internal_revenue_service number release date index number -------------------------------- ---------------------------------- ---------------------------------------------------- ----------------------------------------------- ------------------------------------ in re -------------------------------- ---------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------ telephone number -------------------- refer reply to cc psi b04 plr-134576-05 date february legend father mother decedent wife daughter daughter trust date date date date date state state statute dear ------------ -------------------------- ------------------ ------------------------- ----------------------- ---------------------- ---------------------------- ------------------------------------------------------- -------------------------- ---------------- ------------------------- -------------------------- --------------------- -------- ---------------------------------------------- this is in response to your date letter and other correspondence requesting a ruling concerning the income and generation-skipping_transfer gst tax consequences of the proposed division of a_trust you have requested the following rulings after the proposed modification to trust the successor trusts will be exempt from gst tax under chapter of the internal_revenue_code plr-134576-05 the division of trust does not constitute a sale or other taxable disposition under sec_1001 the proposed division of trust will not result in a transfer by any of the beneficiaries that is subject_to gift_tax under sec_2501 the facts submitted are as follows father died on date mother died on date article iii section b provides that the corporate trustee of trust is to have the article iii section a of father’s will provides that the residue and remainder of father’s property is to be divided into three equal shares for father’s three children one of those shares is to be placed in a separate trust trust designated for the benefit of decedent who is the son of father and mother power to accumulate any part or all of the net_income of trust or to expend the income or any part or all of the principal for the reasonable care support maintenance education enjoyment advancement in life or comfort of mother decedent decedent’s spouse wife issue of decedent and spouses of the issue of decedent who are living during the term of trust article iii section d provides in part that trust is to terminate on the death of the last of father mother and issue of father who was living at the time of father’s death upon termination all the principal and undistributed_income of trust is to be distributed to decedent if living and if not the issue of decedent as shall be living at the time of termination per stirpes power_of_appointment over trust the power_of_appointment was not exercised daughter is married and has descendants daughter and her husband have a son and daughter each of whom is married and have a total of four grandchildren daughter has a son and daughter neither of whom is married daughter sec_1 and their spouses their children their children’s spouses and their grandchildren are all current beneficiaries of trust trustee daughter sec_1 and as individual trustees have a power over investment of the trust’s assets thus the individual trustees have the power to retain real or personal_property of the trust estate to sell or dispose_of property from the trust estate to invest and reinvest the trust estate in any property real personal or mixed to make decedent died on date wife is still living and is a current beneficiary of trust trust has both individual trustees currently daughter sec_1 and and a corporate under article iii section e decedent was granted a testamentary nongeneral decedent and wife had two daughters daughter and daughter each the corporate trustee in its absolute discretion may make distributions out of plr-134576-05 loans out of the trust estate and to borrow money by pledging mortgaging or providing liens of any property of the trust estate either income or principal to the descendants of decedent and wife and the descendants’ spouses for their reasonable care support maintenance education enjoyment advancement in life or comfort the distributions need not be made equally the corporate trustee is authorized to pay the entire estate to one person if it deems such payment advisable at termination the trust assets will be distributed to decedent’s issue by right of representation the trustees represent that because the current beneficiaries have different investment goals and distribution needs it is difficult to invest the trust estate and administer trust in the best interests of all the beneficiaries accordingly daughter sec_1 and propose to petition the state probate_court to divide trust pro_rata into two successor trusts one successor trust will be for the benefit of daughter her husband her descendants and descendants’ spouses the other successor trust will be for the benefit of daughter her husband her descendants and descendants’ spouses in all other particulars the provisions of the successor trusts will be identical to those of trust wife will remain a beneficiary of both successor trusts during her lifetime the trustees represent that they propose to partition and divide trust pro_rata additionally the trustees have submitted a proposed petition for division to be filed by daughter sec_1 and and the corporate trustee in the state probate_court in the petition daughter sec_1 and and the corporate trustee ask that trust’s assets be divided equally between the successor trusts however daughter sec_1 and and the corporate trustee also request that they be given discretion to allocate to the successor trusts in_kind certain different assets of equal value to each trust if those assets cannot be absolutely divided in equal parts such as odd numbered shares of stock or bonds law and analysis ruling sec_2601 imposes a tax on every generation-skipping_transfer the term ageneration-skipping transfer is defined in sec_2611 as a taxable_distribution a taxable_termination or a direct_skip under section a of the tax_reform_act_of_1986 act and sec_26_2601-1 of the generation-skipping_transfer gst tax regulations the gst tax is generally applicable to generation-skipping transfers made after date however under section b a of the act and sec_26_2601-1 the gst tax does not apply to a transfer under a_trust that was irrevocable on september sec_26_2601-1 provides rules for determining when a modification sec_26_2601-1 provides that a modification will not cause an plr-134576-05 but only to the extent that such transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under sec_26_2601-1 will not cause the trust to lose its exempt status exempt trust to be subject_to the gst tax if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a generation-skipping_transfer or the creation of a new generation-skipping_transfer a modification that is administrative in nature that only indirectly increases the amount transferred will not be considered to shift a beneficial_interest in the trust sec_26_2601-1 example illustrates a situation where a_trust that is otherwise exempt from the gst tax is divided into two trusts under the facts presented the division of a_trust into two trusts does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the division and the division does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust accordingly the two partitioned trusts will not be subject_to the provisions of chapter in this case the proposed division of trust into successor trusts will not result in a shift of any beneficial_interest in trust to any beneficiary who occupies a generation lower than the persons holding the beneficial interests further the proposed division of trust into successor trusts will not extend the time for vesting of any beneficial_interest in the new trusts beyond the period provided for in trust accordingly based on the facts submitted and representations made we conclude that the successor trusts created upon the division of trust will be exempt from gst tax ruling sec_61 provides that gross_income includes gains derived from dealings in property and under sec_61 from an interest in a_trust property shall be the excess of the amount_realized therefrom over the adjusted_basis sec_1001 provides that the gain from the sale_or_other_disposition of an exchange of property results in the realization of gain_or_loss under section sec_1001 states that the amount_realized from the sale_or_other_disposition plr-134576-05 provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized of property shall be the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained if the properties exchanged are materially different 499_us_554 there is a material difference when the exchanged properties embody legal entitlements different in_kind or extent or if they confer different rights and powers u s pincite a partition of jointly owned property is not a sale_or_other_disposition of property if the co-owners of the joint property sever their joint_interests but do not acquire a new or additional interest as a result of the transaction thus neither gain nor loss is realized on a partition see revrul_56_437 1956_2_cb_507 common_stock by mutual agreement the two beneficiaries requested the trustee to distribute all the notes to one beneficiary and all the common_stock to the other however neither the trust instrument nor local law gave the trustee the power to make a non-pro rata distribution_of_property in_kind because the trustee did not have authority to allocate the property in a non-pro rata manner the beneficiaries were treated as having an absolute right to a ratable in_kind distribution revrul_69_486 therefore treated the beneficiaries as receiving the notes and common_stock pro_rata followed by an exchange between the beneficiaries in which one received all the notes and the other all the common_stock because in substance a deemed exchange occurred between the beneficiaries revrul_69_486 held that the beneficiaries recognized gain under sec_1001 and sec_1002 in this case the trust instruments do not appear to give the trustees the power to make a non-pro rata distribution of assets upon partition of the trusts however under state statute effective date a trustee has the power to allocate particular assets in proportionate or disproportionate shares when distributing trust property or dividing or terminating a_trust revrul_69_486 1969_2_cb_159 involved a_trust consisting of both notes and accordingly if the petition to partition is filed in state court and the trusts are where the division of the trusts to occur after the effective date of state statute plr-134576-05 the situation here would become distinguishable from revrul_69_486 in that circumstance the beneficiaries of the trust would not be required to receive pro_rata distributions for each asset and the trustees would have the authority to make non-pro rata distributions based on fair_market_value divided into successor trusts after date the division into the successor trusts will not constitute a sale_or_other_disposition and will not result in any gain_or_loss being realized under sec_1001 ruling sec_2501 imposes a tax on the transfer of property by gift by any individual resident or nonresident sec_2511 provides that the 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 the date of the gift shall be considered the amount_of_the_gift sec_2512 provides that where property is transferred for less than an adequate_consideration in money or money’s worth then the amount by which the value of the property exceeded the value of the consideration is deemed a gift will be identical to those of trust except that each of the successor trusts will be established for the benefit of a single daughter of decedent accordingly based on the facts submitted and representations made we conclude that the proposed division of trust will not result in a transfer by any of the beneficiaries that is subject_to gift_tax under sec_2501 in this case the dispositive provisions that are proposed for the successor trusts sec_2512 provides that if a gift is made in property the value thereof at in accordance with the power_of_attorney on file with this office copies of this letter are being sent to your authorized representatives except as expressly provided herein no opinion is expressed or implied the rulings contained in this letter are based upon information and concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination plr-134576-05 provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer s requesting it sec_6110 sincerely yours _________________________ lorraine e gardner senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosure copy of letter for sec_6110 purposes


