internal_revenue_service number release date index number ------------------------- ------------------------------------------------------------ ---------- -------------------------------------------------- ------------------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ----------------------- id no -------------- telephone number ---------------------- refer reply to cc ita b03 plr-106397-16 plr-106398-16 date date ty ------- legend acquirer taxpayer ----------------------------------------------------------------------------------------- target taxpayer ---------------------------------------------------- acquirer sub ------------------------------------- services ------------------------------------------------------------------------------------------------------ --------------------------------- firm --------------------------- firm -------------------------------- person a ----------------- person b ---------------- person c ---------------------- person d ---------------------- accounting firm x ---------------------- accounting firm y ----------------------------------------- year ------- date -------------------- date ---------------------------- date ---------------------------- a ----- b ---- c -------------- d -------------- e -------------- f ------------ g -------------- h -------------- i ------------ j ---------- k -------------- plr-106397-16 l -------------- dear ---------------- this is in response to your letter dated date sent by your representatives in the letter your representatives requested an extension of time to file the forms necessary to make a safe_harbor election under revproc_2011_29 to allocate success-based fees between facilitative and non-facilitative amounts incurred for a covered transaction for acquirer taxpayer’s tax_year ending date and for target taxpayer’s short tax_year ending date the request is based on sec_301_9100-1 and sec_301_9100-3 of the procedure and administrative regulations facts target taxpayer provides services on date acquirer taxpayer through its wholly owned subsidiary acquirer sub acquired percent of the outstanding shares of target taxpayer’s common_stock following the transaction target taxpayer became a wholly owned subsidiary of acquirer sub and an indirect subsidiary of acquirer taxpayer the total consideration was approximately dollar_figurea million target taxpayer engaged firm to provide various services with respect to the transaction pursuant to the terms of the engagement letter firm agreed to provide investment banking services regarding the possible acquisition of some or all of target taxpayer’s business the engagement letter provided that firm would be paid a transaction fee of b percent of the transaction value upon the closing date of a transaction prior to the completion of the transaction firm sent a letter to target taxpayer to the effect that if the acquisition was completed firm would be paid a success-based_fee of dollar_figurec in accordance with the engagement letter target taxpayer represented that on date it provided acquirer taxpayer with dollar_figurec from debt it took on as part of the transaction and acquirer taxpayer paid the dollar_figurec to firm by wire transfer upon closing of the transaction also in conjunction with the transaction acquirer taxpayer engaged firm to provide consulting services associated with the transaction these services included advice analysis and assistance with respect to due diligence and other investigatory matters related to target taxpayer its subsidiaries and its parent companies in conjunction with the acquisition acquirer taxpayer represented that it paid a total dollar_figured of which dollar_figuree was for services to secure financing and thus not an amount qualifying as a success-based_fee moreover acquirer taxpayer also engaged two individuals person a and person b who provided consulting services including due diligence and transaction structuring acquirer taxpayer represented that it paid each of person a and person b dollar_figuref the total success-based fees for firm person a and person b were dollar_figureg payment of which was contingent upon the successful closing of the plr-106397-16 transaction acquirer taxpayer represented that it used funds transferred from target taxpayer to make these payments target taxpayer had engaged accounting firm x for preparation of its federal tax_return for several years prior to the year in which the transaction occurred pursuant to this engagement accounting firm x prepared a form_1120 u s_corporation income_tax return for a taxable_year ending date on behalf of target taxpayer a period which included the acquisition transaction on the form_1120 with a date year-end accounting firm x allocated the dollar_figurec success-based_fee paid to firm as permitted under the safe-harbor election provided by revproc_2011_29 thus that form_1120 reflected that percent of the fee or dollar_figureh was deducted and percent or dollar_figurei was capitalized however accounting firm x inadvertently did not include the election statement required under revproc_2011_29 to properly make the election accounting firm x also included the success-based fees paid to firm person a and person b on target taxpayer’s form_1120 with a date year-end those fees were also allocated as permitted under revproc_2011_29 however accounting firm x determined that the success-based fees were start-up costs under sec_195 and amortizable over months the amount deducted was dollar_figurej with the remaining dollar_figurek to be deducted over the remaining months of the amortization period the form_1120 with a date year-end was presented to person c executive vice president and chief financial officer for acquirer taxpayer and target taxpayer and to person d formerly controller treasurer and chief accounting officer for target taxpayer person c delegated the detailed review and signature to person d who had been responsible for signing target taxpayer’s tax returns in prior years and did so again with respect to the date year-end return at all times person c believed the form_1120 included a valid election under revproc_2011_29 for the total amount of success-based fees target taxpayer’s form_1120 with a date year-end was timely filed no return was filed for acquirer taxpayer for the tax_year ending date subsequent to the filing of target taxpayer’s form_1120 with a date year-end target taxpayer entered into an engagement with accounting firm y for the audit of its financial statements as well as for tax compliance and advisory services during the course of performing the audit of the date financial statements accounting firm y reviewed target taxpayer’s form_1120 with a date year-end while doing so accounting firm y discovered that the election statement required to make the safe-harbor election for success-based fees was not included with that form_1120 despite the fees being properly allocated as permitted by rev_proc during the course of discussions with accounting firm x and accounting firm y person c determined that the best course of action would be to request relief for an extension of time to file the elections under revproc_2011_29 pursuant to the authority of sec_301_9100-1 and -3 plr-106397-16 the internal_revenue_service is examining target taxpayer’s date year-end return and acquirer taxpayer’s date year-end return in conjunction with the examinations it was determined that target taxpayer’s form_1120 filed with a tax_year ending date should instead have reflected that it was a short-period return ending on the date the transaction closed date it was also determined that the success-based fees for acquirer taxpayer should have been reported on a return for the tax_year ending on date which it did not file not on target taxpayer’s return law and analysis sec_263 of the internal_revenue_code and sec_1_263_a_-2 of the income_tax regulations provide that no deduction shall be allowed for any amount_paid out for property having a useful_life substantially beyond the taxable_year in the case of an acquisition or reorganization of a business_entity costs that are incurred in the process of acquisition and that produce significant long-term benefits must be capitalized 503_us_79 397_us_572 under sec_1_263_a_-5 a taxpayer must capitalize an amount_paid to facilitate a business acquisition or reorganization transaction described in sec_1_263_a_-5 an amount is paid to facilitate a transaction described in sec_1_263_a_-5 if the amount is paid in the process of investigating or otherwise pursuing the transaction sec_1_263_a_-5 of the regulations provides that an amount that is contingent on the successful closing of a transaction described in sec_1_263_a_-5 or success- based fee is presumed to facilitate the transaction a taxpayer may rebut the presumption by maintaining sufficient documentation to establish that a portion of the fee is allocable to activities that do not facilitate the transaction to reduce controversy between the irs and taxpayers over the documentation required to allocate success-based fees alternatively to the regulatory presumption the irs issued revproc_2011_29 2011_1_cb_746 the revenue_procedure states that the irs would not challenge a taxpayer's allocation of a success-based_fee between activities that facilitate a transaction described in sec_1_263_a_-5 and activities that do not facilitate the transaction if the taxpayer -- treats percent of the amount of the success-based_fee as an amount that does not facilitate the transaction capitalizes the remaining percent as an amount that does facilitate the transaction and attaches a statement to its original federal_income_tax return for the taxable_year the success-based_fee is paid_or_incurred stating that the taxpayer is electing the safe plr-106397-16 harbor identifying the transaction and stating the success-based_fee amounts that are deducted and capitalized the revenue_procedure applies to covered transactions described in sec_1 a - e which include -- i a taxable_acquisition by the taxpayer of assets that constitute a trade_or_business ii a taxable_acquisition of an ownership_interest in a business_entity whether the taxpayer is the acquirer in the acquisition or the target of the acquisition if immediately after the acquisition the acquirer and the target are related within the meaning of sec_267 or sec_707 or iii a reorganization described in sec_368 b or c or a reorganization described in sec_368 in which stock_or_securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under sec_354 or sec_356 whether the taxpayer is the acquirer or the target in the reorganization sec_301_9100-1 through of the procedure and administration regulations provide the standards the commissioner uses to determine whether to grant an extension