internal_revenue_service national_office technical_advice_memorandum date number release date third party communication none date of communication not applicable index uil no case-mis no 280f 280f 280f tam-103779-09 director lmsb territory taxpayer's name taxpayer's address taxpayer's identification no year s involved date of conference ------------------------------------------------------------- ------------------ ------------------------------------ --------------------------------------------- --------------------------------------- ---------------------- ------------------ legend taxpayer one taxpayer two state owner one owner two trust business unrelated owner lessee one lessee two lessee three aircraft one aircraft two aircraft three aircraft four aircraft five year a -------------------------- ---------------------------- ------------- ------------------------- ---------------- ----------------------------------------------- ---------------------------------------------------------------- ---------------------------- ---------------------------- ------------------------------------- ---------------------------------------------- ------------------------ ------------------------------- --------------------------------------------- ---------------------------- ------------------------------------ ------- tam-103779-09 year b year c date one date two date three date four date five date six date seven date eight issues ------- ------- -------------------------- ------------------------ ------------------ ---------------------- ---------------------- ------------------------ --------------------------- --------------------------- whether taxpayer one regularly engaged in the business of leasing aircraft under sec_1_280f-5t and c of the income_tax regulations such that the two leased aircraft are exempt under sec_280f of the internal_revenue_code from the depreciation limitations imposed under sec_280f whether the aircraft three leased by taxpayer one to lessee one a related subchapter_s_corporation is predominantly_used in a qualified_business_use in year a and therefore exempt from the depreciation limitations pursuant to sec_280f of the code whether taxpayer two regularly engaged in the business of leasing aircraft under sec_1_280f-5t and c of the regulations such that the leased aircraft is exempt under sec_280f of the code from the depreciation limitations imposed under sec_280f whether the aircraft five leased by taxpayer two to lessee one a related subchapter_s_corporation is predominantly_used in a qualified_business_use in year b and therefore exempt from the depreciation limitations pursuant to sec_280f of the code conclusions taxpayer one is not regularly engaged in the business of leasing aircraft under sec_1_280f-5t and c of the regulations and therefore the two leased aircraft are not exempt under sec_280f of the code from the depreciation limitations imposed under sec_280f aircraft three is not predominantly_used in a qualified_business_use in year a pursuant to sec_280f of the code and therefore is subject_to the depreciation limitations of sec_280f and d tam-103779-09 taxpayer two is not regularly engaged in the business of leasing aircraft under sec_1_280f-5t and c of the regulations and therefore the leased aircraft is not exempt under sec_280f of the code from the depreciation limitations imposed under sec_280f aircraft five is not predominantly_used in a qualified_business_use in year b pursuant to sec_280f of the code and therefore is subject_to the depreciation limitations of sec_280f and d facts taxpayer one taxpayer one a state limited_liability_company was formed on date one taxpayer one is owned --- percent by owner one and --- percent by his wife owner two taxpayer one was formed for the purpose of acquiring and leasing non- commercial aircraft and other transportation_property to lessee one taxpayer one is engaged solely in the acquisition and leasing of aircraft and transportation equipment taxpayer one identifies equipment for purchase negotiates purchase contracts arranges financing for purchases and negotiates leases taxpayer one has purchased a total of four airplanes since its inception in year c for use in its leasing business taxpayer one purchased aircraft one and began leasing it in year c on date two taxpayer one purchased aircraft two on date three taxpayer one traded in aircraft one towards the purchase of aircraft three and on date four taxpayer one traded in aircraft two towards the purchase of aircraft four during the years at issue in this letter taxpayer one owned aircraft three and aircraft four since its formation in addition to lessee one taxpayer one has leased its aircraft to lessee two and lessee three all of which are related entities lessee one is directly owned -------percent in total by owner one and owner two specifically owner one owns --------percent and owner two owns --------percent of lessee one an additional --------percent of lessee one is owned by trust a grantor_trust created by owner two unrelated owner owns the remaining -------percent of lessee one accordingly --- percent of lessee one is owned by owner one and owner two directly or through trust lessee one is a subchapter_s_corporation which operates business lessee two is ----- percent owned by owner one lessee three is a single-member llc the single-member of lessee three is lessee one taxpayer one uses the accrual_method of accounting and files its annual partnership returns on a calendar_year basis tam-103779-09 taxpayer one is depreciating the aircraft three including improvements that were made to aircraft three on date five under sec_168 of the code over seven years using the ----- percent declining balance method_of_depreciation personal travel of aircraft three by owner one his family and friends accounted for --------percent of the total use of aircraft three during year a the log for aircraft three noted each personal trip mileage attributable to the presence of owner one on business trips comprise another -------percent qualified_business_use by lessee one exclusive of flights to influence legislation entertainment flights and maintenance flights accounted for -------percent of the plane’s use during year a flights to influence legislation and entertainment flights accounted for --------percent of the plane’s use during year a maintenance flights accounted for -------percent of the plane’s use during year a taxpayer two taxpayer two a state limited_liability_company was formed on date six taxpayer two was formed for the purpose of acquiring and leasing non-commercial aircraft to lessee one owner one and his wife owner two are each --- percent partners of taxpayer two taxpayer two uses the accrual_method of accounting and files its annual partnership returns based on a december year end taxpayer two leased aircraft five to lessee one pursuant to a lease agreement dated date seven taxpayer two has not leased aircraft five to any other parties taxpayer two purchased aircraft five and placed it in service on date eight the partnership claimed the additional_first-year_depreciation allowance provided by sec_168 of the code ie bonus_depreciation in year b and is depreciating the remaining basis of the plane under sec_168 over years using the ----- percent declining balance method_of_depreciation personal travel of owner one his family and friends accounted for --------percent of the use of aircraft five in year b maintenance flights accounted for --------percent of the use of aircraft five during year b business travel with and without owner one aboard the plane accounted for --------percent of the flight time of aircraft five during year b aircraft five was sold after year b and taxpayer two currently owns no aircraft tam-103779-09 law and analysis sec_167 of the code allows as a depreciation deduction a reasonable allowance for the exhaustion wear_and_tear of property used in a trade_or_business or of property_held_for_the_production_of_income sec_168 provides that generally the depreciation deduction provided by sec_167 for any tangible_property shall be determined using the applicable_depreciation_method the applicable_recovery_period and the applicable convention typically aircraft that are not used in the commercial or contract carrying of passengers or freight are classified under asset class dollar_figure of revproc_87_56 1987_2_cb_674 and are depreciated under sec_168 using the percent declining balance method over a period of five years aircraft used in the commercial or contract carrying of passengers or freight are classified under asset cla sec_45 of revproc_87_56 and are generally depreciated under sec_168 using the percent declining balance method over a period of seven years sec_280f of the code defines and is applicable to a class of property designated as listed_property sec_280f provides that subject_to certain exceptions listed_property means any passenger_automobile any other_property used as a means of transportation eg a bus boat or airplane any property of a type generally used for purposes of entertainment recreation or amusement any computer_or_peripheral_equipment and any cellular telephone or other similar telecommunications equipment enacted as part of the tax_reform_act_of_1984 sec_179 vol c b sec_280f was designed to reduce two specific abuses of the tax system by business taxpayers by deferring a portion of the depreciation deduction for listed_property to later years in certain cases the first of these abuses relates only to passenger automobiles and is not relevant to the present case the second however is directly relevant with regard to all types of listed_property including aircraft congress sought to limit the use of accelerated_depreciation for such property where there is excessive personal_use by business owners and their employees the joint_committee on taxation explained that congress was concerned about the use of accelerated_depreciation with respect to property used primarily for personal or investment use rather than in the conduct_of_a_trade_or_business and that the incentive of accelerated_depreciation was not designed to subsidize the purchase of personal_property that is used incidentally or occasionally in the taxpayer's business joint_committee on taxation staff general explanation of the revenue provisions of the deficit_reduction_act_of_1984 98th cong 2d sess to this end congress enacted sec_280f of the code the predominant use limitation which provides that if any listed_property is not predominantly_used in a qualified_business_use for any taxable_year the deduction allowed under sec_168 with respect to such property for such taxable_year and any subsequent taxable_year shall be determined under sec_168 relating to the alternative depreciation tam-103779-09 system which provides only straight-line_depreciation sec_280f clarifies that property shall be treated as predominantly_used in a qualified_business_use for any taxable_year if the business_use_percentage for such taxable_year exceed sec_50 percent sec_280f states that any deduction allowable under sec_179 for listed_property is subject_to the limitations of sec_280f as if it was a depreciation deduction allowable under sec_168 sec_280f of the code clarifies that the term business_use_percentage means the percentage of the use of any listed_property during any taxable_year which is a qualified_business_use sec_280f defines qualified_business_use as any use in the trade_or_business of the taxpayer except for uses listed in sec_280f the exceptions under sec_280f were designed to prevent a taxpayer from disguising excessive personal_use by business owners and their employees by structuring the use as a lease or a compensation arrangement sec_280f of the code provides that qualified_business_use does not include leasing property to any 5-percent_owner or related_person sec_1 280f- d ii of the regulations clarifies that the exclusion in sec_280f applies only to the extent that the use of the listed_property is by an individual who is a related_person or a 5-percent_owner with respect to the owner or lessee of the property without this regulatory clarification to the statute all use under a lease to a 5-percent_owner or related_person would be excluded from qualified_business_use for purposes of the predominant use test of sec_280f or in the case of an aircraft both the 25-percent threshold of sec_280f and the predominant use test of sec_280f in the case where more than percent of the overall use of an aircraft is use under such a lease absent sec_1_280f-6 the aircraft would fail to meet the 25-percent threshold discussed below without regard to whether the aircraft was actually used by the 5-percent_owner or related_person the regulatory clarification limits the exclusion under sec_280f instead to actual use by the individual who is a 5-percent_owner or related_person in accord with the concerns expressed by congress in enacting sec_280f sec_280f and iii provide additional exclusions from qualified_business_use that are not subject_to the restriction found in sec_1_280f-6 sec_280f of the code provides that sec_280f does not apply with respect to an aircraft if at least percent of the total use of the aircraft during the taxable_year consists of qualified_business_use not described in ie not excluded under sec_280f sec_280f of the code provides that for purposes of sec_280f the term 5-percent_owner means any person who is a 5-percent_owner with respect to the taxpayer as defined in sec_416 and the term related_person means any person related to the taxpayer within the meaning of section tam-103779-09 b the definition of related_person includes under sec_267 members_of_a_family including brothers and sisters spouse ancestors and lineal_descendants it also includes under sec_267 a corporation and a partnership if the same persons own a more than percent in value of the outstanding_stock of the corporation and b more than percent of the capital interest or the profits interest in the partnership sec_280f of the code provides that sec_280f does not apply to any listed_property leased or held for leasing by any person regularly engaged in the business of leasing such property sec_1_280f-5t of regulations restates this rule specifically referencing the predominant use limitation sec_1_280f-5t of the regulations states that for purposes of sec_1_280f-5t a person shall be considered regularly engaged in the business of leasing listed_property only if contracts to lease such property are entered into with some frequency over a continuous period of time the determination shall be made on the basis of the facts and circumstances in each case taking into account the nature of the person's business in its entirety occasional or incidental leasing activity is insufficient for example a person leasing only one passenger_automobile during a taxable_year is not regularly engaged in the business of leasing automobiles in addition an employer that allows an employee to use the employer's property for personal purposes and charges the employee for_the_use_of the property is not regularly engaged in the business of leasing with respect to the property used by the employee_leasing exemption the principal issue in this technical_advice_memorandum is whether the three aircraft leased by taxpayer one and taxpayer two to related entities during year a and year b are exempt from the annual depreciation limitation by virtue of sec_280f of the code under that section if taxpayer one and taxpayer two are regularly engaged in the business of leasing aircraft as clarified by sec_1 280f- 5t c of the regulations the aircraft are excluded from the operation of any provision of sec_280f including the predominant use test of sec_280f the phrase occasional or incidental in sec_1_280f-5t of the regulations is drawn directly from the joint_committee on taxation explanation that the incentive of accelerated_depreciation was not designed to subsidize the purchase of personal_property that is used incidentally or occasionally in the taxpayer's business and its use in the regulations was meant to expand on the meaning of the phrase entered into with some frequency over a continuous period of time this meaning is illustrated by the example in the next sentence of the regulation which states that a person leasing only one automobile during a taxable_year is not regularly engaged in the business of leasing automobiles tam-103779-09 in order to make the determination whether taxpayer one and taxpayer two are regularly engaged in the business of leasing the particular facts and circumstances of the instant case must all be taken into account the service accepts the taxpayers' assertion that the aircraft leases at issue are valid leases however leasing activities rise to the standard of being regularly engaged in the business of leasing property for purposes of sec_280f of the code only if they satisfy the requirements enunciated in sec_1_280f-5t of the regulations taxpayer one and taxpayer two have never leased aircraft to persons other than related parties the leases of aircraft three aircraft four and aircraft five during year a and year b have been multi-year leases arguably in violation of the requirement that leases be entered into with some frequency entered into with related parties without competition beginning with the purchase of aircraft two taxpayer one has leased only two aircraft at any time and leased aircraft three and aircraft four under a joint lease to lessee one during year a and year b similarly taxpayer two has leased only one aircraft at any time both of these leases are analogous to the example in the regulations stating that a taxpayer leasing only one automobile during a taxable_year is not regularly engaged in the business of leasing automobiles the commonality of ownership between both taxpayer one and taxpayer two and the lessee companies combined with the considerable degree of personal_use of aircraft three and aircraft five by owner one and owner two demonstrates that owner one and owner two as individuals have retained a significant degree of personal control_over the use of these two aircraft despite the ownership and leasing arrangements the predominant use of aircraft three while under joint lease by taxpayer one to lessee one and of aircraft five while under lease by taxpayer two to lessee one has been personal_use by owner one and owner two as individuals without regard to the leases suggesting that the aircraft are in practice the personal_property of owner one and owner two that are used occasionally or incidentally in the taxpayers' business on the basis of the totality of these factors we conclude that taxpayer one and taxpayer two are not regularly engaged in the business of leasing aircraft and as such are subject_to the 50-percent qualified_business_use test or predominant use test imposed by sec_280f of the code subject_to the restrictions under sec_280f in order to determine whether the taxpayers may depreciate the aircraft under sec_168 qualified_business_use determining whether a taxpayer has met the predominant use test of sec_280f of the code in the case of an aircraft is a two-stage process first it must be determined whether the qualified_business_use of the aircraft satisfies the 25-percent threshold of sec_280f exclusive of uses listed under section tam-103779-09 280f d c i if the 25-percent threshold is met the business uses excluded under sec_280f may be taken into account as qualified_business_use to determine whether more than percent of the total use of the aircraft is qualified_business_use for purposes of sec_280f if sec_280f is satisfied then depreciation under sec_168 the additional_first-year_depreciation allowance bonus_depreciation under sec_168 and the deduction under sec_179 become available for recovering the cost of the aircraft if sec_280f is not satisfied the cost of the aircraft must be recovered using the alternative_depreciation_system under sec_168 taxpayer one and taxpayer two have requested that we address whether three particular types of use of the aircraft will qualify as qualified_business_use for purposes of the 25-percent threshold of sec_280f these uses are business flights on which one or more passengers are percent owners or related_persons maintenance flights and certain other flights without a direct relation to the business of the lessee business flights with a five_percent_owner or related_person on board sec_1_280f-6 of the regulations provides that qualified_business_use does not include leasing property to any 5-percent_owner or related_person but only to the extent that the use of the listed_property is by an individual who is a related_party or a 5-percent_owner with respect to the owner or lessee of the property in other words where the lessee of listed_property is a related_person or a 5-percent_owner with respect to the owner or the lessee of the property any use of the listed_property by an individual who is a related_person or a 5-percent_owner with respect to either the owner or the lessee of the property is not qualified_business_use of the property for purposes of determining whether the owner of the property has satisfied the 25-percent threshold of sec_280f of the code use of the leased listed_property by persons other than a related_person or a 5-percent_owner with respect to the owner or the lessee of the property is not excluded from qualified_business_use under this rule but might be excluded under sec_1_280f-6 or in order to implement sec_1_280f-6 a reasonable allocation must be performed when an aircraft flight transports both a 5-percent_owner a related_person or an employee described in sec_280f of the code and one or more other persons pursuant to proposed sec_1_274-10 of the regulations and notice_2005_45 2005_1_cb_1228 the service will accept as a reasonable allocation an allocation made on the basis of the occupied seat hours or miles method this method is designed for determining the amount of entertainment use of an aircraft by a particular individual but is equally applicable to determining the amount of use by a particular individual for purposes of sec_280f qualified_business_use must be reduced by any occupied seat hours or miles allocable to use by any 5-percent_owner related_person or employee described in sec_280f occupied seat hours tam-103779-09 or miles related to business use on the same flight by persons not described in sec_280f are considered qualified_business_use for purposes of sec_280f in the instant case taxpayer one and taxpayer two both lease listed_property aircraft three and aircraft five respectively to lessee one lessee one is a related_person within the meaning of sec_267 of the code with respect to both taxpayer one and taxpayer two so sec_280f applies to the leases to the extent that an individual that is a 5-percent_owner or a related_person within the meaning of sec_267 with respect either to taxpayer one or taxpayer two or to lessee one eg owner one owner two their children etc uses the aircraft either for personal or business use the allocable amount of their use must be excluded from the qualified_business_use of the aircraft by taxpayer one and taxpayer two pursuant to sec_280f and sec_1_280f-6 of the regulations for purposes of determining whether the percent threshold of sec_280f has been met the taxpayers argue that the service is misinterpreting sec_1_280f-6 in their interpretation the language of sec_1_280f-6 establishes that a taxpayer who leases listed_property to a 5-percent_owner or related_person may not treat all such activity as qualified_business_use simply on the basis of having leased the property but must instead determine it's qualified_business_use based upon the qualified_business_use of the lessee under the taxpayers’ analysis this qualified_business_use is the business use of the property by the taxpayer without regard to whether that business use is by a 5-percent_owner or related_person while we agree with the taxpayers that leasing listed_property to a 5-percent_owner or related_person does not disqualify all use of the property pursuant to the lease from being qualified_business_use for purposes of the 25-percent threshold we disagree with the remainder of the taxpayers' interpretation of our regulations as detailed elsewhere in this memorandum the flush language of sec_1_280f-6 limits the use excluded from qualified_business_use under sec_1_280f-6 to that portion of the overall use of the listed_property that is used by a 5-percent_owner or related_person rather than excluding all use by any person under the lease the taxpayers' assertion that the flush language is meant to show not only that use by persons other than a 5-percent_owner or related_person is not excluded from qualified_business_use but also that use by a 5-percent_owner or related_person for business purposes is not excluded from qualified_business_use is contrary to the clear meaning of the regulatory language and is incorrect maintenance flights maintenance flights for an aircraft used both for qualified_business_use and for other use pertain to all uses not simply to qualified_business_use allocating all maintenance flights to flights flown for qualified_business_use is not a reasonable tam-103779-09 method of allocation in such a circumstance whether the maintenance flights are required on a fixed basis due whether the plane is otherwise flown or not or a variable basis based on hours flown the allocable portion of any maintenance flight that relates to use by an individual who is a 5-percent_owner or related_person with respect to the owner or lessee must itself be treated as use by such person as an individual for purposes of sec_280f of the code therefore taxpayers must ratably allocate maintenance flights between flight hours or miles that are for qualified_business_use and flight hours or miles that are not for qualified_business_use taking into account the exclusions under sec_280f for example if percent of the flight hours or miles of an aircraft other than maintenance flights are qualified_business_use then only percent of maintenance flight hours or miles may be taken into account as qualified_business_use in the instant case personal_use by owner one and his family members accounts for dollar_figure percent of the overall use of aircraft three in year a and dollar_figure percent of the overall use of aircraft five in year b allocating maintenance flights to these figures causes use by owner one and his family to exceed percent of the overall use of both aircraft even without excluding an allocation of occupied seat hours or miles on business flights that included owner one thus an allocation of maintenance flights between personal and business flights even without any further determinations is dispositive in showing that neither taxpayer one nor taxpayer two have met the 25-percent threshold of sec_280f of the code with respect to aircraft three or aircraft five as a consequence taxpayer one is not permitted to claim deductions for depreciation under sec_168 for aircraft three in year a year b or any subsequent taxable_year and taxpayer two is not permitted to claim deductions for depreciation under sec_168 for aircraft five in year b or any subsequent taxable_year in addition taxpayer two is not permitted to claim the additional_first-year_depreciation allowance under sec_168 or the deduction under sec_179 for aircraft five in year b instead taxpayer one and taxpayer two must recover the cost of aircraft three and aircraft five using the alternative_depreciation_system described in sec_168 any deduction claimed by taxpayer one or taxpayer two in excess of the amount permitted under sec_168 is excess_depreciation under sec_280f and must be recaptured pursuant to sec_280f in addition an income inclusion in the taxable_income of lessee one must be calculated under sec_1_280f-7 of the regulations other flights not directly related to the business of lessee one or lessee two lessee one has used aircraft three for certain flights to transport legislative representatives and competitors to various destinations sometimes without any employees of lessee one aboard while these flights are likely personal in nature with respect to lessee one they represent qualified_business_use leasing with respect to taxpayer one as the lessor unless it is determined that one of the exclusions under sec_280f applies to the flight for instance if it is determined that a tam-103779-09 particular flight had no connection to the business activities of lessee one and was essentially a favor done at the behest of owner one or one of his family members for a passenger on the flight then taking into account the commonality of ownership between taxpayer one and lessee one the flight arguably may be excluded from qualified_business_use under sec_280f as use by a 5-percent_owner or related_person without regard to whether a 5-percent_owner or related_person was physically present on the flight caveat temporary or final regulations pertaining to one or more of the issues addressed in this memorandum have not yet been adopted therefore this memorandum will be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusions in the memorandum see section dollar_figure of revproc_2009_2 2009_1_irb_87 or any successor however a technical_advice_memorandum that modifies or revokes a letter_ruling or another technical_advice_memorandum generally is not applied retroactively if the taxpayer can demonstrate that the criteria in section dollar_figure of revproc_2009_2 are satisfied a copy of this technical_advice_memorandum is to be given to the taxpayers sec_6110 of the code provides that it may not be used or cited as precedent


internal_revenue_service p o box cincinnati oh release number release date date legend x name of organization y name of selection committee department of the treasury employer identification contact person - 1d number contact teleohone number uil dear we have considered your request for advance approval of your grant-making program under sec_4945 of the internal_revenue_code dated date with a postmark date of date our records indicate that x was recognized as exempt from federal_income_tax under sec_501 of the code and that it is classified as a private_foundation as defined in sec_509 will provide grants to individuals for travel study or your letter indicates that x education to accomplish a goal that is meaningful to the grantee and to his her surrounding community after individuals are identified as potential grant recipients they are asked to provide information regarding their financial need qualified applicants would as well as the proposed goal purpose of the grant be children who have demonstrated a unique aptitude for or interest in a particular activity such as swimming dancing music or climbing determines that these children cannot afford lessons and further determines that such lessons would benefit the children by developing their talent increasing their self-esteem and encouraging productive activities outside of their schools then x may provide direct financial assistance to these children for the purpose of paying for the lessons x_ may learn of children who have exhibited talent in a in particular area but cannot afford access to necessary facilities or equipment - this event x may take steps to fund the availability of facilities or equipment for also may learn that an educational trip is available for a this group of children particular group of children or young adults serve a significant educational purpose for the children and x determines that x may some or all of the children in the group cannot afford to pay for the trip provide financial assistance to these children for the purpose of participating in x may learn that a particular child has shown significant and ongoing the trip learning difficulties upon confirming these difficulties and upon making a if x believes that the trip would if x x determination that the child’s family cannot pay for additional schooling or educational_assistance x may provide financial assistance to the family for the purpose of providing a special tutor for the child will select volunteers called y who are individuals within the community who x are in the best position to understand and address particular community needs including the needs of children and young adults identify potential grantees collect information regarding potential grantees and make recommendation to x’s board_of trustees x’s board is made up of individuals who have significant and ongoing interest in promoting the well-being talents education and overall happiness of children and young adults x does not make any of the grants to family members or relatives of x’s officers or trustees furthermore x does not make any of the grants to any family members of the board_of selection or to any individuals that have a past or present business relationship with x’s officers or trustees these individuals will x regarding their level of financial need as well if an individual proposes a particular after individuals are identified by the y as potential grant recipients they are asked to provide information to as the proposed goal purpose of the grant trip lesson or activity educational and or community value of the proposed activity and its end result x's board_of trustees determines that a particular grant and the resulting activities will have a significant positive and meaningful impact on the individual and the community and the individual has demonstrated legitimate financial need then x x makes an objective determination of the inherent will make a grant to that individual if under the terms of the grant the individual is only able to use the grant funds for x may require any individual who receives the particular activity approved by x a grant or family whose child receives a grant to produce one or more interim reports to x during the course of the designated activity discretion to require any individual who receives a grant to produce a summary report after the completion of the designated activity the summary report will require detailed explanations of the activities undertaken and how they enhanced the education talents or skills of the intended individual will have the x upon learning of any possible misuse of funds x is making periodic grant payments x misuse for any situation where x cease disbursement of additional funds during its investigation of possible misuse and will attempt to recover any funds that are ultimately determined to have been misused by the grant recipient or his her family where all grant funding has taken place at the onset of a trip or activity and x learns of misuse of funds x will take legal action to retrieve the funds awarded will investigate such possible will x agrees to maintain records that include e the qualifications of potential grantees financial need intent to pursue approved activities the identification of the grantees and their families the amount and purpose of each grant all follow-up information received by x e and all grantee reports and other follow-up data obtained in administering x’s grant program sec_4945 and b of the code impose certain excise_taxes on taxable_expenditures made by a private_foundation sec_4945 of the code provides that the term taxable_expenditure means any amount_paid or incurred by a private_foundation as a grant to an individual for travel study such grant satisfies the requirements of subsection g sec_4945 of the code provides that sec_4945 shall not apply to individual grants awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance if it is demonstrated that or other similar purposes by such individual unless the grant constitutes a scholarship or fellowship_grant which is subject_to the provisions of sec_117 and is to be used for study at an educational_organization described in sec_170 the grant constitutes a prize or award which is subject_to the provisions of sec_74 if the recipient of such prize or award is selected from the general_public or the purpose of the grant is to achieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar capacity skill or talent of the grantee sec_53_4945-4 of the regulations provides that to secure approval a private_foundation must demonstrate that i ii its grant procedure includes an objective and nondiscriminatory selection process such procedure is reasonably calculated to result in performance by grantees of the activities that the grants are intended to finance and iii the foundation plans to obtain reports to determine whether the grantees performed activities that the grants are intended to finance based on the information submitted and assuming your award programs will be conducted as proposed with a view to provide objectivity and nondiscrimination in making the awards we have determined that effective date your procedures for granting the awards comply with the requirements contained in sec_4945 of the code and that awards granted in accordance with such procedures will not constitute taxable_expenditures within the meaning of sec_4945 this determination is conditioned on the understanding that there will be no material_change in the facts upon which it is based it is further conditioned on the premise that no grants will be awarded to foundation managers or members of the selection committee or for a purpose that is inconsistent with the purpose described in sec_170 of the code the approval of your award program procedures herein effective date constitutes a one-time approval of your system standards and procedures designed to result in awards which meet the requirements of sec_4945 of the code this determination only covers the grant programs described above thus approval shall apply to subsequent award programs only as long as the standards and procedures under which they are conducted do not differ materially from those described in your request we have not considered whether grants made under your procedures are excludable from the gross_income of recipients under sec_117 of the code any funds you distribute to individuals must be made on a true charitable basis in furtherance of the purposes for which you are organized therefore you should maintain adequate_records and case histories so that any or all award distributions can be substantiated upon request by the internal_revenue_service this determination is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as a precedent you must report any future changes in your grant making procedures please keep a copy of this letter in your permanent records we have sent a copy of this letter to your representative as indicated in your power_of_attorney if you have any questions please contact the person whose name and telephone number are shown above sincerely yours robert choi director exempt_organizations rulings and agreements


internal_revenue_service number release date index numbers -------------------- ------------------------------- ----------------------------------------- ----------------------- ------------------------------------------------------ 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 plr-117423-10 date date legend --------------------- company ----------------------------------------------------------- country date ---------------------- -------------------------- dear ------------- this letter responds to a letter dated date submitted on behalf of company requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts company was formed under the laws of country on date company represents that it is a foreign_entity eligible to elect to be treated as a disregarded_entity for federal tax purposes company intended to be treated as a disregarded_entity effective date however due to inadvertence company failed to file form_8832 entity classification election electing to treat company as a disregarded_entity effective date law and analysis sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an plr-117423-10 eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301 b unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides in part that for purposes of sec_301 b i a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides in part that except as provided in sec_301_7701-3 and v an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides in part that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed under sec_301_9100-1 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 code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an 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_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer plr-117423-10 acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied consequently company is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center to elect to be treated as a disregarded_entity effective date a copy of this letter should be attached to the form_8832 except for the specific ruling above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code in addition sec_301_9100-1 provides that the granting of an extension of time for making an election is not a determination that the taxpayer is otherwise eligible to make the election this ruling is directed only to the taxpayer requesting it according to sec_6110 of the code this ruling may not be used or cited as precedent under a power_of_attorney on file with this office we are sending a copy of this letter to company’s authorized representatives sincerely associate chief_counsel passthroughs special industries s by _______________________________________ mary beth carchia senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures a copy of this letter a copy for sec_6110 purposes 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 ------------------------------------ telephone number --------------------- refer reply to cc pa apjp b01 plr-111296-06 date date sec_3406 -- backup withholding backup withholding sec_6041 -- information_at_source fixed or determinable gains profits or income payments specifically included sec_6045 -- returns of broker sec_6045 returns of brokers sec_6049 -- returns regarding payments of interest reportable interest legend taxpayer fund x y z a years year dollar_figurea plr-111296-06 dear this letter responds to the letter dated date submitted on behalf of the fund requesting the following rulings settlement payments from the fund to mutual_fund investors are not subject_to information reporting under sec_6041 of the internal_revenue_code except in the case of payments made directly to participants in tax-qualified retirement plans settlement payments from the fund to mutual_fund investors are not subject_to information reporting under sec_6045 settlement payments from the fund to mutual_fund investors are not subject_to information reporting under sec_6049 for purposes of meeting any obligations it may have under sec_3406 as a payor of reportable payments the fund need not solicit taxpayer identification numbers tins from the individuals to whom it will make distributions the fund may obtain the tins from the mutual funds or tax-qualified plans in which such individuals held accounts or from transfer agents performing services for the funds or plans facts based upon the facts and the representations made the fund is a qualified_settlement_fund qsf as described in sec_468b and the regulations thereunder the fund was created in year to resolve an administrative_proceeding brought by the securities_and_exchange_commission commission against x z and a relating to investment advice and distribution services provided to certain mutual funds the proceeding related to the following circumstances inadequate or nonexistent disclosure of the policies of x and z and x’s predecessor y allowing market timing trading of mutual_fund units units actions by a facilitating market timing and late trading in units and the oversight monitoring or management of trades of such units trades from at least the middle of year through the middle of year in an order instituting proceedings oip the commission alleged that x made various material omissions and misrepresentations regarding market timing of funds and that x y z and a committed certain other wrongful acts relating to trades in the units allowing improper market timing and late trading impairs the value of mutual_fund shares by depressing their net asset value improper market timing also generates excess trading volume and thus increases the advisory and other fees mutual funds must pay to investment advisors such as x and y and distributors such as z thus the conduct of x y z and a resulted in damage to the investors and a loss of capital the plr-111296-06 commission based on the improper conduct described above and the resulting damage to mutual_fund investors sought profit disgorgement and civil penalties after investigation and negotiations x z and a agreed to pay dollar_figurea to settle the commission’s claims pursuant to section a of the sarbanes-oxley_act of u s c the oip authorized a fair fund for the disgorgement and penalty components of the settlement thus permitting both components to be paid to injured investors those investors holding units of the mutual funds during any portion of the time period specified in the oip will be eligible to receive distributions from the fund the distributions will be based on the commission’s orders the amount available for distribution is the net settlement pool which includes the sum of dollar_figurea the amount transferred by x z and a into the fund and the amount of net_income earned by the fund investors will be allocated portions of the net settlement pool law and analysis ruling sec_1_468b-2 of the treasury regulations provides that in general distributions by a qsf are subject_to certain information reporting and withholding requirements sec_1_468b-2 provides that a qsf must make a return for or must withhold tax on a distribution to a claimant if one or more transferors would have been required to make a return or withhold tax had that transferor made the distribution directly to the claimant the regulations further provide that for purposes of sec_6041 and sec_6041a if a qsf makes a distribution on behalf of a transferor or a claimant the fund is deemed to make the distribution to the recipient of that payment or distribution in the course of a trade_or_business in such a situation the qsf is also deemed to have made the distribution to the transferor or claimant see sec_1_468b-2 c - d sec_6041 requires all persons engaged in a trade_or_business and making payment in the course of such trade_or_business to another person of rent salaries wages premiums annuities compensations remunerations emoluments or other fixed or determinable gains profits and income of dollar_figure or more in any taxable_year to file an information_return with the service and to furnish an information statement to the payee sec_1_6041-1 provides that payments are fixed when they are paid in amounts definitely predetermined income is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained sec_1 a requires a payor to report sec_6041 amounts on form_1099 thus payments that are not fixed or determinable are not subject_to information reporting under sec_6041 amounts a taxpayer receives to restore a loss of capital are not income except to the extent that the payment exceeds the taxpayer’s basis in the injured property that is the subject of the payment 144_f2d_110 1st cir fund payments to investors for losses the mutual funds suffered from plr-111296-06 market timing and late trading appear to constitute compensation_for a loss of capital market timing permitted by x y and z and late trading facilitated by a depressed the net asset value of mutual_fund shares compensation from the fund will compensate at least partially for this damage because the fund has no access to the investors’ tax basis in their mutual_fund accounts and has no need or occasion to collect information on tax basis the fund is unable to calculate how much of this compensation_for mutual_fund losses constitutes fixed or determinable income accordingly the fund has no information reporting obligations under sec_6041 for such compensation although fund payments may constitute gross_income to investors versus compensation_for loss of capital the fund lacks the data collection authority necessary to calculate such gross_income that income therefore is not fixed or determinable within the meaning of the regulations under sec_6041 accordingly subject_to the exception noted below pertaining to distributions to qualified_retirement_plan participants the fund has no information reporting obligations under sec_6041 the fund states that it may make a certain number of distributions directly to participants in tax-qualified retirement plans sec_72 of the code controls the taxation of such distributions and the distributions must be reported on form 1099-r pursuant to sec_6041 subject_to the dollar_figure reporting threshold set forth in sec_6041 and sec_1_6041-1 ruling sec_1_468b-2 provides that a qsf must make a return for a distribution to a claimant if one or more transferors would have been required to make a return had that transferor made the distribution directly to the claimant sec_6045 provides generally that every person doing business as a broker shall when required by the secretary make a return in accordance with such regulations as the secretary may prescribe sec_6045 defines the term broker to include a dealer a barter_exchange and any other person who for a consideration regularly acts as a middleman with respect to property or services the regulations further define the term broker to mean a person that in the ordinary course of a trade_or_business during the calendar_year stands ready to effect sales to be made by others see sec_1_6045-1 sec_1_6045-1 provides generally that a broker shall make an information_return for each sale effected by the broker in the ordinary course of the broker’s trade_or_business sec_1_6045-1 defines a sale as any disposition of securities commodities regulated_futures_contracts or forward contracts for cash and as including redemptions of stock retirements of indebtedness and entering into short_sales plr-111296-06 the fund’s payments to investors do not result from a sale as that term is defined above the fund therefore has no information reporting obligations under sec_6045 with respect to these payments ruling sec_6049 provides that every person who makes payments of interest aggregating dollar_figure or more to any other person during any calendar_year or receives payments of interest as a nominee and who makes payments aggregating dollar_figure or more during any calendar_year to any other person with respect to the interest so received shall make a return according to the forms or regulations prescribed by the secretary sec_6049 b provides that the term_interest includes interest on any obligation issued in_registered_form or of a type offered to the public other than any obligation with a maturity at issue of a year or less which is held by a corporation pursuant to sec_6049 interest also includes interest on deposits with brokers as defined in sec_6045 the fund distributions in the present case do not relate to deposits with brokers or obligations issued in_registered_form and do not otherwise qualify as interest within the meaning of sec_6049 this is so even though interest earnings may have accrued on the funds to be paid to investors from the time x z and a paid such funds to the fund the fund distributions to investors relate to violations of securities law and compensation_for financial harm not to obligations issued in_registered_form or other instruments that generate interest as sec_6049 defines that term accordingly the fund has no information reporting obligations under sec_6049 regarding its distributions to the investors ruling sec_3406 generally provides that in the case of any reportable_payment if a the payee fails to furnish his or her tin to the payor in the manner required b the secretary notifies the payor that the tin furnished by the payee is incorrect c there has been a notified_payee_underreporting of interest and dividends or d there has been a certification failure collectively referred to as payee failures then the payor shall deduct and withhold from such reportable_payment a backup withholding amount totaling of such payment sec_3406 provides that the term reportable_payment means any reportable_interest_or_dividend_payment and any other_reportable_payment sec_3406 provides that the term other_reportable_payment includes any payment of a kind and to a payee required to be shown on a return under sec_6041 or sec_6045 in light of rulings one through three above only direct payments by the fund to participants in tax-qualified plans will be reportable payments subject_to backup withholding under sec_3406 in order to meet its obligations under sec_3406 and to include tins on information returns it must provide for these reportable plr-111296-06 payments the fund plans to obtain those tins from one of the following sources the plan_administrator the mutual funds in which the participants invested or the transfer agents that provide services to the administrator or mutual funds obtaining the tins in this manner should prove more reliable and less burdensome and costly to the fund than soliciting the tins from the plan participants in light of the authority it has been granted by the commission the fund will be able to obtain the tins of plan participants from the plan administrators mutual funds or transfer agents the fund will not be required to solicit tins from the participants for purposes of applying the backup withholding rules of sec_3406 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 furthermore this letter expresses no opinion about information reporting requirements for fund distributions that are not made directly to the injured investors this letter also expresses no opinion about the income_tax consequences to investors of fund distributions this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative 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 enclosure carol p nachman acting senior technician reviewer office of associate chief_counsel procedure and administration administrative provisions and judicial practice sincerely