t c summary opinion united_states tax_court robert p duplicki petitioner v commissioner of internal revenue respondent docket no 16533-10s l filed date robert p duplicki pro_se john m janusz for respondent summary opinion wells judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed 1unless otherwise indicated section references are to the internal_revenue_code_of_1986 as amended and rule references are to the tax_court rules of continued pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case we must decide whether respondent’s appeals_office properly upheld respondent’s notice_of_federal_tax_lien nftl with respect to petitioner’s tax_year background some of the facts and certain exhibits have been stipulated the parties’ stipulated facts are incorporated in this opinion by reference and are found accordingly at the time of filing the petition petitioner resided in new york in date petitioner moved from curley drive in orchard park new york curley drive residence to a new residence on wanda avenue in cheektowaga new york wanda avenue residence after moving to the wanda avenue residence petitioner applied for and obtained a post office box in buffalo new york buffalo p o box on date sometime in late june or early july after petitioner obtained the buffalo p o box respondent updated his internal records to reflect the change in petitioner’s address from the curley drive residence to the buffalo p o box petitioner had not informed respondent about continued practice and procedure the buffalo p o box and the parties do not dispute that neither party recalls how respondent obtained knowledge of the buffalo p o box petitioner held the buffalo p o box until date when petitioner surrendered the buffalo p o box he notified the u s postal service usps in buffalo new york buffalo post office to forward to the wanda avenue residence any mail addressed to the buffalo p o box until date on date petitioner received from respondent a proposed individual income_tax assessment 30-day_letter stating that respondent had not received a form_1040 u s individual_income_tax_return for the tax_year respondent addressed the 30-day_letter to the buffalo p o box but the buffalo post office forwarded the mail to the wanda avenue residence the envelope that contained the 30-day_letter included a usps mail forwarding label upon receipt of the 30-day_letter petitioner did not inform respondent of his then- current address on date after assessing the tax due respondent sent petitioner notices of balance due to the buffalo p o box on the following dates march april may and date date and date 2the instant case involves the tax_year only but petitioner has not filed a form_1040 for any_tax year since petitioner resided at the curley drive residence when he filed the form_1040 for his tax_year on date respondent filed the nftl and sent to petitioner letter notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 at the wanda avenue residence petitioner timely submitted a form request for a collection_due_process or equivalent_hearing on date the hearing was held on date at which time petitioner spoke via telephone with kenneth heidle a settlement officer in respondent’s appeals_office and claimed that he never received proper notice_and_demand because they all were sent to the buffalo p o box mr heidle updated respondent’s records to list petitioner’s address as the wanda avenue residence after the hearing mr heidle reviewed respondent’s records of petitioner’s address and determined that notice_and_demand was sent to the buffalo p o box on multiple occasions on date respondent’s appeals_office issued to petitioner a notice_of_determination concerning collection action under sec_6320 and or upholding the nftl as properly filed discussion if a taxpayer requests a hearing in response to a notice_of_federal_tax_lien pursuant to sec_6320 a hearing shall be held before an impartial officer_or_employee of the appeals_office sec_6320 at the hearing the taxpayer may raise any relevant issue including appropriate spousal defenses challenges to the appropriateness of the collection action and collection alternatives sec_6320 sec_6330 a taxpayer is precluded from contesting the existence or amount of the underlying tax_liability unless the taxpayer did not receive a notice_of_deficiency for the liability in question or did not otherwise have an earlier opportunity to dispute the liability sec_6330 see also 114_tc_604 the phrase underlying tax_liability includes the tax_deficiency additions to tax and statutory interest 138_tc_295 115_tc_329 following a hearing the appeals_office must determine whether to sustain the filing of the lien in making that determination the appeals_office is required to take into consideration the verification presented by the commissioner during the hearing process that the requirements of applicable law and administrative procedure have been met the relevant issues raised by the taxpayer and whether the proposed lien or levy action appropriately balances the need for efficient collection_of_taxes with the taxpayer’s concerns regarding the intrusiveness of the proposed collection action sec_6330 - pursuant to sec_6330 this court has jurisdiction to review the determination made by the appeals_office in connection with the sec_6320 hearing sec_6320 as mentioned above the appeals_office is required by statute to obtain verification from the secretary that the requirements of any applicable law or administrative procedure have been met sec_6330 one requirement of applicable law is the provision contained in sec_6303 that the commissioner must within days after making an assessment of tax under sec_6203 give notice to each person liable for the assessed tax stating the amount due and demanding payment thereof however ‘ t he form on which a notice of assessment and demand for payment is made is irrelevant as long as it provides the taxpayer with all of the information required under sec_6303 ’ 137_tc_209 quoting 953_f2d_531 9th cir a notice of balance due constitutes a notice_and_demand for payment under sec_6303 119_tc_252 notice_and_demand of the assessed tax must be left at the person’s dwelling or usual place of business or must be sent by mail to the person’s last_known_address sec_6303 actual receipt is not required under sec_6303 lutz v united_states no wl at e d ky date 3petitioner does not contest that respondent sent to petitioner addressed to the buffalo p o box two notices of balance due on march and date within days of the date assessment as long as the records of the internal_revenue_service reflect that notice_and_demand was properly mailed to the taxpayers’ last_known_address it is irrelevant that the taxpayers did not receive actual notice hahn v united_states no wl at c d cal date petitioner contends that after assessment of the tax_liability for the tax_year he never received proper notice_and_demand from respondent respondent contends that actual receipt of notice_and_demand is not required we agree with respondent actual receipt is not required under sec_6303 lutz wl at see also eg cain v commissioner tcmemo_2009_54 wl at n proof of receipt is not required consequently petitioner’s argument that he did not receive notice_and_demand is without merit additionally petitioner contends that respondent failed to send notice_and_demand to his last_known_address respondent contends that notice_and_demand was sent to petitioner’s last_known_address the term last_known_address is well defined in the tax law a taxpayer’s last_known_address is the address that appears on the taxpayer’s most recently filed and properly processed federal tax_return unless the irs is given clear and concise notification of a different address sec_301_6212-2 proced admin regs see also sec_301_6303-1 proced admin regs it is the address to which in the light of all the surrounding facts and circumstances the commissioner reasonably believes the taxpayer wished notice to be sent 74_tc_430 if the government has become aware of a change_of address the commissioner may not rely on the address listed on the last-filed tax_return but must exercise reasonable care to discern the taxpayer’s correct address buffano v commissioner tcmemo_2007_32 wl at although the commissioner must exercise reasonable diligence in ascertaining the taxpayer’s correct address the burden is upon the taxpayer to keep the commissioner informed of the taxpayer’s correct address see 87_tc_643 62_tc_367 aff’d without published opinion 538_f2d_334 9th cir as we have stated w hen a taxpayer changes his address it is he who must notify the commissioner of such change or else accept the consequences alta sierra vista inc v commissioner t c pincite petitioner contends that respondent’s notice_and_demand was not sent to his last_known_address because it was sent to the buffalo p o box petitioner bears the burden of proving that the buffalo p o box was not his last_known_address 4petitioner has not raised sec_7491 and therefore it does not apply consequently petitioner bears the burden_of_proof see rule a petitioner concedes that he applied for the buffalo p o box shortly after moving to the wanda avenue residence and that he used the buffalo p o box until date but claims that the buffalo p o box was not his last_known_address because he did not notify respondent that the buffalo p o box was the address where he wanted to receive correspondence we disagree sec_301_6212-2 proced admin regs provides the irs will update taxpayer addresses maintained in irs records by referring to data accumulated and maintained in the united_states postal service usps national change_of address database that retains change_of address information for thirty-six months ncoa database except as provided in paragraph b ii of this section if the taxpayer’s name and last_known_address in irs records match the taxpayer’s name and old mailing address contained in the ncoa database the new address in the ncoa database is the taxpayer’s last_known_address unless the irs is given clear and concise notification of a different address according to the foregoing regulation in order to inform the usps of a change in permanent address that triggers a change_of address in the ncoa database a taxpayer must submit