of time to make a regulatory election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides extensions of time to make a regulatory election under code sections other than those for which sec_301_9100-2 expressly permits automatic extensions requests for extensions of time for regulatory elections will be granted when the taxpayer provides evidence including affidavits described in the regulations 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 sec_301_9100-3 states that a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer -- plr-106397-16 i requests relief before the failure to make the regulatory election is discovered by the service ii failed to make the election because of intervening events beyond the taxpayer’s control iii failed to make the election because after exercising due diligence the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or v reasonably relied on a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election under sec_301_9100-3 a taxpayer will not be considered to have acted reasonably and in good_faith if the taxpayer -- i seeks to alter a return position for which an accuracy related penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief taking into account sec_1_6664-2 and the new position requires or permits a regulatory election for which relief is requested ii was informed in all material respects of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief if specific facts have changed since the original deadline that make the election advantageous to a taxpayer the service will not ordinarily grant relief target taxpayer and acquirer taxpayer in this case have represented that they have requested relief before the failure to make the regulatory election was discovered by the service target taxpayer and acquirer taxpayer has also represented that they reasonably relied on a qualified_tax professional and the tax professional failed to make or advise target taxpayer and acquirer taxpayer to make the election thus under sec_301_9100-3 and sec_301_9100-3 target taxpayer and acquirer taxpayer will be deemed to have acted reasonably and in good_faith target taxpayer and acquirer taxpayer have also represented that none of the circumstances listed in sec_301_9100-3 apply sec_301_9100-3 provides in part that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money plr-106397-16 similarly if the tax consequences of more than one taxpayer are affected by the election the government’s interests are prejudiced if extending the time for making the election may result in the affected taxpayers in the aggregate having a lower tax_liability than if the election had been timely made sec_301_9100-3 provides in part that the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer’s receipt of a ruling granting relief under these criteria the interests of the government are not prejudiced in this case target taxpayer and acquirer taxpayer have represented that granting relief would not result in a lower tax_liability in the aggregate for either taxpayer for all taxable years affected by the election than each taxpayer would have had if the election had been timely made taking into account the time_value_of_money target taxpayer and acquirer taxpayer have also represented that granting relief would not result in a lower tax_liability in the aggregate for both taxpayers than if the election had been timely made furthermore the taxable years in which the regulatory election should have been made and any taxable years that would have been affected had it been timely made are not closed by the period of assessment conclusion target taxpayer’s and acquirer taxpayer’s elections are regulatory elections as defined under sec_301_9100-1 because the due_date of the election is prescribed in revproc_2011_29 in the present situation the requirements of sec_301 b i and b v of the regulations have been satisfied the information and representations made by target taxpayer and acquirer taxpayer establish that they both acted reasonably and in good_faith furthermore granting an extension will not prejudice the interests of the government target taxpayer and acquirer taxpayer represented that each will not have a lower tax_liability in the aggregate for all taxable years affected by the election if given permission to make the election than they would have if the election were made by the original deadline for making the election target taxpayer also represented that the period of assessment for the short tax_year ending date will not be closed before receipt of a ruling acquirer taxpayer represented that the period of assessment for the tax_year ending date will not be closed before receipt of a ruling accordingly target taxpayer is granted an extension of time to file the statements required by sec_4 of revproc_2011_29 until days following the date of this letter acquirer taxpayer is granted an extension of time to file the statements required by sec_4 of revproc_2011_29 until the later of days following the date of this letter or until days after office of the associate chief_counsel corporate grants acquirer taxpayer relief under sec_301_9100-1 and sec_301_9100-3 of the procedure and administrative regulations to file a consolidated_return for the tax_year ending date plr-106397-16 no opinion is expressed in this letter as to whether it is appropriate for acquirer taxpayer to file a consolidated tax_return whether target taxpayer may file an amended_return for the tax_year ending date or the tax treatment of the dollar_figurec transferred by target taxpayer to acquirer taxpayer except as expressly provided herein no opinion is expressed or implied concerning the federal_income_tax consequences of any aspect of any transaction or item discussed or referenced in this ruling including whether target taxpayer or acquirer taxpayer properly included the correct costs as its success-based fees subject_to the election or whether the transaction was within the scope of revproc_2011_29 this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative 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 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely christopher f kane chief branch income_tax accounting 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 b04 plr-143150-06 date september - ------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------ ------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- re ---------------------------------------- re ---------------------------------------- --------------------------------------- legend subtrust subtrust subtrust ----------------------------------------------------------------------------------------------------------------------------------- subtrust ------------------------------------------------------------------------------------------------------------------------ subtrust ---------------------------------------------------------------------------------------------------------------------------- subtrust ------------------------------------------------------------------------------------------------------------------------ trust decedent spouse a b c d date date date dollar_figurea corporation company ------------------------------------- holding_company -------------------------- co-trustee state local court ------------------------------------------------------------------- ------------------ ------------------------ ------------------------ -------------------- ------------------ ---------------------- -------------------- ----------------- ------------------------- ----------- ---------------------------------------- ------------------------------------- ------------- ---------------------------------------------------------- plr-143150-06 the act statute a statute b statute c ---------------------------------------------------------------------------- dear --------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------- ----------------------------------------------------------------- this is in response to the date letter and other correspondence requesting rulings on the income gift and generation-skipping_transfer gst tax consequences of the proposed modification of certain trusts the facts submitted are as follows decedent died testate on date before date decedent was survived by spouse and three children a b and c there were no children of decedent who predeceased him leaving issue under article viii of decedent’s will the residue of the estate passed to the trust under article viii paragraphs a and c of the will i dollar_figurea is to be paid annually to spouse from the income of the trust ii dollar_figurea of the remaining income is to be paid annually in equal shares to decedent’s children and iii the remaining income is to be paid annually in equal shares to spouse and each of decedent’s children under article viii paragraph g on spouse’s death her interest is to pass to decedent’s children with the result that all of the trust income would be paid in equal shares to a b c under paragraph f on the death of a child of decedent ie a b or c the deceased child’s interest is to pass to that child’s issue per stirpes if the child leaves a surviving_spouse the child may appoint to the surviving_spouse a one-fourth share of the child’s interest on the death of a deceased child’s issue the deceased issue’s interest is to pass to his or her issue if the deceased issue has no issue the interest is to pass to the remaining issue of the deceased child under paragraph j the trustees may divide the trust nearly as possible in the exact proportions required under paragraph d a child of decedent who has attained age is to receive his or her share of income outright under paragraph e the income otherwise payable to a beneficiary under age who is the issue of a deceased child of decedent after deduction for expenses of support maintenance and education is to be accumulated until the beneficiary attains age at that time the accumulation is to be paid over to the beneficiary and he or she is to receive outright distributions of income thereafter under paragraph h except as provided in paragraph i no distribution of corpus may be made until the termination of the trust under paragraph i the trustees have the discretionary power to use corpus if deemed reasonably necessary for the care support or education of a child of decedent or a deceased child’s issue or in extraordinary emergencies after taking into consideration any other income or funds available for this purpose paragraph j authorizes the trustees at their discretion to divide the trust into separate trusts for the benefit of the trust beneficiaries under paragraph q stock plr-143150-06 dividends are not to be considered as income but rather shall be considered as an increment in value of corpus no appreciation in value of corpus shall be considered as income but likewise as an increment in value of corpus all cash dividends except liquidating dividends are to be considered as income under paragraph k the trust is to terminate on the death of the last survivor of spouse decedent’s children all of decedent’s nieces and nephews living at decedent’s death and all of the children of b plus an additional period of years on termination of the trust the entire corpus and all accumulated income are to be distributed to the persons entitled to the income in accordance with their respective interests under article viii spouse died on date subsequently a and b died in accordance with paragraph j of article viii the trustees administered the trust as separate subtrusts subtrusts the current income_beneficiary of subtrust is c and the current income beneficiaries of subtrusts are the issue of a and b the trust was initially funded with shares of corporation which became a wholly owned subsidiary of company the trust’s shares of corporation were exchanged for shares of company corporation’s operating business was sold in year company changed its name to holding_company and continued as a corporate entity holding_company is an s_corporation for federal tax purposes each subtrust has elected to be an electing_small_business_trust under sec_1361 effective date state enacted the act which includes statute a and statute b governing the administration of trusts under statute a in allocating receipts and disbursements to or between principal and income a fiduciary shall a administer a_trust in accordance with the terms of the trust even if there is a different provision in the act b administer a_trust in accordance with the act if the terms of the trust do not contain a different provision or give the fiduciary a discretionary power_of_administration c add a receipt or charge a disbursement to principal to the extent that the terms of the trust and the act do not provide a rule for allocating the receipt to or between principal and income a fiduciary may administer a_trust by the exercise of a discretionary power_of_administration given to the fiduciary by the terms of the trust even if the exercise of the power produces a result different from a result required or permitted under the act in exercising the power to adjust under statute b or a discretionary power_of_administration regarding a matter within the scope of the act whether granted by the terms of the trust or as provided in the act a fiduciary shall administer a_trust impartially based on what is fair and reasonable to all of the beneficiaries except to the extent that the terms of the trust clearly manifest an intention that the fiduciary shall or may favor one or more of the beneficiaries a determination in accordance with the act is presumed to be fair and reasonable to all of the beneficiaries plr-143150-06 under statute b a fiduciary may adjust between principal and income to the extent the fiduciary considers necessary if the fiduciary invests and manages trust assets as a prudent investor the terms of the trust describe the amount that may be distributed to a beneficiary by referring to the trust’s income and the fiduciary determines after applying the provisions of statute a and that the fiduciary is unable to comply with statute a in deciding whether and to what extent to exercise the power conferred by statute b a fiduciary shall consider all factors relevant to the trust and its beneficiaries in exercising discretion under statute b a professional trustee may adopt a policy that applies to all trusts or a policy that applies to individual trusts or classes of trusts stating whether and under what conditions it will use the adjustment power and the method of making adjustments statute c contains the state prudent investor rule on date local court pursuant to co-trustee’s petition issued an order modifying the trust and each subtrust as follows i the limitations of paragraph q in article viii shall not apply in determining trust income ii income is to be determined in accordance with the act and iii the trustees are to have the power to distribute corpus to the extent necessary to allow the trustees to exercise their power to adjust under statute b in making determinations the trustees may consider a the overall return on investments that have been or will be generated from the trust principal each year b the level of distributions that have been historically provided to the beneficiaries and c the impact inflation has on the value of the trust principal to future beneficiaries and the value of the distributions to current beneficiaries the local court order is contingent on the receipt of a private_letter_ruling issued by the irs that the modifications will not affect the generation-skipping_transfer_tax exempt status of the trust or the subtrusts it is represented that the trust including the separate subtrusts was irrevocable on date and there were no additions made after date you have requested the following rulings the judicial modifications will not cause the trust or a subtrust to lose its status as exempt from generation-skipping_transfer_tax the judicial modifications will not result in a taxable gift under sec_2501 the judicial modifications will not cause there to be a disposition for purposes of sec_1001 and will not result in the recognition of gain_or_loss the judicial modifications will satisfy the requirements of sec_1361 ruling sec_1 and plr-143150-06 sec_2501 imposes a tax on the transfer of property by gift by an individual 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 sec_2512 provides that if a gift is made in property the value thereof at the date of the gift shall be considered the amount_of_the_gift sec_2601 imposes a tax on every generation-skipping_transfer gst made after date under section a of the tax_reform_act_of_1986 act and sec_26 a the gst tax is generally applicable to gsts made after date however under section b a of the act and sec_26_2601-1 the gst tax does not apply to a transfer under a_trust that was irrevocable on date but only to the extent that the transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added under sec_26_2601-1 any trust in existence on date will be considered irrevocable unless the decedent 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 decedent had died on date 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 under sec_26_2601-1 or will not cause the trust to lose its exempt status under the regulation unless specifically provided otherwise these rules are applicable only for purposes of determining whether an exempt trust retains its exempt status for gst tax purposes thus unless specifically noted the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of gain for purposes of sec_1001 sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy sec_26_2601-1 b or c 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 plr-143150-06 sec_26_2601-1 provides that 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 to determine whether a modification of an irrevocable_trust will shift a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification if the effect of the modification cannot be immediately determined it is deemed to shift a beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust in addition administration of a_trust in conformance with applicable local law that defines the term income as a unitrust_amount or permits a right to income to be satisfied by such an amount or that permits the trustee to adjust between principal and income to fulfill the trustee's duty_of impartiality between income and principal beneficiaries will not be considered to shift a beneficial_interest in the trust if applicable local law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust and meets the requirements of sec_1_643_b_-1 sec_26_2601-1 example considers a situation where in the grantor a resident of state x establishes an irrevocable_trust for the benefit of grantor’s child a and a’s issue the trust provides that trust income is payable to a for life and upon a’s death the remainder passes to a’s issue per stirpes in state x amends its income and principal statute to permit the trustee to make adjustments between income and principal when the trustee invests and manages the trust assets under the state's prudent investor standard the trust describes the amount that shall or must be distributed to a beneficiary by referring to the trust's income and the trustee after applying the state statutory rules regarding allocation of receipts between income and principal is unable to administer the trust impartially the provision permitting the trustees to make these adjustments is effective in for trusts created at any time the trustee invests and manages the trust assets under the state's prudent investor standard and pursuant to authorization in the state statute the trustee allocates receipts between the income and principal accounts in a manner to ensure the impartial administration of the trust the example concludes that the administration of the trust in accordance with the state statute will not be considered to shift any beneficial_interest in the trust therefore the trust will not be subject_to the provisions of chapter further no trust_beneficiary will be treated as having made a gift_for federal gift_tax purposes and neither the trust nor any trust_beneficiary will be treated as having made a taxable_exchange for federal_income_tax purposes plr-143150-06 in the instant case the trust including the subtrusts was irrevocable on date and there have been no additions made to the trusts after date the trustees propose to administer subtrusts pursuant to state statute b a statute that is similar to the state statute described in sec_26_2601-1 and sec_26_2601-1 example therefore administration of subtrusts in accordance with state statute b will not be considered to shift any beneficial_interest in trust or the subtrusts for gst tax purposes nor will administration of subtrusts in accordance with state statute b cause any beneficiary to be treated as making a gift the modifications to the trust instrument as described above are consistent with the administrative_powers the trustees would otherwise possess in administering the subtrusts under statute b accordingly based on the facts submitted and representations made we conclude that administration of the trust and subtrusts pursuant to statute b and the modification of the trust instrument as described above will not cause the trust or subtrusts to lose status as exempt from gst tax and administration of the trust and subtrusts pursuant to statute b and the modification of the trust instrument as described above will not cause any beneficiary of a subtrust to be treated as making a gift_for federal gift_tax purposes ruling in property and under sec_61 from an interest in a_trust sec_61 provides that gross_income includes gains derived from dealings sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized sec_1001 states that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained sec_1015 provides that if property is acquired after date by in 499_us_554 a financial the court concluded that sec_1_1001-1 reasonably interprets sec_1001 plr-143150-06 a transfer in trust other than by a transfer in trust by a gift bequest or devise the basis shall be the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized by the grantor on such transfer sec_1_643_b_-1 provides that a switch between methods of determining trust income authorized by state statutes will not constitute a recognition event for purposes of sec_1001 and will not result in a taxable gift from the trust’s grantor or any of the trust’s beneficiaries institution exchanged its interests in one group of residential mortgage loans for another lender’s interest in a different group of residential mortgage loans the two groups of mortgages were considered substantially identical by the agency that regulated the financial_institution the issue presented was whether a sale_or_exchange had taken place resulting in a realization of gain_or_loss under sec_1001 and stated that an exchange of property gives rise to a realization event under sec_1001 if the properties exchanged are materially different cottage savings u s pincite in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material 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 of the trust including the subtrusts after the judicial modification will not differ materially from their interests prior to the judicial modification because the act grants the trustees the power to administer the trusts in the same manner as proposed in the modifications the modifications are not treated as an exchange of interests by the beneficiaries or the trusts except for the changes described above all other provisions of the modified trust and subtrusts will be identical to the original trust accordingly the proposed judicial modification will not result in a material difference in_kind or extent of the legal entitlements enjoyed by the beneficiaries the judicial modification of the trust and the subtrusts will not cause there to be a disposition for purposes of sec_1001 and no gain_or_loss is recognized for purposes of sec_1001 ruling 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 s_corporation means with respect to it is consistent with cottage savings to find that the interests of the beneficiaries plr-143150-06 sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 c or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1361 provides that an esbt as defined in sec_1361 is a permitted s_corporation shareholder sec_1361 provides that for purposes of sec_1361 and except as provided in sec_1361 the term esbt means any trust if i the trust does not have as a beneficiary any person other than an individual an estate or an organization described in sec_170 or ii no interest in the trust was acquired by purchase and iii an election under sec_1361 applies to the trust sec_1361 provides that the term electing_small_business_trust shall not include i any qualified_subchapter_s_trust as defined in subsection d if an election under subsection d applies to any corporation the stock of which is held by such trust ii any trust exempt from tax under this subtitle and iii any charitable_remainder_annuity_trust or charitable_remainder_unitrust as defined in sec_664 sec_1361 provides that such an election is to be made by the trustee and is to apply to the tax_year of the trust for which made and all subsequent tax years unless revoked with the consent of the service based solely on the information submitted and the representations made we conclude that after the proposed judicial modifications are adopted the modifications will not result in a change in the beneficiaries of the trust or the subtrusts or otherwise alter the qualification of the trusts as an electing_small_business_trust esbt thus the trust and the subtrusts will continue to satisfy the eligibility requirements of sec_1361 concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed concerning whether holding_company is eligible to be treated as an s_corporation or the validity of its election to do so except as expressly provided herein no opinion is expressed or implied plr-143150-06 this ruling is directed only to the taxpayers requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely george l masnik chief branch office of associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes


number release date id office uilc cca_2010030515290337 ---------- from ------------------- sent friday march pm to -------------------- cc ----------- subject re ----------------------- the gain is dependant on whether the partnership treated the partner as having sold his interest in year and the partnership's records of its accounts_receivable and other ordinary_income assets for that year each year is a separate cause of action so the fact that the partnership may have erroneously issued the partner a schedule_k-1 for a later year contradicting its treatment of the partner having been terminated in year is irrelevant for purposes of determining gain in year treat the partner as having sold his interest in year we would have to issue an fpaa for year to determine that the partner in fact sold his interest in that year for purposes of computing his sec_751 gain if the partnership did not


t c summary opinion united_states tax_court michael t and kathleen l schultheiss petitioners v commissioner of internal revenue respondent docket no 10376-04s filed date michael t and kathleen l schultheiss pro sese michael j proto and debra reale for respondent panuthos chief special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when 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 subsequent section references are to the internal_revenue_code in effect at relevant times and all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax for the issue is whether petitioners are entitled to claim dependency_exemption deductions under sec_151 for three children of petitioner michael t schulteiss petitioner at the time the petition was filed petitioners resided in warwick rhode island background this case was submitted fully stipulated pursuant to rule petitioner was previously married to mrs lisa friemark during their marriage petitioner and mrs friemark had three children mas kes and sms children petitioner and mrs friemark were divorced on date pursuant to a final judgment of divorce divorce decree entered by the family court for washington county state of rhode island in accordance with the divorce decree petitioner and mrs friemark were awarded joint legal custody of the minor children mrs friemark was given primary physical custody of the children custodial_parent petitioner and mrs friemark agreed to the following provision for claiming the children as dependents for federal_income_tax purposes that the parties shall share those tax deductions allowable as to the minor children and husband shall be permitted to claim all three children in the event that wife would not benefit from use of a deduction eg if she has not earned sufficient taxable_income the court uses the initials of minor children petitioners filed a federal_income_tax return for tax_year as married_filing_jointly petitioners claimed dependency_exemption deductions for the children mrs friemark also claimed dependency_exemption deductions for the children on a jointly filed federal_income_tax return for tax_year respondent disallowed petitioners’ claimed dependency_exemption deductions and issued a notice_of_deficiency to petitioners on date petitioners filed a timely petition on date petitioner asserts that he is entitled to claim dependency_exemption deductions for the children in any year in which mrs friemark would not benefit from claiming the deductions respondent disagrees discussion a taxpayer may be entitled to claim as a deduction an exemption_amount for each of his or her dependents sec_151 an individual must meet the following five tests in order to qualify as a dependent of the taxpayer support_test relationship or household test citizenship or residency test gross_income_test and joint_return_test sec_151 and sec_152 if the individual fails any of these tests he or she does not qualify as a dependent as to the support_test a taxpayer generally must provide more than half of a claimed dependent’s support for the calendar_year in which the taxable_year of the taxpayer begins sec_152 in the case of a child of divorced parents if the child is in the custody of one or both of his parents for more than one-half of the calendar_year and receives more than half his support during that year from his parents such child shall be treated for purposes of sec_152 as receiving over half of his support during the calendar_year from the parent having custody for a greater portion of the calendar_year the custodial_parent sec_152 custody is determined by the terms of the most recent decree of divorce or subsequent custody decree and will be deemed to be with the parent who as between both parents has the physical custody of the child for the greater portion of the calendar_year sec_1_152-4 income_tax regs a custodial_parent may release claim to the exemption pursuant to the provisions of sec_152 which provides sec_152 support_test in case of child of divorced parents etc -- exception where custodial_parent releases claim to exemption for the year --a child shall be treated as having received over half of his support during a calendar_year from the noncustodial_parent if- - a the custodial_parent signs a written declaration in such manner and form as the secretary may by regulations prescribe that such custodial_parent will not claim such child as a dependent for any taxable_year beginning in such calendar_year and b the noncustodial_parent attaches such written declaration to the noncustodial parent’s return for the taxable_year beginning during such calendar_year for purposes of this subsection the term noncustodial_parent means the parent who is not the custodial_parent the temporary regulations promulgated with respect to sec_152 provide that a noncustodial_parent may claim the exemption for a dependent_child only if the noncustodial_parent attaches to his her income_tax return for the year of the exemption a written declaration from the custodial_parent stating that he she will not claim the child as a dependent for the taxable_year beginning in such calendar_year sec_1 4t a q a-3 temporary income_tax