internal_revenue_service number release date index number --------------------------- ---------------------------------------- -------------------------------------------------- -------------------------- ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------- id no ------------------ telephone number ---------------------- refer reply to cc ita b06 plr-132688-12 date date in re request for rulings under sec_167 sec_197 and sec_263 taxpayer parent predecessor franchisee -------------------------------------------------- -------------------------- -------------- ---------------------------------------- -------------------------------- party ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------- ------------------- termination_payment ------------------------------ process ------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------ technology ------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------- -------------------------------------- ------------------------------------------------------------------------ technology --------------------------------------- product ----------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- plr-132688-12 ------------------- product --------------------------------------------------------------- ------------- industry ---------------------------------------------------------------------------------------------------------------- state ------------------------------------------------------------------------ -------------- state state date date date date date date year year year a b ------------------------------ ------------------------ ------------------- -------------------------- ---------------------------- ------------------------ ------------------- ---------------------------- ------- ------- ------- ---- ---- dear ----------------- this letter is in response to your letter dated date and subsequent correspondence submitted on behalf of taxpayer requesting a letter_ruling on whether taxpayer must capitalize a termination_payment made by taxpayer to franchisee pursuant to sec_1_263_a_-4 of the income_tax regulations and whether taxpayer’s termination_payment is properly amortizable over the duration of the franchisee’s original useful_life plr-132688-12 of the intangible asset using the remaining portion of the year statutory life established under sec_197 of the internal_revenue_code taxpayer represents that the facts are as follows facts taxpayer is a u s_corporation organized and existing under the laws of state and having its principal office in state and is a subsidiary of parent taxpayer is a global leader in process for industry taxpayer developed certain technology capabilities for use in industry including technology prior to entering into the agreements described below taxpayer primarily operated in state and did not have the capacity to operate effectively in other areas on date taxpayer entered into a franchise agreement with predecessor the predecessor in interest to franchisee whereby predecessor acquired exclusive rights constituting a franchise as defined in sec_1253 to distribute sell or provide goods services or facilities worldwide in connection with product this agreement was perpetual and would not be terminated except upon certain events taxpayer and franchisee amended the agreement on different occasions to change certain terms on date taxpayer entered into a separate franchise agreement with franchisee whereby franchisee acquired exclusive rights constituting a franchise as defined in sec_1253 to distribute sell or provide goods services or facilities worldwide in connection with product this agreement was for a term of a years thereafter perpetually renewable in year increments provided that taxpayer and franchisee agreed in writing to an extension not less than b days before the end of the term additionally this agreement could be terminated by taxpayer or franchisee upon certain events or unilaterally by taxpayer with written notice to franchisee upon certain other events taxpayer and franchisee amended and restated the agreement to change certain terms in year taxpayer’s management determined that taxpayer could increase profits by removing franchisee from the distribution channel and either selling directly to end- users or by seeking a partnership with another company on date taxpayer and franchisee mutually agreed to terminate their existing contractual relationship in accordance with the termination agreement taxpayer was required to pay the termination_payment for among other reasons the termination of all contractual agreements previously entered into by taxpayer and franchisee taxpayer’s ruling_request relates only to the portion of the termination_payment that is allocable to the termination of the agreements entered into on date sec_2 and taxpayer’s ruling_request does not relate to the portion of the termination_payment that is allocable to other items such as the purchase of tangible assets or any non-compete plr-132688-12 agreement also taxpayer did not as a result of the termination agreement pay for the acquisition of assets constituting a trade_or_business or substantial portion thereof rulings requested taxpayer requests that the internal_revenue_service issue the following rulings the portion of the termination_payment made by taxpayer to franchisee that is allocable to the termination of the agreement entered into on date is properly amortizable over the duration of franchisee’s original useful_life of the intangible asset using the statutory life of years under sec_197 when said intangible asset was created in year thus because that useful_life has elapsed under statute the termination_payment although capital under sec_1_263_a_-4 should be fully amortized in the period in which it was made the portion of the termination_payment made by taxpayer to franchisee that is allocable to the termination of the agreement entered into on date is properly amortizable over the duration of franchisee’s original useful_life of the intangible asset using the statutory life of years under sec_197 when said intangible asset was created in year thus taxpayer is entitled to amortize the portion of the termination_payment allocable to the agreement entered into on date ratably over the period beginning with date through the calendar tax_year ended date law and analysis sec_263 provides generally that no deduction is allowed for any amount_paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate or any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made sec_1_263_a_-4 provides rules for applying sec_263 to amounts paid to acquire or create intangibles sec_1_263_a_-4 provides that except as otherwise provided in sec_1_263_a_-4 a taxpayer must capitalize an amount_paid to i acquire an intangible see sec_1_263_a_-4 ii create an intangible described in sec_1_263_a_-4 iii create or enhance a separate and distinct intangible asset within the meaning of sec_1 a - b iv create or enhance a future benefit identified in the federal_register or the internal_revenue_bulletin as an intangible for which capitalization is required and v facilitate as defined in sec_1_263_a_-4 the acquisition or creation of an intangible sec_1_263_a_-4 provides in part that a taxpayer must capitalize an amount_paid to another party to acquire any intangible from that party in a purchase or similar transaction specifically sec_1_263_a_-4 provides that a taxpayer must capitalize amounts paid to another party to acquire a franchise trademark or trade_name as defined in sec_1_197-2 plr-132688-12 sec_1_263_a_-4 provides a general_rule that a taxpayer must capitalize amounts paid to create an intangible described in sec_1_263_a_-4 see also sec_1 a - b ii sec_1_263_a_-4 provides that a taxpayer must capitalize amounts paid to another party to terminate certain agreements a a lease of real or tangible_personal_property between the taxpayer and that party b an agreement that grants that party the exclusive right to acquire or use the taxpayer's property or services to conduct the taxpayer's business or c an agreement that prohibits the taxpayer from competing with that party or from acquiring property or services from a competitor of that party in this case taxpayer terminated its two franchise agreements with franchisee because the original agreements granted franchisee exclusive rights to use taxpayer’s property to conduct taxpayer’s business the termination_payment made by taxpayer to franchisee created new intangible assets under sec_1_263_a_-4 an issue however remains as to whether it could also be construed that taxpayer acquired one or more franchises under sec_1_263_a_-4 because of the different treatment of the two types of intangibles generally and the application of different rules eg the month rule does not apply to acquired intangibles etc it is necessary to assign a particular expenditure into one of the categories in sec_1_263_a_-4 sec_1_263_a_-4 uses explicit language to describe the types of transactions for its application in this case taxpayer’s contract terminations clearly fall under those described in sec_1_263_a_-4 see also sec_1_263_a_-4 example sec_1 and while sec_1253 defines the term franchise as an agreement which gives one of the parties to the agreement the right to distribute sell or provide goods services or facilities within a specified area the termination agreement did not create a new agreement to acquire a franchise under sec_1253 in this respect the legal effect of the agreement to terminate the relationship between taxpayer and franchisee was to extinguish agreements giving one party the exclusive right to distribute product in a specified territory accordingly the termination_payment made by taxpayer is required to be capitalized as created intangible assets under sec_1_263_a_-4 and not as acquired intangible assets under sec_1_263_a_-4 the remaining question is whether taxpayer may recover the termination_payment under sec_167 or sec_197 sec_167 provides that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion wear_and_tear and obsolescence of property used in the taxpayer's trade_or_business sec_1_167_a_-3 provides in pertinent part that if an intangible is known from experience or other factors to be of use in the business or in the production_of_income for only a limited period the length of which can be estimated with reasonable accuracy plr-132688-12 such an intangible asset may be the subject of a depreciation allowance sec_1_167_a_-3 further provides that no allowance will be permitted merely because in the unsupported opinion of the taxpayer the intangible asset has a limited useful_life sec_1_167_a_-3 provides a 15-year useful_life safe_harbor for certain intangible assets with indeterminable useful lives beginning on the first day of the month in which the intangible is placed into service the tax_court in 63_tc_414 held that a taxpayer’s payment to terminate the exclusive right that the taxpayer had previously granted to another person to develop the taxpayer’s motel