to the usps a usps form_3575 official mail 5although the regulations set forth a general_rule that change_of address information that a taxpayer provides to a third party such as a payor or another government agency is not clear and concise notification of a different address for purposes of determining a last_known_address an exception is made for official change_of address forms filed with the usps sec_301_6212-2 proced admin regs forwarding change_of address form sec_301_6212-2 example proced admin regs notice of proposed rulemaking definition of last_known_address fed reg date to be codified pincite c f_r pts however petitioner offered no evidence that he gave the usps a completed usps form_3575 informing it of his move to the wanda avenue residence indeed he admitted that he did not file any specific form with the buffalo post office or the usps the only evidence of petitioner’s address is his application to obtain the buffalo p o box and a notice to the buffalo post office to forward mail to the wanda avenue residence upon surrender of the buffalo p o box petitioner contends that the wanda avenue residence was his last_known_address because upon moving to the wanda avenue residence he submitted to the buffalo post office a post office box application and mail forwarding notice that gave the irs clear and concise notification of petitioner’s change_of address we disagree none of the documents petitioner submitted to the buffalo post office 6taxpayers may also inform the usps of a change in address via telephone or the internet see usps frequently asked questions - change_of address coa http faq usps com ecustomer iq usps request do create kb uspsfaq view c 5bc_usps1104jch 5d varset source sourcetype embedded last visited date petitioner neither alleges nor provides evidence that he informed the usps of his change_of address via telephone or the internet accordingly we do not further discuss those methods were the official change_of address form ie usps form required by the usps to effect a change_of address in the ncoa database petitioner merely notified the usps to forward his mail to the wanda avenue residence therefore petitioner has failed to satisfy his burden of proving that he provided respondent either directly7 or indirectly eg through the ncoa database with clear and concise notification of his change_of address see alta sierra vista inc v commissioner t c pincite consequently petitioner has failed to prove that respondent was not entitled to rely on the buffalo p o box address as his last_known_address for the purpose of sending him notice_and_demand see weinroth v commissioner t c pincite accordingly for purposes of the instant case the buffalo p o box was petitioner’s last_known_address 7petitioner received from respondent the 30-day_letter that was addressed to the buffalo p o box but delivered to the wanda avenue residence with a mail forwarding label petitioner took no action to directly notify respondent of his move to the wanda avenue residence even though the mail forwarding label should have alerted him that respondent had petitioner’s former address in respondent’s records and that respondent was attempting to contact him petitioner also could have directly provided respondent with clear and concise notification of a change in address by filing a form_1040 listing the wanda avenue residence as his address see 91_tc_1019 but as we previously mentioned he has not filed an annual tax_return since on the basis of the foregoing we hold that notice_and_demand of respondent’s assessment of tax against petitioner was not defective and the appeals office’s determination to uphold the lien was correct in reaching the foregoing holdings we have considered all the parties’ arguments and to the extent not addressed herein we conclude that they are moot irrelevant or without merit to reflect the foregoing decision will be entered for respondent


office_of_chief_counsel internal_revenue_service memorandum number release date cc ita postf-149413-06 uilc 263a 263a 263a date to from ----------------------------- senior counsel sl ------------ large mid-size business ------------------------- senior counsel branch income_tax accounting subject wine grape growing and the uniform_capitalization_rules of 263a this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend taxpayer ----------------------------------------------- issue sec_1 where the taxpayer grows a grape crop and subsequently processes the crop into wine when does the actual preproductive_period of the grape crop end for purposes of sec_263a of the internal_revenue_code code which costs incurred between the harvest of a grape crop and blossoming of the subsequent crop are subject_to capitalization postf-149413-06 conclusion sec_1 the actual preproductive_period of a grape crop grown for use in the taxpayer’s wine production ends no later than the onset of the crush of the grapes preproductive_period costs incurred between the end of the actual preproductive_period of a grape crop and the blossoming of the subsequent crop are generally deductible as a cost of maintaining the vine preproductive_period costs incurred between the harvest of the crop and the end of the actual preproductive_period of the crop are capitalized to the crop unless they are field costs that provide no benefit to crop facts the taxpayer operates vineyards that produce wine grapes and a winery that produces wines for federal_income_tax purposes the taxpayer uses an overall accrual_method of accounting and treats the grape growing and wine making activities as a single trade_or_business the grape vines set blossoms in the spring and the grapes are harvested in the fall most or all of the harvested grapes are sent to taxpayer’s winery to be crushed to produce juice that taxpayer will process into wine depending upon circumstances the taxpayer may sell some of its harvested grapes to other wine producers or may purchase grapes from other grape producers to supplement its own harvest law sec_263a unicap in general sec_263a provides that except as otherwise provided sec_263a shall apply to real or tangible_personal_property produced_by_the_taxpayer sec_263a provides that for purposes of sec_263a the term produce includes construct build install manufacture develop or improve sec_1_263a-2 provides that for purposes of sec_263a produce includes the following construct build install manufacture develop improve create raise or grow sec_263a provides that in the case of any property to which sec_263a applies the direct costs of the property and the indirect_costs properly allocable to the property shall be included in inventory costs in the case of property that is inventory in the hands of the taxpayer or shall be capitalized in the case of other_property sec_1_263a-1 provides generally that direct_material_costs of producers include the costs of those materials that become an integral part of specific property postf-149413-06 produced and those materials that are consumed in the ordinary course of production and that can be identified or associated with particular units or groups of units of property produced direct_labor_costs of producers include the costs of labor that can be identified or associated with particular units or groups of units of specific property produced sec_1_263a-1 provides that indirect_costs are defined as all costs other than direct_material_costs and direct_labor_costs in the case of property produced or acquisition costs in the case of property acquired for resale taxpayers subject_to sec_263a must capitalize all indirect_costs properly allocable to property produced or property acquired for resale indirect_costs are properly allocable to property produced or property acquired for resale when the costs directly benefit or are incurred by reason of the performance of production or resale activities indirect_costs may be allocable to both production and resale activities as well as to other activities that are not subject_to sec_263a taxpayers subject_to sec_263a must make a reasonable allocation of indirect_costs between production resale and other activities preproductive periods and preproductive_period costs sec_263a provides that sec_263a does not apply to the production of any animal or any plant with a preproductive_period of years or less if the taxpayer is not required to use an accrual_method of accounting under sec_447 or sec_448 see also sec_1 263a- a for purposes of determining whether a plant has a preproductive_period in excess of years the preproductive_period of plants grown in commercial quantities in the united_states is based on the nationwide weighted average preproductive_period for such plant sec_1_263a-4 see also notice_2000_45 2000_2_cb_256 sec_1_263a-4 provides that unless otherwise provided sec_263a requires the capitalization of the direct costs and an allocable portion of the indirect_costs that directly benefit or are incurred by reason of the production of any property in a farming_business including animals and plants without regard to the length of their preproductive_period the types of direct and indirect_costs that generally must be capitalized by taxpayers under sec_263a are described in sec_1_263a-1 and specific examples of the types of costs typically incurred in the trade_or_business_of_farming are provided in sec_1_263a-4 and ii sec_1_263a-4 provides that the costs of producing a plant typically required to be capitalized under sec_263a include the costs incurred so that the plant's growing process may begin preparatory costs such as the acquisition costs of the seed seedling or plant and the costs of planting cultivating maintaining or developing the plant during the preproductive_period preproductive_period costs preproductive_period costs include but are not limited to management irrigation pruning soil and water conservation including costs that the taxpayer has elected to deduct under sec_175 fertilizing including costs that the taxpayer has elected to deduct under section postf-149413-06 frost protection spraying harvesting storage and handling upkeep electricity tax depreciation and repairs on buildings and equipment used in raising the plants farm overhead taxes except state and federal income taxes and interest required to be capitalized under sec_263a sec_1_263a-4 provides in pertinent part that field costs such as irrigating fertilizing spraying and pruning that are incurred after the harvest of a crop or yield but before the crop or yield is sold or otherwise_disposed_of are not required to be included in the preproductive_period costs of the harvested crop or yield because they do not benefit and are unrelated to the harvested crop or yield preproductive_period sec_1_263a-4 provides that the plant’s actual preproductive_period as distinct from the nationwide weighted average preproductive_period of the plant is used for purposes of determining the period during which a taxpayer must capitalize preproductive_period costs with respect to a particular plant sec_1_263a-4 provides in pertinent part that in the case of the crop or yield of a plant that will have more than one crop or yield the actual preproductive_period begins when the plant has become productive in marketable quantities and the crop or yield first appears for example in the form of a sprout bloom blossom or bud sec_1_263a-4 provides in pertinent part that in the case of the crop or yield of a plant that will have more than one crop or yield the actual preproductive_period ends when the plant crop