internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi - plr-100477-02 date date x a d1 d2 d3 year year year year dear this letter responds to a letter dated date and prior correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on d1 x elected to be treated as an s_corporation effective d2 x had subchapter_c_earnings_and_profits at the close of each of its year year and year taxable years and had gross_receipts for each of those years more than percent of which were passive_investment_income as a result x’s s election terminated on d3 x represents that the termination of x’s election to be an s_corporation was inadvertent unintended and not the result of tax_avoidance or retroactive tax planning in year x paid the tax under sec_1375 for year year and year and distributed all of x’s subchapter_c earnings plr-100477-02 and profits to a x’s sole shareholder x and a agree to make any adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect for the taxable_year sec_1361 provides that a small_business_corporation means a domestic_corporation that is not an ineligible_corporation and that does not 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_1362 provides that an election under sec_1362 shall be terminated whenever the corporation has accumulated_earnings_and_profits at the close of each of three consecutive taxable years and has gross_receipts for each of such years more than percent of which are passive_investment_income sec_1362 provides that any termination under sec_1362 shall be effective on and after the first day of the first taxable_year beginning after the third consecutive taxable_year referred to in sec_1362 sec_1362 provides that if an election under sec_1362 by any corporation was terminated under 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 the termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified under sec_1362 agrees to make the adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary for that period then notwithstanding the circumstances resulting in such termination the corporation shall be treated as an s_corporation during the period specified by the secretary sec_1375 imposes a tax on the income of an s_corporation that has accumulated_earnings_and_profits at the close of a taxable_year and that has gross_receipts more than percent of which are passive_investment_income within the meaning of sec_1362 based solely on the representations made and the information submitted we conclude that x's s_corporation_election terminated on d3 under sec_1362 because x had subchapter_c_earnings_and_profits at the close of each of three consecutive taxable years and had gross_receipts for each of those taxable years more than percent of which were passive_investment_income plr-100477-02 we further conclude that the termination of x's s_corporation_election was an inadvertent termination within the meaning of sec_1362 accordingly pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation beginning d3 and thereafter provided that x's s_corporation_election was valid and is not otherwise terminated under sec_1362 based on the particular facts of this case no adjustments are required under sec_1362 furthermore no amendments shall be made to x's or a’s year income_tax returns with respect to the issues addressed in this letter if these conditions are not met then this ruling is null and void furthermore if these conditions are not met x must notify the service_center with which x's s_corporation_election was filed that the election terminated on d3 except as specifically ruled upon above no opinion is expressed concerning the federal_income_tax consequences of the above-described facts under any other provision of the code this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x sincerely yours j thomas hines chief branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c release number release date date date uil code contact person identification_number contact number employer_identification_number form required to be filed tax years dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final since you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions the instructions in notice further action if you disagree with our proposed deletions you should follow if you agree with our deletions you do not need to take any in accordance with code sec_6104 we will notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed adverse letter you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements letter cg catalog number if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions about your sincerely rob choi director exempt_organizations rulings agreements enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter letter cg catalog number 47632s department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date date b state d date h hospital u board member v board member w board member x board member dear contact person identification_number contact number fax number employer_identification_number vil we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 the basis for our conclusion is set forth below issue do you qualify for exemption under sec_501 of the code facts you were incorporated as a nonprofit corporation in b on date d you do not have members you are governed by u director and president v director vice president and advisor w director and x director and secretary u and v are husband and wife and x is the daughter of v u is board certified in gastroenterology and internal medicine and is certified as a transplant hepatologist v is a registered nurse with a master’s degree in psychology wis a letter cg catalog number 47630w registered nurse an employee of h the chief office nurse of u's medical practice and h's liver center at the present u v and w work approximately ten hours one to two hours and five hours per week respectively x is not involved in your day-to-day activities u has provided a copy of his professional services contract with h where he also serves as medical director of h’s liver disease center liver disease clinic u's services to h include medical services for the your statement of activities indicates that you were formed to participate in clinical research studies to benefit patients with hepatitis b and encephalopathy you conduct each study within formalized study protocols provided by the study sponsor patient eligibility is based on an initial observed screening by u followed by physical and lab testing patients are monitored on a regular basis as required under study protocols patient exams and treatment conducted at the liver disease center at h by u and are coordinated by w and other employees of h patients are informed of the research projects and given protocols to review in order to determine if they wish to participate as part of the clinical research studies medical evaluations laboratory tests and medications are provided to patients afflicted with hepatitis b or encephalopathy at no charge this is done in conjunction with u's medical practice at h you state that u is a renowned liver specialist in the united_states and is generally contacted by the pharmaceutical companies and or the primary investigators in your application you state that from your inception through the present u has participated as a secondary investigator in five clinical research studies to compare the safety and the effectiveness of one drug to another in subjects chronically infected with hbv this study was completed to compare the safety and tolerability of two drugs in subjects with chronic hepatitis b and decompensate liver disease this study was completed to determine the safety effectiveness and subjects’ ability to take a drug twice daily to prevent hepatic encephalopathy this study was completed to evaluate the effect of a drug in combination with endoscopic treatment to address acute variceal bleeding this study was completed to evaluate the long-term safety and tolerability of a drug in subjects with a history of hepatic encephalopathy this study is ongoing you subsequently provide an updated list that u has participated as a secondary investigator in seven clinical research studies focusing on chronic liver disease the two additional clinical research studies include a contract with another research company to identify patients for its site and an observational trial study of a drug on the market to evaluate the long-term safety and letter cg catalog number 47630w tolerability of a drug in subjects with a history of hepatic encephalopathy both of the two additional studies are on going and involved different sponsors you state that u hopes to participate in one to three studies each year you state that the research projects are developed by the pharmaceutical companies and that all past current and planned research studies are on and assumed to be on a contract basis the clinica research flow chart shows that the sponsor pharmaceutical company provides protocols and payments for the research the monitoring company third party monitors protocols and payments u is the investigator researcher u submits the study results to the monitor company which submits the finished results to the sponsor and the sponsor then submits comprehensive pharmaceutical evaluations to the fda similar steps of the process are also discussed in your correspondence that the results of the research are furnished to the monitoring companies and the ownership of the study results is retained by the pharmaceutical companies per contractual agreements u selects the research projects that u will undertake based on appropriateness for u's area_of_interest and expertise focusing on-chronic liver disease physical capabilities and limits and patient availability based on protocols all original documents from each study remain on-site with you until notification is received from the sponsor to destroy the documents you state that