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 corp plr-137260-13 date date legend parent distributing controlled sub sub sub sub sub p sec_1 p sec_2 --------------------------------------------------------------------------------- ------------------------------------------------------ ------------------------ -------------------- ------------------------------------------------------------------------------ ------------------------ ------------------------------------------------------------------------------ ------------------------ ------------------------------------------------------------------------------ ------------------------ ------------------------------------------------------------------------------ ------------------------------------- ------------------------------------------------------------------------------ ----------------------------------------------- ------------------------------------------------------------------------------ ------------------------ ------------------------------------------------------------------------------ ------------------------ plr-137260-13 p sec_3 fsub fsub fsub fsub fsub fsub fsub fsub fsub fsub fsub fsub fsub fsub fsub fsub fsub ------------------------------------------------------------------------------ --------------------- ---------------------------------------------------------------- --------------------------------------------------------------------------------- ------------------------------------------------------------------------------ ------------------------------------------------------------------ ------------------------ 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------------------------------------------------------------------------------ ------------- ------------------------------------------------------------------------------ ------------- plr-137260-13 fsub fsub fsub fsub fsub fsub fsub fsub fsub state a country a country b country c country d country e country f country g country h country i country j ------------------------------------------------------------------------------ ------------- ---------------------------------------------------------------- ---------------------------------------------------------------------- ------------------------------------------------------------------------------ --------------------------------- ------------------------------------------------------- ------------------------ ------------------------------------------------------------------ --------------------------------------------------------------------------------- ------------------------------------------------------------------------------ ---------------------------------- ---------------------------------------------------- ------------ ------- --------------- ---------------------- --------- --------- --------- ---------- ------------- -------- ---------------------------- plr-137260-13 country k busine sec_1 busine sec_1a busine sec_1b date a b c d e f g h i j k l m n o p ---------- ----------------------------------------------------------- ------------------------------------------------------------------------------ ------------------------------------------- ------------------------------------------------------------------------------ ----------------------------------------------------------- -------------------------- ------- ------ ------- ------- ---------- ---------- ------- ---------- ------- ---------- ------- --- -- --- --- --- plr-137260-13 q r s t dear ------------ --- ---- ------- ------------------- this letter responds to your authorized representatives’ letter dated date requesting rulings regarding certain federal_income_tax consequences of a proposed transaction the information submitted in that request and in later correspondence is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process in particular this office has not reviewed any information pertaining to and has made no determination regarding whether the distribution as defined below i satisfies the business_purpose requirement of sec_1_355-2 ii is being used principally as a device for the distribution of the earnings_and_profits of distributing controlled or both see sec_355 of the internal_revenue_code the code and sec_1 d or iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in distributing or controlled see sec_355 and sec_1_355-7 summary of facts parent is a publicly traded state a corporation and the parent of a worldwide group of corporations the parent worldwide group that is engaged in busine sec_1 the parent worldwide group divides its operations into two segments-busine sec_1a and busine sec_1b parent also is the common parent of an affiliated_group_of_corporations that files a consolidated federal_income_tax return parent wholly and directly owns sub a state a corporation that serves as a holding_company for certain of the parent worldwide group’s subsidiaries parent also owns a of the outstanding_stock of sub a state a corporation sub owns the remaining b of outstanding sub stock sub is a holding_company for some of the parent plr-137260-13 worldwide group’s non-u s operations sub also directly and wholly owns sub another state a corporation sub and sub directly own c and d respectively of the outstanding interests in p sec_1 a state a general_partnership that is classified as a partnership for u s federal tax purposes p sec_1 directly and wholly owns sub a state a limited_liability_company that is classified as a disregarded_entity for u s federal tax purposes p sec_1 also directly owns e of the single class of outstanding_stock in distributing a country a entity that is classified as a corporation for u s federal tax purposes sub and parent respectively directly own the remaining f and g of distributing stock distributing is a controlled_foreign_corporation within the meaning of sec_957 distributing directly and wholly owns fsub a country a entity that is classified as a disregarded_entity for u s federal tax purposes and that is engaged in busine sec_1a distributing also directly and wholly owns fsub a country b entity that is classified as a disregarded_entity for u s federal tax purposes fsub directly and wholly owns fsub a country c entity that is classified as a disregarded_entity for u s federal tax purposes in turn fsub directly owns more than h of outstanding equity interests in fsub a country d entity that is classified as a disregarded_entity for u s federal tax purposes the remaining i a nominal amount is owned by sub a state a limited_liability_company that is indirectly owned by and that is disregarded as separate for u s federal tax purposes from distributing fsub directly conducts busine sec_1a in country d fsub also owns directly and indirectly other country d entities that conduct busine sec_1a such entities include fsub a country d entity that is classified as a corporation for u s federal tax purposes fsub owns j of the outstanding equity interests in fsub fsub owns the remaining k a nominal amount fsub does not directly have any employees rather its business is conducted by employees of fsub pursuant to an intercompany agreement distributing also directly owns numerous foreign entities in various countries other than country a that are engaged directly and indirectly in busine sec_1a and busine sec_1b these entities include i fsubs - each of which is -owned by and disregarded as separate for u s federal tax purposes from distributing ii fsubs - each of which is -owned by distributing and classified as a corporation for u s federal tax purposes iii p sec_2 a country e entity that is l -owned by distributing the remaining m is owned by fsub and that is classified as a partnership for u s federal tax purposes iv fsub a country f entity that is h -owned by and disregarded as separate for u s federal tax purposes from distributing the remaining i is owned by fsub as a nominee for distributing v fsub a country g entity that is n -owned by distributing the remaining o is owned by another entity that is disregarded as separate from distributing for u s federal tax purposes and that is classified as a corporation for u s federal tax purposes vi fsub a country h plr-137260-13 entity that is p -owned by distributing the remaining q is owned by an unrelated party and that is classified as a corporation for