regs fed reg date see 114_tc_184 affd on another ground sub nom 293_f3d_1208 10th cir the declaration required under sec_152 must be made either on a completed form_8332 release of claim to exemption for child of temporary regulations are entitled to the same weight as final regulations see peterson marital trust v commission102_tc_790 affd 78_f3d_795 2d cir 98_tc_141 divorced or separated parents or on a statement conforming to the substance of form_8332 miller v commissioner supra pincite form_8332 requires a taxpayer to furnish the names of the children for which exemption claims were released the years for which the claims were released the signature of the custodial_parent confirming his or her consent the social_security_number of the custodial_parent the date of the custodial parent’s signature and the name and the social_security_number of the parent claiming the exemption id pincite although petitioner and mrs friemark have joint legal custody of the children mrs friemark has physical custody and she is deemed to be the custodial_parent for purposes of sec_152 petitioner as the noncustodial_parent is not entitled to the claimed dependency_exemption deductions unless he complied with the provisions of sec_152 and the regulations thereunder by attaching to his return a written declaration or form_8332 executed by mrs friemark petitioner did not attach such a declaration or form_8332 to his return and accordingly he is not entitled to the dependency_exemption deductions for the children for the taxable_year petitioners further argue that they are entitled to the dependency_exemption deductions because of the terms of the divorce decree which provided that petitioner would be entitled to claim the children as dependents if mrs freimark did not benefit from the use of the deduction we need not and do not consider the contingency described in the divorce decree as described above sec_152 provides that the custodial_parent is entitled to the exemption unless the noncustodial_parent fits within one of the exceptions we previously explained that petitioners do not come within the exception under sec_152 petitioners do not fit within any of the other exceptions for the reasons set forth herein respondent’s determination is sustained reviewed and adopted as the report of the small_tax_case division decision will be entered for respondent while sec_152 permits a noncustodial_parent to claim an exemption under specific circumstances said section applies only to qualified pre-1985 instruments the divorce decree was entered in


aee pa e si e commissioner tax exempt and government entities department of the treasury yiil 3u4 é internal_revenue_service washington d c tlep rats ull jan xxxxxxxxxxxxxxxxxxxxxxkk ep sesuaneunisoneateats legend taxpayer a xxxxxxxxxxxxxxaxxxxxxaxxxxx ira x - xxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxaxxaxxx xxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxaxxxx xxxxxxxxxxxxxxxxxxaxxxx - xxxxxxxxxxxxxxxxxxaxxxx xxxxxxxxxxxxxxxxxxaxxxx amount d amount e company f company b date g date l year h dear xxxxxxxxx this letter is in response to your letter dated xxxxxxxxxx submitted on your behalf by your authorized representative as supplemented by a facsimile dated xxxxxxxxxxxxx in which you request a waiver of the day rollover requirement contained in sec_408 of the internal_revenue_code the code the following facts and representations have been submitted under penalties of perjury in support of your request taxpayer a represents that he received a distribution from ira x totaling amount d in error taxpayer a asserts that his failure to accomplish a rollover within the 60-day period prescribed by sec_408 was due to the error committed by company f taxpayer a further asserts that amount d has not been used for any other purpose and the check for the distributions has not been cashed and remains in taxpayer a’s possession taxpayer a age maintains ira x a traditional individual retirement in year h taxpayer a began receiving arrangement ira with company f from ira x one payment of amount e per month an arrangement that was intended to satisfy the requirements of code sec_72 as a series of substantially_equal_periodic_payments payments were made on the first of each month taxpayer a represents that on date g company f made certain distributions in error that caused taxpayer a’s distributions for year to be in excess of the substantially equal amount taxpayer a asserts that he did not intend to receive the additional distribution in excess of the substantially equal periodic_payment amount taxpayer a further asserts that he attempted to retum the distributions of amount d to company f but company f would not take back the distribution taxpayer a states that this error on the part of company f was not discovered until date when he contacted his accountant for advice and at that time the 60-day rollover period provided under code sec_408 had expired in a fasicimile dated xxxxxxxxxxxxxx taxpayer a states that he repeatedly attempted to return the funds but company f would not accept them back taxpayer a asserts that he did not know that he could roll the funds back into the account and that company f did not provide that information to him taxpayer a further asserts that company f will not provide any kind of letter but company f has offered to corroborate taxpayer a’s account by telephone taxpayer a represents that he retained the checks uncashed until date l and then on that date he deposited amount d as a rollover ira contribution into an account with company b based upon the foregoing facts and representations taxpayer a requests that the service waive the day rollover requirement with respect to the distribution of amount d from ira x sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distribute as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if- i ii the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual received the payment or distribution or the entire amount received including money and any other_property is other than an ira for the benefit of paid into an eligible_retirement_plan such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending in the day of such receipt such individual received any other amount described in sec_408 from an ira which was not included in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the secretary may waive the day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity and good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occur after date are eligible for the waiver under sec_408 of the code revproc_2003_16 i r b provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability or hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a is consistent with his assertion that his failure to accomplish a rollover of amount d was due to an error committed by company f in not properly advising taxpayer a that he could roll over the distribution back into a rollover ira therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount d from ira x provided all other requirements of code sec_408 except the 60-day requirement are met with respect to such contribution amount d will be considered a rollover_contribution within the meaning of sec_408 of the code this ruling is limited to a request for a waiver of the 60-day rollover period no opinion is expressed as to weather the payments from ira x to taxpayer a constitute substantially_equal_periodic_payments within the meaning of code sec_72 further no opinion is expressed as to whether the extra payment by company e to taxpayer a or the exercise of this waiver of the day rollover period by taxpayer a would cause a modification of substantially_equal_periodic_payments within the meaning of code sec_72 finally no opinion is expressed as to the tax treatment of the transactions described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent if you have any questions concerning this ruling please contact xxxxxxxxxxxxxxx se t ep ra t3 at xxxxxxxxxxxxxx sincerely yours bays a manager eiances v sloan enclosures deleted copy of letter_ruling notice employee_plans technical group


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 intl b02 plr-142060-14 date date internal_revenue_service number release date index number ----------------------------------- ------------------------------ ------------------------------ ty -------------- legend spouse a ---------------------------------------- spouse b -------------------------------------- fc -------------------------------- country --------------------------- accountant a --------------------- accountant b ------------- accountant c ---------------- firm ----------------------------- year ------ year ------ year ------ year ------ year ------ year ------ year ------ year ------ year ------ year ------ dear -------------------------- this is in response to a letter dated date submitted by your authorized representative that requested the consent of the commissioner of the internal revenue plr-142060-14 service commissioner for spouse a and spouse b collectively taxpayers to make a retroactive qualified_electing_fund qef election under sec_1295 of the internal_revenue_code and sec_1_1295-3 with respect to taxpayers’ investment in fc the ruling contained in this letter is based upon information and representations submitted on behalf of taxpayers by their authorized representative 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 this request_for_ruling such material is subject_to verification on examination the information submitted in the request is substantially as set forth below facts spouse a and spouse b have filed their federal tax returns as a married couple filing jointly for all tax years relevant to this letter_ruling spouse b has been a resident_of_the_united_states since year and became a united_states citizen in year from year through year spouse b received gifts of common shares of fc from family members and since year has received no further gifts of shares taxpayers have never purchased shares of fc fc is an entity organized under the laws of country that is treated as a corporation for federal tax purposes for tax years year through year taxpayers relied on accountant a a competent u s accountant to prepare taxpayers’ federal_income_tax returns and provide advice on taxpayers’ u s tax matters taxpayers provided accountant a with all relevant and available information regarding fc including annual financial statements and year end reporting information accountant a did not advise taxpayers that fc was a passive_foreign_investment_company pfic within the meaning of sec_1297 accountant a failed to advise taxpayers of the possibility of making a qef election under sec_1295 with respect to fc and of the consequences of making or failing to make such an election for tax years year through year taxpayers relied on accountant b a competent u s accountant to prepare taxpayers’ federal_income_tax returns and provide advice on taxpayers’ u s tax matters taxpayers provided accountant b with all relevant and available information regarding fc including information regarding dividend payments accountant b was aware that fc is a corporation organized under the laws of country however accountant b did not advise taxpayers that fc was a pfic within the meaning of sec_1297 and failed to advise taxpayers of the possibility of making a qef election under sec_1295 with respect to fc and of the consequences of making or failing to make such an election accountant b recommended that taxpayers report the dividend income received from fc as ordinary_income and in some cases as qualified_dividend_income plr-142060-14 for tax years year to the present taxpayers have relied on accountant c a competent u s accountant to prepare taxpayers’ federal_income_tax returns and provide advice on taxpayers’ u s tax matters accountant c took over the responsibilities of taxpayers’ tax matters after accountant b left firm a certified public accounting practice where both accountant b and accountant c were shareholders as with accountant b taxpayers provided accountant c with all relevant and available information regarding fc including information regarding dividend payments accountant c was aware that fc is a corporation organized under the laws of country however for tax years year through year accountant c did not advise taxpayers that fc was a pfic within the meaning of sec_1297 and failed to advise taxpayers of the possibility of making a qef election under sec_1295 with respect to fc and of the consequences of making or failing to make such an election in year accountant c attended a continuing professional education seminar focused on pfic rules this presentation alerted accountant c that it was necessary to determine whether fc met the definition of a pfic within the meaning of sec_1297 accountant c thus reviewed the taxpayers’ files discussed the concerns with taxpayers and ultimately advised taxpayers that fc was a pfic since year taxpayers decided to seek relief to make a retroactive qef election taxpayers have submitted affidavits under penalties of perjury that describe the events that led to taxpayers’ failure to make a qef election with respect to fc by the due_date of their return for the year tax_year affidavits have also been submitted by accountant a accountant b and accountant c describing their engagement and responsibilities as well as the advice concerning the tax treatment of fc that each provided to taxpayers taxpayers have paid an amount sufficient to eliminate any prejudice to the united_states government as a consequence of their inability to file amended returns in accordance with a signed closing_agreement between taxpayers and the commissioner further taxpayers have agreed to file an amended_return for each of the subsequent taxable years affected by the retroactive election if any taxpayers represent that as of the date of their request_for_ruling the pfic status of fc had not been raised by the irs on audit for any of the taxable years at issue ruling requested taxpayers request the consent of the commissioner to make a qef election with respect to fc under sec_1_1295-3 retroactive to year law plr-142060-14 sec_1295 provides that a pfic will be treated as a qef with respect to a shareholder if an election by the shareholder under sec_1295 applies to the pfic for the taxable_year and the pfic complies with the requirements prescribed by the secretary for purposes of determining the ordinary_earnings and net capital_gains of the company under sec_1295 a qef election may be made for a taxable_year at any time on or before the due_date determined with regard to extensions for filing the return for the taxable_year to the extent provided in regulations the election may be made after the due_date if the shareholder failed to make an election by the due_date because the shareholder reasonably believed the company was not a pfic under sec_1_1295-3 a shareholder may request the consent of the commissioner to make a retroactive qef election for a taxable_year if the shareholder reasonably relied on a qualified_tax professional within the meaning of sec_1_1295-3 granting consent will not prejudice the interests of the united state sec_3 government as provided in sec_1_1295-3 the request is made before a representative of the internal_revenue_service raises upon audit the pfic status of the company for any taxable_year of the shareholder and the shareholder satisfies the procedural requirements of sec_1 f the procedural requirements include filing a request for consent to make a retroactive election with and submitting a user_fee to the office of the associate chief_counsel international sec_1_1295-3 additionally affidavits signed under penalties of perjury must be submitted that describe the events that led to the failure to make a qef election by the election due_date the discovery of the failure the engagement and responsibilities of the qualified_tax professional and the extent to which the shareholder relied on the professional sec_1_1295-3 and iii conclusion based on the information submitted and representations made with taxpayers’ ruling_request we conclude that taxpayers have satisfied sec_1_1295-3 accordingly consent is granted to taxpayers to make a retroactive qef election with respect to fc for year provided that taxpayers comply with the rules under treas plr-142060-14 reg sec_1_1295-3 regarding the time and manner for making the retroactive qef election we have consequently approved a closing_agreement with taxpayers with respect to those issues affecting their tax_liability on the basis set forth above pursuant to our practice with respect to such agreements the agreement contains a stipulation to the effect that any change or modification of applicable statutes enacted subsequent to the date of this agreement and made applicable to the taxable_period involved will render the agreement ineffective to the extent that it is dependent upon such statutes 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 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 copies of this letter_ruling are being sent to your authorized representatives sincerely kristine a crabtree assistant to the branch chief branch office of associate chief_counsel international cc


internal_revenue_service national_office technical_advice_memorandum date number release date index uil no case mis no tam-103867-00 cc ita b5 district_director taxpayer’s name taxpayer’s address taxpayer’s identification no year involved date of conference legend taxpayer purchaser a purchaser b company a company b escrow a escrow b bank a bank b date date date date date date date year year year dollar_figurec dollar_figured dollar_figuree dollar_figuref dollar_figureg dollar_figureh dollar_figurei dollar_figurej dollar_figurek dollar_figurel dollar_figurem dollar_figuren dollar_figureo dollar_figurep dollar_figureq dollar_figurer dollar_figures dollar_figuret u issues whether taxpayer is entitled to deduct a dollar_figurec repayment made by taxpayer of a portion of a tax sharing payment received by taxpayer in connection with the sale of its losses whether taxpayer is entitled to deduct a dollar_figured payment of interest made by taxpayer in connection with the sale of its losses conclusions taxpayer is not entitled to deduct the repayment of dollar_figurec because the tax sharing payment was not previously included in income taxpayer is entitled to deduct the interest payment of dollar_figured under sec_163 of the internal_revenue_code facts taxpayer is an alaska native regional corporation formed under the alaska native claims settlement act of ancsa p l 85_stat_688 under the terms of various legislative acts taxpayer and other alaska native corporations were effectively able to sell their losses and unused tax_credits to purchasing corporations the purpose of these provisions was to financially benefit those native corporations with losses and credits the sale of these losses and credits could be accomplished by allowing a native_corporation to file a consolidated_return with a subsidiary-member which was initially formed by the purchasing_corporation the subsidiary-member had been assigned income by the purchasing_corporation the assigned income could be offset by the losses and credits of the native_corporation additionally the native_corporation would be paid for the losses and credits used based on the purchasing corporation’s tax savings see generally b of the tax_reform_act_of_1984 vol c b e of the tax_reform_act_of_1986 vol c b and sec_5021 of the technical_and_miscellaneous_revenue_act_of_1988 c b the sale of taxpayer’s losses taxpayer entered into transactions with purchaser a and purchaser b for the sale of its losses the terms of the loss sale to purchaser a are contained in an agreement dated date the sale of taxpayer’s losses to purchaser a was accomplished by means of a transitory subsidiary formed by purchaser a called company a company a was transferred to taxpayer and filed a consolidated_return with taxpayer purchaser a assigned to company a income equal to the amount of taxpayer’s losses being purchased dollar_figuree the assigned income of dollar_figuree was included in taxable_income on the consolidated_return thus the use of the consolidated_return allowed taxpayer’s tax loss to be used to offset what was purchaser a’s taxable gain separate from the assigned income conveyed through company a purchaser a paid taxpayer a tax sharing payment of u cents for each one dollar of losses required to offset the amount of income assigned by purchaser a to company a based on the assigned income of dollar_figuree the tax sharing payment due taxpayer from purchaser a was dollar_figuref taxpayer received dollar_figureg at closing in year and the balance in year payable dollar_figureh cash and dollar_figurei to escrow a maintained at bank a taxpayer included these tax_sharing_payments in book income for financial statement purposes but did not include the tax_sharing_payments in income for federal_income_tax purposes the sale of taxpayer’s losses to purchaser b was similar to the sale to purchaser a the sale of taxpayer’s losses to purchaser b was accomplished by means of a transitory subsidiary formed by purchaser b called company b company b was transferred to taxpayer and filed a consolidated_return with taxpayer purchaser b assigned to company b income equal to the amount of taxpayer’s losses being purchased dollar_figurej the assigned income of dollar_figurej was included in taxable_income on the consolidated_return