there are no preferences given as to results or time of release other than what is contractually required under each study contract however u assigns all intellectual_property rights to the sponsoring pharmaceutical companies and is prohibited from publishing the results of his research under the study contractual agreements is your intent to obtain funding on a level that would only allow research at the present it participation within the scope of the research projects proposed by your sponsors you state that your fundraising consists of research study sponsorship by drug companies your revenues for the first two years were solely from two pharmaceutical companies law sec_501 of the code provides for the exemption from federal_income_tax of corporations organized and operated exclusively for charitable or educational_purposes provided that no part of the net_earnings inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the regulations provides that an organization operates exclusively for exempt purposes only if specified in sec_501 of the code an organization must not engage in substantial activities that fail to further an exempt_purpose it engages primarily in activities that accomplish exempt purposes sec_1_501_c_3_-1 of the regulations provides that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest to meet this requirement it is necessary for an organization to establish that it is not organized letter cg catalog number 47630w or operated for the benefit of private interests sec_1_501_c_3_-1 of the regulations provides that scientific research will be regarded as in the public interest if the results of such research including any patents copyrights processes or a formulae resulting from such research are made available to the public on a nondiscriminatory basis if such research is performed for the united_states or any of its agencies or b instrumentalities or for a state or political_subdivision thereof c if such research is directed toward benefiting the public revrul_69_632 1969_2_cb_120 held that an association composed of the members of a particular industry was not exempt under sec_501 because the association sponsored research projects to develop new and improved uses for the industry’s products although patents and trademarks resulting from the research were licensed royalty free the primary beneficiaries of the association’s research program were the members of the industry revrul_65_1 1965_1_cb_226 development and design of machinery in connection with a commercial operation and in connection therewith had the power to sell assign and grant licenses with respect to its copyrights trademarks trade names or patent rights did not qualify for exemption held that an organization which promoted and fostered the revrul_68_373 1968_2_cb_206 held that a nonprofit organization primarily engaged in testing drugs for commercial pharmaceutical companies did not qualify for exemption revrul_76_296 1976_2_cb_141 distinguishes two situations involving scientific research undertaken pursuant to contracts with private industry commercially sponsored research that otherwise qualifies as scientific research under sec_501 constitutes scientific research carried on in the public interest if the results including all relevant information are timely published in a form available to the interested public even though it is performed pursuant to a contract under which the sponsor has the right to obtain ownership of the patent research is not in the public interest and constitutes unrelated_trade_or_business within the meaning of sec_513 if publication is withheld or delayed significantly beyond the time reasonably necessary to establish ownership rights the organization will agree on request to forego or significantly delay publication of results of a particular project to protect the sponsor's processes technical data or patent rights 326_us_279 held that the presence of a single nonexempt purpose if substantial in nature will preclude tax exemption under sec_501 of the code in 76_tc_380 it was held that if an activity serves letter cg catalog number 47630w a substantial nonexempt purpose the organization does not qualify for exemption even if the activity also furthers an exempt_purpose in it research institute v united_states cl_ct cl_ct a u s claims_court reviewed the activities of an organization exempt under sec_501 of the code the organization contracted with a variety of industry members to perform research for them the court defined the term scientific to include the process by which knowledge is systematized or classified through the use of observation experimentation or reasoning the court found that the organization was not involved in the commercialization of the products or process developed as a result of its research iit research institute only developed a project to the point where the research principles were established at this point the sponsors would make the principles available to different customers usually in the form of newly developed products or equipment the court found significance in the fact that iit research institute did not engage in any consumer or market research or ordinary testing of the type which is carried on incident to commercial operations the court therefore found that the organization’s activities were research and not ordinary testing carried on as an incident to commercial or industrial operations in 92_tc_1053 the organization conducted an educational program for professional political campaign workers it furnished classrooms materials and qualified instructors admission was through a competitive application process the service argued that the academy substantially benefited the private interests of republican party entities and candidates thereby advancing a nonexempt private purpose the relationship between the academy and republican party entities and candidates was not one of control although the academy was an outgrowth of a training program operated by national republican congressional committee the academy argued that the prohibition against private benefit is limited to situations in which an organization's insiders are benefited the tax_court however disagreed with this view and stated that an organization's conferral of benefits on disinterested persons may cause it to serve a private interest within the meaning of sec_1 c - d ii private benefit was defined as nonincidental benefits conferred on disinterested persons that serve private interests application of law you are not described in sec_501 because you are not organized and operated exclusively for charitable educational scientific or religious purposes you are not described in sec_1_501_c_3_-1 of the regulations because more than an insubstantial part of your activities is devoted to non-exempt purposes your activities are conducted to accomplish the commercial purposes for the benefits of the pharmaceutical companies you are not described in sec_1_501_c_3_-1 of the regulations because you are operated for the benefits of private interests of u a researcher and the sponsoring pharmaceutical companies letter cg catalog number 47630w you are not described in sec_1_501_c_3_-1 of the regulations because your research is not regarded as in the public interest and serves u your only investigator and researcher and the pharmaceutical companies sponsors of your research studies you are similar to the organization described in revrul_69_632 supra because you mainly conduct clinical trials for the sponsors of your seven studies thus far six are involved in testing and comparing the safety and effectiveness of certain drugs for your sponsoring pharmaceutical companies and one is to find patients for a research company you are similar to the research organization described in revrul_65_1 supra because the ownership of your research results is controlled and retained by the sponsoring pharmaceutical companies you are similar to the organization described in revrul_68_373 supra because you conduct clinical trial research by comparing and evaluating certain drugs for the pharmaceutical companies as evidenced in your description of studies revenues and contractual agreements unlike situation discussed in revrul_76_296 supra your research does not serve the public interest because u your only investigator and researcher assigns all intellectual_property rights to the sponsoring pharmaceutical companies and is prohibited from publishing the research results per study contractual agreements you are similar to situation described in revrul_76_296 supra because your research is in the control of the sponsors the sponsors own the intellectual_property rights the original research documents are destroyed upon notification from the sponsors and u your researcher is prohibited from publishing the research results to accommodate the sponsor's business_interest per contractual agreements thus your research is not scientific research within the meaning of sec_501 you are similar to the organizations ruled in better business bureau supra and schoger foundation v commissioner supra because your activities serve substantial nonexempt purposes and because you have failed to establish that you are organized or operated exclusively for the benefit of public interests rather than those of your sponsors six of your seven studies are involved in drug testing and evaluations for the sponsoring pharmaceutical companies even the one that is not involved in a clinical study does not even further the exempt purposes because you are contracted to identify patients for a research company and you list a pharmaceutical company as the sponsor unlike iit research institute v united_states supra you conduct clinical research mainly to study the safety and effectiveness of different drugs for commercial purposes on behalf of the pharmaceutical companies your benefits to u and the commercial sponsors outweigh any public benefits that you may provide although participants in your research studies on hepatitis b and encephalopathy may be deemed beneficial by not having to pay for their medications during the clinical trials the results of your studies serve private interests other than incidentally thus you are not entitled to exemption see american campaign academy v commissioner supra letter cg catalog number 47630w applicant’s position you have indicated that you qualify for exemption because you believe that u and the sponsors do not directly benefit from your activities service response to applicant’s position in the contrary the primary beneficiaries of your research program are u and the pharmaceutical companies u directly benefits from your activities because you are formed to obtain funding for his research the pharmaceutical companies directly benefit from your activities because they develop and pay you for the studies and retain ownership of the results any public benefits that may be derived from your research results now or later give no comfort to the facts that you privately serve your researcher u and sponsoring pharmaceutical companies that own the intellectual_property rights to your research such private interest goes beyond the description of sec_501 thus your research is not considered scientific research as described in sec_501 as stated in the regulations conclusion based on the facts and information submitted you are not operated exclusively for exempt purposes your operations further a substantial nonexempt business_purpose and the private interests of private parties therefore you are not described in sec_501 of the code you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter wee will consider your statement and decide if the information affects our determination if your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process if you want representation during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to appeal as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for letter cg catalog number 47630w the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to the applicable address mail to deliver to internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh if you fax you may fax your statement using the fax number shown in the heading of this letter your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely rob choi director exempt_organizations rulings agreements enclosure publication letter cg catalog number 47630w


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 b07 plr-127490-06 date date ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ----------------------- ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ----------------------- legend trust trust -------------------- -------------------------- date -------------------------- grantor -------------------------- son beneficiary -------------------------- beneficiary ----------------------- beneficiary ------------------------ beneficiary ------------------------ date beneficiary ------------------------------ state statute beneficiary ----------------------------- beneficiary ------------------------- beneficiary --------------------- beneficiary ------------------------------ beneficiary ------------------------- company dear ---- ---------------- --------------------------- ---------------------------------------------- this is in response to your authorized representative’s letter dated may son and his widow are both deceased the current income beneficiaries of plr-127490-06 requesting rulings regarding the income gift and generation-skipping_transfer gst tax consequences of the proposed division of trust and trust the facts submitted and representations made are as follows trust was created on date by grantor for the benefit of son and his issue article iii of the trust agreement provides that the trustees shall pay the net_income of trust to son during son’s life on son’s death trust shall be administered for the benefit of son’s surviving widow if any and for the benefit of son’s surviving issue after the death of son’s widow the trust income shall be distributed per stirpes to the surviving children of son and to the living issue of any deceased child of son unless sooner terminated trust shall terminate twenty years and eleven months after the death of the last to die of grantor’s three sons and their children living on date upon termination the trust assets shall be distributed to son’s living issue per stirpes in equal shares according to the number of surviving children of son plus the number of deceased children with living issue if son has no living issue the trust assets shall be distributed per stirpes to the living descendants of grantor’s other two sons trust are beneficiary beneficiary beneficiary and beneficiary be held for the benefit of beneficiary and his issue trust 1b will be held for the benefit of beneficiary and her issue trust 1c will be held for the benefit of beneficiary and beneficiary and their issue the partition will be pro_rata as to value and as to each of the trust assets the partitioned trusts will be administered under the terms of the original trust except for the named beneficiaries of each resulting trust date article iii of the trust agreement provides that the net_income shall be paid per stirpes to grantor’s descendants if a male descendant is survived by a widow up to one-half of the net_income may be paid to the widow until her death other than grantor’s three children and any widow of a descendant of at least years old may receive a discretionary distribution of trust principal equal to the percentage of the net_income to which that beneficiary is entitled no trustee who is also a beneficiary of the trust shall participate in any discretionary distribution decision with respect to a distribution to that trustee article iii paragraph of the trust agreement provides that unless otherwise terminated by the distribution of the entire trust principal trust shall terminate twenty the trustees propose to partition trust into three separate trusts trust 1a will article iii paragraph of the trust agreement provides that any beneficiary trust was created under grantor’s last will and testament on her death on beneficiary is the surviving widow of one of grantor’s sons the current beneficiaries of trust are beneficiary beneficiary state statute provides that the trustee s of a_trust in addition to the authority article iii paragraph a of the trust agreement provides that the trustees plr-127490-06 years after the death of the last to die of grantor’s three sons and any of grantor’s grandchildren living on date upon termination the trust principal shall be distributed to the living descendants of grantor in the same proportion as income widows may not receive distributions of principal on termination have the power to make any division or distribution of the trust assets and to determine the value of the property so allocated divided or distributed otherwise given by law have discretionary power to acquire invest reinvest exchange sell convey control divide partition and manage the trust property in accordance with the standards provided by law and in so doing may select any part of the trust estate in satisfaction of any partition or distribution_in_kind in money or both make non-pro rata distributions of property in_kind allocate particular assets or portions of them or undivided interests in them to any one or more of the beneficiaries without regard to the income_tax basis of specific property allocated to any beneficiary and without any obligation to make an equitable_adjustment beneficiary beneficiary beneficiary beneficiary beneficiary beneficiary beneficiary and beneficiary be held for the benefit of beneficiary and his issue trust 2b will be held for the benefit of beneficiary and her issue trust 2c will be held for the benefit of beneficiary beneficiary beneficiary beneficiary beneficiary beneficiary beneficiary beneficiary and their issue the partition will be pro_rata as to the majority of the trust assets but it may not be pro_rata as to every single asset the partitioned trusts will be administered under the terms of the original trust except for the named beneficiaries of each resulting trust_beneficiary date and date are prior to date the taxpayers represent that no additions actual or constructive have been made to either trust or trust after date two of grantor’s grandchildren were born prior to date and are still living beneficiary and beneficiary all of grantor’s grandchildren were living on date except beneficiary the trustee of the resulting trusts will be company rulings requested partitions of trust and trust will not cause either trust to lose its status as exempt the trustees propose to partition trust into three separate trusts trust 2a will the trustees of the trusts have requested the following rulings the proposed the current trustees of trust and trust are beneficiary beneficiary and sec_2601 imposes a tax on every generation-skipping_transfer sec_2611 defines the term generation-skipping_transfer as a taxable plr-127490-06 from the gst under b a of the tax_reform_act_of_1986 and sec_26 b i d the proposed partition of trust and trust will not result in the recognition of gain_or_loss from the sale_or_other_disposition of property under sec_61 or sec_1001 and the basis of and holding_period for each asset received from trust and trust will be the same as the basis of the original trusts prior to the partition ruling distribution a taxable_termination and a direct_skip under b a of the tax_reform_act_of_1986 and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the generation-skipping_transfer_tax provisions do not apply to any generation-skipping_transfer under a_trust as defined in sec_2652 that was irrevocable on date however this exemption does not apply if additions actual or constructive are made to the trust after date will be considered an irrevocable_trust except as provided in sec_26_2601-1 or c which relate to property includible in a grantor’s gross_estate under sec_2038 and sec_2042 judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax under sec_26_2601-1 or hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status in general unless specifically provided otherwise the rules contained in sec_26_2601-1 are applicable only for purposes of determining whether an exempt trust retains its exempt status for generation-skipping_transfer_tax purposes unless specifically noted the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of gain for purposes of sec_1001 instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy sec_26_2601-1 b or c by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial sec_26_2601-1 provides that any trust in existence on september sec_26_2601-1 provides that a modification of the governing sec_26_2601-1 provides rules for determining when a modification sec_26_2601-1 provides that for purposes of this section a plr-127490-06 interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer to determine whether a modification of an irrevocable_trust will shift a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification if the effect of the modification cannot be immediately determined it is deemed to shift a beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust in addition administration of a_trust in conformance with applicable local law that defines the term income as a unitrust_amount or permits a right to income to be satisfied by such an amount or that permits the trustee to adjust between principal and income to fulfill the trustee’s duty_of impartiality between income and principal beneficiaries will not be considered to shift a beneficial_interest in the trust if applicable local law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust and meets the requirements of sec_1_643_b_-1 of the income_tax regulations before date the trustee has the discretion to distribute income and principal to a b and their issue in such amounts as the trustee deems appropriate on the death of the last to die of a and b the trust principal is to be distributed to the living issue of a and b per stirpes in the appropriate local court approved the division of the trust into two equal trusts one for the benefit of a and a’s issue and one for the benefit of b and b’s issue the trust terms are identical except for the identity of the beneficiaries the division of the trust into two trusts does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the division in addition the division does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust therefore the two partitioned trusts resulting from the division will not be subject_to the provisions of chapter of the internal_revenue_code neither sec_2038 nor sec_2042 apply and each trust was irrevocable as of date in addition there have been no actual or constructive additions made to either sec_26_2601-1 example involves a_trust that is irrevocable on or in the present case trust and trust are considered irrevocable because sec_1001 provides that the gain from the sale_or_other_disposition of sec_61 provides that gross_income includes gains derived from dealings plr-127490-06 trust since date accordingly trust and trust are exempt from gst tax the proposed division of trust and trust into the resulting trusts is not a modification that will shift a beneficial_interest in either trust to any beneficiary who occupies a lower generation than the person or persons who hold the beneficial_interest prior to the division in addition the proposed divisions do not extend the time for vesting of any beneficial_interest beyond the period provided for in the original trust agreements thus the proposed divisions of trust and trust into the resulting trusts will not constitute an addition to either trust will not cause either trust to lose its exempt status under b a of the tax_reform_act_of_1986 and sec_26 b i a and will not subject distributions from either the original trusts or any resulting trusts to the gst tax ruling in property property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 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 code the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property must be recognized the code the gain_or_loss realized from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or as loss sustained the properties exchanged are materially different 499_us_554 properties exchanged are materially different if the properties embody legal entitlements different in_kind or extent or if the properties confer different rights and powers id pincite in cottage savings the supreme court held that mortgage loans made to different obligors and secured_by different homes did embody distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans id pincite in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent id pincite an exchange of property results in the realization of gain_or_loss under sec_1001 if sec_1001 provides that except as otherwise provided in subtitle a of the sec_1_1001-1 provides that except as otherwise provided in subtitle a of in revrul_69_486 1969_2_cb_159 distinguished by revrul_83_61 plr-127490-06 a partition of jointly owned property however is not a sale_or_other_disposition of property where the co-owners of the joint property sever their joint_interests but do not acquire a new or additional interest as a result thereof thus neither gain nor loss is realized on a partition see revrul_56_437 1956_2_cb_507 c b a non-pro rata distribution of trust property was made in_kind by the trustee although the trust instrument and local law did not convey authority to the trustee to make a non-pro rata distribution_of_property in_kind the distribution was effected as a result of a mutual agreement between the trustee and the beneficiaries because neither the trust instrument nor local law conveyed authority to the trustee to make a non-pro rata distribution revrul_69_486 held that the transaction was equivalent to a pro_rata distribution followed by an exchange between the beneficiaries and was subject_to the provisions of sec_1001 and sec_1002 in this case trust will be partitioned into three shares the distribution of trust assets from trust to the resulting trusts will be pro_rata as to value and as to each of the trust’s assets we therefore conclude that the proposed division of trust into these three trusts on a pro-rata basis will not cause the interests of the beneficiaries of the separate trusts to differ materially the beneficiaries will hold essentially the same interests before and after the pro-rata division therefore the proposed partition of trust will not result in the realization of any gain_or_loss from a sale_or_other_disposition of property under sec_61 and sec_1001 see revrul_56_437 1956_2_cb_507 into the resulting trusts will be pro_rata as to value but not as to each and every asset the trust agreement clearly contemplates the non-pro rata or unequal division or distribution of the trust estate in addition state statute expressly grants a trustee or the trustees jointly of a_trust the discretionary power to partition trust property in accordance with the standards provided by law and in so doing to select any part of the trust estate in satisfaction of any partition or distribution_in_kind in money or both and to make non-pro rata distributions of property in_kind consequently the non-pro rata distribution of assets is permitted by state law and by the trust documents in this case therefore the partition of trust is distinguishable from the facts in revrul_69_486 and thus will not result in the recognition of gain_or_loss under sec_61 and sec_1001 based upon the information submitted and representations made we conclude that the partition of trust and trust into the resulting trusts as provided above and the distribution of the assets to the resulting trusts will not require the recognition of gain_or_loss for federal_income_tax purposes under sec_61 and sec_1001 ruling with respect to the partition of trust we note that the distribution of trust assets sec_1_1015-2 provides that in the case of property acquired after plr-127490-06 sec_1015 provides that if property is acquired by a transfer in trust other than a transfer in trust by a gift bequest or devise the basis shall be the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on such transfer date by transfer in trust other than by transfer in trust by gift bequest or devise the basis_of_property so acquired is the same as it would be in the hands of the grantor increased by the amount of gain or decreased in the amount of loss recognized to the grantor on the transfer under the law applicable to the year in which the transfer was made if the taxpayer acquired the property by transfer in trust this basis applies whether the property be in the hands of the trustee or the beneficiary and whether acquired prior to termination of the trust and distribution of the property or thereafter sec_1223 provides that in determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person if under chapter of subtitle a such property has for the purpose of determining gain_or_loss from a sale_or_exchange the same basis in whole or in part in his hands as it would have in the hands of such other person see also sec_1_1223-1 that because sec_1001 does not apply to the partition of trust and trust under sec_1015 the basis of the trust and trust assets will be the same after the partition as the basis of those assets before the partition furthermore pursuant to sec_1223 the holding periods of the each asset in the resulting trusts will include the holding periods of the assets in the original trusts concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter 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 provides that it may not be used or cited as precedent based upon the information submitted and representations made we conclude this ruling is directed only to the taxpayer s requesting it sec_6110 except as expressly provided herein no opinion is expressed or implied the rulings contained in this letter are based upon information and plr-127490-06 being sent to the taxpayer’s representatives pursuant to the power_of_attorney on file with this office a copy of this letter is sincerely melissa c liquerman melissa c liquerman senior technician reviewer branch passthroughs special industries


