internal_revenue_service number release date index number department of the treasury washington dc person to contact telephone number refer reply to cc psi 4-plr-128874-00 date date re legend trust t decedent date child child child child trust trust trust trust trustees bank state dear this is in response to your letter dated date in which you requested a ruling concerning the generation-skipping_transfer_tax consequences of the proposed partitions of certain trusts into separate trusts facts plr-128874-00 the facts are represented to be as follows decedent’s mother died prior to survived by decedent and decedent’s two siblings item v of decedent’s mother’s will established trust t which was divided pursuant to the terms of the will into three separate shares one for decedent and one for each of her two siblings under item v d of decedent’s mother’s will decedent was given a testamentary limited power to appoint her share of trust t to one or more of her descendants or to charity either outright or in trust under item v f of decedent’s mother’s will any trust created under the provisions of the will was to terminate at the time required by the state’s rule_against_perpetuities decedent died on date survived by four children all of whom were born before the death of decedent’s mother under item iii of her will decedent exercised her power_of_appointment over her share of trust t by appointing the property in further trust the trustees were directed to divide the property into four separate trusts trust was created for the benefit of the issue of child trust was created for the benefit of the issue of child trust was created for the benefit of the issue of child and trust was created for the benefit of the issue of child under item iii a of decedent’s will the income of each separate trust is to be divided annually into as many shares as there are in that year living children of the child of decedent for whom the trust is named the trustees are required to use so much of a grandchild’s share of income as deemed necessary for the grandchild’s benefit and any excess is to be retained and reinvested for the benefit of that grandchild until that grandchild reaches age at which time each grandchild will become entitled to all of the income of his or her share under item iii a of decedent’s will each separate trust will terminate upon the death of the child of decedent for whom the trust is named at that time the children of the deceased child who have attained age will receive one-third of their share of the corpus those who have attained age will receive two-thirds of their share of the corpus and those who have attained age will receive their full share of the corpus children of the deceased child who have not reached age by the time of their parent’s death will receive one-third of their share of the corpus upon attaining age one-third upon attaining age and the final one-third upon attaining age under item iii a of decedent’s will if a grandchild of decedent dies leaving issue surviving his or her share of income and principal will belong to such issue if a grandchild of decedent dies leaving no issue surviving his or her share of income and principal will belong to his or her brothers and sisters and the issue per stirpes of any deceased brothers and sisters if a grandchild of decedent dies leaving no issue no brothers or sisters and no issue of deceased brothers or sisters his or her share of income and principal is to be distributed per stirpes among the beneficiaries of the other trusts created for the issue of decedent’s other children item iii a further provides that if a child of decedent survives decedent but dies without issue the separate trust created for the benefit of that child’s issue is to be divided per stirpes among the beneficiaries of the other separate trusts under item iii a of decedent’s will all distributions of corpus and income are to be made at the times specified in the will or years after the death of the last of decedent’s plr-128874-00 children living at the time of decedent’s mother’s death whichever occurs earlier at the present time child is living and has three living children who are and years of age under the terms of decedent’s will the income of trust is divided annually into three equal shares and distributed to the three children of child at the death of child if no additional children are born to or adopted by him before that time the corpus of trust will be divided into three shares one for each child and held in trust or distributed outright in whole or in part under item iii a and item iii a of decedent’s will at the present time child is living and has three living children one of whom i sec_31 and two of whom are years of age under the terms of decedent’s will the income of trust is divided annually into three equal shares and distributed to the three children of child at the death of child if no additional children are born to or adopted by her before that time the corpus of trust will be divided into three shares one for each child and held in trust or distributed outright in whole or in part under item iii a and item iii a of decedent’s will at the present time child is living and has two living children who are and years of age under the terms of decedent’s will the income of trust is divided annually into two equal shares and distributed to the two children of child at the death of child if no additional children are born to or adopted by her before that time the corpus of trust will be divided into two shares one for each child and held in trust or distributed outright in whole or in part under item iii a and item iii a of decedent’s will at the present time child is living and has four children who are and years of age under the terms of decedent’s will the income of trust is divided annually into four equal shares the shares of the younger children are applied for their benefit or reinvested for their benefit and the share of the 21-year-old is distributed to him at the death of child if no additional children are born to or adopted by her before that time the corpus of trust will be divided into four shares one for each child and held in trust or distributed outright in whole or in part under item iii a and item iii a of decedent’s will child child and bank are the trustees of all four trusts the trustees and the beneficiaries propose to partition each trust into separate trusts for the benefit of each of decedent’s living grandchildren the purpose of the partitions is to facilitate the pursuit of different investment strategies by the beneficiaries each new separate trust will be funded with a pro_rata portion of the assets of its predecessor trust and each new separate trust will continue to be governed by the provisions of decedent’s will trust will be partitioned into three separate trusts for the benefit of child 1's children the new trusts will terminate at the death of child although it is not expected that additional children will be born to or adopted by child prior to his death provision is made for that contingency in that event a_trust would be created for the benefit of an afterborn child and funded with a pro_rata distribution from the three trusts created out of trust so that the four trusts would be of equal value the trust for the afterborn child would also be governed by the provisions of decedent’s will trust will be partitioned into three separate trusts for the benefit of child 2's children the new trusts will terminate at the death of child although it is not expected that additional children will be born to or adopted by child prior to her death provision is made for that plr-128874-00 contingency in that event a_trust would be created for the benefit of an afterborn child and funded with a pro_rata distribution from the three trusts created out of trust so that the four trusts would be of equal value the trust for the afterborn child would also be governed by the provisions of decedent’s will trust will be partitioned into two separate trusts for the benefit of child 3's children the new trusts will terminate at the death of child although it is not expected that additional children will be born to or adopted by child prior to her death provision is made for that contingency in that event a_trust would be created for the benefit of an afterborn child and funded with a pro_rata distribution from the two trusts created out of trust so that the three trusts would be of equal value the trust for the afterborn child would also be governed by the provisions of decedent’s will trust will be partitioned into four separate trusts for the benefit of child 4's children the new trusts will terminate at the death of child although it is not expected that additional children will be born to or adopted by child prior to her death provision is made for that contingency in that event a_trust would be created for the benefit of an afterborn child and funded with a pro_rata