internal_revenue_service number release date index number ----------------------------------- ----------------------------------------- ----------------------------- -------------------------- - department of the treasury washington dc person to contact ------------------ id no ------------- telephone number --------------------- refer reply to cc psi b04 - plr-139025-03 date april re ---------------------------------------------------------------------------------------------- -------------------------------------------------------------------- legend grandparent a ------------------------ grandparent b ----------------- child a -------------------- child b ------------------------ grandchild a -------------------------- grandchild b ---------------------------- grandchild c ---------------------- great-grandchild a ------------------ great-grandchild b ----------------------- great-grandchild c ------------------------ great-grandchild d ---------------------- great-grandchild e -------------------------- great-grandchild f -------------------- great-grandchild g ------------------------------ great-grandchild h -------------------- great-grandchild i ---------------------------- trust a ------------------------------------------------------- grandchild a’s trust a ------------------------------------------------------------------ ------------------------------- grandchild b’s trust a ------------------------------------------------------------------- ------------------------------- grandchild c’s trust a ------------------------------------------------------------- ------------------------------- trust b ------------------------------------------------------------- grandchild a’s trust b ------------------------------------------------------------------ plr-139025-03 ------------------------------- grandchild b’s trust b ------------------------------------------------------------------- ------------------------------- grandchild c’s trust b ------------------------------------------------------------- ------------------------------- corporate trustee ----------------------------------------- individual trustee a ---------------------- individual trustee b -------------------------- bank ---------------------------------------- fund ------------------------------------------- date ------------------------ date ---------------------------- date ------------------------ date -------------------- date ------------------------- state --------- statute -------------------------------------------------------------------------------- court ------------------------------------------------ dear -------------- this responds to a letter from your authorized representative dated date and prior correspondence requesting rulings regarding the federal income and generation-skipping_transfer gst tax consequences of a proposed severance of certain trusts facts grandparent a died on date survived by his spouse grandparent b who subsequently died on date grandparent a and grandparent b had two children child a and child b child a had three children grandchild a grandchild b and grandchild c child a died on date child b never married and never had children date date and date are prior to date paragraph a_trust a was to be held for the benefit of grandparent b during her life pursuant to article iii paragraph b on grandparent b’s death trust a was divided into equal shares for the benefit of each child of child a then living therefore following the death of grandparent b on date trust a was divided into grandchild a’s trust a grandchild b’s trust a and grandchild c’s trust a each share has been administered as a separate trust grandparent a’s will provided for the creation of trust a under article iii the facts submitted and representations made are as follows under article iii paragraph e of trust a the trustees may distribute such under article iii paragraph d until the complete distribution of a grandchild’s plr-139025-03 trust or until the grandchild’s prior death so much of the net_income is to be distributed to that grandchild as the trustees in their absolute discretion deem reasonably necessary for the grandchild’s comfortable support education and welfare the remaining income may be distributed to any one or more of grandparent a’s descendants except child a and child b and their spouses as the trustees in their absolute discretion deem advisable any remaining income is to be added to the principal of the share principal of a grandchild’s trust only to that grandchild in their absolute discretion as the trustees deem advisable each grandchild has a limited testamentary_power_of_appointment under paragraph e to direct distribution of that grandchild’s trust share among the grandchild’s lawful descendants in such proportions and subject_to such trusts and conditions as such grandchild directs in default thereof upon a grandchild’s death the trustee is directed to distribute the grandchild’s share per stirpes to grandparent a’s lawful descendants with a special provision for the widow of either grandchild a and grandchild b who should die without leaving a lawful descendant who survives such grandchild paragraph h of article iii contains a provision mandating the termination and distribution of each grandchild’s trust no later than years after the death of the last survivor of a listed class of individuals living at the death of grandparent a and in what proportions any receipts or disbursements shall be credited charged to or apportioned between income and principal date under trust b a separate trust was created for each grandchild of grandparent b grandchild a’s trust b grandchild b’s trust b and grandchild c’s trust b pursuant to paragraph c of article i of trust b until the death of the grandchild the trustee may distribute so much of the net_income to that grandchild as the trustee in its absolute discretion deems advisable for the grandchild’s comfortable support education welfare and happiness the trustee may either accumulate the remaining net_income or distribute so much of it to any one or more of grandparent b’s lawful descendants and their spouses in such proportions as the trustee deems advisable paragraph c also provides that the trustee may only distribute principal to the grandchild of such share under paragraph d the trustee may add undistributed_net_income to principal or may retain such income in an accumulated income account for possible future distribution to beneficiaries from time to time eligible to receive current distributions of net_income grandparent b created trust b an irrevocable_trust on date date is prior to paragraph n of article iii authorizes the trustee inter alia to determine whether pursuant to the terms of trust b each grandchild has a limited testamentary paragraph g of article i contains a provision mandating the termination and paragraph l of article i provides that the trustee shall have the power inter alia plr-139025-03 power_of_appointment under paragraph e of article i to direct distribution of such grandchild’s trust among grandparent b’s lawful descendants in such proportions and subject_to such trusts and conditions as such grandchild directs in default of appointment upon the grandchild’s death the trustee is directed to distribute the trust per stirpes to the primary beneficiary’s lawful descendants or if none per stirpes to grandchild b’s lawful descendants with a special provision for the widow of either of grandchild a and grandchild b who should die without leaving a lawful descendant who survives such grandchild provided however that if the trustee deems any descendants of grandparent b to be incapable of using to good advantage the share otherwise to be so received the trustee may allocate such trust among any of the other descendants of grandparent b in such proportions as the trustee deems proper distributions of each trust under trust b no later than years after the death of the last survivor of a listed class of individuals living at the date of execution of the agreement creating trust b to determine whether and in what proportions any receipts or disbursements shall be credited charged or apportioned between income and principal trust b a significant portion of the assets of each of the current trusts consists of interests in common trust funds ctfs as defined in sec_584 maintained by bank rulings concluding that the entry by court of an order authorizing the trustee to allocate capital_gain receipts to income and charge certain income expenses to corpus and the trustees’ exercise of discretion in accordance with that court order will not adversely affect the status of grandchild a’s trust a grandchild a’s trust b grandchild b’s trust a grandchild b’s trust b grandchild c’s trust a and grandchild c’s trust b as exempt from gst tax each grandchild has three children the great-grandchildren of grandparent a and grandparent b the parties propose to divide each grandchild’s separate trust under trust a and trust b into three equal separate new trusts collectively known as the new trusts the parties propose to name each of the nine new trusts for one of the nine great-grandchildren specifically the trusts will be severed as follows the trustees of trust a are bank and two individuals bank is the sole trustee of on date the internal_revenue_service issued private letter rulings the prior grandchild a’s trust a will be divided into three equal trusts one each for great-grandchild a great-grandchild b and great-grandchild c grandchild a’s trust b will also be divided into three equal trusts one each for great-grandchild a great-grandchild b and great-grandchild c plr-139025-03 grandchild b’s trust a will be divided into three equal trusts one each for great-grandchild d great-grandchild e and great-grandchild f grandchild b’s trust b will also be divided into three equal trusts one each for great-grandchild d great-grandchild e and great-grandchild f grandchild c’s trust a will be divided into three equal trusts one each for great-grandchild g great-grandchild h and great-grandchild i grandchild c’s trust b will also be divided into three equal trusts one each for great-grandchild g great-grandchild h and great-grandchild i the trustees represent that each new trust will be separately managed and all of the trust provisions of each new trust will remain identical to the terms of the original trust from which it was derived prior to the severance the primary beneficiary of each new trust will still be the grandchild who was the original primary beneficiary prior to severance and who will also be the only eligible recipient of principal during that grandchild’s life the trustees’ discretionary powers with respect to undistributed_income will be unchanged including the permissible beneficiaries the trust term and the provisions regarding disposition of trust assets at termination will also be the same administered the assets of each new trust will be invested separately and titled solely in the name of that trust the new trusts will each file separate_income tax returns separately track state law accounting_income and keep separate trust records the trustees represent that the principal purposes of severing the trusts are to accommodate the differing income distribution needs and differing investment objectives of the descendants of the grandchildren and that there is no tax_avoidance purpose to the proposed severance to make the discretionary income distributions only to the grandchild and to the great- grandchild for whom the new trust is named and that great-grandchild’s family you represent that there have been no additions to trust a or trust b since date the trusts are governed by the laws of state you also represent that statute of state law gives the trustees the power to sever the trusts as proposed rulings requested into the new trusts under state law will not adversely affect the trusts’ status as exempt from the gst tax under chapter and each new trust created as a result of the severance will remain exempt from the gst tax the exercise of the trustee’s power to sever each trust on a fractional basis into the new trusts in accordance with state law will not cause the original trusts the the trustee subject_to asset availability and fiduciary duties intends to continue the exercise of the trustee’s power to sever each trust on a fractional basi sec_3 the exercise of the trustee’s power to sever each trust and transfer the trusts’ plr-139025-03 new trusts or their beneficiaries to realize gain_or_loss from the sale_or_other_disposition of property under sec_1001 units of participation in fund on a fractional in-kind basis into the new trusts in accordance with state law will not cause the current trusts the new trusts or their beneficiaries to realize gain_or_loss from the sale_or_exchange of a participating interest in a common_trust_fund under sec_584 as a result of such severance or transfer_tax purposes exercise of fiduciary discretion by the trustee of a new trust to credit realized capital_gains of that trust to income and to charge income expenses of that trust to principal in a manner consistent with the prior rulings will not adversely affect that trust’s status as exempt from the gst tax under chapter ruling_request no - gst tax the holding of the prior rulings will apply to each of the new trusts and the each of the new trusts will be treated as a separate trust for federal income sec_2601 imposes a tax on every generation-skipping_transfer under ' a of the tax_reform_act_of_1986 act the gst tax is generally applicable to generation-skipping transfers made after date however under ' b a of the act and ' b i of the generation-skipping_transfer_tax regulations the tax does not apply to any generation-skipping_transfer from a_trust if the trust was irrevocable on date and no addition actual or constructive was made to the trust after that date under ' b ii any trust in existence on date will be considered irrevocable unless the settlor had a power that would have caused inclusion of the trust in his or her gross_estate under ' or sec_2042 if the settlor had died on date under sec_2602 the amount of tax imposed under sec_2601 is determined by multiplying the taxable_amount by the applicable_rate the taxable_amount of a taxable_distribution is the amount received by the transferee sec_2621 of a taxable_termination is the amount of property with respect to which there was a termination sec_2622 and of a direct_skip is the amount received by the transferee sec_2623 under sec_2641 the term applicable_rate means the product of the maximum_federal_estate_tax_rate in the year that the generation-skipping_transfer occurs and the inclusion_ratio under sec_2642 the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer i sec_1 minus the applicable_fraction under sec_2642 in general the numerator of the applicable_fraction is the gst_exemption amount plr-139025-03 allocated to the property transferred and the denominator is the value of the property transferred under sec_2631 every individual is allowed a gst_exemption amount which may be allocated by the individual or the individual’s executor to any property with respect to which the individual is the transferor sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax will not cause the trust to lose its exempt status sec_26_2601-1 provides that a modification will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in ' than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer sec_26_2601-1 example illustrates a situation where a_trust that is otherwise exempt from the gst tax authorizes the trustee to distribute income and principal at the trustee s discretion for the benefit of a and b and their respective issue on the death of the last to die of a and b the corpus is to be distributed to the issue of a and b per stirpes pursuant to a court order the trust is divided equally into two trusts one for the benefit of a and a s issue and one for the benefit of b and b s issue the example concludes that under the facts presented the division of the trust into two trusts does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in ' than the person or persons who held the beneficial_interest prior to the division and the division does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust accordingly the two partitioned trusts will not be subject_to the provisions of chapter trust created under trust a and trust b into three equal separate new trusts with one trust named for each great-grandchild all of the trust provisions of each new trust will remain identical to the terms of the original trust from which it was derived prior to the severance the primary beneficiary of each new trust will still be a grandchild for whom the original trust was established and that grandchild will also be the only eligible recipient of principal during that grandchild’s life the trustees’ discretionary powers with respect to undistributed_income will be unchanged including the permissible beneficiaries the trust term and the provisions regarding disposition of trust assets at termination will also be the same therefore the proposed division will not shift a in the present case the parties propose to divide each grandchild’s separate sec_1001 provides that the gain from the sale_or_other_disposition of accordingly based on the facts submitted and the representations made we sec_61 provides that gross_income includes gains derived from dealings plr-139025-03 beneficial_interest in the trusts to any beneficiary who occupies a lower generation than the person or persons who held the beneficial_interest prior to the division in addition the division does not extend the time for vesting of any beneficial_interest beyond the period provided for in the original trusts conclude that the exercise of the trustee’s power to sever the trusts on a fractional basis into the new trusts under state law will not adversely affect the trusts’ status as exempt from the gst tax under chapter and each new trust created as a result of the severance will remain exempt from the gst tax ruling_request no -gain or loss in property and under sec_61 from an interest in trust property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in such section for determining loss over the amount_realized of property shall be the sum of any money received plus the fair_market_value of the property other than money received under c except as otherwise provided in subtitle a the entire amount of the gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or as loss sustained a partition of jointly owned property is not a sale_or_other_disposition of property where the co-owners of the joint property sever their joint_interests but do not acquire a new or additional interest as a result of the transaction thus neither gain nor loss is realized on a partition see revrul_56_437 1956_2_cb_507 issue of when a sale_or_exchange has taken place that results in a realization of gain_or_loss under sec_1001 in cottage savings a financial_institution exchanged its interest in one group of residential mortgage loans for another lender’s interests in a different group of residential mortgage loans the two groups of mortgages were considered substantially identical by the agency that regulated the financial_institution sec_1001 states that the amount_realized from the sale_or_other_disposition 499_us_554 concerns the under state law the trustee has the power to sever any trust estate on a in cottage savings u s pincite the court concluded that sec_1_1001-1 it is consistent with the supreme court’s opinion in cottage savings to find that plr-139025-03 reasonably interprets sec_1001 and stated that an exchange of property gives rise to a realization event under sec_1001 if the properties exchanged are materially different in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent cottage savings u s pincite the court held that mortgage loans made to different obligors and secured_by different homes did embody distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans cottage savings u s pincite fractional basis into or more separate trusts for any reason a separate_account or trust created by severance or segregation shall be treated as a separate trust for all purposes from and after the date on which the severance or segregation is effective and shall be held on terms and conditions that are substantially equivalent to the terms of the trust from which it was severed or segregated so that the aggregate interests of each beneficiary in the severed trusts are substantially equivalent to the beneficiary’s interests in the trust before severance see statute the interests of the beneficiaries of the new trusts will not differ materially from their interests in the original grandchild trusts in the proposed transaction the original trusts will be severed in accordance with state law on a pro_rata basis except for the changes described above all other provisions of the new trusts will remain unchanged accordingly the proposed transaction will not result in a material difference in_kind or extent of the legal entitlements enjoyed by the beneficiaries and no gain_or_loss is recognized on the partition of the trusts for purposes of sec_1001 ruling_request no - common_trust_fund trust fund ctf means a fund maintained by a bank exclusively for the collective investment and reinvestment of moneys contributed thereto by the bank in its capacity as a trustee executor administrator or guardian admission or withdrawal of a participant the admission of a participant shall be treated with respect to the participant as the purchase of or an exchange for the participating interest the withdrawal of any participating interest by a participant shall be treated as a sale_or_exchange of such interest by the participant in a ctf from one trust of which the taxpayer is the sole beneficiary to another trust of which the taxpayer is also the sole beneficiary does not constitute a withdrawal of a sec_584 provides that for purposes of subtitle a the term common revrul_60_256 1960_2_cb_193 holds that a transfer of units of participation sec_584 provides that no gain_or_loss shall be realized by the ctf by the based solely on the facts and representations submitted we conclude that the sec_643 provides that under regulations prescribed by the secretary two the primary purposes of establishing the new trusts are represented as being to plr-139025-03 participating interest within the meaning of sec_584 provided that no funds change hands there is no surrender of indicia of ownership nothing is received by the taxpayer and the trustee of the two trusts is the same under such circumstances the basis of the participating units in the hands of the transferee trust is the same as it was in the hands of the transferor trust on the date of transfer transfer of the ctf participating interests from the current trusts to the new trusts does not constitute a withdrawal therefore no gain_or_loss will be realized by the ctf the current trusts the new trusts or any trust_beneficiary under sec_584 ruling_request no - sec_643 or more trusts shall be treated as one trust if such trusts have substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries and a principal purpose of such trusts is the avoidance of federal_income_tax accommodate the differing income distribution needs and investment objectives of the descendants of the grandchildren it is further represented that there is no tax_avoidance purpose in the establishment of the new trusts within the meaning of sec_643 determining whether avoidance of income_tax is a primary purpose of the establishment of the new trusts is a question of fact the determination of which must be deferred until the federal_income_tax returns of the parties involved have been examined by the office having examination jurisdiction over those income_tax returns administered and it is determined that tax_avoidance is not a primary purpose of the establishment of the new trusts each of the new trusts will be treated as a separate trust for federal_income_tax purposes ruling_request no - prior rulings sec_6110 provides that a taxpayer may not rely on a private_letter_ruling issued to another taxpayer see also dollar_figure of revproc_2004_1 2004_1_cb_1 in this case after the severance all trust provisions will remain identical to the terms of the original trust from which it was derived prior to the severance including paragraph n of article iii of trust a and paragraph l of article i of trust b the provisions subject_to the court order considered in the prior rulings accordingly based on the facts and representations we conclude that the holdings in the prior rulings will apply to each of the new trusts therefore the exercise of fiduciary discretion by the trustee of a new trust to credit realized capital_gains of that trust to income and to charge income expenses of that trust to principal in a manner consistent therefore provided that the new trusts are separately managed and plr-139025-03 with the prior rulings and the court orders upon which those rulings were based will not adversely affect that trust’s status as exempt from the gst tax under chapter except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely yours by_________________________ george l masnik branch chief branch office of the associate chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes cc


department of the treasury int ernal revenue service washington d c of f i c e of c h i e f c ou n s e l date number release date cc pa apjp br2 gl-607572-00 uilc internal_revenue_service national_office field_service_advice memorandum for associate area_counsel small_business self-employed cc sb gbo attn a kennedy dawson from assistant chief_counsel administrative provisions judicial practice cc pa apjp subject collection of employment_taxes assessed under name and ein of single member limited_liability_company this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be used or cited as precedent disclosure statement field_service_advice is chief_counsel_advice and is open to public inspection pursuant to the provisions of sec_6110 the provisions of sec_6110 require the service to remove taxpayer identifying information and provide the taxpayer with notice of intention to disclose before it is made available for public inspection sec_6110 and i sec_6110 also authorizes the service to delete information from field_service_advice that is protected from disclosure under u s c sec_552 b and c before the document is provided to the taxpayer with notice of intention to disclose only the national_office function issuing the field_service_advice is authorized to make such deletions and to make the redacted document available for public inspection accordingly the examination appeals or counsel recipient of this document may not provide a copy of this unredacted document to the taxpayer or their representative the recipient of this document may share this unredacted document only with those persons whose gl-607572-00 official tax_administration duties with respect to the case and the issues discussed in the document require inspection or disclosure of the field_service_advice legend single member limited_liability_company sole owner state date issue whether employment_tax assessments in the name and employer_identification_number ein of a single member limited_liability_company are valid assessments against the company’s sole owner under the circumstances described below conclusion pursuant to sec_6203 and the regulations thereunder the summary record of assessment through supporting documents must provide identification of the taxpayer certain errors are permissible in making an assessment so long as the taxpayer is sufficiently identified and the errors do not mislead or prejudice the taxpayer we conclude that the identification of the taxpayer element required for a valid assessment has been met in this case moreover even if the assessments were erroneous in a technical sense because they were made in the name and ein of single member limited_liability_company sole owner was not prejudiced or misled by this error thus we conclude that the assessments are valid against the taxpayer sole owner facts single member limited_liability_company is a limited_liability_company formed under state law it is a disregarded_entity for all federal tax purposes and its activities are treated in the same manner as a sole_proprietorship branch or division of sole owner see sec_301_7701-2 single member limited_liability_company filed delinquent employment_tax returns showing liabilities for each of the periods below gl-607572-00 type period date return filed assessment_date each of the returns was filed with the address of sole owner as the business address for single member limited_liability_company in addition