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 b03 plr-100913-10 date date company ------------------------------------------------------------------------------------------------- ------------------------ date ------------------------ country ---------------------- dear ----------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of company by company’s authorized representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election to be classified as a disregarded_entity for federal tax purposes facts company was formed under country law on date company represents that it is a foreign_entity eligible to elect to be classified as a disregarded_entity for federal tax purposes company intended that it be classified as a disregarded_entity effective date however due to inadvertence a valid form_8832 entity classification election to treat company as a disregarded_entity effective date was not timely filed law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can plr-100913-10 elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership sec_301_7701-3 provides that unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided in sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result company is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect to be treated as a disregarded plr-100913-10 entity for federal tax purposes effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose this ruling is contingent on the owner of company filing within days of this letter all required returns and amended income_tax returns consistent with the requested relief being effective date to the extent appropriate these returns must include but are not limited to the following forms i forms information_return of u s persons with respect to certain foreign_corporations ii forms return of u s persons with respect to certain foreign_partnerships and iii forms information_return of u s persons with respect to disregarded entities such that these forms reflect the consequences of the relief granted in this letter except as specifically set forth above no opinion is expressed or implied concerning the federal tax consequences of the facts described above under any other provision of the code this ruling is directed only to the taxpayer requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to company’s authorized representative sincerely associate chief_counsel passthroughs special industries by s ________________________________ james a quinn senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


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-139553-10 date date legend x ---------------------------------------------------- --------------------------------- d ------------------------- state -------- dear ---------------- this responds to a letter dated date requesting relief under sec_1362 of the internal_revenue_code facts according to the information submitted x was incorporated on d under the laws of state x intended to be treated as an s_corporation for federal tax purposes effective d but the proper election was not timely filed law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if the election is made after the first two and one-half months of a plr-139553-10 corporation's taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if no election is made pursuant to sec_1362 or if made the election is made after the date prescribed for making such an election and the secretary determines there was reasonable_cause for the failure to timely make the election then the secretary may treat such election as timely made for such taxable_year and effective as of the first day of that year x did not file a timely election to be treated as an s_corporation under sec_1362 effective d x has however established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective d if within days from the date of this letter x submits a properly completed form_2553 with a copy of this letter attached to the appropriate service_center 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 specifically no opinion is expressed or implied concerning whether x otherwise qualifies as an s_corporation for federal tax purposes 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 barbara j campbell barbara j campbell senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury washington dc person to contact number release date index number telephone number refer reply to cc psi b1-plr-132970-03 date july legend x state year d1 dear this responds to your letter dated date submitted on behalf of x requesting relief for an inadvertent invalid election under sec_1362 of the internal_revenue_code facts x was formed under the laws of state during year x elected to be an s_corporation effective d1 on d1 x stock was held by trust trust was not a permissible s_corporation shareholder and therefore x’s s_corporation_election was invalid x represents that trust is qualified to make an electing_small_business_trust esbt election and will make the election if x is granted relief for the inadvertent invalid election x also represents that it filed form_1120s consistent with s_corporation status for all years involved in this request law and analysis sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect sec_1361 defines small_business_corporation as a domestic_corporation that is not an ineligible_corporation and that does not a have more than shareholders b have as a shareholder a person other than an estate other than a_trust described in sec_1361 or an organization cc psi b1-plr-132970-03 described in c who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1362 provides that a corporation shall be treated as an s_corporation during the period specified by the secretary if an election under sec_1362 was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of failure to meet the requirements of sec_1361 or to obtain shareholder consents or was terminated under paragraph or of subsection d the secretary determines that the circumstances resulting in ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the terminating even steps were taken so that the corporation is a small_business_corporation or to acquire the required shareholder consents 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 that period according to the legislative_history of sec_1362 - if the internal_revenue_service determines that a corporation's subchapter_s_election is inadvertently terminated the service can waive the effect of the terminating event for any period if the corporation timely corrects the event and if the corporation and the shareholders agree to be treated as if the election had been in effect for such period the committee intends that the internal_revenue_service be reasonable in granting waivers so that corporations whose subchapter_s eligibility requirements have been inadvertently violated do not suffer the tax consequences of a termination if no tax_avoidance would result from the continued subchapter_s treatment in granting a waiver it is hoped that taxpayers and the government will work out agreements that protect the revenues without undue_hardship to taxpayers for example if a corporation in good_faith determined that it had no earnings_and_profits but it is later determined on audit that its election terminated by reason of violating the passive_income test for three consecutive years because the corporation in fact did have accumulated earnings if the shareholders were to agree to treat the earnings as distributed and include the dividends in income it may be appropriate to waive the terminating events so that the election is treated as never terminated cc psi b1-plr-132970-03 likewise it may be appropriate to waive the terminating event when the one class of stock requirement was inadvertently breached but no tax_avoidance had resulted it is expected that the waiver may be made retroactive for all years or retroactive for the period in which the corporation again became eligible for subchapter_s treatment depending on the facts s rep no 97th cong 2d sess 1982_2_cb_718 conclusion based solely on the facts submitted and the representations set forth above we conclude that x’s subchapter_s_corporation election on d1 was an inadvertent invalid election within the meaning of sec_1362 pursuant to sec_1362 x will be treated as continuing to be an s_corporation from d1 and thereafter provided that the beneficiary of trust files an esbt election with the appropriate service_center with a d1 effective date within days of the date of this ruling a copy of this letter must be attached to the esbt election except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed on whether x’s qualifies to be an s_corporation or whether trust is an esbt within the meaning of sec_1361 this ruling is directly only to the taxpayer that requested it sec_6110 of the code provides that if may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer enclosures copy of this letter sincerely dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries


t c memo united_states tax_court ruth ann gillings petitioner v commissioner of internal revenue respondent docket no filed date ruth ann gillings pro_se david w sorensen for respondent memorandum findings_of_fact and opinion foley judge the issues for decision are whether petitioner is liable for the sec_6651 and a additions to tax relating to her federal_income_tax return unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact during petitioner was employed as a respiratory therapist at washoe health systems inc washoe and earned dollar_figure petitioner did not file a tax_return or pay estimated_taxes relating to on date respondent issued petitioner a statutory_notice_of_deficiency relating to in which he determined additions to tax pursuant to sec_6651 and sec_6654 for failure_to_file a return and make estimated_tax payments respectively petitioner paid the liability but did not pay the additions to tax petitioner while residing in sparks nevada filed her petition with this court opinion respondent has the burden of production relating to the sec_6651 and sec_6654 additions to tax see sec_7491 rule a petitioner admitted that she failed to file her return and pay estimated income taxes relating to see 116_tc_438 petitioner may however be excused from the sec_6651 and sec_6654 additions to tax if an exception applies see id pincite petitioner contends that the sec_6651 and sec_6654 additions to tax are not applicable because her parents raised her to believe that the internal_revenue_service was an illegal organization and taught her not to file tax returns or pay taxes as a result petitioner believes that if she ever filed a return or paid taxes she would be disowned by her parents sec_6651 imposes an addition_to_tax for failure to timely file a return unless it is shown that such failure is due to reasonable_cause and not due to willful neglect 469_us_241 a failure_to_file a timely return is due to reasonable_cause if the taxpayer exercised ordinary business care and prudence and nevertheless was unable to file the return within the prescribed time sec_301_6651-1 proced admin regs willful neglect means a conscious intentional failure or reckless indifference united_states v boyle supra pincite petitioner stated that she did not file her return because she feared that she would be disowned by her parents petitioner’s fear however does not excuse her failure_to_file petitioner also contends that the sec_6654 addition_to_tax should be excused because of her fear of being disowned by her parents the addition_to_tax for failure to make estimated_tax payments applies unless petitioner qualifies for an exception pursuant to sec_6654 petitioner did not pay estimated_taxes relating to and does not qualify for any of the sec_6654 exceptions see sec_6654 accordingly we sustain respondent’s determinations contentions we have not addressed are irrelevant moot or meritless to reflect the foregoing decision will be entered for respondent


department of the treasury int ernal revenue service washington d c date o f f i c e o f c h i e f c o u n s e l number release date uil cc intl br1 nchowdhry wta-n-128318-01 memorandum for rob d stanchik supervisory attorney group s c t1 from w ed williams senior technical reviewer branch cc intl subject anonymous closing_agreement pursuant to your request we have reviewed the closing_agreement that was prepared by taxpayer’s counsel and that you forwarded to our office on date in our view the draft closing_agreement is acceptable as an agreement in principal however it should be entered into on behalf of the commissioner only after the taxpayer reveals her identity as you know the internal_revenue_service does not enter into closing agreements with anonymous taxpayers in addition prior to signing the closing_agreement your office should confirm that the taxpayer is not presently under examination and has not been notified of the initiation of any such examination we suggest that the following be added to the closing_agreement on page after the final whereas whereas in recognition of taxpayer’s voluntary disclosure to the irs of the above facts and circumstances taxpayer’s full and immediate payment of the u s income taxes due and the irs policy of determining the extent of retroactive compliance to be required based on all the facts and circumstances and in the best interest of the u s government from the standpoint of reasonableness salutary effect on compliance and prudent deployment of resources the parties desire to enter into this agreement we suggest that the first full sentence in the first full paragraph on page of the agreement be revised as follows wta-n-128318-01 the parties agree that the tax_liability of the taxpayer required to be paid pursuant to this agreement plus statutory interest shall be paid and remitted to the commissioner of internal revenue within ninety days from the signing of this agreement finally we suggest that the following be added as a paragraph directly before the paragraph above upon execution of this agreement for the commissioner the taxpayer shall file unredacted nonresident_alien_individual income_tax returns form sec_1040 nr for the years and with all necessary supporting schedules and copies of unredacted forms k-1 for these years the irs will utilize this information and such other supporting documentation as it may ask the taxpayer to provide to set forth any required adjustments to the taxpayer’s income_tax liabilities for the years and it is our view that the draft closing_agreement provides a basis for resolving the outstanding issues and fully protects the interests of the internal_revenue_service the closing_agreement also brings a taxpayer back into the federal tax system and reasonably ensures future compliance if you have any questions or need further assistance please do not hesitate to call me pincite8 or nina chowdhry pincite1


internal_revenue_service number release date index number ------------------------------ ------------------------------------------------ ---------------------------------- -------------------------------------------- - - company department of the treasury washington dc person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc psi b03 plr-139426-06 date date --------------------------------------------------------------- ----------------------- -------------------------------------------------- ---------------------------------------------------- ------------------------------------------------------------- ------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- entity --------------------------------------------------------------------------------------- ----------------------------- entity ----------------------------------------------------------------------------------------- ------------------------------------------------------------ entity ------------------------------------------------------------------------------------------------ ------------------------------------------------------------------ entity ------------------------------------------------------------------------------------------- entity ------------------------------------------------------------------------------------------- ------------------------------------------------------------- entity ------------------------------------------------------------------------------------------- ------------------------------------------------------------- entity ---------------------------------------------------------------------------------------------------- ------------------------------------------------------------- entity ------------------------------------------------------------------------------------------- ------------------------------------------------------------- entity --------------------------------------------------------------------------------------- ------------------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- -------------------------------------------------------- ----------------------------------------------------- ------------------------------------------------------------------- ----------------------------------------------------- ------------------------------------------------------- -------------------------------------------------------- -------------------------------------------------------------- plr-139426-06 -------------------------------------------------------------------- entity -------------------------------------------------------------------------------------- ------------------------------------------------------------- entity ----------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- entity ------------------------------------------------------------- --------------------------------------------------------------------------------------- ------------------------------------------------------------- entity ------------------------------------------------------------------------------------------ ------------------------------------------------------------- entity ---------------------------------------------------------------------------------------- ------------------------------------------------------------- entity --------------------------------------------------------------------------------------------- ------------------------------------------------------------- entity ------------------------------------------------------------------------------------------- ------------------------------------------------------------- entity entity entity ------------------------------------------------------- ------------------------------------------------------------------------------------ ------------------------------------------------------------- entity ---------------------------------------------------------- -------------------------------------------------------------------------------------- ------------------------------------------------------------- entity ------------------------------------------------------------------------------------------ ------------------------------------------------------------- entity ------------------------------------------------------------------------------------------ ------------------------------------------------------------- entity ---------------------------------------------------------------------------------------------- ------------------------------------------------------------- --------------------------------------------------------- -------------------------------------------------------- -------------------------------------------------------------------- ---------------------------------------------------------------------- ---------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- plr-139426-06 ------------------------------------------------------------- entity -------------------------------------------------------------- ------------------------------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------- entity ---------------------------------------------------------------------------------------- ------------------------------------------------------------- entity ---------------------------------------------------------------------------------------- ------------------------------------------------------------- entity -------------------------------------------------------------------------------------------- ------------------------------------------------------------- entity --------------------------------------------------------------- -------------------------------------------------------------------------------------------- ------------------------------------------------------------- entity ----------------------------------------------------------------------------------------- ------------------------------------------------------------- entity ---------------------------------------------------------------------------------------------- ------------------------------------------------------------- entity ---------------------------------------------------------------------------------------------- ------------------------------------------------------------- entity ---------------------------------------------------------------------------------------------- ------------------------------------------------------------- entity ---------------------------------------------------------- ------------------------------------------------------------------------------------- ------------------------------------------------------------- entity -------------------------------------------------------------------------------------------------- ------------------------------------------------------------- entity ---------------------------------------------------------- ------------------------------------------------------------------------------------- ------------------------------------------------------------- entity ------------------------------------------------------------------------------------------ ------------------------------------------------------------- ----------------------------------------------------------- entity ---------------------------------------------------------------------------------------- ----------------------------------------------------------------- ----------------------------------------------------------------- --------------------------------------------------------------- ------------------------------------------------------------- --------------------------------------------------- ---------------------------------------------- ----------------------------------------------- -------------------------------------------------------- ---------------------------------------------------------- plr-139426-06 ------------------------------------------------------------- entity -------------------------------------------------------------------------------------- ------------------------------------------------------------- property ----------------------------------------------------------------------------- ------------------------------------------------------------------- property --------------------------------------------------------------------------- ------------------------------------------------------------------- property --------------------------------------------------------------------------- property property ------------------------------------------------------ ----------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- property ------------------------------------------------------------------- -------------------------------------------------------------------------------------------- property ------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------- property ---------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- property ------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------- property ---------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- property ------------------------------------------------ ---------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- property ---------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- ------------------------------------------------------------- ---------------------------------------------------- --------------------------------------------- --------------------------------------------- ---------------------------------------- ------------------------------------- ------------------------------------- ------------------------------------------------ ------------------------------------------------ ---------------------------------------------------------- ---------------------------------------------------------- ----------------------------------------------------------------- plr-139426-06 property -------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------ property --------------------------------------------------------------- ------------------------------------------------------------------------------------------------ property -------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- - property ---------------------------------------------------------------------- ----------------------------------------------------------------------------------------------- property --------------------------------------------------------------------- ------------------------------------------------------------------------------------------------ property -------------------------------------------------------------------- ------------------------------------------------------------------------------------------------ property -------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------ property ------------------------------------------- ----------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- property --------------------------------------------------------------------- property ----------------------------------------------------------- -------------------------------------------------------------------------------------------------- property ---------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- property ---------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- property -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- property ---------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- property --------------------------------------------------------------- --------------------------------------------------------- ---------------------------------------------------- --------------------------------------------------- ------------------------------------------------- ------------------------------------------- ------------------------------------------- ------------------------------------------------- --------------------------------------------------- ------------------------------------------------------- plr-139426-06 --------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- property ---------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- property --------------------------------------------- ------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------- property ---------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- property --------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- property --------------------------------------------------- ------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------- property ------------------------------------------------------------------- -------------------------------------------------------------------------------------------- property ------------------------------------------- ----------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- property ------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- property ----------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- property --------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- property ----------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- property ------------------------------------------------------------------- ------------------------------------------------------------------------------------------------ ----------------------------------------------------------------------------------------------------- ---------------------------------------------------------- ------------------------------------------------------- -------------------------------------------------- ------------------------------------------------- ----------------------------------------------- ----------------------------------------------- ------------------------------------------------------ ------------------------------------------------------- --------------------------------------------------------- plr-139426-06 ------------------------------------------------------------------------------------------------ property property ---------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- property ----------------------------------------------------------------- ------------------------------------------------------------------------------------------------ property ---------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- ------------------------------------------- property ----------------------------------------------------------------------- ------------------------------------------------------------------------------------------------ property --------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- property ----------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------ property ---------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- property ----------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- property ---------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- state a state b ------------------------------------------------------- ------------------------------------------------------ --------------------------------------------------- --------------------------------------------- ---------------------------------------- plr-139426-06 country a country b foreign_entity a b c d e dear ------------------ this letter responds to your letter dated date as well as subsequent correspondence submitted on behalf of company requesting a ruling that certain income received by company is not passive_investment_income within the meaning of ' d c i of the internal_revenue_code facts the information submitted states that company was incorporated under the laws of state a on a and it intends to elect under ' a to be an s_corporation company has accumulated_earnings_and_profits on b company acquired all the shares of entitie sec_1 and it will either elect under sec_1361 to treat these entities as qualified subchapter_s subsidiaries or merge each of them into a limited_liability_company wholly owned by company thus entitie sec_1 and effectively will be disregarded for federal tax purposes on the same date company acquired most of the shares of entitie sec_3 and entity will be merged into a limited_liability_company llc which will be treated as a partnership for federal tax purposes company will be the managing member of entity company own sec_80 of entity by vote and value from which it anticipates receiving dividends entity owns an interest in entity entity together with company and entities will constitute a member group which will act as a managing member of entity in addition plr-139426-06 to its acquisition on b of entities company acquired on the same date interests in an llc and various partnerships entities and as part of its expansion and restructuring company will cause entity a corporation to merge into a foreign_entity entity owns property subsequent to the merger entity will be treated as a partnership for u s tax purposes company is involved in all phases of real_estate rental development and management it owns direct and indirect interests in rental properties the properties which are located in countries a and b and include shopping centers office buildings and other commercial real_estate company owns of properties either directly or through entitie sec_1 or company owns less then of properties through tenancies-in-common entities and partnerships entitie sec_3 and llcs entitie sec_5 and and a corporate subsidiary entity entity an llc is to be managed by a board_of managers composed of individuals each one to be appointed by one of five managing members or member groups see the second paragraph under facts entity is a limited_partnership in which company holds a general_partnership interest entity is an llc from which company receives an insubstantial amount of rental income each year the remaining entities that are less than wholly-owned by company are entities which as represented by company are treated under the laws of state b as giving all of their members direct rights of control_over day-to-day operations as well as over major property management decisions company anticipates that the real_estate ventures will be converted to limited_liability companies that will be treated as partnerships for federal tax purposes company or the entity through which it owns its interest in the venture or entity will be the manager or co-manager of each of the limited_liability companies through its wholly-owned property management company entity and the employees of the real_estate ventures in which it owns interests as well as through independent contractors company provides various services in leasing and managing the properties the type and level of services vary according to the particular lease for a property of which leases are net leases covering properties and the services company provides with respect to the non-net lease properties propertie sec_1 and include periodic inspection cleaning and maintenance of common areas maintenance and repair of building structure and systems including roofs exterior walls foundations heating and air conditioning plumbing and electrical systems maintenance of interior walls including painting testing and maintenance of fire alarms sprinklers and security systems parking lot and pavement maintenance including cleaning and upkeep landscape and grounds maintenance janitorial services security pest control rubbish and snow removal and assisting tenants with move-in and the construction of tenant improvements in addition to the services provided to plr-139426-06 tenants company handles the usual leasing and administrative functions involved in managing rental real_estate based on a pro forma income and expense statement for c company expects to receive or accrue approximately d in rents including its allocable or proportionate share of rental income and to pay or incur approximately e in relevant expenses including its allocable or proportionate share of rental expenses on the properties law regulations except as provided in ' g ' a provides that a small_business_corporation may elect in accordance with the provisions of ' to be an s_corporation sec_1362 provides that an election under ' a terminates whenever the corporation i has accumulated_earnings_and_profits at the close of each of three consecutive tax years and ii has gross_receipts for each of such tax years more than percent of which are passive_investment_income the term passive_investment_income means gross_receipts derived from royalties rents dividends interest annuities and sales or exchanges of stock_or_securities except as otherwise provided in ' d c ' d c i provides that sec_1_1362-2 of the income_tax regulations provides that rents means amounts received for_the_use_of or the right to use property whether real or personal of the corporation sec_1_1362-2 provides that rents does not include rents derived in the active trade_or_business of renting property rents received by a corporation are derived in an active trade_or_business of renting property only if based on all the facts and circumstances the corporation provides significant services or incurs substantial costs in the rental business generally significant services are not rendered and substantial costs are not incurred in connection with net leases whether significant services are performed or substantial costs are incurred in the rental business is determined based upon all the facts and circumstances including the number of persons employed to provide the services and the types and amounts of costs and expenses_incurred other than depreciation sec_1_1362-8 provides that for purposes of sec_1362 if an s_corporation holds stock in a c_corporation meeting the requirements of sec_1504 the affiliated_group voting and value test the term passive_investment_income shall not include dividends from such c_corporation to the extent such dividends are plr-139426-06 attributable to the earnings_and_profits of such c_corporation derived from the active_conduct_of_a_trade_or_business active earnings_and_profits for purposes of applying sec_1362 earnings_and_profits of a c_corporation are active earnings_and_profits to the extent that the earnings_and_profits are derived from activities that would not produce passive_investment_income as defined in sec_1362 if the c_corporation were an s_corporation conclusions based solely on the facts and representations submitted we conclude that- the rents company receives from propertie sec_1 and including its share of such rents earned by the entities of which it is a member are not passive_investment_income under ' d c i the rents entity receives from property and entity 4’s share of those rents are not passive_investment_income under ' d c i thus the dividends company receives from entity to the extent such dividends are attributable to rental income realized by entity from property are not passive_investment_income under ' d c i and the leasing and management fees company receives for services rendered by entity with regard to the properties are not passive_investment_income under ' d c i except for the specific rulings above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code specifically we express or imply no opinion regarding company's eligibility to be an s_corporation further the passive_investment_income rules of ' are independent of the passive_activity rules of ' unless an exception under ' applies the rental_activity remains passive for purposes of ' company represents that given its level of activity entity should be treated as a partnership and that a form_1065 u s return of partnership income will be filed as soon as possible under a power_of_attorney on file with this office we are sending copies of this letter to company’s authorized representatives plr-139426-06 this ruling is directed only to the taxpayer who requested it according to ' k this ruling may not be used or cited as precedent sincerely s james a quinn senior technician reviewer acting branch office of associate chief_counsel passthroughs and special industries enclosures copy for ' purposes cc-