internal_revenue_service number release date index number ------------------------- ---------------------------------------- --------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b04 plr-149858-07 date date legend legend trust decedent year niece niece nephew nephew nephew a b c d e f state statute --------------------------------- state statute ------------------------------------- ------------------------------------------- -------------------------------- ------- ------------------------- ------------------------------------- ---------------------- ------------------ ------------------ --------- ------------------------------------ ------------------------------------ -------------- --------- -------------- dear -------------- this responds to your representative’s letter dated date requesting rulings on the income and generation-skipping_transfer gst tax consequences of the proposed modification of trust facts the facts and representations submitted are summarized as follows trust was established under the will of decedent in year a date prior to date under the terms of trust niece niece nephew nephew and nephew decedent’s nieces and nephews are each to receive an annuity of dollar_figurea out of the net plr-149858-07 income of the trust the remaining income of the trust each year is to be divided into six shares to be paid to six identified charitable organizations the charitable remaindermen upon the death of niece nephew nephew or nephew the respective annuity of dollar_figurea allocable to that niece or nephew is payable to the lawful issue of that niece or nephew by right of representation upon the death of niece or upon the death of any named niece or nephew without any surviving lawful issue his or her share of the net_income will augment the amounts provided to be paid to the charitable remaindermen upon the death of the last survivor of the lawful issue of niece nephew nephew and nephew living at the time of decedent’s death the corpus of the trust and any undistributed_income is to be distributed to the charitable remaindermen in equal shares trust was funded with approximately dollar_figureb of assets the assets of the trust are currently valued at dollar_figurec more than four and one half times the original asset value because of the death of niece and the death of nephew without surviving issue only three of the five annuities are currently being paid_by the trust to the annuitant beneficiaries pursuant to the terms of trust the remaining net_income after payment of the annuities is being distributed in equal shares to the charitable remaindermen based on the life expectancy of the youngest measuring life the trust is estimated to terminate years from now it is represented that only dollar_figured which is less than percent of the value of the trust corpus is necessary to fund the annuities for the expected duration of the trust based on the foregoing the charitable remaindermen obtained legal representation to pursue the acceleration of the charitable_remainder interests the charitable remaindermen noted that the total yearly annuity currently payable to the annuitant beneficiaries is only percent of the value of the corpus of the trust and that the trustee’s fees each year are three times the amount of the annuities distributed under these circumstances the charitable remaindermen have argued that no material purpose is served by continuing the trust until the estimated termination_date in and therefore trust should be fully or partially terminated after lengthy negotiations between counsel for the charitable remaindermen and counsel for the annuitant beneficiaries the parties came to an agreement the agreement as follows a b except to the extent of dollar_figured which is the amount required to fund the annuity payments for the remainder of trust’s duration trust should terminate and the corpus should be distributed to the charitable remaindermen trust will continue to pay the annuities of dollar_figurea out of the trust’s income each year to the annuitant beneficiaries and will continue to distribute any excess income each year to the charitable remaindermen as provided for under the original terms of trust plr-149858-07 c d upon the final termination of trust in accordance with the original terms of trust all of the then-remaining balance will be distributed outright to the charitable remaindermen in equal shares as provided for under the original terms of trust the charitable remaindermen will purchase separate and apart from the trust commercial annuities for the benefit of each of the three annuitant families under the annuity_contracts an annuity amount of approximately dollar_figuree will be paid to each annuitant family for a term identical to the term of trust at a total cost to the charitable remaindermen of dollar_figuref the charitable remaindermen have represented that each annuity policy to be purchased will remain the asset of the purchasing charity and the annuitants will have no rights to the annuity payments superior to those of the purchasing charity’s other creditors pursuant to the agreement counsel for the charitable remaindermen filed a petition for modification of trust with the consent of all beneficiaries under the authority of state statute state statute provides in pertinent part a b except as provided in b if all beneficiaries of an irrevocable_trust consent they may compel the modification or termination of the trust upon petition to the court if the continuance of the trust is necessary to carry out a material purpose of the trust the trust cannot be modified or terminated unless the court in its discretion determines that the reason for doing so under the circumstances outweighs the interest in accomplishing a material purpose of the trust the petition attests that the non-petitioning beneficiaries as well as the petitioning beneficiaries have consented to the proposed modification you have requested the following rulings the implementation of the agreement and court order will not cause trust to lose its exempt status under b a of the tax_reform_act_of_1986 and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the partial_termination of trust and the early distribution to the charitable remaindermen will not result in the immediate realization of capital_gain capital_loss or taxable_income by the annuitant beneficiaries the trust or the charitable remaindermen the purchase of the commercial annuities by the charitable remaindermen for the benefit of the annuitant beneficiaries will not result in the immediate plr-149858-07 realization of capital_gain capital_loss or taxable_income by the annuitant beneficiaries law and analysis ruling sec_2601 of the internal_revenue_code imposes a tax on every generation-skipping_transfer gst which is defined under sec_2611 as a taxable_distribution a taxable_termination or a direct_skip under of the tax_reform_act_of_1986 the act gst tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26 b i of the generation-skipping_transfer_tax regulations the tax does not apply to a transfer under a_trust that was irrevocable on date except to the extent the transfer is made out of corpus added to the trust by an actual or constructive_addition after date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under sec_26_2601-1 will not cause the trust to lose its exempt status these rules are applicable only for purposes of determining whether an exempt trust retains exempt status for gst tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a modification of the governing instrument by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the gst tax 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 sec_26_2601-1 provides in part that a modification of an exempt trust will result in a shift in a beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst or the creation of a new gst to determine whether a modification of an irrevocable_trust will shift a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification if the effect of the modification cannot be immediately determined it is deemed to shift a beneficial_interest plr-149858-07 in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification in the present case trust was irrevocable on date it is represented that no additions actual or constructive have been made to trust after that date accordingly trust is exempt from the gst tax under sec_26_2601-1 in measuring the effect of implementing the agreement we have determined that the interest of the annuitant beneficiaries in trust will not change as a result of the implementation of the agreement the annuitant beneficiaries will receive the same amount under the terms of trust as before implementation of the agreement accordingly provided the agreement is valid under applicable state law we conclude that implementing the agreement will not result in a shift of any beneficial_interest in trust to any beneficiary who occupies a lower generation than the beneficiaries holding the beneficial interests prior to the modification in addition implementing the agreement will not extend the time for vesting of any beneficial interests in the trust beyond the period provided for in the trust therefore the agreement will not affect the status of trust as exempt from the gst tax under sec_2601 ruling sec_2 sec_61 of the internal_revenue_code provides that gross_income includes gains derived from dealings in property and under ' a from an interest in a_trust sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in ' for determining gain and the loss shall be the excess of the adjusted_basis provided in ' for determining loss over the amount_realized sec_1001 states that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received under ' c except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under ' on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained in 499_us_554 the supreme court