department of the treasury internal_revenue_service washington d c tax exempt and division release number release date date date xiii xo okra xxx xxx hk ahn hhhxkx yoo iraxhihik contact person xoxhokehk identification_number hhh telephone number xxx xxx kxxhhhhk uil employer_identification_number xx-xxxoxxx dear in response to your request for a ruling that certain proposed contractual relationships not generate unrelated_business_taxable_income under section sec_12 a of the internal this is will revenue code the code you are exempt under sec_501 of the code as an organization described in sec_501 and have been classified as an educational_organization under sec_509 and sec_170 am you are the trustee of a number of charitable_remainder trusts collectively the trusts and as trustee you are the legal owner of the trusts’ assets in addition you have a remainder_interest in each of the trusts as a result of the relationship with the trusts as both trustee and beneficiary you have a substantia interest in the value of each trust moreover the donors to the trusts have funded the trusts with the intention that you benefit substantially from the assets of the trusts and that the assets will be managed to achieve the greatest possible retum on investment your endowment is invested in a diversified manner with investments in domestic and international equities emerging markets equities private equity real assets hedge funds fixed income securities and cash to each of the trusts for ‘you propose to create a contractual obligation pursuant to which you would issue a contract right of your endowment the cumulative value of the units would be the dollar value of the assets held by the individuai trusts combined with the units of the endowment held by the various departments and schools the contract right would entitle the trusts to receive periodic making up your institution a proportionate share or unit oka ix axxo iii iii payments based on the units owned by each of the trusts receive an investment return equal to that of the endowment the trusts would thereby be able to the market_value of each endowment unit you determine a spending rate on the endowment each year based in part an the endowment's investment performance you calculate the market_value of each endowment unit on a monthly basis or contribution to the endowment and is subsequently adjusted in accordance with the market_value of the endowment each department and division is entitled to an amount equal to the spending rate times the number of units it holds initially equals the value_of_the_gift a manner identical to your you seek to enable the trusts to invest in the endowment in departments or schools a_trust would acquire a unit in the endowment which would give the trust sec_2 contractual right against the university but no interest whatscever in the underlying investment_assets of the endowment the units would have the same value that you use for intemal accounting purposes the contract would provide that each trust would receive payments on the units held by it equal to the spending rate you establish for the endowment with payouts made at least annually or a_trust could chaose either to reinvest part of the payout or more frequently as appropriate redeem additional units depending on its cash requirements the trusts will treat payouts as ordinary_income regardless of the character of the underlying income of the endowment whether capital_gain ordinary_income or return_of_capital and regardless of whether the payout is made entirely by distributions of income or in part by redemption of units the trusts will treat redemptions of units ever and above receipt of the spending rate as generating long or short- term capital_gain or loss depending on the holding_period of the redeemed units under the contract the trusts would not have any ownership_interest in the underlying assets of the endowment or any contract rights with respect to the other trusts the trusts would have no power or right of any kind to control direct supervise recommend or review your business activities operations or decisions with respect to the endowment except the right to review the they would not have the right to veto or opt_out of any of the underlying payout computations endowment investments the contract would provide that with respect to the issuance of units you are neither a partner nor an agent of the trusts that the trusts would never be or become liable for any cost expense of payment incurred or due by you or for which you are liable or responsible relating to the endowment or the underlying endowment assets and you would indemnify and hold the trusts harmless from and against any liability arising out of any_action or inaction by you with respect to the endowment or the underlying endowment assets you have requested the fotlowing ruling the issuance of units by you to the trusts the making or receipt of payments with respect to the units and the holding or redemption of the units will not generate unrelated_business_taxable_income to you or the trusts section dollar_figure of rev not issue letter rulings pertaining to unrelated_business_income_tax issues arising when charitable_lead_trust assets are invested with charitable organizations thus the word trusts as used in this letter refers only provides that the service will proc xxx kx xix to your charitable_remainder trusts and the ruling issued by this participation by your charitable_remainder trusts in your endowment letter relates only to the law sec_511 of the code in part imposes a tax on the unrelated_business_taxable_income of organizations described in sec_801 sec_512 of the code defines the term unrelated_business_taxable_income as the gross_income derived by any organization from any unrelated_trade_or_business regularly carried on by it less the allowable deductions which are directly connected with the carrying on of such trade_or_business both computed with the modifications provided in sec_512 b section dollar_figure b of the code sets forth so-called modifications which are excluded from the computation of unrelated_business_taxable_income these modifications include dividends interest royalties rent from real_property and gain from the sale of property sec_513 of the code defines the term unrelated trade or business’ as any trade_or_business the conduct of which is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its exempt_purpose or function section c of the code provides that the term trade_or_business includes any activity which is carried on for the production_of_income from the sale_of_goods or the performance of services sec_1_513-4 of the income_tax regulations provides that gross_income of an exempt of the code is inciudible in organization subject_to the tax imposed by sec_511 the computation of unrelated_business_taxable_income if it is income from a trade_or_business such trade_or_business is regularly carried on by the organization and the conduct of such trade_or_business is not substantially related other than through the production of funds to the organization's performance of its exempt functions sec_1_513-1 b of the regulations provides that for purposes of sec_613 of the code the term trade_or_business has the same meaning it has in sec_162 and generally includes any activity carried on for the production_of_income from the sale_of_goods or performance of services sec_1_513-1 of the regulations provides that in determining whether trade_or_business from which a particular amount of gross_income derives is regularly carried on within the meaning of section dollar_figure of the code regard must be had to the frequency and continuity with which the activities productive of the income are conducted and the manner in which they are pursued for example specific business activities of an exempt_organization will ordinarily be deemed to be regularly carried on’ if they manifest a frequency and continuity and are pursued ina manner generally similar to comparable commercial activities of non-exempt organizations ox kai h rk hhi in general gross_income derives from sec_1_513-1 of the regulations provides that unrelated_trade_or_business within the meaning of sec_513 of the code if the conduct of the trade_or_business which produces the income is not substantially related other than through the production of funds to the purposes for which exemption is granted the presence of this requirement necessitates an examination of the relationship between the business activities which generate the particular income in question -- the activities that is of producing or distributing the goods or performing the services involved -- and the accomplishment of the ‘organization's exempt purposes sec_1 d of the regulations provides that trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has a causal relationship to the achievement of exempt purposes and is substantially retated for purposes of sec_513 of the code only if the causal relationship is thus for the conduct of trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods ar the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes where the production or distribution of the goods or the performance of the services does not contribute importantly to the accomplishment of the exempt purposes of an organization the income from the sale of the goods or the performance of the services does not derive from the conduct of related trade_or_business the accomplishment of any purpose for which an organization is granted exemption depends in each case upon the facts and circumstances involved productive of gross_income contribute importantly to whether activities a substantial one if rul rev 1969_2_cb_127 describes an organization that was formed to provide investment services on a fee basis exclusively to organizations exempt under sec_501 c of the code it receives funds from the participating exempt_organizations invests in common stocks reinvests income and realized appreciation and upon request liquidates a participant's states that providing interest and distributes the proceeds to the participant investment services on a regular basis for a fee is a trade_or_business ordinarily carried