thus the use of the consolidated_return allowed taxpayer’s tax loss to be used to offset what was purchaser b’s taxable gain separate from the assigned income conveyed through company b purchaser b paid taxpayer a tax sharing payment of u cents for each one dollar of losses required to offset the amount of income assigned by purchaser b to company b based on the assigned income of dollar_figurej the tax sharing payment due taxpayer from purchaser b was dollar_figurek taxpayer received dollar_figurel at closing in year and the balance in year payable dollar_figurem cash and dollar_figuren to escrow b maintained at bank b taxpayer included these tax_sharing_payments in book income for financial statement purposes but did not include the tax_sharing_payments in income for federal_income_tax purposes in each case the purchaser required taxpayer to establish an escrow account to hold a portion of the sales_price as security against certain contingencies including potential income_tax_liability taxpayer was to receive the interest_income from the escrow accounts and taxpayer reported the interest_income annually for income_tax purposes the agreements provided that the net balances in each of the escrow accounts would be distributed between taxpayer and the respective purchasers after there was a final_determination the final_determination was defined as occurring after the date of a taxpayer return determination which was defined as the earlier of the execution of a closing_agreement as defined in sec_7121 by taxpayer and the service or the last to occur of a the expiration of the applicable statute_of_limitations or b if any administrative or judicial proceeding was commenced prior to the expiration of the applicable statute_of_limitations the earlier of i the entry of a final and unappealable decision by any court of competent jurisdiction or ii the execution by taxpayer and the irs of a final and binding settlement agreement addressing each and all such matters both the agreement with purchaser a and the agreement with purchaser b contained this language during the process of selling some of its losses taxpayer requested private letter rulings from the internal_revenue_service the letter_ruling regarding purchaser a was dated date the letter_ruling regarding purchaser b was dated date the letter rulings dealt with various aspects of the consolidated structure to be used by taxpayer to sell its losses the letter rulings provide in relevant part that once company a or company b has included in its earnings_and_profits the assigned income from the purchasers distributions from company a or company b to taxpayer are not an additional item_of_income to taxpayer because the distributions represent amounts previously included in taxpayer group’s earnings_and_profits the letter rulings do not address how taxpayer’s group should treat the receipt of the tax_sharing_payments at issue in this technical_advice_memorandum the previous examination and its resolution the irs examined taxpayer’s returns for year and year and challenged the depletion deductions of various oil_and_gas producing properties claimed by taxpayer the adjustment of these claimed deductions resulted in a corresponding adjustment reducing the losses available for sale by taxpayer to the purchasers this in turn resulted in a reduction in the amount of income that the purchasers could assign to company a and company b since the assigned income was limited to the available losses of taxpayer under the agreements the reduction in assigned income created a situation where the excess assigned income would spring back to the purchasers the agreements also provided that if the irs determined that taxpayer's losses were less than originally filed so that there was an excess of assigned income then taxpayer was required to reimburse the purchaser u cents for every one dollar of excess assigned income plus interest at the overpayment rate for federal_income_tax under sec_6611 and sec_6621 the examination of taxpayer’s year tax_return was resolved on date when taxpayer and the irs executed a closing_agreement under the terms of the closing_agreement the amount of excess assigned income includible on the consolidated federal_income_tax returns covering year was dollar_figureo for purchaser a and dollar_figurep for purchaser b the closing_agreement required taxpayer to reduce by dollar_figureq the amount of assigned income reported on its consolidated federal_income_tax return for year the closing_agreement also clarified the amount of net_operating_loss_carryover available to taxpayer however the closing_agreement did not address if taxpayer would have any additional income or deductions as a result of the closing_agreement the disbursements from the trust account by a letter dated date taxpayer requested the trustees of escrow a to close and disburse the funds purchaser a received dollar_figurer including interest from escrow a and taxpayer received the remainder by a letter dated date taxpayer requested the trustees of escrow b to close and disburse the funds purchaser b received dollar_figures including interest from escrow b and taxpayer received the remainder on its original year income_tax return taxpayer included in taxable_income the assigned income from company a and company b however taxpayer did not include the tax_sharing_payments of dollar_figuref from purchaser a and dollar_figurek from purchaser b in taxable_income although it did include the tax_sharing_payments in book income for financial statement purposes taxpayer also included in taxable_income the interest_income it earned on the portion of the tax_sharing_payments held in escrow a and escrow b the dollar_figurer and dollar_figures paid to purchaser a and purchaser b respectively were deducted by taxpayer on its year tax_return the deductions totaling dollar_figuret were claimed as sec_162 contract payment of dollar_figurec and as interest_expense of dollar_figured law and analysis sec_162 allows a deduction for all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business sec_163 allows a deduction for all interest_paid or accrued within the taxable_year on indebtedness sec_165 allows a deduction for any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise in 394_us_678 the united_states supreme court held that a taxpayer is not entitled to a deduction under either sec_162 or sec_165 upon the repayment of any amount which previously was not taxed in skelly oil the taxpayer was a natural_gas producer that made refunds to customers who had been overcharged in earlier years the taxpayer sought to deduct the full amount of the refunds during the earlier years the taxpayer included the full amount of the overcharges in gross_income but in accordance with applicable provisions of the code properly deducted of the receipts to compensate for the depletion of the natural_resources from which the income was derived the court stated that as a result of the depletion_allowance the taxpayer in essence had been taxed on only of its gross_receipts the remaining of the income in reality had been tax exempt permitting a deduction only for the of the refunded payments that had been previously taxed the court stated that it cannot believe that congress intended to give taxpayers a deduction for refunding money that was not taxed when received u s pincite permitting a deduction for the return of previously untaxed amounts the court noted would confer upon the taxpayer the practical equivalent of a double deduction a result that would be both inequitable and contrary to sound principles of tax law u s pincite see also 712_f2d_281 7th cir no deduction allowed for repayment of sick_pay and unemployment benefits because the amounts were not subject_to taxation when received 449_f2d_402 ct_cl deduction allowed for only percent of the repayment amount because the percent dividends received deduction applied in the year the funds were originally received buras v commissioner t c memo no deduction allowed for repayment of item improperly excluded from income in the year received skelly oil controls the tax_determination at issue and unequivocally precludes the taxpayer’s ability to claim a deduction for the return of amounts not previously taxed regardless of the reason for or the correctness of not reporting the amounts in income thus for purposes of this technical_advice request we need not consider whether the tax_sharing_payments of dollar_figuref from purchaser a and dollar_figurek from purchaser b were properly not included in taxpayer’s income regardless of the reason taxpayer did not include the tax_sharing_payments in an income_tax return as income as the courts consistently have held permitting a deduction for the repayment of an amount that was not previously taxed would effectively provide taxpayer with a double deduction regardless of the reason for or the propriety of not reporting the amount in income doing so would be both inappropriate and contrary to sound principles of tax law skelly oil u s pincite in responding to the service’s position taxpayer has asserted that the tax_sharing_payments of dollar_figuref from purchaser a and dollar_figurek from purchaser b were conveyed by the purchasers as part of the income assigned by them to company a and b respectively and thus were included in the taxpayer group’s consolidated_return for each transaction as a result taxpayer argues the dollar_figuref and dollar_figurek payments were in fact reported as income and therefore a deduction is appropriate under skelly oil we disagree taxpayer has not demonstrated either in its written submissions or during its conferences with the national_office that the parties intended nor in fact provided anything other than the payment of consideration of dollar_figuref in the case of purchaser a and dollar_figurek in the case of purchaser b in exchange for taxpayer’s agreement to sell a separately_stated amount of tax losses using income assigned to company a and company b and eliminated on the taxpayer group’s consolidated_return for each transaction as the mechanism for selling the losses on the facts provided we believe dollar_figuref was the purchase_price for the sale to purchaser a and dollar_figurek was the purchase_price for the sale to purchaser b in each case these purchase_price payments were wholly distinct from the asset being sold taxpayer’s losses because neither purchase_price was ever included in taxpayer’s taxable_income taxpayer’s return of a portion of the purchase_price to each purchaser may not be deducted taxpayer contends however that the private letter rulings it received supports its argument that the tax_sharing_payments received from the purchasers were included in its gross_income as part of the income assigned by purchaser a to company a and by purchaser b to company b taxpayer reads the private letter rulings as stating that the tax_sharing_payments were not income to taxpayer because the tax_sharing_payments were part of the income assigned to company a and company b as a result taxpayer argues a deduction is appropriate for the portion of the tax_sharing_payments it repaid to the purchasers taxpayer however misreads the private letter rulings the letter rulings merely provide that once company a or company b has included in its earnings_and_profits the assigned income from the purchasers distributions from company a or company b to taxpayer are not an additional item_of_income to taxpayer because the distributions represent amounts previously included in taxpayer group’s earnings_and_profits the only scenario in which taxpayer would be entitled to a deduction for the returned portion of the tax_sharing_payments is if taxpayer’s group had reported the tax_sharing_payments themselves as a separate item_of_income this issue was not addressed in the private letter rulings and in fact taxpayer’s group did not report the tax_sharing_payments as income taxpayer also argues that the recent decision in doyon v united_states nos and u s app lexis fed cir rev’g 37_fedclaims_10 and 42_fedclaims_175 reh’g req’d no 94-1074t date supports its position in doyon the court_of_appeals held that e of the tax_reform_act_of_1984 which provides that no provision of the internal_revenue_code or principle of law shall apply to deny the benefit or use of losses of native corporations was violated by requiring tax_sharing_payments generated by loss sales transactions to be included in book income for alternative_minimum_tax purposes first the holding in doyon is not applicable to the facts in the instant case because doyon addresses only the propriety of reporting tax_sharing_payments in alternative_minimum_taxable_income even assuming this holding would apply to regular taxable_income the issue in the instant case is not whether the tax_sharing_payments are includible in income but instead whether taxpayer can deduct a portion of the tax_sharing_payments that it never reported in income thus our conclusion does not conflict in any way with the holding in doyon further our conclusion does not in any sense deprive taxpayer of the use or benefit of any portion of its losses to the contrary taxpayer received full compensation_for the sale of its tax losses and was not required to pay any federal tax on the sales proceeds finally however we note that the payments from the escrow accounts to purchaser a and purchaser b included interest in addition to returning a portion of the tax_sharing_payments purchaser a received dollar_figurer including interest from escrow a and purchaser b received dollar_figures including interest from escrow b of the total dollar_figuret deduction taken by taxpayer dollar_figurec was a return of a portion of the tax_sharing_payments to the purchasers while dollar_figured represented interest on those amounts under the agreements with the purchasers in the case of a spring back of assigned income to the purchasers taxpayer was required to reimburse the purchasers a portion of the tax_sharing_payments u cents for every one dollar of the spring back amount plus interest at the overpayment rate for federal_income_tax under sec_6611 and sec_6621 the interest that was paid from the escrow accounts to the purchasers constitutes an expenditure by taxpayer for interest on the returned portion of the tax_sharing_payments this interest was a true expenditure for taxpayer it was in addition to and based on the portion of the tax sharing payment that was returned to the purchasers in contrast to the return of the tax_sharing_payments the payment by taxpayer of interest on those payments constitutes an expense which is deductible_interest under sec_163 a copy of this technical_advice_memorandum is to be given to taxpayer sec_6110 provides that it may not be used or cited as precedent


internal_revenue_service number release date index number ---------------------------- ------------------------------------------------------- ------------------------------------- ---------------------------------------------- --------------------------------- in re ------------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc corp bo1 plr-107310-07 date date foreign parent foreign sub ----------------------------------- --------------------------------------------------------------- ---------------------------- --------------------------------------------- foreign sub us holdings ------------------------------- us life parent ------------------------------------------------------------------------------------- ----------------------------------------------------------------------------- us life group ------------------------------ --------------------------------------------------------------- --------------------------------------------------------------- --------------------- us life sub --------------------------------------------------------------- --------------------- -------------------------------------- ----------------------------- us life sub ------------------------------------------------------ us life llc date date county x -------------- ---------------- ---------------------- plr-107310-07 county y state a r dollar_figureaa dollar_figurebb dear -------------------- ------------- ------------- ----------------------------------- ---------------- ---------------- this letter is in reply to your authorized representative's letter dated date requesting rulings regarding certain federal_income_tax consequences resulting from an anticipated ownership_change as defined in sec_382 of the internal_revenue_code the information submitted is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process summary of facts foreign parent is a country x holding_company that has operations in several countries including the united_states foreign parent owns all of the stock of foreign sub a country x insurance_company foreign sub owns all of the stock of foreign sub a country y corporation foreign sub owns all of the stock of us holding a state a corporation that primarily acts as the holding_company for other united_states subsidiaries in the foreign parent group us holding holds all of the stock of us life parent a state a corporation that is the common parent for a life_insurance group the us life group that files a consolidated federal_income_tax return the us life group includes us life parent and its subsidiaries us life sub and us life sub us life parent wholly owns us life llc which has elected under sec_301_7701-3 of the income_tax regulations to be an entity disregarded from its sole owner and which owns the stock of us life sub as an insurance_company us life parent is subject_to extensive insurance regulation and supervision generally state regulatory agencies and private-sector rating agencies monitor compliance with and periodically conduct examinations regarding many of the following benchmarks state mandated standards of solvency licensing requirements investment limitations restrictions on the size of risks which may be reinsured deposits of securities for the benefit of reinsureds methods of plr-107310-07 accounting and reserves for unearned premiums losses and other purposes in order to make these determinations of minimum capitalization these regulatory and rating agencies look to a formula that is based upon the risk based capital rbc of the insurance_company us life parent on behalf of itself and each of its life_insurance subsidiaries is required to calculate minimum capitalization levels for review by various constituencies that use an insurance company’s rbc ratio as a component of a company’s financial strength state insurance regulators impose certain minimum rbc requirements on insurance_companies private-sector rating agencies such as r also consider capitalization as a primary measure of financial strength each rating agency defines their version of rbc and provides guidance as to minimum levels to maintain rating agency ratings if an insurance_company does not maintain the minimum level of capital defined by the rating agencies for the current rating level the rating agency will reduce the rating maintaining ratings is necessary for general business operations of a reinsurance company because poor ratings could make it difficult to attract new business generally when us life parent requires additional capital to meet the capitalization requirements described above foreign parent or its subsidiaries contribute capital to us life parent foreign parent contributed to us life parent approximately dollar_figureaa in and approximately dollar_figurebb in to maintain these required minimum capitalization levels the capital contributions the capital contributions include contributions made during the two-year period ending on date which is the anticipated closing date of the proposed transaction defined below on or about date a number of investors will purchase newly issued foreign parent stock the proposed transaction as a result us life parent will undergo an ownership_change as defined in sec_382 proposed transaction representations the following representations have been submitted regarding the proposed transaction and the capital contributions a us life parent is the parent of a loss group as defined in sec_1_1502-91 b us life parent has not undergone an ownership_change as defined in sec_382 since date a date more than three years before date plr-107310-07 c the proposed transaction will cause an ownership_change as defined in sec_382 for us life parent on the date the proposed transaction is consummated d each capital_contribution was made solely to maintain minimum recommended capitalization requirements under various rating and regulatory agency guidelines or to pay routine operating_expenses of the us life group ruling based solely on the information submitted and the representations set forth above we rule that the capital contributions will not be excluded from the value of the old_loss_corporation under sec_382 for purposes of computing the value of the old_loss_corporation and the sec_382 limitation within the meaning of sec_382 caveats we express no opinion concerning the federal tax consequences of the proposed transactions under any other provision of the code or regulations or concerning any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above ruling 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 a power_of_attorney on file in this office a copy of this letter is being sent to your authorized representative sincerely _______________________________ michael j wilder senior technician reviewer branch office of associate chief_counsel corporate