internal_revenue_service national_office technical_advice_memorandum date third party communication none date of communication not applicable tam-105543-06 number release date index uil no case-mis no --------------------- -------------------- ---------------------------------- ------------------------------ ------------------------------------- taxpayer's name taxpayer's address taxpayer's identification no year s involved date of conference ----------------------------- --------------------------------------- ------------------------ --------------------------------------------- ---------------- --------------- -------- ------------------ legend legend taxpayer country a country b management desk city a city b year year year date a date b date c date d ------------------------------------ ---------- ------------------------------- ----------------------------------------------------- ------- ------------- -------------------------- -------------------------- -------------------------- ---------------------- ------------------------- -------------------------- -------------------------- tam-105543-06 --------------------- amount a --------------------- amount b --------------------- amount c --------------------- amount d --------------------- amount e --------------------- amount f --------------------- amount g amount h --------------------- rate a ---------- percent a ------ issue s whether taxpayer’s interest in partnership which itself is not engaged in trade_or_business_within_the_united_states is effectively connected under sec_864 and the regulations with taxpayer’s banking_financing_or_similar_business within the united_states for the taxable years year year and year and whether taxpayer’s distributive_share of income gains and losses from securities held by partnership are eligible for allocation under the percent rule formula under sec_1_864-4 conclusion s general principles of application to determining eci from partnership subchapter_k of the code is a blend of aggregate and entity treatment for partners and partnerships and for purposes of applying provisions of the code not included in subchapter_k a partnership may be treated as an aggregate of its partners or as an entity distinct from its partners depending on the purpose and scope of such provisions rev-rul 1991_1_cb_107 taxpayer’s interest in partnership is evaluated in accordance with the purpose and scope of sec_864 and the regulations thereunder the scope of income that may be treated as eci is determined in accordance with an entity_theory so that taxpayer’s eci from partnership will not exceed its distributive_share the eci or non-eci treatment of taxpayer’s distributive_share of income from an investment_partnership that itself is not engaged in trade_or_business is evaluated on an aggregate approach taxpayer’s interest in partnership is not tested as a separate entity-level asset under any of the asset use business activities or material_participation tests in sec_1 c the aggregate approach for determining eci of taxpayer’s distributive_share applies the appropriate test under sec_1_864-4 directly to the partnership assets this approach achieves the purpose of the sec_1_864-4 regulations by applying the same eci characterization rule taxpayer would tam-105543-06 have applied to each particular type of income had all of the assets been acquired and held directly in the same capacity that they were acquired and held by partnership application of the aggregate approach to partnerships not engaged in trade_or_business taxpayer is engaged in the active_conduct_of_a_banking_financing_or_similar_business within the united_states under sec_1_864-4 accordingly the eci treatment of income gain and loss from securities as defined in sec_1_864-4 acquired for investment is determined by reference to whether the securities are attributable to the u s office where taxpayer’s banking_financing_or_similar_business is carried on sec_1 c ii when a taxpayer is engaged in a banking_financing_or_similar_business within the united_states in lieu of the asset_use_test in sec_1 c and the business_activities_test in sec_1_864-4 sec_1_864-4 provides a material_participation test for attributing securities to a u s office for purposes of determining eci treatment of investment securities the material_participation test determines attribution to a u s office without regard to whether the securities are booked or held for use in the conduct of the trade_or_business_within_the_united_states and without regard to whether the income from the securities is collected or used in the further conduct of the trade_or_business sec_1_864-4 for these reasons taxpayer’s interest in partnership is not evaluated under the asset_use_test of sec_1 c or the business_activities_test of sec_1_864-4 to determine whether its distributive_share of securities income may be eci at the partner level application of aggregate_theory to taxpayer’s interest in partnership because taxpayer is engaged in the active_conduct_of_a_banking_financing_or_similar_business within the united_states and partnership’s assets for taxable years year year and year consist entirely of securities as defined under sec_1_864-4 all assets held by partnership are evaluated for their eci treatment in accordance with the banking_financing_or_similar_business rules the securities initially sold to partnership were originally acquired through the material_participation of the u s office and all of partnership’s activities and asset acquisitions were conducted through the continued material_participation of taxpayer’s u s office all of partnership’s securities including some new securities acquired on the open secondary market instead of from taxpayer would have been attributable to taxpayer’s u s office under the material_participation test applied at the time they were acquired by partnership had the securities been acquired directly by taxpayer at that time application of the aggregate approach to the rule under sec_1 c ii and to taxpayer’s distributive_share of partnership all of partnership’s securities were acquired and held by partnership for tam-105543-06 investment as a result taxpayer’s distributive_share of the income gains and losses from securities held by partnership that are described in sec_1 c ii b is allocable under the rule allocation formula notwithstanding that prior to acquisition by partnership the majority of the securities were held for trading by taxpayer for its own account and treated as wholly eci under the rule override provision in sec_1_864-4 sec_1_864-4 principles do not prohibit an asset originally held for a trading use from being converted to an investment status during its holding_period such conversion may be effected under the facts and circumstances for sec_864 purposes without regard to whether such conversion is prohibited for other purposes of the code such as under sec_475 taxpayer adequately demonstrated that such conversion to investment status was effected by partnership’s acquisition and use of the securities in accordance with partnership’s charter and offering memorandum notwithstanding partnership’s investment use of all of the securities in its portfolio treasury securities held by partnership are described in sec_1 c ii b rather than paragraph b and are not eligilble for the rule allocation since taxpayer’s distributive_share of treasury securities income is attributable to taxpayer’s u s office of its banking_financing_or_similar_business under the material_participation test such treasury income is therefore treated as wholly eci treatment of partnership assets in the rule formula to determine taxpayer’s overall eci percentage under the rule formula taxpayer’s distributive_share of partnership assets and taxpayer’s directly held assets of its u s office must be combined in the denominator of the fraction in the formula similarly in determining taxpayer’s numerator in the formula taxpayer’s distributive_share percentage of partnership’s total securities described in sec_1_864-4 must also be included in both the total b securities numerator and combined with other b securities if any that taxpayer may have had attributable to its u s office no amount of taxpayer’s outside_basis of its interest in partnership is includible in either the numerator or the denominator of fraction in the rule formula facts taxpayer is a corporation resident in country a that conducts retail banking activities in country a and corporate and private banking as well as other financial services in country a and throughout the world taxpayer has many subsidiaries and branches throughout the world including in the united_states where it is engaged in the active_conduct_of_a_banking_financing_or_similar_business within the united_states as defined in sec_1_864-4 taxpayer is also a dealer_in_securities for purposes of both sec_864 and sec_475 tam-105543-06 funding of taxpayer’s worldwide operations is overseen by its management desk located at its head office in city a the responsibility for managing the day-to-day funding of the bank’s u s branch operations is delegated to the management desk located in the city b branch under the direction of the country a treasurer among the activities conducted in the united_states for tax years year year and year was a securities arbitrage activity this activity consisted of the ownership and management of five types of securities portfolios remics us government obligations equity derivatives us equity baskets and interest rate swaps a senior vice president employed by the city b branch managed the bank’s securities arbitrage desk and its management desk in the united_states the income gains and losses at issue in this memorandum primarily are with respect to the debt securities as defined in sec_1_864-4 originally held in securities arbitrage accounts located in taxpayer’s branch offices in the united_states in city a and in country b and which were sold to partnership during date a prior to their sale to partnership all of these securities were held in accounts designated by taxpayer as utilized for trading for their own account trading accounts and were marked to market on taxpayer’s books_and_records in accordance with country a generally_accepted_accounting_principles as well as for u s tax purposes partnership also acquired some additional securities on the secondary market to replace securities at maturity that were originally acquired from taxpayer taxpayer and exam agree that all of the debt securities originally acquired from taxpayer were attributable to taxpayer’s u s office located in city a within the meaning of sec_1 c iii and that all of the