on for the services were regularly provided by one tax-exempt_organization for other profit tax-exempt organizations such activity would constitute unrelated_trade_or_business the rev_rul holds that the organization is not exempt under sec_501 as noted previously organizations described in sec_501 c of the code are subject_to tax in order for such an organization's on their unrelated_business_income under sec_511 income to be subject_to the unrelated_business_income_tax three requirements must be met the income must be from a trade_or_business the trade_or_business must be regularly carried on and the conduct of the trade_or_business must not be substantially related to the organization's exempt_purpose or function see sec_1_513-1 a of the regulations the rev_rul analysis you propose to enter into a contractual relationship with certain trusts that are charitable_remainder trusts in which you have an interest as a beneficiary and serve as trustee of the under such a contractual relationship each trust would receive payments on the units trust xxx xxii ar iioh aki ioniiok held by it equal to the spending rate you establish for your endowment with payouts made as determined by you each trust would acquire units from your endowment which would give the trusts a contractual right against you no interest whatsoever in the underlying investment_assets of the endowment the contract between you and the trusts would provide that the price of the units would equal their value at the time of acquisition the units would have the same value that you use for internal accounting purposes but consequently a_trust could choose either to reinvest part of the payout or redeem a portion of the units depending on its cash requirements thus under the contractual relationship with you the trusts would have a right to the payout declared by you plus the right to redeem the units at the value that you use for internal accounting purposes see rev_rul supra generally an organization that otherwise qualifies for recognition of exemption under sec_501 of the code and provides investment services on a regular basis for a fee to other exempt or nonexempt organizations would be engaged in an unrelated_trade_or_business under sec_513 such an activity would constitute a trade or business’ under sections c and b of the regulations and would be regularly carried on under sec_512 and c fee for investment management services provided to organizations unrelated to you or generated income from the management of the funds invested by such organizations these activities could result in not unrelated_business_taxable_income under sec_512 charging a fee for services and not otherwise receiving income from the services provided to the trusts not receive unrelated_business_taxable_income under sec_512 thus under these circumstances you will here however you are thus if you charged a the fact that you will engage in the investment activity for the benefit af individuals who are co- beneficiaries of the trusts at the same time that you engage in investment activity for your own benefit as the remainder beneficiary limits the scope of the service provided to others’ and distinguishes it from a commercial venture in view of the foregoing we rule as follows the issuance of units fram you to the trusts the making or receipt of payments with respect to and the holding or redemption of the units will not generate unrelated business the taxable_income to you or the trusts units this ruling is based on the following two assumptions third other not charge any fee party management firms for managing the investment of the trusts in your you will endowment receive reimbursement of expenses for management services provided to your endowment these fees and expenses are charged against the aggregate return of the endowment and will be reflected indirectly in the payout to the trusts and others participating in the endowment you will also be entitled to the fees any trustee may receive with respect to the administering the trusts charge and fee a xo h kh iai hin hx kher you are the sole charitable_beneficiary of each charitable_remainder_trust this ruling is based on the understanding that there will be no material changes in the facts upon which it is based we express no opinion as to the tax consequences of the proposed transaction under any other section of the code pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to your authorized representatives a copy of this letter should be kept in your permanent records this ruling is directed only to the organization that requested it provides that it may not be used or cited by others as precedent sec_6110 of the code if there are any questions about this telephone number are shown in the heading of this letter_ruling please contact the person whose name and sincerely robert w malone acting manager exempt_organizations technical group enclosure notice


internal_revenue_service number release date index number --------------------------- ------------------------------------ ------------------- -------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b03 plr-101174-15 date date legend x sub ------------------------------------------------------------------------------------------------------ ------------------------ ------------------------------------------------------------------------------------------------------ ------------------------ state ------------- d1 d2 d3 d4 ------------------ ------------------------ -------------------------- --------------------- dear ------------ this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representative requesting a ruling under sec_1362 of the internal_revenue_code code the information submitted states that sub was incorporated on d1 under the laws of state and elected to be an s_corporation effective d2 sub became a wholly facts plr-101174-15 owned subsidiary of x on d3 and x elected to treat sub as a qsub effective as of d4 however due to inadvertence x’s election to treat sub as a qsub was ineffective x represents that it and sub have filed tax returns for all the relevant tax years consistent with the tax treatment of sub as a qsub from d4 law and analysis sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1361 provides that except as provided in regulations prescribed by the secretary for purposes of the code - i a corporation which is a qsub shall not be treated as a separate corporation and ii all assets liabilities and items of income deduction and credit of a qsub shall be treated as assets liabilities and such items as the case may be of the s_corporation sec_1361 provides that the term qsub means any domestic_corporation which is not an ineligible_corporation as defined in sec_1361 if i percent of the stock of such corporation is held by the s_corporation and ii the s_corporation elects to treat such corporation as a qsub sec_1362 provides that an election under sec_1362 will be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that if an election under sec_1362 or sec_1361 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or or sec_1361 the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in plr-101174-15 the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or a qsub as the case may be or b to acquire the shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation or a qsub as the case may be as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation will be treated as an s_corporation or a qsub as the case may be during the period specified by the secretary conclusion based solely upon the information submitted and the representations made we conclude that x’s election to treat sub as a qsub was ineffective for the taxable_year beginning d4 we also conclude that the circumstances resulting in such ineffectiveness were inadvertent within the meaning of sec_1362 accordingly under sec_1362 sub will be treated as a qsub from d4 and thereafter provided that sub’s qsub election was otherwise valid and has not otherwise terminated under sec_1361 except for the specific rulings above we express or imply no opinion concerning the federal_income_tax consequences of the facts of this case under any other provision of the internal_revenue_code specifically we express no opinion regarding whether x otherwise qualifies as a small_business_corporation under sec_1361 or whether sub otherwise meets the definition of a qsub under sec_1361 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 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-101174-15 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely bradford r poston senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


department of the treasury internal_revenue_service uil tax_exempt_and_government_entities_division date date taxpayer_identification_number number release date form tax_year s ended person to contact id number contact numbers phone fax certified mail - return receipt requested dear in a determination_letter dated october 19xx you were held to be exempt from federal_income_tax under sec_501 c of the internal_revenue_code the code based on recent information received we have determined you have not operated in accordance with the provisions of sec_501 c of the code accordingly your exemption from federal_income_tax is revoked effective january 20xx this is a final letter with regard to your exempt status we previously provided you a report of examination explaining why we believe revocation of your exempt status was necessary at that time we informed you of your right to contact the taxpayer_advocate as well as your appeal rights on june 20xx you signed form 6018-a consent to proposed action agreeing to the revocation of your exempt status under sec_501 c of the code you are required to file federal_income_tax returns for the tax period s shown above if you have not yet filed these returns please file them with the the ogden service_center within days from the date of this letter unless a request for an extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service office_of_the_taxpayer_advocate if you have any questions please contact the person whose name and telephone number are shown at the beginning of this