or yield is sold or otherwise_disposed_of farming_business sec_263a provides that the term farming_business means the trade_or_business_of_farming but does not include the operation of a nursery or sod farm or the raising or harvesting of tress bearing fruit nuts or other crops or certain ornamental trees sec_1_263a-4 provides generally that a farming_business means a trade_or_business involving the cultivation of land or the raising or harvesting of any agricultural or horticultural commodity harvesting does not include contract harvesting of an agricultural or horticultural commodity grown or raised by another sec_1_263a-4 provides that a farming_business includes processing activities that are normally incident to the growing raising or harvesting of agricultural or horticultural products for example the harvesting washing inspecting and packaging of fruits and vegetables for sale are incidental activities of the trade_or_business of raising fruits and vegetables postf-149413-06 by contrast sec_1_263a-4 provides that a farming_business does not include the processing of commodities or products beyond those activities that are normally incident to the growing raising or harvesting of such products for example the processing of grain into breads cereals and similar food products is not normally incident to the growing and harvesting of grain and is not part of a farming_business sec_1_263a-4 example similarly the slaughtering processing and packaging or canning of poultry are not normally incident to the growing or raising of poultry and are not part of a farming_business sec_1_263a-4 example analysi sec_1 where the taxpayer grows a grape crop and subsequently processes the crop into wine when does the actual preproductive_period of the grape crop end for purposes of sec_263a of the internal_revenue_code code grape vines produce multiple crops of grapes accordingly the actual preproductive_period of a grape crop ends when the crop is sold or otherwise_disposed_of sec_1 263a- b i c i the taxpayer retains physical custody and legal_title of the grapes as they grow to maturity after harvest the grapes are sent to taxpayer’s winery and are crushed to produce juice that is processed into wines that are sold to customers at what point along this process then does the actual preproductive_period app of the crop end does the app extend until the wines produced from the crop are sold or does the app end at an earlier point in time we note initially that the grapes themselves are never subject_to a sale_or_other_disposition as these terms are customarily used in federal_income_tax law only the wine produced from the grapes is sold or otherwise_disposed_of despite the express language of sec_1_263a-4 linking the end of the app with a sale_or_other_disposition however we believe that the app of a grape crop grown for use in producing the taxpayer’s own wines must end no later than when the crop is crushed we believe that the crush constitutes an appropriate latest date for the end of the app for several reasons first the crush marks the point in time when the crop loses its physical character as grapes the crush converts the grape crop into must juice and marc residue of the grapes these materials are respectively a raw material and a byproduct of wine production they do not constitute grapes or a crop of grapes in any ordinary sense of these terms postf-149413-06 second the crush marks the point in time when the taxpayer stops growing grapes and starts producing wine these two production activities are quite distinct in their methods and resulting products grape growing involves the cultivation of multicrop plants to produce grapes a perishable agricultural product winemaking involves fermenting and manipulating the raw material of grape juice into wine a packaged and manufactured product third because crushing the grapes terminates both the grape crop and its production the crush also marks the point in time when taxpayer ceases to incur costs to produce grapes and begins to incur costs to produce wine the costs of direct materials which become physically incorporated into the grapes and direct labor which must be identified or associated with particular units of grapes produced can no longer be incurred with respect a grape crop once it has been crushed out of existence sec_1_263a-1 sec_1_263a-4 similarly indirect_costs are not properly allocable to the grape crop after the crush because the crush terminates the production of the grape crop and thus indirect_costs can no longer directly benefit or be incurred by reason of the production of grapes sec_1_263a-1 sec_1_263a-4 in sum delaying the end of the actual preproductive_period of a grape crop beyond the crush would extend capitalization into a time period when there are no costs that may properly be capitalized into the crop fourth the crush marks the end of the farming_business of grape growing under sec_63a e and the beginning of the nonfarming trade_or_business of producing wine growing grapes is a farming_business because it involves the cultivation of land and the raising of grapes which are an agricultural commodity sec_1_263a-4 the farming_business of growing grapes includes certain processing activities that are normally incident to the growing raising or harvesting of grapes such as noncontract harvesting washing and inspecting sec_1_263a-4 at first impression the crushing of grapes and the production of wine might also seem to be normally incident to the growing of grapes because these activities are the anticipated continuations of growing wine grapes the regulations make it clear however that the preparation of processed food products such as wine is not part of a farming_business even where the farming_business also produces the agricultural commodity grapes that constitute the raw material for the processed food product for example the milling of flour and production of baked goods are not part of the farming_business of raising grains even though such activities are a logical and foreseeable consequence of raising grains sec_1_263a-4 sec_1_263a-4 example in sum we believe that despite the sale_or_other_disposition language in sec_1 263a- b i c i the app of grapes grown for self use must end no later than the onset of the crush because this marks the end of the grape crop the growing process and the farming_business extending the app beyond this point would result in the capitalization of inappropriate costs into a crop that no longer exists and would be postf-149413-06 contrary to both the general principles of sec_263a and the special rules that implement such principles for farming businesses which of the costs incurred between the harvest of a grape crop and blossoming of the subsequent crop are subject_to capitalization grape vines are grown in commercial quantities in the united_states and their nationwide weighted average preproductive_period is more than years see notice_2000_45 accordingly sec_263a applies to the costs of producing grape vines unless an election is made under sec_263a not to apply the provisions of sec_263a sec_1 263a- a b a taxpayer growing a grape vine must capitalize the direct costs and an allocable portion of the indirect_costs of producing the vine sec_1_263a-1 sec_1_263a-4 specifically a taxpayer growing a grape vine must capitalize the preparatory costs of the vine and the preproductive_period costs of the vine that are incurred during the app of the vine sec_1_263a-4 the app of the grape vine ends when the vine first becomes productive in marketable quantities sec_1_263a-4 after the end of the app preproductive_period costs are generally capitalized to a crop during the preproductive_period of the crop and are deducted as a cost of maintaining the vine when incurred between the end of the app of one crop and the beginning of the app of the subsequent crop sec_1_263a-4 example ii a special exception applies to the period between the harvesting of a crop and the sale_or_other_disposition of the crop sec_1_263a-4 provides that field costs such as irrigating fertilizing spraying and pruning are not required to be capitalized into the harvested crop because they do not benefit and are unrelated to the harvested crop or yield the cost of the harvest itself is a preproductive cost that is capitalized into the crop if as is usual it is incurred during the app of the crop sec_1_263a-4 the listed examples- irrigation fertilization spraying and pruning - illustrate the common characteristic of the field costs qualifying for the exception they maintain and improve the health of the vines but they do not and cannot provide any benefits to the crop which has already been severed from the vines stated more precisely in terms of unicap principles field costs are cost which i are not direct costs of the crop and ii are not indirect_costs allocable to the crop because they do not directly benefit and are not incurred by reason of the production of the crop following these principles the irrigation fertilization spraying or pruning of the vines are field costs because they do are not directly benefit and are not incurred by reason of the production of a grape crop that has already been severed from the vines on the other hand costs such as administration tax depreciation and repairs on farm buildings postf-149413-06 farm overhead and taxes other than state and federal income taxes are not field costs because they directly benefit or are incurred by reason of the production of the crop finally we note that sec_1_263a-4 provides that the field cost exception applies during the period between harvest and the sale or disposition of the crop consistent with our conclusions in the first issue we believe that field cost exception ends when the app of the crop ends which in the case of grapes grown for self use is the onset of the crush please call -------------------- if you have any further questions