securities in the trading accounts were subject_to mark to market treatment under sec_475 formation of partnership by taxpayer and unrelated third parties in order to increase taxpayer’s tier bank regulatory capital under the bank regulatory rules applicable to taxpayer in country a taxpayer and unrelated third-parties formed partnership in the united_states for the stated limited purpose of acquiring and holding identified eligible securities from the pool of securities held by taxpayer in its trading accounts on its city a and country b books partnership is a llc formed under the laws of state a that is treated as a partnership for u s tax purposes and a corporation for country a tax and bank regulatory purposes the debt securities identified as eligible securities to be held by partnership were disposed of by taxpayer from its trading accounts in the following manner during date a the bank transferred approximately amount a in cash to partnership a newly formed state a company which is treated as a partnership for u s tax purposes through an initial offering additional interests in partnership were issued to unrelated third parties of taxpayer for an additional_amount b the unrelated third-party investors in partnership received series a preferred securities while taxpayer received common securities in partnership tam-105543-06 partnership used the amount a and amount b cash contributions to purchase approximately amount c worth of the trading securities held by taxpayer on its city a and country b branch books taxpayer marked to market all of the securities sold to partnership incident to the sale and recorded the gains and losses on its city a and country b branch books_and_records partnership’s by-laws state that the sole purposes of the partnership are to issue preferred securities and common securities and to use substantially_all of the proceeds thereof to purchase and hold eligible securities taxpayer in its protest to appeals described partnership’s activities as follows partnership does not act as a broker-dealer or market maker in eligible securities_partnership purchased additional eligible securities only to replace matured assets in the portfolio and only in the secondary market using taxpayer’s u s branch as an agent for the purchases partnership engages only in specified hedging_transactions other than holding the purchased securities for investment_partnership is prohibited from borrowing and from engaging in repurchase or reverse-repurchase transactions partnership is not permitted to originate loans purchase revolving credit agreements or participate in transactions where the partnership commits in advance to extend credit to a borrower partnership cannot receive origination fees or other fees typically earned by an entity engaged in a banking or financing business and partnership is not licensed as a bank mortgage broker insurance_company broker dealer or finance company the offering memorandum for partnership sets forth a stated strategy to buy and hold liquid income producing securities it states that partnership does not intend to invest in securities of other issuers for the purposes of exercising control_over such users i ii underwrite securities of other issuers iii actively trade in investments iv offer securities in exchange for property or v make loans to third parties tam-105543-06 purpose for formation and transfer of securities to partnership the country a bank regulatory authority requires its resident banks to maintain minimum levels of bank regulatory capital in accordance with country a’s implementation of its commitments under the basle accords as amended under country a’s bank regulatory requirements certain preferred equity securities held by unrelated third parties may qualify as tier i capital for country a bank regulatory purposes taxpayer indicated that treating preferred equity securities held by unrelated third parties in a partnership for u s tax purposes would provide taxpayer with a cost effective means of obtaining regulatory capital the eligible securities identified for this purpose were those that would generate net_income for distribution to holders of the preferred and common shares in partnership taxpayer and exam agree that partnership at all times was engaged in an investment management activity and at no time was partnership engaged_in_a_trade_or_business_within_the_united_states partnership’s offering memorandum includes the following statement taxpayer intends to treat the series a preferred securities as tier capital of taxpayer under relevant country a regulatory capital guidelines it is also expected that the issuance of the series a preferred securities will reduce taxpayer’s foreign exchange exposure with respect to its tier risk-based capital ratio partnership’s offering memorandum also provides that the series a preferred securities held by the unrelated third party investors would have dividend and other distribution priority over the common securities issued to and held by taxpayer the coupon rate on the series a preferred shares was a fixed rate a for years prior to date b after the transfer of the trading securities to partnership none of the shareholders in partnership had a specific interest in the securities held by partnership taxpayer agreed to maintain its interest in partnership for as long as any series a preferred securities remained outstanding the proceeds received by partnership from the issuance of the preferred securities were included in taxpayer’s worldwide financial statements as stockholders equity - minority interests after the acquisition of the securities from taxpayer partnership’s initial portfolio totaled amount d in unpaid debt principal and amount e of estimated market_value the initial portfolio consisted of floating rate remics fixed rate remics adjustable rate mortgages hybrid adjustable rate mortgages and treasury securities all but a de_minimis amount f of the total amount d initial portfolio had a current coupon rate below the rate a series a preferred shares the average current coupon rate of partnership’s initial portfolio was rate b which was less than rate a guaranteed return to the series a preferred shareholders tam-105543-06 taxpayer’s activities with respect to and on behalf of partnership taxpayer’s city a branch office exercised significant management activities over partnership generally and over the eligible securities portfolio both incident to and after its sale to partnership taxpayer and partnership entered into a services agreement under which taxpayer’s u s branch office maintained partnership’s securities portfolio corporate records financial statements and provided accounting legal tax and other support services for an annual fee of amount f which was observed for year and year the annual fee was increased to amount g in year except for one independent director all officers and directors of partnership were officers and employees of taxpayer for year year and year partnership paid the one independent director fees for services of amount h per year plus reimbursement of expenses for attendance at director’s meetings but did not pay compensation to officers and directors that were employees of taxpayer taxpayer represents that all cash distributed by partnership to taxpayer as a result of the interest_income earned from the partnership investments was retained or reinvested by taxpayer’s u s branch office and all such interest_income generated by partnership with respect to taxpayer’s distributive_share is reflected on taxpayer’s u s branch office books_and_records for both book and u s tax purposes after the acquisition of the eligible securities from taxpayer partnership accounted for the securities on the accrual basis of tax_accounting accordingly after taxpayer recognized gain on the transfer of securities to partnership it subsequently ceased to take into account the mark to market values of the securities as of the subsequent taxable_year ends with respect to its distributive_share of income from the same or replacement securities held by partnership taxpayer recognized it’s distributive_share of income in accordance with taxpayer’s method_of_accounting as an investor in the securities taxpayer’s tax treatment of partnership income taxpayer claimed for the tax years year year and year that its investment in the common shares of partnership was a partnership_interest that constitutes property held in connection with taxpayer’s trade_or_business_within_the_united_states under the asset_use_test in sec_864 and sec_1_864-4 alternatively taxpayer claims that its distributive_share of its investment in partnership is eci under the business_activities_test in sec_864 and sec_1 c however in determining the effectively connected amount of its distributive_share of partnership income taxpayer argues that the banking_financing_or_similar_business rules including the formula allocation rules of sec_1_864-4 the rule apply in addition to the asset use and business activities tests and overrides the eci results of those provisions under the banking_financing_or_similar_business rules tam-105543-06 taxpayer treated its distributive_share of income as attributable to taxpayer’s u s office under the same rule that would have applied to the securities held by partnership if such securities were held directly by bank this treatment was applied notwithstanding that taxpayer used an entity_theory to first treat its interest in partnership as an eci asset under rules that don’t apply to investment securities under the banking_financing_or_similar_business rules accordingly taxpayer has applied the eci rules to its distributive_share on both an entity basis and then supplementally under an aggregate approach once eci treatment is first established with respect to taxpayer’s interest in partnership in applying the rules of sec_1_864-4 to its distributive_share taxpayer did not include its ratable portion of the book_value of partnership’s eligible securities in the rule allocation formula instead taxpayer estimated that its outside_basis in partnership was approximately the same as its inside_basis of its distributive_share of securities and it included its outside_basis in the portion of the allocation formula that requires eligible_debt securities under sec_1_864-4 however taxpayer stipulates that its rule allocation computation should be adjusted to the extent that partnership held securities that would not have been eligible for allocation under sec_1_864-4 eg the treasury securities that constituted approximately percent a of the initial portfolio acquired by partnership would not be eligible for allocation under the rule formula and would give rise to an adjustment to the amount taxpayer included in the allocation for taxpayer’s years year and year taxpayer’s total volume of securities eligible for allocation under the rule formula including the amount of its outside_basis in partnership that it treated as a surrogate for its share of partnership’s securities exceeded of its total assets of its u s office accordingly the rule formula resulted in an allocation of income gains and losses from both its directly held allocable securities as well as from its distributive_share of securities income from partnership for year taxpayer’s computation of the volume of securities eligible for allocation under the rule again including its outside_basis in partnership in the formula were less than 10-percent of all of taxpayer’s total assets of its u s office and therefore no allocation was made between effectively and noneffectively connected income for that year for interest_expense allocation purposes under sec_1_882-5 taxpayer has treated its investment in partnership as a u s asset prior to application of the rule allocation formula taxpayer did not make an election under sec_1_884-1 to use either the income or asset method to allocate and apportion the outside_basis of its interest in partnership between effectively and noneffectively connected characterization and stated that it believed the result would be the same under either method exam does not agree that the outside_basis of taxpayer’s partnership_interest is effectively connected with taxpayer’s trade_or_business_within_the_united_states under sec_864 and in any event does not agree that taxpayer’s distributive_share of tam-105543-06 income gains and losses from partnership are eligible for allocation under the rule_of sec_1_864-4 even if its distributive_share of partnership income is treated as effectively connected under the asset_use_test of sec_864 and sec_1 c or the business_activities_test in sec_864 and sec_1_864-4 accordingly exam has treated all distributive_share of income gains and losses from partnership as noneffectively connected with taxpayer’s trade_or_business_within_the_united_states for tax years year year and year and has excluded all of taxpayer’s outside_basis in partnership from inclusion in taxpayer’s u_s_assets for interest_expense allocation purposes under sec_1_882-5 and sec_1_884-1 consequently exam did not make an asset or income_method election for taxpayer with respect to its outside_basis in partnership under sec_1_884-1 law and analysis this memorandum addresses the relevant applications of both entity and aggregate theories of partnership_taxation to determine the eci treatment of a distributive_share of income from a partnership that is not itself engaged in trade_or_business_within_the_united_states to a foreign_partner that is directly engaged in the active_conduct_of_a_banking_financing_or_similar_business within the united_states taxpayer and exam agree that partnership was engaged solely in an investing activity that did not constitute a trade_or_business at issue is under what applicable test s in sec_864 and the regulations thereunder may taxpayer’s distributive_share of partnership’s investment_income be effectively connected to taxpayer’s banking_financing_or_similar_business within the united_states and whether the conditions of such test s are met for the taxable years year year and year investing for a taxpayer’s own account does not constitute a trade_or_business_within_the_united_states 312_us_212 managerial attention to investments including maintaining records and collecting the income is encompassed by the term investing and such activities do not convert investment ownership to a trade_or_business regardless of the volume of this type of activity id pincite a trade_or_business_within_the_united_states does not result solely from investing activities even if such investment activities are conducted within the united_states through the exercise of sole discretion by an agent liang v commissioner 23_tc_1040 a partnership does not cause a foreign_partner to be treated as engaged in trade_or_business_within_the_united_states as a result of the partnership’s activities unless the partnership activities constitute a trade_or_business sec_875 provides for purposes of this subtitle- a nonresident_alien_individual or foreign_corporation shall be considered as being engaged_in_a_trade_or_business_within_the_united_states if the partnership of which such individual or corporation is a member is so engaged tam-105543-06 however the income from an investment_partnership that is not itself engaged in trade_or_business_within_the_united_states may still be taxable in a trade_or_business_within_the_united_states under sec_882 if such income is effectively connected with a trade_or_business of one or more of its partners under the conditions of sec_864 under sec_864 eci treatment is authorized for u s source investment_income of a type described in sec_871 sec_871 sec_881 sec_881 or from the sale_or_exchange of capital assets if either the income gain_or_loss is derived from assets used or held for use in the conduct_of_a_trade_or_business within the united_states asset_use_test or the activities of a trade_or_business_within_the_united_states were a material factor in the realization of the income gain_or_loss business_activities_test the asset_use_test is further described in sec_1_864-4 and the business_activities_test in sec_1_864-4 a third test is provided by regulations to determine the eci treatment of income gains and losses from certain stocks and securities earned in connection with the active_conduct_of_a_banking_financing_or_similar_business sec_1_864-4 in determining whether an aggregate or an entity_theory should apply in characterizing a distributive_share of income from a partnership as eci or non-eci revrul_91_32 1991_1_cb_107 provides in relevant part subchapter_k of the code is a blend of aggregate and entity treatment for partners and partnerships compare sec_751 of the code with sec_741 for purposes of applying provisions of the code not included in subchapter_k a partnership may be treated as an aggregate of its partners or as an entity distinct from its partners depending on the purpose and scope of such provisions revrul_91_32 addresses the eci treatment of a disposition of a partnership_interest in accordance with the purpose and scope of sec_864 however the ruling addresses the partner’s eci treatment only where the partnership caused the foreign taxpayer to be engaged in trade_or_business_within_the_united_states under sec_875 the ruling provides that gain_or_loss is eci by reference to whether property dispositions would be eci if sold by the partnership ie to the extent such gain_or_loss is attributable to eci united_states source property of the partnership the ruling observes the entity characteristics of the partnership and property that it holds in determining the eci nature of the outside_gain from the disposition of the partnership_interest however revrul_91_32 does not address how to determine the eci or non- eci character of the distributive_share of income at the partner level when the partnership is not itself engaged in trade_or_business_within_the_united_states even though partnership provides no effectively_connected_income to taxpayer through a trade_or_business under sec_875 the eci or non-eci characterization of taxpayer’s distributive_share solely at taxpayer’s level as a partner must still be resolved in accordance with the purpose and scope of sec_864 and the regulations thereunder accordingly the principles of sec_864 must be adapted to a factual situation not present in revrul_91_32 the relevant inquiry is to determine the purpose and scope of sec_864 as applied to interest_income from securities of tam-105543-06 a taxpayer engaged in the active_conduct_of_a_banking_financing_or_similar_business within the united_states entity approach for recognition of taxpayer’s distributive_share and management fees exam agrees that taxpayer’s formation of partnership and acquisition of securities for investment had a valid business_purpose of efficiently raising bank regulatory tier i capital for taxpayer under its home_country regulatory rules taxpayer and exam also agree that the securities purchased by partnership from taxpayer during date a were acquired for their fair_market_value and that all gains were taken into account by taxpayer’s trade_or_business_within_the_united_states incident to the sales disposition taxpayer and exam also stipulate that the stated purposes of partnership to acquire and maintain securities investments were observed at all times during tax years year year and year taxpayer’s management of partnership was compensated through service fees recognized by taxpayer as effectively connected fee income in its banking_financing_or_similar_business while taxpayer continued to exercise operating control_over all of the securities it originally owned and managed directly in its u s office taxpayer’s economic ownership of the income from the assets was reduced to the residual amount of income earned by partnership after the series a preferred shareholders were paid their rate a amount accordingly after partnership acquired the securities taxpayer may no longer treat the securities as wholly owned and wholly attributable to its u s office the entity approach is necessary to give effect to taxpayer’s distributive_share of income and to taxpayer’s fees for its management services to partnership which were taken into account in determining partnership’s income while the entity approach provides recognition of the management fees for services performed by taxpayer the exercise of certain of those services through taxpayer’s u s office such as the acquisition of securities for partnership is relevant for determining taxpayer’s eci treatment of its distributive_share of income under the aggregate approach discussed below the entity approach is also necessary to establish taxpayer’s outside_basis in partnership for purposes of taxpayer’s interest_expense allocation to its total effectively_connected_income under sec_1_882-5 and for its computation of its branch_profits_tax under sec_1_884-1 however the entity approach is limited to determining only the amount of taxpayer’s distributive_share and its outside_basis in partnership that is subject_to apportionment between eci and non-eci the apportionment of taxpayer’s distributive_share of income and its outside_basis between eci and non-eci is separately evaluated in accordance with the purpose and scope of sec_864 to which the aggregate