distribution from the four trusts created out of trust so that the five trusts would be of equal value the trust for the afterborn child would also be governed by the provisions of decedent’s will provision is also made in case a grandchild of decedent should predecease his or her parent who is a child of decedent in that case the grandchild’s separate trust will continue to be held in trust and administered under the terms of decedent’s will until his or her parent who is a child of decedent dies the trust will be subject during the parent’s life to the provision regarding afterborn children of the parent at the parent’s death the trust will terminate and be distributed in accordance with item iii a of decedent’s will the trustees will petition the local court in state to appoint guardians ad litem for the minor grandchildren of decedent any unborn afterborn grandchildren of decedent and any unborn descendants of a grandchild of decedent who might predecease his or her parent who is a child of the decedent to make decedent’s children parties to the proceeding and to approve the partition of trust trust trust and trust in the manner described above ruling_request the trustees have requested a ruling that the successor trusts to be created pursuant to the proposed partitions and any successor trusts that may be created for afterborn children will remain exempt from the application of the generation-skipping_transfer_tax imposed under chapter of the internal_revenue_code law and analysis sec_2601 imposes a tax on every generation-skipping_transfer gst which is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip under a of the tax_reform_act_of_1986 the generation-skipping_transfer_tax gstt is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 of the generation-skipping plr-128874-00 transfer_tax regulations the tax does not apply to a transfer under a_trust that was irrevocable on date but only to the extent that such 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 settlor held a power with respect to the trust that would have caused the value of the trust to be included in the settlor’s gross_estate for federal estate_tax purposes by reason of sec_2038 or by reason of sec_2042 if the settlor 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 generation-skipping_transfer_tax under sec_26_2601-1 will not cause the trust to lose its exempt status sec_26_2601-1 provides that a modification will not cause an exempt trust to be subject_to the gstt if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer sec_26_2601-1 example provides that if the division of a_trust into two trusts does not shift any 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 division and the division does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust then the two partitioned trusts will not be subject_to the provisions of chapter of the internal_revenue_code in a previously issued private_letter_ruling we concluded that trust t was irrevocable on date if no additions were made to trust t after date transfers from trust t would be exempt from the gstt and decedent’s exercise of her testamentary limited_power_of_appointment over her share of trust t by creating trust trust trust and trust did not cause trust t trust trust trust or trust to lose its exempt status for gstt purposes for purposes of the present case it is represented that no additions actual or constructive were made to trust t after date and no additions actual or constructive were made to trust trust trust or trust since decedent’s death in this case the proposed partitions of trust trust trust and trust by the trustees will not result in a shift of any beneficial_interest in either trust to any beneficiary who occupies a generation lower than the persons holding the beneficial interests prior to the division further the proposed partitions will not extend the time for vesting of any beneficial_interest in either trust beyond the period provided for in the original trust accordingly based on the facts submitted and the representations made we conclude that the proposed partition of trust into three separate trusts the proposed partition of trust into three separate trusts the proposed partition of trust into two separate trusts and the proposed partition of trust plr-128874-00 into four separate trusts will not cause either trust to lose its exempt status for generation- skipping transfer_tax purposes in addition if successor trusts are created for afterborn children as described above the new successor trusts will not be subject_to the gstt and will not cause the partitioned trusts to lose their exempt gstt status the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for the ruling it is subject_to verification on examination except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code the ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours katherine a mellody senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes


internal_revenue_service number release date index no cc tege eb ec-plr-104666-00 date target acquiring sub date a year b year c this is in reply to a request for rulings concerning the deduction limitation of sec_162 of the internal_revenue_code the facts as presented by target are as follows on date a target and acquiring announced a merger whereby a wholly-owned subsidiary of acquiring will merge with and into target so that immediately after the merger target will be a wholly-owned subsidiary of acquiring target shareholders will become shareholders of acquiring at the completion of the merger target represents that the merger is structured to qualify as a reorganization pursuant to sec_368 of the internal_revenue_code it is further represented that the transaction will be treated as a pooling of interest for gaap purposes plr-104666-00 all of the companies involved are on the accrual_method of accounting target’s taxable_year is the calendar_year and it’s final separate consolidated tax_year will end on the date of the merger acquiring’s taxable_year is the calendar_year also sub is a direct wholly-owned subsidiary of acquiring which was incorporated for the sole purpose of effecting the merger with and into target it engages in no other business according to target it will not be required to file any reports or statements with the securities exchange commission sec that disclose executive compensation_for target’s short_year that ends with the merger target further contends that for the year of the merger because it will not have publicly-traded equity securities after the merger it will not file a summary compensation table disclosing the compensation of target’s ceo and target’s four highest paid officers for the short_year ending with the merger target contends that there are target executives who are expected to continue to serve as executives of the post-merger combined company and who may be included in the year b summary compensation table to be filed by acquiring the compensation paid_by target to these executives will not be counted or reported in the filing by acquiring the compensation paid and deducted by target in its short_year ending with the merger will never be reported on a summary compensation table filed either by acquiring or target certain of the corporate officers of target have resigned in year c or may resign in a later year as employees others may resign their positions as officers and all of their duties as officers in a later year those individuals who resign their positions as officers may continue to perform services as consultants to target or as employees of acquiring or another company in the acquiring controlled_group for the remainder of the year of resignation and possibly in future years resignation from their positions as officers does not necessarily equate to separation_from_service as consultants or employees these officers may in addition be listed pursuant to the executive compensation disclosure rules under the securities exchange act of as chief_executive_officer or one of the highest compensated officers for the year of resignation sec_162 of the code allows as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business including a reasonable allowance for salaries or other compensation_for_personal_services actually rendered sec_162 of the code provides that in the case of any publicly_held_corporation no deduction is allowed for applicable_employee_remuneration with respect to any covered_employee to the extent that the amount of the remuneration for the taxable_year exceeds dollar_figure plr-104666-00 sec_162 of the code defines covered_employee to mean any employee of the taxpayer if as of the close of the taxable_year such employee is the chief_executive_officer of the taxpayer or is an individual acting in such capacity or the total compensation of such employee for the taxable_year is required to be reported to shareholders under the securities exchange act of by reason of such employee being among the highest compensated officers for the taxable_year other than the chief_executive_officer sec_1_162-27 of the income_tax regulations provides the general_rule for who is a covered_employee under the regulations a covered_employee means any individual who on the last day of the taxable_year is a the chief_executive_officer of the corporation or is acting in such capacity or b among the four highest compensated officers other than the chief_executive_officer whether an individual is the chief_executive_officer or one of the four highest compensated officers is determined pursuant to the executive compensation disclosure rules under the exchange act in the notice of proposed rulemaking containing the proposed_regulations under sec_162 the preamble contains the following language concerning the identification of covered_employee the regulations clarify which employees are covered employees for purposes of sec_162 the legislative_history to sec_162 provides that covered employees are defined by reference to the sec rules governing executive compensation disclosure under the exchange act under the regulations an individual generally is a covered_employee if the individual’s compensation is reported on the summary compensation table under the sec’s executive compensation disclosure rules as set forth in item of regulation s-k cfr under the exchange act however the regulations specifically provide that in order to be a covered_employee for sec_162 purposes an individual must be employed as an executive officer on the last day of the taxable_year thus only those employees who appear on the summary compensation table and who are also employed on the last day of the taxable_year are covered employees therefore based on the facts as outlined above we rule as follows assuming that no summary compensation table is required to be filed by target with the sec for the merger year for purposes of sec_162 of the code target’s officers will not be covered employees with respect to the merger year for purposes of sec_162 of the code officers of target and acquiring will not be covered employees with respect to any year of plr-104666-00 resignation if they have resigned their employment or positions as officers before the last day of that year with no intent to resume their duties as officers at any time in the foreseeable future accordingly no compensation paid to these officers with respect to the year of resignation will be subject_to the sec_162 deduction limitation this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent except as specifically ruled above no opinion is expressed as to the federal tax consequences of the transaction described above under any other provisions of the code sincerely yours _________________________ robert b misner assistant chief executive compensation branch office of division counsel associate chief_counsel tax exempt and government entities enclosure copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c c h ief c o u n sel number info release date uil dear date cc intl br2 genin-129420-02 this is in reply to an undated taxpayer_advocate assistance request asking us to provide information to you regarding your late filed sec_911 elections for your and tax years for your information sec_1_911-7 sets forth the procedural rules for making a valid sec_911 election the election must be made on form_2555 or on a comparable form and must be filed with an income_tax return or with an amended_return sec_1_911-7 provides in part that an election once made remains in effect for that year and all subsequent years unless revoked under paragraph b of this section with respect to the timing of the election sec_1_911-7 provides that a valid sec_911 election must be made a with an income_tax return that is timely filed including any extensions of time to file b with a later return filed within the period prescribed in sec_6511 amending a timely filed return c with an original return filed within one year after the due_date of the return determined without regard to any extension of time to file or d with an income_tax return filed after the period described in paragraphs a i a b or c of this section provided - the taxpayer owes no federal_income_tax after taking into account the exclusion and files form_1040 with form_2555 or a comparable form attached either before or after the internal_revenue_service discovers that the taxpayer failed to elect the exclusion or genin-129420-02 the taxpayer owes federal_income_tax after taking into account the exclusion and files form_1040 with form_2555 or a comparable form attached before the internal_revenue_service discovers that the taxpayer failed to elect the exclusion under sec_1_911-7 and the validity of a taxpayer’s sec_911 election on a form_2555 with respect to a late filed income_tax return depends in part on whether the taxpayer owes federal_income_tax after taking into account the exclusion the phrase owes no federal_income_tax under sec_1_911-7 means a taxpayer’s federal_income_tax liability after any payments such as withholding_tax estimated_tax tax_credits and etc have been applied to offset any federal_income_tax liability thus if a taxpayer has a refund or no balance due the taxpayer owes no federal_income_tax under sec_1_911-7 and in addition sec_911 provides a denial of double benefits and states that no deduction or exclusion_from_gross_income under this subtitle or credit against the tax imposed by this chapter including any credit or deduction for the amount of taxes paid_or_accrued to a foreign_country or possession_of_the_united_states shall be allowed to the extent such deduction exclusion or credit is properly allocable to or chargeable against amounts excluded from gross_income under subsection a accordingly the foreign_tax_credit is disallowed to the extent foreign taxes are allocable to income excluded under sec_911 the amount of disallowed foreign taxes is determined pursuant to sec_1_911-6 which states to determine the amount of disallowed foreign taxes multiply the foreign tax imposed on foreign_earned_income as defined in sec_1_911-3 received or accrued during the taxable_year by a fraction the numerator of which is amounts excluded under sec_911 in such taxable_year less deductible expenses properly allocated to such amounts see paragraphs a and b of this section and the denominator of which is foreign_earned_income as defined in sec_1_911-3 received or accrued during the taxable_year less deductible expenses properly allocated or apportioned thereto this letter provides general information only that we hope will be helpful in resolving the issues raised in your return pursuant to your power_of_attorney a copy of genin-129420-02 this letter is being sent to your authorized representative please call at with any questions __________________________ phyllis e marcus chief branch associate chief_counsel international


internal_revenue_service number release date index number ---------------------- ------------------------------ ------------------------ ----------------------------------------------- -------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------------ telephone number ---------------------- refer reply to cc corp b05 plr-103674-15 date date legend distributing controlled nominee depositary trustee business a business b business c senior notes date a date b date c date d date e date f -------------------------------------------------------- ------------------------ ---------------- ------------------------------------------- ------------------------------------------- -------------------------------------------------- --------------------------------------------------- ------------------------------------------------------ ------------------------------ ------------------------ ------------------------ -------------------------- --------------------------- ------------------------- --------------------------- plr-103674-15 a b c d e f ---- ---- ------------ ------------------ -- -------- dear ------------- this letter responds to a letter dated date submitted on behalf of distributing requesting rulings on the proper treatment of two significant issues presented under sec_361 in a planned spin-off transaction described in sec_368 and sec_355 additional information was submitted on date and date the information submitted is summarized below this letter is issued pursuant to section dollar_figure of revproc_2015_1 2015_1_irb_1 regarding one or more significant issues under sec_332 sec_351 sec_355 sec_368 or sec_1036 the rulings contained in this letter only address one or more discrete legal issues involved in the transaction this office expresses no opinion as to the overall tax consequences of the transactions described in this letter or as to any issue not specifically addressed by the rulings below 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 summary of facts distributing is a widely held publicly traded domestic_corporation that operates business a business b together with business a the controlled business and business c as of date d the controlled business represented approximately a of the total fair_market_value approximately b of the total annual revenues and approximately c of the total book_value of distributing distributing currently has a variety of debt outstanding including senior notes issued on date a the notes other term debt and a revolving credit facility the notes were issued with an aggregate principal_amount of dollar_figured the notes mature on date f and are plr-103674-15 governed by an indenture dated as of date a the indenture the notes are publically traded and were trading at a premium as of the close of business on date e the notes have a unique cusip number and a unique isin number pursuant to the indenture the notes were issued in the form of one global note in substantially the form set forth in exhibit a to the indenture the distributing global note the distributing global note is registered in the name of nominee as nominee for the depositary and is held by trustee as custodian for the depositary the depositary maintains electronic book entry records of the amounts of notes beneficially owned through each of its members and its members in turn maintain electronic book entry records of the amounts of notes beneficially owned by each of their account holders the transaction distributing intends to spin off the controlled business in a transaction intended to qualify for tax-free treatment under sec_368 and sec_355 the transaction in the transaction distributing will contribute the controlled business to a newly formed corporation controlled in exchange for all of the stock of controlled a controlled note the controlled global note and the assumption by controlled of certain liabilities of distributing collectively the asset contribution immediately after which distributing will distribute all of the stock of controlled pro_rata to the shareholders of distributing the spin-off distributing will retain and continue to operate business c and certain other assets following the transaction in the transaction distributing’s outstanding indebtedness will be divided between distributing and controlled based on the expected post-transaction values of distributing and controlled controlled will assume responsibility for approximately a of distributing’s outstanding indebtedness in the transaction by issuing the controlled global note and by directly assuming liabilities or issuing other new debt instruments under the terms of the indenture if the asset contribution were to constitute a transfer of all or substantially_all of the property and assets of distributing the parties would be required to substitute controlled for distributing under the indenture and the notes and to release distributing from any further obligations under the indenture and the notes distributing sought and received the consent of a majority of the holders of record of the notes as of date b to an amendment of the indenture to among other things clarify that the asset contribution will constitute the transfer of substantially_all of the property and assets of distributing for purposes of the relevant portion of the indenture the amendment consenting shareholders received dollar_figuree per dollar_figuref principal_amount in exchange for their consent the amendment was effectuated in a supplemental indenture dated as of date c together with the indenture the amended indenture plr-103674-15 distributing will distribute or cause to be distributed the controlled global note to depositary in exchange for the distributing global note the distributing global note will then be cancelled as a result of the cancellation of the distributing global note and issuance by controlled of the controlled global note in replacement of the distributing global note the notes will receive new cusip numbers and new isin numbers the controlled global note will bear all of the same terms as the distributing global note and will be identical to the distributing global note in all respects other than the identity of the obligor and the cusip and isin numbers distributing makes the following representations representations a the notes constitute securities within the meaning of sec_361 b the asset contribution will qualify as a reorganization described in sec_361 and distributing and controlled will be parties to such reorganization within the meaning of sec_368 c the spin-off will qualify as a transaction described in sec_355 d the change in obligor under the notes from distributing to controlled upon the occurrence of the asset contribution will constitute a significant modification under sec_1_1001-3 rulings based solely on the information submitted and representations made we rule as follows the substitution of controlled for distributing as the obligor under the notes upon the occurrence of the asset contribution will be treated for purposes of sec_361 as an issuance of controlled notes with terms identical to the notes the controlled notes to distributing as partial consideration for the asset contribution followed by a distribution by distributing of the controlled notes to holders of the notes in exchange for the notes the controlled notes will be treated as securities for purposes of sec_361 caveats except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular no opinion is expressed on any_tax consequences resulting from plr-103674-15 the consent payment or on whether any aspect of the transaction constitutes a significant modification within the meaning of sec_1 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 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives 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 sincerely _isaac w zimbalist_________________ isaac w zimbalist senior technician reviewer branch office of associate chief_counsel corporate


t c summary opinion united_states tax_court mary ann whitacre petitioner v commissioner of internal revenue respondent docket no 14982-02s filed date mary ann whitacre pro_se audrey m morris and charles a hall for respondent armen special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time that 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 rule references are to the tax_court rules_of_practice and procedure and unless otherwise indicated all subsequent section references are to the internal_revenue_code as amended - - this matter is before the court on respondent’s motion to dismiss for lack of jurisdiction as supplemented respondent contends that this case should be dismissed for lack of jurisdiction as the petition requests review of respondent’s determination denying relief from liability based upon the provisions of sec_66 as explained in detail below we shall grant respondent’s motion as supplemented background the record establishes and or the parties do not dispute the following a petitioner and mr sonnabend at the time that her petition was filed with the court and at all other times relevant to this case petitioner resided in dallas texas as a resident of texas petitioner is subject_to the community_property_laws of that state for a period of time petitioner was married to henry sonnabend mr sonnabend a certified_public_accountant and senior regional partner with ernst and young like petitioner mr sonnabend was a resident of texas at all relevant times and subject_to the community_property_laws of that state prior to the taxable_year petitioner and mr sonnabend selected as their annual_accounting_period a fiscal_year ending june accordingly petitioner’s taxable_year includes the period from date through date - - petitioner and mr sonnabend separated on date and their divorce became final on date b petitioner’s profession and income petitioner has a bachelor’s degree in pharmacy during the taxable_year she worked as an account executive for certain health care providers and received total wages in the amount of dollar_figure c petitioner’s return and amended_return petitioner timely filed a federal_income_tax return form_1040 for the taxable_year petitioner’s return was prepared by a certified_public_accountant c p a on her return petitioner listed her filing_status as married filing separate petitioner included in income one- half of her wages about dollar_figure and one-half of mr sonnabend’s income of dollar_figure as disclosed to her by mr sonnabend petitioner reported a tax_liability of dollar_figure which was reduced by one-half of the tax withheld from her wages dollar_figure leaving a balance due of dollar_figure petitioner did not claim any credit or payment attributable to mr sonnabend on her return ’ petitioner avers that mr sonnabend did not have any income subject_to_withholding and that he did not make any estimated_tax payments q4e- in date petitioner with the assistance of her c p a filed an amended_return form 1040x for the taxable_year the principal change reflected on the amended_return was the inclusion of her share of estimated_tax payment made in the amount of dollar_figure the bottom line of the amended_return showed a balance due of dollar_figure d petitioner’s request for relief on or about date petitioner filed with respondent form_8857 request for innocent spouse relief for the taxable_year in an attachment to the form petitioner stated that she was requesting equitable relief according to revised guidelines which she quoted as follows if you were married and filed a separate_return ina community_property_state and are now liable for an underpayment or understatement_of_tax you may request equitable relief if you believe it is unfair for you to be liable for the unpaid tax eb respondent’s final notice in date the commissioner utilized a form letter with the record does not definitively reveal who made the estimated_tax payment on date however it would appear that it was made by mr sonnabend also the record suggests that this payment was actually a payment that accompanied a request by mr sonnabend for extension of time to file his separate_return for the taxable_year the record does not reveal whether respondent accepted petitioner’s amended_return this sentence appears in the general instructions accompanying form_8857 - check boxes letter do rev as a final notice of the commissioner’s determination that a taxpayer is not entitled to relief from joint_and_several_liability on a joint_return under either sec_6015 c or f the form letter also served to advise the taxpayer that you can contest our determination by filing a petition with the united_states tax_court on date respondent sent petitioner letter do rev respondent modified the letter by manually typing in the following check box and sentence you are not entitled to equitable relief of liability for the unpaid tax under sec_66 of the internal_revenue_code f petitioner’s petition petitioner appealed respondent’s determination by filing a petition with this court which was docketed as a petition for determination of relief from joint_and_several_liability ona joint_return in her petition petitioner does not identify or invoke any section of the internal_revenue_code under which she seeks relief however the crux of petitioner’s position is clearly revealed in the following passages from the petition according to state community_property_laws if i had not have to claim half his mr sonnabend’s income i would not have owed anything tf you were only to look at my income- -and my withholding--and my payments--i should receive a refund that refund and return of the money i have paid would pay the amount i owe on the last two years it is important to note that i did not have use of his mr sonnabend’s income even though it was community_property g respondent’s motion as previously stated respondent filed a motion to dismiss for lack of jurisdiction the premise of respondent’s motion is that no section of the internal_revenue_code confers jurisdiction on this court to review the commissioner’s denial of relief under sec_66 in respect of unpaid liability on a separately- filed return pursuant to notice respondent’s motion was called for hearing at the court’s motions session in washington d c counsel for respondent appeared at the hearing and presented argument in support of the pending motion there was no appearance by or on behalf of petitioner at the hearing however petitioner did file a written_statement pursuant to rule c following the hearing the court directed respondent to supplement his motion to provide certain documents relevant to the disposition of his motion respondent so complied discussion we begin by emphasizing that the tax in respect of which petitioner seeks relief is tax that petitioner reported on her separately filed income_tax return for the taxable_year that tax is principally attributable to community_property income - of mr sonnabend if petitioner had not reported that income on the ground that the provisions of sec_66 did not require her to do so respondent might have concluded to the contrary after examining her return and determined a deficiency in her income_tax if that had happened petitioner would have had the right to file a petition for redetermination with this court and invoke the relief provided by sec_66 see sec_6211 a see also 181_f3d_1002 cir affg tcmemo_1997_97 morris v commissioner tcmemo_2002_17 beck v commissioner tcmemo_2001_198 unfortunately for petitioner the foregoing scenario did not occur in short the present action is not one for redetermination as respondent did not determine a deficiency in petitioner’s income_tax rather petitioner commenced the present action asking this court to review respondent’s denial of her request on form_8857 for innocent spouse relief there is no question that the tax_court is a court of limited jurisdiction and we may exercise our jurisdiction only to the extent authorized by congress sec_7442 in bernal v under certain circumstances sec_66 provides that a taxpayer may be relieved of liability from federal_income_tax on community_property earned by a spouse see bernal v commissioner t c slip op pincite for a summary of the relief provided by that section of particular note is sec_66 which under the conditions enumerated in that section relieves a spouse of liability for tax on an item of community_property attributable to the other spouse --- - commissioner t c _ we held that this court does not have jurisdiction to review the commissioner’s denial of equitable relief under sec_66 in a stand alone i ée independent action commenced by a spouse or former spouse who filed a separate_return we are not unsympathetic to the plight of petitioner who strikes us as a conscientious taxpayer however if we lack jurisdiction as we do we have no alternative but to grant respondent’s motion to dismiss ’ although petitioner cannot pursue the present case in this court she is not without legal remedies thus petitioner may pay the tax file a claim_for_refund with the internal_revenue_service and if the claim is denied or not acted on within months sue for a refund in the appropriate federal district_court or the u s court of federal claims see 55_tc_138 in addition at the hearing on respondent’s motion counsel for respondent acknowledged that if respondent pursues collection against petitioner by either filing a notice_of_federal_tax_lien or serving a final notice_of_intent_to_levy petitioner would be entitled to present appropriate spousal defenses which would include equitable relief under sec_66 see sec_6330 a and d a sec_301 6330-l1 e proced admin regs see also bernal v commissioner t c slip op --- - reviewed and adopted as the report of the small_tax_case division to reflect the foregoing an order will be entered qranting respondent’s motion to dismiss for lack of jurisdiction as supplemented


release number release date te_ge technical_advice_memorandum internal_revenue_service uil date area manager - taxpayer's name taxpayer's address taxpayer's identification_number years involved conference held legend t issues whether funds derived by t a state-chartered credit_union described in sec_501 of the internal_revenue_code from the sale of credit life and credit disability insurance should be treated as unrelated_business_taxable_income under sec_511 of the internal_revenue_code facts established in t is a state-chartered credit_union which is recognized as exempt from federal_income_tax under sec_501 a of the internal_revenue_code code as an organization described in sec_501 t's board_of directors supervisory committee and loan committee are comprised entirely of elected members of the credit_union who serve on a voluntary basis without compensation t’s purposes as stated in its articles of incorporation are to promote thrift and provide low cost credit for its members t’s activities include accepting deposits from and maintaining the accounts and savings of its members these deposit accounts include savings or share accounts on which members earn periodic dividends credited to the accounts and share draft accounts which are transaction accounts similar to bank checking accounts t represents that its day-to-day business operations differ from conventional banking institutions in several ways t states that it conducts its business to reflect its non-profit mutual structure t makes loans to its members and states that many borrowers have low incomes and might not otherwise qualify for credit from conventional for-profit banks t also represents that it regularly issues loans for very small amounts such as loans for auto repairs which are typically not made by for-profit banks t indicates that it serves smaller communities than those served by for-profit banks t also indicates that because of its mutual non-profit operation all members not just those maintaining high minimum balances are able to earn competitive rates on their deposits and pay low banking fees all of these insurance products are underwritten or otherwise provided by t represents that in order to maintain its financial viability and continue to satisfy its stated purposes of promoting thrift and providing a source of low cost credit it has endeavored to become a full service financial_institution consequently t offers more than just demand deposits and loans currently t makes credit life and credit disability insurance available to members the credit insurance is described in more detail below third-party insurance_companies or other third-party vendors in each case t makes its members aware of the purpose and availability of these products answers members’ questions about the products or refers the member to the vendor for additional information and with respect to some of the products obtains and submits applications for coverage premium payments and claims mortgage vehicle and other secured and unsecured loans the majority of the loans were personal mortgage and vehicle in a total of loans were made and approximately of these loans were collateralized t filed form 990-t unrelated_business_income_tax return for the year at issue however the amounts derived from the sale of the products discussed no information was provided regarding the default rate on these loans as during the year at issue t made the following types of loans personal a percentage of total loans for the year at issue herein were not included as income derived from unrelated_trade_or_business sale of credit life and credit disability insurance t offers its member borrowers the opportunity to purchase credit life and credit disability insurance on certain loans t is a party to and beneficiary under standard group credit life and credit disability policies with a third party insurance_company under these policies a member-borrower who obtains a loan mortgages and other loans secured_by real_estate are often excluded may if he or she chooses obtain credit life and credit disability insurance which pays the loan installments during the period of physical disability which impacts the borrower's employment a loan officer informs each member-borrower of the availability of credit life and credit disability insurance coverage and if the member-borrower elects to obtain the coverage the premium charge is added to the borrower's loan balance obtaining the credit life and credit disability insurance coverage is never a condition of the member's receiving the loan as reflected in the group credit insurance_policy and letter agreements the credit disability coverage is standard coverage that provides that the insurer will repay the balance of a member's loan up to the policy limit the maximum loan duration covered wa sec_120 months and the maximum amount of loan insured was dollar_figure t does not offer credit life and credit disability insurance in connection with overdraft protection home equity loans and real_estate loans under the terms of the policy t is also reimbursed for its administrative expenses in connection with its performance of the prescribed duties as the policyholder t’s employees perform the following duties with respect to the credit disability insurance program e e e during the loan process and as part of the loan transaction itself explain the insurance program to member-borrowers process insurance applications collect and forward the premiums to the insurance_company e receive and forward claims claims can be filed directly by the member- borrower to the insurance_company and situations where coverage appears beneficial based on the level of personal and family resources available for loan repayment in the event of disability t's staff may recommend that the member opt to obtain coverage in answer member-borrowers’ questions e the credit disability insurance coverage requires monthly premium payments the charges are calculated by t and added to the member's loan balance t remits the premiums it has collected less its expenses as noted above to the insurance_company t's commission for its role in coverage issuance and policy administration is based on premiums written for credit life and credit disability insurance this percentage is based on an agreement between t and the insurance_company at the time the insurance was purchased approximately of borrowers opted for credit insurance during the year at issue law sec_501 of the internal_revenue_code code provides in part that organizations described in sec_501 are exempt from federal_income_tax sec_501 of the code specifically exempts from federal_income_tax credit unions without capital stock organized and operated for mutual purposes and without profit sec_1_501_c_14_-1 of the income_tax regulations regulations provides in part that credit unions other than federal credit unions described in sec_501 of the code without capital stock organized and operated for mutual purposes and without profit are exempt from tax under sec_501 state-chartered credit unions were first acknowledged as exempt from federal_income_tax in a opinion of the attorney_general the attorney_general considered credit unions organized under the laws of the commonwealth of purposes of credit unions existing at that time the attorney general’s opinion described the i t is apparent that the purpose of these financial associations is to help people save and to assist those in need of financial help whose credit may not be established at the larger banks in reality they are fundamentally similar and supplemental to the existing agencies for promoting thrift namely the savings banks and cooperative banks except on a much smaller scale the attorney general's opinion also described some of the operations of credit unions--making loans in appropriate amounts to members on which a low rate of interest is charged and that p rompt payment of obligations is a fundamental requirement the opinion described in detail the procedures by which members’ savings were held by the credit_union and how the members earned interest on their deposits the opinion also pointed to the democratic character of the governance of these early credit unions by their members at the annual meeting of the association each member shareholder and depositor has but one vote after review of the features and operations of these early credit unions the attorney general's opinion held that state-chartered credit unions would be exempt from federal_income_tax see u s op atty gen the legal analysis of the attorney general's opinion was adopted in treasury regulations issued in and this remained the official basis for the tax exempt status of state-chartered credit unions until the revenue act of granted express statutory tax-exempt status to state-chartered credit unions however the revenue act of removed tax exemption from savings and the legislative loan associations cooperative banks and mutual_savings_banks history of the act suggests that the reason these entities lost their exemption was because of their increasing similarity to commercial banks and the resulting loss of their original characteristic of mutuality specifically referring to the early days of these institutions the legislative_history states the fact that the members were both the borrowers and the lenders was the essence of the mutuality of these organizations see generally s rep no date reprinted in u s code cong ad svc present-day sec_501 - as enacted in - incorporates the requirements of mutuality and non-profit operation which formed the basis for the attorney general's recognition of credit unions’ tax-exempt status in accordingly the basic purposes of the credit_union tax exemption remain essentially the same today as they were in based on the attorney general's opinion the basis for exemption is the provision of savings accounts and loans to members who may not be served by banks in a non-profit and mutual manner sec_511 of the code imposes a tax on the unrelated_business_taxable_income of organizations otherwise exempt from federal_income_tax under sec_501 sec_512 of the code provides that the term unrelated_business_taxable_income means with certain modifications the gross_income derived by an organization from any unrelated_trade_or_business regularly carried on by it less allowable deductions sec_513 of the code defines the term unrelated_trade_or_business in the case of any organization subject_to tax imposed by sec_511 as any trade_or_business the conduct of which is not substantially related aside from the need of such organization for the income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its exempt_function sec_1_513-1 of the regulations provides that gross_income of an exempt_organization subject_to the tax imposed by sec_511 of the code is with certain exceptions includable in the computation of unrelated_business_taxable_income if it is income from trade_or_business such trade_or_business is regularly carried on by the organization and the conduct of such trade_or_business is not substantially related other than through the production of funds to the organization's performance of its exempt functions sec_1_513-1 of the regulations provides that the term trade_or_business has the same meaning it has in sec_162 of the code and generally includes any activity carried on for the production_of_income from the sale_of_goods or the performance of services sec_1_513-1 of the regulations states that in determining whether a trade_or_business is regularly carried on within the meaning of sec_512 of the code regard must be had to the frequency and continuity with which the activities are conducted and the manner in which they are pursued hence for example specific business activities will ordinarily be deemed regularly carried on’ if they manifest a frequency and continuity and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations sec_1_513-1 of the regulations provides that gross_income is derived from unrelated_trade_or_business within the meaning of sec_513 of the code if the conduct of the trade_or_business which produces the income is not substantially related other than through the production of funds to the purposes for which exemption is granted the presence of this requirement necessitates an examination of the relationship between the business activities that generate the particular income in question - the activities that is of producing or distributing the goods or performing the services involved - and the accomplishment of the organization's exempt purposes sec_1_513-1 of the regulations provides that a trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has a causal relationship to the achievement of exempt purposes other than through the production_of_income and it is substantially related for purposes of sec_513 only if the causal relationship is a strong one thus for the conduct_of_a_trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those exempt purposes whether activities contribute importantly to an organization’s exempt purposes depends in each case upon the facts and circumstances involved in 693_f2d_525 5th cir a business league described in sec_501 of the code engaged in several activities including the endorsement of insurance to its members the court analyzed whether these activities were substantially related to the business league's exempt_purpose under sec_501 of advancing the credit_union movement in order to determine whether income generated from those activities resulted in unrelated_business_income to the business league in its analysis the court stated that the substantial relationship’ determination is necessarily a fact- based inquiry id pincite the court also noted that the regulations under sec_513 require a case-by-case identification of the exempt_purpose an analysis of how the activity contributes to that purpose and an examination of the scale on which the activity is conducted the league promoted the purchase of insurance policies from a particular carrier providing the carrier with convenient services in the marketing and administration of its programs the court stated that the league's endorsement of group_insurance plans was principally motivated by a desire to raise revenue the court also discussed at length the distinction between group and individual benefit the court said the distinction between inherently group benefits and individual benefits is analogous to the aggregate entity concept familiar in partnership_taxation as just as a member of a partnership may enjoy benefits in his separate capacities as partner and non-partner so may a a member of the league may enjoy benefits both league member and as an individual credit_union only those activities that benefit the credit unions in their capacities as league members can be considered substantially related to this group benefit standard the league’s exempt_function also accords with the requirement that a business league seek to improve the conditions of an entire line_of_business rather see treas than perform discrete services for individuals reg sec_1_501_c_6_-1 when the activities of a business league are directed toward the achievement of the common business_interest of its members the benefits that accrue to its members are inherently group benefits id pincite the court continued its analysis by stating that insurance endorsement and administration is not the sort of unique activity that satisfies the substantial relationship_test nor are its benefits group-related id pincite rather than merely advising members of the availability and desirability of insurance coverage to credit unions generally the league promoted the purchase of polices from a particular carrier the court affirmed the district court's rationale that the league’s insurance activities did little more than generate revenue because the league’s endorsement was basically a fundraising activity it was by definition unrelated business activity under sec_513 id pincite therefore the court concluded that the league’s insurance activities were not substantially related to its tax-exempt purpose of advancing the credit_union movement rather the connection between the furtherance of the credit_union movement and the selling of insurance was at best tangential in 78_tc_246 aff'd 726_f2d_1097 cir the court held that promotional and administrative fees and an experience rating reserve refund received by a business league described in sec_501 of the code for promoting group_insurance programs for its members constituted unrelated_business_taxable_income under sec_512 in holding that the business league’s activities were not substantially related the court considered whether the league’s insurance activities contributed importantly to the league’s exempt_purpose of advancing the common business interests of independent insurance agents the court stated the burden is on the taxpayer to show that the challenged activities contribute directly and importantly to the improvement of conditions in a particular line_of_business the court noted that the petitioner's insurance activities did little more than generate revenue for the association and provided members with a convenient and economical service in the operation of their agencies as such they stood in sharp contrast to petitioner's educational and legislative activities which served the broader purpose of improving the general business environment in which insurance agents operated thus the court found petitioner’s activity of promoting insurance was not substantially related to its exempt_purpose in la caisse popu563_f2d_505 1st cir the government unsuccessfully challenged the exempt status under sec_501 of the code of an organization chartered as a credit_union by the state of new hampshire the government maintained that the organization was not exempt because it offered a wide variety of services typically offered by nonexempt full service banks and was therefore not organized or operated as a credit_union among these services were checking accounts mortgage loans banking by mail safe deposit boxes and a night depository this case focused solely on the taxpayer's exemption under sec_501 and did not address the provisions of sec_511 through in 646_fsupp_1199 n d ala a credit_union described in sec_501 of the code offered cancer and group_life_insurance to its individual members the issue was whether commissions the credit_union received from servicing these particular types of insurance policies constituted unrelated_business_income under sec_512 the court did not reach the issue for jurisdictional reasons however it stated in a footnote that the petitioner would have lost on the merits of this issue because the policies benefited the insured without any reference to the member's loans or accounts with the credit_union that court stated in dicta that cancer and group_life_insurance offered by a credit_union to its members would result in unrelated business table income for the following reasons petitioner earned commissions for servicing cancer and group_life_insurance policies these policies were for the express benefit of the insured without any reference to the member's loans or accounts with the credit_union petitioner derived no benefit from the policies other than commission on the sale of said policies earned from the insurance_companies which issued the policies the sale of the cancer and group_life_insurance policies referred to had no substantial causal relationship to petitioner's exempt purposes and the sale of the policies bore no relationship to petitioner's function as a credit_union id pincite n revrul_69_282 1969_1_cb_155 provides that an organization must be formed and operated under the state law governing the formation of credit unions to qualify for exemption under sec_501 of the code as a state- chartered credit_union revrul_72_37 1972_1_cb_152 provides that to qualify as a credit_union_exempt from income_tax under sec_501 a of the code an organization must in addition to being formed and operated under a state credit_union law operate without profit and for the mutual benefit of its members the revenue_ruling clarified revrul_69_282 stating that a state charter isa threshold requirement for exemption but not the sole requirement revrul_60_228 1960_1_cb_200 interprets the substantially related requirement of sec_513 an organization exempt from federal_income_tax as an agricultural_organization described in sec_501 of the code promoted wider insurance coverage among its members and other local farmers including life casualty and fire insurance the insurance programs are provided by several insurance_companies but the organization’s administrative and secretarial staff is assigned to the work the organization receives an overall fee from the insurance_company for office and other services rendered them in connection with the insurance programs the revenue_ruling provides that a trade_or_business is substantially related to an organization's exempt_activities if the principal purpose of the trade_or_business furthers these exempt purposes however in this case such activities are not usually associated with the functions of an agricultural_organization and normally would not be carried on by such an organization in furtherance of its exempt purposes therefore these activities are not substantially related to the organization’s exempt purposes thus the income resulting from these activities is subject_to tax under sec_511 analysis in determining whether an income-producing activity is an unrelated_trade_or_business it is necessary to show that there is a trade_or_business the trade_or_business is regularly carried on and the conduct of the trade_or_business is not substantially related to the organization's exempt_purpose or function see sec_1_513-1 a of the regulations t has agreed that the activities at issue are trades_or_businesses that are regularly carried on therefore the sole issue is whether each activity is substantially related to the organization's achievement of its exempt purposes gross_income is derived from an unrelated_trade_or_business if the conduct of the trade_or_business is not substantially related other than through production of funds to the purposes for which exemption is granted sec_1_513-1 of the regulations determination of the substantial relationship issue requires an examination of the relationship between the business activities which generate the particular income in question and the accomplishment of the organization’s exempt purposes id the regulations further state that for the conduct of trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes sec_1_513-1 of the regulations see also profil ins agents of michigan supra insurance activity was not substantially related because activity did little more than generate revenue and provide members with a service and did not further taxpayer's exempt_purpose of improving business conditions and louisiana credit_union leaque supra league's endorsement of group_insurance plans was principally motivated by a desire to raise revenue and at best was only tangentially related to the furtherance of the league’s exempt_purpose of improving business conditions of one or more lines of business the court found the requisite substantial relationship lacking for t’s activities to escape taxation as unrelated_business_income the activities must contribute directly and importantly to the accomplishment of one or more of t’s exempt purposes-promotion of thrift and providing low cost credit for its members through mutual and nonprofit operation sec_1_513-1 of the regulations see also prof'l ins agents of michigan supra we address each of the activities below credit life and credit disability t argues that the sale of credit disability insurance is directly related to the credit union’s specific exempt purposes of fostering thrift among the members including both the extension of credit to members on reasonable terms and encouraging savings among the members and providing services to members on a mutual basis t further maintains that credit insurance which is an integral part of a member loan transaction is a mechanism for assuring the prompt repayment of debts in situations where the financial resources of the borrower and the borrower's family become strained as a result of disability the facts do not show how sales of credit life and credit disability insurance contribute directly and importantly to accomplishing t’s exempt purposes credit life and credit disability insurance is not required for the in fact credit life and credit disability insurance is not approval of a loan available to members on certain types of loans such as mortgage and other real_estate loans the member decides whether to purchase credit life and credit disability insurance based on his or her own assessment of whether the insurance will provide a benefit to that individual member the individual member benefits in that the member need not worry about paying a loan to t in the event of death or disability while there is also a benefit to the credit_union as the beneficiary the facts do not show how the sale of credit life and credit disability insurance otherwise contributes importantly and directly to accomplishing t’s exempt purposes other than through the production_of_income availability of credit life and credit disability insurance does not encourage savings or assist t in offering low cost credit - t does not take into consideration the need for this insurance by members t performs no studies to determine which members may need credit life and credit disability insurance and there is no required corresponding counseling to members who may have more need than others although t’s staff may recommend insurance based on the level of personal and family resources these recommendations are not mandatory in specific cases and coverage is not required in these cases additionally t’s receives commissions based on the amount of premiums_paid for credit life and credit disability because the insurance is voluntary and has no bearing on the approval of a loan the individual benefit-to the selling employee-is the primary benefit of offering the insurance applying the factors of alabama central credit_union supra t earns commissions for providing credit life and credit disability insurance sells policies for the express benefit of the insured albeit with reference to a member's loan with the credit_union derives some benefit from the credit life and credit disability insurance but the primary benefit is production_of_income both through the commission on the sale of the insurance earned the insurance referred to has no substantial causal relationship to t’s exempt purposes and the insurance bears no relationship to t’s function as a credit_union looking at the facts with respect to credit life and credit disability insurance the sale of credit insurance is not substantially related to t’s exempt purposes the available information indicates that the sale of insurance is primarily for the purpose of generating income to t and some of its employees and for the benefit of the insured rather than for the benefit of t’s membership based on all of the facts and circumstances t’s activities with respect to the sale of credit life and credit disability insurance do not contribute importantly to accomplishing t’s exempt purposes therefore the sale of credit life and credit disability insurance is not substantially related to t’s exempt purposes and amounts received therefrom are subject_to ubit conclusion for reasons set forth above we conclude that the income received by a sec_501 credit_union from the sale of credit life and credit disability insurance are not substantially related to the furtherance of t’s exempt purposes and therefore are subject_to ubit a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 of the code provides that it may not be used or cited as precedent - end -


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 2-plr-138014-01 date date legend x a b c d1 d2 year dear this responds to your letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on d1 the first date on which x had assets issued stock or began doing business was d2 of year a b and c the shareholders of x intended for x to be an s_corporation effective for the year taxable_year x has submitted a letter from x’s attorney evidencing this intent however a form_2553 election by a small_business_corporation was not timely filed for x’s year taxable_year sec_1362 provides that if -- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the plr-138014-01 secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation for x’s year taxable_year accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x’s year taxable_year a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being forwarded to x’s authorized representative sincerely yours matthew lay senior technician reviewer branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes