department of the treasury internal_revenue_service washington d c date cc dom fs it a tl-n-100-99 number release date uilc internal_revenue_service national_office field_service_advice memorandum for from deborah a butler assistant chief_counsel field service cc dom fs subject this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend taxpayer related_party qualified_intermediary third party third party lender property x property y property xy property z date date date year year year legend cont’d father child child child child lender a b c d e f g issue s whether taxpayer was entitled to nonrecognition of gain treatment under sec_1031 in year on the exchange of property x for an interest in property z whether there are grounds either under sec_1031 or under another theory for including the gain on the exchange of property x in year conclusion s taxpayer was not entitled to nonrecognition of gain on the exchange of property x for an interest in property z in year under sec_1031 because the transaction was structured to avoid the purposes of sec_1031 therefore taxpayer is subject_to an adjustment in year although under sec_1031 it is proper to recognize the gain from the exchange of property x in year we believe that under the circumstances presented in this case sec_1031 also supports an argument that the gain may be included in year facts we rely on the facts set forth in your memorandum of date father is a real_estate developer father and his four children have interests in several related entities involved in developing real_estate prior to year e a corporation owned by father purchased property x from an unrelated party property x was eventually transferred in equal shares to the four children the property was held as tenants-in-common by the four children under the name a a leased property x to b a joint_venture owned by father child child and two unrelated parties b constructed property y on property x the entire property property xy was leased to g also prior to year related_party obtained financing from lender to construct property z the loan was secured in part by a second trust deed and assignment of rents on property xy related_party is a corporation partially owned by father child and child father child and child own approximately of the stock of related_party in year a and b entered into an agreement with third party for the sale of property xy the parties decided to structure the transaction as a like-kind_exchange under sec_1031 to facilitate the exchange on date taxpayer was formed as a general_partnership by child child child and child as equal partners d a subchapter_s_corporation was incorporated by child child and child who contributed their interests in taxpayer in exchange for equal shares of stock in d in addition c was formed as a limited_partnership child is the general_partner and owns a interest in c father and child are limited partners and together own an interest in c in order to effectuate the like-kind_exchange on date a contributed its interest in property x to taxpayer and b contributed its interest in property y to c a and b assigned to taxpayer and c their respective interests in the purchase agreement with third party in addition taxpayer and c entered into written exchange agreements with qualified_intermediary under the agreements taxpayer and c agreed to transfer property xy to qualified_intermediary to complete the like-kind_exchange also on date related_party entered into two purchase agreements with qualified_intermediary under the agreements qualified_intermediary agreed to purchase an undivided interest in property z plus assume some or all of the loan from lender when the exchange was completed qualified_intermediary agreed to transfer a interest in property z to taxpayer and a interest to c on date the loan from lender was modified to allow for the release of property xy from the second deed_of_trust in exchange for the release of its security_interest in property xy lender was paid an amount from the net_proceeds from the sale of the property to third party the facts concerning the exact timing of the exchange are unclear however it is our understanding that the exchange occurred on or about date at this point third party received property xy and taxpayer and c received and interests in property z respectively on date in year taxpayer c and related_party sold their interests in property z to third party at this time taxpayer c and related_party were released from their remaining obligations under the loan from lender taxpayer reported a loss on the sale of its interest in property z on its federal_income_tax return for year in addition taxpayer reported cancellation_of_indebtedness_income examination has issued a notice of final_partnership_administrative_adjustment fpaa to taxpayer for year one of the adjustments requires taxpayer to recognize gain from the exchange of property x the adjustment made to taxable_income in year is based on the determination that the property received in the exchange with related_party was disposed of within years from the date of the exchange therefore under f there is no nonrecognition of the gain from the exchange year was not a subject of the examination and no adjustments were proposed for that year law and analysis sec_1031 provides generally that no gain_or_loss shall be recognized on the exchange of property held for productive use in a trade_or_business or for investment if such property is exchanged solely for property of like_kind which is to be held either for productive use in a trade_or_business or for investment sec_1031 provides special rules for exchanges between related_persons if a taxpayer exchanges property with a related_person there is nonrecognition_of_gain_or_loss to the taxpayer in accordance with sec_1031 with respect to the exchange and within years of the date of the last transfer that was part of the exchange either the taxpayer or the related_person disposes of the property received in the exchange