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-133358-07 date december ---------------- legend ----------------------------- settlor llc --------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- date date date date date date date date trust v w x y z year year trustee trust ------------------ ------------------------- ------ ------- ------- -------------------------------------- --------------------- ----------------- ------------------- ------------------ ---------------------- --------------------------------------------------------------- ---- -- -- -- ---------------------- ---------------------------- --------------------------------------------------------------------------------- --------------------------------------------- -------------------------------------------------------- plr-133358-07 trust court state statute state statute dear ------------- correspondence from your authorized representative requesting rulings on the income and generation-skipping_transfer gst tax consequences of the proposed division and modification of a_trust facts this is in response to a letter dated date and prior under the terms of trust trustee in its sole discretion may distribute income on date as amended on date and date settlor established trust for her benefit during her lifetime and after her death for the benefit of her lineal descendents and their spouses widows or widowers trust became irrevocable at settlor’s death on date a date prior to date it is represented that no additions have been made to trust subsequent to that date and principal in equal or unequal proportions for the support maintenance comfort and happiness of the beneficiaries any income not distributed will be accumulated and added to the principal annually as of date settlor had v living lineal_descendants or spouses of lineal_descendants trust terminate sec_21 years after the death of the last survivor of two of settlor’s brothers her husband her lineal descendents and the husbands wives widows or widowers of any of her lineal_descendants living at the creation of trust there are currently w lineal_descendants and one widow of a lineal descendant who were living when trust was created on date and are still living upon termination of trust the assets will be distributed to the then living beneficiaries in equal or unequal portions in trustee’s sole discretion elect to be treated as an s_corporation effective date in order to make the election all of llc’s members including trust must be eligible shareholders as defined in sec_1361 accordingly trust must be eligible to make a valid electing_small_business_trust esbt election which requires that all of the potential current beneficiaries of trust must be either united_states citizens or residents as of date trust had v persons who could be considered potential current beneficiaries and some of these beneficiaries are nonresident_aliens from year through year trustee made annual distributions from trust to x beneficiaries of which y are nonresident_aliens the spouses and the lineal_descendants of the y beneficiaries are also nonresident_aliens llc represents that but for the fact that y beneficiaries are nonresident_aliens trust would otherwise qualify to be an esbt trust owns approximately z of the outstanding units in llc llc plans to plr-133358-07 on date trustee filed a petition for division and modification of trust with court the petition requests that trust be split into two trusts trust and trust trust holding only llc units esbt trust and trust holding all other trust assets non-esbt trust the beneficiaries of the new trusts will be the same as the beneficiaries of trust trustee would remain trustee of both trusts the terms and conditions of the new trusts will be the same as trust except for a modification to trust after the modification trust will provide that no nonresident_alien as described in sec_7701 or any successor statute who may otherwise be a beneficiary of the trust shall be entitled to nor in the discretion of any person may receive a distribution from the principal or income of trust for so long as the trust shall have in effect an election to be taxed as an esbt pursuant to sec_1361 or any successor statute and a nonresident_alien is not permitted to be a potential current income_beneficiary of an esbt under applicable provisions of the internal_revenue_code or treasury regulations therefore after the modification of trust the only potential current beneficiaries of trust will be u s citizens in addition trustee has stated it intends to make discretionary distributions from the new trusts in amounts comparable in total to what the beneficiaries would have received from trust the beneficiaries currently receiving trust distributions were notified of and consented to the petition on date court approved the petition court’s ruling is conditioned upon the receipt of favorable rulings from the service separate trusts if the result does not impair the rights of any beneficiary or adversely affect achievement of the purposes of the trust state statute provides that upon division of a_trust a trustee may make distributions in divided or undivided interests or allocate particular assets in proportionate or disproportionate shares pursuant to state statute a trustee may divide a_trust into two or more you have requested the following rulings the proposed division of trust will not i cause a beneficial_interest to be shifted to a beneficiary who occupies a generation lower than the beneficiaries who hold the interests prior to the division and ii extend the time for vesting of any beneficial_interest in trust or trust beyond the period provided for currently in the trust the proposed division of trust into trust and trust in accordance with court’s order authorizing division of trust and modification of trust to prohibit distributions to nonresident_alien beneficiaries as long as nonresident_aliens are not permissible current beneficiaries of an esbt or as long as trust holds s_corporation stock will result in trust being eligible to elect esbt status under sec_1361 the proposed division of trust into trust and trust will not result in recognition of gain to any trust or beneficiary pursuant to sec_61 or sec_1001 plr-133358-07 issue sec_2601 of the internal_revenue_code imposes a tax on each generation- skipping transfer under section b a of the tax_reform_act_of_1986 act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the generation- skipping transfer_tax shall not apply to any generation-skipping_transfer under a_trust that was irrevocable on date but only to the extent that the transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added sec_26_2601-1 provides that any trust in existence on date will be considered an irrevocable_trust except as provided in sec_26_2601-1 or c relating to property includible in the grantor’s gross_estate under sec_2038 and sec_2042 sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax will not cause the trust to lose its exempt status the regulation provides that the rules contained in the paragraph are applicable only for purposes of determining whether an exempt trust retains its exempt status for generation-skipping_transfer_tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy paragraph b i a b or c of this section by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter but only 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 trust was irrevocable prior to date and it is represented that there have been no additions constructive or otherwise to trust after date accordingly trust is exempt from the generation-skipping_transfer_tax based on the facts presented and representations made we conclude that the proposed division of trust will not shift any beneficial_interest in 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 in addition the proposed division of plr-133358-07 trust will not extend the time for vesting of any beneficial_interest in trust or trust beyond the period provided for in the original trust issue 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 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect for the taxable_year sec_1361 defines a small_business_corporation as 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 for purposes of sec_1361 an esbt may be a shareholder of an s_corporation sec_1361 defines an esbt sec_1361 provides that for purposes of sec_1361 the term potential_current_beneficiary pcb means with respect to any period any person who at any time during such period is entitled to or at the discretion of any person may receive a distribution from the principal or income of the trust sec_1361 provides that in the case of an esbt each pcb of such trust shall be treated as a shareholder for purposes of sec_1361 except that if for any period there is no pcb of such trust such trust shall be treated as the shareholder during such period sec_1_1361-1 of the income_tax regulations provides that for purposes of determining whether a corporation is a small_business_corporation within the meaning of sec_1361 each pcb of an esbt generally is treated as a shareholder of the corporation subject_to the provisions of sec_1_1361-1 a pcb generally is with respect to any period any person who at any time during such period is entitled to or in the discretion of any person may receive a distribution from the principal or income of the trust a person is treated as a shareholder of the s_corporation at any moment in time when that person is entitled to or in the discretion of any person may receive a distribution of principal or income of the trust sec_1_1361-1 provides that a nonresident_alien as defined in sec_7701 is an eligible_beneficiary of an esbt however if the nonresident_alien plr-133358-07 is a pcb of the esbt the s_corporation will have an ineligible shareholder and its s_corporation_election will terminate sec_1_1361-1 provides that if a pcb of an esbt is not an eligible shareholder of a small_business_corporation within the meaning of sec_1361 the s_corporation_election terminates for example the s_corporation_election will terminate if a nonresident_alien becomes a potential_current_beneficiary of an esbt such a potential_current_beneficiary is treated as an ineligible shareholder beginning on the day such person becomes a potential_current_beneficiary and the s_corporation_election terminates on that date pursuant to sec_1_1361-1 a person who is entitled to receive a distribution only after a specified time or upon the occurrence of a specified event such as the death of the holder of a power_of_appointment is not a potential_current_beneficiary until such time or the occurrence of such event based solely on the facts and representations submitted we conclude that the proposed division of trust into trust and trust in accordance with court’s order authorizing the division of trust and modification of trust to prohibit distributions to nonresident_alien beneficiaries as long as nonresident_aliens are not permissible current beneficiaries of an esbt or as long as trust holds s_corporation stock will result in trust being eligible to elect esbt status under sec_1361 issue sec_61 provides that gross_income includes gains derived from dealings in property and under sec_61 from an interest in a_trust sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized sec_1001 provides that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the 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 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 plr-133358-07 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 in revrul_69_486 c b a non-pro rata distribution of trust property was made in_kind by the trustee although the trust instrument and local law did not convey authority to the trustee to make a non-pro rata distribution_of_property in_kind the distribution was effected as a result of a mutual agreement between the trustee and the beneficiaries because neither the trust instrument nor local law conveyed authority to the trustee to make a non-pro rata distribution revrul_69_486 held that the transaction was equivalent to a pro_rata distribution followed by an exchange between the beneficiaries an exchange that required recognition of gain under sec_1001 499_us_554 concerns the issue of when a sale_or_exchange has taken place that results in realization of gain_or_loss under sec_1001 in cottage savings a financial_institution exchanged its interests in one group of residential mortgage loans for another lender's interests in a different group of residential mortgage loans the two groups of mortgages were considered substantially identical by the agency that regulated the financial_institution the supreme court in cottage savings concluded that sec_1_1001-1 reasonably interprets sec_1001 and stated that an exchange of property gives rise to a realization event under sec_1001 if the properties exchanged are materially different cottage savings u s pincite in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent cottage savings u s pincite the court held that mortgage loans made to different obligors and secured_by different homes did embody distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans cottage savings u s pincite under state statute a trustee may divide a_trust into two or more trusts separate trusts if the result does not impair the right of any beneficiary or adversely affect achievement of the purposes of the trust state statute provides that upon division of a_trust a trustee may make distributions in divided or undivided interests or allocate particular assets in proportionate or disproportionate shares it is consistent with the supreme court's opinion in cottage savings to find that the interests of the beneficiaries of the new trusts will not differ materially from their interests in trust in the proposed transaction trust will be divided in accordance with state law and under the trustee’s powers except for the changes described above the new trusts will be administered under the same provisions as trust accordingly based upon the facts presented and representations made we conclude that the proposed transaction will not result in a material difference in the kind or extent of the legal entitlements enjoyed by the beneficiaries of the trust and no gain_or_loss is realized by the beneficiaries or trust on the division for purposes sec_1001 plr-133358-07 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed concerning whether llc is otherwise eligible to be treated as an s_corporation or whether trust is otherwise eligible to be an esbt this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent 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 lorraine e gardner senior counsel branch office of the associate chief_counsel passthroughs and special industries sincerely enclosures copy for sec_6110 purposes