considered whether a sale_or_exchange had taken place that resulted in realization of gain_or_loss under sec_1001 when a financial_institution exchanged its interests in one plr-149858-07 group of residential mortgage loans for another lender's interests in a different group of residential mortgage loans the two groups of mortgages were considered substantially identical by the agency that regulated the financial_institution the court concluded that sec_1_1001-1 reasonably interprets sec_1001 id pincite the court also stated that an exchange of property gives rise to a realization event under sec_1001 if the properties exchanged are materially different in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent id pincite the court held that mortgage loans made to different obligors and secured_by different homes did embody distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans id pincite it is consistent with the supreme court's opinion in cottage savings to find that the interests of the annuitants and the six charities in trust will not differ materially as a result of the proposed partial_termination of trust and the early distribution to the charitable remaindermen the legal entitlements of the beneficiaries will not be changed each annuitant beneficiary’s payment from trust will remain unchanged only the timing of the receipt of a large portion of trust corpus by the charitable remaindermen will be modified except for the changes described above all other provisions of trust will remain unchanged accordingly the modification of trust to provide for the partial_termination of trust and the early distribution to the charitable remaindermen will not result in a material difference in_kind or extent of the legal entitlements enjoyed by the beneficiaries and no gain_or_loss will be recognized on the modification of trust under sec_1001 as for the purchase of the annuities for the benefit of the annuitant beneficiaries it is represented that each annuity policy to be purchased by the charitable remaindermen will remain the asset of the purchasing charity and the annuitant beneficiaries will have no rights to the annuity payments superior to those of the purchasing charities’ other creditors accordingly the purchase of the annuities by the charitable remaindermen for the benefit of the annuitant beneficiaries will not result in the immediate realization of capital_gain capital_loss or taxable_income by the annuitant beneficiaries 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 representative plr-149858-07 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely james f hogan senior technician reviewer branch passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter


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 ita b05 plr-116913-09 date date legend taxpayer property llc llc pr pr fx llc borrower llc owner llc mm ml subtenant year year date a b c d dear ---------------- --------------------------- ------------------------------------------------------- ----------------------- ------------------------------- --------------------- ----------------- ------------------------ ------------------------------------ ------------------------------------ ---------------------------- ------------------------- -------------------------------------------- -- ------------------------------------------ ------- ------- ------------------- --------------- --------------- --------------- ------------- this responds to your authorized representative's letter and submissions of date in which he requested on your behalf a ruling on the proper treatment of income arising from the cancellation of indebtedness under sec_108 of the internal_revenue_code_of_1986 code plr-116913-09 issue taxpayer has requested a ruling that indebtedness collateralized by an ownership_interest in an entity owning real_property is secured_by such real_property within the meaning of sec_108 facts taxpayer is a domestic limited_liability_company currently classified as a partnership for federal_income_tax purposes taxpayer is owned by two domestic limited_liability companies llc and llc llc is owned by two members pr1 and pr2 each a domestic resident_of_the_united_states for federal_income_tax purposes llc is owned by fx through several wholly-owned subsidiaries fx is a foreign_corporation that has elected to be treated as a partnership for federal_income_tax purposes each subsidiary in fx’s chain of ownership of llc is disregarded as an entity separate from its owner for federal_income_tax purposes in year after taxpayer and its subsidiaries were formed to acquire the property taxpayer is the sole owner of llc a domestic limited_liability_company together llc and taxpayer own all of the interests in borrower llc which is also a limited_liability_company both llc and borrower llc are disregarded entities for federal_income_tax purposes borrower llc is the sole member of owner llc a domestic limited_liability_company that is also a disregarded_entity owner llc holds legal_title to the entire fee interest in the property purchase of the property was financed in year with equity contributions from members of taxpayer and funds borrowed by owner llc from third party lenders original debt the original debt was secured_by a mortgage on the property as well as other collateral in year the property was comprised of both office and retail commercial rental property the property has operated exclusively as a rental property since acquisition taxpayer represents that neither taxpayer nor any of the related parties in the ownership chain engages in any significant business activity other than those related or incidental to the acquisition ownership and operation of the property for federal_income_tax purposes taxpayer is treated as owning the property through the foregoing series of disregarded entities in year taxpayer’s subsidiaries commenced a project to renovate and convert a portion of the property into residential rental units and to rehabilitate the remaining portion to pay off the original debt to secure funding for the renovations and to obtain cash for distributions to the owners taxpayer and its subsidiaries borrowed new funds on date mm ml and subtenant were formed on date concurrently owner llc leased the property to ml as master-lessee and ml subleased the property to subtenant all ownership interests in both mm and subtenant are held by owner llc both mm and subtenant are domestic limited_liability companies and are disregarded plr-116913-09 entities for federal_income_tax purposes mm is the managing member of ml the other member is an unrelated third party the funds for the refinancing were acquired from three separate sources a senior refinance loan to owner llc an unsecured loan to owner llc and a dollar_figurea mezzanine loan mezz debt to borrower llc the total refinance indebtedness exceeded the taxpayer’s outstanding obligations on the original debt the unsecured loan is subordinated to both the senior refinance loan and the mezz debt the senior refinance loan is comprised of two notes each secured_by a mortgage on the property in the face_amount of the note as well as other security the mezz debt consisted of dollar_figureb in principal the lender retained the remaining dollar_figurec of the loan as reserves for the payment of interest and fees for various credit supports for the senior refinance loan in accordance with the mezz debt loan agreement dollar_figured of the mezz debt principal was deposited into a --------------------------------------------- account ultimately some of the proceeds of mezz debt were released for disbursement at closing while the funds held in the --------------------------------------------- account were not released until some months later the mezz debt is secured_by the following a perfected first priority security_interest in percent of the ownership interests in owner llc mm and subtenant and mm’s minority ownership_interest in ml ii five springing guaranties from various parties and iii a subordinated assignment of certain other income rights and claims associated with the property and the renovation and conversion project the loan agreements restrict the use of funds and the transfer and issuance of ownership interests in the pledged entities the springing guarantors guaranteed to pay for losses_incurred by the mezzanine lender if any of the entities whose ownership interests are pledged file for bankruptcy or a similar legal procedure before the lender can foreclose on the ownership interests assigned as collateral for the mezz debt in the event of a default on the mezz debt among other things the mezzanine lender can step into the shoes of the borrower pledgor on a pre-agreed basis taxpayer is negotiating to refinance the mezz debt current economic conditions have significantly and adversely affected the value of the property and taxpayer’s ability to secure financing taxpayer anticipates future refinancing will result in a discharge of some of the mezz debt law and analysis under sec_61 of the code gross_income includes income from the discharge_of_indebtedness see also sec_1_61-12 of the income_tax regulations sec_108 of the code however excludes discharge_of_indebtedness income from gross_income under certain circumstances the omnibus_budget_reconciliation_act_of_1993 plr-116913-09 amended sec_108 to provide that in certain instances the gross_income of a taxpayer does not include income from the discharge of qualified_real_property_business_indebtedness qrpbi sec_108 sec_108 sets forth the criteria for a debt to be qrpbi first the debt must have been incurred or assumed in connection with real_property used in a trade_or_business whether the in connection with requirement is satisfied is determined as of the time the debt was incurred or assumed second at the time the debt is forgiven it must be secured_by the real_property used_in_the_trade_or_business third