then there is no nonrecognition_of_gain_or_loss in the exchange in other words the gain_or_loss that was deferred under sec_1031 must be recognized any gain_or_loss the taxpayer is required to recognize by reason of sec_1031 is taken into account as of the date of the disposition of the property generally sec_1031 applies to transfers after date in tax years ending after that date a related_person is defined under sec_1031 as any person bearing a relationship to the taxpayer described in sec_267 or sec_707 sec_267 provides that a corporation and a partnership are related_persons if the same persons own more than in value of the outstanding_stock of the corporation and more than of the capital interest or the profits interest in the partnership the ownership of stock is determined under sec_267 which provides that an individual shall be considered as owning the stock owned directly or indirectly by or for his family sec_267 provides that the family of an individual shall include only his brothers and sisters spouse ancestors and lineal_descendants sec_707 disallows losses from sales or exchanges of property directly or indirectly between a partnership and a person owning directly or indirectly more than of the capital interest or the profits interest in such partnership sec_707 provides that for these purposes the ownership of a capital or profits interest in a partnership shall be determined in accordance with the rules for constructive_ownership of stock provided in sec_267 sec_1031 provides that sec_1031 shall not apply to any exchange which is part of a transaction or series of transactions structured to avoid the purposes of sub sec_1031 in other words if a transaction is set up to avoid the restrictions on exchanges between related_persons sec_1031 operates to prevent nonrecognition of the gain_or_loss on the exchange sec_1_1031_k_-1 provides for various safe harbors for deferred exchanges which result in a determination that the taxpayer is not in actual or constructive receipt of money or other_property not of like_kind for purposes of sec_1031 one of the safe harbors listed in paragraph g is that of the qualified_intermediary sec_1_1031_b_-2 also provides a safe_harbor for qualified intermediaries in the case of simultaneous transfers of like-kind properties in such cases the qualified_intermediary as defined in sec_1_1031_k_-1 is not considered the agent of the taxpayer for purposes of sec_1031 the transfer and receipt of property by the taxpayer is treated as an exchange sec_1_1031_k_-1 defines a qualified_intermediary as a person who is not the taxpayer or a disqualified_person and who enters into a written_agreement with the taxpayer to acquire the relinquished_property from the taxpayer transfer the relinquished_property acquire the replacement_property and transfer the replacement_property to the taxpayer in tech adv mem date the taxpayer held a one-third interest_in_real_property and the taxpayer’s mother held the remaining two-thirds interest an unrelated party wanted to purchase the entire parcel held by the taxpayer and his mother for cash the parties entered into a sales agreement subsequently the taxpayer’s mother purchased another property property to use as a personal_residence after entering into the sales contract the taxpayer decided that he wanted to arrange a like-kind_exchange he initially attempted to acquire replacement_property from a second unrelated party but was unsuccessful in negotiating a deal in time for the exchange to qualify instead the taxpayer entered into an agreement to purchase property from his mother as replacement_property the transaction was arranged using a qualified_intermediary the taxpayer transferred his interest in the relinquished_property and his rights and obligations under the sales contract with the unrelated party to the qualified_intermediary he also transferred his rights and obligations under the contract with his mother for the purchase of property to the qualified_intermediary the qualified_intermediary then sold the taxpayer’s interest in the relinquished_property to the unrelated party and used the proceeds to pay the taxpayer’s mother for property then the qualified_intermediary transferred title of property to the taxpayer in a separate but concurrent transaction the unrelated party purchased the remaining two-thirds interest in the relinquished_property from the taxpayer’s mother the entire exchange took place on one day the technical_advice did not address the issue of the treatment of nonrecognized gain where the exchanged property is subsequently disposed of by one of the related parties instead advice was requested on the issue of whether the taxpayer was eligible for nonrecognition treatment with respect to the exchange under sec_1031 it was determined that the taxpayer was not entitled to nonrecognition of gain on the above-described transaction the basis for this determination was sec_1031 which prevents related parties from circumventing subsection f by structuring their transactions to avoid the related_party rules see h_r rep no 101st cong 1st sess the technical_advice concluded that in substance the result of the series of exchanges was identical to what would have occurred in a direct exchange of property between the taxpayer and his mother followed by a sale of the property by the taxpayer’s mother to the unrelated party the facts did not suggest that the qualified_intermediary was needed to prevent constructive receipt of money or other_property not of a like_kind in fact the sole consequence of eliminating the qualified_intermediary appeared to be the disqualification of the exchange under sec_1031 if the qualified_intermediary had been eliminated from the transaction the taxpayer would have had to recognize gain on the exchange under sec_1031 when his mother sold the property to the unrelated party within years of the exchange because the taxpayer was unable to show that the qualified_intermediary had a substantive purpose in the transaction the service reasoned that the exchange was structured to avoid application of the related_party rules and accordingly concluded that sec_1031 operated to preclude nonrecognition of gain under sec_1031 although they are more far more complicated the facts of the instant case bear many similarities to the facts outlined in the technical_advice for example the transaction in year is between related_persons within the meaning of sec_1031 taxpayer is a partnership owned by child and d a corporation owned by child child and child related_party is a corporation of which is owned by father child and child under sec_267 a corporation and a partnership are related if the same persons own more than in value of the outstanding_stock of the corporation and more than of the capital interest or the profits interest in the partnership child may be considered as owning the stock owned by his brother and sisters under sec_267 accordingly child constructively owns of d and therefore of taxpayer similarly with respect to related_party child may be considered as owning the stock of his father and sister under sec_267 thus child constructively own sec_72 of related_party also under the attribution_rules the same person owns more than of taxpayer and related_party therefore the two entities are related_persons within the meaning of sec_1031 and exchanges between the two entities are subject_to the special rules for exchanges between related_persons under sec_1031 in the instant case like the technical_advice a qualified_intermediary was used to complete the exchange between taxpayer and related_party in a transaction that included the simultaneous sale of taxpayer’s property to an unrelated party further like the technical_advice it does not appear that a straight exchange with related_party would have been disqualified by the constructive receipt of money or other_property not of a like_kind thus like the technical_advice there is no obvious reason for interposing a qualified_intermediary in the transaction however if the transaction had been structured as a straight exchange with related_party and a subsequent sale from related_party to third party the exchange would not have qualified for nonrecognition treatment under sec_1031 thus as in the technical_advice it appears that the interposition of the qualified_intermediary had no purpose except to prevent the exchange from disqualification from nonrecognition treatment under sec_1031 accordingly we agree with your conclusion that the facts of this case support the argument that the exchange in year was set up to avoid the related_party rules although the regulations provide for_the_use_of a qualified_intermediary to effect a like-kind_exchange the statute makes clear that a qualified_intermediary may not be used to circumvent the related_party rules as stated in the technical_advice the mere interposition of a qualified_intermediary cannot correct a transaction otherwise flawed under sec_1031 f thus in accordance with sec_1031 sec_1031 does not apply to the exchange between taxpayer and related_party in year because sec_1031 does not apply to the exchange any gain from the exchange is subject_to recognition in year however we believe the service is also permitted to make an adjustment in year in the instant case unlike the situation in the technical_advice taxpayer sold the replacement_property to third party in year this sale was in contravention of the requirements of sec_1031 because it occurred within years of the initial exchange sec_1031 provides that where gain from an exchange between related_persons has not been recognized and the property is disposed of within years of the exchange there is no nonrecognition of gain from the exchange the statute further provides that in such cases the recognition of gain should be taken into account as of the date of the disposition of the property sec_1031 specifically provides that the determination of whether the gain_or_loss from the initial exchange was recognized should be made without regard to the subsection f related_party rules if there is nonrecognition_of_gain_or_loss to the taxpayer under this section with respect to the exchange of such property determined without regard to this subsection sec_1031 emphasis added in this case if the related_party rules of sec_1031 are not taken into account ie the rule under sec_1031 there was nonrecognition of gain under sec_1031 with respect to the exchange between taxpayer and related_party in year certainly nonrecognition treatment was claimed by taxpayer and benefits were received in year further the replacement_property was disposed of in year within years of the exchange in contravention of the requirements of sec_1031 thus the facts of the instant case fall squarely within the parameters of sec_1031 given these facts sec_1031 expressly authorizes an adjustment to recognize the gain from the exchange as of the date of the disposition of the property in year we find nothing in the statutory language or in the legislative_history to indicate that the applicability of sec_1031 precludes or supersedes the applicability of sec_1031 therefore assuming the facts support the argument as they appear to in this case we believe it is proper to take the position we are permitted to make an adjustment under sec_1031 in the year the replacement_property is disposed of notwithstanding the fact that an adjustment could have been made in a prior year under sec_1031 case development hazards and other considerations if you have any further questions please call by richard l carlisle chief income_tax accounting branch


c h i ef c ou n sel of f i c e of department of the treasury i n t e r n al r e v e n u e s e r v i c e w ashington d c date number info release date conex-132581-09 uil 280f ----------------------------- ---------------------------------------------------------------------------- --------------------------------------- -------------------------------- attn --------------------------------------------------------------- dear ------------- i am responding to your date letter to commissioner shulman you expressed your support for the elimination of the tax consequences for the personal_use of employer-provided cell phones as expressed by commissioner shulman in a statement released on date we are aware that the current law regarding employee_use of employer-provided cell phones is burdensome poorly understood by taxpayers and difficult to administer consistently he and treasury secretary geithner formally requested that the congress act to make clear that neither employers nor employees will face tax consequences for personal_use of employer-provided cell phones we recently issued notice_2009_46 2009_23_irb_1068 requesting public comments regarding various simplified procedures for substantiating employees’ business and personal_use of cell phones under the current law we encourage you to submit written comments regarding these proposals or suggesting other simplifying approaches in the manner provided in notice_2009_46 conex-132581-09 i hope this information is helpful if you need further assistance please call me or ------- ---------------------at --------------------- sincerely kathleen reed kathleen reed branch chief branch office of associate chief_counsel income_tax accounting


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 b01 plr-127440-05 date date x state date date date ----------- ------------------------- --------------------------- ---------------------------- --------------------------------- legend ----------------------------------------------------------- --------- --------- date --------- a -------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------ -------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------- --------------------------------------------------- ------------------------------------------------------------ ---------------------------------- ---------------------------- trust trust trust plr-127440-05 -------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -- ------------------------------------------------------------ dear -------------------- this responds to a letter dated date submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts x was incorporated on date under the laws of state in addition x elected to be taxed as an s_corporation effective date on date a a shareholder of x transferred all of a’s shares of x to trust a grantor_trust a retained the power_to_revoke modify or alter trust in whole or in part x represents that trust is an eligible s_corporation shareholder as a grantor_trust on date a established trust a transferred shares of x to trust on date at all times relevant to this ruling trust 2’s only asset was stock in x x represents that trust was qualified to elect to be a qualified_subchapter_s_trust inadvertently trust 2’s income_beneficiary failed to file a timely election to treat trust as a qualified_subchapter_s_trust on date a established trust a transferred shares of x to trust on date at all relevant times trust 3’s only asset was stock in x x represents that trust was qualified to elect to be a qualified_subchapter_s_trust inadvertently trust 3’s income_beneficiary failed to file a timely election to treat trust as a qualified_subchapter_s_trust the income_beneficiary for each trust intended to file an election for trust and trust respectively to be treated as a qualified_subchapter_s_trust qsst under sec_1361 however all income beneficiaries failed to timely file the appropriate election under d as a result of the failure_to_file this election x’s s_corporation_election terminated x represents that there was no intent to terminate x’s s_corporation_election and that the failure_to_file timely qsst elections for trust and trust was not motivated by tax_avoidance or retroactive tax planning x also represents that since date and thereafter trust and trust have complied with the requirements under sec_1361 which defines a qsst x and its shareholders agree to make any adjustments required by the secretary consistent with the treatment of x as an s_corporation plr-127440-05 law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1361 provides that a qsst whose beneficiary makes an election under sec_1362 will be treated as a_trust described in sec_1361 and the qsst's beneficiary will be treated as the owner for purposes of sec_678 of that portion of the qsst's s_corporation stock to which the election under sec_1361 applies under sec_1361 a beneficiary of a qsst may elect to have sec_1361 apply under sec_1361 this election will be effective up to days and two months before the date of the election sec_1361 defines a qsst as a_trust a the terms of which require that i during the life of the current income_beneficiary there shall be only one income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current beneficiary in the trust shall terminate on the earlier of the beneficiary's death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to that beneficiary and b all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to one individual who is a citizen or resident_of_the_united_states sec_1362 by any corporation was terminated under paragraph or of sec_1362 the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in termination steps were taken so that the corporation is once more a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make any adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to the period then notwithstanding the circumstances resulting in the termination the corporation sec_1362 provides in relevant part that if an election under plr-127440-05 shall be treated as continuing to be an s_corporation during the period specified by the secretary conclusion based solely on the information submitted and the representations made we conclude that x's subchapter_s_election terminated because qsst elections were not filed for trust and trust in addition we conclude that the termination was inadvertent within the meaning of sec_1362 therefore x will be treated as continuing to be an s_corporation from date and thereafter provided that the respective beneficiaries for trust and trust file a qsst election with the appropriate service_center effective date within days of the date of this letter a copy of this letter should be attached to the qsst election except as specifically set forth above we express no opinion concerning the this ruling is directed only to the taxpayer s requesting it sec_6110 of federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x is otherwise eligible to be treated as an s_corporation whether trust is a grantor_trust or whether trust or trust are eligible to be treated as qssts the code provides that it may not be used or cited as precedent letter is being sent to the taxpayer_representative in accordance with the power_of_attorney on file with this office a copy of this sincerely s david r haglund david r haglund senior technician reviewer branch passthroughs special industries enclosures cc copy of this letter copy of this letter for sec_6110 purposes


internal_revenue_service significant index no department of the treasury washington dc person to contact telephone number refer reply to op e ep a ate may in re this letter constitutes notice that pursuant to your request of date the conditional waiver of the minimum_funding_standard for the above-named plan for the plan_year ending date which was granted in our ruling letter dated date has been modified to remove the credit balance condition and to add the following conditions the company will make contributions necessary to satisfy the minimum_funding_standard under the plan for the plan years ending date through date within days of the date of this letter the company will enter into a security_agreement with the pension_benefit_guaranty_corporation pbgc that gives the plan a first priority security_interest in the company’s real_estate in an amount satisfactory to the pbgc within days of the signing of such agreement a copy of the signed agreement shall be provided to this office at the following address internal_revenue_service constitution avenue n w attn john heil op e ep a room washington dc according to the information provided with the request contributions necessary to satisfy the minimum_funding_standard for the plan_year ending date have been made to the plan a copy of this letter is being sent to the as well as to your authorized representative pursuant to a power_of_attorney form of ff key district_office in on file above if you have any questions concerning this ruling please contact the individual referenced sincerely yours martin l pippins chief actuarial branch acting off


internal_revenue_service number release date index number ------------------------ ------------- --------------------------------- --------------------------- ----------------------------- in re --------------------------------- -------------------------------- ---------------------------------- legend agency subsidiary state a dear ----------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ---------------- id no ------------- telephone number --------------------- refer reply to cc tege eoeg teb plr-157115-04 date date --------------------------------- --------------------------------------------- ----------- -- this is in response to your request for rulings on behalf of agency that agency and agency’s subsidiary are instrumentalities for purposes of sec_141 of the internal_revenue_code income of agency and agency’s subsidiary is excludable from gross_income under sec_115 and agency’s use of bond proceeds will not constitute use meeting either the private business tests of sec_141 or the private loan tests of sec_141 facts and representations agency agency was formed by its members and is organized under the nonprofit corporation laws of state for the purpose of benefiting its members agency currently has a members agency represents that its members consist of natural_gas and electric joint action agencies and natural_gas and electric distribution systems agency also represents that all of its members are political subdivisions agency was formed to perform the functions of or to carry out the purposes of its members with a view towards maximizing the efficient acquisition management and delivery of natural_gas plr-157115-04 supplies and reducing operating costs of its members to fulfill this purpose agency will a acquire and finance long-term natural_gas supplies through the acquisition of interests in natural_gas producing properties for the benefit of its members and provide ongoing management of such natural_gas supplies and balance deliveries of such supplies into the relevant pipeline transportation system b acquire construct own manage operate and finance natural_gas pipelines liquefied natural_gas facilities storage and related facilities and equipment as may be necessary or convenient in connection with the ownership transportation management operation or storage of long-term natural_gas supplies and c contract with joint action agencies and public gas or power systems to provide them with natural_gas supplies for their operations agency’s governing documents provide that membership in agency is limited to a state_or_local_governmental_unit or an instrumentality the income of which is excludable from gross_income under sec_115 governmental entity the governing documents also provide that any member of agency that ceases to be a governmental entity will cease to be a member of agency will have no rights or privileges as a member of agency will have no beneficial_interest in agency or its assets and will have no right to receive any further distributions of income or assets from agency as a member of agency agency is organized and will be operated at all times exclusively for the benefit of its members agency will not make any distributions of its net_earnings except to its members and no part of the net_earnings of agency will inure to the benefit of or be distributable to any director officer or trustee of agency or any private person in the event of dissolution agency will dispose_of its assets to its members agency is required to deliver quarterly financial statements to each member within days after the end of each fiscal quarter and annual audited financial statements within days after the end of each fiscal_year each member also has the right to conduct at its option and at its own expense internal audits of the books records and accounts of agency agency is controlled by a board_of directors board that is composed exclusively of representatives of its members the board is responsible for among other items making policy decisions with respect to the business and affairs of agency approving agency’s annual budget approving all projects that are proposed to be implemented by agency and approving the dissolution of agency and the winding up of its affairs each member appoints one director to the board and may remove and replace any such director by resolution or other action taken by its governing body each director appointed to the board serves until i a successor is designated by the member that appointed such director or ii until the director’s earlier resignation removal death or inability to serve a director may be removed either for or without cause by the member that appointed him vacancies on the board are filled by the member that plr-157115-04 appointed the director previously holding the position generally at meetings of the board two thirds of the directors are necessary to constitute a quorum for the transaction of business except as otherwise provided in its bylaws an act of a majority of the directors present at a meeting at which a quorum is present at the time shall be an act of the board agency’s officers consist of a chairman vice chairman president secretary and treasurer designated by the board the chairman vice chairman secretary and treasurer serve for two year terms beginning on the date prescribed by the board and thereafter until their successors have been elected and qualified or until their earlier death resignation removal retirement or disqualification the president and any other officer appointed by the board will serve at the will of the board and until their successors have been elected and qualified or until their earlier death resignation removal or retirement any officer elected by the board may be removed by the board whenever in its judgment the best interests of agency will be served agency will obtain interim financing necessary to acquire natural_gas producing properties and other long-term sources of natural_gas supplies a project all costs and expenses associated with the interim financing will be included in the costs billed to the member on a monthly basis in accordance with the terms of a project agreement within six months after notice from agency a member must make a payment to agency for the acquisition of its share of a project member may use the proceeds of tax- exempt bonds to make such payment for its share of the project agency subsidiary agency formed subsidiary as a limited_liability_company under state law to acquire own and operate on behalf of agency the natural_gas reserves or other sources of natural_gas supplies comprising agency’s initial project agency represents that subsidiary will hold acquired properties on behalf of agency to afford a measure of protection to agency and its members against environmental and other liabilities arising with respect to the acquired properties subsidiary’s governing documents provide that agency is its sole member and that its membership interest may not be assigned or transferred in whole or in part and no other person may be admitted as a member of subsidiary its stated purposes are to act on behalf of agency with respect to properties facilities equipment rights or assets acquired as part of a program of acquiring long-term natural_gas supplies for the benefit of agency and its members subsidiary’s articles of organization limit its activities to those consistent with its purpose and the requirements for an organization to qualify as a governmental instrumentality the income of which is excludable from gross_income for federal_income_tax purposes subsidiary’s governing documents provide that no part of the assets funds or earnings_of subsidiary will be distributed to or inure to the benefit of any person other than agency the governing documents also provide that management of the business and affairs of subsidiary will be vested solely in agency plr-157115-04 upon dissolution of subsidiary its assets after payment of all debts charges and expenses of dissolution will be distributed solely to agency agency is responsible for maintaining complete and accurate books_and_records appropriate for subsidiary’s business law and analysis a sec_141 agency as instrumentality sec_103 of the internal_revenue_code provides that gross_income does not include interest on any state_or_local_bond sec_103 provides that sec_103 does not apply to any private_activity_bond which is not a qualified_bond within the meaning of sec_141 sec_1_103-1 of the income_tax regulations provides that interest upon obligations of state territory a possession_of_the_united_states the district of columbia or any political_subdivision thereof hereinafter collectively or individually referred to as state_or_local_governmental_unit is not includable in gross_income except as provided under sec_103 and d and the regulations thereunder sec_1_103-1 provides in part that obligations issued by or on behalf of any governmental_unit by a constituted_authority empowered to issue such obligations are the obligations of such a unit sec_141 provides that a private_activity_bond is any bond issued as part of an issue that satisfies the private_business_use_test of sec_141 and the private_security_or_payment_test of sec_141 or the private_loan_financing_test of sec_141 sec_141 provides that an issue meets the private_business_use_test if more than percent of the proceeds of the issue are to be used for any private_business_use_test sec_141 provides that for purposes of sec_141 the term private_business_use means use directly or indirectly in a trade_or_business carried on by any person other than a governmental_unit sec_1_141-1 provides in part that a governmental person means a state_or_local_governmental_unit as defined in sec_1_103-1 or any instrumentality thereof under sec_1_103-1 governmental_unit includes any state or political_subdivision thereof revrul_57_128 1957_1_cb_311 sets forth the following factors to be taken into account in determining whether an entity is an instrumentality of one or more governmental units whether the organization is used for a governmental purpose plr-157115-04 and performs a governmental function whether performance of its function is on behalf of one or more states or political subdivisions whether there are any private interests involved or whether the states or political subdivisions involved have the powers and interests of an owner whether control and supervision of the organization is vested in a public authority or authorities whether express or implied statutory or other authority is necessary for the creation and or use of the organization and whether this authority exists and the degree of financial autonomy of the entity and the source of its operating_expenses applying the factors of revrul_57_128 to this case we conclude that agency is an instrumentality of its members for purposes of sec_141 agency was formed to acquire and manage long-term natural_gas supplies for the benefit of its members in doing so agency coordinates and performs duties which are common to each of its members and which each member otherwise would have to perform by aggregating the purchasing power of its members agency expects to maximize the efficient acquisition management and delivery of natural_gas supplies on behalf of its members reduce operating costs increase operating revenue and minimize risk through the diversification of natural_gas supply resources agency’s functions will enable its members to better serve their customers agency thus will be used for a governmental purpose and perform a governmental function on behalf of its members who are all governmental entities there are no private interests in agency and the members have the powers and interests of an owner the governing documents provide that membership in agency is limited to governmental entities no part of the assets will be paid or inure to the benefit of any private person the expenses of agency are allocated among its members in a manner reflecting the participation of its members in each project in the event of dissolution members receive the assets of the agency to the extent that any remain after payment of agency’s debts control and supervision in agency rests with its members all governmental entities all of the members of agency’s board are appointed by the members each member may remove a director it appointed at any time with or without cause and appoint a replacement statutory authority for the creation and use of agency is found in the nonprofit corporation law of state no other authority is necessary for the creation or use of agency plr-157115-04 the financial affairs of agency are controlled by its members agency is required to deliver quarterly financial statements to each member within days after the end of each fiscal quarter and to deliver annual audited financial statements within days after the end of each fiscal_year each member also has the right to conduct at its own expense internal audits of the books record and accounts of agency agency satisfies the factors in revrul_57_128 accordingly we conclude that agency is an instrumentality of its members for purposes of sec_141 agency subsidiary as instrumentality based on the facts we also conclude that subsidiary will be an instrumentality of agency’s members for purposes of sec_141 subsidiary was formed as a limited_liability_company to protect agency and agency’s members from environmental and other liabilities that might arise as a result of owning the natural_gas properties subsidiary’s sole member is agency an instrumentality of its members by owning agency’s assets for a project subsidiary is assisting agency in performing duties for its members so that subsidiary is used for a governmental purpose and performs a governmental function on behalf of agency and its members who are all governmental entities subsidiary’s governing documents provide that no part of the assets or earnings_of subsidiary may inure to the benefit of or be distributed to any person other than agency under agency’s governing documents agency will not make any distributions of its net_earnings except to its members all governmental entities in the event of dissolution subsidiary’s assets will be distributed to agency who must upon its dissolution distribute its assets to its members control and supervision of subsidiary is vested exclusively in agency who is controlled by its members furthermore statutory authority for the creation of subsidiary is found in the limited_liability law of state and no other authority is necessary for the creation or use of subsidiary last subsidiary’s financial affairs are controlled by agency its sole member and agency’s financial affairs are controlled by its members accordingly weighing the factors of revrul_57_128 we conclude that subsidiary is also an instrumentality of agency’s members for purposes of sec_141 private use of bond proceeds by agency under sec_1_141-1 a governmental person includes a state_or_local_governmental_unit or any instrumentality thereof since private_business_use requires use by a person other than a governmental person use by an instrumentality of state_or_local_government is not private_business_use thus we conclude that the use by agency of any proceeds of bonds issued by agency members will not of itself cause private_business_use of the proceeds however private_business_use of bond proceeds depends on the direct or indirect uses of the bond proceeds thus whether or not plr-157115-04 proceeds of bonds issued by members are privately used will depend on the ultimate use of those bond proceeds b sec_115 sec_115 provides that gross_income does not include income derived from any public_utility or the exercise of any essential government function and accruing to a state or any political_subdivision thereof in revrul_77_261 1977_2_cb_45 income from an investment fund established under a written declaration of trust by a state for the temporary investment of cash balances of the state and its participating political subdivisions is excludable from gross_income for federal_income_tax purposes under sec_115 the ruling indicates that the statutory exclusion was intended to extend not to the income of a state or municipality resulting from its own participation in activities but rather to the income of a corporation or other entity engaged in the operation of a public_utility or the performance of some governmental function that accrued to either a state or municipality the ruling points out that it may be assumed that congress did not desire in any way to restrict a state's participation in enterprises that might be useful in carrying out projects that are desirable from the standpoint of a state government and which are within the ambit of a sovereign to properly conduct in revrul_90_74 1990_2_cb_34 the service determined that the income of an organization formed funded and operated by political subdivisions to pool various risks casualty public liability workers'_compensation and employees' health is excludable from gross_income under sec_115 in revrul_90_74 private interests neither materially participate in the organization nor benefit more than incidentally from the organization agency’s income agency facilitates the cost effective acquisition management and transportation of natural_gas supplies by and improves the operations of utility businesses operated by its members all functions that the members would otherwise perform themselves agency represents that all of its members are political subdivisions accordingly agency performs an essential_governmental_function based on agency’s representations for purposes of sec_115 the net_income of agency accrues solely to entities that are political subdivisions no part of agency’s income will inure to the benefit of or be distributed to any party other than its members each of which must at all times be a state_or_local_governmental_unit or an instrumentality thereof the income of which is excludable from gross_income under sec_115 other than incidentally as reasonable_compensation for services or to make payments in furtherance of agency’s purposes as set forth in its articles of incorporation upon the dissolution of agency all assets remaining after satisfaction of its liabilities shall be distributed to its members plr-157115-04 the income of agency is derived from an essential_governmental_function and accrues to a political_subdivision accordingly the income of agency is excludable from gross_income for federal_income_tax purposes under sec_115 subsidiary’s income subsidiary’s purposes are limited to acquiring owning and operating natural_gas resources on behalf of agency its sole member subsidiary assists agency in carrying out its essential governmental purposes and provides protection to agency against liabilities arising with respect to properties acquired in connection with the transmission of natural_gas supplies to its members accordingly subsidiary performs an essential_governmental_function in addition to deriving income from the performance of an essential_governmental_function the income of subsidiary must accrue to a state a political_subdivision of a state or another sec_115 organization upon dissolution subsidiary’s remaining assets will accrue to agency therefore the income of subsidiary meets the accrual requirement finally agency’s membership interest in subsidiary may not be assigned or transferred thus private interests do not benefit from subsidiary’s activities plr-157115-04 because the income of subsidiary is derived from an essential_governmental_function and accrues to a political_subdivision of a state or to an entity the income of which is excludable from gross_income under sec_115 the income of subsidiary is excludable from gross_income for federal_income_tax purposes under sec_115 conclusion based on the facts and representations submitted we conclude that agency and subsidiary are instrumentalities of their members for purposes of sec_141 however this ruling does not apply in the event any member is other than a political_subdivision we also conclude that the use by agency of any proceeds of tax-exempt_bonds issued by agency members will not of itself constitute use meeting either the private business tests of sec_141 or the private loan tests of sec_141 we also conclude that agency’s income is excludable from gross_income under sec_115 and the income of subsidiary is also excludable under sec_115 however this ruling does not apply to any subsidiaries created by agency in the future except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the 1986_code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of plr-157115-04 the material submitted in support of the request for rulings it is subject_to verification on examination sincerely assistant chief_counsel exempt_organizations employment_tax government entities by _____________________________ timothy l jones senior counsel tax exempt bond branch cc ------------------------ ----------------------------------------------------- --------------------- ------------------------------------------------------------ --------------------------------- ------------------------- ------------------------ 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