letter thank you for your cooperation sincerely barbara l harris acting director eo examinations department of the treasury internal_revenue_service tax_exempt_and_government_entities_division uil date date taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax manager's name id number manager's contact number response due_date certified mail - return receipt requested dear why you are receiving this letter enclosed is a copy of our report of examination explaining why revocation of your organization's tax-exempt status is necessary what you need to do if you agree if you agree with our findings please sign the enclosed form 6018-a consent to proposed action and return it to the contact at the address listed above we'll send you a final letter revoking your exempt status if we don't hear from you if we don't hear from you within calendar days from the date of this letter we'll process your case based on the recommendations shown in the report of examination and this letter will become final effects of revocation in the event of revocation you'll be required to file federal_income_tax returns for the tax_year s shown above file these returns with the contact at the address listed above within calendar days from the date of this letter unless a request for an extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns what you need to do if you disagree with our findings letter 3610-r catalog number 59432g if you disagree with our position you may request a meeting or telephone conference with the supervisor of the contact identified in the heading of this letter you also may file a protest with the irs appeals_office by submitting a written request to the contact person at the address listed above within calendar days from the date of this letter the appeals_office is independent of the exempt_organizations division and resolves most disputes informally for your protest to be valid it must contain certain specific information including a statement of the facts the applicable law and arguments in support of your position for specific information needed for a valid protest please refer to page one of the enclosed publication how to appeal an irs decision on tax-exempt status and page six of the enclosed publication the examination process publication also includes information on your rights as a taxpayer and the irs collection process please note that fast track mediation referred to in publication generally doesn't apply after we issue this letter if you and appeals don't agree on some or all of the issues after your appeals_conference or if you don't request an appeals_conference you may file suit in united_states tax_court the united_states court of federal claims or united_states district_court after satisfying procedural and jurisdictional requirements you may also request that we refer this matter for technical_advice as explained in publication please contact the person identified in the heading of this letter if you're considering requesting technical_advice if we send a determination_letter to you based on a technical_advice_memorandum issued by the exempt_organizations rulings and agreements office then no further irs administrative appeal will be available to you contacting the taxpayer_advocate office is a taxpayer right you have the right to contact the office_of_the_taxpayer_advocate service tas tas is your voice at the irs this service helps taxpayers whose problems with the irs are causing financial difficulties who have tried but haven't been able to resolve their problems with the irs and those who believe an irs system or procedure is not working as it should if you believe you are eligible for tas assistance you can call the toll-free number or tty tdd for more information go to www irs govladvocate if you prefer you may contact your local taxpayer_advocate at internal_revenue_service office_of_the_taxpayer_advocate for additional information if you have any questions please call the contact at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you letter 3610-r catalog number 59432g thank you for your cooperation sincerely acting director eo examinations enclosures report of examination form 6018-a publication publication letter 3610-r catalog number 59432g form 886-a rev date name of taxpayer issue explanations of items tax identification_number schedule number or exhibit year period ended 20xx whether revenue code irc sec_501 c as a social_club should be exempt from federal_income_tax under internal facts was incorporated in the state of in december of 19xx applied for exempt status and a letter was issued on october 19xx granting exempt status as a c organization an addendum was added to that letter stating if your organization owns and maintains private residential streets roadways culverts bridges and drainage areas which are not a part of your social facility you may jeopardize your exempt status under sec_501 this is not a c activity the original started as a development that would sell lots and have numerous amenities among these amenities were to be horse stables bridle trails a golf course a horse racing track and other attractions the original development had financial trouble and had to sell off land the original lot owners did not want to see the development fail and started their intent was to resume sales in the 19xx's and continue to sell lots until the could take over operations that goal was reached in the late 19xx's when the dissolved and the new took over operations as a members-only facility consists of one-quarter acre lots of the total lots there are the current lots that can be developed and are set_aside as an open space conservation_easement the developed lots and the open space lots are not contiguous only sells enough lots to maintain the year old common facilities so the that the dues on the membership are not raised dues are the largest percentage of the income brought into the organization lots are primarily used for dry camping as the organization does not provide water there are only a few full time residents of the organization guests pay their own way they do not rent the common facilities to the public the organization has two winter storage areas for members to store their rv's for a fee the organization provides this amenity to members as additional security due to vandalism and thefts in the complex members have to transport water to their own properties the clubhouse is open all year round county health laws place restrictions on the number of days members can stay on the property due to the lack of water and sanitation facilities form 886-a catalog number 20810w page_1_ publish no irs gov department of the treasury-internal revenue service form 886-a rev date name of taxpayer explanations of items tax identification_number schedule number or exhibit year period ended 20xx articles of incorporation the articles of incorporation they are for list seven purposes for the to foster and maintain acquaintanceship and friendship among the members of through the maintenance generally of a western atmosphere and way of life through recreational activities fostered through the acquisition and ownership of community parkway bridle trails stables playgrounds open spaces and recreational areas clubhouses swimming pools and other places of amusement throughout the general real_estate development known as in own all of the roads designated as private roads on the various plat of subdivisions within the general development of to maintain all of these roads and bridle trails also to own and operate a water system or systems within certain designated areas of the development and to levy monthly charges for dues among the members of the and additional charges from among the users of the water system or systems to enforce liens charges restrictions conditions and covenants existing upon and or created benefit of parcels of real_property within the overall development over which this corporation will have jurisdiction and to which said parcels may be subject_to the extent that the corporation has the legal right to enforce the same and to pay all expenses incidental thereto to pay the taxes and assessments which may be levied by any public authority upon any of the property now or hereafter acquired as common areas parks playgrounds clubhouses club buildings places of amusement and or recreation areas wherever situate as may be maintained for the general benefit and use of the members of the to expend the monies collected by the received for the payment and discharge of costs expenses and obligations incurred by the in carrying out any and all of the purposes for which this corporation has been formed particularly to pay out from dues all sums necessary for the maintenance of the private roads throughout from assessments and charges and other sums generally to do any and all lawful things which may be advisable proper authorized and or permitted to be done by nonprofit_corporations under and by virtue of the laws of the state of incidental to the general welfare of the members of the association all of whom will be owners of lots within the various subdivisions of a real_estate development to improve and maintain all of the roadways culverts bridges and drainage areas set forth in the various plats of subdivisions of cooperation with public agencies police and fire protection throughout the general development of and to provide for generally and in form 886-a catalog number 20810w page_2_ publish no irs gov department of the treasury-internal revenue service form 886-a rev date name of taxpayer explanations of items tax identification_number schedule number or exhibit year period ended 20xx the organization reported the following gross_receipts on its 20xx form_990 revenues membership dues investment_income rents gross_sales land sales of inventory total gross_receipts amount dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figuredollar_figure dollar_figure president advised that the organization sells lots and holds the contracts on the mortgages to those sales which allows the organization to foreclose on the lots for nonpayment the organization has to purchase properties at a sheriff's auction when contracts held by outside lenders are foreclosed upon this costs the organization more money program gives members access to camping areas nationwide has limited nonmember use of its facilities as part of the this nontraditional income sources nontraditional income is received by an organization exempt under sec_501 c when money-making activities do not serve the organization's exempt_purpose the nontraditional sources for are lot sales investment_income propane sales range lease rv storage total bylaws dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure in article of the bylaws the organization's purpose is stated as shall be conducted as a nonprofit social and maintenance organization for the the purposes generally set forth in the articles of incorporation concerning the development and sale of property at part to maintain shared facilities and infrastructure for the enjoyment pleasure and benefit of the membership as set forth below the may authorize the board_of directors of to draw enact and enforce regulations governing access to and use of shared facilities and infrastructure for the purpose of maintaining and preserving said facilities and the purpose of the shall be in in form 886-a catalog number 20810w page_3_ publish no irs gov department of the treasury-internal revenue service form 886-a rev date name of taxpayer explanations of items tax identification_number schedule number or exhibit year period ended 20xx infrastructure maintaining peace and tranquility minimizing harmful excessive or costly impact on said facilities and infrastructure and for the purpose of ensuring access and to provide for the enjoyment welfare and security of the membership the shall authorize such regulations and shall take or authorize such actions as it may determine to be in the general interests of the lot owners and the shall take no action that unduly favors either those owners who have purchased lots primarily for recreation or those owners who have purchased lots with the intent to establish permanent residence now or in the future the shall therefore be conducted so as to preserve for both recreational and residential lot owners article of the bylaws states in the is authorized to sell real_property consisting to purchasers notwithstanding the conditions set forth in authorization to sell lots the of the platted lots in the area known as may appoint agents to show lots for sale to prospective purchasers and may enter into legal agreements and derive income from the sale of lots or transfer ownership of said lots from the below may with approval of the board_of directors sell lease grant rights to enter the upon or may withhold from sale or withhold the right to enter upon portions of within divisions or other legal description when the sale lease rights to entry or the withholding of sale or rights to entry benefits the include but are not strictly limited to preservation of sections of undeveloped state the preservation and protection of various species of plants or animals the creation of fire breaks the control of access the preservation and control of hunting or fishing other sporting used including use by off-road vehicles and activities relating to conservation said benefits may generally in a natural or law sec_501 provides exemption from income_tax for clubs organized for pleasure recreation and other non-profitable purposes substantially_all of the activities of which are for such purposes and no part of the net_earnings of which inures to the benefit of any private shareholder form 886-a catalog number ow page _l publish no irs gov department of the treasury-internal revenue service form 886-a rev date name of taxpayer explanations of items tax identification_number schedule number or exhibit year period ended 20xx sec_1_501_c_7_-1 provides that a the exemption provided by sec_501 a for organizations described in sec_501 c applies only to clubs which are organized and operated exclusively for pleasure recreation and other non-profitable purposes but does not apply to any club if any part of its net_earnings inures to the benefit of any private shareholder in general this exemption extends to social and recreation clubs which are supported solely by membership fees dues and assessments however a club otherwise entitled to exemption will not be disqualified because it raises revenue from members through the use of club facilities or in connection with club activities b a club which engages in business such as making its social and recreational facilities available to the general_public or by selling real_estate timber or other products is not organized and operated exclusively for pleasure recreation and other non-profitable purposes and is not exempt under sec_501 a solicitation by advertisement or otherwise for public patronage of its facilities is prima facie evidence that the club is engaging in business and is not being operated exclusively for pleasure recreation or social purposes however an incidental sale of property will not deprive a club of its exemption in revrul_68_168 1968_1_cb_269 a nonprofit organization was formed to develop a lake and adjacent areas to provide facilities for the pleasure and recreation of its members they acquired substantial acreage subdivided the lots and leased them to members for year terms receipts from the organization were primarily derived from initial payments and annual rentals and not from the members' use of recreational facilities or activities the subdividing and leasing of lots in the manner described constitutes engaging in business although the revenues from this activity are derived from the organization's members only the revenues are not raised from the members' use of recreational facilities or in connection with the organization's recreational activities the conduct of such real_estate activity whether with members only or with the general_public is not incidental to or in furtherance of any purpose covered by sec_501 c of the code accordingly the organization does not qualify for exemption from federal_income_tax under that section in revrul_66_149 c b a club was held to be not exempt as an organization described in code sec_501 because it regularly derived a substantial part of its income from nonmember sources such as for example dividends and interest from investments it owned the ruling clearly states that to the extent that income is derived from nonmember sources it inures to the benefit of the members revrul_58_589 provides that there must be an established membership of individuals personal contacts and fellowship a commingling of the members must play a material part in the life of the organization in addition net_earnings may inure to members in such forms as an increase in services offered by the club without a corresponding increase in dues or other fees paid for club support or as an increase in the club's assets which would be distributable to members upon the dissolution of the club the revenue_ruling provides practical guidance stating that a business activity a non-traditional activity will defeat exemption unless it is incidental trivial or nonrecurring in nature west side tennis club v commissioner fed form 886-a catalog number 20810w page_5_ publish no irs gov department of the treasury-internal revenue service form 886-a rev date name of taxpayer explanations of items tax identification_number schedule number or exhibit year period ended 20xx 2d certiorari denied 311_us_674 mah jongg league inc v united_states fed supp revrul_75_494 g b provides answers to inquires asking whether certain activities engaged in by clubs similar to the club described in revrul_69_281 g b will preclude their exemption under code sec_501 the ruling was given in question answer format the question answers that are relevant to this report are shown below question will a club fail to qualify for exemption under sec_501 c of the code if it owns and maintains residential streets which are not a part of its social facilities answer yes a street providing immediate access to a club's golf course could be considered part of the course and thus part of a social facility however streets primarily serving residential areas are not a part of a club's social facilities even though members must travel on them to reach the social facilities thus a club which owns and maintains residential streets is not operated exclusively for pleasure recreation and other non-profitable purposes as required by sec_501 of the code question will a club fail to qualify for exemption under code sec_501 if it administers and enforces covenants for preserving the architecture and appearance of the housing development answer yes a club which administers and enforces covenants for the preservation of the architecture and appearance of the housing development is not operated exclusively for pleasure recreation and other non-profitable purposes as required by code sec_501 c taxpayer's position the taxpayer's position has not been determined at this time government's position no longer qualifies for exemption from federal_income_tax under internal the revenue code sec_501 c isn't operated for pleasure recreation and other non-profitable purposes a substantial number of the activities are not for such purposes and a portion of the net_earnings inure to the benefit of members the disqualification is for the following reasons form 886-a catalog number 20810w page__ _ publish no irs gov department of the treasury-internal revenue service form 886-a rev date name of taxpayer explanations of items tax identification_number schedule number or exhibit year period ended 20xx is selling lots on a continuing basis in addition holds the mortgage contracts on a number of the lots a c organization cannot be in the business of holding mortgages has issued restrictions and covenants governing the property this is not an allowed c activity owns and maintains the roads of the property which is not a c activity sec_501 -1 b states that a club which engages in business such as making its social and recreational facilities available to the general_public or by selling real_estate timber or other products is not organized and operated exclusively for pleasure recreation and other non-profitable purposes and is not exempt under sec_501 a solicitation by advertisement or otherwise for public patronage of its facilities is prima facie evidence that the club is engaging in business and is not being operated exclusively for pleasure recreation or social purposes however an incidental sale of property will not deprive a club of its exemption continues to sell real_estate lots activity was never intended to be allowed by a c this activity invalidates the exempt status under sec_501 c of the internal_revenue_code further evidence that this activity is in violation of sec_501 c is that according to the president of the organization is to make it easier to maintain control of the property in the case of a foreclosure holds the sales contracts on a number of the lots this activity maintains covenants and restrictions on the property revenue states that a club which administers and enforces covenants for the preservation of the architecture and appearance of the housing development is not operated exclusively for pleasure recreation and other non-profitable purposes as required by code sec_501 c the articles of incorporation for to enforce liens charges restrictions conditions and covenants existing upon and or created benefit of parcels of real_property within the overall development over which this will have jurisdiction and to which said parcels may be subject_to the extent that the has the legal right to enforce the same and to pay all expenses incidental thereto states one of its purposes is the fact that enforcing covenants and restrictions on the property is in the articles of incorporation is evidence of an activity in violation of c status revrul_75_494 states a road providing access to a club's golf course could be considered a part of the course and part a social facility however streets primarily serving residential areas are not a part of a club's social facilities even though members must travel on them to reach the social facilities thus a club which owns and maintains residential streets is not operated exclusively for pleasure recreation and other non-profitable purposes as required by sec_501 of the code form 886-a catalog number 20810w page_ _ publish no irs gov department of the treasury-internal revenue service form 886-a rev date name of taxpayer explanations of items tax identification_number schedule number or exhibit year period ended 20xx multiple portions of the articles of incorporation for ownership and maintenance of the residential roads of the complex the ownership of the roads is not allowed for a c organizations the owning of roads was addressed in an addendum to the determination_letter for pertain to the the sale of inventory propane by the organization contributes dollar_figure to the organization this is a continuing activity by the organization despite being members-only the sale of propane is a nontraditional activity the sale of the propane is a personal service to the members and is not in keeping with the normal activities of a c exempt_organization another personal_service_activity is the providing of rv storage facilities to the members a social club's purpose is to be engaged in the activity of promoting social interaction the mention of the social requirements of a c organization does not appear the prime purpose of the organization see attachment a for a calculation of nontraditional income the amount of nontraditional income of significantly exceeds the limit allowed to a c organizations the gross_receipts from the sale of land are almost a quarter of the total gross_receipts of the organization this shows that the activity is not trivial or insignificant for the organization this is an activity more in line with a mortgage_lender or bank not an organization with exemption under sec_501 conclusion no longer qualifies as an exempt_organization under the provisions of the sec_501 a as an organization described in sec_501 c a number of the activities are in violation of the c status the dollar_figure of income from these activities is significant as it results in an nontraditional income_percentage see exhibit a at the end of this report for the calculation therefore january 20xx exempt status should be revoked effective should this revocation be upheld the organization is required to file form_1120 or form 1120-h for all periods starting with the effective date whether or not it has taxable_income form 886-a catalog number 20810w page_8_ publish no irs gov department of the treasury-internal revenue service form 886-a rev date name of taxpayer explanations of items tax identification_number schedule number or exhibit year period ended 20xx alternative position if the organization is in compliance with the requirements of law and continues to qualify as an exempt_organization described in sec_501 forms 990-t should be filed to report the net_income from nontraditional activities facts in the year ended december 20xx investment_income and nontraditional income in total gross_receipts has not filed a form 990-t under the assumption that all income is member only income which is not taxable included its receipts from activity sales land rv storaqe propane sales ranqeland lease investment_income net_income subject_to form 990-t income dollar_figure dollar_figure dollar_figure law expense dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure gain loss dollar_figure reg c -1 b provides in part that a club which engages in business such as by making its social and recreational facilities available to the general_public or by selling real_estate timber or other products is not organized and operated exclusively exclusively is the standard exercised prior to the enactment of p l for pleasure recreation and other non-profitable purposes and is not exempt under sec_501 a following the enactment of p l in the term exclusively should be replaced with the terms substantially_all sec_512 stipulates that all income derived by an organization exempt under the provisions of c is taxable_income except for the income derived from members for dues assessments or participation by members and their bona_fide guests for activities traditionally considered to be exempt_purpose activities of a social or recreational club revproc_71_17 provides the record keeping requirements for social clubs to substantiate the member and nonmember character of the income derived by the organization for products or services provided form 886-a catalog number 20810w page_9_ publish no irs gov department of the treasury-internal revenue service form 886-a rev date name of taxpayer explanations of items tax identification_number schedule number or exhibit year period ended 20xx public law amends revproc_71_17 to allow organizations exempt from income_tax to have up to of their gross_income from nonmember sources and an additional from investment_income without jeopardizing the organization's exempt status it also amends the language of sec_501 from operated exclusively for pleasure recreation and other non-profitable purposes to substantially_all of the activities are for such purposes portland golf club v commissioner the supreme court affirmed the original position of the service held in revrul_81_69 and decided that nonmember income must be determined by using the same method to allocate fixed costs to nonmember sales as that used to compute the club's actual profit or loss revrul_58_589 states in part an organization must establish that it is a club both organized and operated exclusively for pleasure recreation and other non-profitable purposes and that no part of its net_earnings inures to the benefit of any private_shareholder_or_individual to meet the first requirement there must be an established membership of individual's personal contacts and fellowship a commingling of the membership must play a material part in the life of the organization government's position has received income from nontraditional sources and investment_income the total nontraditional income including investment_income is dollar_figure the expenses allocable to nontraditional activities are dollar_figure leaving a net amount of dollar_figure the organization would be entitled to the specific deduction of dollar_figure leaving taxable_income of dollar_figure the dollar_figure would be taxed at a rate of on the amount over dollar_figure resulting in a tax amount of dollar_figure taxpayer's position the taxpayer's position is not known at this time conclusion has incurred at least dollar_figure in unrelated_business_taxable_income in the tax_year ended december 20xx accordingly the organization should file form 990-t and be assessed dollar_figure in tax form 886-a catalog number 20810w page _jq publish no irs gov department of the treasury-internal revenue service form 886-a rev date name of taxpayer explanations of items tax identification_number schedule number or exhibit year period ended 20xx exhibit a nontraditional income_percentage calculation gross_receipts minus membership dues investment_income rangeland lease rv storage gross_sales land modified gross_receipts per rev proc71-17 non-traditional activity - gross_sales land investment_income propane sales rangeland lease rv storage total nontraditional income divided by modified gross_receipts nontraditional income dollar_figure percentage of non-traditional income 20xx dollar_figure dollar_figure dollar_figure dollar_figure form 886-a catalog number 20810w page _11 publish no irs gov department of the treasury-internal revenue service


uniform issue list internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to date ope ep t4 attn legend state a employer m plan x group b employees t i ladies and gentlemen this letter is in response to your request for a private_letter_ruling dated august supplemented by a letter dated date submitted on your behalf by your authorized representative regarding the federal_income_tax treatment of certain contributions to plan x under sec_414 of the internal_revenue_code code and the following facts and representations have been submitted pursuant to the law of state a employer m a municipality under the law of state a has established plan x for the benefit of group b employees the law of state a requires group b employees to contribute percent of their salary to plan x plan x satisfies the qualification requirements under sec_40l a of the code further it has been represented that core e employer m has adopted a resolution providing that in accordance with the law of state a and that group employer m shall pick up group b employees' contributions to plan x b employees' current cash salaries shall be reduced by the amount picked up group b employees will not be given the option of receiving cash directly in lieu of contributions based on the aforementioned facts and representations you have requested the following rulings the mandatory employee contributions picked up by employer m shall be excluded from the current gross_income of group b employees until distributed the contributions picked up by employer m will not constitute wages from which federal income taxes must be withheld sec_414 of the code provides that contributions otherwise designated as employee contributions shall be treated as employer contributions if such contributions are made to a plan described in sec_401 established by a state government or a political_subdivision thereof and are picked up by the employing unit the federal_income_tax treatment to be accorded contributions which are picked up by the employer within the meaning of sec_414 of the code is specified in revrul_77_462 c b in that revenue_ruling the employer school district agreed to assume and pay the amounts employees were required by state law to contribute to a state pension_plan concluded that the school district's picked-up contributions to the plan are excluded from the employee's gross_income until such time as they are distributed to the employees the revenue_ruling held further that under the provisions of sec_3401 of the code the school district's contributions to the plan are excluded from wages for purposes of the collection of income_tax at source on wages therefore no withholding is required from the employees' salaries with respect to such picked-up contributions revrul_77_462 the issue of whether contributions have been picked up and revrul_81_36 c b by an employer within the meaning of sec_414 of the code is addressed in revrul_81_35 1981_1_cb_255 revenue rulings established that the following two criteria must be met contributions although designated as employee contributions are being paid_by the employer in lieu of the employer must specify that the these a7 contributions by the employee and be given the option of choosing to receive amounts directly instead of having them paid_by the employer to the pension_plan is immaterial whether an employer picks up contributions through a reduction in salary an offset against future salary increases or a combination of both furthermore it the employee must not in revrul_87_10 c b the internal_revenue_service considered whether contributions designated as employee contributions to a governmental_plan are excludable from the gross_income of the employee service concluded that to satisfy the criteria set forth in revenue rulings and with respect to particular contributions the required specification of employee contributions must be completed before the period to which such contributions relate the in this case the resolution adopted by employer m satisfies the criteria set forth in revrul_81_35 and revrul_81_36 because employer m will assume and pay mandatory employee contributions to plan x contributions by group b employees and group b employees may not elect to receive such contributions directly instead of having such contributions paid_by employer m to plan xx in lieu of accordingly we conclude that the mandatory employee contributions picked up by employer m shall be treated as employer contributions and will not be includible in group b employees gross_income in the year in which contributed these amounts will be includible in the gross_income of group b employees or their beneficiaries only in the taxable_year in which they are distributed to the extent that the amounts represent contributions by employer m because we have determined that the amounts picked up by employer m on behalf of group b employees are to be treated as employer contributions such amounts are excepted from wages as defined in sec_3401 a therefore no withholding of federal_income_tax is required from group b employees' salaries with respect to such picked-up contributions for purposes of the application of sec_414 it the code is immaterial whether employer m picks up contributions through a reduction in salary an offset against future salary increases or a combination of both of the effective date for the commencement of the pick up of group b employees' contributions as specified in the aforesaid resolution cannot be earlier than the later of the 2e7 date the resolution is signed or the date it effect is put into these rulings are based on the assumption that plan x meets the requirements for qualification under sec_401 of the code at the time of the proposed contributions and distributions no opinion is expressed as to whether the amounts in question are subject_to tax under the federal_insurance_contributions_act the amounts in question are paid pursuant to a salary reduction agreement within the meaning of sec_3121 of the code no opinion is expressed as to whether this ruling is directed only to the taxpayer who requested it it may not be used or cited by others as precedent sec_6110 of the code provides that a copy of this letter is being sent to your authorized representative in accordance with the power_of_attorney on file in this office sincerely yours john g riddle jr manager employee_plans technical group tax_exempt_and_government_entities_division enclosures deleted copy of private_letter_ruling notice cc pa


internal_revenue_service number info release date index number ---------------------------- ------------------------------------------ ----------------------------- ------------------------- - department of the treasury washington dc third party communication date of communication month dd yyyy person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc psi genin-114701-05 date date dear -------------- this letter responds to your inquiry dated date requesting information relating to a late s_corporation_election for the taxable_year based on the information provided it appears that you are ineligible for automatic relief under revproc_2003_43 because the window period has closed further you are ineligible for relief under revproc_97_48 due to the late filing of your tax_return generally to request relief for a late s_corporation_election you must request a private_letter_ruling plr from the national_office the procedures for requesting a plr are set forth in revproc_2005_1 copy enclosed the standard user_fee for a plr is dollar_figure however if the entity’s gross_income was less than dollar_figure million on the tax_return it qualifies for a reduced user_fee of dollar_figure in order for the lower fee to be accepted you must include a statement verifying the taxpayer’s gross_income for the last 12-month taxable_year otherwise you will be billed for the higher fee if you decide to submit a formal request for a plr please follow the sample format shown in appendix b of revproc_2005_1 your request must include required procedural statements a user_fee check and documents to substantiate your intent to be an s_corporation please refer your ruling_request to the following address attn cc pa t p o box ben franklin station washington dc direct to cc psi genin-114701-05 incidentally the irs has developed two compact discs cds to help educate small_business owners on their tax responsibilities publication introduction to federal taxes for small_business self-employed and publication small_business workshop these items are free and can be ordered by calling an online classroom is available at www irs gov businesses small this letter has called your attention to certain general principles of the law it is intended for informational purposes only and does not constitute a ruling please keep this letter with your tax records and feel free to provide a copy of it to your authorized representative we hope that the above information proves helpful if you have any additional questions please contact our office at s dianna k miosi enclosure revproc_2005_1 dianna k miosi chief branch office of associate chief_counsel passthroughs special industries sincerely


internal_revenue_service national_office technical_advice_memorandum number release date third party contact index uil no date cc dom it a b6 case mis no tam-118843-98 district_director taxpayer’s name taxpayer’s address taxpayer’s identification no years involved date of conference legend taxpayer a b state a state b state c state d state e date a date b year a amount a amount b amount c did the taxpayer acquire the right to conduct business in state b issues state b branching rights with a fair_market_value basis pursuant to sec_597 of the internal_revenue_code of in any event has the taxpayer properly determined the fair_market_value of the state b branching rights upon their acquisition in any event did the taxpayer abandon the state b branching rights in year a so that a deduction is permitted under sec_165 of the code conclusions the taxpayer did not acquire the state b branching rights with a fair_market_value basis pursuant to sec_597 of the code market_value of the state b branching rights upon their acquisition in any event the taxpayer has not properly determined the fair in any event the taxpayer did not abandon the state b branching rights in year a so that a deduction is permitted under sec_165 of the code facts on date a a a subsidiary of the taxpayer acquired three insolvent federal savings and loan associations through supervisory mergers approved by the federal_home_loan_bank board fhlbb at the time of the transaction a was headquartered in state a two of the acquired savings associations were located in state b and one was located in state c after the mergers the acquired institutions ceased to exist as separate entities thereafter the acquired institutions’ historic businesses were operated as branches of a in their respective states a entered into a number of written agreements for the acquisitions first on date b a entered into a merger agreement with b to acquire the three merged institutions the parties agreed to several conditions precedent before the completion of the merger among them were a the fhlbb must approve the transaction and b the federal savings and loan insurance corporation fslic must provide a satisfactory assistance agreement on date a a entered into an assistance agreement with the fslic in which the agency stated it would provide indemnification and or financial assistance under title u s c f sec_406 of the national housing act for the acquisition of the three insolvent institutions fslic agreed to provide several types of financial assistance eg a cash negative net_worth payment and loss protection payments with respect to certain assets a imposed a number of conditions precedent to its obligations under the assistance agreement among them were a the fhlbb issue a federal charter to a in substantially the form it requested b a supervisory forbearance letter be issued and c the fhlbb certify that grounds for the merger exist under title u s c sec_1464 or iii the last paragraph of the agreement stated that restrictions imposed by either fslic or the fhlbb on the insolvent institutions would not apply to a the liabilities that the taxpayer assumed in connection with the acquisition of the state b institutions exceeded the fair_market_value of the assets it received by approximately amount a for financial_accounting purposes that amount was treated as the cost of core_deposits and goodwill and amortized over various periods no federal tax deduction however was initially claimed for any portion of this amount in year a a sold its state b branches to two in-state financial institutions in one sale agreement a agreed not to compete with the acquirer in state b or in adjacent counties in state d and state e for a period of three years except by national or regional advertising not targeted at state b in the other agreement a agreed not to compete with the acquirer for a period of two years within a specified metropolitan_statistical_area within state b on its year a federal_income_tax return a reported gain of amount b from the sale of its state b branches the adjusted_basis for the branches did not include any portion of the excess of liabilities assumed over the fair_market_value of assets acquired in connection with the acquisition of the state b institutions amount a the examining agent and the taxpayer do not dispute that taxpayer’s acquisition of the state b institutions was part of a reorganization within the meaning of sec_368 of the code and that the assets acquired by the taxpayer would generally have a carryover_basis pursuant to sec_362 the taxpayer currently claims however under the plan the two state b institutions were to be merged into b a state c_corporation prior to the merger with a that of amount a approximately amount c reflects the fair_market_value of state b branching rights and that it should be permitted to deduct this amount under sec_165 because the rights were abandoned in year a taxpayer asserts that the rights were assistance provided to a within the meaning of sec_597 of the internal_revenue_code of and that it thus acquired the rights as tax-exempt_income with a fair_market_value basis law and analysis issue sec_597 background at the time a acquired the three insolvent institutions sec_597 of the internal_revenue_code of provided that the gross_income of a domestic_building_and_loan_association did not include any amount of money or other_property received from the fslic pursuant to sec_406 of the national housing act u s c f regardless of whether any note or other instrument is issued in exchange therefore sec_597 provided that payments described in sec_597 cause no reduction in the basis of the assets of the recipient sec_597 was first added to the code effective date the section was intended to resolve the question of whether financial assistance from fslic was either includible in income because of a quid pro quo or whether the assistance was a non- shareholder contribution_to_capital within the meaning of 412_us_401 and would have a zero basis itself under sec_362 or reduce the basis of other_property owned by the taxpayer federal banking law at the time a acquired the three insolvent thrifts the fhlbb was an independent federal_agency and authorized among other things to charter federal savings and loan associations under such rules and regulations as it may prescribe u s c b and a this mandate was sufficiently broad for the fhlbb to permit federal associations to operate branches throughout a state as well as to operate branches in multiple states without regard to limitations of state law 557_fsupp_23 d d c nonetheless the agency chose to exercise this authority in a restricted manner for example the agency would permit federal associations to establish branches only to the extent state law permitted state chartered institutions to establish branches c f_r sec_556 a h_r conf_rep no 97th cong 1st sess in the fhlbb adopted a general policy not to approve the establishment of branch offices by a federal association outside its home state fed reg date this statement was later amended to say it was the general policy not to approve interstate branching fed reg date subsequently the policy was further modified by the amendment of regulations in c f_r sec_556 on date subparagraph a iii provided that interstate branching could be approved when the establishment of a branch resulted from the acquisition of assets of another institution pursuant to action by the fslic to prevent failure of the other institution and the risk to the fslic was reduced by maintaining the branch the fslic was created in title u s c a the statute refers to formation and operation of the fslic under the direction of the fhlbb the fslic was to operate under such bylaws rules and regulations as the fhlbb might prescribe for purposes of the subchapter namely to provide insurance for savings and loan accounts under u s c c fslic was nonetheless a separate corporate entity authorized to sue and be sued in its own name in addition to providing deposit insurance the fslic was authorized to provide assistance from its assets to insolvent savings associations this assistance included arranging acquisitions capital contributions asset purchases guarantees assumption_of_liabilities and loans u s c f fslic was restricted to providing financial assistance the fslic was not authorized itself to grant charter or branching authority to any institution the fhlbb was not authorized itself to provide financial assistance to insolvent institutions under u s c f nor was the fhlbb authorized to provide financial contributions or assistance to the fslic analysis in sec_597 of the internal_revenue_code of provided a limited exclusion from income for assistance to aid insolvent financial institutions first the exclusion applied solely to savings associations second it applied solely to assistance furnished by the fslic third it applied solely to financial assistance authorized by sec_406 of the national housing act u s c f under the facts of this case fslic did not agree to provide a charter or license to a to operate within state b the written_agreement between the fslic and a does not grant or promise these rights the only reference in the assistance agreement remotely related to this issue is that the obligations of a are conditioned upon it receiving a charter a supervisory forbearance letter and a certification letter from the fhlbb similarly the only reference to this issue in the merger agreement between a and b is a condition the fhlbb approve the transaction in its proposed form and that the fslic enter into an acceptable assistance agreement the taxpayer argues that because the assistance agreement was conditioned upon the fhlbb granting a a charter with multi-state branching rights the state b branching rights must have been assistance provided by fslic under sec_406 of the national housing act it claims this position is further supported by the fhlbb’s resolution dated date a one paragraph of the resolution states resolved further that the bank board as operating head of the fslic hereby determines that pursuant to sec_406 of the national housing act that financial assistance by the fslic is necessary and the amount of such assistance would not exceed the amount that would be reasonably necessary to save the cost of liquidating through receiverships accompanied by the payment of insurance of accounts emphasis added we do not agree with the taxpayer’s analysis for several reasons first the assistance agreement does not grant the state b branching rights second the fslic did not have authority to grant such rights third the fhlbb recognizes in its resolution that sec_406 of the national housing act addresses financial assistance by fslic only elsewhere in the resolution the fhlbb exercises its own authority to grant a a charter with the branching rights although the taxpayer seems to argue that fslic and the fhlbb are one and the same this is not the case under federal_law generally and is not the case for federal tax law as noted above the fslic and the fhlbb are separate federal entities with different purposes and assets the fact the fslic may be subject_to the control or supervision of the fhlbb does not mean they are a single corporate entity see 319_us_436 62_f2d_407 9th cir cert_denied 289_us_730 these entities were created by federal statute congress was aware they were separate and congress chose to limit sec_597 to financial assistance from fslic we have no legislative_history or other information that congress intended the statute to resolve issues concerning the exercise of authority of the fhlbb we have no guidance from congress explaining how to expand the interpretation of the statute to encompass transactions not explicitly described we note that in the year of the merger the fhlbb promulgated a regulation that included its authority to permit multi-state branching rights in a supervisory acquisition the authority for the entire regulation is listed a sec_12 u s c sec_1464 and sec_3 c f_r sec_556 a ii of the national housing act as codified this statement of authority does not compel agreement with the taxpayer’s position there are a number of subparagraphs in section dealing with various powers of the fslic and the fhlbb we cannot conclude from the broad citation that the fhlbb thought that section f was the particular authority for it to permit multi-state branching rights under the regulation to the contrary the fhlbb’s own statements in its resolution above leads to the conclusion that the agency considered section f sec_406 to refer solely to financial assistance rather than to various charter or license rights this conclusion is further supported by the manner in which the fslic and the fhlbb computed the cost of the assistance package offered to a nowhere in the memorandum from the fslic to the fhlbb recommending the a transaction as the least cost resolution was there any mention of the state b branching rights as part of the cost of the assistance package for all the reasons outlined above we conclude that the grant of either a charter or a license to operate a savings association or branches does not specifically fall within the criteria of sec_597 the fslic had no authority to grant a charter or license under sec_406 of the national housing act the charter or state b branching rights were not financial assistance issue fair_market_value even if sec_597 of the code did apply to give taxpayer a fair_market_value basis in the state b branching rights upon their acquisition taxpayer’s methodology for determining that fair_market_value basis is seriously flawed taxpayer essentially argues that the liabilities it assumed in connection with the acquisition of the state b institutions exceeded the fair_market_value of the assets it acquired by approximately amount a and that some amount c of this premium represents the value of the branching rights this methodology ignores a host of other possible benefits taxpayer derived from the acquisitions that would explain why taxpayer would agree to assume liabilities exceeding the fair_market_value of acquired assets the methodology ignores for example the assets and liabilities of the state c institution acquired as part of the same transaction and any value attributable to the right to do business in state c taxpayer’s position conflicts with that of the industry taken in the winstar litigation in 116_sct_2432 the supreme court found that in order to minimize the amount of financial assistance that would have to be provided as a result of the savings and loan association crisis federal regulators provided solvent acquiring institutions such as the taxpayer with favorable regulatory accounting treatment these institutions were permitted to take into account supervisory goodwill in meeting their capital requirements thus increasing the institutions’ ability to lend moreover the relatively slow amortization of this asset improved the institutions’ balance sheets the industry has taken the position with success that this favorable accounting treatment is a valuable contract right issue abandonment finally even if taxpayer could establish that it held an asset in the nature of state b branching rights and its basis in such an asset taxpayer has not produced facts showing that it is entitled to an abandonment_loss deduction sec_165 of the code provides that there shall be allowed as a deduction any loss sustained during the taxable_year and not compensated by insurance or otherwise sec_1_165-1 of the income_tax regulations provides that to be deductible a loss must be evidenced by closed and completed transactions fixed by identifiable events and actually sustained during the taxable_year only a bona_fide loss is allowable substance and not mere form shall govern in determining a deductible loss sec_1_165-2 of the regulations provides that a loss incurred in a business and arising from the sudden termination of the usefulness in such business of any nondepreciable_property in a case where such business is discontinued or where such property is permanently discarded from use therein shall be allowed as a deduction under sec_165 for the taxable_year is which the loss is actually sustained taxpayer claims to have abandoned the state b branching rights in year a the year in which it sold the last of its state b branches a taxpayer claiming an abandonment_loss must show an intent to abandon property and an overt act of abandonment 59_tc_220 acq 1973_2_cb_2 the overt act of abandonment must communicate to a third party the taxpayer’s intent to abandon the property in question for example in 935_f2d_703 5th cir a taxpayer claiming to have abandoned a partnership_interest had tendered the interest to other partners and stated that he would not make any further contributions to the partnership the court concluded that the overt act requirement had been met by contrast in 945_f2d_224 7th cir the court held that a taxpayer claiming to have abandoned a mineral lease failed to adequately communicate that intent in support of its holding the court explained that i ntra-corporate affairs do not generate signs visible to outside observers thus internal communications within the taxpayer’s organization did not suffice as overt acts the court also explained that although there may have as authority for the overt act requirement the court cited sec_1_165-1 and its requirement that losses be evidenced by closed and completed transactions and fixed by identifiable events been no established method of abandoning the type of interest the taxpayer held the taxpayer could have communicated its intent to any one of a number of parties such as the transferor of the mineral_interest the company hired to conduct mining or the company hired to manage the taxpayer’s interest in this case irrespective of whether taxpayer possessed the intent in year a to abandon its right to conduct business in state b it has not shown that it unambiguously communicated that intent to any third party thus the overt act requirement has not been met correspondence internal to the taxpayer such as board resolutions do not suffice moreover the noncompete agreement that was part of the sale of the taxpayer’s last state b branch was limited both in terms of its duration and its geographic scope under the agreement taxpayer and related parties are precluded from competing for a period of two years within a given statistical_area in short the intent communicated by taxpayer in year a was to preserve its right to conduct business in state b subject_to a narrowly-drawn noncompete covenant taxpayer’s status is similar to that of the taxpayer in 79_f2d_343 3d cir in that case the taxpayer purchased the right to use certain educational materials in correspondence courses in japan after investigating the japanese market however the taxpayer determined that a japanese business was not feasible the taxpayer charged off the cost of the franchise on its books and claimed a loss deduction for federal_income_tax purposes the service disallowed the deduction and was affirmed by the courts the appellate court commented the petitioner neither canceled nor surrendered its contract with the international textbook company to develop the territorial rights in japan it could at any time resume activities in that country if it deemed the conditions favorable caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 of the code provides that it may not be used or cited as precedent even this limited agreement not to compete provides an exclusion that permits the taxpayer to acquire institutions within the noncompete area although in that event the buyer is given an option to purchase the acquired institution from the taxpayer


internal_revenue_service number release date index number ---------------------------------------- ------------------------------------------------------------ ---------------------------- ----------------------- ----------------------------- ----------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi b03 plr-127055-07 date december -------------------------- ---------------------------- ----------------------- ---------------------------------- ----------------------- ---------------------------------------- ----------------------- legend x y z country d1 d2 d3 dear ------------ this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time pursuant to sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations for x to file an election under sec_301_7701-3 to be treated as an entity disregarded as separate from its owner for federal tax purposes --------------------------- -------------------------- ----------------------- plr-127055-07 facts x was formed under the laws of country on d1 as of d2 x owned of y on d2 z acquired of x x intended to elect under sec_301_7701-3 to be classified as a disregarded_entity for federal tax purposes as of d3 however x inadvertently failed to timely file the proper election with the appropriate service_center law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single owner having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 entity classification election and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government plr-127055-07 conclusion based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied accordingly x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and to elect to be classified as a disregarded_entity for federal tax purposes effective d3 a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose federal tax consequences of the facts described above under any other provision of the internal_revenue_code provides that it may not be used or cited as precedent except as specifically set forth above we express no opinion concerning the this ruling is directed only to the taxpayer requesting it sec_6110 pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representatives sincerely s william p o'shea associate chief_counsel passthroughs special industries enclosures a copy of this letter a copy for sec_6110 purposes cc