internal_revenue_service number release date index numbers ---------------------- ------------------------- ------------------------------------- ------------------------------- - department of the treasury washington dc person to contact ------------------ id no ------------- telephone number --------------------- refer reply to cc corp b04 - plr-106113-04 date date legend parent target common parent sub sub sub sub ------------------------------------- ------------------------------ ------------------------ ------------------------------------------------------------ -------------------------- ------------------------ ----------------------------------------- ------------------------------- ------------------------ --------------------------- ------------------------------- ------------------------ -------------------------------------------- ------------------------------ ------------------------ ------------------------------------------- ------------------------------ ------------------------ -------------------------------------------------------- -------------------------- plr-106113-04 state a date date date date x investment a dear ---- ----------- ------------------------ -------- ---------------- ---------------------- ----------------- ----------------------- -------------- -------------------------------------------- this letter responds to your date request for rulings on certain federal_income_tax consequences of a proposed transaction the information submitted in that request and in subsequent correspondence is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process summary of facts common parent is a mutual holding_company and the parent of a consolidated_group filing a life-nonlife consolidated_return sub a nonlife holding_company is a wholly owned subsidiary of common parent sub is a wholly owned subsidiary of sub sub is in the business of insuring life_insurance annuity and other related risks sub is taxed as a life_insurance_company under sec_801 of the internal_revenue_code the code sub is a wholly owned nonlife subsidiary of sub parent is a wholly owned nonlife subsidiary of sub sub and parent are holding_companies sub sub sub and parent are all members of common parent’s life-nonlife consolidated_group parent wholly owns target which is in the business of insuring life_insurance annuity and other related risks and is taxed as a life_insurance_company under sec_801 plr-106113-04 sub is a wholly owned subsidiary of target sub is in the business of insuring life_insurance annuity and other related risks and is taxed as a life_insurance_company under sec_801 sub is a member of target’s life-life consolidated_group on date parent joined common parent’s life-nonlife consolidated_group target and sub file a life-life consolidated_return proposed transaction in order to promote efficiency by consolidating the insurance_business and eliminating numerous federal and state regulatory and tax filings as well as to realize the value associated with target’s charters and licenses the following transaction has been proposed the proposed transaction i target will transfer assets subject_to liabilities to sub in constructive exchange for sub stock and the assumption by sub of certain target liabilities sub and target will enter into a reinsurance agreement whereby sub will assume target's obligations to policyholders under target's insurance and annuity_contracts after the receipt of the target assets and liabilities sub will continue the business transferred by target with its existing business in conjunction with the reinsurance transactions target plans to contribute additional cash and assets to sub to the extent that the policy obligations are assumed by sub under the assumption_reinsurance agreement described below there will be no continuing obligation to the policyholders on the part of target ii target will adopt a plan_of_liquidation and distribute all of its remaining assets to parent except target's corporate charter state insurance licenses and the minimum capital and surplus necessary to maintain in force the charter and licenses authorizing the conduct of the life_insurance business collectively the retained assets parent will assume all of the liabilities of target other than those assumed by sub in step i above as part of the liquidation of target the sub stock will be distributed to parent the assets to be distributed to parent before the sale described below are hereinafter referred to as the unwanted assets and the distribution of the unwanted assets is hereinafter referred to as the pre-sale distribution iii once the liquidating distributions are complete and target holds only the retained assets parent will sell the stock of target to an unrelated third party corporation purchaser in conjunction with the sale of target's stock parent and purchaser will make a joint election to treat the stock sale as a deemed asset sale pursuant to sec_338 to the extent necessary the actual transfer of contracts from target to sub will be governed by an indemnity agreement coinsurance reinsurance agreement as plr-106113-04 well as an assumption_reinsurance agreement assumption_reinsurance agreement collectively the reinsurance agreements the reinsurance agreements entered into by target and sub will be effective on the same day the reinsurance agreements will be drafted in such a manner as to allow for the ultimate transfer of the target business on an assumption_reinsurance basis to sub however for the period of time from the effective date of the reinsurance agreements until the assumption_reinsurance transaction is complete the coinsurance reinsurance agreement will provide for the transfer of the economic benefit and obligations of the policies to sub through a percent coinsurance agreement target and sub represent that this coinsurance arrangement is intended to be effective only until the necessary regulatory approvals or policyholder consents for the assumption_reinsurance are obtained the assumption_reinsurance agreement will provide that sub will be the primary insurer of the risks completely replacing target the agreement further will provide that the parties intend to effect a complete novation for contracts covered by the assumption_reinsurance agreement from the target to sub unless and until the coinsurance reinsurance agreement is terminated any contracts not yet subject_to the assumption_reinsurance agreement including those for which policyholder approval is not obtained may revert to target upon the occurrence of a number of events including sub 4’s insolvency if a policyholder does not approve the assumption that contract will not be subject_to the assumption_reinsurance agreement policyholder consent to the assumption of target’s policies by sub is required in most states however some state insurance departments do not require policyholder approval of an assumption_reinsurance transaction approval of the reinsurance transaction will be requested from the state a department of insurance since state a is target’s state of domicile after state a has approved the transaction approval of the policyholders from whom consent is required will be requested if necessary once the policy obligations are assumed by sub under the assumption_reinsurance agreement there will be no continuing obligation to the policyholders on the part of target representations the taxpayer has made the following representations in connection with step i above of the proposed transaction a no stock_or_securities will be issued to target for services rendered to or for the benefit of sub in connection with the proposed transaction and no stock_or_securities will be issued for indebtedness of sub that is not evidenced by a security or for interest on indebtedness of sub which accrued on or after the beginning of the holding_period of target plr-106113-04 b c d e f g h i j k for the debt no assets to be transferred to sub were received by target as part of a plan_of_liquidation of another corporation target neither accumulated receivables nor made extraordinary payment of payables in anticipation of the transaction sub will report items which but for the transfer would have resulted in income_or_deduction to target in a period after the transfer and such items will constitute income or deductions to sub when received or paid_by it the proceeds received in collection of the income items will be included as ordinary_income in computing the taxable_income of sub stock of another corporation is not part of the property being transferred to sub the transfer to sub is not the result of the solicitation by a promoter broker or investment house target will not retain any rights in the property transferred to sub the value of the stock received in exchange for accounts_receivable will be equal to the net value of the account transferred ie the face_amount of the accounts_receivable previously included in income less the amount of the reserve for bad_debts the adjusted_basis and the fair_market_value of the assets to be transferred by target to sub will in each instance be equal to or exceed the sum of the liabilities to be assumed within the meaning of sec_357 by sub the liabilities of target to be assumed by sub were incurred in the ordinary course of business and are associated with the assets to be transferred there is no indebtedness between target and sub and there will be no indebtedness created in favor of plr-106113-04 target as a result of the transaction the transfers and exchanges will occur under a plan agreed upon before the transaction in which the rights of the parties are defined all exchanges between target and sub will occur on approximately the same date however due to state approval limitations the assumption of certain policyholder liabilities may occur on different dates there is no plan or intention on the part of sub to redeem or otherwise reacquire any stock or indebtedness to be issued in the proposed transaction taking into account any issuance of additional shares of sub stock any issuance of stock for services the exercise of any sub stock_rights warrants or subscriptions a public offering of sub stock and the sale exchange transfer by gift or other_disposition of any of the stock of sub to be received in the exchange target will be in control of sub within the meaning of sec_368 although no additional shares of sub will be issued the increase in value of target’s stock in sub will approximately equal the fair_market_value of the property transferred to sub or for services rendered or to be rendered for the benefit of sub sub will remain in existence and retain and use the property transferred to it in a trade of business there is no plan or intention by sub to dispose_of the transferred property other than in the normal course of business operations each of the parties to the transaction will pay its own expenses if any incurred in connection with the proposed transaction sub will not be an investment_company within the meaning of sec_351 and sec_1 c ii l m n o p q r s t plr-106113-04 u v target is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 and the stock_or_securities received in the exchange will not be used to satisfy the indebtedness of such debtor sub will not be a personal_service_corporation within the meaning of sec_269a and iii above of the proposed transaction the taxpayer has made the following representations in connection with steps ii w x y z aa bb parent on the date of adoption of the plan_of_liquidation and at all times until the final liquidating_distribution is completed will be the owner of at least percent of the single outstanding class of target stock no shares of target stock will have been redeemed during the years preceding the adoption of the plan of complete_liquidation of target except as may occur in step iii above of the proposed transaction all distributions from target to parent pursuant to the plan of complete_liquidation will be made within a single taxable_year of target in any event target will adopt a plan_of_liquidation specifying that the final liquidating_distribution is to be completed within years from the close of the taxable_year of target in which the first liquidating_distribution is made as soon as the first liquidating_distribution has been made target will cease to be a going concern and its activities will be limited to winding up its affairs paying its debts and distributing its remaining assets other than the retained assets to parent target will remain in existence as an inactive_subsidiary of parent solely for the purpose of enabling parent to protect the corporate charter legal existence and or identity of target target will retain its corporate charter and only those assets required under local law to maintain corporate existence the minimum capital target will engage in no activity other than action required under local law to preserve its charter legal existence and or identity target will retain its corporate charter and only those assets required under local law to maintain corporation existence and preserving its insurance licenses minimum capital the sole reason that target will not be dissolved under local law is to isolate the value of target's charter for resale to a purchaser that is not related to target parent or their shareholders for purposes of this representation a purchaser that is not related is a purchaser that does not own actually or constructively pursuant to sec_318 of the code as modified by sec_304 any stock of target parent or their shareholders cc target will retain no assets following the final deemed liquidating plr-106113-04 distribution dd ee ff gg hh ii jj kk prior to the purchase of target purchaser will not own either actually or constructively pursuant to sec_318 as modified by sec_304 any stock of target or parent or their shareholders as soon as reasonably possible and in any event within no more than months from the date of the first liquidating_distribution of the unwanted assets target will be dissolved under local law or sold to an unrelated purchaser other than the capital_contribution by parent of dollar_figurex in date the capital_contribution of investment a on date the sec_351 transaction described in step i above and the capital_contribution by parent of an amount necessary for target to continue to meet the state minimum capital and surplus requirements target will not have acquired assets in any nontaxable_transaction at any time except for acquisitions occurring more than years prior to the date of adoption of the plan_of_liquidation except for a cash dividend distribution on date and the transaction described in step i above no assets of target have been or will be disposed of by either target or parent except for dispositions in the ordinary course of business and dispositions occurring more than years prior to adoption of the plan_of_liquidation except for the transaction described in step i above the liquidation of target will not be preceded or followed by the reincorporation or transfer or sale to a recipient corporation recipient of any of the businesses or assets of target if the persons holding directly or indirectly more than percent in value of target stock also hold directly or indirectly more than percent in value of the stock in recipient for purposes of this representation ownership will be determined by application of the constructive_ownership rules of sec_318 as modified by sec_304 prior to the adoption of the liquidation plan no assets of target will have been distributed in_kind transferred or sold to parent except for i transactions occurring in the normal course of business ii transactions occurring more than years before adoption of the liquidation plan and iii cash dividend distributions to parent target will report all earned_income represented by assets that will be distributed to parent such as receivables being reported on a cash_basis unfinished construction contracts and commissions due the fair_market_value of the assets of target will exceed their respective liabilities both at the date of the adoption of the plan of complete_liquidation and immediately prior to the time the first liquidating_distribution is made ll there is no intercorporate debt existing between parent and target and plr-106113-04 none has been cancelled forgiven or discontinued except for transactions that occurred more than years prior to the date of adoption of the liquidation plan mm parent is not an organization that is exempt from federal_income_tax under sec_501 or any other provision of the code nn oo pp both parent and target will file the statement described in sec_1_381_b_-1 prior to the plan of complete_liquidation described herein no formal or informal plan of complete_liquidation will ever have been adopted by target all other transactions undertaken contemporaneously with in anticipation of in conjunction with or in any way related to the proposed liquidation of target have been fully disclosed qq throughout every day since date sub i was in existence and a member of the common parent group determined without the exclusions in sec_1504 ii was engaged in the active_conduct_of_a_trade_or_business iii did not experience a change in tax character and iv did not undergo disproportionate asset acquisitions sec_1_1502-47 rulings based solely on the information submitted and the representations set forth above we rule as follows with respect to step i above the transfers described in step i above will qualify under sec_351 as a tax- free transfer of assets by target in constructive exchange for additional sub stock and the assumption by sub of the transferred liabilities sec_351 revrul_94_45 1994_2_cb_39 no gain_or_loss will be recognized by target upon the transfer of assets in constructive exchange for sub stock and the assumption by sub of liabilities plus any liabilities to which the transferred assets are subject sec_357 no gain_or_loss will be recognized by sub upon its receipt of assets from target in constructive exchange for sub stock sec_1032 plr-106113-04 the basis of sub stock in the hands of target will increase by the sum of the basis of each asset in the hands of sub will equal the basis of such the basis of the assets transferred to sub increased by the amount of any unamortized policy_acquisition_expenses associated with those assets and decreased by the amount of liabilities assumed by sub and liabilities to which the transferred assets are subject including insurance reserve liabilities sec_358 asset in the hands of target immediately prior to the proposed transaction sec_362 each instance be the same as the holding_period of that asset in the hands of target immediately before the proposed transaction sec_1223 or annuity_contracts as part of a sec_351 exchange the transfer is not subject_to the provisions of sec_803 and sec_805 and sec_1_817-4 and sec_1_848-2 revrul_94_45 1994_2_cb_39 the holding_period of each transferred asset in the hands of sub will in because the actions in step i above effectuate the transfer of insurance for the taxable_year in which target transfers the insurance and annuity_contracts to sub target will include in its reserves as of the close of that year for purposes of sec_807 and b the ending balances of the reserves described in sec_807 that target held for the contracts immediately before the transfer and target is not entitled to a deduction under sec_805 for transferring assets to sub in consideration of the assumption by sub of the liabilities under the insurance and annuity_contracts revrul_94_45 1994_2_cb_39 for the first taxable_year beginning after the transfer of the insurance and annuity_contracts to sub target will not include in its reserves as of the beginning of that year for purposes of sec_807 and b the ending balances of the reserves described in sec_807 that target held for the contracts immediately before the transfer revrul_94_45 1994_2_cb_39 for the taxable_year in which target transfers the insurance and annuity_contracts to sub sub will include in its reserves at the beginning of such year for purposes of sec_807 and b the ending balances of the reserves described in sec_807 that target held for the contracts immediately before the transfer and sub will not take into premium income under sec_803 any amount with respect to the assets transferred to sub in consideration of the assumption_of_liabilities under the insurance and annuity_contracts revrul_94_45 1994_2_cb_39 target and sub will not include in net_premiums under sec_848 any amount with respect to target’s assets transferred to sub in consideration of the assumption by sub of liabilities under target's specified insurance contracts within the meaning of sec_848 revrul_94_45 1994_2_cb_39 plr-106113-04 the unamortized specified_policy_acquisition_expenses of target attributable to the insurance and annuity_contracts transferred to sub will continue to be amortized by sub over the remaining period as the amounts would have been deductible by target revrul_94_45 1994_2_cb_39 the unamortized balance of any sec_807 adjustment of target attributable to the insurance and annuity_contracts transferred to sub will be treated as transferred to sub and will continue to be amortized by sub over the remaining period as the amounts would have been amortized by target revrul_94_45 1994_2_cb_39 the assumption by sub of liabilities under insurance contracts issued by target will have no effect on the date each life_insurance or annuity_contract of target was issued entered into purchased or came into existence for purposes of sec_72 sec_72 sec_72 sec_72 sec_72 sec_72 sec_72 sec_72 sec_101 sec_264 sec_264 sec_7702 and sec_7702a moreover the transfer of liabilities will not require retesting or the starting of new test periods for the contacts under sec_264 sec_7702 - e and 7702a c a sec_72 sec_72 sec_72 sec_72 sec_72 sec_72 sec_72 sec_72 sec_101 sec_264 sec_264 sec_7702 and sec_7702a it is held as follows with respect to steps ii and iii above provided i purchaser makes a timely election under sec_338 or ii parent and purchaser make a timely election under sec_338 parent will not be treated as having sold target stock but rather target will be treated for federal_income_tax purposes as if while a wholly owned subsidiary of parent it sold all of its assets except the assets actually distributed to parent in the pre- sale distribution in a single transaction deemed sale as of the day on which purchaser purchases all of the stock of target acquisition_date and as if at the close of the acquisition_date but after the deemed sale it distributed to parent the proceeds of the deemed sale the actual pre-sale distribution and the deemed_distribution of the deemed sale proceeds will be treated as a series of distributions in a complete_liquidation to which sec_332 and sec_337 apply sec_338 sec_1_338_h_10_-1 and sec_1_338_h_10_-1 and ii accordingly gain including any items of recapture and loss from the deemed sale of target's assets will be included in target’s federal_income_tax return for the taxable_period that includes the acquisition_date and neither gain nor loss from the sale of target stock will be included in income of any member of the common parent affiliated_group sec_338 sec_1 h - e and no gain_or_loss will be recognized by parent on its actual or deemed receipt of the assets of target pursuant to the plan_of_liquidation sec_332 plr-106113-04 no gain_or_loss will be recognized by target on its actual or deemed_distribution of assets to parent in complete_liquidation sec_337 the basis of each asset distributed in the pre-sale distribution in the hands of parent will be the same as the basis of the asset in the hands of target immediately preceding its distribution sec_334 the holding_period of each asset distributed by target to parent in the pre-sale distribution will include the period during which such asset was held by target sec_1223 pursuant to sec_381 and sec_1_381_a_-1 parent will succeed to and take into account the items of target described in sec_381 and the regulations thereunder subject_to the conditions and limitations specified in sec_381 and c and sec_381 provided that parent makes the election under sec_1 b - b the date of the pre-sale distribution shall be treated as the date on which i substantially_all_of_the_properties of target to be distributed or transferred to parent have been distributed or transferred and ii target has ceased all operations other than liquidating activities thus the date of the pre-sale distribution shall be treated as the date of the distribution within the meaning of sec_1_381_b_-1 provided that parent makes the election under sec_1 b - b parent will succeed to and take into account the earnings_and_profits or deficit in earnings_and_profits of target as of the date of the pre-sale distribution any deficit in earnings_and_profits of target or parent will be used only to offset earnings_and_profits accumulated after the date of the distribution sec_381 as of date sub will have met the eligibility requirements of paragraphs a - d of sec_1_1502-47 the implementation of steps i through iii above will not restart the base_period for determining sub 4’s eligibility to join common parent’s consolidated_group sec_1 d caveats we express no opinion about the tax treatment of the proposed transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings specifically we express no opinion about the validity of the sec_338 election to be made in step iii above of the proposed transaction plr-106113-04 procedural matters this ruling is directly only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent temporary or final regulations pertaining to the issues addressed in this ruling have not yet been adopted therefore this ruling will be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in this ruling see dollar_figure of revproc_2004_1 however when the criteria in sec_11 of revproc_2004_1 are satisfied a ruling may not be revoked or modified retroactively except in rare or unusual circumstances a copy of this ruling letter should be attached to the federal_income_tax returns of the taxpayers involved in the proposed transaction for the taxable_year in which the transactions are completed sent to the taxpayer under the power_of_attorney on file in this office a copy of this letter has been sincerely richard k passales___ richard k passales senior counsel branch office of associate chief_counsel cc -------------------------------------- corporate ------------------------------- ----------------------------------------- ------------------------------- ----------------------------- ---------------------------------- ------------------------------------------------------------------ ---------------------------------- -----------------------------


internal_revenue_service number release date index number - --------------------------------- ---------------------------- ------------------------------------------- ---------------------------- department of the treasury washington dc person to contact ----------------------- -------- ------------- telephone number --------------------- refer reply to cc psi - plr-166093-04 date may --------------- ---------------------- ---------------------------- legend x --------------------------------------------------- a ---------------------------------- d1 dear ---------------- this letter responds to a letter dated date submitted on behalf of x by its authorized representative requesting a ruling under sec_1362 of the internal_revenue_code of x represents that a intended to elect s_corporation treatment effective on d1 however no timely form_2553 election by a small_business_corporation was filed any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year has established reasonable_cause for failing to make a timely election to be an s_corporation effective d1 accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 effective d1 along with a copy of this letter based solely on the facts and the representations submitted we conclude that x sec_1362 provides that if -- a an election under sec_1362 is made for the information submitted states that x was incorporated on d1 a the president pursuant to a power_of_attorney on file with this office a copy of this letter is except as specifically set forth above no opinion is expressed concerning the this ruling is directed only to the taxpayer who requested it sec_6110 plr-166093-04 with the appropriate service_center within days from the date of this letter then such election will be treated as timely made for d1 federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 of the code provides that it may not be used or cited as precedent being forwarded to x's authorized representative enclosures beverly katz senior technician reviewer branch associate chief_counsel passthroughs and special industries copy of this letter copy for sec_6110 purposes sincerely yours


internal_revenue_service number release date index number --------------------------------------------------- ---------------------------------------------- ---------------------------------- re --------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------- id no ------------------ telephone number ---------------------- refer reply to cc psi plr-121781-15 date september legend decedent date spouse date dear -------------- ---------------------------------------------- -------------------- ------------------------------------------- -------------------------- this letter responds to your authorized representative’s letter of date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election under sec_2010 of the internal_revenue_code code to allow a decedent’s surviving_spouse to take into account that decedent’s deceased spousal unused exclusion dsue amount the facts and representations submitted are as follows decedent died on date survived by spouse date is a date after the effective date of the amendment to sec_2010 which provides for portability of a dsue amount to a surviving_spouse to obtain the benefit of portability of decedent’s dsue amount to spouse decedent’s estate was required to file form_706 united_states estate and generation-skipping_transfer_tax return on or before the date that is months after decedent’s date of death or the last day of the period covered by an extension decedent’s form_706 was due on date but the estate did not file a timely form_706 to make the portability election the estate discovered its failure to elect portability after the due_date for making the election plr-121781-15 it is represented that the value of decedent’s gross_estate is less than the basic exclusion amount in the year of decedent’s death including any taxable_gifts made during her lifetime you request an extension of time pursuant to sec_301_9100-3 to elect portability of decedent’s dsue amount pursuant to sec_2010 law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2010 provides that a credit of the applicable credit_amount shall be allowed to the estate of every decedent against the tax imposed by sec_2001 sec_2010 provides that the applicable credit_amount is the amount of the tentative_tax that would be determined under sec_2001 if the amount with respect to which such tentative_tax is to be computed were equal to the applicable_exclusion_amount on date congress amended sec_2010 effective for estates of decedents dying and gifts made after date to allow portability of a decedent’s unused applicable_exclusion_amount between spouses tax relief unemployment insurance reauthorization and job creation act of pub_l_no sec_303 124_stat_3296 sec_2010 provides that the applicable_exclusion_amount is the sum of the basic exclusion amount and in the case of a surviving_spouse the dsue amount sec_2010 generally provides that the basic exclusion amount is dollar_figure to be adjusted for inflation annually after calendar_year sec_2010 defines the dsue amount to mean the lesser_of a the basic exclusion amount or b the excess of -- i the applicable_exclusion_amount of the last deceased spouse of the surviving_spouse over ii the amount with respect to which the tentative_tax is determined under sec_2001 on the estate of such deceased spouse sec_2010 provides that a dsue amount may not be taken into account by a surviving_spouse under sec_2010 unless the executor of the estate of the deceased spouse files an estate_tax_return on which such amount is computed and makes an election on such return that such amount may be so taken into account the election once made shall be irrevocable no election may be made if such return is filed after the time prescribed by law including extensions for filing such return plr-121781-15 sec_2010 provides that the secretary shall prescribe regulations as may be necessary or appropriate to implement sec_2010 sec_20_2010-2t a of the estate_tax regulations as in effect on date provides that to allow a decedent’s surviving_spouse to take into account that decedent’s dsue amount the executor of the decedent’s estate must elect portability of the dsue amount on a timely-filed form_706 under sec_20_2010-2t a the due_date of an estate_tax_return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been granted under sec_20_2010-2t a the portability election is made by timely filing a complete and properly prepared estate_tax_return unless the executor satisfies the requirements for the election not to apply in sec_20_2010-2t a i sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that the term statutory election means an election whose due_date is prescribed by statute the term regulatory election means an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute a request for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election the due_date for the portability election is prescribed by statute in the case of an estate required to file an estate_tax_return under sec_6018 see sec_2010 sec_6075 and sec_6018 in the case of an estate that is not required to file an estate_tax_return under sec_6018 the due_date is prescribed by regulation see sec_20_2010-2t a plr-121781-15 see also sec_20_2010-2 and revproc_2014_18 2014_7_irb_513 sec_2 accordingly in the latter case a taxpayer may seek an extension of time to elect portability under the provisions of sec_301_9100-3 sec_6018 requires the filing of an estate_tax_return in all cases where the gross_estate exceeds the basic exclusion amount in effect under sec_2010 for the calendar_year which includes the date of death for purposes of this determination under sec_6018 the basic exclusion amount is reduced but not below zero by the sum of -- a the amount of the adjusted_taxable_gifts within the meaning of sec_2001 made by the decedent after date plus b the aggregate amount allowed as a specific exemption under sec_2521 as in effect before its repeal by the tax reform act of with respect to gifts made by the decedent after date as executor spouse represents that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is not required to file an estate_tax_return under sec_6018 under these facts the commissioner has discretionary authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly we grant an extension of time of days from the date of this letter in which to elect portability under sec_2010 the election should be made by filing a complete and properly-prepared form_706 and a copy of this letter within days from the date of this letter to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center stop cincinnati oh for purposes of electing portability a form_706 filed by decedent’s estate within days from the date of this letter will be considered to be timely filed the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination if it is later determined that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is required to file an estate_tax_return pursuant to sec_6018 the commissioner is without authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-121781-15 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 karlene m lesho senior technician reviewer branch passthroughs special industries enclosures


free fertility foundation petitioner v commissioner of internal revenue respondent docket no 17122-07x filed date p a nonprofit corporation founded by s provides s’s sperm free of charge to women seeking to become pregnant through artificial insemination or in vitro fertilization s and his father f are p’s board members and officers s and f ulti- mately determine to whom p will distribute sperm p seeking tax exemption as a private_operating_foundation pursuant to sec_501 i r c contends that it operates exclusively for the charitable purpose of promoting health held p’s activities do not promote health for the benefit of the community held further pursuant to sec_501 i r c p is not operated exclusively for exempt purposes and therefore does not qualify for tax exemption marcus s owens and nancy ortmeyer kuhn for peti- tioner philip t hackney and michael b blumenfeld for respondent verdate 0ct date jkt po frm fmt sfmt v files freefert sheila united_states tax_court reports opinion foley judge pursuant to sec_7428 sec_1 petitioner seeks a declaratory_judgment that it meets the requirements of sec_501 and is exempt from federal income tax- ation this case was submitted for decision based on the stipulated administrative record as defined in rule b petitioner has exhausted its administrative rem- edies as required by sec_7428 and rule c received a final adverse determination_letter dated date and invoked the jurisdiction of this court by a petition filed date background william c naylor jr naylor is a software engineer who holds more than patents on various inventions on date naylor entered into a contract contract with a spokane washington sperm bank to store and distribute his sperm to recipients of his choice pursuant to the contract naylor was required to pay annual storage fees and designate recipients on date naylor founded and incorporated petitioner in california as a nonprofit public benefit corpora- tion the purpose of the corporation is to provide sperm free of charge to women seeking to become pregnant through artificial insemination or in vitro fertilization petitioner advertises online through a search engine and a web site on date petitioner submitted to respondent form_1023 application_for recognition of exemption in which petitioner seeks tax-exempt status as a private oper- ating foundation on date respondent requested a copy of petitioner’s agreement with the sperm bank that stored its donated sperm in response to the request peti- tioner on date submitted naylor’ sec_2001 contract petitioner’s web site states that naylor is its single sperm donor and chronicles naylor’s life from infancy to adulthood naylor’s donor profile includes photographs a physical description health information family history and achieve- ments in particular the web site provides great detail of naylor’s academic and athletic accomplishments during unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as amended and all rule references are to the tax_court rules_of_practice and procedure verdate 0ct date jkt po frm fmt sfmt v files freefert sheila free fertility found v commissioner elementary_school eg spelling bee competition junior high school eg science fair competition high school eg swim- ming competitions and college eg recognition as top engineering student on the web site naylor states i derive meaning and happiness from believing that i am making the world a better place being a sperm donor is a way that i can help a few people to have children who otherwise could not this makes more of a positive difference to the world than all of the inventions and scientific discoveries that i could ever create petitioner’s bylaws provide for a board consisting of to directors all of whom shall be appointed by naylor none of the directors may be compensated naylor and his father a retired university professor are petitioner’s board members and officers naylor’s father is petitioner’s president and chairman of the board naylor is petitioner’s secretary treas- urer and sole financial contributor petitioner’s board_of directors selects all sperm recipients women seeking to receive sperm from petitioner are required to submit answers to a questionnaire created by naylor and his father collectively the naylors the ques- tions relate to the woman’s family background living environment age history of fertility treatment educational attainment personal achievements and desire to have a child preference is given to women with better education and no record of divorce domestic violence or difficult fer- tility histories and are from families whose members have a track record of contributing to their communities who are in a traditional marriage situation who are under age who are ethnic minorities and who are from locations where petitioner has not previously accepted recipients petitioner scores the questionnaires by hand transfers the information to a computer-readable form and enters the information into a computer_program which assigns a score to each woman the threshold score required for a woman to receive sperm is adjusted so that the number of recipients accepted matches the number of sperm vials available the naylors are authorized to override a score to accept or reject anyone if in their judgment the computer_program fails to account for a critical factor in petitioner received questionnaires and distributed sperm to women in verdate 0ct date jkt po frm fmt sfmt v files freefert sheila united_states tax_court reports petitioner received questionnaires and distributed sperm to women on date respondent sent petitioner a pro- posed exemption denial letter petitioner on date submitted a written protest the parties held a conference on date to discuss petitioner’s application_for exemption on date respondent issued a final_determination letter denying petitioner’s request for exemp- tion on date petitioner a california corporation filed its petition with this court seeking review of the final_determination discussion pursuant to sec_501 organizations described in sec_501 are exempt from federal income_taxation sec_501 organizations include corporations organized and operated exclusively for religious chari- table or educational_purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation and which does not participate in or intervene in any political campaign the requirement that a corporation be operated exclusively for exempt purposes is referred to as the operational_test see sec_1_501_c_3_-1 income_tax regs to meet the requirements of the operational_test an organization must engage primarily in activities that accomplish exempt pur- poses and no more than an insubstantial part of the organization’s activities may be in furtherance of a non- exempt_purpose sec_1_501_c_3_-1 income_tax regs an organization is not operated exclusively for exempt pur- poses unless it serves a public rather than a private interest sec_1_501_c_3_-1 income_tax regs respondent contends that petitioner does not pursuant to sec_501 operate exclusively for exempt purposes and therefore is not entitled to tax exemption more specifically respondent contends that petitioner’s operations do not pro- mote health or otherwise serve a charitable purpose peti- we need not and do not decide whether sec_7491 applies to a declaratory_judgment action the applicability of sec_7491 does not impact the outcome of this case verdate 0ct date jkt po frm fmt sfmt v files freefert sheila free fertility found v commissioner tioner contends that it operates exclusively to promote health by providing free health products and services sec_501 identifies a number of exempt purposes including charitable purposes the term charitable is used in its generally accepted legal sense sec_1 c - d income_tax regs in particular this court has found that the promotion of health for the benefit of the community is a charitable purpose 113_tc_47 affd 242_f3d_904 9th cir the promotion of health may be deemed beneficial to the community if the class of beneficiaries is sufficiently large to benefit the community as a whole id 71_tc_158 citing scott trusts sec_372 3d ed restate- ment trust sec_2d sec_372 cmt c the free provision of sperm may under appropriate cir- cumstances be a charitable activity petitioner however does not qualify for tax exemption because the class of peti- tioner’s beneficiaries is not sufficiently large to benefit the community as a whole petitioner contends that the class of individuals that could be direct beneficiaries of petitioner is extremely large all women of child-bearing age to the con- trary the class of potential beneficiaries includes only the limited number of women who are interested in having one man-naylor 3-be the biological father of their children and who survive the very subjective and possibly arbitrary selec- tion process controlled by the naylors over a 2-year period petitioner received inquiries and provided sperm to women in deciding who receives the sperm petitioner has certain preferences that narrow the class of eligible recipi- ents it is not apparent what if any relationship some of these preferences have to the promotion of health for example petitioner prefers women from families whose members have a track record of contributing to their commu- nities and women with better education petitioner doe sec_3 the contract and both petitioner’s form_1023 and web site indicate that naylor is the only donor on date however there were sperm vials available from two other do- nors petitioner’s web site states that vials are required for a cycle of artificial insemination and that women typically require cycles of artificial insemination ie sperm vials to achieve pregnancy thus the sperm provided by donors other than naylor was not sufficient to complete a typical cycle of artificial insemination moreover there is no evidence of these do- nors’ involvement with petitioner before or after date nor is there evidence that these donors’ vials were made available to the public the naylors have unfettered veto power in the selection process verdate 0ct date jkt po frm fmt sfmt v files freefert sheila united_states tax_court reports not provide medical_care research education or other serv- ices that advance or further health cf scott trusts sec_372 3d ed noting the types of organizations that pro- mote health in addition petitioner’s questionnaire fails to inquire about any health-related issues and petitioner’s board members and officers ie the naylors do not have health-related education or expertise simply put petitioner’s activities may promote the propagation of naylor’s seed and population growth but they do not promote health for the benefit of the community as the supreme court has recognized charitable exemp- tions are justified on the basis that the exempt entity confers a public benefit 461_us_574 while naylor may believe that petitioner’s activities make more of a positive difference to the world than all of the inventions and scientific discoveries that he could ever create we are not convinced that the distribution of one man’s ie naylor’s sperm to a small number of women selected in the manner presented pro- motes health or confers a public benefit accordingly we find that petitioner is not operated exclusively for exempt purposes and therefore does not qualify for tax exemption pursuant to sec_501 contentions we have not addressed are irrelevant moot or meritless to reflect the foregoing decision will be entered for respondent f petitioner does not contend nor is there evidence that it relieves the poor distressed or otherwise underprivileged verdate 0ct date jkt po frm fmt sfmt v files freefert sheila