approach is applicable aggregate approach to determining eci under the banking_financing_or_similar_business rule - sec_1_864-4 tam-105543-06 taxpayer is engaged in the active_conduct_of_a_banking_financing_or_similar_business within the united_states under sec_1_864-4 as a result the manner in which taxpayer determines the eci treatment of investment securities is determined under a defined material_participation test and a special_allocation rule rule in sec_1 c ii both of which take precedence over the asset_use_test in sec_1 c and the business_activities_test in sec_1_864-4 the rule provides that u s source income gain_or_loss from securities that are capital assets and that are attributable to a u s office where the active_conduct_of_a_banking_financing_or_similar_business is carried on is also generally treated as effectively_connected_income if the security is acquired in the manner or for the purposes provided in sec_1 c ii a - or the security is of a type described in sec_1_864-4 attribution to a u s office is determined by whether the u s office materially participates in negotiating soliciting or performing other material activities necessary to the acquisition of the stock or security sec_1_864-4 the u s office need not be the only location that materially participates in the acquisition of the security and attribution does not require that a security be booked in the u s office or even held for use in connection with the taxpayer’s banking_financing_or_similar_business within the united_states sec_1_864-4 see revrul_86_154 1986_2_cb_103 however sec_1_864-4 also provides that the income gains and losses from securities described in sec_1_864-4 that are attributable to the u s office may be subject_to allocation between eci and non-eci if the securities exceed 10-percent of the total value of the securities held by such u s office accordingly in lieu of the asset use and business activities tests sec_1_864-4 applies an overriding third test but only to determine the eci treatment of stocks and securities attributable to the u s office where the foreign taxpayer carries on a banking_financing_or_similar_business the banking_financing_or_similar_business provisions of sec_1_864-4 apply only to stocks acquired in the manner set forth in sec_1_864-4 or to securities as defined in sec_1_864-4 the material_participation test applies to the eci determination of all investment securities acquired by a foreign person’s u s office of a banking_financing_or_similar_business whether they are banking-related assets of the type described in sec_1_864-4 - and b - or whether they are treated as non-banking related securities under sec_1_864-4 and are allocable under the rule further the material_participation test applies separately to each security to determine the attribution of each to the u s office taxpayer’s interest in partnership is not a security as defined in sec_1_864-4 to which the material_participation test may apply however for the tax years year year and year all of taxpayer’s distributive_share from partnership was income gains and losses with respect to investment securities that are subject only to the material_participation test and eci rules of sec_1_864-4 and are expressly not subject_to the asset use and busine sec_1 sec_1_864-4 - also applies to determine whether stocks may be eci to a banking_financing_or_similar_business within the united_states partnership held no stocks for any of the tax years at issue tam-105543-06 activities tests in the hands of a banking_financing_or_similar_business within the united_states if the entity_theory were applied to the determination of eci and subjected to the asset use and business activities tests as a first step as taxpayer and exam propose then the purposes of the banking_financing_or_similar_business rules with respect to the treatment of investment securities income might be avoided accordingly securities income to which a u s office materially participates could be converted to non-eci as a result of the asset use or business activities rules that would not otherwise apply to the same securities if they were acquired directly by taxpayer similarly securities income to which a u s office does not materially participate could be converted to eci as a result of the asset use or business activities rules applied to the partnership_interest the aggregate approach also preserves the purposes of the sec_1_864-4 rules with respect to stocks or other investments in which a u s office of the banking_financing_or_similar_business does not materially participate for instance if partnership acquired and held any stocks for investment the distributive_share of dividends and gains or losses from the disposition of stocks by partnership would be non-eci under the asset_use_test rule in sec_1_864-4 unless it could be shown that the stocks were acquired for the more limited purposes to which the material_participation test applies to stock in the banking_financing_or_similar_business rules under sec_1 c ii a - in this regard a taxpayer’s distributive_share of dividend income that could not be eci under the asset_use_test if stocks were held directly by taxpayer cannot be converted to eci by treating the partnership_interest as an independent asset held in connection with taxpayer’s trade_or_business further if partnership were to increase its securities investment holdings through additional tiered investments in other investment partnerships whose activities did not constitute a trade_or_business_within_the_united_states and such investment activities of the lower-tier partnerships were also not conducted by taxpayer through its u s office where its banking_financing_or_similar_business is carried on under the aggregate approach taxpayer’s distributive_share of income gain_or_loss with respect to securities held by such tiered partnerships would be non-eci under the material_participation test taxpayer sold the securities to partnership during date a and performed all of the material_participation functions through its u s office in causing partnership to be formed and to purchase such securities in addition taxpayer also managed partnership on a day to day basis and materially participated through its u s office in acquiring new securities for partnership as older ones matured taxpayer and exam agree that all of partnership’s securities including the new securities acquired as replacement securities would have been attributable to taxpayer’s u s office had they been acquired directly by taxpayer during date a and subsequently instead of by partnership for these reasons the eci treatment of taxpayer’s distributive_share is evaluated on an aggregate basis consistent with the purposes of attributing securities income to a u s tam-105543-06 office of a banking_financing_or_similar_business within the united_states taxpayer’s interest in partnership is not tested on an entity basis under any of the asset use business activities or material_participation tests under the aggregate approach the material_participation test of sec_1_864-4 and the eci rule in sec_1_864-4 is applied to each security held by partnership to determine whether taxpayer’s distributive_share of income from each is attributable to taxpayer’s u s office and whether such attributable income is treated as eci under the banking_financing_or_similar_business rules taxpayer and exam agree that approximately percent a of partnership’s total securities portfolio were treasury securities described in sec_1 c ii b since the treasury securities are attributable to taxpayer’s u s office under the aggregate approach all of taxpayer’s distributive_share of income gains and losses from the treasury securities is treated as eci under sec_1_864-4 application of aggregate approach to the rule under sec_1_864-4 taxpayer’s distributive_share of non-treasury securities income from partnership is income eligible for allocation under the rule in sec_1_864-4 and is not subject_to the override provision applicable to securities held for trading in paragraph vi taxpayer and exam agree that other than the treasury securities all of the remaining assets in partnership’s portfolio for the tax years year year and year are securities described in sec_1_864-4 it is also agreed that once the securities were acquired by partnership they were held at all times for investment prior to their acquisition by partnership the securities acquired from taxpayer were held in taxpayer’s trading accounts and treated by exam as wholly eci under the rule override provision in sec_1_864-4 however once acquired by partnership the securities were converted to an investment status including with respect to the eci treatment of taxpayer’s distributive_share nothing in sec_1_864-4 or vi prohibits a security that is held for trading from being converted to an investment use during its holding_period regardless of whether such conversion to investment status is prohibited for other purposes of the code such as for timing of recognition of income purposes under sec_475 under the aggregate approach to evaluating the eci character to a banking_financing_or_similar_business of taxpayer’s distributive_share of securities income the acquisition and use of the securities by partnership from taxpayer is viewed the same as if taxpayer remained the direct holder of the securities and sought to convert their use from trading status which is treated as wholly eci under sec_1_864-4 to investment status which is eligible for the rule allocation without the override provision of paragraph vi however the investment or trading status of the securities is evaluated by reference to their use at the partnership level and not by reference to whether taxpayer’s interest in partnership is held in an investment or trading capacity while factual proof of conversion from an original trading use to investment status may be difficult to substantiate absent clear_and_convincing evidence such proof was met for the taxable years year year and year partnership purchased the securities for an tam-105543-06 investment purpose that was clearly stated in its articles of incorporation and offering memorandum and both taxpayer and exam agree that partnership’s activities were in fact limited to the stated investment purposes which did not constitute being engaged in trade_or_business exam also agreed that the investment use of the acquired securities was easily identifiable by the reduced turnover of the portfolio which was limited to dispositions of securities at maturity aggregate approach to the treatment of partnership assets in the rule formula the rule allocation formula is an asset-based allocation_ratio comprised of a fixed ratio of divided by a fraction determined as the average book_value of securities described in sec_1_864-4 numerator divided by the total average book_value of the total assets of the u s office including the securities described in sec_1 c ii b denominator the income gains and losses from the b securities are multiplied by the following formula ___________10 _____________________ average book_value of b securities book_value of total asset of u s office the resulting percentage from the formula is the percentage of income gain and loss from the securities described in paragraph b that is treated as eci taxpayer included its outside_basis in partnership in the rule formula as a surrogate for its share of partnership assets however taxpayer did not apportion its outside_basis in partnership to take account of the percent a portion attributable to treasury assets the rule contemplates that only securities as defined in sec_1 c v that are described in paragraph b may be included in the numerator of the formula the rule also does not provide for separate allocations of securities attributable to the u s office that are directly held and indirectly held through a partnership accordingly taxpayer’s distributive_share of assets from partnership must be combined with all of taxpayer’s u s office assets its distributive_share of securities described in paragraph b that are attributable to its u s office under the material_participation test must also be combined with taxpayer’s directly held b securities attributable to taxpayer’s u s office under the aggregate approach taxpayer’s portion of partnership’s total assets and its share of partnership’s b securities attributable to taxpayer’s u s office must be derived by multiplying the average balance of each by the percentage of taxpayer’s distributive_share of partnership’s total income taxpayer’s percentage distributive_share of partnership’s total income applies pro-rata to all of partnership’s assets for each tax_year year year and year the percentage distributive_share is derived tam-105543-06 for each year by dividing the amount of taxpayer’s distributive_share of income by the total amount of partnership income since the preferred equity shareholders receive a fixed amount of income each year and the partnership assets produce variable rates of income taxpayer’s percentage distributive_share will also vary in accordance with the residual amount of income allocated to taxpayer in each year such varied percentage increase or decrease is also applied to partnership’s assets to determine the amounts taxpayer must include in the numerator and denominator of the rule formula since all of partnership’s b securities were attributable to taxpayer’s u s office for the tax years year year and year taxpayer’s percentage distributive_share may be applied to all of partnership’s b securities and included in the numerator of the formula for those years this approach may require adjustment for any_tax year in which taxpayer’s distributive_share of income is not pro_rata with respect to all of the income of partnership summary taxpayer’s eci treatment of its distributive_share of income from partnership is tested under an aggregate approach because taxpayer is engaged in the active_conduct_of_a_banking_financing_or_similar_business within the united_states and it operated and managed partnership through taxpayer’s u s office its distributive_share of income all of which is from investment securities is subject_to the material_participation test in sec_1_864-4 and not to the asset use or business activities tests the material_participation test is applied directly to partnership’s assets and not to taxpayer’s interest in partnership because taxpayer performed all of the material functions necessary to the acquisition of securities for partnership all of partnership’s securities are treated as attributable to taxpayer’s u s office with respect to taxpayer’s distributive_share of securities income under the eci rules in sec_1_864-4 taxpayer’s distributive_share of treasury income is treated as wholly eci in accordance with sec_1_864-4 the remainder of taxpayer’s distributive_share is income with respect to securities described in sec_1_864-4 and is income with respect to an investment activity of partnership that is eligible for allocation and apportionment under the rule taxpayer must apply its distributive_share percentage of partnership’s total income to the book_value of the partnership securities described in sec_1_864-4 and to the book_value of the total partnership securities to determine the pro-rata portions it must include in the numerator and denominator of the rule formula taxpayer may not include its eci portion of its outside_basis in partnership in the rule formula the entity approach applies to provide recognition of the amount of taxpayer’s distributive_share of income and the management service fees taxpayer earned for managing partnership and to establish taxpayer’s outside_basis in partnership for interest_expense allocation purposes under sec_1_882-5 and for branch_profits_tax purposes under sec_1_884-1 the apportionment between eci and non-eci of taxpayer’s outside_basis in partnership is determined under the same results obtained from the aggregate approach in determining taxpayer’s eci treatment of its distributive_share of income tam-105543-06 caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


department of the treasury internal_revenue_service washington d c j may tax_exempt_and_government_entities_division uil khaki aik riki irie eai i iiia ire fir iii io tti iir i iiia iie kaki ati rir er iari isite attention iiib kari iii tiara aai hair raei i arik ir iiia ire ire legend state a corporation m religious affiliation a church a church b church c denomination d plan p plan q planr plan s plan t committee n dear krekkrkeereeeeee chris ioi iii a io iii i seis friar riki rii iie lisi eia -_ _ hk iiariiarri arerr erieiihriaer hk ikk aik aker eerie ere - kkk kkk ker eker soria iir ir eis aia iaai kakkrea arerr irie ria hrkkkek kkk eerie eeere - _ -_ hither kiki krha it ere iari hair kiara eerie ririria eer kiki a aria ikea riki ere friar aai arerr reiter mhra rake eritrea rerer kkk hiker ek ekekkeraihkeeeer hikari eir krieiiereerik - -_ -_ -_ this is in response to a ruling_request dated date as supplemented by correspondence dated date submitted on your behalf by your authorized representative with respect to the applicability of sec_414 of the internal_revenue_code to plan p plan q plan r plan s and plan t the following facts and representations have been submitted on your behalf rii rii ir ii rii aia iir iti iia iisa air corporation m is an organization described in sec_501 of the code which is exempt from taxation under sec_501 corporation m non-profit corporation incorporated in state a for the object to establish strengthen perpetuate and maintain a superior university in which courses and branches in literature the sciences the arts music the bible morals and all branches of a general education may be taught is also a corporation m's statement of faith and belief is set forth in sec_2 of article xvi of its articles of association which provides it is hereby expressly declared that corporation m is and must it must forever remain distinctly a religious affiliation a institution conserve defend and promote the fundamentals of the religious affiliation a faith and in all its teachings and policies conform to and be in harmony with the established and acknowledged principles and policies of religious affiliation a churches affiliated with church a and church c_corporation m is an institution of church a and is listed in church a's directory church a was founded in and has an annual statewide meeting and fellowship of over big_number members in over churches and chapels in state a that cooperate with denomination d church a is an organization described in sec_501 of the code which is tax exempt under sec_501 corporation m receives funding from church a the board_of trustees of all members of corporation m are nominated and appointed by church a corporation m's board_of trustees must be members of a church b church which is affiliated with church c_corporation m's board_of trustees is authorized to control and direct the management and business of corporation m which includes the appointment of corporation m's president all executive cabinet members and deans of corporation m must be members of a religious affiliation a church in addition all employees of corporation m are required to sign a principles and expectation statement that outlines denomination d doctrines and beliefs that should govern the employees’ actions corporation m maintains several employee benefit plans which include plan p a code sec_403 plan plan q a code sec_403 plan plan r a code sec_125 plan plan s and plan t only employees of corporation m are eligible to participate in the above-mentioned plans plan p plan q plan r plan s and plan t a benefits committee of corporation m the principal purpose or function of committee n is the administration of corporation m's employee benefit plans are administered by committee n fi torr it iir tor iiia iia iaai iash iia oer ’ o including plan p plan q plan r plan s and plan t committee n consists of members appointed as follows six staff members one of whom shall be the human resources director who are appointed by the president of corporation m two retired faculty or staff members who are appointed by the association of retired personnel of corporation m two ex-officio members who are the vice-president for administration of corporation m and the administrative assistant to the vice- president for administration of corporation m the vice-president for administration is appointed by the president of corporation m the administrative assistant to the vice-president for administration is appointed by the vice-president for administration of corporation m six faculty members who are appointed by the faculty senate of corporation m the faculty senate is elected by all faculty of corporation m corporation m the provost is appointed by the president of corporation m all faculty members are appointed by the provost of all decision made by committee n are submitted as recommendations to the president of corporation m or its board_of trustees depending on the nature of the decision who have the final_decision making responsibility you represent that employees of corporation m are not employed in connection with one or more unrelated trades_or_businesses within the meaning of sec_513 of the code based on the aforementioned facts you have requested a ruling that plan p plan q plan r plan s and plan t are church plans within the meaning of sec_414 of the code sec_414 of the code defines the term church_plan as a plan established and maintained for its employees or their beneficiaries by a church or by a convention or association of churches which is exempt from taxation under sec_501 sec_414 of the code provides that a plan established and maintained for its employees or their beneficiaries by a church or by a convention or association of churches includes a plan maintained by an organization whether a civil law corporation or otherwise the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits or both for the employees of a church or a convention or association of churches if such organization is riki iari aris kiara iari aire ii iaa controlled by or associated with a church or a convention or association of churches sec_414 of the code defines employee to include a duly ordained commissioned or licensed minister of a church in the exercise of a ministry regardless of the source of his or her compensation and an employee of an organization whether a civil law corporation or otherwise which is exempt from taxation under sec_501 and which is controlled by or associated with a church or a convention or association of churches sec_414 of the code provides that a church ora convention or association of churches which is exempt from tax under sec_501 shall be deemed the employer of any individual included as an employee under subparagraph b sec_414 of the code provides that an organization whether a civil it shares common religious bonds and convictions with law corporation or otherwise is associated with a church or a convention_of_association_of_churches if that church_or_convention_or_association_of_churches in order for an organization to have a qualified church_plan it must establish that its employees are employees or deemed employees of the church_or_convention_or_association_of_churches under sec_414 of the code employees of any organization maintaining a plan are considered to be church employees if the organization is exempt from tax under sec_501 of the code is controlled by or associated with a church_or_convention_or_association_of_churches and provides for administration or funding or both of the plan by an organization described in sec_414 of the code in this case corporation m is an organization that is associated with church a church b and religious affiliation a as follows the members of corporation m's board_of trustees are nominated and appointed by church a and must be members of a church b church which is affiliated with church c_corporation m's board_of trustees is authorized to control and direct the management and business of corporation m including the appointment of corporation m's president all executive cabinet members and deans of corporation m must be members of a religious affiliation a church all employees of corporation m must sign a principles and expectation statement that outlines denomination d doctrines and beliefs that govern employees’ actions further corporation m shares common religious bonds and convictions with church a church c and religious affiliation a as evidenced by its articles of association that provide in part that corporation m is and must forever remain distinctively a religious affiliation a institution it must conserve defend and fir iiia iiia iri i iti iiia iaa iiia promote the fundamentals of the religious affiliation a faith and it must conform to and be in harmony with the established and acknowledged principles and policies of religious affiliation a churches affiliated with church a and church c in view of the stated purpose of corporation m its organization and structure its actual activities and its common religious bonds with church a church b church c and religious affiliation a we conclude that the employees of corporation m meet the definition of employee in sec_414 of the code and are deemed to be employees of an organization whether a civil law corporation or otherwise which is exempt from tax under sec_501 and is controlled by or associated with a church or a convention or association of churches accordingly pursuant to sec_414 and c of the code employees of corporation m are deemed to be employees of church a through corporation m's affiliation with church a church c and religious affiliation a and church a is deemed to be the employer of such employees for purposes of the church_plan rules of sec_414 of the code however an organization must also establish that its plan is established and maintained by a church or a convention or association of churches or by an organization described in sec_414 of the code to be described in sec_414 of the code an organization must have as its principal purpose the administration of the plan and must also be controlled by or associated with a church or a convention or association of churches it has been represented that plan p plan q plan r plan s and plan t are it has also been represented that the principal administered by committee n purpose or function of committee n is the administration of corporation m's employee benefit plans including these plans committee n consists of members who are either directly or indirectly appointed by the president or other all decisions made by committee n are submitted as official of corporation m recommendations to either the president of corporation m or corporation m's board_of trustees the president of corporation m and its board_of trustees have the final_decision making responsibility because the principal function of committee n is the administration of corporation m's employee benefit plans including plan p plan q plan r plan s and plan t committee n is an organization the principal purpose or function of which is the administration or funding of plans or programs for the provision of retirement or welfare benefits for employees of corporation m therefore committee n qualifies as an organization described in sec_414 of the code therefore we conclude with respect to your ruling_request that plan p plan q plan r plan and plan t are church plans within the meaning of sec_414 of the code rti i air ierie iari kia ii iie this ruling express no opinion as to whether plan p and plan q code sec_403 arrangements satisfy the requirements for a tax sheltered annuity program under sec_403 of the code the determination as to whether such plans constitute qualified programs under sec_403 requires the issuance of a separate private_letter_ruling by the employee_plans technical office of rulings and agreements washington d c see revproc_2002_4 2002_1_irb_127 date while not crucial to our holding above we note that under code sec_403 an arrangement intended to qualify under sec_403 must satisfy the nondiscrimination requirements of sec_403 these rules do not however apply to plans maintained by churches of qualified church- controlled organizations as defined in sec_3121 w a and b of the code this ruling expresses no opinion as to whether corporation m is a church or qualified_church-controlled_organization within the meaning of sec_3121 further this ruling expresses no opinion as to whether plan r a code sec_125 plan constitutes a cafeteria_plan within the meaning of sec_125 this ruling expresses no opinion as to whether plan s and plan t meet the requirements for welfare plans under the code this ruling shall not be construed as approving any of these plans under sec_125 or any other provision of the code except for sec_414 this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it cannot be used or cited by others as precedent a copy of this letter has been sent to your authorized representative in accordance with a power_of_attorney on file in this office should you have any questions please contact frat a iaai ras ik asia a iaai ae sii t ep ra t at haar rrr iir kiki ir sincerely yours pre g ct gt joyce e floyd manager employee_plans technical group enclosures deleted copy of this ruling notice


number release date id office uilc cca_2012041016102537 ---------- from ------------------- sent tuesday date pm to -------------------- cc ----------- subject re signature on extension ---------- if neither partner is a manager then both would be deemed member-managers under sec_301_6231_a_7_-2 in the absence of a designation then the member-manager with the largest profits interest would be tmp by operation of law under sec_6231 if the tmp is an entity its manager under state law would sign for it


tax_exempt_and_government_entities_division number release date department of the treasury internal_revenue_service te_ge eo examination commerce street dallas texas jan employer_identification_number person to contact id number contact numbers uil certified mail- return receipt requested dear this is a final adverse determination regarding your exempt status under sec_501 of the internal_revenue_code the code we determined that you do not qualify as exempt from federal_income_tax under sec_501 c of the code effective date the revocation of your exempt status was made for the following reasons you have not demonstrated that you are operated exclusively for exempt purposes within the meaning of sec_501 c and sec_1 c -1 d you did not engage primarily in activities that accomplish one or more of the exempt purposes specified in sec_501 c you are operated for a substantial non-exempt purpose you are operated for the benefit of private rather than public interests and your activities resulted in substantial private benefit contributions to your organization are not deductible under sec_170 of the code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours l-cr a t nanette m downing director eo examinations


internal_revenue_service number release date index number ------------------------ -------------------------- -------------------------------- -------------------------------- ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------------ telephone number ---------------------- refer reply to cc psi b03 plr-103651-13 date may x ----------------------------------------------------------------------------------------------------------------------- legend state -------------- ----------------------- ---------------------- ---------------------- date date date dear ---------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_301 c iv of the procedure and administration regulations specifically your letter requests consent to change x’s classification from an association_taxable_as_a_corporation to a partnership effective date facts the information submitted states that on date x was formed as a limited_liability_company under the laws of state at the time of formation x had a single owner and was treated as a disregarded_entity for federal tax purposes effective date x elected to be an s_corporation on date a foreign_entity acquired an ownership_interest in x thereby terminating x’s s_corporation_election in addition effective date new owners including the foreign_entity acquired more than fifty percent of the ownership interests in x plr-103651-13 law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes elections are necessary only when an eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification sec_301_7701-3 provides that except as provided in sec_301 b unless the entity elects otherwise a domestic eligible_entity is i a partnership if it has two or more members or ii disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides that except as provided in sec_301 c iv and v an eligible_entity may elect to be classified other than as provided under sec_301 b or to change its classification by filing form_8832 with the appropriate service_center under sec_301_7701-3 this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed sec_301_7701-3 provides that if an eligible_entity makes an election under sec_301_7701-3 to change its classification the entity cannot change its classification by election again during the sixty months succeeding the effective date of the election however the commissioner may permit the entity to change its classification by election within the sixty months if more than fifty percent of the ownership interests in the entity as of the effective date of the subsequent election are owned by persons that did not own any interests in the entity on the filing_date or on the effective date of the entity's prior election sec_301_7701-3 provides that an eligible_entity that timely elects to be an s_corporation under sec_1362 is treated as having made an election under sec_301_7701-3 to be classified as an association provided that as of the effective date of the election under sec_1362 the entity meets all other requirements to qualify as a small_business_corporation under sec_1361 subject_to sec_301 c iv the deemed_election to be classified as an association will apply as of the effective date of the s_corporation_election and will remain in effect until the entity makes a valid election under sec_301_7701-3 to be classified as other than an association plr-103651-13 conclusion based solely on the information submitted and the representations made we consent to x changing its classification to a partnership for federal tax purposes effective date under sec_301_7701-3 x should file a form_8832 entity classification election with the appropriate service_center with a copy of this letter attached except as expressly provided herein we express or imply no opinion concerning the tax consequences of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion whether x is otherwise eligible to make the election this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative sincerely james a quinn senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


department of the treasury internal_revenue_service washington d c of f i c e of c h i e f c ou n s e l date number release date cc pa cbs br3 postn-123984-02 uil memorandum for eric johnson attorney large and mid-size business cc lm rfp stp from joseph w clark chief branch collection bankruptcy and summonses cc pa cbs br3 subject summoning access to a taxpayer’s website this chief_counsel_advice responds to your date field_service_advice request regarding an examination team that wants to access the restricted portions of a taxpayer’s internet website we believe that a summons-and not entering into contract and waiver negotiations--is the appropriate vehicle to obtain access to the restricted information this document is not to be relied upon or otherwise cited as precedent discussion a summoned taxpayer may be required to produce such books papers records or other data as may be relevant or material to the service’s inquiry sec_7602 sec_7602 endows the service with expansive information-gathering authority to encourage effective tax investigations see 465_us_805 although there are no reported cases specifically holding that access to a website may be summoned there is a strong argument that a taxpayer’s website constitutes records or other data within the meaning of sec_7602 see 543_f2d_996 2d cir summons of computer tapes comprising part of a corporate taxpayer’s record keeping system enforced see also 116_f3d_1227 8th cir summons of tax preparation software enforced under powell v 379_us_48 a summons will be judicially enforced if the government makes a showing that the summons is issued for a proper_purpose that the information sought may be relevant to that purpose that the information sought is not already within the commissioner’s possession and that the administrative steps required by the internal_revenue_code have been followed a summons in the instant case must be narrowly tailored to meet these requirements case development hazards and other considerations the service may face substantial hazards under the powell standard to the extent that it seeks to enforce a summons that would give it unlimited access to the restricted confidential data on the taxpayer’s web page first a summons seeking unfettered access to the taxpayer’s website may be attacked as seeking irrelevant information the courts are quite lenient in applying the relevancy standard see eg 18_f3d_1311 5th cir nevertheless a completely open-ended summons for all restricted financial information on the taxpayer’s website-not limited to information on the tax years that are the subject of the examination-runs a serious chance of being deemed partially unenforceable by the courts if the examination team believes that current financial information is crucial to its inquiry into prior tax years it should be prepared to offer specific and detailed reasons why second a summons seeking unfettered access to the taxpayer’s website may be attacked as overbroad and unreasonable the service’s license to fish is not unlimited see eg dauphin deposit trust co 385_f2d_129 3d cir summonses generally should be definite in nature and finite in scope see eg 765_f2d_1094 n 11th cir any effort in the subject case to indiscriminately summons access to everything on the taxpayer’s restricted website including non-financial proprietary information such as trade secrets customer lists etc or including financial information on tax years not subject_to investigation will be overly broad and unenforceable finally a summons faces a serious overbreadth challenge if it is not limited in time the right to access the restricted material on the website may not be enforceable for the entire time of the examination the service should consider agreeing to a reasonable temporal limitation-a few weeks or a month or two or whatever is sufficient time to document and analyze the summoned information a summons for a right of access unlimited in time looks more like an unenforceable fishing expedition in sum the broad language of the statute and the case law strongly suggest that a summons for the right to access a website will be upheld as a summons for records or other data within the meaning of sec_7602 we believe that for legal and policy reasons a summons offers the best route to secure the right of access to the taxpayer’s website a summons offers the service the flexibility it needs to secure the required documents the contract-waiver route involves potentially protracted negotiation over what data may be accessed and the mechanisms for access counsel is institutionally reluctant to enter into negotiations for materials that the code clearly permits it to have the summons offers the service the right to see information as it is presented to third party creditors-on the taxpayer’s website a contract waiver effectively allows the taxpayer greater control_over the service’s right of access if necessary judicial enforcement of a summons is relatively quick and easy a typical breach of contract could significantly slow the subject examination the national_office will work together with field counsel and the examination team to draft a summons that will provide all necessary access to relevant information but is narrowly tailored to ensure that it meets the requirements for enforceability under powell please call if you have any questions cc associate area_counsel large and mid-size business_associate chief_counsel procedure and administration assistant chief_counsel collection bankruptcy and summonses


tax_exempt_and_government_entities_division department of the treasury internal_revenue_service washington d c jul uniform issue list xxxxxxxxkxxxxkx xxxxxxxxkxkxkxkxk xxxxxxxxxxxxxx tep ratt legend taxpayer a ira b ira c xxxxxxxxxxxxkx xxxxxxxxxxxxkx xxxxxxxxxxkxkkk xxxxxxxxxxxxkxk xxxxxxxxxkxxxkxk xxxxxxxxxxxxkx xxxxxxxxxxxxkxk financial_institution d xxxxxxxxxkxxkxkx company e xxxxxxxxxxxxxxk financial_institution e xxxxxxxxxxkxxkxx company f individual g xxxxxxxxxxxxkx xxxxxxxxxxkxxx amount real_estate xxxxxxxxxkxkxxxx xxxxxxxxxxkxxx xxxxxxxxxxxxxx xxxxxxxxxxkxkkxk xxxxxxxxxxxxxx amount amount amount dear xxxxxxxxxxxxxx this letter is in response to your request for a ruling dated date as supplemented by correspondence dated date date date date and date submitted on your behalf by your authorized representative in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a represents that he received a distribution from ira b an individual_retirement_annuity under sec_408 of the code totaling amount taxpayer a asserts that his failure to accomplish a rollover of amount within the 60-day period prescribed by sec_408 was due to individual g’s misrepresentations and fraudulent activity in in december taxpayer a states that he owned ira b with financial_institution d a established a self-directed_ira ira c with company e individual g was the president of company e income producing real_property taxpayer a terminated ira b and had the balance in the account amount transferred to ira c maintained with company e on march purchasing and managing the property amount was transferred from ira c to company f upon its formation on march amount received from ira c and amount a loan from financial_institution e to purchase reai estate __ individual g organized company f to be owned by ira c for the purpose of __ upon receipt of an offer to purchase company f used amount of the taxpayer taxpayer a intended that the funds amount transferred from ira b to ira c were to remain in a qualified ira and he relied on company e to act as a custodian for his investment account taxpayer a did not learn of individual g and company e’s fraudulent misrepresentations until the publication of the outcome of the federal investigation in unbeknownst to taxpayer a individual g engaged in a ponzi scheme and misrepresented company e as a fiduciary under the employee_retirement_income_security_act_of_1974 and the fact that company e was registered as an investment_advisor under the investment_advisor act of in fact company e was nota qualified ira custodian and ira c was not a qualified ira consequently the transfer of funds amount from ira b to ira c was not a direct_rollover but instead a taxable_distribution under sec_408 of the code based on the foregoing facts and representations you request a ruling that the internal_revenue_service the service waive the 60-day rollover requirement with respect to the distribution of amount from ira b sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the 60th day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code foreign_country or postal error the use of the amount distributed for example in the revproc_2003_16 r b date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a with his assertion that his failure to accomplish a timely rollover of amount was due to individual g’s misrepresentations as to company e’s ability to act as an ira custodian and individual g’s fraudulent activity with respect to the assets that taxpayer a entrusted to him through company e and company f is consistent therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount from ira b taxpayer a is granted a period of days from the issuance of this ruling letter to contribute a cash amount of not more than amount into a rollover ira provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contribution the contribution will be considered a valid rollover_contribution within the meaning of sec_408 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter is being sent to your authorized representative pursuant to a power_of_attorney on file in this office if you wish to inquire about this ruling please contact xxxxxxxxxxxxx identification no xxxxxxxx at xxx xxx-xxxx please address all correspondence to se t ep ra t1 sincerely notice of intention to disclose cullen a wesrins carlton a watkins manager employee_plans technical group deleted copy of ruling letter enclosures


internal_revenue_service number release date index number ---------------------------------- -------------------------------- ---------------------------- ------------------------------ ----------------------------- --------------- -------------------- department of the treasury washington dc person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc psi b04 - plr-111357-09 date date legend husband wife date date gst_trust gst_trust son son law firm a company accounting firm -------- year year -------------------------------------------------------- ---------------------------------------------------- --------------------- ------------------- --------------------------------------------- --------------------------------------------- ------------------------------- ------------------------------ ------------------- --------- --------------- ------------------------------------------------------------------------------ ------- ------- dear -------------------------------- this letter responds to a request from your authorized representative dated date for an extension of time pursuant to sec_2642 of the internal_revenue_code and sec_301_9100-3 of the procedure and administration regulations to allocate the generation-skipping_transfer gst exemptions of husband and wife taxpayers to transfers to gst_trust and gst_trust the facts and representations submitted are summarized as follows on date husband and wife established two irrevocable trusts trust for the benefit of son and his lineal_descendants and trust for the benefit of son and his lineal_descendants law firm drafted the trust agreements each trust authorizes the trustee to take any actions to minimize or eliminate any generation-skipping_transfer gst tax that may be due this authority includes directing the personal_representatives of the plr-111357-09 grantors’ estates to allocate their unused gst exemptions to the trust if appropriate and dividing the trust into an exempt and non-exempt trust for gst tax purposes on date prior to date husband transferred a shares of company stock to gst_trust and wife transferred a shares of company stock to gst_trust accounting firm prepared taxpayers’ form sec_709 united_states gift and generation- skipping transfer_tax returns for year the returns reported taxpayers’ respective transfers to gst_trust sec_1 and and indicated that taxpayers were electing under sec_2513 to treat the transfers as having been made one-half by each spouse on the returns the taxpayers did not allocate any of their available gst_exemption to the date transfers in year accounting firm discovered the failure to allocate each respective taxpayer’s available gst_exemption to the date transfers to gst_trust sec_1 and it is represented that no distributions have been made from gst_trust sec_1 and taxpayers have requested an extension of time under sec_2642 and sec_301_9100-1 and sec_301_9100-3 to allocate their respective gst_exemption to the date transfers to gst_trust sec_1 and sec_2601 imposes a tax on every generation-skipping_transfer gst made by a transferor to a skip_person in general under sec_2652 the transferor for gst tax purposes is defined as the last person with respect to whom the transfer was subject_to an estate or gift_tax sec_2652 and sec_26_2652-1 provide that if under sec_2513 one-half of a gift is treated as made by an individual and one-half is treated as made by the spouse of the individual then for purposes of the gst tax each spouse is treated as the transferor of one-half of the entire value of the property transferred by the donor spouse regardless of the interest the electing spouse is actually deemed to have transferred under sec_2513 sec_2631 provides that for purposes of determining the gst tax every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under sec_2631 which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed plr-111357-09 sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides that an allocation of gst_exemption to property transferred during the transferor’s lifetime other than in a direct_skip is made on form_709 sec_2642 provides in relevant part that if the allocation of the gst_exemption to any transfers of property is made on a timely filed gift_tax_return or is deemed to be made under sec_2632 or c the value of such property for purposes of determining the inclusion_ratio shall be its value as finally determined for gift_tax purposes and such allocation shall be effective on and after the date of such transfer sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of sec_2642 which was enacted into law on date sec_2642 provides that in determining whether to grant relief the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief the time for making the allocation shall be treated as if not expressly prescribed by statute notice_2001_50 2001_2_cb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers is to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a notice published in the internal_revenue_bulletin in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 under the provisions of sec_301_9100-3 plr-111357-09 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied husband and wife are each granted an extension of time of days from the date of this letter to allocate their available gst_exemption with respect to the date transfers to gst_trust sec_1 and the allocations will be effective as of date the allocations should be made on supplemental form sec_709 united_states gift and generation-skipping_transfer_tax return for the year in which the date transfers were made and filed with the internal_revenue_service center cincinnati ohio a copy of this letter should be attached to each supplemental form_709 a copy is enclosed for this purpose the rulings contained in this letter are based upon information and representations submitted by the taxpayers 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 except as specifically ruled herein no opinion is expressed or implied concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we are not ruling on whether gst_trust sec_1 and will have zero inclusion ratios as a result of taxpayers’ allocations of gst_exemption to the date transfers to the trusts this ruling is directed only to the taxpayers requesting it sec_6110 provides that it may not be used or cited as precedent plr-111357-09 in accordance with a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely curtis g wilson associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter cc


number release date internal_revenue_service 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 b01 plr-102739-06 date date ------------------ ----------------------- -------------------------------------------- ----------------- ------- ----------------------------------------------------- ----------------------- legend x y d1 d2 country country dear ------------------- this is in response to a letter dated date submitted on behalf of x 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 according to the information submitted x was formed on d1 under the laws of country on d2 y a country corporation acquired all of the stock of x x -------------------------------------------------- --------- plr-102739-06 intended to be treated as a disregarded_entity for federal tax purposes effective d2 however x inadvertently failed to timely file form_8832 entity classification election to be treated as a disregarded_entity for federal tax purposes law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes 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 guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single owner having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form 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 except subtitles e g h and i section b defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under 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 granting 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_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make an election to be treated plr-102739-06 as a disregarded_entity for federal tax purposes effective d2 x should make the election by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely heather c maloy heather c maloy associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes