t c summary opinion united_states tax_court steven m and karen arhontes petitioners v commissioner of internal revenue respondent docket no 8621-00s steven m and karen henry c bonney jr couvillion special pursuant to sec_7463 at the time the petition is not reviewable by any be cited as authority filed date arhontes pro_se for respondent trial judgae this case was heard of the internal_revenue_code in effect was filed t the decision to be entered other court and this opinion should not unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year at issue all rule practice and procedure references are to the tax_court rules of respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax for and an accuracy-related_penalty under sec_6662 of dollar_figure the issues for decision are whether petitioners are entitled to reduce gross_receipts by a cost_of_goods_sold of dollar_figure in connection with a trade_or_business activity of steven m arhontes petitioner known as spanky's sports cards spanky's whether petitioners are entitled to a deduction for car and truck expenses of dollar_figure in connection with spanky's whether petitioners are entitled to a dollar_figure depreciation deduction in connection with spanky's and whether petitioners are liable for the accuracy-related_penalty under sec_6662 for negligence or disregard of rules or regulations in the amount of dollar_figure the remaining adjustments in the notice_of_deficiency to petitioners' itemized_deductions self-employment taxes and self-employment_tax deduction are computational and will be resolved by the court's holdings on the aforementioned issues some of the facts were stipulated and those facts with the annexed exhibits are so found and are incorporated herein by reference at the time the petition was filed petitioners’ legal residence was castro valley california during the year at issue petitioners were both employed by bay area rapid transit bart at san francisco california petitioner as a train operator and his wife karen arhontes as an administrative analyst also during the year at issue petitioner operated spanky's through which he bought and sold sports trading cards and various types of collectible memorabilia petitioner began operating spanky's at a retail location in dublin california during sometime between the middle and end of petitioner closed that location and moved the operation into his personal_residence because he was considering entering into a construction business with his brothers petitioner began his employment with bart in date he continued to operate spanky's out of his home until he sold all of the remaining inventory and discontinued the business during the year at issue in this case the operation of spanky's was discontinued because petitioner had experienced a series of net losses in recent years and had been offered dollar_figure for the purchase of the entire remaining inventory of spanky's on their joint federal_income_tax return for petitioners included a schedule c profit or loss from business schedule c in connection with spanky's on this schedule c petitioners reported dollar_figure in gross_receipts that they reduced by dollar_figure in cost_of_goods_sold resulting in a negative gross_income of dollar_figure petitioners also claimed schedule c deductions for car and truck expenses of dollar_figure and depreciation of dollar_figure resulting in a reported net_loss of dollar_figure in the notice_of_deficiency respondent disallowed all of the claimed cost_of_goods_sold and all of the claimed car and truck expenses and depreciation_deductions for lack of substantiation as a result of these adjustments respondent made computational adjustments to petitioners’ itemized_deductions self-employment taxes and self-employment_tax deduction for respondent also determined that petitioners were liable for the accuracy-related_penalty under sec_6662 for negligence or disregard of rules and regulations in the amount of dollar_figure the first issue is whether petitioners are entitled to reduce gross_receipts by a cost_of_goods_sold of dollar_figure in connection with spanky's in order to compute the gross_income of a schedule c bussiness gross_receipts are reduced by cost_of_goods_sold sec_1_61-3 income_tax regs cost_of_goods_sold is computed by subtracting the value of ending inventory goods still on hand at the end of the year from the sum of the opening_inventory and purchases during the year 78_tc_705 any amount claimed a sec_2 respondent made no adjustment to the dollar_figure in gross_receipts reported by petitioner such costs are not treated as deductions and are not subject_to the limitations on deductions contained in sec_162 and sec_274 88_tc_654 see infra discussion on pages and cost_of_goods_sold must be substantiated and taxpayers are required to maintain records sufficient for this purpose sec_6001 newman v commissioner tcmemo_2000_345 wright v commissioner tcmemo_1993_27 sec_1_6001-1 income_tax regs taxpayers generally bear the burden of proving entitlement to costs and deductions claimed 699_f2d_450 8th cir affg 78_tc_458 however this court may estimate costs and allowable deductions under certain circumstances where a taxpayer establishes entitlement to an allowable cost or deduction but does not establish the amount of the cost or deduction 39_f2d_540 2d cir any such estimate however must have a reasonable evidentiary basis 85_tc_731 without ‘ the internal_revenue_service restructuring reform act of publaw_105_206 sec 112_stat_726 added sec_7491 which under certain circumstances places the burden of production on the secretary with respect to a taxpayer’s liability for taxes penalties and additions to tax in court proceedings arising in connection with examinations commencing after date the record is unclear as to whether the examination of petitioners' return commenced before or after date nevertheless the burden_of_proof with respect to the items of deficiency did not shift to respondent because petitioners did not provide substantiation and credible_evidence in connection therewith 116_tc_438 moreover respondent has satisfied the burden of production with respect to the accuracy-related_penalty under sec a such a basis any allowance would amount to unguided largesse 245_f2d_559 5th cir on their schedule c petitioners reported a beginning_inventory of dollar_figure purchases during the year of dollar_figure and an ending inventory of zero resulting in a cost_of_goods_sold of dollar_figure petitioners reported a zero ending inventory because they sold all of the inventory of spanky's during the year at issue in the process of terminating the business in support of their claimed cost_of_goods_sold petitioners submitted various invoices and canceled checks referencing purported inventory purchases made during the years and in support of inventory purchases made prior to petitioners submitted their schedule c filed for spanky's along with copies of an internal_revenue_service irs income_tax examination changes and a closing_agreement from an irs appeals officer in connection with an audit of petitioners' federal income taxes the audit documents petitioners contend that the information contained in the audit documents is tantamount to respondent's admission of the accuracy of petitioners' reported beginning_inventory as well as some inventory purchases made in connection with spanky's on their schedule c filed in connection with spanky's petitioners reported a beginning_inventory of dollar_figure purchases of dollar_figure ending inventory of dollar_figure and cost of continued respondent disagrees with petitioners' assertion claiming instead that the audit focused merely on purchases made during and made no determination with respect to the beginning_inventory reported by petitioners petitioners have failed to prove that during the audit of their federal_income_tax return respondent audited and made determinations with respect to the beginning_inventory reported in connection with spanky's however on this record the court is satisfied that petitioners did have goods on hand when they sold spanky's and therefore are entitled to reduce their gross_receipts from spanky's by some amount for cost_of_goods_sold even though petitioners failed to substantiate the exact amount claimed on their return therefore pursuant to the so-called cohan_rule and the evidence submitted in this case the court holds that petitioners are entitled to reduce their spanky's gross_receipts by a cost_of_goods_sold of dollar_figure for the second issue is whether petitioners are entitled to a deduction for car and truck expenses of dollar_figure in connection with spanky's petitioners claimed these expenses for mileage during continued goods sold of dollar_figure during the audit of petitioners' tax_year respondent disallowed the claimed dollar_figure cost_of_goods_sold petitioners agreed with this adjustment in the settlement with the appeals_office ie miles pincite cents per mile in the notice_of_deficiency respondent disallowed the amount claimed sec_162 allows a deduction for the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business to qualify for the deduction an expense must be both