the certificate of formation of single member limited_liability_company shows the address of sole owner as the business address for single member limited_liability_company all of the delinquent employment_tax liabilities associated with the form_940 and form sec_941 were assessed under single member limited_liability company’s ein and under the name single member limited_liability_company as evidenced by the certificates of assessments and payments form for each of the periods at issue further the address where each notice was sent is the business address of single member limited_liability_company which also happens to be the home address of sole owner on date the service filed a notice_of_federal_tax_lien against single member limited_liability_company for the delinquent amounts law and analysis the regulations on procedure and administration provide that a business_entity with a single owner is classified as either a corporation or disregarded as an entity separate from its owner sec_301_7701-2 for purposes of these regulations a single member limited_liability_company is treated as a business_entity the regulations provide that certain business entities are always classified as corporations business entities that are not automatically classified as corporations eligible entities are permitted to choose their classification for federal tax purposes sec_301_7701-3 a single member limited_liability_company is considered an eligible_entity and may choose its tax classification if a single member limited_liability_company does not choose its tax classification the default classification for all federal tax purposes is that of an entity disregarded as an entity separate from its owner sec_301 gl-607572-00 b if a single member limited_liability_company is disregarded its activities are treated in the same manner as a sole_proprietorship branch or division of the owner sec_301_7701-2 notice_99_6 1999_3_irb_12 permits a single member limited_liability_company to separately calculate report and pay its employment_tax obligations with respect to its employees under its own name and employer_identification_number the notice makes clear that the owner of a single member limited_liability_company that is treated as a disregarded_entity for federal tax purposes is the employer for purposes of employment_tax liability consequently the owner retains ultimate responsibility for the employment_tax obligations incurred with respect to employees of the disregarded_entity id thus as a disregarded_entity single member limited_liability_company cannot be the employer for employment_tax purposes regardless of the fact that single member limited_liability_company filed the employment_tax returns for the periods at issue in this case sec_6201 of the internal_revenue_code provides the authority for assessment until an assessment of tax has been made the service is not entitled to collect a tax administratively the lien provisions of the code depend on the making of a demand for payment and there cannot be a demand for payment if there is no assessment see sec_6303 and sec_6321 although sole owner is ultimately liable for the employment_taxes incurred by single member limited_liability_company the service is precluded from administratively collecting the liability from sole owner without a valid assessment generally speaking an assessment is the formal recording of a taxpayer’s tax_liability sec_6203 provides that t he assessment shall be made by recording the liability of the taxpayer in the office of the secretary in accordance with rules or regulations prescribed by the secretary the regulations on procedure and administration further provide as follows t he assessment shall be made by an assessment officer signing the summary record of assessment the summary record through supporting records shall provide the identification of the taxpayer the character of the liability assessed the taxable_period if applicable and the amount of the assessment the date of the assessment is the date the summary record is signed by an assessment officer gl-607572-00 sec_301_6203-1 emphasis added thus to make a valid assessment the service must record the assessment on a signed summary record of assessment and create a supporting record which includes the four elements referred to in the regulation although the regulations under sec_6203 include requirements for a valid assessment court cases interpreting sec_6203 indicate that certain mistakes are permissible when making an assessment without the assessment thereby being considered invalid thus for example a united_states bankruptcy court has indicated that although an assessment contains an incorrect social_security_number and address for the taxpayer the assessment may nonetheless be valid gongaware v united_states u s t c cch big_number bankr w d pa aff’d without published opinion 159_f3d_1351 3d cir in reaching its conclusion the court acknowledged the errors but found that they were not sufficient to cause prejudice to the taxpayer who was sufficiently identified in the assessment id similarly in another case involving an assessment for sec_6672 liability the responsible_person was correctly identified but the assessment referred to the wrong corporation 386_fsupp_499 n d tex aff’d without published opinion 514_f2d_1070 5th cir the allan court concluded that the assessment was valid as it correctly identified the taxpayer and the taxpayer suffered no prejudice the service is not required to identify a taxpayer by a social_security_number when making an assessment moore v united_states u s t c cch big_number e d cal similarly there is no requirement that an employer_identification_number be used in making an assessment 61_fsupp2d_836 s d ind in a case with facts somewhat similar to the present situation the court_of_appeals for the tenth circuit held that an assessment made in taxpayers’ trade_name rather than taxpayers’ individual names was valid 719_f2d_1507 10th cir in marvel the service made employment_tax assessments in the trade_name of an unincorporated business rather than in the names of its two individual owners the notices issued by the service were sent to the taxpayers’ business address rather than to the address of the owners and the notices listed the taxpayer_identification_number for the business the taxpayer_identification_number for the business was shown on the taxpayers’ schedule c attached to their gl-607572-00 income_tax returns for the years in question the court stated that taxpayers cannot seriously contend that the notices to the business did not operate to give actual notice to each of the taxpayers we conclude that the assessments were valid and effective as to the individual plaintiffs being issued in the trade_name which they themselves adopted id pincite in 881_f2d_340 6th cir the court_of_appeals for the sixth circuit citing marvel f 2d pincite and allan f_supp pincite stated that notices containing technical defects are valid where the taxpayer has not been prejudiced or misled by the error and is afforded a meaningful opportunity to litigate his claims thus the fact that the taxable_period in planned investments was incorrectly stated did not invalidate the notification to the taxpayer concerning a penalty assessment in the present situation several arguments can be made in support of our conclusion that sole owner was adequately identified by the assessments and that sole owner was not prejudiced or misled by the fact that single member limited_liability company’s name and ein were used first given single member limited_liability company’s status as a disregarded_entity for all federal tax purposes and single member limited_liability company’s close relationship to sole owner the reference in the assessments to single member limited_liability_company as the taxpayer is tantamount to an identification of sole owner as the taxpayer in substance single member limited_liability_company is a trade_name by which sole owner conducts business as in marvel v united_states supra this conclusion is supported by the fact that sole owner indicated that single member limited_liability_company was an llc to be taxed as sole_proprietor on the application_for ein second although sole owner’s social_security_number ssn was not included on the assessment the court cases cited above indicate that an assessment is not required to identify the taxpayer by an ssn or an ein moreover the ein used in making the assessments in this case identified sole owner as the taxpayer in that sole owner must use this ein in preparing sole owner’s schedule c which is attached to sole owner’s federal_income_tax return as a disregarded_entity single member limited_liability company’s items of income deduction gain and credit will be reported on sole owner’s federal_income_tax return gl-607572-00 further in reference to the requirement that the taxpayer must not be prejudiced or misled by the assessment the notices at issue were addressed to single member limited_liability_company rather than to sole owner however sole owner was doing business as single member limited_liability_company and as the only owner of the business sole owner cannot reasonably assert lack of knowledge of the notices in addition the home address of sole owner and the business address of single member limited_liability_company were one and the same moreover sole owner has not disputed actual receipt of those notices consequently sole owner cannot contend that the notices to single member limited_liability_company failed to give notice to sole owner of sole owner’s tax_liability thus even if the assessments may have been erroneous in a technical sense sole owner was not misled or prejudiced by the errors planned investments inc v united_states supra we conclude that in the present situation the employment_tax assessments under the name and ein of single member limited_liability_company are valid against sole owner case development hazards and other considerations a court might accept the argument that single member limited_liability_company is a separate_entity under state law and should also be viewed as a separate_entity for employment_tax purposes even if it is not a separate_entity for income_tax purposes in support of this view single member limited_liability_company is arguably the common_law employer also it made payment of wages to the employees of the business and thus could be viewed as the employer under sec_3401 and 419_us_43 moreover it made payments or deposits of employment_taxes and filed returns using its own name and ein in accordance with notice_99_6 this method of reporting and paying the instructions to schedule c of form_1040 indicate that an ein must be included on schedule c if the sole_proprietor is required to file an employment_tax return as mentioned above sole owner is the employer and is responsible for filing employment_tax returns although notice_99_6 allows single member limited_liability_company to file the employment_tax returns sole owner remains ultimately liable for the employment_taxes and is required to file an employment_tax return in the absence of filing by single member limited_liability_company thus the ein of single member limited_liability_company is required on schedule c of sole owner’s return gl-607572-00 employment_taxes arguably undercuts the service’s position that single member limited_liability_company is a disregarded_entity a court might view this method of reporting and paying employment_taxes as providing support for treatment of single member limited_liability_company as a separate_entity for employment_tax purposes notwithstanding the service’s position to the contrary also with respect to whether sole owner was prejudiced or misled by the errors in the assessments sole owner might argue that the facts in this case are not parallel to marvel unlike the notices in marvel that were made using the taxpayers’ trade_name marvel photo the notices and assessments in this case used the name of a legal entity that is recognized under state law further a court might be sympathetic to sole owner’s lack of knowledge of the tax law thus sole owner might believe that single member limited_liability_company is an entity separate and distinct from sole owner for federal employment_tax purposes as well as state law purposes based on such a belief it could be argued from sole owner’s perspective that the assessments and the notices sent by the service did not identify him as the taxpayer but rather identified single member limited_liability_company as the taxpayer moreover in several cases a tax_assessment which named the partnership entity but not individual members of the entity was held to be invalid against an individual member in re briguglio bankr lexis bankr c d cal date in re galletti bankr lexis bankr c d cal date 205_br_497 bankr w d tex in el paso refining an assessment was made against a limited_partnership and liens were filed against the general_partner the court concluded that the service failed to meet the requirements of sec_6203 because the general_partner was not assessed for the liability consequently assessment of the limited_partnership was not sufficient to allow the service to file liens against the general_partner even though the general_partner was liable for the debts of the partnership under state law similarly the courts in galletti and briguglio concluded that a valid employment_tax assessment against individual partners rather than the partnership was a prerequisite to tax collection against the individual partners the government has appealed both cases to the united_states district_court central district of california eastern division while the decisions in galletti briguglio and el paso refining may seem contrary to our conclusions we have reached in this case we gl-607572-00 believe that our case is clearly distinguishable based on the differences between a partnership and a single member limited_liability_company subchapter_k treats a partnership as an entity for certain tax purposes for example a partnership is required to file a tax_return and partnership elections affecting taxable_income are generally made at the partnership level under sec_703 most importantly a partnership is an employer and is liable for payment of federal employment_taxes sec_31_3401_d_-1 by contrast a single member limited_liability_company is a nonentity for all federal tax purposes and has no obligation to file a tax_return or pay federal employment_taxes therefore regardless of the ultimate outcome in galletti and briguglio and the court’s decision in el paso refining we believe these partnership cases are not relevant to the issue in this case if you have questions please contact susan l hartford at also before collection action is undertaken in this case we suggest that you contact ms hartford and walter ryan who is the assistant branch chief of the branch office responsible for collection matters cc p a cbs br mr ryan may be reached at gl-607572-00 curtis g wilson by ____________________ michael l gompertz acting senior technician reviewer branch


department of the treasury internal_revenue_service washington d c number release date uil memorandum for from date cc psi frev-245546-96 industry director natural_resources and construction lm nrc chief branch cc psi passthroughs and special industries subject denial of consent for change in accounting_method in accordance with section a of revproc_2002_1 2001_1_irb_1 this chief_counsel_advice advises you that consent for a change in accounting_method has been denied to a taxpayer within your jurisdiction pursuant to sec_6110 k this chief_counsel advise is not to be cited as precedent legend taxpayer date taxpayer filed the form_3115 application_for change in accounting_method to request permission to change its method of computing depreciation for certain assets under revproc_96_31 1996_1_cb_714 because this change was under an automatic revenue_procedure taxpayer may have already made this change taxpayer is a utility involved in the generating transmitting and distributing of electricity as well as distribution of gas taxpayer previously included certain tools shop equipment and laboratory equipment such as lathes bandsaws hydraulic presses and tools used for testing in asset cla sec_49 electric utility steam production plant asset cla sec_49 electric utility transmission and distribution plant and asset cla sec_49 gas utility distribution facilities under revproc_87_56 c b for property generally placed_in_service after and before acrs property class lives are described in revproc_83_35 c b this letter is written in terms of revproc_87_56 for property generally placed_in_service after macrs_property references to revproc_87_56 however should be frev-245546-96 taxpayer believes these classifications were improper specifically taxpayer believes that these assets belong in class a property personal_property with no class_life pursuant to revproc_87_56 and rev_proc former sec_168 acrs generally applies to recovery_property placed_in_service after and before the term recovery_property is defined in former sec_168 as meaning tangible_property of a character subject_to the allowance for depreciation that is used in a trade_or_business or held_for_the_production_of_income recovery_property does not include public_utility_property if the taxpayer does not use a normalization method_of_accounting pursuant to former sec_168 each item of recovery_property is assigned to one of the classes of property specified in former sec_168 the term 5-year_property is defined in former sec_168 as meaning recovery_property that is sec_1245 class property and that is not 3-year_property 10-year_property or 15-year public_utility_property the classification of recovery_property as 3-year_property 10-year_property or 15-year public_utility_property is made with reference to the property’s present class_life the present class lives of recovery_property for purposes of former sec_168 are set forth in revproc_83_35 this revenue_procedure divides assets into two broad categories asset classes dollar_figure through which consist of specific depreciable assets used in all business activities and asset classes through that consist of depreciable assets used in specific business activities the depreciation deduction provided by sec_167 for tangible_property placed_in_service after generally is determined under sec_168 this section prescribes two methods_of_accounting for determining depreciation allowances one method is the general depreciation system in sec_168 and the other method is the alternative_depreciation_system in sec_168 under either depreciation system the depreciation deduction is computed by using a prescribed recovery_period depreciation method and convention for purposes of the general depreciation system the recovery_period is determined by the property's classification under sec_168 pursuant to sec_168 property with a class_life of years or less is classified as 3-year_property property with a class_life of more than years but less than years is classified as 5-year_property property with a class_life of years or more but less than years is classified as 7-year_property property with a class_life of years or more but less than years is classified as year property property with a class_life of years or more but less than years is classified as 15-year_property and property with a class_life of years or more is classified as 20-year_property understood to also be references to revproc_83_35 the asset classes discussed in this letter are substantially the same under both revenue procedures frev-245546-96 the term class_life is defined in sec_168 as meaning the class_life if any that would be applicable with respect to any property as of date under sec_167 determined without regard to sec_167 and as if the taxpayer had made an election under sec_167 as in effect on the day before the date of enactment of the revenue reconciliation act of former sec_167 provided that in the case of a taxpayer who elected the asset_depreciation_range adr system of depreciation the depreciation allowance was based on the class_life prescribed by the secretary that reasonably reflected the anticipated useful_life of that class of property to the industry or other group sec_1_167_a_-11 of the income_tax regulations provides rules for classifying property under former sec_167 property is included in the asset_guideline_class for the activity in which the property is primarily used the class lives of property subject_to depreciation under sec_168 are set forth in revproc_87_56 this revenue_procedure divides assets into two broad categories asset classes dollar_figure through that consist of specific depreciable assets used in all business activities and asset classes through that consist of depreciable assets used in specific business activities an asset that falls within both an asset group that is asset classes dollar_figure through and an activity group that is asset classes through is classified in the asset group see 111_tc_105 taxpayer’s business activity is described in utility asset classe sec_49 and dollar_figure of revproc_87_56 under the class_life system property generally is included in the asset_guideline_class for the activity in which the property is primarily used taxpayer uses the certain tools shop equipment and laboratory equipment such as lathes bandsaws hydraulic presses and tools used for testing in furtherance of its business activity therefore the assets that taxpayer wishes to include as class a property personal_property with no class_life are more appropriately included in taxpayer’s specific business activity asset classes the method changes would have been effective with the taxable_year beginning date and would have resulted in a negative sec_481 adjustment decrease in taxable_income if you have any questions on this matter do not hesitate to call me at charles b ramsey chief branch office of associate chief_counsel passthroughs special industries cc


internal_revenue_service number release date index number -------------------------------------- ----------------------------- ------------------- --------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------ telephone number -------------------- refer reply to cc psi b02 plr-138935-13 date date ------------------------------- x ------------------------------------------------- state d1 d2 d3 trust a ------------------------------------------------- trust b ------------ --------------------- ------ --------------------- --------------------------------------- -------------------------------------- ---------------------- ----------------------------------- trust c ---------------------- dear ---------------- this responds to a letter dated date submitted on behalf of x by its authorized representative requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated under the laws of state and elected to be an s_corporation effective on d1 in d2 shares of x were transferred to trust a to trust b and to trust c collectively the three trusts each of the three trusts was treated as a wholly-owned grantor_trust under sec_671 and sec_676 on d3 the grantor of the three trusts ceased to be treated as the owner of the three trusts for income_tax purposes x represents that the three trusts were eligible to elect qualified_subchapter_s_trust qsst treatment under sec_1361 however the respective beneficiaries of the three trusts each inadvertently failed to timely make a qsst election therefore x's s election terminated on d3 plr-138935-13 x represents that x and each of its shareholders have filed consistently with the treatment of x as an s_corporation since d1 x represents that the termination was not motivated by tax_avoidance or retroactive tax planning x and its shareholders have agreed to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation sec_1361 of the code 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 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 sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be an s_corporation shareholder sec_1361 provides that in the case of a qsst for which a beneficiary makes an election under sec_1361 the trust is treated as a_trust described in sec_1361 and for purposes of sec_678 the beneficiary of the trust shall be treated as the owner of that portion of the trust that consists of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1361 provides that a beneficiary of a qsst may elect to have sec_1361 apply sec_1_1361-1 provides that the current income_beneficiary of a qsst must make the election under sec_1361 by signing and filing with the service_center with which the corporation files its income_tax returns the applicable form or a statement including the information listed in sec_1_1361-1 sec_1362 provides that a in general an election under sec_1362 shall 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 and b any termination under sec_1362 shall be effective on and after the date of cessation sec_1362 provides in part that if an election under sec_1362 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 the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of plr-138935-13 time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation 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 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 during the period specified by the secretary based solely on the facts submitted and the representations made we conclude that x's s_corporation_election terminated on d3 because of the inadvertent failure of the beneficiaries of the three trusts to make qsst elections and that this termination of x's s election was an inadvertent termination within the meaning of sec_1362 accordingly pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d3 and thereafter provided x's s_corporation_election was valid and not otherwise terminated under sec_1362 this ruling is contingent upon the respective beneficiaries of each of the three trusts filing qsst elections with an effective date of d3 with the appropriate service_center within days of the date of this ruling a copy of this letter should be attached to the qsst election if x or its shareholders fail to treat x as described above this letter_ruling will be null and void except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x is a small_business_corporation under sec_1361 or whether trust is a qsst within the meaning of sec_1361 plr-138935-13 this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file 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 special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number --------------------- -------------------------- --------------------------------------- in re --------------------------------------- ---------------- ------------------------------------------- -------------------------- department of the treasury washington dc person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc corp b05 - plr-147055-03 date december --------------------------------------------------------- ---------------------------------------- ----------------------------------------------- legend distributing ------------------------------------------------------------- ---------------------------------------------------------------------- controlled ------------------------------------------------------------------- ---------------------------------------------------------------------- sub ------------------------------------------------------------- ---------------------------------------------------------------------- sub ------------------------------------------------------------- ---------------------------------------------------------------------- llc ------------------------------------------------------------- --------------------------------------------------------------------------------------- llc ------------------------------------------------------------- --------------------------------------------------------------------------------------- corp ------------------------------------------------------------- ---------------------------------------------------------------------- state x --------------------------------------------------- -------------------------------------------------- --------------------------------------- ------------------------------------ ---------------- plr-147055-03 r dollars q dollars v w percent x percent y percent z percent zz percent business a business b business c a ------------------------- ------------- -------------- --------------- ------------------ -------------- --------------- ------------------ ---------------------------- ---------------------------------- ----------------------- ------------------------- ------------------------------ -- -- ---------------------- b date r s dear -------------- income_tax consequences of a proposed transaction the facts submitted for consideration are substantially as set forth below distributing has outstanding a single class of voting common_stock x percent of which is held by llc the remaining shares are held by others none of whom own five percent or more thereof distributing is a state x corporation which operates as a holding_company this letter responds to your date request for rulings on certain federal distributing wholly owns sub and sub both of which are state x corp is a state x corporation which has outstanding a single class of common plr-147055-03 corporations sub is engaged in business a and sub is engaged in business b sub has outstanding solely voting common_stock llc is a state x limited_liability_company which is engaged in business c distributing holds a w membership interest in llc the remaining y membership interest in llc is held by corp stock percent of which is held by each of individuals a and b and business b has had gross_receipts and operating_expenses representative of the active_conduct_of_a_trade_or_business for each of the past five years equity_interest in a corporation that reflects the value of sub 1’s business at the same time a does not want to be subject_to a majority corporate shareholder that might allocate business a’s resources to a sister operating entity sub a is key_employee of sub a has expressed a desire to acquire a significant accordingly the following transaction is proposed financial information has been submitted which indicates that each of business a i ii sub will cancel intercompany debt in the amount of dollar_figurer dollars that distributing owes sub distributing will form controlled as a state x corporation with only voting common_stock authorized and outstanding iii distributing will transfer all of the stock of sub and its interest in llc to controlled in exchange for all of the outstanding_stock of controlled and the assumption by controlled of certain liabilities of distributing iv controlled will contribute to sub the interest in llc it receives from distributing in constructive exchange for sub stock v sub will acquire the remaining interest in llc from corp in exchange for sub voting common_stock which will amount to between z and zz percent vi distributing will distribute on date all of controlled s stock to its shareholders on a pro_rata basis plr-147055-03 the sub voting common_stock issued to corp in step v above will be identical in all respects to the sub voting common_stock theretofore outstanding except that it will be redeemable by sub under certain limited circumstances in addition corp will have a right to require sub to redeem the sub shares it holds which if fully exercised would leave corp with no less than v percent of the outstanding_stock of sub as of date if fully exercised however at least q dollars of the investment by corp in the sub stock would remain at risk in sub will constitute a minority of each board distributing and controlled will also have the same chief financial officer and will share s employees who perform secretarial accounting and technical support functions following the distribution distributing and controlled will share r directors which in connection with the proposed transaction it has been represented that a no part of the controlled stock being distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a distributing shareholder the years of financial information submitted on behalf of sub and sub in each case represents its present operation and there have been no substantial operational changes since the date of the last financial statements submitted following the distribution sub and sub will each continue the active_conduct of its business independently and with its own employees with the exception of the board the directors the chief financial officer and the s employees as described above immediately after the distribution at least percent of the fair_market_value of the gross assets of distributing will consist of the stock of sub a controlled_corporation that is engaged in the active_conduct_of_a_trade_or_business as defined in sec_355 immediately after the distribution at least percent of the fair_market_value of the gross assets of controlled will consist of the stock of sub a controlled_corporation that is engaged in the active_conduct_of_a_trade_or_business as defined in sec_355 b c d e plr-147055-03 f the distribution of all the stock of controlled is carried out for the following corporate business_purpose to provide a meaningful equity stake to the key_employee of sub the distribution of all the stock of controlled is motivated in whole or substantial part by this corporate business_purpose there is no plan or intention by the shareholders of distributing to sell exchange transfer by gift or otherwise dispose_of any stock in distributing or controlled after the distribution there is no plan or intention by either distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the distribution other than through purchases meeting the requirements of sec_4 b of revproc_96_30 there is no plan or intention to liquidate either distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the distribution except in the ordinary course of business the total adjusted bases and the fair_market_value of the assets to be transferred to controlled by distributing will in each instance equal or exceed the sum of the liabilities assumed within the meaning of sec_357 by controlled the liabilities to be assumed as determined under sec_357 by controlled were incurred in the ordinary course of business and are associated with the assets being transferred no intercorporate debt will exist between distributing and controlled at the time of or after the distribution immediately before the distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_2_cb_147 and as currently in effect sec_1_1502-13 as published by t d further an excess_loss_account if any with respect to the controlled stock and the sub stock will be included in income immediately before the distribution see sec_1_1502-19 g h i j k l m plr-147055-03 n payments made in connection with all continuing transactions if any between sub and sub and the distributing group and controlled_group generally will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm's length o p q no two parties to the transactions are investment companies as defined in sec_368 and iv the distribution is not part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest as defined in sec_355 in distributing or controlled immediately after the distribution no person will hold directly or indirectly disqualified_stock within the meaning of sec_355 in distributing or controlled that constitutes a percent or greater interest within the meaning of sec_355 in distributing or controlled based solely on the information submitted and on the representations set forth above we rule that the transfer by distributing of all of the stock of sub and the interest in llc to controlled in exchange for all of the outstanding_stock of controlled and the assumption by controlled of certain liabilities followed by the distribution of the controlled stock to the shareholders of distributing will be a reorganization within the meaning of sec_368 of the internal_revenue_code distributing and controlled will each be a_party_to_a_reorganization within the meaning of sec_368 the transfer to sub by controlled of the interest in llc will not prevent the transaction described in ruling from qualifying as a reorganization under sec_368 the cancellation of debt owing by distributing to sub in the amount of dollar_figurer dollars shall qualify as a distribution_of_property subject_to sec_301 and sec_1_1502-13 of the income_tax regulations no gain_or_loss will be recognized by distributing on its transfer of assets to controlled in exchange for controlled stock and the assumption_of_liabilities sec_361 and sec_357 plr-147055-03 no gain_or_loss will be recognized by controlled on the receipt of the assets in exchange for its stock sec_1032 the basis of the assets received by controlled will be the same as the basis of the assets in the hands of distributing immediately prior to transfer sec_362 the holding_period of the assets received by controlled will include the respective periods during which such assets were held by distributing sec_1223 no gain_or_loss will be recognized by and no amount will be included in the income of the stockholders of distributing on the receipt of the controlled stock sec_355 the basis of the stock of distributing and controlled in the hands of the distributing shareholders immediately after the distribution of controlled stock will be the same as the basis of the distributing stock in their hands immediately before the distribution allocated between the distributing stock and the controlled stock in proportion to the fair_market_value of each in accordance with sec_1_358-2 sec_358 the holding_period of the controlled stock received by shareholders of distributing will include the holding_period of the distributing stock with respect to which it was distributed provided that such stockholder held the distributing stock as capital_asset on the date of the distribution sec_1223 no gain_or_loss will be recognized by distributing on the distribution to its stockholders of all of its controlled stock sec_361 as provided in sec_312 of the code proper allocation of earnings_and_profits between controlled and distributing will be made under sec_1 a no opinion is expressed about the tax consequences of the transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above rulings this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent plr-147055-03 a copy of this letter should be attached to the federal_income_tax returns of the taxpayers involved for the taxable_year in which the transaction covered by this ruling letter is consummated in accordance with the power_of_attorney on file with this office this letter is being sent to the taxpayer s representative with a copy to the taxpayer sincerely _debra carlisle________ debra carlisle chief branch office of associate chief_counsel corporate cc


number release date internal_revenue_service index numbers - ---------------------------------------- ----------------------------------------- ------------------------- ------------------------- --------------------- department of the treasury washington dc person to contact ----------------------------------------------------- -------- telephone number -------------------- refer reply to cc psi - plr-100338-06 date date legend x ----------------------------------------- --------- ----------- ----- ---------- ------------------ d1 country dear -------------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to file an election to be treated as a disregarded_entity under the laws of country was acquired by a single owner with limited_liability on d1 x intended to be treated as a disregarded_entity for federal tax purposes effective d1 however x did not timely file a form_8832 entity classification election according to the information submitted all of the interest in x an entity formed 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 as provided in sec_301_7701-3 sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes under sec_301_7701-3 except as provided in sec_301 b unless it elects otherwise a foreign eligible_entity is classified as an association if all members have limited_liability sec_301_7701-3 provides that for purposes of sec_301_7701-3 a sec_301_7701-3 provides that an election under sec_301_7701-3 member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member will be effective on the date specified on form_8832 or on the date filed if no such date is specified on the form the effective date specified on form_8832 cannot be more than days prior to the date the form is filed and cannot be more than months after the date on which the form is filed sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 sets forth the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file form_8832 and elect to be treated as a disregarded_entity for federal tax purposes effective d1 a copy of this letter should be attached to the form_8832 based on the facts submitted and representations made we conclude that the except as specifically set forth above no opinion is expressed or implied as to the federal tax consequences of the transaction described above under any other provision of the code sec_6110 provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer on whose behalf it was requested in accordance with the power_of_attorney on file with this office a copy of this sincerely letter is being sent to x’s authorized representative enclosures copy of this letter copy for sec_6110 purposes heather c maloy associate chief_counsel passthroughs and special industries


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 b02 plr-101903-09 date date legend x state date date date date date dear ---------------- --------------------------------------------------- ----------------------- ----------------- -------------------------- ------------------------- -------------------------- -------------------- ----------------------- this letter is in response to your request dated date on behalf of x seeking inadvertent termination relief under sec_1362 of the internal_revenue_code facts based on the materials submitted and representations within we understand the relevant facts to be as follows x was incorporated in state on date x made an election to be treated as an s_corporation effective date on date x amended its articles of incorporation to include both for the designation of voting shares and nonvoting shares date amended articles article of the date amended plr-101903-09 articles provides that the common_stock shall be identical in all respects except for certain voting rights article a provides for an automatic conversion of nonvoting shares into voting shares immediately prior to the closing of a liquidity event a defined term within the date amended articles on date x’s shareholders exchanged some of their voting shares for nonvoting shares following the exchange the shareholders of x were advised by their legal counsel and accountants that article of the date amended articles could possibly be interpreted to provide differing rights to voting shares and nonvoting shares upon the occurrence of certain hypothetical events an affidavit from the drafting attorney included with the ruling_request indicates that article was included in the date amended articles to ensure that the voting shares and nonvoting shares will be identical in all respects in the case of a liquidity event on date in order to eliminate any potential inconsistencies between article and article x filed amendments to the date amended articles with the secretary of state x and its shareholders represent that all allocations of income losses deductions and credits for x were made on a pro_rata basis among all the shareholders of both classes of stock as though all shares were one class of stock for all years at issue in addition no disproportionate distributions were made for any years at issue in accordance with sec_1362 and sec_1_1362-4 x and each person who has been a shareholder of x at any time after date through the date of the ruling_request have consented to any adjustments as may be required by the secretary law and analysis 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 the year sec_1361 provides that for purposes of subchapter_s the term small_business_corporation means a domestic_corporation that is not an ineligible_corporation and that does not among other things have more than one class of stock sec_1_1361-1 of the income_tax regulations provides that a corporation is generally treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds sec_1_1361-1 provides that the determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter articles of incorporation bylaws applicable state law plr-101903-09 and binding agreements relating to distribution and liquidation proceeds collectively the governing provisions a commercial contractual agreement such as a lease employment agreement or loan agreement is not a binding agreement relating to distribution and liquidation proceeds and thus is not a governing provision unless a principal purpose of the agreement is to circumvent the one class of stock requirement although a corporation is not treated as having more than one class of stock so long as the governing provisions provide for identical distribution and liquidation rights any distributions including actual constructive or deemed distributions that differ in timing or amount are to be given appropriate tax effect in accordance with the facts and circumstances sec_1_1361-1 provides that bona_fide agreements to redeem or purchase stock at the time of death divorce disability or termination of employment are disregarded in determining whether a corporation's shares of stock confer identical rights sec_1362 provides that an election under sec_1362 will be terminated whenever at any time on or after the 1st day of the 1st taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that the termination shall be effective on and after the date of cessation sec_1362 provides that if an election under sec_1362 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 the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the required shareholder consents and the corporation and each person who was a shareholder in 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 as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination such corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based on the information submitted and the representations made we conclude that x's s_corporation_election may have terminated because x may have had more than one plr-101903-09 class of stock however we conclude that if x's s election was terminated such a termination was inadvertent within the meaning of sec_1362 of the code further we conclude that the corrective action taken by x and its shareholders does not create a second class of stock under sec_1361 consequently we rule that x will be treated as continuing to be an s_corporation from date and thereafter provided that x's s election otherwise is not terminated under sec_1362 except as specifically ruled upon above no opinion is expressed as to the federal_income_tax consequences of the facts described above under any other provision of the code in particular no opinion is expressed or implied as to whether x otherwise qualifies as a subchapter_s_corporations under sec_1361 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and are accompanied by a perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of this request it is subject_to verification on examination in accordance with the power_of_attorney on file with this office a copy of this letter_ruling will be sent to the taxpayer representatives 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 sincerely bradford r poston senior counsel branch office of the associate chief_counsel passthroughs special industries enclosure copy of letter for sec_6110 purposes