chain in four states was depreciable under sec_167 over the remaining useful_life of the original agreement the capital_expenditure is properly amortizable over the remaining useful_life of the original agreement because it is made to obtain the asset held by another person that is an asset limited by the terms of the original agreement see rodeway t c pincite while the terms of the territorial agreement in rodeway provided for its continuance for as long a sec_24 years and months after the date on which it was cancelled the court determined that the agreement’s remaining useful_life wa sec_5 years because all desirable locations for motels would be taken within that time id pincite sec_197 provides that a taxpayer shall be entitled to an amortization deduction with respect to any amortizable sec_197 intangible sec_197 provides that no other depreciation or amortization deduction shall be allowable with respect to any amortizable sec_197 intangible the amount of the deduction under sec_197 is determined by amortizing the adjusted_basis of such intangible ratably over the 15-year period beginning with the month in which the intangible was acquired the term sec_197 intangible is defined in sec_197 and the regulations thereunder intangible assets not described in sec_197 or the regulations thereunder may not be amortized under sec_197 further sec_197 provides that the term amortizable sec_197 intangible does not include any sec_197 intangible that is not described in sec_197 e or f and that is created by the taxpayer unless the intangible is created in connection with a transaction or series of related transactions involving the acquisition of assets constituting a trade_or_business or substantial portion thereof sec_1_197-2 states in part that a sec_197 intangible is created by the taxpayer to the extent the taxpayer makes payments or otherwise incurs costs for its creation production development or improvement taxpayer represents that it did not acquire assets constituting the acquisition of a trade_or_business or a substantial portion thereof we note however that taxpayer did not provide a list of the intangible assets or interest therein acquired or reacquired by taxpayer upon entering into the termination agreement despite our request that taxpayer provide such list consequently we cannot determine whether taxpayer acquired or reacquired any sec_197 intangibles that constitute the acquisition of a trade or plr-132688-12 business or a substantial portion thereof eg any trademarks therefore taxpayer must depreciate the termination_payment if at all under sec_167 the service will ordinarily not rule on the useful_life of assets for purposes of sec_167 see sec_4 of revproc_2013_3 2013_1_irb_113 nonetheless we note that the termination_payment is allocable in part to a perpetual agreement if the useful_life of the intangible asset created upon the termination of the perpetual agreement cannot be estimated with reasonable accuracy taxpayer may avail itself of the safe_harbor in sec_1_167_a_-3 however despite taxpayer’s arguments to the contrary taxpayer may not use franchisee’s remaining statutory life of either franchise under sec_197 sec_197 does not establish a useful_life for purposes of the depreciation deduction under sec_167 conclusion based solely on the facts and representations submitted and the relevant law and analysis as set forth above we conclude that the termination_payment is capitalizable under sec_1_263_a_-4 and is not properly amortizable over the duration of franchisee’s original useful_life of the intangible assets using the statutory life of years under sec_197 when said intangible assets were created we conclude that the termination_payment may be recovered under sec_167 if taxpayer knows from experience or other factors that the intangibles assets are of use in the business or in the production_of_income for only a limited period the length of which can be estimated with reasonable accuracy or if not under sec_1_167_a_-3 we understand that taxpayer already took the position that they requested in this letter_ruling on their originally filed year federal tax_return accordingly taxpayer should assess whether it needs to amend its year federal tax_return to become compliant with the conclusions in this letter_ruling if taxpayer determines that it must amend its year federal tax_return it should attach a copy of this letter_ruling with its amended_return except as set forth above we express no opinion concerning the federal_income_tax consequences of the facts described above under any other provisions of the code specifically no opinion is expressed or implied on i whether the intangibles have reasonably ascertainable value and a limited useful_life ii whether the portion of the termination_payment that that taxpayer allocated to the termination of the agreements entered into on date sec_2 and is correct iii whether any agreements not referenced above affect the proper characterization of the transactions for federal tax purposes and iv whether taxpayer acquired any sec_197 intangibles this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-132688-12 in accordance with the power_of_attorney we are sending copies of this letter to taxpayer's authorized representative we are also sending a copy of this letter to the appropriate operating division director sincerely patrick m clinton patrick m clinton assistant to the branch chief branch income_tax accounting enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury significant index no washington dc person to contact telephone number by ebps date apr in re this letter constitutes notice that with respect to the above-named defined benefit pension_plan your request for a waiver of the minimum_funding_standard for the plan_year ended date has been denied the information furnished indicates that the company had significant net losses for its fiscal years ended date and the company also had large negative working_capital and a deteriorating net_worth for the fiscal years ended date and in addition the company had de_minimis cash-on-hand as of date the plan's assets were equal to of the plan's present_value of accrued_benefits plan's assets were equal to of the plan's present_value of accrued enefits as of date the the information furnished failed to demonstrate that the hardship was temporary and a tentative denial was proposed informed of our tentative denial and was offered a conference of right a telephone conference was held on date the information discussed during the conference failed to demonstrate that the hardship was temporary telephone calls to your office on march march and date also generated no additional information denial no additional was submitted after the conference therefore our tentative the company was is now final accordingly the minimum_funding_standard under sec_412 of the code and sec_302 of the employee_retirement_income_security_act_of_1974 erisa wil apply to the plan for the plan_year ended date there will be an accumulated_funding_deficiency as of date on which a tax is imposed under sec_4971 of the code we have sent a copy of this letter to the director in key district sincerely yours dover t ballad fe _ james e holland jr o chief actuarial branch o2 o


internal_revenue_service number release date index number ------------------------------------------- ----------------------------------------------------- ------------------------------ attention ---------------------- ------------------------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------ telephone number --------------------- refer reply to cc ita b06 plr-133684-07 date date --------------------------------------------- ------------------------------------- ----------------------------------- ---------------------- legend taxpayer ---------------------------------------------------- b ---------------------------------------------------- c ---------------------------------------------------- d ---------------------------------------------------- e ---------------------------------------------------- x y date date date year state ------------------------- ------------ ------- -------------------------- -------------------------- -------------------------- --------------------------- ------------------------------ ---------- plr-133684-07 city dear -------------- this ruling is in reply to a request submitted by the taxpayer for an extension of time under sec_301_9100-1 of the procedure and administration regulations and revproc_2007_1 2007_1_irb_1 date to submit a late form_3115 application_for change in accounting_method requesting permission for itself and its subsidiaries b c d and e to change from an accrual_method of accounting to the cash_receipts_and_disbursements_method of accounting for federal_income_tax purposes facts the taxpayer a state subchapter_s_corporation is an x engaged in y through its four affiliated qualified subchapter_s subsidiaries b c d and e collectively the qsubs the taxpayer engages in no other business activity of its own the taxpayer and its qsubs maintain complete separate_accounting records as required by regulations and use an overall accrual_method of accounting the taxpayer reports federal_income_tax for itself and its qsubs on a calendar-year basis on date the taxpayer instructed its tax representative to prepare form_3115 requesting permission for itself and its qsubs to change their method_of_accounting for federal_income_tax reporting purposes from an accrual_method to the cash_method effective the beginning of year on date the taxpayer’s tax representative delivered a completed form_3115 and attachments to the taxpayer so that an authorized officer of the taxpayer could execute and file the material with the internal_revenue_service on or before date under ordinary circumstances there would have been more than enough time for the taxpayer to file form_3115 on or before date the deadline for the taxpayer to request advance consent for an accounting_method change for year on the evening of date and well into the following day however state suffered the second of two major weather events that paralyzed city and large portions of state and caused the governor to declare a disaster the intensity of the back-to-back weather events prompted a university climatologist after researching meteorological records to describe the situation as unprecedented because of the disruption of transportation the inability of employees to report for work and the closure of businesses and government facilities the taxpayer was unable to obtain a postmark on its form_3115 until after the filing deadline for requesting permission to change its and its qsubs’ method_of_accounting for year the taxpayer reviewed and filed the form_3115 soon after its operations resumed however when the service received the taxpayer’s application postmarked after date it rejected the plr-133684-07 taxpayer’s form_3115 as untimely filed the taxpayer then filed this request for a letter_ruling granting permission under sec_301 to file a late form_3115 to change to the cash_method_of_accounting law and analysis sec_446 of the internal_revenue_code and sec_1_446-1 of the income_tax regulations state that except as otherwise provided a taxpayer must secure the commissioner’s written consent before changing a method_of_accounting for federal_income_tax purposes sec_1_446-1 requires that in order to obtain the commissioner’s consent to a method change a taxpayer must file form_3115 during the taxable_year in which the taxpayer desires to make the proposed change section dollar_figure of revproc_97_27 1997_1_cb_680 provides that unless specifically authorized by the commissioner a taxpayer may not request or otherwise make a retroactive change in method_of_accounting regardless of whether the change is from a permissible or an impermissible method sec_301_9100-3 provides generally for extensions of time to make regulatory elections under sections of the code other than those for which sec_301_9100-2 expressly prescribes automatic extensions sec_301_9100-3 provides in part that the commissioner will grant a request for an extension of time when a taxpayer provides evidence including affidavits described in paragraph e of the regulation establishing to the commissioner’s satisfaction that the taxpayer acted reasonably and in good_faith and that granting relief would not prejudice the interests of the government sec_301_9100-3 provides in part that except as provided in subparagraphs b i through b iii a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer fails to make a timely election because of intervening events beyond its control sec_301_9100-3 provides in part that a taxpayer is deemed to have not acted reasonably and in good_faith if the taxpayer i seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested ii was informed in all material respects of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief sec_301_9100-3 provides in part that the interests of the government are prejudiced if granting relief would result in a taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money plr-133684-07 if the tax consequences of more than one taxpayer are affected by the election the government’s interests are prejudiced if extending the time for making the election may result in the affected taxpayers in the aggregate having a lower tax_liability than if the election had been timely made sec_301_9100-3 provides in part that the interests of the government ordinarily are prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment sec_301_9100-3 imposes special rules for accounting_method regulatory elections such as the one in question the regulation provides that the interests of the government are deemed to be prejudiced except in unusual and compelling circumstances if the accounting_method regulatory election for which relief is requested is subject_to the requirement in sec_1_446-1 for advance written consent of the commissioner or requires an adjustment under sec_481 or would require such an adjustment if the taxpayer changed to the method_of_accounting for which relief is requested in a taxable_year subsequent to the year in which the election should have been made thus barring unusual and compelling circumstances the taxpayer would not receive relief under sec_301_9100-3 because the government’s interests are prejudiced by its late filing the taxpayer has shown that it acted reasonably and in good_faith further the taxpayer has shown that because of unusual and compelling circumstances caused by an intervening event beyond the taxpayer’s control the interests of the government are not prejudiced by granting the requested relief for an extension of time under sec_301_9100-1 ruling consent is hereby granted to the taxpayer to file form_3115 requesting permission to change its own and its qsubs’ method_of_accounting for federal_income_tax purposes from an accrual to the cash_method effective year the form_3115 that was filed previously by the taxpayer will thus now be considered by the service 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 private_letter_ruling specifically no opinion is expressed or implied regarding whether the requested change in method_of_accounting will be granted this private_letter_ruling is directed only to the taxpayer sec_6110 provides that it may not be used or cited as precedent plr-133684-07 in accordance with the power_of_attorney on file with this office a copy of this private_letter_ruling is being sent to each of the taxpayer’s authorized representatives sincerely jeffery g mitchell branch chief branch office of associate chief_counsel income_tax accounting


department of the treasury internal_revenue_service washington d c contact person id number telephone number oo p ‘ef fou date mar significant index number third party contacts none egend x i i z z z i n o w y o t employer_identification_number dear taxpayer we have considered your ruling_request with regard to the federal_income_tax consequences of the proposed grants to x to establish a scholarship and fellowship program the purpose of the scholarship program is designed to expand access to higher education and increase the number of outstanding low income african-american american indian alaska native asian pacific american and hispanic students enrolling in and completing undergraduate and graduate degree programs preliminary expenditures y undertook a variety of preliminary activities to identify ways to address the need for access to higher education in america to foster new leaders and especially leaders from groups that historically have been denied higher education opportunities preliminary activities included a review and study by foundation officers and employees of the literature addressing higher education opportunities officers and employees interviewed numerous nationally recognized leaders in education to discuss scholarship programs in general and the types of specific scholarship programs that might address y's concerns in addition y commissioned a study from a research and consulting firm to learn about the costs of higher education the types of financial aid programs presently available and the need for additional financial support for future leaders y incurred or paid the costs described above in the good_faith belief that such costs were reasonable and that the payment or incurrence of such expense in such amounts was consistent with ordinary business care and prudence grants to establish the program and supporting expenditures on receipt of the grants x a public charity described in sec_501 with the assistance of its partner c organizations will administer and supervise the program under the terms of the grant agreement under the terms of the agreement y will make annual contributions to x of up to dollar_figurem over n years to fund the scholarships and the costs associated with the administration of the program x will prepare and furnish scholarship nomination forms receive all nominations determine the recipients and amount to be awarded to each recipient notify the recipients of the award confirm enrollment in an educational_institution make payment of the award and supervise and investigate the use of the grant funds by the recipients in their educational programs recipients will be determined under the supervision of x based on criteria set forth in the nomination guidelines and forms prepared by x y will not control the selection of scholarship recipients although y will have a representative on the selection committee in the first year individuals will be eligible for nomination if they i are african-american american indian alaska native asian pacific american or hispanic citizens permanent residents of the united_states who have ii attained a cumulative grade point average of on a scale iii have applied to have been accepted into or are enrolled full-time in an accredited college or university for the academic year at the time of the award or have applied to have been accepted into or are enrolled in a graduate degree program in mathematics science including life sciences physical sciences and computer science engineering education or library science for the academic year at the time the nomination is complete iv have significant financial need as defined by the federal needs analysis formula and v have demonstrated leadership ability through participation in community service extracurricular activities or other activities scholarships or fellowships will only be awarded to students who have been accepted to or are enrolled in institutions that meet the requirements of sec_170 an ii of the code the scholarships and fellowships will not be employer-related grants no scholarships or fellewships will be awarded to creators officers directors trustee or members of the selection committee or for a purpose inconsistent with the purposes described in sec_170 b of the code in addition to providing x with the grants y will provide advisory and oversight support to x and its partners to develop the administrative details eg nomination forms and program materials and effect the implementation of the program this oversight and support will continue over the life of the program y will also aid x and its partners in educating the public about the existence of the program sec_4942 of the internal_revenue_code imposes an excise_tax on the undistributed_income of a private income undistributed_income is defined in part as the amount by which qualifying distributions are less than the foundation's minimum_investment_return sec_4942 g a of the code defines a qualifying_distribution to mean any amount including that portion of reasonable and necessary administrative expenses paid to accomplish one or more purposes described in sec_170 c b of the code other than contributions to controlled organizations or to non-operating foundations sec_53_4942_a_-3 of the foundation and other excise_tax regulations provides in part that an organization is controlled by a foundation or one or more disqualified persons with respect to the foundation if any such persons may by aggregating their votes or positions of authority require the donee organization to make an expenditure or prevent the donee organization from making an expenditure sec_53_4942_a_-3 a of the regulations includes the following example with respect to qualifying distributions m a private_foundation makes the following payments in a calendar_year i a payment of dollar_figure to five employees for conducting a foundation program of educational grants for research and study ii dollar_figure for various items of overhead of which is attributable to sec_4945 of the code imposes an excise_tax on each taxable_expenditure made by a private_foundation sec_4945 of the code provides in part that a taxable_expenditure is any amount_paid or incurred by a private_foundation i to carry on propaganda or otherwise attempt to influence legislation ii to influence the outcome of any specific public election or to carry on directly or indirectly any voter registration drive iii as a grant to an individual for travel study or other similar purposes by such individual public charity an exempt_operating_foundation or the private_foundation exercises expenditure_responsibility with respect to such grant or v for any purpose other than one described in sec_170 b of the code iv as a grant to an organization unless such organization is a sec_53_4945-4 i of the regulations provides in part that a grant by a private_foundation to another organization which the grantee organization uses to make payments to an individual for purposes described in sec_4945 shall not be regarded as a grant by the private_foundation to the individual grantee if the foundation does not earmark the use of the grant for any named individual and there does not exist an agreement oral or written whereby such grantor foundation may cause the selection of the individual grantee by the grantee organization for purposes of this subparagraph a grant described herein shall not be regarded as a grant by the foundation to an individual grantee even though such foundation has reason to believe that certain individuals would derive benefits from such grant so long as the grantee organization exercises control in fact over the selection process and actually makes the selection completely independently of the private_foundation sec_53 a ii of the regulations provides that a grant by a private_foundation to an organization described in sec_509 or which the grantee organization uses to make payments to an individual for purposes described in sec_4945 shall not be regarded as a grant by the private_foundation to the individual grantee regardless of the application of subdivision i of this subparagraph if the grant is made for a project which is to be undertaken under the supervision of the sec_509 or organization and such grantee organization controls the selection of the individual grantee this subdivision shall apply regardless of whether the name of the individual grantee was first proposed by the private_foundation but only if there is an objective manifestation of the sec_509 a or organization s contro over the selection process although the selection need not be make completely independently of the private_foundation the preliminary expenditures incurred to research and develop the program represent direct expenditures by y to investigate and design a program in furtherance of its educational_purposes similar to those specified in example under sec_53_4942_a_-3 of the regulations likewise the anticipated expenses y will incur in furtherance of the program's supporting activities including the reasonable overhead associated with these activities all come within the definition of qualifying distributions set out in sec_4942 of the code in addition the grants to x will constitute direct payments to a public charity that is not controlled by y because x is a public charity amounts donated to x by y will be viewed as amounts expended to accomplish one or fe more of the purposes described in sec_170 of the code thus the preliminary expenditures the grants and the supporting expenditures constitute qualifying distributions under sec_4942 of the code and applicable regulations sec_4945 of the code imposes an excise_tax on each taxable_expenditure made by a private_foundation neither the preliminary expenditures nor the supporting expenditures constitute taxable_expenditures for purposes of sec_4945 of the code because y expended or will expend these amounts in furtherance of an educational purpose one of the purposes specified in sec_170 amounts incurred in support of the scholarship program are in support of an educational purpose because the program provides scholarships and fellowship for higher education the definition of taxable_expenditure under sec_4945 of the code specifically in the present case the grants are made to x a public charity while the definition of excludes grants to an organization that is a public charity described in sec_509 of the code taxable_expenditure does include amounts paid_or_incurred by a private_foundation as a grant to an individual for travel study or similar purposes by such individual unless the grant satisfies the requirements of sec_4945 of the code this provision does not apply in this situation because the grants here are grants to x and not to individuals per se rather the program comes within the purview of sec_53_4945-4 of the regulations which provides that a grant by a private_foundation to a public charity which the grantee organization uses to make payments to an individual for purposes described in sec_4945 of the code shall not be regard as a grant by the private_foundation to the individual grantee if the grant is made for a project to be undertaken under the supervision of the public charity and such grantee organization controls the selection of the individual grantee under the program described herein x will supervise the scholarships and fellowships and will control the selection of the individual grantees therefore the grants will not constitute taxable_expenditures under sec_4945 of the code accordingly we conclude that a the preliminary expenditures the grants and the supporting expenditures alt constitute qualifying distributions under sec_4942 of the code the preliminary expenditures and the supporting expenditures comply with the requirements of b sec_4945 of the code and therefore do not constitute taxable_expenditures under sec_4945 of the code the grants comply with the requirements of sec_4945 of the code and therefore will not constitute ataxable expenditures under sec_4945 of the code because this letter could help to resolve any questions please keep a copy of it in your permanent records this ruling letter is directed only to the organizations that requested it sec_6110 k of the code provides that it may not be used or cited as precedent -s- if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely signed robert c hares ji robert c harper jr manager exempt_organizations technical group


internal_revenue_service department of the treasury number release date index numbers re private_letter_ruling request washington dc person to contact telephone number refer reply to cc psi b09-plr-137126-03 date date legend taxpayer state date trustee trust agreement dollar_figurex family_foundation date date dear this is in response to your authorized representative’s letter dated date and subsequent correspondence requesting gift estate and income_tax rulings under the applicable provisions of the internal_revenue_code the code the facts and representations submitted are as follows taxpayer is a resident of state on date taxpayer and trustee entered into trust agreement trustee is not related to taxpayer by blood or marriage under the terms of trust agreement taxpayer established four irrevocable trusts referred to collectively as the charitable lead trusts concurrently with the signing of trust agreement on date taxpayer funded each charitable_lead_trust created under trust agreement with dollar_figurex paragraph dollar_figure of trust agreement provides in part that any property transferred to trustee and held under trust agreement shall be allocated equally plr-137126-03 among each of the four charitable lead trusts in addition each of the four charitable lead trusts shall bear the name of one of the children of taxpayer followed by the term charitable_lead_trust with respect to each charitable_lead_trust the child of taxpayer for whom that trust is named shall be the beneficiary and the special trustee of such trust paragraph dollar_figure provides that after the initial funding no additional contributions may be made to any of the charitable lead trusts paragraph dollar_figure provides that the charitable term of each trust shall begin on date and end twenty-one years after that date paragraph dollar_figure provides that except as provided in paragraph in each taxable_year during the charitable term trustee shall pay from each of the four charitable lead trusts to one of more charitable organizations an annuity amount equal to seventy thousand dollars dollar_figure for a total of two hundred eighty thousand dollars dollar_figure from all four charitable lead trusts regardless of any provision of state law or any provisions of trust agreement to the contrary during the charitable term trustee may not exercise any power to invade principal or income for any persons other than a charitable_organization paragraph provides that the obligation to pay the annuity amount shall begin on date paragraph dollar_figure provides that the annuity amount payable from each charitable_lead_trust shall be paid in equal installments at the end of each quarter on the last day of march june september and december first from the ordinary taxable_income including short-term_capital_gains which is not unrelated_business_income as defined in sec_681 then from fifty percent of the unrelated_business_income then from the long-term_capital_gains then from the balance of the unrelated_business_income then from the tax-exempt_income then from any accumulated income and finally from the principal in that order any net_income for a taxable_year in excess of the annuity amount shall be added to principal paragraph dollar_figure provides that prior to each child of taxpayer attaining the age of twenty-one years the annuity amount attributable to each charitable_lead_trust shall be paid to family_foundation upon each child attaining the age of twenty-one years or if a child is twenty-one years of age on date ninety percent of the annuity amount of such child’s charitable_lead_trust shall be paid to family_foundation and the remaining ten percent of the annuity amount shall be paid in accordance with paragraph if during the charitable term family_foundation is not an organization described in sec_170 and sec_2522 the amount that would have been paid to family_foundation shall instead be paid to one or more organizations described in sec_170 and sec_2522 in the sole discretion of trustee notwithstanding the foregoing no distribution of any part of the annuity amount may be made to a charitable_organization plr-137126-03 of which taxpayer is a director at the time of the distribution and taxpayer irrevocably agrees to not become a director of any charitable_organization that has at any time received a distribution of any part of the annuity amount paragraph dollar_figure provides that upon each child of taxpayer attaining the age of twenty-one years or if a child is twenty-one years of age on date such child shall become a special trustee of his or her trust and shall instruct trustee to distribute ten percent of the annuity amount to one or more charitable organizations described in sec_170 and sec_2522 as the child shall select in the exercise of absolute discretion if one of taxpayer’s children dies or ceases to act in his or her capacity as special trustee one hundred percent of the annuity amount from the charitable_lead_trust named for that child shall be paid to family_foundation paragraph dollar_figure provides that upon the termination of the charitable term of each charitable_lead_trust trustee shall distribute all of the income accrued during the charitable term to the charitable organizations described in paragraphs dollar_figure and paragraph b provides that after both the expiration of the charitable term and the payment of all the annuity amount to the charitable_beneficiary or beneficiaries the trustee shall distribute the balance of each charitable_lead_trust outright to the child for whom such trust is named if the child for whom a charitable_lead_trust is named is not then living and is not survived by descendants then living then the deceased child’s trust shall be divided into equal shares and one equal share shall be allocated to each of taxpayer’s then living children and distributed outright if at the termination of the charitable term a child for whom a charitable_lead_trust is named is not then living but is survived by descendants then living the deceased child’s trust shall be allocated to the living descendants of that deceased child and shall be apportioned into partial shares among those living descendants upon the principle of representation each charitable_lead_trust allocated for the living descendants of a deceased child shall be held in separate trust for those descendants paragraph sets forth the powers of the trustee and provides in part that regardless of any other provision of trust agreement trustee shall take no action regarding any of the charitable lead trusts that would i violate the requirements of sec_2522 ii prevent the annuity amount from being deductible from the gross_income of each charitable_lead_trust to the extent allowed by sec_642 or iii violate the provisions of paragraph paragraph dollar_figure provides that in entering into trust agreement taxpayer intends i to obtain the full benefit of any gift_tax_charitable_deduction to which taxpayer may be entitled under the code ii for the annuity amount to qualify as a guaranteed_annuity_interest under sec_2522 iii for the charitable lead trusts to not be deemed grantor trusts with respect to taxpayer iv for the trust estates of the charitable lead trusts not to be included in the estate of taxpayer and v for the annuity amount distributions to a charitable_organization to be deductible from the gross_income of each charitable_lead_trust to the extent allowed by sec_642 plr-137126-03 paragraph dollar_figure provides that in accordance with sec_508 and sec_4947 trustee is prohibited from engaging in certain activities paragraph entitled self-dealing provides that trustee is prohibited from engaging in any act of self-dealing as defined in sec_4941 paragraph entitled excess_business_holdings provides that except to the extent provided in sec_4947 regarding the charitable deduction not exceeding percent of the aggregate fair_market_value of the charitable lead trusts trustee is prohibited from retaining any excess_business_holdings as defined in sec_4943 that would subject the charitable lead trusts to tax under sec_4943 paragraph entitled jeopardy investments provides that except to the extent provided in sec_4947 regarding the charitable deduction not exceeding percent of the aggregate fair_market_value of the charitable lead trusts trustee is prohibited from acquiring retaining or both acquiring and retaining assets that jeopardize the carrying out of the charitable purposes of the charitable lead trusts and would subject the charitable lead trusts to tax under sec_4944 paragraph entitled taxable_expenditures provides that trustee may not make any taxable_expenditures as defined in sec_4945 paragraph entitled distribution of income provides that if sec_4942 is at any time deemed applicable to the charitable lead trusts trustee shall make distributions at the time and in the manner as not to subject the charitable lead trusts to tax under sec_4942 paragraph dollar_figure provides that it is taxpayer’s intent that the charitable lead trusts created under trust agreement shall not be taxed as grantor trusts under sec_671 and that the provisions of paragraph dollar_figure shall control any contradictory provisions paragraph entitled no reversion - sec_673 provides that despite any other trust provision to the contrary taxpayer shall have no interest in the income or principal of any charitable_lead_trust and trustee is prohibited from making a distribution of principal or income to taxpayer as described in sec_673 paragraph entitled power of disposition - sec_674 provides that despite any other trust provision to the contrary neither taxpayer nor any person classified as a nonadverse_party under sec_672 shall have any power to determine beneficial_enjoyment of the principal or income in any manner that would cause any part of the income or principal of any charitable_lead_trust to be considered a grantor_trust under sec_674 plr-137126-03 paragraph entitled power to deal with trust assets - sec_675 provides that despite any other trust provision to the contrary neither taxpayer nor any other person shall have the power i to dispose_of the income or principal of any charitable_lead_trust for less than an adequate_consideration in money or money’s worth ii to borrow principal or income of any charitable_lead_trust directly or indirectly without adequate interest or security or iii to borrow directly or indirectly the principal or income of any charitable_lead_trust in addition neither taxpayer nor any other person shall have a power_of_administration exercisable in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity paragraph entitled power_to_revoke - sec_676 provides that despite any other trust provision to the contrary neither trustee nor any other person shall have the power to revest any income or principal of any charitable_lead_trust in taxpayer paragraph entitled distribution of income - sec_677 provides that despite any other trust provision to the contrary no income of any charitable_lead_trust may be distributed to taxpayer or taxpayer’s spouse held for future distribution to taxpayer or taxpayer’s spouse or applied to the payment of premiums on a policy of insurance on the life of taxpayer or taxpayer’s spouse paragraph entitled distribution of income - sec_678 provides that despite any other trust provision to the contrary no person may become vested of a power over income or principal of any charitable_lead_trust to vest the principal or income of any charitable_lead_trust in himself paragraph dollar_figure provides that it is taxpayer’s intent that no part of the charitable lead trusts be included in taxpayer’s gross_estate under sec_2033 paragraph entitled three-year_rule - sec_2035 provides that despite any other trust provision to the contrary taxpayer shall have no interest in the income or principal of the charitable lead trusts and trustee is prohibited from making a distribution of principal or income to taxpayer paragraph entitled income of the trust - sec_2036 provides that despite any other trust provision to the contrary taxpayer shall have no power to designate the persons who shall enjoy the principal or income of the charitable lead trusts nor shall taxpayer have any right to income or to possess or enjoy the assets of the charitable lead trusts paragraph entitled reversion - sec_2037 provides that despite any other trust provision to the contrary no part of the trust estate of any of the charitable lead trusts may revert to taxpayer plr-137126-03 paragraph entitled power_to_revoke - sec_2038 provides that despite any other trust provision to the contrary taxpayer shall not have the power to alter amend revoke or terminate the charitable lead trusts paragraph entitled power_of_appointment - sec_2041 provides that despite any other trust provision to the contrary taxpayer shall not have the right to appoint any property transferred to a charitable_lead_trust nor may taxpayer be granted a power to appoint property transferred to the charitable lead trusts paragraph entitled no purchase of life_insurance - sec_2042 provides that despite any other trust provision to the contrary trustee may not purchase any life_insurance on the life of taxpayer taxpayer’s spouse or both of their lives paragraph dollar_figure provides that during the charitable term no amount other than an amount transferred for full and adequate_consideration may be paid to or for_the_use_of any person other than an organization described in each of sec_170 or sec_170 sec_2055 and sec_2522 paragraph dollar_figure provides that no gift or estate_tax that may be assessed against the trust estate of each charitable_lead_trust by reason of either taxpayer’s transfer of assets to each charitable_lead_trust or taxpayer’s death shall be paid out of the trust estate of that charitable_lead_trust paragraph dollar_figure provides that trustee shall not make any payments to taxpayer nor shall taxpayer have any rights to designate any beneficiary under trust agreement and taxpayer shall not have any power and trustee shall not grant any power to taxpayer or any other person that would cause any charitable_lead_trust to be a grantor_trust with respect to taxpayer under sec_671 through this provision may be enforced by a charitable_organization paragraph dollar_figure provides that trustee shall have the power to amend trust agreement in any manner required for the purposes of i complying with the requirements of sec_2522 ii qualifying any charitable_lead_trust for the income_tax deduction under sec_642 and iii avoiding the imposition of any private_foundation_excise_tax under sec_4941 through any amendment shall be implemented by a written document signed only by trustee taxpayer’s signature shall be neither required nor permitted paragraph dollar_figure provides that except as provided in paragraph trust agreement is irrevocable and may not be altered amended or revoked paragraph provides that despite any other provision to the contrary taxpayer may never act as a trustee or co-trustee of the charitable lead trusts and plr-137126-03 that taxpayer shall have no rights as a trustee or otherwise to designate a charitable_organization to receive part or all of the annuity amount or to designate any other beneficiaries of any charitable_lead_trust pursuant to a determination_letter issued by the internal_revenue_service on date family_foundation is exempt from income_tax under sec_501 as an organization described in sec_501 the directors of family_foundation are taxpayer’s four children section dollar_figure of family foundation’s bylaws as amended on date provides that family_foundation is organized exclusively for charitable purposes within the meaning of sec_501 the bylaws further provide that family_foundation shall not engage in any activities or exercise any powers that are not in furtherance of the purposes of the corporation and that the corporation shall not carry on any other activities not permitted to be carried on by a corporation exempt from federal_income_tax under sec_501 or by a corporation contributions to which are deductible under sec_170 sec_5 of the bylaws provides that taxpayer may not act at any time as a director of the corporation taxpayer requests the following rulings the annuity amount_paid from each charitable_lead_trust will qualify under sec_2522 as a guaranteed annuity taxpayer will be entitled to a gift_tax_charitable_deduction under sec_2522 for the value of the annuity amount valued under sec_2502 and sec_7520 to be paid to the charitable_organization s during the charitable term no part of the assets transferred to the charitable lead trusts will be included in taxpayer’s gross_estate under sec_2036 no part of the assets transferred to the charitable lead trusts will be included in taxpayer’s gross_estate under sec_2037 no part of the assets transferred to the charitable lead trusts will be included in taxpayer’s gross_estate under sec_2038 no part of the assets transferred to the charitable lead trusts will be included in taxpayer’s gross_estate under sec_2041 no part of the assets transferred to the charitable lead trusts will be included in taxpayer’s gross_estate under sec_2042 no part of the assets transferred to the charitable lead trusts will be included in taxpayer’s gross_estate under sec_2035 plr-137126-03 no part of the income or principal transferred to the charitable lead trusts will be owned by taxpayer under sec_671 due to the application of sec_673 no part of the income or principal transferred to the charitable lead trusts will be owned by taxpayer under sec_671 due to the application of sec_674 no part of the income or principal transferred to the charitable lead trusts will be owned by taxpayer under sec_671 due to the application of sec_675 no part of the income or principal transferred to the charitable lead trusts will be owned by taxpayer under sec_671 due to the application of sec_676 no part of the income or principal transferred to the charitable lead trusts will be owned by taxpayer under sec_671 due to the application of sec_677 no part of the income or principal transferred to the charitable lead trusts will be owned by taxpayer under sec_671 due to the application of sec_678 the payments of the annuity amount from the charitable lead trusts to a charitable_organization will be amounts that are paid for a purpose specified in sec_170 the payment of the annuity amount from the charitable lead trusts to a charitable_organization will be allowed as an income_tax charitable deduction in computing each charitable lead trust’s taxable_income under sec_642 to the extent paid from gross_income ruling sec_1 and sec_2501 provides that a tax is imposed each calendar_year on the transfer of the property by gift during each calendar_year by any individual sec_2511 provides that the gift_tax shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-2 of the gift_tax regulations provides that as to any property or part thereof of which the donor has so parted with dominion and control as plr-137126-03 to leave in him no power to change its disposition whether for the donor’s own benefit or for the benefit of another the gift is incomplete sec_25_2511-2 provides in part that a gift is incomplete in every instance in which a donor reserves the power to revest the beneficial title to the property in himself a gift is also incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves sec_2522 provides in part that in computing taxable_gifts for the calendar_year there shall be allowed as a deduction the amount of all gifts made during the year to or for_the_use_of the charitable purposes described therein sec_2522 provides that where a donor transfers an interest in property other than an interest described in sec_170 to a person or for a use described in sec_2522 and an interest in the same property is retained by the donor or is transferred or has been transferred for less than an adequate_and_full_consideration in money_or_money's_worth from the donor to a person or for a use not described in sec_2522 no deduction shall be allowed for the interest which is or has been transferred to the person or for the use described in sec_2522 unless - a in the case of a remainder_interest such interest is in a_trust which is a charitable_remainder_annuity_trust or a charitable_remainder_unitrust described in sec_664 or a pooled_income_fund described in sec_642 or b in the case of any other interest the interest is in the form of a guaranteed annuity or is a fixed percentage distributed yearly of the fair_market_value of the property to be determined yearly sec_25_2522_c_-3 provides that the term guaranteed_annuity_interest means an irrevocable right pursuant to the instrument of transfer to receive a guaranteed annuity a guaranteed annuity is an arrangement under which a determinable amount is paid periodically but not less often than annually for a specified term of years or for the life or lives of certain individuals each of whom must be living at the date of the gift and can be ascertained at such date under sec_25 d iv the present_value of a guaranteed_annuity_interest in trust is to be determined under sec_25_2512-5 in this case taxpayer’s transfer of assets to the charitable lead trusts constitutes a completed_gift under sec_25_2511-2 because i the charitable lead trusts are irrevocable ii taxpayer has retained no interest or reversion in the trusts and iii taxpayer is prohibited from serving as a trustee of the charitable lead trusts or as a director of family_foundation in addition trust agreement provides certain qualified charitable organizations including family_foundation with the irrevocable right to receive an annual annuity of dollar_figure from each charitable_lead_trust based on the forgoing we conclude that the annuity payable under each charitable_lead_trust satisfies the requirements of sec_25_2522_c_-3 and plr-137126-03 constitutes a guaranteed annuity for purposes of sec_2522 accordingly taxpayer is entitled to a gift_tax deduction under sec_2522 based on the present_value of the guaranteed annuity of each charitable_lead_trust payable to charity as determined under sec_25_2512-5 ruling sec_3 and sec_2033 provides that the value of the gross_estate shall include the value of all property to the extent of the interest therein of the decedent at the time of the decedent’s death sec_2035 provides that if - the decedent made a transfer by trust or otherwise of an interest in any property or relinquished a power with respect to any property during the 3-year period ending on the date of the decedent's death and the value of such property or an interest therein would have been included in the decedent's gross_estate under sec_2036 sec_2037 sec_2038 or sec_2042 if such transferred interest or relinquished power had been retained by the decedent on the date of the decedent’s death then the value of the gross_estate shall include the value of any property or interest therein that would have been so included sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise under which the decedent has retained for life or for any period not ascertainable without reference to the decedent's death or for any period which does not in fact end before the decedent's death - the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom sec_20_2036-1 of the estate_tax regulations provides in part that for purposes of sec_2036 an interest or right is treated as having been retained or reserved by the decedent if at the time of the transfer there was an understanding express or implied that the interest or right would later be conferred sec_2037 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time after date made a transfer except in the case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise if - possession or enjoyment of the property can through ownership of such interest be obtained only by surviving the decedent and the decedent has retained a reversionary_interest in the property and the value of such reversionary_interest immediately before the death of the decedent exceed sec_5 percent of the value of such property plr-137126-03 sec_2038 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise where the enjoyment thereof was subject at the date of the decedent’s death to any change through the exercise of a power in whatever capacity exercisable by the decedent alone or by the decedent in conjunction with any other person to alter amend revoke or terminate or where any such power is relinquished during the 3-year period ending on the date of the decedent's death sec_2041 provides that the value of the gross_estate shall include the value of all property to the extent of any property with respect to which the decedent has at the time of the decedent’s death a general_power_of_appointment or with respect to which the decedent has at any time exercised or released such a power_of_appointment by a disposition that is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent's gross_estate under sec_2035 through inclusive sec_2041 provides that a general_power_of_appointment is a power that is exercisable in favor of the decedent the decedent’s estate the decedent’s creditors or the creditors of the decedent's_estate except that a power to consume invade or appropriate property for the benefit of the decedent which is limited by an ascertainable_standard relating to the health education support or maintenance of the decedent shall not be deemed a general_power_of_appointment sec_2042 provides that the value of the gross_estate shall be the value of all property to the extent of the amount receivable by all other beneficiaries as insurance under policies on the life of the decedent with respect to which the decedent possessed at death any of the incidents_of_ownership exercisable either alone or in conjunction with any other person in the present case the charitable lead trusts created under the terms of trust agreement are irrevocable for a twenty-one year period commencing on date trustee must distribute annually a fixed annuity amount of dollar_figure to organizations described in sec_170 and sec_2522 upon the termination of the twenty-one year annuity period the remaining property in each charitable_lead_trust will pass to or for the benefit of the child of taxpayer for whom the trust was created and or such child’s descendants taxpayer has not retained any i interest or reversion in the charitable lead trusts ii any right to alter amend or revoke the charitable lead trusts or iii any right to receive an annuity_or_other_payment from the charitable lead trusts during taxpayer’s lifetime in addition taxpayer holds no general_power_of_appointment over the property in the charitable lead trusts plr-137126-03 assuming there is no understanding express or implied between taxpayer and trustee regarding the disposition of the amounts held as part of the charitable lead trusts we conclude that no portion of the assets of the charitable lead trusts will be included in taxpayer's gross_estate under sec_2036 sec_2037 sec_2038 sec_2041 or sec_2042 for federal estate_tax purposes we further conclude that because no portion of the assets transferred by taxpayer to the charitable lead trusts will be includible in taxpayer’s gross_estate under sec_2036 sec_2037 sec_2038 or sec_2042 no portion of the assets transferred by taxpayer to the charitable lead trusts will be includible in taxpayer’s gross_estate under sec_2035 rulings and sec_671 provides that where it is specified in subpart e of part i of subchapter_j that the grantor or another person shall be treated as the owner of any portion of a_trust there shall then be included in computing the taxable_income and credits of the grantor or the other person those items of income deductions and credits against tax of the trust that are attributable to that portion of the trust to the extent that such items would be taken into account under chapter in computing taxable_income or credits against the tax of an individual sec_673 through specify the circumstances under which the grantor or a person other than the grantor is treated as the owner of a portion of a_trust sec_673 provides that the grantor shall be treated as the owner of any portion of a_trust in which the grantor has a reversionary_interest in either the corpus or the income therefrom if as of the inception of that portion of the trust the value of such interest exceed sec_5 percent of the value of such portion sec_674 provides in general that the grantor shall be treated as the owner of any portion of a_trust in respect of which the beneficial_enjoyment of the corpus or the income therefrom is subject_to a power of disposition exercisable by the grantor or a nonadverse_party or both without the approval or consent of any adverse_party sec_674 provides that sec_674 shall not apply to a power to determine the beneficial_enjoyment of the corpus or the income therefrom if the corpus or income is irrevocably payable for a purpose specified in sec_170 relating to the definition of charitable_contributions under sec_675 and applicable regulations the grantor is treated as the owner of any portion of a_trust if under the terms of the trust agreement or circumstances attendant on its operation administrative control is exercisable primarily for the benefit of the grantor rather than the beneficiary of the trust sec_676 provides that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under any other provision plr-137126-03 of part i subchapter_j chapter where at any time the power to revest in the grantor title to such portion is exercisable by the grantor or a nonadverse_party or both sec_677 provides in general that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under sec_674 whose income without the approval or consent of any adverse_party is or in the discretion of the grantor or a nonadverse_party or both may be distributed to the grantor or the grantor’s spouse held or accumulated for future distribution to the grantor or the grantor’s spouse or applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor’s spouse sec_678 provides in general that a person other than the grantor shall be treated as the owner of any portion of a_trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself or such person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would within the principles of sec_671 to inclusive subject a grantor of a_trust to treatment as the owner thereof based solely on the facts and representations submitted we conclude that an examination of the charitable lead trusts reveals none of the circumstances that would cause taxpayer or any other person to be treated as the owner of any portion of the charitable lead trusts under sec_673 sec_674 sec_676 sec_677 or sec_678 we further conclude that an examination of the charitable lead trusts reveals none of the circumstances that would cause administrative controls to be considered exercisable primarily for the benefit of taxpayer under sec_675 thus the circumstances attendant on the operation of the charitable lead trusts will determine whether taxpayer will be treated as the owner of any portion of the charitable lead trusts under sec_675 this is a question of fact the determination of which must be deferred until the federal_income_tax returns of the parties involved have been examined by the office with responsibility for such examination ruling sec_170 provides subject_to certain limitations a deduction for charitable_contributions as defined in sec_170 payment of which is made in the taxable_year sec_170 provides in part for purposes of sec_170 the term charitable_contribution means a contribution or gift to or for_the_use_of federal or other government entities for exclusively public purposes a corporation trust or community chest fund or foundation created in the united_states and organized exclusively for religious charitable scientific literary or educational_purposes with no part of the net_earnings inuring to the benefit of a private_shareholder_or_individual or certain transfers to fraternal or veterans organizations plr-137126-03 in this case each charitable_lead_trust provides that the annuity amount is to be distributed to family_foundation or one or more organizations described in sec_170 further each charitable_lead_trust provides that in the event that family_foundation is not an organization of the type described in sec_170 during the charitable term the amount that would have been paid to family_foundation will instead be paid to one or more organizations described in sec_170 accordingly the annuity amount_paid by each charitable_lead_trust will be paid for purposes specified in sec_170 ruling sec_642 provides that in the case of an estate_or_trust other than a_trust meeting the specifications of subpart b there shall be allowed as a deduction in computing its taxable_income in lieu of the deduction allowed by sec_170 relating to deduction for charitable etc contributions and gifts any amount of the gross_income without limitation which pursuant to the terms of the governing instrument is during the taxable_year paid for a purpose specified in sec_170 determined without regard to sec_170 sec_642 provides that the deduction allowed for a_trust is subject_to sec_681 relating to unrelated_business_income sec_681 provides that no charitable deduction is allowable to a_trust under sec_642 for any amount allocable to the trust’s unrelated_business_income for the taxable_year the term unrelated_business_income means an amount under sec_512 if the trust were exempt from tax under sec_501 by reason of sec_501 that would be computed as its unrelated_business_taxable_income under sec_512 except to the extent that the charitable lead trusts have unrelated_business_income under sec_681 and except to the extent that contributions are nondeductible under sec_508 or sec_4948 the charitable lead trusts will be allowed deductions in accordance with sec_642 for amounts of gross_income paid to family_foundation or other charitable organizations during that taxable_year or the close of the following taxable_year if trustee makes an election under sec_1_642_c_-1 of the income_tax regulations because the deduction under sec_642 is limited to amounts of gross_income no deduction will be allowed for a distribution of principal except to the extent that the amount distributed has been included in the gross_income of the trust and provided no deduction was allowed for any previous taxable_year for the amount distributed in addition the ordering of income distributions provided in paragraph dollar_figure of trust agreement will not be given effect for federal_income_tax purposes because the ordering provision has no economic_effect on the distributions independent of tax consequences trust agreement requires that the charitable lead trusts pay annually a stated annuity amount to organizations described in sec_170 and sec_2522 regardless of the amount or character of income earned by the charitable lead trusts plr-137126-03 instead income distributed to the organizations described in sec_170 and sec_2522 shall consist of the same proportion of each class of the items of income of that charitable_lead_trust as the total of each class bears to the total of all classes see sec_1_642_c_-3 this ruling is directed only to the taxpayer s requesting it sec_6110 provides that it may not be used or cited as precedent the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely melissa c liquerman melissa c liquerman branch chief branch office of associate chief_counsel passthroughs and special industries enclosure copy for purposes


internal_revenue_service number release date index number ------------------------- ------------------------------ ------------------------------------------- -------------------------------------- legend department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b03 plr-151524-06 date date ------------- ----------------------- ------------------------- ------------------------- ----------------------- company state employee ira ----------------------------------------------------------------------------------------------------------- shareholders ----------------------------- ------------------------- ------------------------ ------------------------- ------------------ ----------------------- --------------------------------------------------------------------------------- ----------------------------- ------------------------- ------------------------ ------------------------- --------------------- ------------------------- plr-151524-06 ----------------------- ------------------------- ------------------- ------------------------- ---------------- ------------------------- ------------------------------ ------------------------- --------------------- ------------------------- -------------------------- ------------------------- --------------------------- ------------------------- --------------------------------------------------------------------------------- -------- ------------------------------------------ ------------------- ------------------------- --------------------------------------------------------------------------------- ------------------------------------------------------ ----------------------- --------------------------------------------------------------------------------- ------------------------------------------------------- ----------------------- ----------------------------- ------------------------- ------------------ ------------------------- ------------------------ plr-151524-06 ------------------------- --------------------------- ------------------------- ------------------ ------------------------- ----------------------- ------------------------- --------------------- ------------------------- --------------- ------------------------- ----------------------- ------------------------- ------------------- ------------------------- ---------------------------- ------------------------- ----------------------- ------------------------- ----------------------------- ------------------------- ---------------------------- ------------------------- -------------------- ------------------------- ------------------------- ------------------------- ------------------------ ------------------------- plr-151524-06 date date date date date date date date date a b c x ------------------------ ------------------------- -------------------- ------------------------- ---------------------- ------------------------- ------------------------ ------------------------- ----------------------------- ------------------------- -------------- ------------------------- -------------------------- ---------------------- --------------------- --------------------- ----------------- ------------------- -------------------- --------------------------- ---------------------- ----- ----- ------- ----------- --------- ----------- plr-151524-06 y z dear ---------------- this letter responds to your letter dated date and subsequent correspondence submitted on behalf of company requesting a ruling on the status of company as an s_corporation facts company incorporated under state law on date and made an s_corporation_election effective date during company’s c taxable_year company was owned by shareholders under company’s employee stock purchase program employee could buy shares of company stock and company would match employee’s stock purchase according to a matching formula under the program employee desired to have her ira buy company’s stock on date company employee and ira executed a subscription agreement in which ira was to purchase a shares of company stock for x subsequently ira purchased the shares of company stock on date for x due to a rounding error company refunded y to employee as an adjustment to the purchase_price of the a shares on date a clerical_error caused company to issue b shares of company stock amount of stock ira purchased and amount of stock company issued under its matching formula to employee not to ira on date company made a pro_rata distribution to its shareholders in which company distributed z from company’s s_corporation earnings to employee on or about date company corrected the clerical_error regarding the identity of the shareholder by issuing a new stock certificate to ira dated date thereby voiding the prior stock certificate issued to employee on date outside counsel for company notified company that an individual_retirement_account is ineligible to own s_corporation stock on date company employee and ira entered into a rescission agreement under the rescission agreement company voided the stock certificate issued to ira and returned to ira the purchase_price of the shares of company stock and employee returned to company the amount company distributed to employee and the amount company refunded to employee due to the rounding error company represents that no distributions were made to ira law and analysis plr-151524-06 sec_1361 provides in part that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides in part that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which 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 will be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation the service recognizes that a rescission may be given full effect in abrogating a transaction under certain conditions when these conditions are met the transaction is disregarded for federal_income_tax purposes in this connection revrul_80_58 1980_1_cb_181 states the general legal principles pertaining to the doctrine_of rescission in the following terms the legal concept of rescission refers to the abrogation canceling or voiding of a contract that has the effect of releasing the contracting parties from further obligations to each other and restoring the parties to the relative positions that they would have occupied had no contract been made a rescission may be effected by mutual agreement of the parties by one of the parties declaring a rescission of the contract without the consent of the other if sufficient grounds exist or by applying to the court for a decree of rescission the revenue_ruling states that there are at least two conditions that must be satisfied for the remedy of rescission to apply to disregard a transaction for federal_income_tax purposes first the parties to the transaction must return to the status quo ante that is they must be restored to the relative positions they would have occupied had no contract been made second this restoration must be achieved within the taxable_year of the transaction conclusion company employee and ira were restored to the relative positions they would have occupied had company’s stock never been issued to ira in addition the restoration and the original transaction both occurred within company’s c taxable_year therefore the legal doctrine_of rescission applies to disregard company’s issuance plr-151524-06 of company stock to ira and prevent the termination of company’s s_corporation status based solely on the facts submitted and representations made we rule that company will be treated as continuing to be an s_corporation during the period from date to date and thereafter provided that company’s s_corporation_election was valid and was not otherwise terminated under sec_1362 we further rule that during the period from date to date shareholders will be treated as the shareholders of company accordingly shareholders must include in income their pro_rata shares of the separately and nonseparately stated items of company under sec_1366 make any adjustments to stock basis under sec_1367 and take into account any distributions made by company under sec_1368 this ruling is null and void if company or shareholders fail to comply with these requirements except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether company is otherwise eligible to be 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 a power_of_attorney on file with this office a copy of this letter is being sent to company’s authorized representative sincerely s mary beth collins senior technician reviewer 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 info release date jan cc psi 1-genin-165296-01 uilc we are responding to correspondence submitted on your behalf by cpa requesting relief in order to establish as the first taxable_year for an s the information submitted explains that corporation election for the professional who you hired at inception failed to file your form_2553 internal_revenue_service records reflect that no return has been received on this corporate account for the taxable_year which renders your company ineligible for automatic relief under revproc_97_48 however the irs has subsequently approved an election for an effective date of date although we are unable to respond to your request as submitted this letter provides useful information about correcting your situation announcement copy enclosed provides guidance on seeking relief for late s_corporation elections generally to request relief for a late or invalid s_corporation_election you must request a private_letter_ruling from the national_office the procedures for requesting a ruling are set out in revproc_2002_1 copy enclosed in addition a proper user_fee must be submitted along with your request the fee for a ruling is dollar_figure however taxpayers with gross_income of less than dollar_figure million for the last 12-month taxable_period qualify for a reduced user_fee in the amount of dollar_figure if your business qualifies for the reduced fee your request must include a statement certifying gross_income otherwise you will be billed the higher fee please format your ruling_request as shown in appendix b of revproc_2002_1 if you decide to submit a ruling_request please provide documents supporting your intention to be an s_corporation and include the proper user_fee please refer your package to our office by adding the following to the address attn cc pa t p o box ben franklin station washington dc direct to cc psi b1 room if you have internet access you may wish to visit www irs gov smallbiz for specialized tax information products and forms relating to small businesses please keep this letter with your tax records and feel free to provide a copy of it to your authorized representative we hope that the above information proves helpful s dianna k miosi sincerely yours dianna k miosi chief branch associate chief_counsel passthroughs and special industries enclosures announcement revproc_2002_1


cca-591112-13 id -------------- office uilc number release date from ---------- sent wednesday date pm to ------------------------- cc ---------------------------- subject tfrp reclassification question --------- hi below is our response to the issues that you raised my reviewer has read and approved this advice the first issue is whether there can be a trfp when no taxes were ever withheld from the independent contractor’s employee’s wages the short answer to this is yes the supreme court has held that a responsible_person may be held responsible for the tfrp if he or she willfully fails to collect the trust_fund_taxes or to truthfully account for the taxes or to pay over the taxes to the service slodov v united_states in this case the responsible_person failed to perform all three requirements his or her failure to collect withhold the employment_taxes is in and of itself sufficient for a tfrp assessment the second issue is whether the irs is precluded from raising the trust fund recovery penalty issue by the closing_agreement it signed with the taxpayer in the factual situation before us the taxpayer corporation treated its employees as independent contractors for tax years ------- ------- and ------- the closing_agreement signed by the taxpayer corporation and the service provides that the service will assess and collect only the employment_taxes owed for ------- thus reclassifying taxpayer corporation’s workers as employees for that year and will discharge the taxes owed for ------- and ------- the agreement also provides that the service will not disturb the taxpayer’s classification of workers as independent contractors for tax purposes for any period from january ------- through december ------- the amount due for ------- is the reduced sec_3509 amount not the full amount of employment_taxes sec_3509 provides a lower calculation of employment_taxes in reclassification cases in which the taxpayer’s classification of workers as independent contractors was supported by reasonable_cause an employment_tax liability and the corresponding tfrp are two different liabilities one is owed by the taxpayer employer the other is owed by the responsible_person in this case the service entered into an agreement with the taxpayer employer alone pursuant to which the taxpayer employer is liable for just one of the three years at issue although the responsible persons were not parties to this closing_agreement we believe the service’s application of the lower sec_3509 calculation for ------- would make it extremely difficult if not impossible to establish willfulness