the debt must have been incurred or assumed prior to or if incurred or assumed after the debt must be qualified_acquisition_indebtedness as defined in sec_108 qualified_acquisition_indebtedness is defined as indebtedness incurred or assumed to acquire construct reconstruct or substantially improve business real_property finally the taxpayer must elect to exclude the discharge_of_indebtedness income and reduce the basis of depreciable_property under sec_108 the amount excluded is limited to the difference between the principal_amount of the debt and the fair_market_value of the property at the time of discharge less the amount of any senior qualified_debt with respect to the ownership and management of the property taxpayer represents the following i that through its managing member taxpayer has been actively engaged in the acquisition of the property and in the renovation and conversion project on a continuous basis ii a management company controlled by pr1 provides the day- to-day management of the operation and maintenance of the property and iii taxpayer supervises the management activities the taxpayer further represents that the property is used in a trade_or_business based on taxpayer’s representations we conclude that the mezz debt meets the first requirement for qrpbi status-it was incurred in connection with real_property used in a trade_or_business we therefore consider whether the mezz debt is secured_by the real_property the second requirement the legislative_history of sec_108 describes the prevailing economic circumstances causing congress to enact sec_108 the committee understands that real_property has declined in value in some areas of the nation in some cases to such a degree that the property can no longer support the debt with which it is encumbered the committee believes that where an individual has discharge_of_indebtedness that results from a decline in value of business real_property securing that indebtedness it is appropriate to provide for deferral rather than current inclusion of the resulting income h_r rep no pincite plr-116913-09 the legislative_history as well as the statutory provision limiting relief to the amount by which the debt exceeds the value of the security indicate that congress intended for the exclusion to apply when debt secured_by real_property becomes undersecured due to a decline in the property’s value under these circumstances rather than requiring a taxpayer to report discharge_of_indebtedness income when the debt is modified the code allows a taxpayer to reduce the basis of depreciable_property and take smaller depreciation_deductions the taxpayer's circumstances in this case are those contemplated by congress the mezz debt is junior debt that has become undersecured due to declining property value and which the parties wish to renegotiate neither the statue nor the legislative_history contains any explanation of or definition for the term secured_by such real_property mortgages are the most common mechanism by which lenders take a secured interest in real_estate but the legislative_history of the omnibus_budget_reconciliation_act_of_1993 does not state that indebtedness is secured_by real_property only when that security is a mortgage the conference_report makes reference to mortgages in its explanation of how the new provision will work but the legislation does not use the term mortgage we must assume that congress had a reasonable understanding of the terms it employed to express its intention 94_f2d_510 1st cir the fact that congress used the more general term secured_by rather than limiting the sec_108 security_interest to mortgages is indicative of its intent to include a broader range of security interests in other areas of the code eg those governing reits the service has interpreted the term debt secured_by real_property so as to include debt secured indirectly by real_property where the lender can if necessary acquire the property to satisfy the obligation revproc_2003_65 2003_1_cb_1035 allows a reit to treat debt secured_by an interest in a partnership or disregarded_entity holding real_property as debt secured_by real_property see also revrul_80_280 1980_2_cb_207 loans secured_by other loans that were secured_by mortgages qualified as debt secured_by real_property and revrul_77_459 1977_2_cb_239 loan secured_by interest in an illinois land trust whose sole beneficiary assigned its interest in the land to simplify foreclosure treated as secured_by real_property economically the mezz debt is secured_by real_property as the only assets held by owner llc are the property and related personal_property upon default the creditor steps into the shoes of owner llc and thereby acquires control of the property the transaction was so structured to limit cost associated with the financing to prevent delays in foreclosure of the pledged real_property for the senior mortgage debt holder and to facilitate remarketing or securitization of the senior debt and related bonds any foreclosure on the mezz debt will produce a transfer of all of the equity_interest in the property leaving no minority interest the only difference between this structure and that of a mortgage or deed_of_trust is the method of foreclosure plr-116913-09 owner llc is a special purpose disregarded_entity holding the real_property for federal_income_tax purposes taxpayer is treated as owning the property through a series of disregarded entities the entity that incurred the mezz debt is itself a disregarded_entity thus for federal_income_tax purposes the taxpayer owns the real_property at issue and incurred the debt at issue it would be incongruent to give significance to the two disregarded llcs for purposes of determining whether the debt is secured_by the real_property and disregard them for all other purposes the taxpayer’s mezz debt is secured_by the property while the flush language of sec_108 indicates that the proceeds of a refinancing constitute qualified_acquisition_indebtedness only to the extent they do not exceed the amount of qualified_acquisition_indebtedness that is refinanced here a portion of the excess_proceeds are used for reconstruction a purpose that qualifies independently while not all of the excess_proceeds qualify as explained below the flush language of sec_108 supports the notion that debt can qualify under sec_108 in part the fact that a portion of a single debt does not meet the requirements of the statute does not disqualify the entire debt not all of the indebtedness was incurred to acquire construct reconstruct or substantially improve the property for example some of the indebtedness was incurred for the purpose of making distributions to owners such indebtedness is not qualified_acquisition_indebtedness within the meaning of sec_108 no opinion is expressed regarding the allocation of the mezz debt between qualified_acquisition_indebtedness and nonqualifying indebtedness in the absence of guidance on this issue taxpayer must use a reasonable allocation method sec_108 places a limit on the amount eligible for exclusion and no determination is made with respect to what amount of the mezz debt may be eligible for exclusion in the year any portion of it is discharged relief for qrpbi is limited to the excess of the outstanding principal_amount of such debt immediately before the discharge over the fair_market_value immediately before the discharge of the business real_property which is security for the debt less the amount of senior qualified_debt sec_108 sec_1_108-6 no opinion is expressed about the federal_income_tax treatment of the transaction under other provisions of the code and the regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by this ruling further except as specifically set forth in this ruling no opinion is expressed about the application to the proposed transaction of any other provision of sec_108 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 plr-116913-09 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 temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling will be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in the letter_ruling see section dollar_figure of revproc_2009_1 2009_1_irb_1 however when the criteria in section dollar_figure of revproc_2009_1 2009_1_irb_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely john m aramburu senior counsel branch associate chief_counsel income_tax accounting cc


o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date number info release date conex-143712-09 uil number ---------------------------- ---------------------------------- --------------------------- dear ------------------ i am responding to your letter to senator barbara a mikulski about the department of defense housing assistance program hap you asked if payments made under the hap as expanded by the american_recovery_and_reinvestment_act_of_2009 arra are taxable senator mikulski asked us to respond directly to you the department of defense hap provides payments to certain employees and members of the armed_forces to offset the adverse effects on housing values that result from military base realignment or closure the payments are authorized under the provisions of title united_states_code section individuals can take an income_tax exclusion for payments made under the hap program as in effect on date sec_132 of the internal_revenue_code the arra expanded the statute that authorizes the department of defense to make hap payments sec_1001 of the arra under the arra amendments the department of defense can make hap payments to additional categories of eligible individuals including those adversely affected by the round of defense base closures and realignments certain wounded members of the armed_forces and their spouses and certain members of the armed_forces permanently reassigned during the mortgage crisis unless specifically excluded from income under a provision of the code gross_income for federal_income_tax purposes includes all income from whatever source derived code sec_61 the exclusion from income applies to hap payments that were in effect on date it does not apply to the additional categories of hap payments that the congress enacted as part of arra when the congress expanded the categories of payments that the department of defense can make under its hap it did not make a corresponding amendment to code sec_132 to expand the categories of hap payments that individuals can exclude from income because no conex-143712-09 other code provision excludes hap payments from income individuals receiving those payments must include them in income to the extent they exceed the fair_market_value of the property relinquished in exchange for the payments moreover because individuals receive hap payments with the performance of services these amounts are includible in income as compensation_for services while we are sympathetic to the plight of service men and women who receive these benefits to exclude them from taxation would require legislative action by the congress we note that the house of representatives recently approved legislation addressing this issue and the senate is considering it under s this legislation would amend code sec_132 so that individuals could exclude from gross_income hap benefits as expanded by arra i hope this information is helpful if we may be of further assistance please contact ----- ------------------------------------------------------------------ of my staff at -------------------- sincerely nancy marks division counsel associate chief_counsel tax exempt government entities cc the honorable barbara a mikulski attention ---------------------------


t c summary opinion united_states tax_court raymond j pavelko and ilene h pavelko petitioners v commissioner of internal revenue respondent docket no 13642-01s filed date raymond j pavelko pro_se blaine c holiday for respondent dinan special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined deficiencies in petitioners’ federal income taxes of dollar_figure dollar_figure dollar_figure and dollar_figure and accuracy- related penalties of dollar_figure dollar_figure dollar_figure and dollar_figure for the taxable years and the sole issue for decision is whether petitioner husband petitioner engaged in certain activities for profit during each of the years in issue respondent concedes the application of the accuracy-related_penalties in this case some of the facts have been stipulated and are so found the stipulations of fact and the attached exhibits are incorporated herein by this reference petitioners resided in west salem wisconsin on the date the petition was filed in this case petitioners filed a joint federal_income_tax return for each of the years in issue with these returns petitioners filed schedules c profit or loss from business for several activities in petitioners filed a schedule c which named petitioner as the proprietor and listed rental as the principal business this schedule reflected the following loss 1petitioners also argue in their petition that petitioner was able to engage in a trade_or_business and that he was not precluded from doing so by any medical disability petitioner’s physical or mental ability to engage in a trade_or_business is not being questioned in this case gross_receipts or sales dollar_figure-0- cost_of_goods_sold -0- gross_profit -0- car and truck expense big_number mortgage interest big_number net profit loss big_number in each of the years in issue petitioners filed a schedule c which named petitioner as the proprietor and listed mental health services or mental health and other services as the principal business these schedules reflected the following losses gross_receipts or sales dollar_figure dollar_figure-0- dollar_figure dollar_figure-0- cost_of_goods_sold -0- -0- -0- gross_profit -0- big_number -0- advertising -0- car and truck expense -0- big_number big_number -0- depreciation big_number big_number big_number insurance -0- big_number -0- legal and professional -0- big_number big_number office -0- -0- big_number -0- rental -0- -0- big_number -0- repairs and maintenance -0- -0- big_number -0- supplies big_number big_number big_number taxes and licenses -0- -0- -0- travel -0- -0- -0- utilities -0- -0- -0- educational expense big_number -0- big_number -0- net profit loss big_number big_number big_number big_number finally in petitioners filed a schedule c which named petitioner as the proprietor and listed developmental research as the principal business this schedule reflected the following loss gross_receipts or sales dollar_figure cost_of_goods_sold -0- gross_profit advertising car and truck expense big_number insurance big_number supplies big_number taxes and licenses utilitie sec_502 professional dues business use of home net profit loss big_number in the notice_of_deficiency respondent determined that the activities listed on each of the schedules c filed in and and the developmental research schedule c in did not constitute bona_fide business ventures entered into for profit respondent accordingly disallowed the deductions claimed for the expenses on each of these schedules and recharacterized the gross_profits shown thereon as other income under sec_162 a taxpayer may deduct the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business a taxpayer is engaged in a trade_or_business if the taxpayer is involved in the activity with continuity and regularity and with the primary purpose of making a profit 480_us_23 2the record is not clear why this determination was not made with respect to the mental health and other services schedule c if an activity of a taxpayer is not conducted for profit sec_183 disallows all deductions related thereto except as provided by sec_183 as relevant here an activity is not conducted for profit if it is one with respect to which deductions are not allowable under sec_162 sec_183 if an activity of a taxpayer is not conducted for profit sec_183 allows the taxpayer to deduct expenses which otherwise would have been allowable without regard to profit_motive and certain additional expenses to the extent of the gross_income derived from the activity less those deductions of the first type the test to determine whether a taxpayer conducted an activity for profit is whether he or she engaged in the activity with an actual and honest objective of earning a profit 94_tc_41 78_tc_642 affd without opinion 702_f2d_1205 d c cir sec_1_183-2 income_tax regs although a reasonable expectation of profit is not required the taxpayer’s profit objective must be bona_fide as determined from a consideration of all the facts and circumstances keanini v commissioner supra dreicer v commissioner supra pincite 72_tc_411 affd without published opinion 647_f2d_170 9th cir 45_tc_261 affd 379_f2d_252 2d cir more weight is given to objective facts than to the taxpayer’s statement of his or her intent 72_tc_659 sec_1_183-2 income_tax regs the regulations under sec_183 provide nine nonexclusive factors to be used in determining whether a taxpayer is conducting an activity with the intent to make a profit sec_1_183-2 income_tax regs the factors are the manner in which the taxpayer carried on the activity the expertise of the taxpayer or his or her advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that the assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer’s history of income or losses with respect to the activity the amount of occasional profits if any which are earned the financial status of the taxpayer and elements of personal pleasure or recreation id no single factor controls other factors may be considered and the mere fact that the number of factors indicating the lack of a profit objective exceeds the number indicating the presence of a profit objective or vice versa is not conclusive id we first address the rental_activity petitioner testified that this activity involved the rental of real_estate to petitioner wife’s father who lived on the land and farmed it petitioner further testified that his father-in-law did not pay rent instead paying taxes in exchange for the right to occupy the land petitioner stated that the car and truck expenses which were listed on the schedule c for this activity were put there in error and that the expenses should have been listed on the mental health services schedule c instead petitioners did not explain the only other expense on this schedule c the mortgage expense nor did they explain how this activity could have been operated for a profit when the lessee was not required to pay rent petitioners produced no evidence supporting a finding of a profit objective in this activity with respect to the above-mentioned factors we therefore find that petitioners have not met their burden of proving respondent’s determinations to be in error see rule a and we sustain respondent’s determination with respect to the rental_activity we now turn to the remaining two activities both of which are related to the mental health field petitioners’ testimony and arguments concerning these activities can be summarized as follows during each of the years in issue petitioner was involved in an activity in which he sold videotapes related to sec_7491 does not shift the burden_of_proof to respondent in this case because petitioners have provided no credible_evidence supporting a profit objective with respect to the rental_activity sec_7491 the mental health field the tapes were minutes in length and were about living in the community with self-respect petitioner sold these both by mail and by going around to different mental health centers and different shows these videotapes were available for dollar_figure plus tax or by mail for dollar_figure total by petitioner realized that selling the videotapes was not profitable so he began a new activity involved in developmental research in the mental health field this activity involved research into the question what is the immediate effect of using spiritual sayings and thoughts with persons who have experienced a recent mental health crisis petitioner hopes to use the results of this research to open an office and offer counseling services the following is the application of the sec_183 factors to petitioner’s mental health services and developmental research activities manner in which the taxpayer carries on the activity a profit objective may be indicated where the taxpayer operates the activity in a businesslike manner and keeps complete and accurate books_and_records sec_1_183-2 income_tax regs a change_of operating methods in a manner consistent with an intent to improve profitability may also indicate a profit objective id there is no suggestion that petitioner kept books_and_records of any type or that petitioner otherwise operated the activities in a businesslike manner petitioner did testify that he abandoned the videotape sales activity after or more years without success in that activity however for at least full years--while petitioner had nearly zero sales or other income from the activities while incurring significant expenses as discussed in more detail below--petitioner did not make any changes in his operation of this activity this factor favors respondent expertise of the taxpayer or advisers a profit objective may be indicated where the taxpayer carries on an activity in accordance with practices learned from extensive study of accepted business and economic practices or consultation with experts involved therein sec_1_183-2 income_tax regs there is no suggestion that petitioner studied accepted business practices or consulted with experts or that petitioner was already an expert in the field of mental health services or mental health research this factor favors respondent time and effort expended by the taxpayer a profit objective may be indicated where the taxpayer uses much of his personal time and effort to carry on the activity sec_1_183-2 income_tax regs petitioner did not state the exact number of hours he dedicated to these activities however we nevertheless are convinced that petitioner spent a significant amount of time in pursuit of the activities this factor favors petitioners expectation that assets may appreciate in value despite a lack of profit from current operations a profit objective may be indicated where a taxpayer intends to earn an overall profit with income earned from operations together with the appreciation in the value of assets used in the activity sec_1_183-2 income_tax regs this factor is not applicable to this case taxpayer’s success in other activities a profit objective may be indicated where the taxpayer has in the past undertaken activities and made them profitable despite initial unprofitability sec_1_183-2 income_tax regs because there is no indication that petitioner was engaged in prior similar activities or that he made other activities profitable this factor also is not applicable to this case history of income losses and amount of occasional profits if any a profit objective is strongly indicated where the taxpayer has experienced a series of profitable years sec_1 b income_tax regs a series of losses_incurred during the startup stage of an activity does not necessarily indicate the lack of a profit objective but it may so indicate if the losses continue beyond the customary startup_period and are not otherwise explainable as due to customary business risks id even before deducting expenses petitioner derived no significant income from either of the mental health-related activities petitioner reported gross_receipts from videotape sales of dollar_figure in for a gross_profit of dollar_figure after cost_of_goods_sold of dollar_figure however it is unclear how petitioner could have made this profit he testified that he sold videotapes but he did not explain whether he made these tapes or purchased them for resale he also testified that they were available for dollar_figure retail or by mail order for dollar_figure if petitioner purchased and resold these tapes it is unclear how his cost_of_goods_sold was dollar_figure which would imply only one tape resold at dollar_figure if petitioner was a sales agent for the manufacturer it is unclear how his gross_receipts were dollar_figure with individual sales of dollar_figure or dollar_figure petitioner later testified that the videotapes were made available for sale in a catalog in which they sold for dollar_figure each and for which he received payment of dollar_figure each this testimony likewise does not explain petitioner’s gross_receipts and cost_of_goods_sold petitioner also reported gross_receipts of dollar_figure in however petitioner testified that he was uncertain of the source of this income and that he had not experienced a significant increase in his sales of videotapes in finally petitioner reported gross_receipts of dollar_figure in petitioner testified that this amount was received as payment for his participation in a research study an experience which he believed would in turn help him in conducting his own research in short we find that petitioner had a de_minimis amount of income in both of the activities during the years in issue we find that petitioner’s claimed expenditures in these activities over the course of years totaling over dollar_figure objectively indicates that petitioner did not expect a profit or engage in the activities with an intent to profit these factors strongly favor respondent financial status of the taxpayer a profit objective may be indicated where the taxpayer does not have substantial income from sources other than the activity sec_1_183-2 income_tax regs during the years in issue petitioner was employed on a part-time basis at a halfway house for psychiatric patients petitioner wife was employed by a school district petitioners received combined wage income_interest income and dividends totaling dollar_figure dollar_figure dollar_figure and dollar_figure in and respectively thus petitioners had modest but reliable sources of income during the years in issue this factor favors respondent elements of personal pleasure or recreation a lack of profit objective may be indicated where there are personal motives for carrying on the activity especially where the motive is personal pleasure or recreation sec_1 b income_tax regs profit need not be the only objective however and personal motives may coexist with an actual and honest intent to derive a profit id although petitioner was personally interested in these activities we do not find that personal pleasure or recreation was a primary motive in carrying out these activities this factor favors petitioners conclusion we are convinced that petitioner engaged in certain activities in the mental health field that he held an interest in and dedication to them and that he devoted time to these endeavors however based on the objective facts in this case as discussed above in connection with the individual factors we must conclude that petitioner did not have an actual and honest objective of earning a profit in these activities sec_1 a income_tax regs we therefore sustain respondent’s determination with respect to the mental health services activity and the developmental research activity reviewed and adopted as the report of the small_tax_case division to reflect the foregoing decision will be entered for respondent with respect to the deficiencies and for petitioners with respect to the penalties


internal_revenue_service number release date index number 45d -------------------------------------------- --------------------------------------------------- --------------------------- -------------------------------------- legend 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 b05 plr-135919-08 date december taxpayer ----------------------------------------------------------------------------------- ------------------------------------------------------------------ ------------------------ state a city b -------- ------------------------- address c ------------------------------------------------------- area d -------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ dear ---------------- this is in response to your request for a ruling dated date submitted on behalf of taxpayer the ruling concerns the application of the new_markets_tax_credit under sec_45d of the internal_revenue_code to the transaction described below facts taxpayer was incorporated as a state a nonprofit corporation in ------- taxpayer provides health care services to residents of city b and the surrounding community the mission of taxpayer is to provide comprehensive primary health care services with plr-135919-08 excellence and dignity to our community taxpayer carries out this mission by providing a spectrum of health care services including pediatric adult medicine obstetrical and gynecological pharmacy laboratory radiology immunization health education social dental school-based behavioral case management translation and other preventative and primary care services the services are offered ---- days a week at -------- service delivery sites in city b in ------- taxpayer provided services to --------- patients those patients are primarily under percent of the federal poverty guidelines for income levels and many of them are working poor with no health insurance and suffering chronic illnesses such as diabetes and heart disease the income of all taxpayer’s patients are verified upon registration by taxpayer’s staff adjusted for family size and updated annually the income is documented in taxpayer’s practice management system in ------- ------- ----------of the ----------total patients were at an income level of ------------or less eighty percent of the median family income for area d is ----------- taxpayer receives an annual health center program grant from