u s federal tax purposes vii p sec_3 a country i entity that is q -owned by distributing the remaining p is owned by unrelated parties and that is classified as a partnership for u s federal tax purposes viii fsub a country j entity that is q -owned by distributing the remaining p is owned by unrelated parties and that is classified as a corporation for u s federal tax purposes and ix fsub a country k entity that is r -owned by distributing the remaining s is owned by fsub and that is classified as a corporation for u s federal tax purposes the foreign entities listed in the foregoing paragraph except for fsub together with fsub are referred to herein as the non-country a entities in turn the non-country a entities other than fsub fsub fsub and fsub are referred to herein as the transferred non-country a entities for purposes of the distribution distributing will rely on busine sec_1a as conducted by fsub the fsub business and controlled will rely on busine sec_1a as conducted by fsub and fsub the fsub business to satisfy the active_trade_or_business_requirement of sec_355 these businesses are representative of the businesses conducted by other subsidiaries of distributing financial information has been submitted indicating that each of the fsub business and the fsub business has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years as of date distributing had approximately dollar_figuret of intercompany debt outstanding for u s federal tax purposes proposed transaction for what is represented to be a valid corporate business_purpose parent proposes to undertake the following transactions collectively the proposed transaction pursuant to a single overall plan certain intercompany debts of the parent worldwide group will be restructured or eliminated through repayment contribution distribution or set-off p sec_1 will form a new foreign_corporation controlled with minimal capital distributing will transfer its equity interests in each of the transferred non-country a entities to controlled in exchange controlled will issue shares directly to p sec_1 sub and parent in proportion to their respective equity interests in distributing plr-137260-13 p sec_1 sub and parent may contribute their respective equity interests in for formed global holding_company in exchange controlled proportionate interests therein to a newly in connection with the proposed transaction distributing and controlled expect to enter into certain agreements and arrangements concerning the relationship between distributing and controlled after the proposed transaction collectively the continuing arrangements the continuing arrangements are expected to include among other agreements a shared services agreement pursuant to which distributing will perform certain non-core services-it operations eg safety and productivity finance reporting accounting tax and treasury and human resources functions-on behalf of companies in the distributing sag and the controlled sag as defined below on an ongoing basis services provided under the shared services agreement will be provided at cost representations a b c d e no part of the consideration to be distributed by distributing in the distribution will be received by a shareholder of distributing as a creditor or an employee or in any capacity other than that of a shareholder of distributing controlled will treat all members of its separate_affiliated_group within the meaning of sec_355 the controlled sag as one corporation in determining whether it satisfies the requirements of sec_355 regarding the active_conduct_of_a_trade_or_business no intercorporate debt will exist between distributing or any member of its affiliated_group and controlled or any member of the controlled sag at the time of or subsequent to the distribution other than any debt that arises under the continuing arrangements any indebtedness owed by controlled or any member of the controlled sag to distributing or any member of its affiliated_group after the distribution will not constitute stock_or_securities the five years of financial information submitted by parent with respect to the fsub business conducted by distributing is representative of the present operation of the fsub business and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted the five years of financial information submitted by parent with respect to the fsub business to be conducted by the controlled sag is representative of the present operation of the fsub business and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted plr-137260-13 f g h i j k l neither the fsub business nor control of an entity conducting the fsub business will have been acquired during the five-year period ending on the date of the distribution in a transaction in which gain_or_loss was recognized or treated as recognized in whole or in part throughout the five-year period ending on the date of the distribution distributing will have been the principal_owner of the goodwill and significant assets of the fsub business and it will continue to be the principal_owner following the distribution neither the fsub business nor control of an entity conducting the fsub business will have been acquired during the five-year period ending on the date of the distribution in a transaction in which gain_or_loss was recognized or treated as recognized in whole or in part throughout the five-year period ending on the date of the distribution the distributing separate_affiliated_group within the meaning of sec_355 the distributing sag will have been the principal_owner of the goodwill and significant assets of the fsub business and the controlled sag will continue to be the principal_owner following the distribution following the distribution distributing and the controlled sag will continue the active_conduct of the fsub business and the fsub business respectively independently and with its separate employees except with respect to services provided under the shared services agreement the distribution is being carried out for the corporate business_purpose of reducing significant audit defense legal and advisory costs incurred in connection with the unreasonable audits and demands of the country a tax authorities the distribution is motivated in whole or substantial part by this corporate business_purpose the distribution is not being used principally as a device for the distribution of the earnings_and_profits of distributing controlled or both the distribution of controlled stock to distributing’s shareholders in the distribution is with respect to their ownership of distributing stock any money property or stock contributed by distributing to controlled in the contribution as defined below will be exchanged solely for stock in controlled and the assumption of certain liabilities of distributing m the total adjusted_basis and the fair_market_value of the assets to be transferred by distributing to controlled in the contribution each will equal or exceed the sum of the liabilities to be assumed within the meaning of sec_357 if any by controlled plus any liabilities to which the transferred assets are subject plr-137260-13 n o p q r s t the liabilities if any to be assumed within the meaning of sec_357 by controlled in the contribution and the liabilities to which the transferred assets are subject were incurred in the ordinary course of business and are associated with the assets being transferred the fair_market_value of the assets of controlled will exceed the amount of its liabilities immediately after the contribution the fair_market_value of the assets transferred to controlled in the contribution will equal or exceed controlled’s aggregate basis in those assets immediately after the contribution distributing neither accumulated its receivables nor made extraordinary payment of its payables in anticipation of the proposed transaction for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution or ii attributable to distributions on distributing stock_or_securities that were acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution in connection with all continuing payments made transactions between distributing or any of its subsidiaries and controlled or any of its subsidiaries following the distribution will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length except in the case of services provided under the shared services agreement such as it financial reporting and accounting tax and human resources which will be provided at cost plr-137260-13 u v w x y z aa bb cc dd no two parties to the proposed transaction 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_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled including any predecessor of or successor to any such corporation immediately after the transaction within the meaning of sec_355 either i any person that holds a 50-percent_or_greater_interest within the meaning of sec_355 in any disqualified_investment_corporation within the meaning of sec_355 will have held such an interest in such corporation immediately before the transaction or ii neither distributing nor controlled is or will be a disqualified_investment_corporation within the meaning of sec_355 distributing and controlled and their respective shareholders each will pay their own expenses if any incurred in connection with the proposed transaction distributing and controlled each will be a controlled_foreign_corporation within the meaning of sec_957 immediately before and after the distribution parent and p sec_1 each will be a sec_1248 shareholder within the meaning of sec_1_367_b_-2 with respect to distributing and controlled immediately before and after the distribution the notice requirements of sec_1_367_b_-1 will be satisfied for the distribution the contribution and distribution will not include an exchange described in sec_1_367_b_-4 sec_1_367_b_-4 or sec_1_367_b_-4 following the distribution parent and p sec_1 each will compute its pre-distribution amount and post-distribution amount with respect to distributing and controlled as defined under sec_1_367_b_-5 and to the extent the pre-distribution amount exceeds the post-distribution amount with respect to either distributing or controlled parent and p sec_1 will make basis adjustments and recognize income if any as required under the treasury regulations the contribution and the distribution will not include the transfer of stock of any corporation that has been a us transferor the transferee foreign_corporation or the transferred corporation with respect to any unexpired gain_recognition_agreement within the meaning of sec_1_367_a_-3 sec_1_367_a_-8 or sec_1_367_a_-8t plr-137260-13 ee ff neither distributing nor controlled will hold any united_states real_property interests as defined in sec_897 immediately before or after the distribution neither distributing nor controlled is or will be a passive_foreign_investment_company within the meaning of sec_1297 immediately before or after the distribution rulings based solely on the information submitted and the representations set forth above and provided that i the distribution of controlled stock to distributing’s shareholders in the distribution is with respect to their ownership of distributing stock ii any money property or stock contributed by distributing to controlled in the contribution will be exchanged solely for stock in controlled and the assumption of certain liabilities of distributing and iii any other transfer of stock money or property between distributing controlled or any distributing shareholder and any person related to distributing controlled or any distributing shareholder is respected as a separate transaction we rule as follows step sec_2 and of the proposed transaction will be treated for u s federal_income_tax purposes as i the contribution by distributing of certain busine sec_1 assets namely its interests in the regarded transferred non-country a entities and the assets of the disregarded transferred non-country a entities to controlled in exchange for all of the stock of controlled and the assumption by controlled of liabilities relating to the transferred assets the contribution followed immediately thereafter by ii the distribution of all of the stock of controlled by distributing to its shareholders on a pro_rata basis the distribution cf revrul_77_191 1977_1_cb_94 the contribution together with the distribution will qualify as a reorganization within the meaning of sec_368 distributing and controlled each will be a_party_to_a_reorganization within the meaning of sec_368 distributing will recognize no gain_or_loss on the contribution sec_361 and sec_357 controlled will recognize no gain_or_loss on the contribution sec_1032 immediately after the contribution controlled’s basis in each asset received in the contribution will equal the basis of that asset in the hands of distributing immediately before the contribution sec_362 plr-137260-13 controlled’s holding_period for each asset received in the contribution will include the period during which distributing held that asset sec_1223 distributing will recognize no gain_or_loss on the distribution sec_361 p sec_1 sub and parent will not recognize any gain_or_loss and will not otherwise include any amount in income upon their receipt of controlled stock in the distribution sec_355 immediately after the distribution the basis in the hands of p sec_1 sub and parent of the distributing stock and the controlled stock will equal the basis of the distributing stock immediately before the distribution in the hands of p sec_1 sub and parent respectively allocated in proportion to the fair market values of the distributing and controlled stock immediately after the distribution in accordance with sec_1_358-2 sec_358 b and c the holding_period of the shares of controlled stock received by p sec_1 sub and parent in the distribution will include the holding_period of the shares of distributing stock with respect to which the distribution is made provided that such shares of distributing stock are held as capital assets on the date of the distribution sec_1223 earnings_and_profits will be allocated between distributing and controlled in accordance with sec_312 and reg sec_1_312-10 caveats 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 we express no opinion about the tax treatment of the proposed transaction under other provisions of the code and the treasury regulations or the tax treatment of any condition existing at the time of or effect resulting from the proposed transaction that is not specifically covered by the above rulings in particular no opinion is expressed or implied regarding i ii whether the distribution satisfies the business_purpose requirement of sec_1 b whether the distribution is being used principally as a device for the distribution of the earnings_and_profits of distributing controlled or both see sec_355 and sec_1_355-2 iii whether the distribution and any acquisition or acquisitions are part of a plan or series of related transactions under sec_355 plr-137260-13 iv v any consequences under sec_367 with respect to any transaction described in this letter_ruling or any cost-based transactions between distributing and controlled and or their respective subsidiaries procedural statements 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 a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely douglas c bates senior technician reviewer branch office of associate chief_counsel corporate cc


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 psi b04 - plr-123093-04 date april - legend decedent ----------------- state x ------------- year ------- spouse ------------------------- child ---------------------------- child ---------------------------- child ------------------------- grandchild -------------------------------- grandchild ------------------------ grandchild ---------------------------------- grandchild --------------------- greatgrandchild ----------------------------- greatgrandchild ------------------------------ greatgrandchild ------------------------- trust ------------------------------------------------------ charity ----------------------------------------------------------- charity -- -------------------------------- year ------- date --------------------- date -------------------------- date ---------------------- plr-123093-04 date ----------------------- date ----------------------- greatgrandchild ------------------------------- greatgrandchild --------------------------------- greatgrandchild ---------------------------- greatgrandchild ------------------------------ greatgrandchild ------------------------------ greatgrandchild ------------------------------------------ greatgrandchild ----------------------------- greatgrandchild ---------------------------- y --------- trust ---- ---------------------------------------- ------------------------------------ trust ---- ---------------------------------------- ------------------------------------ this is in response to a letter dated date and other dear --------------- correspondence requesting rulings regarding the income gift and generation-skipping_transfer gst tax consequences of a proposed judicial construction of trust to permit proposed sales of remainder interests in trust facts the facts submitted and representations made are as follows the decedent a resident of state x died testate in year at the time of his death the decedent was survived by his spouse child child child and the following lineal_descendants of child grandchild grandchild grandchild grandchild greatgrandchild greatgrandchild and greatgrandchild at the time of the decedent's death greatgrandchild was in utero after the decedent's death eight additional greatgrandchildren greatgrandchild through greatgrandchild were born and are currently living all are lineal_descendants of child article sixth of the decedent's will created trust a residuary_trust with respect to which the spouse was the trustee under the terms of the trust child was entitled to receive distributions from income not exceeding dollar_figure per month for reasonable care comfort and support all net_income after the distributions to child was paid to spouse for her life after spouse's death all the income after the distributions to child is to be distributed equally to child and child upon the death of child or child each child's share of the income will be paid to that respective child's issue if either child or child has no surviving issue that child's share will augment the share to the plr-123093-04 surviving child or his or her issue in addition the trustee may make discretionary distributions of principal for an income beneficiary's reasonable maintenance comfort and support for expenses of accident illness or other misfortunes the trust will terminate upon the death of the last to die of the spouse child child and child and the issue of child and child at that time the corpus and any undistributed_income will be paid one-half to charity and one-half to charity the will also contains a spendthrift_clause which provides that each beneficiary hereunder is hereby restrained from anticipating encumbering alienating or in any other manner assigning his or her interest or estate in either principal or income and is without power to do so nor shall such interest or estate be subject_to his or her liabilities or obligations nor to judgment or other legal process bankruptcy proceedings or claims of creditors or others all income and principal or either of them shall be payable and deliverable only and personally to the respective beneficiaries entitled thereto in year the decedent's_estate sought and received an order from the appropriate local state x court for an accounting and distribution of the estate included in the order was a statement that the trust would terminate and distribution to the charities would occur on the death of the last survivor of the beneficiaries namely spouse child child child and the last survivor of the issue of said child living at the death of said decedent specifically referencing grandchild grandchild grandchild and grandchild thus for the purpose of determining the measuring lives for the duration of the trust the order purported to specifically name the individuals that comprised the class defined as issue under the trust and limited this class to certain specified children of child living at decedent's death grandchildren of child living at decedent's death were not listed as measuring lives the order also required that the distributions to the charities were to be used only for their charitable purposes you represent that spouse child and child are deceased and that child had no issue child is living and as noted above has issue living consequently child is currently the only income_beneficiary the living descendants of child include grandchildren through and greatgrandchildren through all of whom were living at the time of the decedent's death and eight additional greatgrandchildren greatgrandchild through greatgrandchild who were born after the decedent died some of the descendants of child petitioned the appropriate court for an order that the omission of greatgrandchildren through who were living at the decedent's death from the list of measuring lives for determining when trust will terminate in the year court order was a clerical_error charity and the grandchildren of child entered into a settlement under the settlement on date charity sold its interest to existing trusts previously established for the benefit of the then-living grandchildren the service issued a ruling on date as supplemented on date that the plr-123093-04 of child ie greatgrandchildren of the decedent all of whom are issue of child and or directly to the current beneficiaries of such trusts the value of charity 1's interest was determined by computing an amount half way between the present_value computed pursuant to sec_7520 of the interest assuming greatgrandchildren through were not measuring lives and the present_value of the interest assuming that the greatgrandchildren through were measuring lives on date the court approved this settlement in an order that bound all of the parties including charitie sec_1 and the trusts entering into the transaction were established for the benefit of specific grandchildren of child the terms of each trust other than different beneficiaries are virtually identical each trust is irrevocable and provides for the net_income to be paid at least annually to the beneficiary for the term of the trust and gives the trustee the discretion to distribute principal to the beneficiary for the beneficiary's proper care medical treatment welfare maintenance and education no income or principal may be distributed to anyone other than the beneficiary during the term of the trust each trust will terminate at the earlier of years from the date it was created or the death of the beneficiary at termination the trust corpus will be distributed to the beneficiary if living or as directed by the beneficiary pursuant to the exercise of a testamentary general_power_of_appointment or if not exercised to the beneficiary's estate settlement would not affect the exempt status of trust for generation-skipping_transfer_tax purposes in the ruling_request it was represented that if no court decision was entered on the merits of the controversy as to the date of trust termination the portion of the trust representing charity 1's interest would terminate on the date that references spouse child child child grandchild grandchild grandchild grandchild and greatgrandchild greatgrandchild and greatgrandchild as the measuring lives charitie sec_1 and correcting the year court order nunc_pro_tunc and interpreting that order to include greatgrandchildren through in the list of measuring lives thus under the date court order trust will terminate on the death of the last to die of child grandchild grandchild grandchild grandchild and greatgrandchild greatgrandchild and greatgrandchild as a result of the sale by charity of it’s remainder_interest to decedent’ sec_11 then-living greatchildren greatgrandchild greatgrandchild greatgrandchild greatgrandchild and greatgrandchild each own a percent remainder_interest in trust greatgrandchildren through each own a percent remainder_interest greatgrandchild owns a percent remainder_interest and greatgrandchildren and each own a percent remainder_interest in trust in equal shares to greatgrandchild greatgrandchild and greatgrandchild greatgrandchildren and each propose to sell a percent remainder_interest on date the court issued an order that bound all of the parties including under the terms of trust sec_1 and each great grandchild is the primary plr-123093-04 the proposed sale would reduce the remainder_interest owned by greatgrandchild from to percent and the remainder_interest owned by greatgrandchild from percent to zero in addition grandchild created a substantially identical irrevocable_trust for each of his sons greatgrandchildren and and the descendants of each son trust and trust respectively greatgrandchildren and will each sell all or part of hi sec_12 percent remainder_interest in trust to trust and trust respectively on the date of the proposed sale of the remainder interests in trust all of the assets of trust will be marketable_securities except one parcel of real_estate with a current fair_market_value estimated at dollar_figurey in all of the proposed sales of remainder interests in trust the sales_price of the remainder interests will equal the fair_market_value of the assets of trust on the date of sale multiplied by the sec_7520 actuarial remainder factor then in effect and then multiplied by the fraction representing that portion of the remainder_interest subject_to the sale beneficiary of his trust during his life each trust will pay any part of the income and principal of a primary beneficiary’s share to any among the primary beneficiary and the primary beneficiary’s descendants from time to time living and at such times as the trustee deems advisable for the health support maintenance in reasonable comfort education and best interests of the beneficiaries a primary beneficiary is granted a testamentary special power to appoint in trust that beneficiary’s share to any persons in a specified class any part of that share the primary beneficiary fails to appoint will be divided into separate shares and held under the terms of the trust as specified among a group including the then living lineal_descendants of grandchild a named niece and nephew of grandchild 4's spouse or their then living lineal_descendants and the then living grandchildren of child excluding greatgrandchild if at any time there is no then living descendant of grandchild 4's parents or of the parents of grandchild 4's spouse the remaining trust assets will be distributed to charity each trust is intended to be a qualified perpetual trust under applicable state law to which the rule_against_perpetuities does not apply trust subsequent to date and that other than the date court order trust has not been amended or otherwise altered in any manner since date construes the spendthrift provision of trust to permit the proposed sales the court will issue the following order it is represented that no additions constructive or otherwise have been made to the trustee of trust has petitioned the appropriate court for an order that plr-123093-04 the spendthrift_clause provision of trust restraining transfer of a beneficiary’s interest does not prohibit the proposed sales as defined herein of the purchased remainder interests as defined herein because the spendthrift_clause does not apply to the interests acquired after decedent’s death under the settlement approved by the appropriate court on date but only to beneficial interests arising under the terms of decedent’s will itself the trustee has requested the following rulings the court construction of the spendthrift_clause and provisions of trust to allow the proposed sales of remainder interests in trust will not affect the exempt status of trust for gst tax purposes status of trust for gst tax purposes taxable_gifts for federal gift_tax purposes as to the buyers or sellers of such interests the proposed sales of remainder interests in trust will not affect the exempt the proposed sales of remainder interests in trust will not result in any the court approval of the proposed sales of remainder interests in trust a gain_or_loss for each of the proposed sales will occur equal to the difference despite the spendthrift_clause will not result in the recognition of gain_or_loss to the trust or any trust beneficiaries between the amount_realized for the remainder_interest and the cost that the seller incurred to acquire the remainder_interest law and analysis ruling sec_1 skipping transfer which includes under sec_2611 a taxable_distribution a taxable_termination and a direct_skip sec_2601 of the internal_revenue_code imposes a tax on each generation- sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under sec_2631 which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable under ' a for purposes of chapter the term atransferor means the decedent in the case of any property subject_to tax imposed by chapter and donor in the case of any property subject_to tax imposed by chapter the individual with plr-123093-04 respect to whom property was most recently subject_to federal estate or gift_tax is the transferor of that property for purposes of chapter sec_26_2652-1 of the generation-skipping_transfer_tax regulations thus an individual may be a transferor even though there is no transfer of property under local law at the time the federal estate or gift_tax applies sec_26_2652-1 states that for purposes of chapter a transfer is subject_to federal gift_tax if a gift_tax is imposed under ' a without regard to exemptions exclusions deductions and credits under a of the tax_reform_act_of_1986 act the generation-skipping sec_26_2601-1 provides that a modification of the governing sec_26_2601-1 provides rules for determining when a modification transfer_tax is generally applicable to generation-skipping transfers made after date under b a of the act and sec_26_2601-1 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 sec_26_2601-1 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 sec_2038 or sec_2042 if the settlor had died on date 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 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 if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer irrevocable before date it is represented that no additions constructive or otherwise have been made to the trust subsequent to that date the proposed sales of remainder interests in trust and the proposed sales of remainder interests in trust will not shift any beneficial interests in trust to a lower generation and will not extend the time for vesting of any beneficial_interest in trust beyond the period provided for in the original trust accordingly based upon the facts submitted and the the court construction of the spendthrift_clause and provisions of trust to allow in the present case trust is not subject_to gst tax because it became sec_2512 provides that if a gift is made in property the value thereof at sec_2501 imposes a tax on the transfer of property by gift by an individual we note that under ' a grandchild is the transferor of trust sec_1 and plr-123093-04 representations made and pursuant to sec_26_2601-1 we conclude that the court construction of the spendthrift_clause and provisions of trust to allow the proposed sales of remainder interests in trust will not affect the exempt status of trust for gst tax purposes further the proposed sales of remainder interests in trust will not affect the exempt status of trust for gst tax purposes and thus the rules under sec_2631 and sec_2652 apply to those trusts ruling sec_2511 provides that the tax imposed by sec_2501 applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible the date of the gift shall be considered the amount_of_the_gift sec_2512 provides that where property is transferred for less than an adequate_consideration in money or money’s worth then the amount by which the value of the property exceeded the value of the consideration is deemed a gift under sec_25_2512-5 of the gift_tax regulations in general the fair_market_value of remainders transferred by gift is the present_value of the remainders determined by use of the appropriate sec_7520 actuarial factor sec_7520 provides that the value of an annuity any interest for life or a term of years or any remainder_interest or reversionary_interest is determined under tables prescribed by the secretary and by using an interest rate rounded to the nearest two-tenths of one percent equal to percent of the applicable federal midterm rate for the month in which the valuation_date falls remainder interests will equal the fair_market_value of the trust assets on the date of sale multiplied by the sec_7520 actuarial remainder factor then in effect and then multiplied by the fraction representing that portion of the remainder_interest subject_to the sale based upon the facts submitted and the representations made we conclude that the proposed sales of remainder interests in trust will not result in any taxable_gifts for federal gift_tax purposes as to the buyers or sellers of such interests ruling derived sec_61 provides that gross_income includes gains derived from dealings in property sec_61 provides that gross_income means all income from whatever source in the proposed sales of remainder interests in trust the sales_price of the sec_1001 provides that except as otherwise provided in subtitle a the entire plr-123093-04 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 such section 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 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 an exchange of property results in the realization of gain_or_loss under sec_1001 if the properties are materially different 499_us_554 properties exchanged are materially different if the properties embody legal entitlements different in_kind or extent or if the properties confer different rights and powers id pincite in cottage savings the supreme court held that mortgage loans made to different obligors and secured_by different homes embodies distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans id in defining what constitutes a material difference for purposes of sec_1001 the court states 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 id pincite the same property interests and legal entitlements as a result of the proposed construction of the spendthrift_clause it is represented that the court will construe the spendthrift_clause to be inapplicable to the remainder_interest sales because the court’s construction of the spendthrift_clause does not change the property interests and legal entitlements of the remaindermen it would be consistent with cottage savings to find that the remaindermen’s interests after the proposed construction of the clause will not differ materially from the remaindermen’s interests before the proposed construction of the clause thus the proposed construction of the spendthrift_clause would not give rise to a realization of income to the remaindermen or the trust under sec_61 or sec_1001 in the present case the issue is whether the remaindermen of the trust would have sec_1001 provides that except as otherwise provided in subtitle a sec_1001 provides that the gain from the sale_or_other_disposition of sec_1_1001-1 provides that the term term_interest_in_property does not plr-123093-04 ruling 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 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 the entire amount of the gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1001 provides in determining gain_or_loss from the sale_or_other_disposition of a term_interest_in_property that portion of the adjusted_basis of such interest which is determined pursuant to sec_1014 sec_1015 or sec_1041 shall be disregarded the term term_interest_in_property means a life interest in property an interest in property for a term of years or an income_interest in a_trust refer to remainder or reversionary interests in the property itself or other interests in property which will ripen into ownership of the entire property upon termination or failure of a preceding term_interest property or other_property in the present case greatgrandchildren and bought their remainder interests in the trust from an unrelated third party charity consequently under sec_1012 the basis of each of their respective interests is the amount that each paid for the property each would recognize gain from the sale of the remainder_interest equal to the difference between the amount_realized over the adjusted_basis of the remainder_interest grandchild of their interests in trust to trust sec_1 and respectively greatgrandchildren and bought their remainder interests in trust from an unrelated third party charity consequently under sec_1012 the basis of each of their respective interests is the amount that each paid for the property each would recognize gain from the sale of the remainder_interest equal to the difference between the amount_realized over the adjusted_basis of the remainder_interest trust or applicable state laws sec_1012 generally provides that the basis_of_property shall be the cost of the likewise with respect to the sales by greatgrandchildren and the sons of sec_1_1012-1 defines cost to be the amount_paid for the property in cash we express no opinion on whether the proposed sales are authorized under this ruling is directed only to the taxpayer who requested it sec_6110 except as specifically ruled herein we express no opinion on the federal tax plr-123093-04 consequences of the modification under the cited provisions or under any other provisions of the code provides that it may not be used or cited as precedent senior counsel branch office of associate chief_counsel enclosure copy for sec_6110 purposes passthroughs and special industries lorraine e gardner _________________________ sincerely yours


t c summary opinion united_states tax_court michael p tulay petitioner v commissioner of internal revenue respondent docket no 21664-04s filed date michael p tulay pro_se james l may jr for respondent cohen judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax for respondent also determined an accuracy-related_penalty under sec_6662 and b and of dollar_figure the issues for decision are whether petitioner’s dollar_figure payment to his former wife was alimony deductible under sec_71 and whether petitioner is liable for the penalty for negligence or substantial_understatement of tax background some of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference petitioner resided in knoxville tennessee at the time that he filed his petition on date petitioner and his then wife pamela moritz tulay tulay met with their respective attorneys to negotiate the terms of their divorce after failed attempts at mediation at the time of the august meeting petitioner was represented by william a mynatt mynatt and tulay was represented by wanda g sobieski sobieski tulay had previously been represented by different counsel in the divorce proceedings a court reporter was present at the august meeting and prepared a transcript at the end of the meeting sobieski read into the record the understanding that the parties had reached as follows petitioner would pay dollar_figure a month in child_support tulay would keep the house in which she was living and petitioner would keep the condominium in which he was living each party retained his or her vehicle personal_property would remain in the possession of whoever had it on that date and any stock or cash accounts would be divided as of their balance on that date date tulay was to be granted a percent plus dollar_figure interest in petitioner’s retirement accounts and an account for the children would be maintained with tulay as custodian and petitioner as trustee petitioner agreed to be bound by the stated terms after the meeting in accordance with the understanding that had been stated sobieski prepared the marital dissolution agreement mda to be signed by petitioner and tulay petitioner had taken handwritten notes at the august meeting and tulay initialed petitioner’s notes on the last page of those notes petitioner had labeled the dollar_figure cash payment as rehab alimony the terms of the mda followed the understanding of the parties as stated at the august meeting under the heading retirement accounts investment accounts petitioner was to transfer percent plus dollar_figure of his retirement accounts to tulay and he agreed to assist tulay in obtaining any qualified_domestic_relations_order or other documents necessary to secure the transfer of those funds to tulay without penalty there was neither a heading nor a specific designation of money to be paid to tulay as alimony petitioner signed the mda on date and it was filed by sobieski with the chancery court for knox county tennessee the tennessee court on date on date the tennessee court entered a final decree of divorce and found that petitioner and tulay had made adequate and sufficient provisions in their mda for an equitable settlement of any and all property rights custody and support the mda was incorporated as an order of the court and petitioner and tulay were ordered to comply with its terms on date ubs paine webber paine webber issued a check to tulay in the amount of dollar_figure representing a 50-percent interest in one of petitioner’s retirement accounts and the dollar_figure payment required under the terms of the mda on date petitioner electronically filed a form_1040 u s individual_income_tax_return for on which he claimed a deduction of dollar_figure for alimony petitioner had assistance from harold adair adair of h_r block in filling out his tax_return adair had been assisting petitioner in filling out his tax returns for the prior or years petitioner told adair that the dollar_figure payment was alimony to pay for the education of tulay however he did not provide adair with the mda after reviewing with petitioner internal_revenue_service publication and the requirements for a payment to be considered alimony adair determined that petitioner met the requirements and deducted the payment on petitioner’s tax_return in the notice_of_deficiency the internal_revenue_service disallowed petitioner’s deduction because he did not establish that the amount shown was a alimony and b paid it is not deductible characterization of the dollar_figure payment discussion the parties dispute whether the dollar_figure payment at issue was a property settlement or alimony in the event the payment was some form of alimony the parties dispute whether it met the requirement of sec_71 property settlement payments are not deductible for tax purposes from the income of the paying spouse 82_tc_128 and cases there cited see rogers v commissioner tcmemo_2005_50 applying tennessee law under sec_215 a deduction is allowed for an amount equal to alimony or separate_maintenance payments paid during the taxable_year alimony_or_separate_maintenance_payment means any alimony_or_separate_maintenance_payment that is includable in the gross_income of the recipient under sec_71 sec_215 sec_71 defines alimony_or_separate_maintenance_payment as any payment in cash if-- a such payment is received by or on behalf of a spouse under_a_divorce_or_separation_instrument b the divorce_or_separation_instrument does not designate such payment as a payment which is not includible in gross_income under this section and not allowable as a deduction under sec_215 c in the case of an individual legally_separated from his spouse under a decree of divorce or of separate_maintenance the payee spouse and the payor spouse are not members of the same household at the time such payment is made and d there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment in cash or property as a substitute for such payments after the death of the payee spouse if the payor is liable for any qualifying payment after the recipient’s death none of the related payments required will be taxed as alimony sec_1_71-1t q a-13 temporary income_tax regs fed reg date whether a postdeath obligation exists may be determined by the terms of the divorce_or_separation_instrument or if the instrument is silent on the matter by state law 309_us_78 see rogers v commissioner supra the parties agree that the divorce decree does not provide any conditions for the termination of the payment tennessee law provides for three kinds of alimony alimony in futuro alimony in solido and rehabilitative alimony see burlew v burlew s w 3d tenn see also self v self s w 2d tenn alimony in futuro is awarded to provide financial support to a spouse who cannot be rehabilitated burlew v burlew supra pincite it is subject_to modification and its duration is uncertain due to contingencies agreed upon by the parties or imposed by the courts id alimony in futuro terminates upon the death or remarriage of the recipient tenn code ann sec a b alimony in solido is an award of a definite sum of money to be paid in a lump sum or as installments over a definite period of time it is not subject_to modification and does not terminate upon the death of either party burlew v burlew supra pincite rehabilitative alimony is awarded when it is feasible for the economically disadvantaged spouse to achieve with reasonable effort an earning capacity that will allow for the spouse to be self-sufficient and have a standard of living comparable to the one he or she enjoyed during the marriage id tenn code ann sec d c rehabilitative alimony is modifiable and terminates upon the death of either spouse tenn code ann sec d c self v self supra pincite respondent argues that the disputed dollar_figure payment was on the face of the agreement part of the property settlement rather than alimony and would not have terminated upon the death of tulay in the alternative respondent argues that if the court were to determine the payment was alimony the same result would follow because the lump-sum payment was alimony in solido under tennessee law which would not terminate upon the death of tulay petitioner argues that the payment was rehabilitative alimony to cover the cost of tulay’s obtaining a postgraduate degree and therefore would terminate upon the death of tulay petitioner claims that the dollar_figure amount was determined based on her receiving dollar_figure month for months which represented approximate costs for graduate school and the length of time until the youngest child would begin school respectively the dollar_figure month was consistent with the rehabilitative alimony figures discussed during mediation at trial both sobieski and mynatt testified as to the terms of the mda according to sobieski there was no agreement as to alimony payments at any time she testified that the unequal division of assets ie the imbalance was intended as an equitable division and that tulay always claimed that she was entitled to more than percent of the property mynatt testified that correspondence with tulay’s previous counsel regarding division of property and a draft mda prepared by tulay’s previous counsel indicated that there was to be alimony for tulay in order for her to pursue a postgraduate degree however none of the correspondence with tulay’s previous counsel was presented as evidence and mynatt acknowledged that sobieski never requested alimony on behalf of tulay mynatt recalled discussing support for tulay at the date meeting but he said that support was not mentioned in the mda because it was her demand that she be given that payment of dollar_figure instead the supreme court of tennessee in self v self supra pincite stated obviously great care should be exercised by counsel and trial courts in crafting decrees the decree should reflect the court’s findings with regard to the circumstances of the parties the purpose or expected results of the relief granted and the specific benefits granted to and obligations imposed upon the respective parties in addition to the rights and obligations of the parties with respect to each other the liability for taxes the rights of creditors and other significant consequences may depend upon the preciseness of the language employed in the decree construction by the courts of uncertain and ambiguous language is a poor substitute for careful articulation much litigation in this court results from failure of negotiating parties to be precise in drafting the terms of marital agreements this case is an example of that type of litigation though the payment reflected an unequal division of property in tulay’s favor there is no requirement that marital property in tennessee be divided equally in order for the division to be equitable see norman v norman wl tenn app lexis ct app date see also bookout v bookout s w 2d tenn ct app there are statutorily prescribed factors to be considered tenn code ann sec c for example when dividing property a court may take into consideration the tangible or intangible contributions by one party to the education training or increased earning power of the other party tenn code ann sec c it may also consider the contribution of each party to the acquisition preservation appreciation depreciation or dissipation of the marital or separate_property including the contribution of a party to the marriage as homemaker wage earner or parent tenn code ann sec c the unequal division of the marital property in this case therefore is inconclusive after examining all of the facts and circumstances we conclude that the dollar_figure payment by petitioner to tulay was part of a property settlement the mda provides that the payment to tulay was made from petitioner’s retirement account and there is no indication anywhere in the document that it was for alimony the only evidence that the payment was intended as alimony is petitioner’s and mynatt’s testimony and petitioner’s handwritten notes it is not clear that the payment would not be due if tulay had died before it was made see rogers v commissioner supra the written_agreement is the final agreement of the parties and it leads to the conclusion that the dollar_figure was designated as a division of property the payment does not satisfy the requirement of sec_71 and therefore is not deductible by petitioner sec_6662 accuracy-related_penalties under sec_6662 a taxpayer may be liable for a penalty of percent on the portion of an underpayment_of_tax due to negligence or intentional disregard of rules or regulations or any substantial_understatement_of_income_tax sec_6662 and b and sec_6662 defines negligence as including any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code and defines disregard as any careless reckless or intentional disregard an understatement of income_tax is substantial if it exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6662 an understatement is defined as the excess of the tax required to be shown on the return over the tax actually shown on the return less any rebate sec_6662 petitioner’s understatement_of_tax for is substantial the sec_6662 penalty is not imposed with respect to any portion of the underpayment as to which the taxpayer acted with reasonable_cause and in good_faith sec_6664 see also 116_tc_438 the decision as to whether a taxpayer acted with reasonable_cause and in good_faith is made by taking into account all of the pertinent facts and circumstances sec_1_6664-4 income_tax regs relevant factors include the taxpayer’s efforts to assess his or her proper tax_liability including an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances id petitioner intended and calculated that the dollar_figure payment made to tulay was rehabilitative alimony for her to obtain a postgraduate degree looking to all of the facts and circumstances it was reasonable for petitioner to believe that the dollar_figure payment to tulay was deductible_alimony and we conclude that he acted in good_faith to reflect the foregoing decision will be entered for respondent as to the deficiency and for petitioner as to the penalty


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 ------------------------- --------------------- -- telephone number --------------------- refer reply to cc psi b2 plr-135940-11 date date legend x ------------------------------------------------------------------------------------------------------ ------------------------ state -------------------- d1 ---------------- dear -------------- this responds to the letter dated date and subsequent correspondence submitted on behalf of x by x's authorized representative requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated in state on d1 it was intended for x to be an s_corporation effective d1 however no form_2553 election by a small_business_corporation was timely filed for x accordingly x requests a ruling that it will be treated as an s_corporation effective d1 sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective generally if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one-half months of a corporation's taxable_year then the plr-135940-11 corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year and sec_1362 shall not apply based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation effective d1 accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective d1 within days following the date of this letter then such election will be treated as timely made for x's taxable_year beginning d1 a copy of this letter should be attached to the form_2553 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 was or is a small_business_corporation under sec_1361 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 x's authorized representative sincerely charlotte chyr 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 --------------------------------------- --------------------------------------------- -------------------------- ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ---------------- telephone number -------------------- refer reply to cc psi b03 plr-147807-13 date date x y a state date date date date date legend ---------------------------------------------------------------------------------------------- ----------------------------- ---------------------------------------------------------------------------------------------- ----------------------------- ---------------------------------------------------------------------------------------------- -------------------------------- ------------- ----------------------- --------------------- --------------------- ------------------ ----------------------- dear ---------------- this letter responds to a letter dated date and subsequent correspondence written on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code plr-147807-13 facts the information submitted states that x was incorporated under the laws of state on date x elected to be an s_corporation effective date x has been the sole shareholder of y stock at all times since date x elected to treat y as a qualified_subchapter_s_subsidiary qsub effective date on date x’s articles of incorporation were amended to authorize the issuance of preferred_stock to a in exchange for a’s contribution of money the preferred_stock had preferential_distribution and liquidation rights over the common_stock on date x’s articles of incorporation were amended to authorize the issuance of perpetual preferred_stock to a in exchange for a’s contribution of money the perpetual preferred_stock had preferential_distribution and liquidation rights over the common_stock x inadvertently terminated its s_corporation_election on date by issuing a second class of stock on date x took corrective action by amending its articles of incorporation to eliminate the preferred_stock and perpetual preferred_stock and create non-voting common_stock x represents that no distributions of cash or other_property have ever been made by x with respect to the preferred_stock and perpetual preferred_stock x represents that the termination was not motivated by tax_avoidance or retroactive tax planning x and its shareholders agree to make any adjustments consistent with the treatment of x as an s_corporation as might be required by the secretary law and analysis sec_1362 provides that if an election under sec_1362 or sec_1361 by any corporation was terminated under sec_1362 or sec_1361 the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such termination steps were taken so that the corporation for which the termination occurred is a small_business_corporation or a qsub as the case may be and the corporation for which the termination occurred and each person who was a shareholder of such corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of such corporation as an s_corporation or a qsub as the case may be as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such termination such corporation shall be treated as an s_corporation or a qsub as the case may be during the period specified by the secretary plr-147807-13 conclusion based solely on the facts submitted and representations made we conclude that x’s s_corporation_election and y’s qsub election terminated on date we also conclude that the termination of x’s s_corporation_election and y’s qsub election was inadvertent within the meaning of sec_1362 therefore we conclude that x will be treated as an s_corporation from date and thereafter provided x’s s_corporation_election is otherwise valid and is not otherwise terminated under sec_1362 in addition y will be treated as a qsub of x from date and thereafter provided that y is otherwise eligible to be treated as a qsub except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion regarding whether x is otherwise eligible to be an s_corporation or whether y is otherwise eligible to be a qsub this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative the ruling contained in this letter is 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 ruling_request it is subject_to verification on examination sincerely stacy l short senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc