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 fip b04 plr-129719-08 date date legend state state date date address --------------------------------------------- ----------------------------- ------------------------ ---------------------- ------------------------------------------------------------------------------------------ -------------------- ----------------------------------------------------------------------------------------- fund ------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- new fund --------------------------------------------------------- existing funds ---------------------------------------------------------------- ------------------------------------------------------------------- ---------------------------------------------- trust adviser ------------------------------- ------------------------------------------------------------------ adviser parent --------------------------- plr-129719-08 dear ----------------- this is in response to the letter submitted by your authorized representative dated date requesting rulings concerning the tax_ownership of fund shares additional information was submitted on october and date facts the trust is a business_trust formed under the laws of the state on date the trust the trust’s and each fund’s address is address the new fund is a newly formed series of the trust that has not yet commenced operations the existing funds commenced operations on date each existing fund’s annual_accounting_period is and the new fund’s annual_accounting_period will be the year ended december each existing fund uses and the new fund intends on using the accrual_method of accounting for maintaining its accounting books and filing federal_income_tax returns the existing funds and the new fund together constitute the funds the trust is registered with the securities_and_exchange_commission the sec as an open-end management investment_company under the investment_company act of as amended the act the trust may issue an unlimited number of shares of beneficial_interest no par_value in each fund the shares of beneficial_interest of each existing fund are and the shares of beneficial_interest of the new fund will be registered under the securities act of as amended shares of the existing funds are and shares of the new fund will be offered to insurance_company segregated_asset accounts to serve as an investment vehicle for variable life_insurance policies and variable_annuity contracts collectively variable_contracts and to other regulated_investment_companies advised by the adviser or an affiliate of the adviser that are offered to insurance_company segregated_asset accounts to serve as an investment vehicle for variable_contracts each a related variable fund and collectively the related variable funds except as otherwise permitted by sec_1 f of the treasury regulations and except for shares held by a related variable fund all of the shares of the existing funds and related variable funds are and all shares of the new fund will be held by one or more segregated_asset accounts of one or more insurance_companies and public access to each existing fund and each related variable fund is and public access to the new fund will be available exclusively through the purchase of a variable_contract within the meaning of sec_817 of the internal_revenue_code_of_1986 as amended the code although the terms of each variable_contract may vary the insurance_company will generally hold the premiums_paid by the variable_contract holder net of any fees or commissions and any income earned on the net_premiums in a segregated_asset_account the variable_contract holder generally will be able to allocate amounts held in plr-129719-08 the segregated_asset_account among several different investment options or subaccounts at least one subaccount will correspond to an investment in a particular fund each existing fund has elected to be taxed as a regulated_investment_company under part i of subchapter_m of the code and has qualified and intends to continue to qualify for the tax treatment afforded regulated_investment_companies under the code for each of its taxable years the new fund intends to elect to be taxed as a regulated_investment_company under part i of subchapter_m of the code and intends to qualify for each of its taxable years for the tax treatment afforded regulated_investment_companies under the code pursuant to sec_851 of the code each existing fund is and the new fund will be treated for federal_income_tax purposes as a separate corporation each existing fund has entered into and the new fund intends on entering into an investment advisory agreement with the adviser the adviser is a corporation organized under the laws of state and is a registered investment adviser under the investment advisers act of as amended pursuant to the investment advisory agreements the adviser is or will be responsible for managing the investment and reinvestment of the assets of each fund in accordance with the fund’s investment objectives policies and restrictions which are set forth in the fund’s prospectus and statement of additional information and administering the fund’s affairs to the extent requested by and subject_to the supervision of the trust’s board_of trustees the adviser may enter into an investment subadvisory agreement with another investment adviser a subadviser under which the subadviser will make investment decisions buy and sell securities and conduct research that leads to those purchase and sale decisions for all or a portion of the new fund’s portfolio existing funds each existing fund seeks to achieve its investment objective by investing across a range of asset classes utilizing a wide variety of securities and investment styles in order to gain exposure to these asset classes each existing fund invests a certain percentage of its assets in other regulated_investment_companies and etfs that invest primarily in fixed income securities of all credit qualities and maturities and a certain percentage in other regulated_investment_companies and etfs that invest in equity securities of all capitalization levels underlying funds other than assets invested in money market instruments and cash management investment vehicles advised by the adviser the assets of the existing funds are currently invested under normal market conditions in underlying funds in the future each existing fund may invest in other_securities or derivative instruments plr-129719-08 the underlying funds in which the existing funds invest are primarily related variable funds all of the shareholders of which except as otherwise permitted by sec_1 f of the treasury regulations are one or more segregated_asset accounts of one or more insurance_companies and other related variable funds there are currently however only a limited number of related variable funds that provide exposure to the asset classes that the existing funds desire in order to obtain exposure to specific asset classes for which related variable funds are not available and in order to more effectively execute the existing funds’ investment strategies each existing fund may invest in regulated_investment_companies and etfs that are available to investors other than through the purchase of a variable_contract public funds some of the public funds in which the existing funds may invest are advised by investment advisers other than the adviser or an affiliate of the adviser it is possible that at times up to one hundred percent of an existing fund’s total assets may be invested in public funds each existing fund however will not invest under normal market conditions more than thirty percent of its total assets in any single public fund if fluctuations in the market values of an existing fund’s assets cause the existing fund’s investment in any public fund to exceed the thirty percent limit as of the last day of any fiscal quarter the existing fund’s investments will be reallocated to comply with this limit within thirty days of the end of such quarter the portfolio managers of each existing fund regularly review the existing fund’s investments including investments in underlying funds and adjust the existing fund’s investments in seeking to take advantage of current or expected market conditions or to manage risk in making their investment decisions the portfolio managers use a proprietary mix of qualitative and quantitative inputs to arrive at a view for the securities markets and segments of those markets based on the desired exposure to a particular investment and a thorough risk analysis the portfolio managers then decide which funds to use as underlying funds and what proportion of an existing fund’s assets should be allocated to each underlying fund the portion of each existing fund’s assets allocated to an underlying fund changes over time and there can be no expectation that current or past positions in an underlying fund will be maintained in the future other than a variable_contract holder’s ability to allocate premiums and transfer amounts in the insurance_company segregated_asset_account to and from the insurance_company subaccount corresponding to an existing fund all investment decisions concerning an existing fund are made by the adviser and the trust’s board_of trustees in their sole and absolute discretion a variable_contract holder is not able to direct an existing fund’s investments in any particular asset or recommend a particular investment or investment strategy and there is no agreement or plan between the adviser and a variable_contract holder regarding a particular investment a variable_contract holder has no current knowledge of an existing fund’s specific assets the existing funds’ portfolio holdings however will be available on a delayed basis on the funds’ website and in quarterly filings with the sec including annual and semi-annual plr-129719-08 reports to shareholders a variable_contract holder has no legal equitable direct or indirect interest in any of the assets of an existing fund rather a variable_contract holder has only a contractual claim against the insurance_company offering the variable_contract to receive cash from the insurance_company pursuant to the terms of the specific variable_contract in addition to satisfying its self-imposed limitation of investing no more than thirty percent of its assets in any single public fund each existing fund will comply with the diversification requirements of sec_817 and in accordance with these requirements must treat each public fund as a single investment pursuant to such requirements no more than fifty-five percent of the value of each existing fund’s total assets will be represented by any one investment no more than seventy percent of the value of each existing fund’s total assets will be represented by any two investments no more than eighty percent of the value of each existing fund’s total assets will be represented by any three investments and no more than ninety percent of the value of each existing fund’s total assets will be represented by any four investments new fund the new fund’s investment objective is capital appreciation the new fund currently expects to seek to achieve its investment objective by investing its assets in several strategies and or asset categories in order to gain exposure to these strategies and or asset categories the new fund may invest in other regulated_investment_companies including regulated_investment_companies advised by the adviser or an affiliate of the adviser and etfs whether or not such etfs qualify as regulated_investment_companies that emphasize these strategies and or asset categories some of the regulated_investment_companies and etfs in which the new fund will invest may be advised by investment advisers other than the adviser or an affiliate of the adviser because there are currently no related variable funds that provide the exposure to the strategies and or asset categories that the new fund desires it is anticipated that the new fund will invest in public funds other_securities and derivative instruments however it is anticipated that the new fund will at least initially primarily invest in public funds and it is possible that at times up to one hundred percent of the new fund’s total assets may be invested in public funds the new fund however will not invest under normal market conditions more than thirty percent of its total assets in any single public fund if fluctuations in the market values of the new fund’s assets cause the new fund’s investment in any public fund to exceed the thirty percent limit as of the last day of any fiscal quarter the new fund’s investments will be reallocated to comply with this limit within thirty days of the end of such quarter the initial strategies and or asset categories in which the new fund may invest will be approved by the trust’s board_of trustees over time the new fund’s portfolio plr-129719-08 managers will evaluate the possibility of adding new strategies and or asset categories the addition of a new strategy and or asset category will be subject_to the approval of the trust’s board_of trustees the new fund’s portfolio managers will determine the percentage of the new fund’s assets allocated to each strategy and or asset category and how the assets allocated to each strategy and or category will be invested including what percentage of the new fund’s assets will be invested in each public fund the specific assets held by the new fund will be subject_to change at any time but a specific asset may be held over a long period of time if the adviser or a subadviser believes doing so will further the new fund’s investment objective other than a variable_contract holder’s ability to allocate premiums and transfer amounts in the insurance_company segregated_asset_account to and from the insurance_company subaccount corresponding to the new fund all investment decisions concerning the new fund will be made by the adviser the subadvisers and the trust’s board_of trustees in their sole and absolute discretion a variable_contract holder will not be able to direct the new fund’s investments in any particular asset or recommend a particular investment or investment strategy and there will be no agreement or plan between the adviser and a variable_contract holder regarding a particular investment a variable_contract holder will have no current knowledge of the new fund’s specific assets the new fund’s portfolio holdings however will be available on a delayed basis on the funds’ website and in quarterly filings with the sec including annual and semi-annual reports to shareholders a variable_contract holder will have no legal equitable direct or indirect interest in any of the assets of the new fund rather a variable_contract holder will have only a contractual claim against the insurance_company offering the variable_contract to receive cash from the insurance_company pursuant to the terms of the specific variable_contract in addition to satisfying its self-imposed limitation of investing no more than thirty percent of its assets in any single public fund the new fund will comply with the diversification requirements of sec_817 and in accordance with these requirements must treat each public fund as a single investment pursuant to such requirements no more than fifty-five percent of the value of the new fund’s total assets will be represented by any one investment no more than seventy percent of the value of the new fund’s total assets will be represented by any two investments no more than eighty percent of the value of the new fund’s total assets will be represented by any three investments and no more than ninety percent of the value of the new fund’s total assets will be represented by any four investments the funds are concerned that the excise_tax under sec_4982 will apply if the investor_control doctrine attributes the ownership of the fund shares to the policy holders representations plr-129719-08 in addition to the facts presented above thetrust has also made the following representations a the trust is registered under the act as an open-end management investment_company b each fund is a separate series of the trust is a fund as such term is used in sec_851 of the code and is treated as a separate corporation for federal_income_tax purposes pursuant to sec_851 of the code c each existing fund has elected to be taxed as a regulated_investment_company under part i of subchapter_m of the code and has qualified and intends to continue to qualify for the tax treatment afforded regulated_investment_companies under the code for each of its taxable years d the new fund will elect to be taxed as a regulated_investment_company under part i of subchapter_m of the code and intends to qualify for the tax treatment afforded regulated_investment_companies under the code for each of its taxable years e except as otherwise permitted by sec_1_817-5 of the treasury regulations all of the beneficial interests in the existing funds are held directly or indirectly by one or more segregated_asset accounts of one or more insurance_companies and public access to the existing funds is available exclusively through the purchase of a variable_contract within the meaning of sec_817 f except as otherwise permitted by sec_1_817-5 of the treasury regulations all of the beneficial interests in the new fund will be held directly or indirectly by one or more segregated_asset accounts of one or more insurance_companies and public access to the new fund will be available exclusively through the purchase of a variable_contract within the meaning of sec_817 g except as otherwise permitted by sec_1_817-5 of the treasury regulations all of the beneficial interests in the related variable funds are held directly or indirectly by one or more segregated_asset accounts of one or more insurance_companies and public access to the related variable funds is available exclusively through the purchase of a variable_contract within the meaning of sec_817 h the life_insurance_companies whose segregated_asset accounts hold shares of the existing funds or shares of the related variable funds are life_insurance_companies within the meaning of sec_816 i the life_insurance_companies whose segregated_asset accounts will hold shares of the new fund will be life_insurance_companies within the meaning of sec_816 j each segregated_asset_account that holds shares of the existing funds or shares of the related variable funds is a separate_account registered with the sec as a unit_investment_trust under the act k each segregated_asset_account that will hold shares of the new fund will be a separate_account registered with the sec as a unit_investment_trust under the act plr-129719-08 l each fund will satisfy the diversification requirements of sec_817 and sec_1 b of the treasury regulations m no more than thirty percent of a fund’s total assets will be invested under normal market conditions in any single public fund if fluctuations in the market values of a fund’s assets cause the fund’s investment in any public fund to exceed the thirty percent limit as of the last day of any fiscal quarter the fund’s investments will be reallocated to comply with this limit within thirty days of the end of such quarter n there is not and there will not be any arrangement plan contract or agreement between the adviser or a subadviser and a variable_contract holder regarding the availability of a fund as a subaccount under the variable_contract or the specific assets to be held by a fund or an underlying fund o other than a variable_contract holder’s ability to allocate variable_contract premiums and transfer amounts in the insurance_company segregated_asset_account to and from the insurance_company subaccount corresponding to a particular fund all investment decisions concerning each fund are and will be made by the adviser the subadvisers and the trust’s board_of trustees in their sole and absolute discretion the percentage of a fund’s assets invested in a particular public fund will not be fixed in advance of any variable_contract holder’s investment and will be subject_to change by the adviser or a subadviser at any time p a variable_contract holder cannot and will not be able to direct a fund’s investment in any particular asset or recommend a particular investment or investment strategy and there is not and will not be any agreement or plan between the adviser or a subadviser and a variable_contract holder regarding a particular investment of any fund q no variable_contract holder can or will be able to communicate directly or indirectly with the adviser or a subadviser concerning the selection quality or rate of return on any specific investment or group of investments held by a fund r a variable_contract holder does not have and will not have any current knowledge of a fund’s specific assets a variable_contract holder does not have and will not have any legal equitable direct or indirect ownership_interest in any of the assets of a fund a variable_contract holder only has and only will have a contractual claim against the insurance_company offering the variable_contract to receive cash from the insurance_company under the terms of his or her variable_contract s all of the shares of each existing fund and the new fund will be held directly or indirectly by segregated_asset accounts of life_insurance_companies that are held in connection with variable_contracts as defined in code sec_817 and each existing fund and new fund therefore will qualify for the exception from federal excise_tax provided by code sec_4982 unless a variable_contract holder is treated as a shareholder of the relevant fund pursuant to the investor_control requirements of revrul_81_225 1981_2_cb_12 and revrul_82_54 1982_1_cb_11 plr-129719-08 ruling requested each fund respectfully requests a ruling that the fund’s investment in public funds will not cause the variable_contract holders to be treated as the owners of the fund’s shares for federal_income_tax purposes law and analysis sec_61 provides that the term gross_income means all income from whatever source derived including gains derived from dealings in property interest and dividends a long standing doctrine_of taxation provides that taxation is not so much concerned with the refinement of title as it is with actual command over the property taxed - the actual benefit for which the tax is paid 281_us_376 the incidence of taxation attributable to ownership of property is not shifted if the transferor continues to retain significant control_over the property transferred 435_us_561 333_us_591 309_us_331 without regard to whether such control is exercised through specific retention of legal_title the creation of a new equitable but controlled interest or the maintenance of effective benefit through the interposition of a subservient agency 749_f2d_513 8th cir revrul_77_85 1977_1_cb_12 considers a situation in which the individual purchaser of a variable_annuity contract retained the right to direct the custodian of the account supporting that variable_annuity to sell purchase and exchange securities or other assets held in the custodial_account the purchaser also was able to exercise an owner’s right to vote account securities either through the custodian or individually the internal_revenue_service the service concluded that the purchaser possessed significant incidents_of_ownership over the assets held in the custodial_account the service reasoned that if a purchaser of an investment annuity_contract may select and control the investment_assets in the separate_account of the life_insurance_company issuing the contract then the purchaser is treated as the owner of those assets for federal_income_tax purposes thus any interest dividends or other income derived from the investment_assets are included in the purchaser’s gross_income in revrul_80_274 1980_2_cb_27 the service applying revrul_77_85 concluded that if a purchaser of an annuity_contract may select and control the certificates of deposit supporting the contract then the purchaser is considered the owner of the certificates of deposit for federal_income_tax purposes similarly revrul_81_225 1981_2_cb_12 concludes that investments in mutual_fund shares to fund annuity_contracts are considered to be owned by the purchaser of the annuity plr-129719-08 contract if the mutual_fund shares are available for purchase by the general_public revrul_81_225 also concludes that if the mutual_fund shares are available only through the purchase of an annuity_contract then the sole function of the fund is to provide an investment vehicle that allows the issuing insurance_company to meet its obligations under its annuity_contracts and the mutual_fund shares are considered to be owned by the insurance_company finally in revrul_82_54 1982_1_cb_11 the purchaser of certain annuity_contracts could allocate premium payments among three funds and had an unlimited right to reallocate contract value among the funds prior to the maturity_date of the annuity_contract interests in the funds were not available for purchase by the general_public but were instead only available through the purchase of an annuity_contract the service concludes that the purchaser’s ability to choose among general investment strategies for example between stock bonds or money market instruments either at the time of the initial purchase or subsequent thereto did not constitute control sufficient to cause the contract holders to be treated as the owners of the mutual_fund shares in christoffersen v u s supra the eighth circuit considered the federal_income_tax consequences of the ownership of the assets supporting a segregated_asset_account the taxpayers in christoffersen purchased a variable_annuity contract that reflected the investment return and market_value of assets held in an account that was segregated from the general_asset_account of the issuing insurance_company the taxpayers had the right to direct that their premium payments be invested in any one of six publicly traded mutual funds the taxpayers could reallocate their investment among the funds at any time the taxpayers also had the right upon seven days notice to withdraw funds surrender the contract or apply the accumulated value under the contract to provide annuity payments the eighth circuit held that for federal_income_tax purposes the taxpayers not the issuing insurance_company owned the mutual_fund shares that funded the variable_annuity the court concluded that the taxpayers surrendered few of the rights of ownership or control_over the assets of the subaccount that supported the annuity_contract according to the court the payment of annuity premiums management fees and the limitation of withdrawals to cash did not reflect a lack of ownership or control as the same requirements could be placed on traditional brokerage or management accounts thus the taxpayers were required to include in gross_income any gains dividends or other income derived from the mutual_fund shares sec_817 which was enacted by congress as part of the deficit_reduction_act_of_1984 pub_l_no the 1984_act provides rules regarding the federal_income_tax treatment of variable life_insurance and annuity_contracts sec_817 of the code defines a variable_contract as a contract that provides for the allocation of all or part of the amounts received under the contract to an account that pursuant to state law or regulation is segregated from the general asset accounts of the company and that provides for the payment of annuities or is a life_insurance_contract in the plr-129719-08 legislative_history of the 1984_act congress expressed its intent to deny life_insurance treatment to any variable_contract if the assets supporting the contract include funds publicly available to investors the conference agreement allows any diversified fund to be used as the basis of variable_contracts so long as all shares of the funds are owned by one or more segregated_asset accounts of insurance_companies but only if access to the fund is available exclusively through the purchase of a variable_contract from an insurance_company in authorizing treasury to prescribe diversification standards the conferees intend that the standards be designed to deny annuity or life_insurance treatment for investments that are publicly available to investors h_r conf_rep no pincite sec_817 of the code provides that a variable_contract based on a segregated_asset_account shall not be treated as an annuity endowment or life_insurance_contract unless the segregated_asset_account is adequately diversified in accordance with regulations prescribed by the secretary_of_the_treasury if a segregated_asset_account is not adequately diversified income earned by that segregated_asset_account is treated as ordinary_income received or accrued by the policyholders approximately two years after the enactment of sec_817 the treasury_department issued proposed and temporary regulations prescribing the minimum level of diversification that must be met for an annuity or life_insurance_contract to be treated as a variable_contract within the meaning of sec_817 the preamble to the temporary regulations stated as follows the temporary regulations do not provide guidance concerning the circumstances in which investor_control of the investments of a segregated_asset_account may cause the investor rather than the insurance_company to be treated as the owner of the assets in the account for example the temporary regulations provide that in appropriate cases a segregated_asset_account may include multiple sub-accounts but do not specify the extent to which policyholders may direct their investments to particular sub-accounts without being treated as owners of the underlying assets guidance on this and other issues will be provided in regulations or revenue rulings under sec_817 relating to the definition of variable_contracts fed reg date the final regulations adopted with certain revisions not relevant here the text of the temporary regulations in revrul_2003_91 2003_33_irb_347 a variable_contract holder did not have control_over segregated account assets sufficient for the service to deem the variable plr-129719-08 contract holder the owner of the assets the variable_contracts at issue were funded by a separate_account that was divided into twelve subaccounts the issuing insurance_company could increase or decrease the number of subaccounts at any time but there would never be more than twenty subaccounts available under the contracts each subaccount offered a different investment strategy interests in the subaccounts were available solely through the purchase of a variable life or variable_annuity contract that qualified as a variable_contract under sec_817 the investment activities of each subaccount were managed by an independent investment adviser there was no arrangement plan contract or agreement between the contract holder and the issuing insurance_company or between the contract holder and the independent investment adviser regarding the availability of a particular subaccount the investment strategy of any subaccount or the assets to be held by a particular subaccount other than a contract holder’s right to allocate premiums and transfer funds among the available subaccounts all investment decisions concerning the subaccounts were made by the issuing insurance_company or the independent investment adviser in their sole and absolute discretion a contract holder had no legal equitable direct or indirect interest in any of the assets held by a subaccount but had only a contractual claim against the issuing insurance_company to collect cash in the form of death_benefits or cash surrender values under the contract the service concluded that based on all the facts and circumstances the contract holder did not have direct or indirect control_over the separate_account or any subaccount asset and therefore the contract holder did not possess sufficient incidents_of_ownership over the assets supporting the variable_contracts to be deemed the owner of the assets for federal_income_tax purposes analysis in the revenue rulings discussed above the service took the position that if the holder of a variable life_insurance_policy or variable_annuity contract possesses sufficient incidents_of_ownership over the assets supporting the policy or contract the contract holder is viewed for federal_income_tax purposes as the owner of the underlying assets and as a result is currently taxed on any income and gains attributable to the underlying assets the service stated in revrul_2003_91 that the determination of whether the holder of a variable life_insurance_policy or variable_annuity contract possesses sufficient incidents_of_ownership over the assets of the separate_account underlying the variable life_insurance_contract or variable_annuity contract depends on all the relevant facts and circumstances in the instant case the fact that the funds may invest in public funds does not cause the variable_contract holders to be treated as the owners of the funds’ shares for federal_income_tax purposes in revrul_82_54 the amounts held in the segregated_asset_account underlying a variable_contract were invested as the contract holder directed in shares of any or all of three open-end investment companies mutual funds each mutual_fund represented a different broad general investment strategy shares of the mutual funds were available only to insurance_company segregated_asset plr-129719-08 accounts while the mutual funds themselves were not available to the general_public the mutual funds held common stocks bonds and money market instruments all of which were available for purchase by members of the general_public the public availability of the assets held by the mutual funds did not lead to the conclusion that the issuing insurance_company was simply a conduit between the contract holders and their mutual funds or the underlying assets of the mutual funds revrul_82_54 held that the insurance_company not the contract holders was the owner of the mutual_fund shares similar to the mutual funds in revrul_82_54 the funds are or will be available only to insurance_company segregated_asset accounts and will invest in assets that are available to the general_public in the current case instead of investing in common stocks bonds and money market instruments that are available to the general_public the funds will invest in regulated_investment_companies and etfs that are available to the general_public based on the representations and facts presented by the taxpayer the variable_contract holder in this case does not appear to have any more control_over the assets held under their contract than was the case in revrul_82_54 based on the representations presented by the taxpayer the funds are not an indirect means of allowing a variable_contract holder to invest in a public fund conclusion based on the authority cited above and the representations and facts presented by the taxpayer each fund’s investment in public funds will not cause the variable_contract holders to be treated as the owners of the fund’s shares for federal_income_tax purposes except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling will be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in the letter_ruling see dollar_figure of revproc_2008_1 2008_1_irb_1 however when the criteria in dollar_figure of revproc_2008_1 2008_1_irb_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative plr-129719-08 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 s donald j drees senior technician reviewer branch financial institutions products


internal_revenue_service number release date index numbers ------------------------------- --------------------------------- ----------------------------------------------- ----------------------- ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------ id no ------------- telephone number --------------------- refer reply to cc corp b06 plr-111467-08 date july ------------ ------------ legend distributing controlled sub sub sub llc llc llc lp lp a ------------------------ ------------------------------- ----------------------- -------------------------- ------------------------- --------------------------------- ------------------------- ----------------------- ----------------------- -------------------- ------------------ --------------------------------- --------------- business x --------------------- business y ------------------- plr-111467-08 dollar_figurea dollar_figureb dollar_figurec dollar_figured dollar_figuree dollar_figuref x y z year year year year state a -------------- -------------- ---------------- ---------------- ---------------- ---------------- ------ ------ ------ ------- ------- ------- ------- ------------- dear --------------- this letter responds to your date letter from your authorized representatives requesting rulings on certain federal_income_tax consequences of a proposed transaction additional information was received in letters dated april may june and date the information provided in these letters is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process in particular this office has not reviewed any information pertaining to and has made no determination regarding whether the distribution described below i satisfies the business_purpose plr-111467-08 requirement of sec_1_355-2 of the income_tax regulations ii is used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 of the internal_revenue_code and sec_1_355-2 or iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 distributing is the common parent of an affiliated_group_of_corporations filing a consolidated federal_income_tax return distributing owns all of the stock of sub sub owns all of the stock of sub and all of the membership interests of llc and llc llc and llc are disregarded entities that own all of the partnership interests in lp also a disregarded_entity lp owns all of the stock of sub lp owns x of the distributing stock individual a owns y and others own the remaining z in year for what are represented to be valid business reasons sub borrowed money from an unrelated party and loaned it to distributing this debt is open account indebtedness during the past two years the amount of the debt has fluctuated between approximately dollar_figuree and dollar_figuref sub has made the following distributions to distributing dollar_figureb in year dollar_figurec in year and dollar_figured in year sub a member of the separate_affiliated_group of distributing as defined in sec_355 dsag is engaged in business x and sub through disregarded entities also a member of the dsag is engaged in business y financial information has been received indicating that business x and business y each has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years for what are represented to be valid corporate business purposes described herein distributing desires to separate business x and business y the separation is intended to be accomplished by the following transactions collectively the proposed transaction i distributing will form controlled and llc a disregarded_entity ii distributing will cause sub to merge with and into llc pursuant to state a law sub merger iii distributing will contribute all of the interests in llc and llc to controlled in exchange for additional controlled stock and the assumption by controlled of approximately dollar_figurea of liabilities relating to the transferred assets contribution plr-111467-08 alternatively instead of controlled assuming such liabilities controlled will borrow dollar_figurea from unrelated parties and distribute that amount to distributing if distributing receives dollar_figurea from controlled as part of this step it will distribute that dollar_figurea to either its shareholders or creditors within a one-year period beginning on the date of the distribution described below in no event would distributing retain any portion of the dollar_figurea beyond that one-year period iv distributing will distribute all of the controlled stock pro_rata to its shareholders with respect to their distributing stock_distribution any outstanding options to acquire distributing stock distributing options held by controlled employees and certain controlled directors will be exchanged for options to acquire controlled stock controlled options a portion of the distributing options held by a director of distributing who will serve as a director of both distributing and controlled following the transaction will also be exchanged for controlled options distributing options held by employees and certain directors of the distributing group members will be adjusted after the transaction to reflect the value of controlled the ratio of the exercise price for each pre-transaction distributing option to the pre- transaction fair_market_value of the distributing stock will be maintained for each post- transaction distributing or controlled option the pre-transaction aggregate spread value for each option will be maintained post-transaction it is anticipated that after the transaction controlled will enter into a contract with distributing to pay distributing for providing certain intercompany employee services for a transitional period of time following the consummation of the transaction to administer the k non qualified_plan benefit plans auto leasing and property casualty workmen’s compensation insurance established for the benefit of controlled these benefits will be concurrently administered for a period of approximately one year after the one-year anniversary of the transaction controlled will enter into new contracts with various vendors as the old contracts expire the 401_k_plan will continue to be administered by distributing for a two-year period following the transaction subject_to possible renewals additionally distributing will provide income_tax preparation tax filing and audit coordination assistance to controlled for a two-year period following the consummation of the transaction subject_to renewal pursuant to a tax sharing and indemnification agreement controlled will pay distributing an arm’s-length fee for distributing’s performance of all transitional services the transitional services are hereinafter referred to as the continuing relationships the following representations have been made in connection with the sub merger a distributing sub and llc will adopt a plan_of_liquidation by merger plan and the sub merger will occur pursuant to such plan plr-111467-08 b distributing on the date of the adoption of the plan and at all times until the effective time of the sub merger will be the owner of at least of the total combined voting power of all classes of stock of sub and the owner of at least of the total value of all classes of sub stock excluding nonvoting_stock if any that is limited and preferred as to dividends and otherwise meets the requirements of sec_1504 c no shares of sub stock will have been redeemed during the three years preceding the adoption of the plan d all asset transfers from sub to llc resulting from the sub merger will be made in a single transfer e at the effective time of the sub merger all of the stock of sub will be cancelled and sub will cease to be a separate legal entity f sub will retain no assets following the sub merger g sub will not have acquired assets in any nontaxable_transaction at any time except for acquisitions occurring more than three years prior to the date of the adoption of the plan h except as described above under iii of the proposed transaction the sub merger will not be preceded or followed by the reincorporation in or transfer or sale to a recipient corporation recipient of any of the businesses or assets of sub if persons holding directly or indirectly more than in value of the sub stock also hold directly or indirectly more than in value of the stock in recipient for purposes of this representation ownership will be determined by application of the constructive_ownership rules of sec_318 as modified by sec_304 i prior to the adoption of the plan no assets of sub will have been distributed in_kind transferred or sold to distributing except for i the distributions described above ii transactions occurring in the normal course of business and iii transactions occurring more than three years prior to the adoption of the plan j sub will report all earned_income represented by assets that will be distributed to distributing as owner of llc such as receivables being reported on a cash_basis unfinished construction contracts commissions due etc k the fair_market_value of the assets of sub will exceed its liabilities both at the date of the adoption of the plan and immediately before the effective time of the sub merger plr-111467-08 l other than in connection with the contribution no assets of sub have been or will be disposed of by either sub llc or distributing except for dispositions as described in representation i dispositions in the ordinary course of business and dispositions occurring more than three years prior to the adoption of the plan m there is no intercorporate debt existing between distributing and sub other than indebtedness created in the ordinary course of business and certain intercorporate debt owed by distributing to sub as described above and none has been cancelled forgiven or discounted except for transactions that occurred more than three years prior to the date of the adoption of the plan n sub 1’s basis in the debt issued to it by distributing as described above equals the adjusted_issue_price of that debt o neither distributing nor llc are organizations that are exempt from federal_income_tax under sec_501 or any other provision of the code p pursuant to the sub merger as a result of the operation of law the following will occur simultaneously i all of the assets and liabilities of sub will become assets and liabilities of llc and ii sub will cease its separate legal existence q neither distributing nor llc has any plan or intention to sell or otherwise dispose_of any of the assets of sub acquired in the sub merger except for dispositions made in the ordinary course of business or pursuant to the proposed transaction r the liabilities of sub assumed by distributing as owner of llc and the liabilities to which the transferred assets of sub are subject were incurred by sub in the ordinary course of its business s following the sub merger distributing as owner of llc will continue the historic_business of sub or use a significant portion of sub 1’s historic_business_assets in a business t distributing llc and sub will pay their respective expenses if any incurred in connection with the sub merger u no parties to the sub merger are investment companies as defined in sec_368 and iv v sub is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 plr-111467-08 w the fair_market_value of the assets of sub will exceed its liabilities both at the date of the adoption of the plan and immediately prior to the effective time of the sub merger x all other transactions undertaken contemporaneously with in anticipation of in conjunction with or in any way related to the sub merger have been fully disclosed the following representations have been made in connection with the contribution and distribution aa the indebtedness if any owed by controlled to distributing after the distribution will not constitute stock_or_securities bb no part of the consideration to be distributed by distributing to its shareholders will be received by any shareholder of distributing as a creditor employee or in any capacity other than that of a shareholder of distributing cc the five years of financial information submitted on behalf of business x conducted by sub a member of the dsag is representative of its present operation and with regard to that business there have been no substantial operational changes since the date of the last financial statements submitted sub is and immediately after the distribution will be affiliated with distributing in a manner that satisfies sec_1504 without regard to sec_1504 dd the five years of financial information submitted on behalf of business y conducted by sub through disregarded entities a member of the dsag is representative of its present operation and with regard to that business there have been no substantial operational changes since the date of the last financial statements submitted ee following the distribution sub a member of the dsag and controlled through disregarded entities will each continue the active_conduct of their respective businesses independently and with their separate employees ff the distribution is carried out for the following corporate business purposes a to use equity incentives and equity separation for the employees in order to enable business x and business y to attract retain and properly provide incentives to management including future management and management owners of acquired companies as well as focus the employees’ efforts on strategic priorities since their equity incentives will be tied solely to the business that they are involved with and b to eliminate the possibility that distributing or controlled will be subject_to customer based business exposure with respect to overlapping customers the distribution is motivated in whole or substantial part by these corporate business purposes plr-111467-08 gg the transaction is not used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both hh for purposes of sec_355 immediately after the distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution ii for purposes of sec_355 immediately after the distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five year period determined after applying sec_355 ending on the date of the distribution or ii attributable to distributions on distributing stock that was acquired by purchase as defined in sec_355 and during the five year period determined after applying sec_355 ending on the date of the distribution jj distributing neither accumulated its receivables nor made extraordinary payment of its payables in anticipation of the transaction kk no intercorporate debt will exist between distributing or any of its subsidiaries and controlled or any of its subsidiaries at the time of the distribution and no intercorporate debt will exist between distributing or any of its subsidiaries or controlled or any of its subsidiaries subsequent to the distribution except as may arise in the ordinary course of business or with respect to payments pursuant to any continuing relationships between distributing and controlled or that may arise under the tax sharing and indemnification agreement ll immediately before the distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_2_cb_147 and as currently in effect sec_1_1502-13 as published by t d further any excess_loss_account of a member in the stock of another member that is required to be taken into account by sec_1_1502-19 will be included in income immediately before the transaction mm payments made in connection with all continuing transactions if any between distributing or any of its subsidiaries and controlled or any of its subsidiaries will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm's length plr-111467-08 nn no two parties to the transaction are investment companies as defined in sec_368 and iv oo no acquisition of stock of distributing or controlled including any predecessor or successor of any such corporation is part of a plan or series of related transactions within the meaning of sec_1_355-7 that includes the distribution of controlled stock pp immediately after the transaction as defined in sec_355 neither distributing nor controlled will be a disqualified_investment_corporation within the meaning of sec_355 qq distributing and controlled will each pay their own respective expenses if any incurred in connection with the transaction rr the total fair_market_value of the assets that distributing will transfer to controlled in the contribution will exceed the sum of i the amount of liabilities if any assumed within the meaning of sec_357 by controlled in connection with the exchange ii the amount of liabilities owed to controlled by distributing that are discharged or extinguished in connection with the exchange and iii the amount of the cash and the fair_market_value of any other_property other than stock and securities permitted to be received under sec_361 without recognition of gain received by distributing from controlled in connection with the exchange the fair_market_value of the assets of controlled will exceed the amount of its liabilities immediately_after_the_exchange ss the total fair_market_value of the assets transferred to controlled by distributing in the contribution will equal or exceed the aggregate adjusted_basis of the transferred assets tt the total adjusted bases and the fair_market_value of the assets transferred to controlled by distributing in the contribution will equal or exceed the sum of i the total liabilities if any assumed within the meaning of sec_357 by controlled and ii the total amount of any money and the fair_market_value of any other_property within the meaning of sec_361 received by distributing from controlled and transferred to distributing’s creditors in connection with the transaction if any the liabilities to be assumed within the meaning of sec_357 by controlled in the contribution were incurred in the ordinary course of business and are associated with the assets to be transferred uu the payment of cash in lieu of fractional shares if any of controlled stock will be solely for the purpose of avoiding the expense and inconvenience to distributing of issuing fractional shares and will not represent separately bargained for consideration it is expected that the total cash consideration that will be paid to the shareholders of controlled instead of issuing fractional shares will not exceed one percent of the total plr-111467-08 consideration that will be issued in the transaction to the controlled shareholders any fractional share interests of each controlled shareholder will be aggregated and it is intended that no controlled shareholder will receive cash in an amount equal to or greater than the value of one full share of controlled stock vv neither business x conducted by sub a member of the dsag nor control of an entity conducting this business will have been acquired during the five-year period ending on the date of the distribution in a transaction in which gain_or_loss was recognized or treated as recognized in whole or in part throughout the five-year period ending on the date of the distribution sub will have been the principal_owner of the goodwill and significant assets of business x and will continue to be the principal_owner following the distribution ww neither business y conducted either by sub through disregarded entities or controlled through disregarded entities nor control of an entity conducting this business will have been acquired during the five-year period ending on the date of the distribution in a transaction in which gain_or_loss was recognized or treated as recognized in whole or in part throughout the five-year period ending on the date of the distribution either sub through disregarded entities or controlled through disregarded entities will have been the principal_owner of the goodwill and significant assets of business y and will continue to be the principal_owner following the distribution based solely on the information submitted and the representations provided we rule as follows in connection with the sub merger no gain_or_loss will be recognized by distributing in the sub merger no gain_or_loss will be recognized by sub in the sub merger the basis of each asset received by distributing through llc in the sub merger will equal the basis of that asset in the hands of sub immediately before the sub merger the holding_period of each asset received by distributing through llc in the sub merger will include the holding_period during which that asset was held by sub distributing through llc will succeed to and take into account those attributes of sub described in sec_381 subject_to the conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 and the regulations thereunder sec_381 and sec_1_381_a_-1 based solely on the information submitted and the representations provided we rule as follows in connection with the contribution and distribution plr-111467-08 the contribution and distribution will constitute a reorganization within the meaning of sec_368 distributing and controlled will each be a_party_to_a_reorganization within the meaning of sec_368 distributing will not recognize any gain_or_loss on the receipt of the controlled stock and the assumption by controlled of liabilities associated with the transferred assets pursuant to the contribution sec_357 and sec_361 b further if distributing receives cash from controlled in the amount of dollar_figurea instead of controlled assuming certain liabilities of distributing equal to that amount distributing will not recognize income or gain upon the receipt of such cash provided that it distributes the entire amount of that cash to its shareholders or creditors sec_361 and b controlled will not recognize any gain_or_loss on the contribution sec_1032 controlled's basis in each asset received from distributing in the contribution will equal the basis of that asset in the hands of distributing immediately before the contribution sec_362 controlled's holding_period in each asset received from distributing in the contribution will include the period during which distributing held that asset sec_1223 earnings_and_profits will be allocated between distributing and controlled in accordance with sec_312 and sec_1_312-10 and sec_1_1502-33 distributing will not recognize any gain_or_loss on the distribution sec_361 the shareholders of distributing will not recognize any gain_or_loss and will not otherwise include any amount in income on the distribution sec_355 each distributing shareholder’s basis in a share of distributing stock as adjusted under sec_1_358-1 shall be allocated between the share of distributing stock with respect to which the distribution is made and the share or shares of controlled stock or allocable portions thereof received with respect to the share of distributing stock in proportion to their fair market values if one share of controlled stock is received in respect of more than one share of distributing stock the basis of each share of distributing stock must be allocated to the shares of controlled stock received in a manner that reflects that to the extent possible a share of controlled stock is received in respect of shares of distributing stock acquired on the same date and at the same price if a distributing shareholder that purchased or acquired shares of distributing stock on different dates or at different prices is not able to identify which particular share of controlled stock or portion thereof is received with respect to a particular share of distributing stock the shareholder may designate which particular share of controlled plr-111467-08 stock or portion thereof is received with respect to a particular share of distributing stock provided that the designation is consistent with the terms of the distribution a distributing shareholder's holding_period in the controlled stock received will include that shareholder's holding_period for the distributing stock with respect to which the distribution is made provided that the distributing stock is held as a capital_asset on the date of the distribution sec_1223 if cash in lieu of a fractional share of controlled stock is received by a shareholder the shareholder will have gain_or_loss measured by the difference between the basis of the fractional share as allocated thereto as determined in ruling above and the amount of cash received sec_1001 any gain_or_loss will be treated as capital_gain or loss provided such fractional share will be held as a capital_asset on the date of the distribution sec_1221 and sec_1222 no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings in particular no opinion is expressed regarding i whether the distribution satisfies the business_purpose requirement of sec_1_355-2 ii whether the proposed transaction is used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both see sec_355 and sec_1_355-2 iii whether the proposed transaction is part of a plan or series of related transactions under sec_355 and iv the federal_income_tax consequences of the cancellation of the intercorporate debt owed by distributing to sub this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives plr-111467-08 a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely mary e goode senior counsel branch corporate cc


office_of_chief_counsel internal_revenue_service memorandum number release date cc tege eoeg et2 ------------ plr-135354-07 third party communication none date of communication not applicable uilc date date to deputy commissioner international se lm in office of the deputy commissioner international from chief employment_tax branch office of division counsel associate chief_counsel tax exempt government entities subject withholding of income_tax on remuneration paid to employees working outside the united_states this chief_counsel_advice arose from a request for a private_letter_ruling submitted by the taxpayer below the taxpayer withdrew its request for a ruling when we notified its representatives that we intended to rule adversely this chief_counsel_advice sets forth our opinion on the issues submitted in the ruling_request in accordance with sec_6110 this chief_counsel_advice may not be used or cited as precedent legend x ------------------------------------------ ---------------------------------- ------------------- -------------------------------------- --------------------- --------------- ----------------------------- fc ------------------------ fc tax authority ------------------------------------------------------ fc government_official ---------------------------------------------------- plr-135354-07 the request for a ruling concerned whether certain remuneration paid_by the taxpayer x to certain employees is subject_to united_states federal_income_tax withholding under sec_3402 of the internal_revenue_code all references to section numbers are to the internal_revenue_code unless otherwise indicated facts submitted by taxpayer x is a delaware limited_liability corporation x represented that it is a partnership for federal_income_tax purposes x employs a number of united_states citizens and united_states_resident aliens in a foreign_country fc for varying lengths of time expatriate employees x represented that none of its employees are partners of x for federal_income_tax purposes the expatriate employees’ assignments to fc are generally for a period of less than years some of the expatriate employees qualify or expect to qualify for the sec_911 foreign_income and housing exclusion some united_states citizen expatriate employees who expect to qualify for the sec_911 exclusion may have submitted a completed form_673 statement for claiming exemption from withholding on foreign_earned_income eligible for the exclusion s provided by sec_911 to x in order to apply to have the employer exclude the applicable_amount of compensation from wages for united_states federal_income_tax withholding purposes in accordance with sec_3401 form_673 by its terms does not apply to resident aliens under the current fc income_tax procedures fc income_tax salaries tax is remitted to the fc tax authority using a program of provisional tax_payments submitted by the individual employees who are liable for the salaries tax x had been advised by counsel in fc that payroll deductions that are not specifically permitted under the fc law are prohibited x indicated that the deductions permitted under fc law are generally limited to those required by fc law x stated that all other deductions are prohibited except where fc government_official an official in fc government with jurisdiction over the matter has given his express approval x was not aware of any occasion where fc government_official has approved deductions from wages which are not expressly permitted under fc law the fc office of x or a related company of x has previously applied to fc government_official for the approval to withhold wages for payment under an employee_stock_purchase_plan but approval was denied x stated that the prohibition applies to wages as defined under fc law for this purpose or any other sum due to the employee x acknowledged that the prohibition against withholding under fc law does not apply to annual discretionary bonuses paid to employees or other_amounts that are payable only at the discretion of the employer plr-135354-07 thus it is undisputed that fc law does not prohibit the deduction of united_states income_tax_withholding from the discretionary bonuses paid to the expatriate employees generally a significant portion of the total remuneration of the expatriate employees consists of annual discretionary bonuses x represented that if any employer makes a deduction that is not permitted by fc law or which has not otherwise been approved by the fc government_official the employer would be subject_to a fine or imprisonment x stated that this liability extends to any director manager or other similar officer of a company or the partner or manager of a firm where the deduction was made as a result of his her consent connivance or neglect x was planning to adopt the following proposed approach proposed approach to attempt to comply with both united_states and fc laws with regard to the payment of compensation to the expatriate employees under the proposed approach x would enter into an agreement with the fc tax authority to obtain an acknowledgement that x is the expatriate employee’s agent in connection with the purchase of tax reserve certificates trc’s on behalf of the expatriate employee the trc’s would be automatically redeemed by the fc tax authority on a first-in-first-out basis to settle any outstanding fc tax_liabilities for each expatriate employee the fc tax authority would automatically redeem the trc’s purchased on behalf of the specific expatriate employee to pay the fc tax_liability of that expatriate employee on the tax due_date without involvement of the expatriate employee concerned x believed that under the proposed approach x would be replicating a tax withholding system by deducting approximately percent of the expatriate employee’s gross compensation to purchase trc’s in the same amount for the expatriate employee’s fc trc account to satisfy applicable fc tax x requested two rulings concerning withholding on the united_states citizens and residents working in fc first x requested that the proposed procedure to be adopted by x will satisfy the requirement of sec_3401 that the employer is required by the law of a foreign_country to withhold income_tax upon such remuneration x’s second ruling_request concerns the issue of whether the exception provided by sec_3401 or ii may apply to remuneration for services paid to an individual who is a resident_alien and not a united_states citizen ruling_request with respect to whether sec_3401 applies to individuals whose remuneration is subject_to the proposed approach sec_3402 provides that except as otherwise provided in this section every employer making a payment of wages shall deduct and withhold upon such wages a tax determined in accordance with tables or computational procedures proscribed by the secretary sec_3401 defines the term wages for purposes of federal_income_tax withholding as all remuneration for services performed by an employee for his employer with certain specific exceptions plr-135354-07 sec_3401 in part provides for an exception for services for an employer other than the united_states or any agency thereof -- i performed by a citizen_of_the_united_states if at the time of the payment of such remuneration it is reasonable to believe that such remuneration will be excluded from gross_income under sec_911 or ii performed in a foreign_country or in a possession_of_the_united_states by such a citizen if at the time of the payment of such remuneration the employer is required by the law of any foreign_country or possession_of_the_united_states to withhold income_tax upon such remuneration sec_31_3401_a_8_a_-1 of the employment_tax regulations essentially reiterates the language of the statute sec_31_3401_a_8_a_-1 provides that remuneration is not exempt from withholding under this paragraph if the employer is not required by the law of a foreign_country or a possession_of_the_united_states to withhold income_tax upon such remuneration mere agreements between the employer and the employee whereby the estimated income_tax of a foreign_country or of a possession_of_the_united_states is withheld from the remuneration in anticipation of actual liability under the law of such country or possession will not suffice revrul_79_392 1979_2_cb_360 concerned whether the exception provided by sec_3401 applied under facts described in the ruling under the facts of the ruling consultants performing services in a foreign_country are employees of a united_states company and continue to receive their salaries from the united_states pursuant to the laws of the foreign_country the remuneration is subject_to the foreign country’s income_tax_withholding however pursuant to an agreement under the laws of the foreign_country between the company and the foreign country’s taxing authority the foreign_country will assess the consultants on a direct collection basis this method provides for an assessment based on the wages earned by an employee in the year prior to assessment and payment in four equal quarterly installments revrul_79_392 concludes that the agreement between the company and the foreign_country to assess the consultants on a direct collection basis is an agreed upon method of complying with a requirement by the foreign_country to withhold and is therefore consistent with the language of sec_3401 therefore the company is not required to withhold income_tax under sec_3402 on the remuneration of the consultants x analogizes its proposed approach for funding of trc’s with revrul_79_392 however there is a fundamental distinction between the facts of the revenue_ruling and the facts in this private_letter_ruling request under the facts of revrul_79_392 the company was required under the law of the foreign_country to withhold income_tax on the remuneration paid to the consultants however fc law does not require plr-135354-07 withholding from the remuneration paid to the employees of x in contrast it is x’s representation that fc prohibits such withholding on wages as wages is defined for this purpose under fc law unless there is an agreement between the employer and employee approved by the fc tax authority therefore this revenue_ruling deals with different facts than the facts present here and does not support the ruling requested under the facts of this ruling_request x’s funding of the trc’s through the proposed approach would not require x to withhold fc income_tax from the wages of the expatriate employees within the meaning of sec_3401 furthermore we are unaware of any amendment to x’s proposed approach that would require x to withhold fc income_tax from the wages of the expatriate employees within the meaning of sec_3401 in light of x’s representation that fc law provides that no withholding of fc income_tax is required from the wages of employees ruling_request with respect to applicability of sec_3401 or sec_3401 to resident aliens revrul_92_106 1992_2_cb_258 provides guidance with respect to withholding of income taxes and other employment_taxes on wages paid to united_states citizens and residents in situation of the ruling a united_states citizen or resident performs services outside the united_states but not in a united_states possession as an employee of a united_states_person situation of the ruling contains the same facts as situation except that the employer is a foreign_person revrul_92_106 cites the statutory language of sec_3401 and sec_3401 after citing these exceptions the revenue_ruling notes that a domestic_corporation employing a united_states citizen to perform services overseas is not required to withhold on amounts not exceeding in the aggregate the exclusion the employee is entitled to under sec_911 and to the extent the payment exceeds such exclusion on any payments that are subject_to_withholding by a foreign jurisdiction with respect to situation sec_1 and revrul_92_106 concludes that amounts of remuneration for services paid to the employee who is a united_states citizen are wages for income_tax_withholding purposes to the extent that they exceed the amount of the exclusion that the employee is entitled to under sec_911 and are not subject_to_withholding under the laws of a foreign_country in the case of wages paid to a united_states_resident no exemption from income_tax_withholding is available for the amount of the exclusion that the employee is entitled to under sec_911 the exception provided by sec_3401 directly references the exception provided by sec_3401 in describing the scope of the application of the exception to united_states citizens with the language by such a citizen thus nothing in the statute suggests that either of the exceptions is intended to apply to anyone other than united_states citizens plr-135354-07 in x’s ruling_request x cited certain language in the preamble in t d fr date as supporting its interpretation that sec_3401 can apply to remuneration for services paid for services performed by resident aliens the preamble in general discusses the comments made with respect to proposed_regulations and the changes made in response to the comments the language x cited is merely describing a comment made with respect to the proposed_regulations and does not purport to describe the applicability of the exception provided by sec_3401 the preamble states as follows the commenters requested that the regulations provide an exception for united_states residents or citizens who are working overseas and receive supplemental wage payments that are subject_to foreign_income_tax but not foreign_income_tax withholding the language from the preamble including this statement does not provide support for x’s interpretation there is no authority indicating that the exception provided by sec_3401 applies to anyone other than united_states citizens the statute regulations and revrul_92_108 provide that the exception only applies to remuneration for services performed by a citizen_of_the_united_states that meets the requirements of the exception summary of our opinion on rulings requested thus with respect to ruling_request number we intended to rule that because fc does not require income_tax_withholding on the wages of the expatriate employees remuneration paid to the expatriate employees does not qualify for the exception provided by sec_3401 regardless of whether x enters into the proposed approach accordingly with respect to ruling_request number we intended to rule that neither the exception provided by sec_3401 nor the exception provided by sec_3401 applies to remuneration for services performed by an alien individual whether a resident_alien or a nonresident_alien thus neither the exception provided by sec_3401 nor the exception provided by sec_3401 can apply to an employee of x who is an alien individual please call if you have any further questions


t c summary opinion united_states tax_court sylvester monroe jr petitioner v commissioner of internal revenue respondent docket no 1484-o0s filed date sylvester monroe jr pro_se stephen j neubeck for respondent carluzzo special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority - - respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax the issue for decision is whether petitioner is entitled to a deduction for a rental real_estate loss claimed on the schedule e supplemental income and loss included with his federal_income_tax return the resolution of this issue depends upon the amount of time that petitioner spent performing services in connection with his rental real_estate activity during background some of the facts have been stipulated and are so found at the time that the petition was filed petitioner resided in columbus ohio petitioner was married as of the close of and lived with his spouse at least for a portion of that year he filed a timely federal_income_tax return as a married individual filing separately petitioner has been employed with the ohio department of taxation the department since during petitioner held a supervisory position at the department not counting vacation and sick leave he worked big_number hours for the department that year ’ over the years petitioner purchased and as necessary renovated residential real_estate properties that he held for ' petitioner’s compensation from the department was based on a big_number hour work year rent as of the close of petitioner owned five such rental properties one of which was purchased that year two of the rental properties are four-unit apartment buildings the other three properties are two-unit apartment buildings for the most part petitioner was solely responsible for managing and maintaining his rental properties among other things he met with prospective tenants negotiated and prepared leases collected rent and from time-to-time initiated and prosecuted eviction proceedings he personally made repairs to his rental properties and he arranged for repairs to be made by third-parties petitioner reviewed financial statements made monthly payments to various creditors and developed and maintained a bookkeeping system for recording the income and expenses attributable to his rental real_estate activity petitioner maintained a detailed activity records log the log updated at least on a weekly basis in which he recorded time spent performing personal services in connection with his rental real_estate activity according to the log during petitioner spent big_number hours performing various personal services in connection with his rental real_estate activity including big_number hours of what is described in the log as phone-in office hours days a year on the schedule e included with his return petitioner reported the following income and expenses attributable to his rental real_estate activity rental income dollar_figure expenses big_number rental real_estate loss big_number in the notice_of_deficiency respondent relying upon sec_469 determined that petitioner is not entitled to a deduction for the rental real_estate loss other adjustments made in the notice_of_deficiency are not in dispute discussion the extent to which petitioner is entitled to a rental real_estate loss deduction is determined by reference to sec_469 ’ that section sets forth what are commonly referred to as the passive_activity_loss rules although those rules are complex and spawn many disputes between taxpayers and the commissioner the disagreement between the parties in this case is relatively simple--the parties disagree as to the number of hours that in general an individual is not entitled to a deduction for a passive_activity_loss see sec_469 except as provided in sec_469 the term passive_activity includes any rental_activity an otherwise deductible loss attributable to a rental real_estate activity and sustained by an individual who actively participates in that rental real_estate activity is deductible to a limited extent see sec_469 1i an otherwise deductible loss attributable to a rental real_estate activity and incurred by a taxpayer who materially participates ina real_property business is not subject_to the limitations imposed by the passive_activity rules because the activity is not considered a passive_activity if the taxpayer performed more than one- half of his personal services during the year in real_property trades_or_businesses in which he materially participated and performed more than hours of services during the taxable_year in real_property trades_or_businesses in which the taxpayer materially participates see sec_469 - - petitioner spent during performing personal services in connection with his rental real_estate activity all other requirements of the statutory scheme having been satisfied by petitioner the number of hours that he spent performing services in his rental real_estate activity is critical because in order to be entitled to the deduction here in dispute petitioner must establish that those hours exceed the hours that he spent performing personal services as an employee of the department see sec_469 b i not counting vacation and sick leave petitioner spent at least big_number hours’ performing personal services as an employee of the department petitioner’s log indicates that the time he spent performing personal services in his rental real_estate activity ie big_number hours exceeds the time he spent performing services as an employee however respondent argues that the time reported in the log is overstated by the hours identified as phone-in office hours days a year the disputed hours the disputed hours consist of time that petitioner was available to take telephone calls rather than the number of hours that he was petitioner does not qualify for a limited deduction for a loss attributable to rental real_estate activity because he did not live separate and apart from his spouse for all of and did not file a joint_return for that year with her see sec_469 we need not decide whether vacation and sick leave hours should be taken into account in the computation of the hours that petitioner spent performing personal services as an employee of the department -- - actually involved in telephone conversations according to respondent the time that petitioner was merely available for telephone calls should not count as time actually spent providing personal services in connection with petitioner’s rental real_estate activity the disputed hours total big_number well over one-half of the big_number hours listed on the log at trial petitioner explained that generally he could be reached by telephone hours a day by tenants or others but he only counted hours a day from p m to p m as time that he spent in his rental real_estate activity the disputed hours were not computed with reference to the amount of time he actually spent on the telephone with tenants or others petitioner recorded some but not all of his actual telephone calls in the log at trial petitioner was unable to approximate the number of hours that he actually spent on the telephone in connection with his rental real_estate activity as we view the matter allocating hours a day for days of the year is not a reasonable means of establishing the time that petitioner actually spent on the phone speaking with tenants and or others in connection with his rental real_estate activity sec_1_469-5t f temporary income_tax regs fed reg date we find it highly unlikely that petitioner actually spent that much time speaking on the phone on matters concerning his rental properties furthermore according to the log on numerous occasions during the hours of p m and p m petitioner was engaged in other activities these hours are also included in the total hours reported in the log in effect duplicating or double counting the same hours we accept petitioner’s claim that he could do more than one thing at any given time but any hour within which multiple tasks were performed should only be counted once accordingly we find that the disputed hours cannot be considered hours spent by petitioner performing personal services in connection with his rental activities deducting the disputed hours from the total hours recorded in the log leaves big_number hours petitioner performed at least big_number hours of services as an employee of the department in consequently he did not perform more than one-half of his personal services during that year in real_property trades_or_businesses in which he materially participated accordingly respondent’s determination that petitioner is not entitled to a deduction for the rental real_estate loss he incurred in is sustained --- - reviewed and adopted as the report of the small_tax_case division to reflect the foregoing decision will be entered for respondent


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 intl b01 plr-136731-11 date date ty -------------- legend taxpayer rrsp lira tax years year year year year year year year ---------------------- ------------------------ --------------------- -------------------------------- -------------------- -------------------------------- -------------- ------- ------- ------- ------- ------- ------- ------- plr-136731-11 year tax preparer dear --------------- ------- --------------------------------------- this is in reply to a letter dated ---------------------- and additional information submitted - ------------------------- requesting an extension of time under sec_301_9100-3 for taxpayer to elect the provisions of revproc_2002_23 2002_1_cb_744 with respect to tax years the ruling contained in this letter is based upon information and representations submitted by 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 requested ruling it is subject_to verification on examination the information submitted for consideration is substantially as set forth below facts taxpayer is a canadian citizen who became a permanent resident_of_the_united_states in year while in canada taxpayer established and contributed to a canadian registered retirement savings_plan rrsp and a locked-in retirement account lira or locked-in rrsp taxpayer’s lira holds funds transferred from a canadian registered pension_plan after immigrating to the united_states taxpayer continued to maintain her rrsp and lira but has not contributed to either account since moving to the u s in year sec_2 and taxpayer caused amounts to be distributed from her rrsp taxpayer represents that she paid all canadian taxes assessed on those distributions reported those distributions on her u s joint income_tax returns and claimed foreign tax_credits with respect to the canadian taxes paid taxpayer represents that she has not received any distributions from her lira taxpayer represents that she and her husband have timely filed u s joint income_tax returns for tax years for year sec_2 and taxpayer’s returns were prepared by tax preparer who did not advise taxpayer to elect to defer current u s income_taxation on the accrued earnings in her rrsp and lira pursuant to article xviii of the u s - canada income_tax treaty treaty taxpayer did not report the accrued earnings in her rrsp or her lira on those returns for year sec_4 and taxpayer prepared her u s joint income_tax returns using commercially available tax preparation software taxpayer represents that she was unaware of the need to make the election under article xviii of the treaty to defer plr-136731-11 current u s taxation on the accrued earnings in her rrsp and lira taxpayer did not report the accrued earnings in her rrsp or her lira on her year or returns in year taxpayer learned of the obligation to file form td f report of foreign bank and financial accounts fbar with respect to her rrsp and her lira after hiring a professional tax advisor taxpayer also became aware of the need to elect to defer current u s income_taxation on the undistributed_earnings in her rrsp and her lira pursuant to article xviii of the treaty and to file form_8891 as of the date of this ruling_request taxpayer represents that the internal_revenue_service had not communicated with taxpayer regarding her rrsp or her lira ruling requested taxpayer requests the consent of the commissioner of the internal_revenue_service for an extension of time under sec_301_9100-3 to make an election pursuant to revproc_2002_23 to defer u s federal income_taxation on income accrued in the rrsp and her lira as provided for in article xviii of the treaty for tax years law and analysis sec_301_9100-1 provides that the commissioner has discretion to grant a taxpayer a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301 -1 b provides that an election includes an application_for relief the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government in the present situation the election provided in revproc_2002_23 is a regulatory election within the meaning of sec_301_9100-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer an extension of time provided that taxpayer satisfies the standards set forth in sec_301_9100-3 based solely on the information submitted and representations made we conclude that taxpayer satisfies the standards of sec_301_9100-3 accordingly taxpayer is granted an extension of time until days from the date of this ruling letter to make an election under revproc_2002_23 for the rrsp and the lira for tax years as provided in sec_301_9100-1 the granting of an extension of time is not a determination that taxpayer is otherwise eligible to make the above-described election plr-136731-11 pursuant to section dollar_figure of revproc_2002_23 the election once made cannot be revoked except with the consent of the commissioner for open tax years taxpayer must file amended u s income_tax returns to which forms for the rrsp and lira are attached for each subsequent tax_year through the year in which a final distribution is made from taxpayer’s rrsp or lira taxpayer must attach a form_8891 for each respective account to her u s income_tax return except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter a copy of this letter must be attached to taxpayer’s u s income_tax return for the year in which taxpayer obtained the ruling and should be associated with taxpayer’s amended returns for open tax years this letter_ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter will be sent to your authorized representatives sincerely elizabeth u karzon chief branch office of associate chief_counsel international enclosure copy for purposes cc