the bureau of primary health care bphc at the health resources and services administration hrsa of the u s department of health and human services the grant supports taxpayer’s provision of primary medical_care oral health care behavioral health care and ancillary health services to persons living in medically underserved areas the grant is administered under u s c 254b it requires taxpayer to report into a uniform data system uds regarding among other items the sources of its income the data in a uds report from a health center are audited by hrsa taxpayer also uses that data to inform its financial statements which are audited annually by an independent auditing firm taxpayer also receives grants from state a as well as foundation and private grants for specific medical conditions or procedures taxpayer collects fees for services from patients who pay per a discounted fee schedule if the patient lacks health insurance taxpayer also collects the allowable amounts from patients’ insurance private or public and receives the annual health center program grant from bphc as stated above which covers those amounts uncompensated due to lack of insurance coverage taxpayer’s total gross_income for--------was dollar_figure--------------- this number includes dollar_figure---------- --- from grants and other revenues plus dollar_figure--------------from patient fees and insurance payments while taxpayer serves over ----------patients annually in its----------sites this only represents a small portion of the residents of the area in need of health center services accordingly taxpayer determined that it must build a new clinic building to expand services to meet the community’s health care needs taxpayer purchased a tract of land at address c and is ready to construct a new clinic building at that location taxpayer originally sought to qualify for a construction loan from a qualified community plr-135919-08 development entity as defined in sec_45d for the clinic building assuming that address c is located in a geographic low-income_community under sec_45d however address c is not in a census_tract that qualifies under sec_45d address c is located directly across the street from a qualifying census_tract under sec_45d a map of the area shows that---- of the census tracts surrounding address c’s census_tract including --contiguous census tracts qualify under sec_45d taxpayer serves patients from all the surrounding census tracts taxpayer believes that due to the health care services it provides to low-income persons it can qualify its health care business in the new clinic building as a qualified_active_low-income_community_business qalicb for low-income targeted populations under sec_45d and sec_3 of notice_2006_60 2006_2_cb_82 taxpayer requests a ruling that the term derived from in sec_3 a i of notice_2006_60 includes gross_income derived from payments made directly by patients to taxpayer and amounts and contributions provided to taxpayer on behalf of patients in the form of federal and state grants and in-kind contributions such as reduced utility costs building rent labor costs drug costs and medical supply costs gross_income derived from taxpayer’s patients includes but is not limited to fees from the patients payments from their public or private insurance and public or private funding collected to cover the costs of health care services that remain uncompensated after patient and insurance payments are received specifically the portion of a grant awarded under u s c 254b that is used to cover the costs of health care services to taxpayer’s patients should be considered gross_income derived from services provided to patients law and analysis sec_45d provides a new_markets_tax_credit on certain credit allowance dates described in sec_45d with respect to a qualified_equity_investment in a qualified_community_development_entity cde described in sec_45d sec_45d provides that an equity_investment in a cde is a qualified_equity_investment if among other requirements a the investment is acquired by the taxpayer at its original issue directly or through an underwriter solely in exchange for cash b substantially_all of the cash is used by the cde to make qualified_low-income_community investments and c the investment is designated for purposes of sec_45d by the cde sec_45d provides that an entity is a cde only if among other requirements the entity is certified by the secretary as a cde sec_45d provides that the term qualified_low-income_community_investment qlici means a any capital or equity_investment in or loan to any qalicb as defined in sec_45d b the purchase from another cde of any loan made by the entity that is a qlici c financial counseling and other services specified plr-135919-08 in regulations prescribed by the secretary to businesses located in and residents of low-income communities and d any equity_investment or loan to any cde under sec_45d a qalicb is any corporation including a non-profit corporation or partnership if among other requirements i at least percent of the total gross_income of the entity is derived from the active_conduct of a qualified_business with any low-income_community ii a substantial portion of the use of the tangible_property of the entity whether owned or leased is within any low-income_community and iii a substantial portion of the services performed for the entity by its employees are performed in any low-income_community under sec_45d with certain exceptions a qualified_business is any trade_or_business section sec_45d defines the term low-income_community as any population census_tract if a the poverty rate for such tract is at least percent or b i in the case of a tract not located within a metropolitan area the median family income for such tract does not exceed percent of statewide median family income or b ii in the case of a tract located within a metropolitan area the median family income for such tract does not exceed percent of the greater of statewide median family income or the metropolitan area median family income sec_221 of the american_jobs_creation_act_of_2004 p l amended sec_45d to provide that the secretary shall prescribe regulations under which one or more targeted populations within the meaning of sec_103 of the riegle community development and regulatory improvement act of u s c may be treated as low-income communities the regulations shall include procedures for determining which entities are qalicbs with respect to those populations the term targeted populations is defined in u s c and c f_r as individuals or an identifiable group of individuals including an indian_tribe who a are low-income persons or b otherwise lack adequate access to loans or equity investments the term low-income is defined in u s c and c f_r to mean having an income adjusted for family size of not more than a for metropolitan areas percent of the area median family income and b for non-metropolitan areas the greater of i percent of the area median family income or ii percent of the statewide nonmetropolitan_area median family income section dollar_figure of notice_2006_60 provides that for purposes of sec_45d targeted populations that will be treated as a low-income_community are individuals or an identifiable group of individuals including an indian_tribe who are low-income persons as defined in section dollar_figure of notice_2006_60 or who are individuals who otherwise lack adequate access to loans or equity investments as defined in section dollar_figure of notice_2006_60 plr-135919-08 sec_3 of notice_2006_60 provides that for purposes of sec_45d an individual shall be considered to be low-income if the individual's family income adjusted for family size is not more than a for metropolitan areas percent of the area median family income and b for non-metropolitan areas the greater of i percent of the area median family income or ii percent of the statewide nonmetropolitan_area median family income sec_3 a i of notice_2006_60 provides that a qalicb for low-income targeted populations with respect to any taxable_year is a corporation including a nonprofit corporation or a partnership engaged in the active_conduct of a qualified_business as defined in sec_1_45d-1 of the income_tax regulations if at least percent of the entity's total gross_income for any taxable_year is derived from sales rentals services or other transactions with individuals who are low-income persons for purposes of sec_45d sec_4 of notice_2006_60 provides that taxpayers may rely on notice_2006_60 for designations made by the secretary after date therefore taxpayers may apply section dollar_figure of notice_2006_60 for all qlicis made on or after date conclusion based on the information submitted and representations made we conclude that the term derived from in sec_3 a i of notice_2006_60 includes gross_income derived from payments made directly by low-income persons to taxpayer and amounts and contributions of property or services provided to taxpayer on behalf of low-income persons thus taxpayer’s gross_income under sec_3 a i that is derived from sales rentals services or other transactions with individuals who are low-income persons for purposes of sec_45d include federal state or local grants such as the bphc grant under u s c 254b charitable donations or in-kind contributions as well as collected fees insurance re-imbursements and other sources of income as long as these payments and contributions are provided on behalf of low-income persons on an individual basis or as a class of individuals taxpayer’s total gross_income in ------- was dollar_figure--------------- this number includes dollar_figure--------------from grants and other revenues such as interest emergency room on call fees case management fees and fundraising plus dollar_figure--------------from patient fees and insurance payments nearly-----percent of taxpayer’s gross_income is derived from sources other than direct payment from patients through collected fees or public and private insurance plr-135919-08 accordingly for purposes of sec_3 a i of notice_2006_60 we rule that taxpayer may treat the federal state or local grants such as the bphc grant under u s c 254b charitable donations or in-kind contributions as well as collected fees insurance re-imbursements and other sources as gross_income derived from sales rentals services or other transactions with taxpayer’s patients as long as these payments and contributions are provided on behalf of patients on an individual basis or as a class of individuals no opinion is expressed or implied regarding the application of any other provisions of the code or regulations specifically we express no opinion on whether taxpayer’s patients qualify as low-income persons for purposes of sec_45d this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely paul f handleman paul f handleman chief branch office of the associate chief_counsel passthroughs special industries-