ordinary and necessary within the meaning of sec_162 308_us_488 deductions are a matter of legislative grace and the taxpayer bears the burden of proving entitlement to any deductions claimed 292_us_435 moreover a taxpayer is required to maintain records sufficient to establish the amount of his or her income and deductions sec_6001 sec_1_6001-1 income_tax regs as stated previously under certain circumstances where a taxpayer establishes entitlement to a deduction but does not establish the amount of the deduction the court is allowed to estimate the amount allowable cohan v commissioner supra in the case of travel_expenses however specifically including meals_and_lodging while away from home as well as in the case of entertainment_expenses and expenses with respect to listed_property sec_274 overrides the so-called cohan doctrine 50_tc_823 affd per curiam 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs fed reg date sec_274 imposes stringent substantiation requirements for deductions related to travel entertainment gifts and listed_property as defined in sec_280f passenger automobiles are listed_property under sec_280f sec_274 denies these deductions unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the taxpayer's own statement a the amount of such expense or other item b the time and place of the travel entertainment amusement recreation or use of the facility or property or the date and description of the gift c the business_purpose of the expense or other item and d the business relationship to the taxpayer of persons entertained using the facility or property or receiving the gift thus under sec_274 deductions for automobile expenses travel_expenses and meals and entertainment_expenses may not be estimated instead the taxpayer must provide adequate_records or corroborate testimony with other evidence the limited amount of evidence submitted by petitioners in support of this item is insufficient to satisfy the strict substantiation requirements of sec_274 accordingly on this record the court holds that petitioners are not entitled to deduct the dollar_figure in car and truck expenses claimed on their schedule c for spanky's respondent is sustained on this issue the third issue is whether petitioners are entitled to a dollar_figure schedule c depreciation deduction sec_167 allows -- - taxpayers a depreciation deduction for the exhaustion and wear_and_tear of property used in a trade_or_business or held_for_the_production_of_income property becomes depreciable beginning when it is placed_in_service 84_tc_739 affd on another issue 803_f2d_1572 llth cir clemente v commissioner tcmemo_1985_367 sec_1_167_a_-10 income_tax regs property is considered placed_in_service when it is ready and available fora specifically assigned function piggly wiggly s inc v commissioner supra williams v commissioner t c memo sec_1_167_a_-11 income_tax regs at trial petitioners were unable to identify the asset for which they claimed the subject depreciation deduction thus petitioners failed to substantiate their entitlement to the claimed depreciation deduction accordingly the court holds that petitioners are not entitled to a dollar_figure depreciation deduction in connection with spanky's respondent is sustained on this issue the final issue for decision is whether petitioners are liable for the accuracy-related_penalty under sec_6662 a for negligence or disregard of rules or regulations in the amount of dollar_figure sec_6662 provides that if it is applicable to any portion of an underpayment in taxes there shall be added to the tax an amount equal to percent of the portion of the underpayment to which sec_6662 applies sec_6662 b provides that sec_6662 shall apply to any underpayment attributable to negligence or disregard of rules or regulations sec_6662 provides that the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws and the term disregard includes any careless reckless or intentional disregard of rules or regulations negligence is the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances 85_tc_934 however under sec_6664 no penalty shall be imposed under sec_6662 with respect to any portion of an underpayment if it is shown that there was a reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion the determination of whether a taxpayer acted with reasonable_cause and in good_faith depends upon the facts and circumstances of each particular case sec_1 b income_tax regs relevant factors include the taxpayer's efforts to assess his or her proper tax_liability the knowledge and experience of the taxpayer and reliance on the advice of a professional such as an accountant drummond v commissioner tcmemo_1997_71 the most important factor is the extent of the taxpayer's effort to determine the taxpayer's proper tax_liability sec_1_6664-4 income_tax regs an honest misunderstanding of fact or law that is reasonable in light of the experience knowledge and education of the taxpayer may indicate reasonable_cause and good_faith remy v commissioner tcmemo_1997_72 in the notice_of_deficiency respondent applied the sec_6662 penalty to all adjustments for the year at issue the underpayment resulted from respondent's total disallowance of petitioners' claimed cost_of_goods_sold and deductions for car and truck expenses and depreciation in connection with spanky's as well as computational adjustments made in relation thereto as discussed above petitioners are entitled to reduce their business gross_receipts by a cost_of_goods_sold of dollar_figure however respondent's disallowance of the car and truck expenses and depreciation_deductions has been sustained petitioners' evidence fell short of what was required to allow the bulk of the claimed cost_of_goods_sold or any of the claimed car and truck expenses and depreciation_deductions furthermore petitioners presented no evidence to show that they used due care in deducting the disputed items on their return that were subseguently adjusted in the notice_of_deficiency and sustained by this court in favor of respondent nor did petitioners present evidence to show that they had reasonable_cause to deduct such items petitioners failed to maintain adequate books_and_records to support the majority of the costs and deductions claimed in connection with their business therefore the court finds that petitioners negligently or intentionally disregarded rules or regulations with regard to the adjustments in the notice_of_deficiency that were sustained by this court accordingly the accuracy-related_penalty under sec_6662 1s sustained reviewed and adopted as the report of the small_tax_case division decision will be entered under rule


internal_revenue_service number release date index numbers ----------------------- --------------------------------------- ------------------------------ --------------------- ------------------------ ------------- -------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------ id no ----------------- telephone number --------------------- refer reply to cc fip b03 plr-117726-15 date date legend taxpayer ----------------------------------------------- company -------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ state date a b c government agency dear ------------------ ------------- ---------------------- -- -- --- -------------------------- this ruling responds to a letter dated date submitted on behalf of taxpayer taxpayer requested a ruling that ski lift towers that will be owned by taxpayer qualify as real_property for purposes of sec_856 of the internal_revenue_code facts plr-117726-15 taxpayer was formed on date as a state trust and has elected to be treated as a real_estate_investment_trust reit within the meaning of sec_856 taxpayer is a publicly traded reit that owns a portfolio of properties primarily in the destination entertainment education and recreation sectors taxpayer is in the process of acquiring ski resort assets from company the ski resort assets at issue will be leased to operators under triple-net leases with the operators responsible for the maintenance and day-to-day operations of the resorts taxpayer’s typical ski lift conveyer system will consist of the following components concrete foundations towers tower head assemblies walking beams sheave assemblies lift chairs or gondolas cables machinery and a building to house the machinery for purposes of this ruling a ski lift tower is defined to include only the foundation tower tower head assembly and walking beam taxpayer will own all of the property constituting a ski lift tower the function of a ski lift tower is to support the sheave assemblies and the cables on which the lift chairs or gondolas are attached a tower designed for a ski lift tower is typically a rolled steel column or tube anchored to a reinforced concrete foundation using threaded galvanized bolts lock- washers and nuts the concrete foundation is typically an eight by eight foot pad that extends more than six feet into the ground a tower head assembly is made of steel and is bolted to the top of a tower the function of a tower head assembly is to support the walking beam and sheave assemblies a walking beam is a walkway constructed of steel and equipped with safety railings a walking beam is bolted to the tower head assembly and is used to maintain the sheave assemblies a ski lift tower is designed and constructed to remain permanently in place it is rare for any particular component of a ski lift tower to be replaced due to damage because the damage would likely result from an event that would damage the entire ski lift tower a ski lift tower is typically custom-designed and engineered for use at a particular location a ski lift tower is designed to withstand extreme weather conditions including high winds and avalanches the removal of a ski lift tower is both costly and time consuming a removal project typically takes a to b weeks and requires the use of heavy construction equipment such as cranes and in some cases helicopters except in rare circumstances it is economically impractical to relocate a ski lift tower a ski lift tower is typically sold for scrap metal or discarded once removed each ski lift tower was constructed on a site that was expected to be controlled by the owner for a period in excess of c years from the date of the initial erection of the ski lift tower taxpayer does not intend or expect to remove and in most cases is not plr-117726-15 permitted to remove a ski lift tower following the expiration of ground leases or government agency occupancy permits law and analysis sec_856 of the code provides that at the close of each quarter of its taxable_year at least percent of the value of a reit's total assets must be represented by real_estate_assets cash and cash items including receivables and government securities sec_856 provides that the term real_estate_assets means real_property including interests_in_real_property and interests in mortgages on real_property and shares or transferable certificates of beneficial_interest in other reits that meet the requirements of sec_856 through sec_859 sec_1_856-3 of the income_tax regulations provides in part that the term real_estate_assets means real_property sec_1_856-3 provides that the term real_property means land or improvements thereon such as buildings or other inherently permanent structures thereon including items which are structural_components of such buildings or structures in addition the term real_property includes interests_in_real_property local law definitions will not be controlling for purposes of determining the meaning of real_property for purposes of sec_856 and the regulations thereunder the term real_property includes for example the wiring in a building plumbing systems central heating or central air-conditioning machinery pipes or ducts elevators or escalators installed in a building or other items which are structural_components of a building or other permanent structure the term does not include assets accessory to the operation of a business such as machinery printing press transportation equipment which is not a structural_component of the building office equipment refrigerators individual air-conditioning units grocery counters furnishings of a motel hotel or office building even though such items may be termed fixtures under local law revrul_75_424 1975_2_cb_269 considers whether certain assets used in connection with the transmission and reception of microwave signals qualify as real_property for purposes of sec_856 the ruling concludes that the building the heating and air conditioning system the transmitting and receiving towers and the chain link fencing are real_estate_assets within the meaning of sec_856 the antennae waveguides transmitting receiving multiplex equipment and prewired modular racks are assets accessory to the operation of a business and therefore not real_estate_assets within the meaning of sec_856 a ski lift tower is a large steel structure that is anchored to a reinforced concrete foundation using heavy duty hardware a ski lift tower is designed and plr-117726-15 constructed to remain permanently in place a ski lift tower cannot be readily moved and is most often sold for scrap metal or discarded once removed taxpayer’s ski lift towers will remain in place following the expiration of taxpayer’s ground lease or occupancy permit removing a ski lift tower requires significant time and expense the permanency and other characteristics of a ski lift tower are similar to those of the transmitting and receiving towers that were held to be real_estate_assets in revrul_75_424 similar to the transmitting and receiving towers in revrul_75_424 each ski lift tower supports or is directly or indirectly connected to components of the ski lift conveyer system ie sheave assemblies lift chairs or gondolas cables and machinery that are assets accessory to the operation of a business that would not qualify as real_estate_assets under sec_856 however the fact that the ski lift towers support or are directly or indirectly connected to these assets does not prevent the ski lift towers themselves from qualifying as real_estate_assets conclusion based on the information submitted and representations made by taxpayer we rule that taxpayer’s ski lift towers are inherently permanent structures that qualify as real_property for purposes of sec_856 this ruling's application is limited to the facts representations code sections and regulations cited herein except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular no opinion is expressed concerning whether taxpayer otherwise qualifies as a reit under subchapter_m part ii of chapter of the code this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely __________________________ k scott brown branch chief branch office of associate chief_counsel financial institutions products


department of the treasury internal_revenue_service washington d c tax exempt ano government entities oivision date date contact person identification_number telephone number employer_identification_number uil legend o o j x i dear _ we have considered the request of a and b dated date and subsequently amended by a letter dated date for a ruling concerning the federal income and excise_tax consequences of a proposed transfer percent or more of the fair_market_value of a’s net assets to b facts a and b are recognized as organizations described in sec_501 of the internal_revenue_code and are private_foundations within the meaning of sec_509 of the code both a and b are controlled by the same director trustees a proposes to transfer its real_estate partnership assets to b to further their exempt purposes by facilitating a more efficient distribution of funds limiting their liability with regard to the assets and simplifying asset management a and b state that the value of the transfer will be approximately percent or more of the fair_market_value of a's net assets of dollar_figurex and that a will receive no consideration in exchange for the transfer state that they will make grants to organizations that are exempt under section both a and b c of the code the private_foundations state that they have not notified the service that they intend to terminate or received notice that the service terminated their status as private_foundations they also state that they have no knowledge that either organization has made willful repeated acts or failures to act or a willful and flagrant act or failure to act that would give rise to a liability for tax under chapter a and b represent that a's disqualified persons are not affiliated with the transferred assets finally a represents that it will exercise expenditure_responsibility with regard to the transferred assets and has drafted sample documents to ensure that b will use the transferred funds properly you have requested the following rulings for purposes of chapter of the code sec_4940 et seq and part ii of subchapter_f of chapter sec_507 through of the code as a result of a's transfer of real_estate partnership assets to b b will be treated as if it were a and all of the savings provisions applicable to private_foundations under the tax reform act of as amended will apply to b to the same extent and in the same manner as such provisions applied to a a b the transfer of real_estate partnership assets from a of assets described in sec_507 of the code and sec_1_507-3 and c of the regulations consequently the transfer will not result in the termination of a's private_foundation_status or result in an assessment of the termination_tax under sec_507 of the code against either a or b under sec_507 of the code and sec_1_507-3 of the regulations b will not be treated as a newly created organization to b will constitute a transfer a's tax basis and holding_period for the assets that b will receive including the basis computed under sec_4940 of the code will carry over to b in the same manner as if such assets had continued to be held without interruption by a the transfer of assets a will not itself give rise to net_investment_income to a under sec_4940 of the code and will not constitute a sale_or_other_disposition within the meaning of sec_4940 b will not constitute a direct or indirect act of self-dealing under sec_4941 of the code with regard to a b or any foundation managers substantial contributors or other disqualified persons of a or b c will not constitute an investment by a or b which jeopardizes the exempt purposes of a or b under sec_4944 of the code d will not constitute a taxable_expenditure as defined in section d of the code by a and will not subject a or b to any expenditure_responsibility requirements under sec_4945 and e to the extent that a has any obligation that requires the exercise of expenditure_responsibility under sec_4945 of the code at the time of the transfer a will continue to exercise expenditure_responsibility with respect to such obligations the distribution_requirements of a and b under sec_4942 of the code for the year of the transfer shall be fulfilled by each as determined by the assets held by each the transfer will not adversely affect the tax-exempt status of a or b and neither a nor b will be subject_to federal_income_tax under subtitle a or chapter of the code with regard to the transfer law sec_501 of the internal_revenue_code exempts organizations that are organized and 2uu806015 operated exclusively for charitable and other exempt purposes from federal_income_tax sec_507 of the code states that the status of any organization as a private_foundation is terminated only if it notifies the secretary of its intent to terminate or there have been either willful repeated acts or a willful and flagrant act giving rise to liability for tax under chapter and the secretary notifies the organization that it is liable for termination_tax under sec_507 sec_507 of the code permits one private_foundation to transfer its assets to another private_foundation without treating the transferee foundation as a newly created organization sec_507 of the code imposes a tax on a private_foundation that terminates its private_foundation_status by notifying the service of its intent to terminate or that has made willful repeated acts or failures to act or a willful and flagrant act or failure to act that results in tax under chapter and the service has notified the organization that it is liable for the tax and either the organization has paid the tax or the tax was abated sec_4940 of the code imposes an annual tax on the net_investment_income of private_foundations sec_4940 of the code defines net_investment_income as the amount by which the sum of the gross_investment_income and the capital_gain_net_income exceed the allowable deductions and the term capital_gain_net_income as gains and losses from the sale_or_other_disposition of property used for the production of interest dividends rents and royalties and other_property used for the production_of_income included in computing the tax imposed by section dollar_figure sec_4941 a of the code imposes an excise_tax on acts of self-dealing between a private_foundation and any of its disqualified persons as defined in sec_4946 sec_4942 of the code imposes an annual tax on the undistributed_income_of_a_private_foundation it requires a private_foundation to pay qualifying distributions as defined in sec_4942 to accomplish one or more exempt purposes a qualifying_distribution includes any amount_paid to accomplish one or more purposes including reasonable administrative expenses_incurred in the direct active_conduct of an exempt_purpose described in sec_170 sec_4944 of the code imposes a tax on any investment that jeopardizes an exempt organization's charitable purpose sec_4945 of the code imposes a tax on the taxable_expenditures of a private_foundation sec_4945 of the code defines the term taxable_expenditure as any amount_paid or incurred by a private_foundation as a grant to an organization unless the organization is described in paragraph or of sec_509 or is an exempt_operating_foundation or the private_foundation exercises expenditure_responsibility with respect to the grant -4- sec_4945 of the code defines the term expenditure_responsibility to mean that a private_foundation is responsible for exerting all reasonable efforts and for establishing procedures to see that the grant is spent solely for the purpose for which made to obtain full and complete reports from the grantee on how the funds are spent and to make full and detailed reports with respect to such expenditures to the secretary sec_1_507-3 of the income_tax regulations states that in the case of a significant disposition of assets to one or more private_foundations within the meaning of paragraph c which describes a sec_507 transfer the transferee organization shall not be treated as a newly created organization but shall succeed to those attributes and characteristics of the transferor organization which include its aggregate tax_benefit substantial contributors and chapter tax and penalty liabilities sec_1_507-3 of the regulations states that the provisions contained in sec_4940 sec_4942 sec_4941 sec_4942 sec_4945 and sec_508 if the conditions described therein are met shall apply to the transferee foundation with respect to the assets transferred to the same extent and in the same manner that they would have applied to the transferor foundation had the transfer described in sec_507 not been effected sec_1_507-3 of the regulations provides that for purposes of sec_507 the terms other adjustment organization or reorganization shall include a significant disposition of assets the terms other adjustment organization or reorganization includes any partial_liquidation or any other significant disposition of assets to one or more private_foundations other than transfers for full and adequate_consideration or distributions out of current income sec_1_507-3 of the regulations provides that the term significant disposition of assets to one or more private_foundations includes any disposition for a taxable_year where the aggregate of the dispositions to one or more private_foundations for the taxable_year i sec_25 percent or more of the fair_market_value of the net assets of the distributing foundation at the beginning of the taxable_year sec_1_507-3 of the regulations states that unless a private_foundation voluntarily gives notice pursuant to sec_507 a transfer of assets described in sec_507 will not constitute a termination of the transferor’s private_foundation_status under section s07 a sec_1_507-4 of the regulations states that private_foundations that make transfers described in sec_507 are not subject_to the tax imposed under sec_507 with respect to such transfers unless the provisions of sec_507 become applicable sec_53_4940-1 of the foundation and similar excise_tax regulations states that a distribution_of_property for purposes described in sec_170 of the code or sec_170 which is a qualifying_distribution under sec_4942 shall not be treated as a sale or other distribution_of_property sec_53_4945-5 of the regulations provides that a private_foundation will be considered to be exercising expenditure_responsibility under sec_4945 as long as it exerts all reasonable efforts and establishes adequate procedures i to see that the grant is spent solely -5- for the purpose for which made ii to obtain full and complete reports from the grantee on how the funds are spent and iii to make full and detailed reports with respect to such expenditures to the commissioner sec_53_4945-5 of the regulations states that if a private_foundation makes a grant described in sec_4945 of the code to a private_foundation that is exempt from taxation under sec_501 for endowment for the purchase of capital equipment or for other capital purposes the grantor foundation shall require annual reports from the grantee on the use of the principal and income if any from the grant funds the grantee shall make such reports annually for its taxable_year in which the grant was made and the immediately succeeding two taxable years only ff succeeding taxable_year neither the principal the income from the grant funds nor the equipment purchased with the grant funds has been used for any purpose which would result in a liability for tax under sec_4945 the grantor may then allow such reports to be discontinued it is reasonably apparent to the grantor that before the end of the second sec_53_4946-1 of the regulations states that for purposes of sec_4941 of the code only the term disqualified_person will not include any organization described in sec_501 analysis this proposed transaction involves a private foundation's transfer of percent or mone of the fair_market_value of its total net assets to an entity that qualifies for exemption under sec_501 of the code and that has not notified the secretary of its intent to terminate its status as a private_foundation accordingly the proposed transaction is not a transfer described in sec_507 which imposes a termination_tax under sec_507 c instead it is a significant transfer of assets as described in sec_507 consequently b will not be treated as a newly created organization and with regard to the transferred assets the provisions described in sec_1_507-3 and of the regulations will apply to b to the same extent and in the because a will make the grant to further their same manner as they would have applied to a charitable purposes and b is exempt under sec_501 c the transfer will not adversely affect the exempt status of a or b nor will it be treated as investment_income an act of self- dealing or a jeopardizing investment within the meaning of sec_4940 sec_4941 and sec_4944 when a private_foundation makes a partial transfer of assets to another under sec_507 of the code the regulations require the exercise of expenditure_responsibility to interpret them otherwise would weaken the sec_4945 and h rules that require expenditure_responsibility over grants or transfers between private_foundations accordingly a’s transfer to b will not be considered a taxable_expenditure as long as a exercises expenditure_responsibility over the grant in accordance with sec_4945 and sec_53_4945-5 and sec_53_4945-5 of the regulations based on the foregoing we rule as requested as follows result of the transfer with regard to the transferred assets b will succeed to a’s as a attributes and characteristics as described in sec_1_507-3 of the regulations -6- and the provisions described in sec_1_507-3 will apply to b to the same extent and in the same manner as they would have applied to a the transfer will not result in the termination of a’s private_foundation_status or result in the imposition of a termination_tax against either a or b under sec_507 of the code and b will not be treated as a newly created organization the tax basis and the holding_period for the transferred assets will carry over to b the transfer a b c d e will not give rise to net_investment_income to a under sec_4940 of the code and will not constitute a sale_or_other_disposition within the meaning of sec_4940 will not constitute a direct or indirect act of self-dealing under sec_4941 of the code with regard to a b or a’s disqualified persons will not constitute an investment by a or b which jeopardizes the exempt purposes of a or b under sec_4944 of the code will not constitute a taxable_expenditure as long as a follows the requirements of sec_4945 of the code and sec_53_4945-5 and sec_53 4945-s c of the regulations will require a to exercise expenditure_responsibility with respect to the transferred assets under sec_4945 of the code aand b will each be responsible for meeting their own distribution_requirements under sec_4942 of the code the transfer will not adversely affect the tax-exempt status of a or b and will not trigger a liability of federal_income_tax under subtitle a or excise_tax under chapter of the code against either a or b this ruling is based on the understanding there will be no material changes in the facts upon which it is based this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described this ruling is directed only to the organization that requested it sec_6110 of the code provides it may not be used or cited by others as precedent this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make if you disagree with our proposed available for public inspection is attached to notice deletions you should follow the instructions in notice if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative in accordance with the power of sincerely lizabeth c kastenberg acting manager exempt_organizations technical group enclosure notice


internal_revenue_service number release date index numbers ------------------------------ ------------------------------------------- ------------------------ ------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ---------------- telephone number ------------------ refer reply to cc psi b3 plr-136332-14 date date legend x ------------------------------- ------------------------------------ ------------------------------- a --------------------------------------- trust ------------------------------- ------------------------------------ state ------ date ------------------------ date -------------------- dear --------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representatives requesting a ruling under sec_1362 of the internal_revenue_code code facts the information submitted states that x was incorporated under the laws of state on date x elected to be an s_corporation effective date however the required consent to x’s s_corporation_election was not obtained from shareholder a in addition it is represented that trust meets the definition of a qualified_subchapter_s_trust plr-136332-14 qsst under sec_1361 however no election was made to treat trust as a qsst effective date furthermore the required consent to x’s s_corporation_election was not obtained from the beneficiary of trust in addition form_2553 election by a small_business_corporation filed by x included the incorrect number of shares owned by each shareholder accordingly x’s s_corporation_election was ineffective x represents that there was no tax_avoidance or retroactive tax planning involved in the failure of a or the beneficiary of trust to properly execute x’s form_2553 in the failure of the form_2553 to contain to correct number of shares owned by each shareholder and in the failure of trust to timely file a qsst election it is represented that x and its shareholders have treated x as an s_corporation and trust as a qsst since date in addition x and its shareholders agree to make any adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary 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 provides that the term small_business_corporation means a domestic_corporation that is not an ineligible_corporation and that does not among other requirements 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 sec_1361 provides that for the purposes of sec_1362 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be an s_corporation shareholder sec_1361 provides that in the case of a qsst with respect to which a beneficiary makes an election under sec_1361 the trust is treated as a_trust described in sec_1361 and for purposes of sec_678 the beneficiary of such trust shall be treated as the owner of that portion of the trust which consists of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1361 provides that a beneficiary of a qsst may elect to have sec_1361 apply sec_1_1361-1 of the income_tax regulations provides that the current income_beneficiary of the trust must make the election under sec_1361 by signing and filing with the service_center with which the corporation files its income_tax return the applicable form or statement including the information listed in sec_1_1361-1 plr-136332-14 sec_1362 provides that a beneficiary of qsst or his legal_representative may election to have sec_1362 apply sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 is terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that any termination under sec_1362 is effective on and after the date of cessation sec_1362 provides that if an election under sec_1362 or sec_1361 by any corporation i was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or ii was terminated under sec_1362 or or sec_1361 the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination steps were taken so that the corporation for which the election was made or the termination occurred is a small_business_corporation or a qsub as the case may be or to acquire the required shareholder consents and the corporation for which the election was made or the termination occurred and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agree to make the adjustments consistent with the treatment of the corporation as an s_corporation or a qsub as the case may be as may be required by the secretary with respect to this period then notwithstanding the circumstances resulting in such ineffectiveness or termination the corporation shall be treated as an s_corporation or a qsub as the case may be during the period specified by the secretary conclusion based solely on the facts submitted and representations made we conclude that x’s s_corporation_election was ineffective on date as a result of the missing consents to x’s s_corporation_election the incorrect information concerning stock ownership and the failure of the beneficiary of trust to make a qsst election under sec_1361 for trust we further conclude that the ineffectiveness of x’s s_corporation_election constituted an inadvertent invalid election within the meaning of sec_1362 consequently under sec_1362 x will be treated as an s_corporation from date and thereafter provided that x’s s_corporation_election was otherwise valid and not otherwise terminated under sec_1362 as a condition of the rulings each shareholder of x including a and the beneficiary of trust must each sign a written_statement as described in sec_1 plr-136332-14 b consenting to x’s s_corporation_election effective date the written statements must be filed with the appropriate service_center within days from the date of this letter indicating that the statements are to be associated with x’s originally filed form_2553 in addition this ruling is contingent on the beneficiary of trust filing an election under sec_1361 for trust with an effective date of date with the appropriate service_center within days from the date of this letter a copy of this letter should be attached to the election under sec_1361 and to the consent statements except as specifically ruled above we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was otherwise a valid s_corporation or whether trust is eligible to elect to be treated as a qsst this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited for precedent pursuant to a power_of_attorney on file we are sending a copy of this letter to x’s authorized representatives the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the rulings requested it is subject_to verification on examination sincerely bradford r poston senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom corp-plr-102145-99 date date mutual holding_company trustee custodian state a state b date dear this is in response to your letter dated date regarding a proposed transaction additional information was supplied in subsequent submissions in a letter dated date you withdrew requested rulings and modified ruling_request and requested two additional rulings in a letter dated date you withdrew ruling_request of the date supplement ruling_request in a letter dated date you withdrew requested ruling of the date submission the facts submitted indicate that mutual is a mutual_life_insurance_company organized under the laws of state a mutual is the common parent of an affiliated_group which files a life-nonlife consolidated_return as a mutual_insurance_company mutual has no authorized issued or outstanding_stock the policyholders of mutual through purchases of policies acquire both insurance coverage and certain rights membership interests in mutual these rights which arise by operation of state a law include the right to vote to elect directors of the company and rights to share in the surplus of the company including the right to receive a share of the company’s surplus upon a liquidation of the company plr- mutual has determined that it can raise capital more efficiently and have greater flexibility to make acquisitions if it becomes a stock company this will enable mutual to increase its market leadership and financial strength providing additional security for existing and future policyholders therefore the mutual board_of directors authorized the development of a plan_of_reorganization the plan for mutual to convert to a stock life_insurance subsidiary of a stock holding_company holding_company under the plan mutual’s eligible policyholders will receive common_stock of the holding_company cash or policy credits as consideration for the termination of their membership interests in mutual the demutualization the holding_company common_stock will be held through a_trust the trust to be established for the benefit of the policyholders who are to receive stock under the terms of the plan also referred to as the beneficiaries trust will be governed by the laws of state b to accomplish the demutualization the following transactions are proposed i ii iii iv v vi prior to the effective date of the demutualization the effective date mutual will form holding_company as a wholly-owned subsidiary of mutual on the effective date the mutual policyholders’ membership interests in mutual will be extinguished by operation of law mutual will issue of its common_stock to the trust on behalf and for the benefit of the mutual policyholders also referred to as beneficiaries the beneficiaries will be issued trust interests reflecting their proportionate ownership of the shares held in the trust immediately thereafter the trust will exchange the shares of mutual common_stock that it received in step iii above for shares of holding_company common_stock also referred to as trust shares such holding_company common_stock to be held for the exclusive benefit of the beneficiaries mutual will surrender to the holding_company and the holding_company will cancel all of the remaining shares of holding_company common_stock held by mutual immediately prior to the effective date mutual will establish a liability on its books reflecting the aggregate amount that the mutual board_of directors anticipates will be credited to policyholders who are required to receive policy credits as consideration under the terms of the plan and the aggregate amount of cash payable to policyholders who are entitled to receive cash under the terms of the plan plr- vii on the same date that the plan becomes effective the holding_company will sell shares of its common_stock to the public through an initial_public_offering ipo the holding_company shares that will be sold in the ipo will have rights and preferences with respect to voting dividends sharing on liquidation and all other matters that are identical to those of the holding_company shares issued to the trust on the effective date viii following the demutualization the number of outstanding shares of mutual stock will be reduced pursuant to a recapitalization under the terms of the plan all eligible policyholders will ultimately receive holding common_stock to be held by the trust for the benefit of such eligible policyholders except cash will be distributed by mutual to i policyholders who elect to receive cash ii policyholders with non-u s mailing addresses and iii policyholders with respect to which it is determined that it is not reasonable feasible to provide consideration in the form of stock in addition under the plan consideration will be paid through the addition of policy credits by mutual in cash or stock for qualifying policies that are i tax-sheltered annuities within the meaning of sec_403 ii individual retirement annuities within the meaning of sec_408 or sec_408a and iii individual annuity_contracts and individual life_insurance policies issued directly to a plan participant pursuant to a plan qualified under sec_401 or sec_403 policyholders who elect to receive cash will receive a cash payment from mutual as soon as is reasonably practicable following the plan effective date in consideration of the extinguishment of their membership interests each beneficiary will be issued a number of trust interests equal to the number of shares trust shares of holding_company allocated to such beneficiary under the terms of the plan all trust interests will be held in the name of a custodian the custodian who will keep records of all beneficiaries’ trust interests including a list of the names of each beneficiary and such beneficiary’s trust interests in addition to the trust interests received by the beneficiaries as described above each beneficiary that holds fewer than big_number trust interests may make an election to purchase additional shares of holding_company common_stock the additional shares of holding_company common_stock that are purchased on behalf of a beneficiary will be delivered to the trustee of the trust to be deposited in trust in exchange for additional trust interests that will be distributed to the beneficiary beneficiaries of the trust will be able to withdraw trust shares for sale sale election at prevailing market prices through a purchase and sale program trust shares will be sold through an independent agent in the market or in holding company’s discretion to holding_company at market prices pursuant to a share repurchase program to be established by holding company’s board_of directors board in addition a beneficiary may withdraw withdrawal election the trust plr- shares allocable to the beneficiary in_kind from trust in liquidation of all of the beneficiary’s trust interests beginning on the first anniversary of the effective date following the effective date beneficiaries may also elect to participate in any tender or exchange_offer for holding_company common_stock if a beneficiary elects to participate the beneficiary’s allocable trust shares will be withdrawn from the trust in liquidation of the beneficiary’s trust interest and the allocable trust shares will be tendered or exchanged on behalf of the beneficiary further in the event there is a transaction which would result in the exchange or conversion of trust shares for cash or other_property a beneficiary may elect to receive consideration other than in the form of common_stock of the acquirer if the beneficiary so elects the beneficiary’s allocable trust shares will be withdrawn from trust in liquidation of the beneficiary’s trust interests in addition the board may terminate the trust if the number of trust shares falls below of all outstanding shares of holding_company common_stock in any event the trust will terminate when the number of trust shares held by trust is less than of the outstanding holding_company common_stock upon termination of trust all remaining trust shares and any accumulated distributions thereon will be distributed by the trustee to the beneficiaries at that time holding_company may offer to purchase all or a portion of the trust shares to be distributed and beneficiaries will be given the opportunity to elect to have holding_company purchase all or some of their allocable trust shares under the trust agreement the trustee has only the powers set forth in the trust agreement the trust agreement provides that the trust will hold trust shares of holding_company except for the investment of distributions on the trust shares pending distributions to beneficiaries as described below the trustee has no power under the trust agreement to acquire other assets under the trust agreement on all matters other than beneficiary consent matters as defined in the trust agreement the trustee has the exclusive and absolute right to vote assent or consent the trust shares in favor of and in opposition to such matter or abstain from voting on such matter in accordance with the recommendation given by the board_of directors of the holding_company to its stockholders in respect of the matter or if no such recommendation is given as directed by the board_of directors of the holding_company with respect to any such matter other than a beneficiary consent matter for which no such recommendation is provided to the holding company’s stockholders the board_of directors of the holding_company shall provide voting directions to the trustee the trustee must request instructions from the beneficiaries in accordance with the trust agreement and must vote assent consent or abstain on the matter in accordance with the conditions in the trust agreement if the matter is a beneficiary plr- consent matter beneficiary consent matters include matters concerning the election or removal of directors of holding_company if a contesting stockholder of the holding_company has in compliance with the provisions of the holding company’s by-laws and applicable law given timely notice of the stockholder’s proposal to a nominate one or more candidates or a slate of candidates for election as directors of the holding_company b oppose one or more nominees of the holding company’s board_of directors for election of directors c remove one or more directors for cause or d nominate one or more candidates for elections as directors of the holding_company to fill the vacancy or vacancies resulting from the removal of one or more directors by the holding company’s stockholders the merger or consolidation of the holding_company into or with any other person the sale lease or exchange of all or substantially_all of the property or assets of the holding_company or the recapitalization or dissolution of the holding_company in each case which requires a vote of the holding company’s stockholders under applicable state b law or any other transaction that would result in an exchange or conversion of trust shares for cash securities or other_property prior to the first anniversary of the plan effective date the issuance of common_stock after the plan effective date at a price materially less than the then prevailing market price other than through an underwritten offering or to officers employees or insurance agents of the holding_company or an subsidiary of the holding_company pursuant to an employee_benefits plan any proposal requiring the board_of directors of the holding_company to amend or redeem the rights under the holding company’s stockholder rights plan other than a proposal with respect to which the holding_company has received advice of nationally-recognized legal counsel to the effect that the proposal is not a proper subject for stockholder action under state b law if at any time during the term of the trust the trustee shall receive cash dividends upon any trust shares the trustee shall distribute the same together with interest if any earned on such cash dividend by the trust to the custodian which shall promptly distribute such amounts to each trust_beneficiary pro_rata in accordance with the beneficiary’s interests on the holding company’s record_date for the payment of the dividend under the trust agreement the trustee shall distribute to the custodian any plr- cash dividends received upon any trust shares together with any interest earned the custodian shall promptly distribute such amount to each trust_beneficiary pro_rata in accordance with the trust beneficiary’s interests on the holding company’s record_date for the payment of the dividend distributions of all regular cash dividends if any received by the trust during any six-month period ending june or december in any calendar_year together with any interest earned thereon shall be made on the following july or january or if such day is not a business_day on the first business_day thereafter notwithstanding the foregoing the holding_company shall set a payment_date for such dividends so that they are distributed by the custodian to trust beneficiaries within days after their receipt by the trustee distributions of all other cash dividends to the custodian shall be made on the first business_day following the 30th day after receipt thereof by the trust and the custodian shall promptly thereafter distribute such amounts to the trust beneficiaries alternatively the trustee may arrange with the holding_company for the direct payment by the holding_company of such cash dividends to the trust beneficiaries pending distribution to the custodian cash dividends unless distributed directly by the holding_company to the trust beneficiaries shall be invested by the trustee in short term obligations of or guaranteed by the united_states or any agency_or_instrumentality thereof and in certificates of deposit of any bank or trust company having at the time of the investment a combined capital and surplus not less than dollar_figure any such obligations or certificates of deposit shall mature prior to the next distribution date and shall be held by the trustee until maturity the custodian shall make all calculations of interest on cash dividends required to be paid to trust beneficiaries hereunder the holding_company shall reimburse the trustee for all reasonable out-of- pocket expenses_incurred by the trustee in performance of its duties under the agreement however the holding_company shall not be required to reimburse the trust or the trustee for the expense of mailing to the custodian any proxy and other materials received by the trustee from persons other than the holding_company including mailings with respect to any beneficiary consent matter the following representations have been provided a b to the best of mutual’s knowledge and belief under the law regulations and irs rulings in effect as of the date hereof the policyholder’s receipt of mutual voting common_stock as consideration for the termination of their membership interest pursuant to the plan will constitute a recapitalization within the meaning of sec_368 provided the requested below are issued to the best of mutual’s knowledge and belief under the law regulations and irs rulings in effect on the date hereof the transfer by the trust to plr- the holding_company of mutual common_stock in exchange for newly- issued shares of holding_company common_stock will constitute a transfer described in sec_351 of the code provided the rulings requested below are issued c the trust will through the custodian cause form 1099’s reporting the trust’s items of income and deduction to be mailed on an annual basis to all beneficiaries in respect of whom form_1099 s are required to be issued sec_7701 of the code provides that the term corporation includes associations sec_301_7701-4 of the procedure and administration regulations provides that an investment_trust will not be classified as a_trust if there is a power under the trust agreement to vary the investment of the certificate holders however an investment_trust with a single class of ownership interests representing undivided beneficial interests in the assets of the trust will be classified as a_trust if there is no power under the trust agreement to vary the investment of the certificate holders in 122_f2d_545 2d cir cert_denied 314_us_701 the court stated that a power to vary the investment of the certificate holders exists if there is managerial power under the trust instrument that enables a_trust to take advantage of market variations to improve the investment of the investors the court held that a power to acquire new bonds upon the admission of new investors where existing investors would acquire a pro_rata interest in the new bonds was a power to vary the investment of the existing investors as the power allowed the trustee to take advantage of market variations in a manner that could improve the investment of the original investors although a trustee may not actually exercise all the powers and discretion granted under the trust agreement the parties are not at liberty to say that their purpose was other or narrower than that which they formally set forth in the instrument under which their activities were conducted 296_us_369 xv-1 c b in revrul_75_192 1975_1_cb_384 a trustee receives principal and interest payments on a pool of mortgages under the trust agreement therein the trustee will make quarterly distributions of all principal and interest payments received to each investor in proportion to its interest during the period between quarterly distribution dates the trustee is required to invest cash on hand in short-term obligations of or guaranteed by the united_states or any agency_or_instrumentality thereof and in certificates of deposit of any bank or trust company having a minimum stated surplus and capital the trustee is permitted to invest only in obligations maturing prior to the plr- next distribution date and is required to hold such obligations until maturity all the proceeds received from the mortgage payments along with the interest earned on these short-term investments and deposits will be distributed to the investors quarterly the trustee has no authority under the trust agreement to purchase new securities or mortgages or to make any other new investments in revrul_86_92 1986_2_cb_214 a_trust holds tax-exempt_bonds and contracts to purchase tax-exempt_bonds the contracts provide that the bonds must be transferred to the trust within days of the trust’s creation if a bond is not transferred for reasons beyond the control of the trustee or the trust’s sponsor the sponsor has days within which to transfer different bonds of substantially the same character and quality the revenue_ruling concludes that neither the trustee nor the sponsor has a power to take advantage of market variations to improve the investment of certificate holders the powers are incidental to the organization of the trust in revrul_90_63 1990_2_cb_270 the trustee of an investment_trust has a power to consent to changes in the credit support of debt obligations held by the trust the power is exercisable only to the extent the trustee reasonably believes the change is advisable to maintain the value of trust property by preserving the credit rating of the obligations the revenue_ruling concludes that although it is possible for the change in credit support to result in an increase in the value of the trust property the increase would be incidental to maintaining the value of the trust property thus the trustee’s limited power under the circumstances does not constitute a power to vary the investment of the trust as the term is used in sec_301_7701-4 of the regulations in revrul_75_192 each investor-certificate holder-beneficiary is treated as the owner of an aliquot portion of the trust pursuant to sec_677 the powers of the trustee to vote the trust shares does not enable the trustee to take advantage of market conditions to change the investment of the trust like the powers in revrul_86_92 and revrul_90_63 the trustee’s power to vote is incidental to the maintenance and preservation of the trust property and is independent of market consideration the power of the trustee to alter the make-up of the trust corpus is restricted to situations set forth in the trust agreement and the power to vote on corporate actions is not inconsistent with the trust agreement and does not constitute a power to vary the investment the short-term obligations in which the trustee may invest are similar to those in revrul_75_192 the trustee may invest only in obligations maturing prior to the next distribution date and must hold such obligations until maturity limiting the trustee to a fixed return similar to that earned on a bank account sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized over the adjusted_basis provided in sec_1011 plr- for determining gain and the loss shall be the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized sec_1_1001-1 of the income_tax regulations provides that gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or as loss sustained when a grantor is treated as the owner of an entire trust the grantor is considered to be the owner of the trust assets for federal_income_tax purposes revrul_85_13 1985_1_cb_184 revrul_90_7 1990_1_cb_153 provides that a certificate holder in an investment_trust that has a single class of ownership interests and a fixed portfolio of stock does not recognize gain_or_loss when the certificates are exchanged for a proportionate share of the stock held by the trust however gain_or_loss is realized and recognized to the extent cash received in lieu of fractional shares exceeds or falls short of the certificate holder’s adjusted_basis in the fractional shares pursuant to sec_3 of revproc_99_3 1999_1_irb_106 the internal_revenue_service will not rule as to whether sec_351 applies to an exchange of stock for stock in the formation of a holding_company however the service has discretion to rule on significant subissues that must be resolved to determine whether a transaction qualifies under sec_351 the service will only rule on such subissues if they are significant and not clearly addressed by a statute regulation decision of the supreme court tax_treaty revenue_ruling revenue_procedure notice or other authority published in the internal_revenue_bulletin accordingly based on the information provided and the representations given and provided that no beneficiary receives cash in lieu of a fractional share in holding_company it is held as follows trust will be classified as a_trust for federal_income_tax purposes under sec_301_7701-4 of the regulations and not as a business_entity under sec_301_7701-2 and each beneficiary of the trust will be treated by reason of sec_677 as the owner of an aliquot portion of the trust and all income deductions and credits attributable to that portion are to be treated as those of the beneficiaries under sec_671 for u s federal_income_tax purposes the beneficiaries receipt of trust interests in the trust as classified in ruling above as consideration for the termination of their membership interests pursuant to the plan will be treated as i the exchange by the beneficiaries of their membership interest in mutual for voting common_stock of mutual followed by ii the plr- transfer by the beneficiaries of the mutual stock that they are deemed to receive under clause i above to the trust in exchange for trust interests the fact that i mutual common_stock will be issued to the trust as classified in ruling above prior to the transfer of the mutual common_stock to the holding_company in exchange for holding_company common_stock and ii the trust will hold the holding common_stock received in such exchange for the benefit of the beneficiaries will not affect the qualification of the exchange of the mutual common_stock for newly- issued holding_company common_stock as a transfer described in sec_351 no gain_or_loss will be recognized by a beneficiary on the contribution of mutual voting common_stock to the trust in exchange for trust interests no gain_or_loss will be recognized by a beneficiary upon the withdrawal of trust shares from the trust pursuant to a sale election a withdrawal election or in connection with a tender or exchange_offer or a cash- election merger any gain_or_loss recognized upon a subsequent sale exchange or other_disposition of the withdrawn trust shares by a beneficiary will be recognized solely by that beneficiary no gain_or_loss will be recognized by a beneficiary upon the distribution of trust shares to the beneficiary in liquidation of the beneficiary’s trust interests upon termination of trust any gain_or_loss upon the subsequent sale exchange or other_disposition of trust shares by the beneficiary will be recognized solely by that beneficiary beneficiaries who receive trust interests in exchange for their mutual stock will have a basis in their trust interests equal to the basis in the mutual stock transferred to trust on their behalf a beneficiary that receives trust interests in exchange for holding_company common_stock purchased on behalf of the beneficiary will have a basis in those trust interests equal to the basis of the holding_company common_stock transferred to the trust on the beneficiary’s behalf provided all of a beneficiary’s trust interests are acquired by the beneficiary on the same day and at the same cost the beneficiary’s basis in the trust shares distributed from trust to the beneficiary is determined by ratably apportioning the beneficiary’s basis in the beneficiary’s trust interests among all assets owned by the trust according to the relative values of those assets on the date the beneficiary acquired the beneficiary’s trust interests a beneficiary’s holding_period in a beneficiary’s trust shares will include the time the trust shares are held in the trust for the benefit plr- of that beneficiary see sec_1_1012-1 c of the regulations for rules that apply if a beneficiary’s trust interests are acquired on different dates or at different prices generally the policyholder’s basis in their membership interests in mutual is zero revrul_71_233 1971_1_cb_113 see revrul_74_277 1974_1_cb_88 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular no opinion is expressed or implied concerning the application of sec_302 and sec_1_1502-31 sec_1_1502-33 and sec_1_1502-75 no opinion is expressed or implied as to whether the transactions otherwise qualify under sec_351 and sec_368 no opinion is expressed concerning requested rulings and specifically no opinion is expressed as to whether the reimbursement of the trust’s expenses by the holding_company will give rise to taxable_income to the beneficiaries of the trust furthermore we are unable to rule on issue of the supplemental ruling_request section dollar_figure of revproc_99_1 1999_1_irb_6 pincite requires the taxpayer to provide all pertinent facts and to include copies of all documents pertinent to the ruling_request the taxpayer has not provided the documents it proposes to insert in the form_1099 mailing we will be pleased to consider this issue substantively if the taxpayer complies with revproc_99_1 this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely philip j levine assistant chief_counsel by lewis k brickates assistant to the branch chief