a contribution to the trust and grant to any of h’s and w’s descendants the right to withdraw property from the trust equal to the lesser_of the greater of dollar_figure or of the aggregate value of the trust principal or the beneficiary’s proportionate share of the contribution based on the number of beneficiaries with withdrawal rights this right will lapse if it is not exercised within days after the beneficiary receives notice of the contribution the trustee is directed to segregate any part of the trust property to which gst_exemption was allocated the exempt portion any exempt portion shall be held by the trustee as a separate trust with the same terms conditions and name as the trust from which it was segregated provided that the exempt portion shall have a zero inclusion_ratio as defined in sec_2642 all trusts created under the trust agreement will terminate on the day preceding the expiration of years from the death of the last survivor of the following persons living on the date of trust is executed h and w h’s and w’s children and other descendants of h and w and all persons who are mentioned by name in the trust agreement and all of their descendants upon termination the assets of trust will be delivered and distributed in fee simple and free of trust to the income beneficiaries at the time of termination it is represented that h and w made transfers of cash to trust sec_1 and in years and to trust in years in each case the transfer made in a calendar_year to each trust did not exceed the gift_tax annual exclusion for that year under sec_2503 grandchild and are all currently under the age of the following rulings have been requested each of trusts satisfies the requirements of sec_2503 from the date of its inception through the date the primary beneficiary reaches age the contribution period accordingly all contributions to trust sec_1 and in years and to trust in years were excluded from h’s and w’s total gifts for federal gift_tax purposes further all future contributions to each of trusts during the contribution period will be excluded from h’s and w’s total gifts for federal gift_tax purposes except to the extent any contributions exceed the amount described in sec_2503 each of trusts is a skip_person with respect to h and w within the meaning of sec_2613 during the contribution period accordingly all contributions by h and w to trusts in years and to trust in years were direct skips within plr-142016-05 the meaning of sec_2612 and any further contributions by h and w to trusts during this period will be direct skips h’s and w’s unused gst_exemption was automatically allocated to contributions by h and w to trust sec_1 and in years and trust in years to the extent necessary to make the inclusion_ratio for such property zero in accordance with sec_2632 sec_2501 imposes a tax on the transfer of property by gift during each calendar_year by any individual sec_2511 provides that the gift_tax imposed by sec_2501 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 interests in property made to any person by the donor during the calendar_year the first dollar_figure adjusted for inflation as provided in sec_2503 of such gifts to such person shall not be included in the total_amount_of_gifts made during such year sec_2503 provides that in the case of gifts other than gifts of future sec_25_2503-3 of the gift_tax regulations provides that no part of the sec_2503 provides that no part of a gift to an individual who has not value of a gift of a future_interest may be excluded in determining the total_amount_of_gifts made during the calendar_period future_interest is a legal term and includes reversions remainders and other interests or estates whether vested or contingent and whether or not supported by a particular interest or estate which are limited to commence in use possession or enjoyment at some future date or time sec_25_2503-3 provides that an unrestricted right to the immediate use possession or enjoyment of property or the income from property such as a life_estate or term certain is a present_interest in property an exclusion is allowable with respect to a gift of such an interest attained the age of years on the date of the transfer shall be considered a gift of a future_interest in property for purposes of sec_2503 if the property and the income therefrom may be expended by or for the benefit of the donee before his attaining the age years and will to the extent not so expended pass to the donee on his attaining the age of years and in the event the donee dies before attaining the age of years be payable to the estate of the donee or as he may appoint under a general_power_of_appointment as defined in sec_2514 sec_2503 by reason of the mere fact that there is left to the discretion of a trustee the determination of the amounts if any of the income or property to be expended for the benefit of the minor and the purpose for which the expenditure is to be made provided there are no substantial restrictions under the terms of the trust instrument on sec_25_2503-4 provides in part that a transfer does not fail to satisfy plr-142016-05 the exercise of such discretion the donee upon reaching age has the right to extend the term of the trust or the governing instrument contains a disposition of the property or income not expended during the donee’s minority to persons other than the donee's estate in the event of the default of appointment by the donee revrul_74_43 1974_1_cb_285 holds that a gift in trust for the benefit of a minor beneficiary satisfies the requirements of sec_2503 where the trust provides that the beneficiary has upon reaching age either a continuing right to compel immediate distribution of the trust corpus by giving written notice to the trustee or to permit the trust to continue by its own terms or a right during a limited period to compel immediate distribution of the trust corpus to the beneficiary which if not exercised will permit the trust to continue by its own terms accordingly a transfer to the trust will constitute a gift of a present_interest qualifying for the annual exclusion under sec_2503 sec_2514 provides that the exercise or release of a general power of sec_2514 defines general_power_of_appointment as a power exercisable appointment created after date shall be deemed a transfer of property with respect to the individual possessing the power in favor of the individual possessing the power the individual’s estate or the creditors of either in general under sec_2514 a power exercisable by the possessor in conjunction with another person is a general_power_of_appointment if the person whose joinder is required does not have a substantial interest in the property subject_to the power which is adverse to the exercise of the power in favor of the decedent sec_2514 provides that the lapse of a power_of_appointment created after date during the life of the individual possessing the power shall be considered a release of such power however this rule applies with respect to the lapse of powers during any calendar_year only to the extent that the property which could have been appointed by exercise of such lapsed powers exceeded in value at the time of such lapse the greater of the following amounts a dollar_figure or b percent of the aggregate value at the time of such lapse of the assets out of which or the proceeds of which the exercise of the lapsed powers could have been satisfied sec_2601 imposes a tax on every generation-skipping_transfer gst a gst sec_2612 provides that the term direct_skip means a transfer subject is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip to a tax imposed by chapter or of an interest in property to a skip_person sec_2613 provides that the term skip_person means a natural_person assigned to a generation which i sec_2 or more generations below the generation assignment of the transferor or a_trust if all interests in such trust are held by skip persons plr-142016-05 under sec_2652 and sec_26_2612-1 of the generation-skipping_transfer_tax regulations a person has an interest in a_trust if a person has a present right to receive trust principal or income is a permissible current recipient of trust principal or income and is not described in sec_2055 or is described in sec_2055 and the trust is a charitable_remainder_annuity_trust or unitrust as defined in sec_664 or a pooled_income_fund as defined in sec_642 be the value of the property received by the transferee sec_2623 provides that the taxable_amount in the case of a direct_skip shall sec_2602 provides that the amount of the tax is the taxable_amount multiplied by the applicable_rate sec_2641 defines applicable_rate as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer under sec_2642 the inclusion_ratio with any property transferred in a generation-skipping_transfer is generally defined as the excess of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction in which the numerator is the amount of gst_exemption under sec_2631 allocated to the trust or to property transferred in a direct_skip and the denominator is the value of the property transferred to the trust or involved in the direct_skip sec_2654 provides that for purposes of gst tax the portions of a_trust attributable to transfers from different transferors shall be treated as separate trusts and substantially separate and independent shares of different beneficiaries in a_trust shall be treated as separate trusts sec_2631 as in effect for gst transfers before date provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under sec_2631 which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor for gst transfers after date the gst_exemption amount is equal to the applicable_exclusion_amount under sec_2010 sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_2632 provides that if any individual makes a direct_skip during his lifetime any unused portion of such individual's gst_exemption shall be allocated to the property transferred to the extent necessary to make the inclusion_ratio for such property zero if the amount of the direct_skip exceeds such unused portion the entire unused portion shall be allocated to the property transferred sec_2632 provides that for purposes of sec_2632 the unused portion of an individual's gst plr-142016-05 exemption is that portion of such exemption which has not previously been allocated by such individual or treated as allocated under sec_2632 or sec_2632 sec_2642 provides in part that if the allocation of the gst_exemption to any transfers of property is deemed to be made under sec_2632 or c the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 such allocation shall be effective on and after the date of such transfer in this case the terms of trusts provide that the trustee may make discretionary distributions of corpus and income to grandchild grandchild or grandchild respectively until the beneficiary reaches age if the grandchild dies before reaching age the corpus is to be distributed pursuant to the grandchild’s exercise of a general_power_of_appointment upon reaching age the respective grandchild has the right to terminate his or her trust and receive the accumulated income and corpus free of trust however if the grandchild does not terminate the trust then the trust continues for the benefit of the grandchild based upon the information submitted and the representations made we conclude as follows from the date of its inception through the date the primary beneficiary reaches age the contribution period each of trusts satisfies the requirements of sec_2503 accordingly h’s and w’s contributions to trust sec_1 and in years and to trust in years are excluded from the respective donor’s total gifts for federal gift_tax purposes further all of h’s and w’s future contributions to each of trusts during the contribution period will be excluded from the respective donor’s total gifts for federal gift_tax purposes except to the extent any contributions exceed the amount described in sec_2503 each of trusts is a skip_person with respect to h and w within the meaning of sec_2613 during the contribution period accordingly all contributions by h and w to trust sec_1 and in years and to trust in years were direct skips within the meaning of sec_2612 and any further contributions by h and w to trusts during this period will be direct skips in accordance with sec_2632 h’s and w’s unused gst_exemption was automatically allocated to contributions by h and w to trust sec_1 and in years and trust in years to the extent necessary to make the inclusion_ratio for such property zero except as specifically ruled herein we express or imply no opinion on the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter under the cited provisions or under any other provisions of the code no opinion is expressed or implied concerning the application of sec_2642 to trusts plr-142016-05 the rulings contained in this letter are based upon information and representations submitted by the taxpayers 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 this ruling is directed only to the taxpayer s 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 sincerely george l masnik branch chief branch passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter


internal_revenue_service department of the treasury index number and ruling release date washington dc person to contact telephone number refer reply to cc dom p si 7-plr-118513-97 date oct legend a b c d corporation partnership state date date x cc dom p si 7-plr-118513-97 we received a request for rulings and subsequent correspondence submitted on your behalf by your authorized representative this letter is in reply to your requests facts a and b are married they have two children c and d a is an employee and the majority shareholder of corporation a plans to retire soon c and d are actively involved in the management of corporation c and d also own stock in corporation c and d acquired their stock in corporation by gift from a corporation currently owns a life_insurance_contract on a’s life the contract is an adjustable whole_life_insurance contract issued by a domestic commercial insurance carrier corporation has designated itself as the beneficiary of the policy corporation no longer needs this contract and wishes to sell it to c and d c and d believe that the purchase of the life_insurance_contract would be a good investment a and b are also general partners and limited partners in partnership partnership was organized on date under the uniform_limited_partnership_act of state partnership’s purpose is to engage in investment activities under partnership_agreement profits and losses allocable to the limited partners and distributions of distributable cash must be allocated and distributed to the limited partners in proportion to their capital contributions distributable cash consists of all cash revenues of partnership less amounts spent by partnership during the period and working_capital or reserves or other_amounts the general partners reasonably deem necessary or appropriate for the proper operation of partnership business or its winding up and liquidation_partnership currently has investment_assets of approximately dollar_figurex in value partnership will dissolve no later than date partnership has not elected to be treated as an association_taxable_as_a_corporation under sec_301_7701-3 of the income_tax regulations a proposes to give portions of his limited_partnership_interest in partnership to c and d in the current_year it is represented that the value of the limited_partnership_interest in partnership that a proposes to give to each child will be approximately dollar_figure and that the gifts will occur before c and d acquire the life_insurance_contract from corporation further it is represented that a plans to continue gifting limited_partnership interests in partnership to c and d over the next two to three years and that if the value of the limited_partnership interests in partnership given to each child cc dom p si 7-plr-118513-97 exceeds the annual exclusion allowable under sec_2503 b has agreed to consent to split gift treatment under sec_2513 a also intends to continue gifting corporation stock to c and d under the current gifting pattern a proposes to dispose_of his controlling_interest in corporation before the life_insurance_policy transaction described below is executed neither c nor d however will hold a majority interest in corporation after the gifts have been made subsequent to the initial gifts of partnership interests to each of c and d c and d propose to purchase the life_insurance_contract for the greater of its interpolated_terminal_reserve_value or its cash_value the closing of the sale will be accomplished by the corporation executing a bill of sale evidencing the sale of the life_insurance_contract to c and d c and d will then execute a demand note in favor of corporation in the amount of the purchase_price of the life_insurance_contract interest on the demand note will accrue on the unpaid balance at the applicable_federal_rate under sec_7520 simultaneous with the closing c and d will obtain a loan from the commercial insurance carrier that issued the life_insurance_contract the amount of the loan will be approximately in the amount of the cash_value of the life_insurance_contract c and d will use the loan proceeds to pay off corporation’s demand note if sufficient cash is available if the loan is less than the sales_price of the life_insurance_contract an amount will remain to be paid on the demand note corporation will have no security_interest in the life_insurance_contract after closing the death_benefit under the life_insurance_contract will be reduced by any unpaid loan amount after the sale c and d will hold jointly all incidents_of_ownership in the life_insurance_contract for example only c and d will be able to obtain policy_loans assign or surrender the contract designate beneficiaries and exercise all other rights with respect to the contract immediately after the sale c and d will designate themselves beneficiaries of the contract they will pay all premiums due on the contract upon receipt of the proceeds at a's death c and d will share equally in the death_proceeds for purposes of the ruling under sec_101 it is represented that partnership is a valid partnership under subchapter_k further it also is represented that following the gifts of the limited_partnership interests to c and d c and d will be partners of a under subchapter_k rulings requested cc dom p si 7-plr-118513-97 the proposed transfer of the life_insurance_contract from corporation to c and d will be a transfer to a partner of the insured within the meaning of sec_101 and will not be subject_to the transfer for value rules of sec_101 the proposed transfer of limited_partnership interests in partnership from a and b to c and d will be eligible for the annual dollar_figure exclusion from gift_tax under sec_2503 sec_2035 will not apply to include the proceeds of the life_insurance policies in a’s gross_estate law and analysis issue 1-exception to the transfer_for_value_rule sec_101 provides that except as otherwise provided in sec_101 sec_101 and sec_101 gross_income does not include amounts received under a life_insurance_contract if such amounts are paid_by reason of the death of the insured sec_101 provides that if a life_insurance_contract or any interests therein is transferred for a valuable consideration the exclusion_from_gross_income provided by sec_101 is limited to an amount equal to the sum of the actual value or the consideration and the premiums and other_amounts subsequently paid_by the transferee an exception to the general_rule of sec_101 is provided in sec_101 when the life_insurance_contract is transferred to the insured to a partner of the insured or to a partnership in which the insured is a partner or to a corporation in which the insured is a shareholder or officer in these cases amounts received by the contract beneficiaries are completely excluded from gross_income as provided by sec_101 the term transfer for valuable consideration is defined for purposes of sec_101 in sec_1_101-1 as any absolute transfer for value of the right to receive all or a part of the proceeds of a life_insurance_policy issue 2-gift of present_interest in property sec_2501 provides for the imposition of a tax on the transfer of property by gift sec_2511 provides that the gift_tax applies to a transfer by way of gift 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_2503 provides that in the case of gifts other than gifts of future interests in property made to any person by the donor during the calendar_year the cc dom p si 7-plr-118513-97 first dollar_figure of such gifts to such person shall not be included in the total_amount_of_gifts made during such year the annual exclusion is only allowed for gifts of present interests in property under sec_2503 this dollar_figure amount is subject_to adjustment annually to reflect the increase in the cost of living index sec_25_2503-3 of the gift_tax regulations provides that a present_interest in property is an unrestricted right to the immediate use possession or enjoyment of the property or the income from the property such as a life_estate or a term certain thus to be eligible for the annual exclusion from gift_tax under sec_2503 the proposed transfers by a and b of limited_partnership interests in partnership to c and d must constitute gifts of present interests in property in this case the management powers possessed by a and b as the general partners authorize a and b in determining partnership_distributions to withhold only amounts that the general partners reasonably deem necessary or appropriate for the proper operation of partnership business or its winding up and liquidation the general partners must exercise such powers in a fiduciary capacity and are held to a high standard of conduct toward the limited partners see generally in re usacafes l p litigation a 2d del ch and a b willis j s pennell p g postlewaite partnership_taxation 4th ed sec_1 issue 3-gift within 3-years of death under sec_2035 as amended by the taxpayer_relief_act_of_1997 if the decedent made a transfer by trust or otherwise of an interest in property or relinquished a power with respect to property during the 3-year period ending on the date of decedent's death and the value of such property or an interest therein would have been included in the decedent's gross_estate under sec_2036 sec_2037 sec_2038 or sec_2042 if such transferred interest or relinquished power had been retained by the decedent on the date of death then the value of the gross_estate shall include the value of any property which would have been so included other transfers made within three years of death are not includible in the gross_estate further transfers that are bona_fide sales for adequate_and_full_consideration in money or money’s worth made within three years of death are not includible in the gross_estate sec_2042 provides that the value of the gross_estate includes the value of the amount receivable as insurance under policies on the life of the decedent by beneficiaries other than the executor with respect to which decedent possessed at the date of death any of the incidents_of_ownership in the policies exercisable alone or in conjunction with any other person sec_20_2042-1 provides that proceeds of life_insurance that are not includible in the gross_estate under sec_2042 may depending upon the facts of a particular case be includible under some other section of the estate_tax provisions of the code for example if the decedent possessed incidents_of_ownership in an cc dom p si 7-plr-118513-97 insurance_policy on decedent’s own life and gratuitously transferred all rights in the policy within years of death the proceeds would be includible under sec_2035 sec_20_2042-1 provides that if a decedent is the controlling stockholder in a corporation that holds a life_insurance_policy on the decedent’s life and the proceeds of the policy are payable to a third party for nonbusiness purposes the incidents_of_ownership held by the corporation will be attributed to the decedent through the decedent’s stock ownership and the proceeds will be included in the decedent’s gross_estate under sec_2042 for this purpose a controlling stockholder is one who owns at death stock possessing more than fifty percent of the total combined voting power of a corporation includibility of life_insurance_proceeds under sec_2042 depends on the decedent’s possession of incidents_of_ownership in the policy at death includibility of life_insurance_proceeds under sec_2035 however is based on a different rule sec_2035 will apply if the decedent possessed an incident_of_ownership in the life_insurance_policy at some time during the three-year period prior to death and transferred such incident_of_ownership during the same period thus the relevant frame of reference for purposes of sec_2035 is not merely the time of death but the three- year period preceding death if during the three-year period preceding death the decedent possessed incidents_of_ownership either directly or through an ownership_interest in a corporation and the decedent subsequently relinquished the incidents_of_ownership by assignment of the policy or by the transfer of a sufficient amount of stock to cause divestment of control of the corporation the application of sec_2035 will be triggered see revrul_90_21 1990_1_cb_172 conclusions based upon the information submitted and the representations set forth above we rule as follows the transfer of the life_insurance_contract on the life of a by corporation to c and d will be a transfer to a partner of the insured under sec_101 and therefore excepted from the transfer for valuable consideration rule_of sec_101 provided that a the contract qualifies as a life_insurance_contract under sec_7702 b partnership is a partnership for purposes of subchapter_k and c c and d are considered partners under subchapter_k the proposed transfers by a and b of the limited_partnership interests in partnership to c and d will be eligible for the annual exclusion from gift_tax under sec_2503 provided that cc dom p si 7-plr-118513-97 a a b c and d act in a manner consistent with their representations that they are partners in partnership and b c and d have rights as limited partners in partnership that are consistent with the rights of limited partners contained in the agreement establishing partnership including the right to distributions of cash and property the right to sell or assign their interests in partnership subject_to the right_of_first_refusal voting rights and rights on termination of partnership sec_2035 will not apply to the transfer of the insurance policies to c and d provided that a a transfers controlling interests in corporation more than three years before a’s death or b the transfer of the life_insurance_policy to c and d constitutes a bona_fide sale for adequate_and_full_consideration in money or money’s worth the rulings contained in this letter are based on information and representations submitted by the taxpayers and accompanied by a 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 we express or imply no opinion as to the tax treatment of the subject transaction under any section of the code or regulations that is not specifically covered by this ruling or as to the tax treatment of any conditions existing at the time of or effects resulting from the transaction specifically we express no opinion as to whether the contract that is proposed to be transferred qualifies as a life_insurance_contract under sec_7702 we express no opinion as to whether a and or b must recognize gain_or_loss on the transfer of limited_partnership interests to c and d further we express no opinion as to whether the corporation will experience a taxable gain upon the sale of the contract finally no opinion has been requested and no opinion is given as to whether c and d may deduct any interest_paid or accrued on the loans this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely joseph h makurath cc dom p si 7-plr-118513-97 senior technician reviewer branch assistant chief_counsel p si


department of the treasury internal_revenue_service washington d c contact person danny smith identification_number telephone number by employer_identification_number dear sir or madam this is in reference to your letter of date requesting a ruling that your grants to individuals are not taxable_expenditures within the meaning of sec_4945 of the internal_revenue_code you are exempt under sec_501 of the code and have been classified as a private_foundation within the meaning of sec_509 your stated purpose is to assist research in the field of chemistry that will produce new and useful discoveries and inventions all of which shall be made available to mankind in furtherance of your purpose you propose to make an annual award when warranted to a young scientist in recognition of his or her past research endeavors in the field of chemistry the award will be entitled b under your guidelines any c college or university may nominate one candidate for the award for any given year nominations must normally be submitted in the form of a letter from the institution where the nominated individual is a faculty_member and should include i a brief statement of the basis for the nomination including copies of the nominee's most important research publications and ii three supporting letters from individuals in the nominee’s field at least two of which come from persons at institutions other than the nominating institution to be eligible for the award a candidate i must be years of age or younger on december 31o0f the year in which nominated and ii should have spent the most recent five years doing chemical research in c your directors officers and members of your scientific advisory board are not eligible to receive the award and no individual may nominate herself or himself for the award your guidelines provide that your scientific advisory board will review all nominations that are received by you prior to the established deadline for a specific award year and that meet the nomination conditions described above the scientific advisory board will then consider all nominations based on their merit and will recommend to your board_of directors not more than three nominees the board_of directors will make the finat decision all recommendations and selections will be based on objective and nondiscriminatory criteria that are reasonably related to the purposes of the award the current monetary amount of the award is x but this amount may be increased or decreased from time to time by action of your board_of directors you have represented that the award is not intended to finance any further activities of the recipient nor is the recipient required to render any future services as a condition of receiving the award sec_4945 of the code provides for the imposition of taxes on each taxable_expenditure of a private_foundation sec_4945 of the code provides that the term taxable_expenditure includes any amount_paid or incurred by a private_foundation as a grant to an individual for travel study or similar purposes by such individual unless such grant satisfies the advance approval requirements of sec_4945 revrul_77_380 1977_2_cb_419 holds that grants made by a private_foundation primarily in recognition of past achievement with the funds being unrestricted and not earmarked for subsequent travel or study are not taxable_expenditures within the meaning of sec_4945 your awards are for past achievement and are not intended to finance any future activity of the recipient as was the case in revrul_77_380 there are no conditions or requirements to meet subsequent to receiving an award thus the awards are not grants to individuals for travel study or similar purposes within the meaning of sec_4945 advance approval under sec_4945 is not required based on the above we rule that your grants are not taxable_expenditures within the meaning of sec_4945 of the code we are informing the chio te_ge office of this action please keep a copy of this ruling with your organization’s permanent records this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as precedent s if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this jetter sincerely erectol v dock gerald v sack manager exempt_organizations technical group