internal_revenue_service number release date index number ------------------------------------------------------------ ------------------ ------------------------------- ------------------------------- ---------------------------------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc tege eb hw plr-154552-06 date date legend taxpayer ------------------------------- ----------------------------------------- plan ----------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- trust ---------------------------------------------------------------------------------------------------------- ----------------------- dear -------------- this is in reply to your letter of date and subsequent correspondence in which you request various rulings on behalf of the taxpayer with respect to its plan and trust taxpayer has established plan to provide medical benefits for retired firefighters and their spouses and dependents plan was established pursuant to a memorandum of understanding between taxpayer and an entity that represents taxpayer firefighters a participant in plan qualifies for benefits under plan only if he or she has retired under the state public employee retirement_system participants who qualify for plan benefits are reimbursed quarterly for the payment of qualified expenses qualified expenses include the premium payments required for health coverage on an individual or group plr-154552-06 basis premiums for medicare part b and part d premiums for medicare supplement plans and any other expenses described under sec_213 of the internal_revenue_code the code plan is administered by taxpayer plan can be amended or terminated by taxpayer’s council although there is an advisory committee of two taxpayer- appointed members and two firefighter-appointed members its role is only advisory taxpayer has the responsibility for making all decisions with respect to the plan you represent that trust will be used solely to pre-fund retiree health insurance and for the payment of medical_expenses as defined in sec_213 of the code on behalf of eligible retirees their spouses and dependents and nondependent domestic partners you further represent that to the extent coverage is provided to nondependent domestic partners the value of such coverage under the plan for nondependent domestic partners will be included in gross_income as such benefits are earned and not when received the value of such coverage will be included in a participant’s gross_income for a taxable_year only if he or she is expected to have a nondependent domestic partner upon attaining eligibility for benefits under the plan such participants will be identified by reasonable actions of the taxpayer and the amounts to be included in the employees’ gross_income will be determined under an actuarial calculation that takes into account reasonable actuarial assumptions eligible retirees will not receive any amounts in cash or as any other taxable or nontaxable benefits pursuant to plan all assets must be held in trust to carry out the provisions of plan taxpayer has adopted a_trust agreement establishing trust trust holds all contributions made under the terms of plan together with any income gains or profits and taking account losses all contributions to plan are made by taxpayer no contributions are made by employees contributions are not allocated to separate participant accounts but are held in trust as pooled funds which are available to pay the health benefits of all eligible retirees no part of trust may be diverted to purposes other than the exclusive benefit of the participants and their beneficiaries taxpayer has exclusive authority and discretion to manage and control the assets of plan and direct the trustee on investments the trustee for trust is the chief financial officer of taxpayer taxpayer may remove and replace the trustee at any time the trust agreement will continue as long as plan is in full force and effect however plan can be terminated by the taxpayer council in accordance with a memorandum of understanding between taxpayer and firefighters upon termination of plan after all assets held in trust have been distributed pursuant to plan all benefits owed under plan have been paid and all plan and trust expenses have been paid if there are any assets remaining in trust the assets will revert to taxpayer or be transferred to another entity the income of which is excluded from gross_income under sec_115 of the code sec_115 of the code provides that gross_income does not include income derived from any public_utility or the exercise of any essential government function and accruing to a state or any political_subdivision thereof in revrul_77_261 1977_2_cb_45 income from an investment fund established under a written declaration of trust by a state for the temporary investment of cash balances of the state and its participating political subdivisions was excludable from plr-154552-06 gross_income for federal_income_tax purposes under sec_115 the ruling indicated that the statutory exclusion was intended to extend not to the income of a state or municipality resulting from its own participation in activities but rather to the income of a corporation or other entity engaged in the operation of a public_utilities or the performance of some governmental function that accrued to either a state or municipality the ruling points out that it may be assumed that congress did not desire in any way to restrict a state’s participation in enterprises that might be useful in carrying out projects that are desirable from the standpoint of a state government and which are within the ambit of a sovereign to properly conduct in addition pursuant to sec_6012 and the underlying regulations the investment fund being classified as a corporation that is subject_to taxation under subtitle a of the code was required to file a federal_income_tax return each year in revrul_90_74 1990_2_cb_34 the service determined that the income of an organization formed funded and operated by political subdivisions to pool various risks casualty public liability workers’ compensation and employees’ health is excludable from gross_income under sec_115 of the code in revrul_90_74 private interests neither materially participate in the organization nor benefit more than incidentally from the organization trust provides health benefits to retired employees of taxpayer a political_subdivision of the state providing health benefits to current and former employees constitutes the performance of an essential government function based upon revrul_90_74 and revrul_77_261 trust performs an essential_governmental_function within the meaning of sec_115 of the code the income of trust accrues to taxpayer taxpayer is the sole participating employer in plan no private interests participate in or benefit from the operation of trust any distribution of remaining funds in trust to participating retirees upon the dissolution of trust satisfies an obligation taxpayer has assumed with respect to providing health benefits to its employees the benefit to the participating employees is incidental to the public benefit see revrul_90_74 sec_6012 and sec_1_6012-2 provide in general that every corporation as defined in sec_7701 subject_to taxation under subtitle a is required to file an income_tax return regardless of whether it has taxable_income or regardless of its gross_income see revrul_77_261 sec_6012 provides that every trust having for the taxable_year any taxable_income or having gross_income of dollar_figure or more regardless of the amount of taxable_income must file an annual income_tax return sec_61 of the code and sec_1_61-21 of the income_tax regulations provide that except as otherwise provided in subtitle a of the code gross_income includes compensation_for services including fees commissions fringe_benefits and similar items sec_1_61-21 of the regulations provides that a fringe benefit provided in plr-154552-06 connection with the performance of services shall be considered to have been provided as compensation_for such services sec_1_61-21 of the regulations provides that in general a taxable fringe benefit is included in the income of the person performing the services in connection with which the fringe benefit is furnished thus a fringe benefit may be taxable to a person even though that person did not actually receive the fringe benefit if a fringe benefit is furnished to someone other than the service provider such benefit is considered as furnished to the service provider and use by the other person is considered use by the service provider sec_1_61-21 of the regulations provides that an employee must include in gross_income the fair_market_value of the fringe benefit in general fair_market_value under the principles set forth in sec_1_61-21 of the regulations is determined on the basis of the amount that an individual would have to pay for the particular fringe benefit in an arm's-length_transaction in the case of group medical coverage the amount includible in the individual's gross_income is the fair_market_value of the group medical coverage sec_106 of the code provides that gross_income of an employee does not include employer-provided coverage under an accident_or_health_plan sec_1_106-1 of the regulations provides that the gross_income of an employee does not include contributions which the employee's employer makes to an accident_or_health_plan for compensation through insurance or otherwise to the employee for personal injuries or sickness incurred by the employee or the employee's spouse or dependents as defined in sec_152 the employer may contribute to an accident_or_health_plan either by paying the premium on a policy of accident_or_health_insurance covering one or more of the employees or by contributing to a separate trust or fund which provides accident or health benefits directly or through insurance to one or more of the employees however if the insurance_policy trust or fund provides other_benefits in addition to accident or health sec_106 applies only to the portion of the contributions allocable to accident or health benefits coverage provided under an accident_and_health_plan to former employees and their spouses and dependents is excludable from gross_income under sec_106 see revrul_62_199 1962_2_cb_38 revrul_82_196 1982_2_cb_53 sec_104 provides that except in the case of amounts attributable to and not in excess of deductions allowed under sec_213 relating to medical_expenses for any prior taxable_year gross_income does not include amounts received through accident_or_health_insurance or through an arrangement having the effect of accident_or_health_insurance for personal injuries or sickness other than amounts received by an employee to the extent such amounts a are attributable to contributions by the employer which were not included in the gross_income of the employee or b are paid_by the employer sec_105 provides that except as otherwise provided in sec_105 amounts received plr-154552-06 by an employee through accident_or_health_insurance for personal injuries or sickness shall be included in gross_income to the extent such amounts are attributable to contributions by the employer which were not includible in the gross_income of the employee or are paid_by the employer sec_105 provides that except in the case of amounts attributable to and not in excess of deductions allowed under sec_213 relating to medical_expenses for any prior taxable_year gross_income does not include amounts referred to in subsection a if such amounts are paid directly or indirectly to the taxpayer to reimburse the taxpayer for expenses_incurred by him for the medical_care as defined in sec_213 of the taxpayer his spouse and his dependents as defined in sec_152 of the code employer-provided coverage under an accident_or_health_plan for personal injuries or sickness incurred by individuals other than the employee his or her spouse or his or her dependents as defined in sec_152 is not excludable from the employee's gross_income under sec_106 in addition reimbursements received by the employee through an employer-provided accident_and_health_plan are not excludable from the employee's gross_income under sec_105 unless the reimbursements are for medical_expenses incurred by the employee his or her spouse or his or her dependents as defined in sec_152 however reimbursements that are not excludable under sec_105 may be excludable under sec_104 if they are attributable to employer contributions that were included in the employee's income based on the information submitted and the representations made we conclude as follows the income of trust is derived from the exercise of an essential_governmental_function and will accrue to a state or a political_subdivision thereof for purposes of sec_115 accordingly trust’s income is excludable from gross_income under sec_115 of the code if trust is classified as a_trust for federal_income_tax purposes no annual income_tax return is required to be filed by trust pursuant to sec_6012 since any income realized by trust is excluded from gross_income under sec_115 however if trust is a corporation as defined in sec_7701 it will be required to file an income_tax return pursuant to sec_6012 employer contributions paid to the plan and payments made from the plan which are used exclusively to provide for the medical_care as defined in sec_213 of retired employees their spouses and dependents as defined in sec_152 of the code are excludable from gross_income under sec_106 or sec_105 of the code with respect to domestic partners who do not qualify as sec_152 dependents neither the employee nor the domestic partner will include in income any amount received as payment or reimbursement under the plan to the extent the coverage was paid for with after-tax employee contributions or the fair_market_value of the coverage was included in the gross_income of the employee pursuant to the provisions of sec_104 of the code plr-154552-06 the medical coverage provided to nondependent domestic partners will not otherwise adversely affect the exclusions from gross_income under sec_106 or sec_105 of amounts contributed by taxpayer or paid_by plan for the medical_care of employees their spouses and dependents as defined in sec_152 of the code this ruling is contingent upon taxpayer amending the plan so that it is consistent with proposed amendments as set forth in the taxpayer’s letter dated date because this ruling is dependent upon the amendment of the plan document as represented by taxpayer the ruling applies only for periods on and after the date on which the amendments become effective no opinion is expressed concerning the federal tax consequences of the plan or trust under any other provision of the code other than those specifically stated herein in particular sec_3 of revproc_2007_3 2007_1_irb_108 provides that the service will not issue a ruling concerning whether a self-insured_medical_reimbursement_plan satisfies the requirements of sec_105 for a plan_year accordingly no opinion is expressed concerning whether the plan satisfies the nondiscrimination requirements of sec_105 of the code and sec_1_105-11 of the regulations 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 harry beker chief health and welfare branch office of division counsel associate chief_counsel tax exempt government entities sincerely


internal_revenue_service index nos number release date cc dom it a plr-121480-98 date ein attn dear this is in reference to a form_1128 application to adopt change or retain a tax_year submitted on behalf of the above- named taxpayer requesting permission to change its accounting_period for federal_income_tax purposes from a taxable_year ending august to a taxable_year ending june effective for the tax_year beginning date the taxpayer has requested that the form_1128 be considered timely filed under the authority contained in sec_301_9100-3 of the procedure and administration regulations the taxpayer's form_1128 requesting a change in accounting_period to a tax_year ending june was due on or before date information furnished indicates that the taxpayer intended to file the form on a timely basis but due to an error or misunderstanding the form was not timely filed however the form was filed within days of the due_date the late filing was not due to any lack of due diligence or prompt action on the part of the taxpayer sec_1_442-1 of the income_tax regulations provides that in order to secure the commissioner's consent to a change in accounting_period the taxpayer must file an application on form_1128 with the commissioner on or before a the 15th day of the second calendar month following the close of the short_period or b if revproc_92_13 c b is applicable as in the instant case on or before the due_date including extensions of the return of tax required for the short_period sec_301_9100-3 of the regulations provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions such as the instant case must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government based on the facts and information submitted and the representations made it is held that the taxpayer has acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government accordingly the requirements of the regulations for the granting of relief have been satisfied in this case and taxpayer’s late filed form_1128 requesting permission to change to a tax_year ending june effective for the tax_year beginning date is considered timely filed the ruling contained in this letter is based upon facts and representations submitted by the taxpayer and is limited to the filing of form_1128 except as specifically addressed herein no opinion is expressed regarding the tax treatment of the subject transaction under the provisions of any other sections of the code or regulations that may be applicable thereto this office has not verified any of the material submitted in support of the requested ruling verification of factual information representations and other data is within the examination jurisdiction of the taxpayer’s local district_director a copy of this letter_ruling and taxpayer’s form_1128 are being forwarded to the service_center where the taxpayer files its federal_income_tax returns with instructions that the form_1128 be considered timely filed and processed in accordance with established procedures under revproc_92_13 in accordance with the provisions of a power_of_attorney currently on file with this office the original is being sent to the taxpayer’s designated representative and a copy is being furnished to the taxpayer this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent sincerely yours assistant chief_counsel income_tax and accounting s irwin a leib enclosures copy of this letter copy for sec_6110 purposes by irwin a leib deputy assistant chief_counsel