t c memo united_states tax_court chickie’s and pete’s inc petitioner v commissioner of internal revenue respondent docket no filed date harry c citrino jr for petitioner gerald a thorpe for respondent memorandum findings_of_fact and opinion chiechi judge respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax for the taxable_year ended date year at issue we must decide whether petitioner is entitled to deduct for the year at issue the portion of a dollar_figure payment that it made to its sole stockholder and officer in excess of the amount of such payment that respondent concedes petitioner may deduct we hold that it is not findings_of_fact some of the facts have been stipulated and are so found at the time of the filing of the petition in this case petitioner’s principal_place_of_business was in philadelphia pennsylvania in date the name chickie’s and pete’s was registered with the united_states patent and trademark office u s patent and trademark office on or about date peti- tioner began operating a bar restaurant under that name on roosevelt avenue in philadelphia pennsylvania philadelphia at all relevant times peter ciarrocchi jr mr ciarrocchi was petitioner’s sole stockholder and officer as well as the sole stockholder and officer of inc which operated a bar restaurant under the name chickie’s and pete’s on robbins avenue in philadelphia on date inc and ogden entertainment inc ogden which was operating food and beverage concessions at veterans stadium in philadelphia ogden’s veterans stadium 1respondent concedes that petitioner may deduct dollar_figure of the dollar_figure payment in question 2the application to register the name chickie’s and pete’s was submitted to the u s patent and trademark office on date concessions entered into a license agreement ogden license agreement that agreement provided in pertinent part whereas licensee ogden operates the food and beverage concessions at veterans stadium in philadelphia pennsylvania veterans stadium whereas licensee desires the right to use the trademark ie chickie’s pete’s and the goodwill associated therewith and the recipes and menu items devel- oped formulated and tested by licensor inc such recipes and menu items being the licensed rights at its location pincite robbins avenue philadelphia to identify the goods and services being licensed to licensee under this agreement the business and whereas licensor is willing to grant to licensee a non-exclusive license to use the trademark and the licensed rights in the identification and operation of licensee’s business pursuant to the provi- sions contained in this agreement now therefore in consideration of the mutual covenants and promises hereinafter set forth the parties intending to be legally bound hereby agree as follows grant of license a licensor hereby grants to licensee subject_to the provisions of this agreement the non- exclusive license to use the trademark and such other variations of the trademark as may be authorized by licensor in the operation of a food service business together with the licensed rights only at veter- ans stadium the license b except as set forth in paragraph a above this agreement shall in no way limit licensor’s use of the trademark or the licensed rights in its current operation or in any future endeavor which licensor may pursue or desire to pursue including but not limited to operating or licensing others to operate chickie’s pete’s concessions in any other stadium arena or other similar venue c in consideration for the granting of this license licensee shall make the following payments to licensor at the times and in the manner set out below i licensee shall pay a one- time fee of ten thousand dollars dollar_figure as an initial license fee which fee shall be paid no later than the execution of this agreement at which time it shall be deemed fully earned due and payable the initial license fee is not refundable under any circumstances ii as a continuing fee_royalty on or before tuesday of each week during the term of this agreement licensee shall pay to licensor a sum equal to eleven percent of the gross_sales for the seven day period ending at the close of business on the sunday preceding such tuesday a the term gross_sales means all of licensee’s receipts from operations sales charges fees orders taken services concessions business interruption insurance and all other revenues of any kind and nature whether for cash or credit in from about or by reason of the operation of licensee’s business under the trademark and licensed rights but excludes inter- company transfers bona_fide credits and refunds upon return of merchandise discounts tips the value of any coupon voucher or allowance issued or granted to a customer of a restaurant in furtherance of any promotional program and which is received and credited in full or partial payment for products or services sold at the business and amounts collected and turned over by licensee for use_tax sales_tax excise_tax and all other similar taxes other than taxes on net_income levied by any governmental body licensee’s obligations and undertakings a licensee covenants and agrees as part of the consideration of the issuance of this license by licensor that licensee ii shall serve all of the menu items specified by licensor as set forth on schedule a ii attached hereto and made a part hereof and shall serve only such menu items as are specified by licensor and shall follow all specifications and formulae of licensor as to the contents quality and weight of the unit or products served in order to assure that licensee operates in strict accordance with such standards licensee shall purchase the goods listed on schedule a ii attached directly from 3schedule a ii was not attached to the ogden license agreement that is part of the record in this case licensor or from such sources as licensor may designate in writing from time to time licensor’s obligations licensor agrees to provide at its own expense a an on-site manager to train license e and or its employees and staff on food produc- tion customer service staffing and training and b all materials and information needed by licensee to open and maintain the business using the trademarks and licensed rights other than inventory to be used or consumed by licensee in the operation of the business except for an initial training session that mr ciarrocchi provided for ogden personnel neither mr ciarrocchi nor any other employee of inc had any involvement in the manage- ment or operation of the ogden’s veterans stadium concessions on date mr ciarrocchi and petitioner entered into a license agreement petitioner’s license agreement that agreement provided in pertinent part whereas licensee petitioner operates the food and beverage bar restaurant pincite0 roosevelt boulevard philadelphia whereas licensee desires the right to use the trademark ie chickie’s pete’s and the good- will associated therewith and the recipes and menu items developed formulated and tested by licensor mr ciarrochi such recipes and menu items being the licensed rights at its location pincite robbins avenue philadelphia to identify the goods and services being licensed to licensee under this agree- ment the business and whereas licensor is willing to grant to licensee a non-exclusive license to use the trademark and the licensed rights in the identification and operation of licensee’s business pursuant to the provi- sions contained in this agreement now therefore in consideration of the mutual covenants and promises hereinafter set forth the parties intending to be legally bound hereby agree as follows grant of license a licensor hereby grants to licensee subject_to the provisions of this agreement the non- exclusive license to use the trademark and such other variations of the trademark as may be authorized by licensor in the operation of a food service business together with the licensed rights only at roosevelt boulevard philadelphia the license b in consideration for the granting of this license licensee shall make the following payments to licensor at the times and in the manner set out below i licensee shall pay as a con- tinuing fee_royalty peri- odically each year twenty-two and one-half percent of the gross_sales for the yearly period september 1st through august 31st each year a the term gross_sales means all of licensee’s receipts from operations sales charges fees orders taken services concessions business interruption insurance and all other revenues of any kind and nature whether for cash or credit in from about or by reason of the operation of licensee’s business under the trademark and licensed rights but excludes intercompany transfers bona_fide credits and refunds upon return of merchandise discounts tips the value of any coupon voucher or allowance issued or granted to a customer of a restaurant in furtherance of any promotional program and which is received and credited in full or partial payment for products or services sold at the business and amounts collected and turned over by licensee for use_tax sales_tax excise_tax and all other similar taxes other than taxes on net_income levied by any governmental body licensee’s obligations and undertakings a licensee covenants and agrees as part of the consideration of the issuance of this license by licensor that licensee ii shall serve all of the menu items specified by licensor as set forth on schedule a ii attached hereto and made a part hereof and shall serve only such menu items as are specified by licensor and shall follow all specifications and formulae of licensor as to the contents quality and weight of the 4schedule a ii was not attached to petitioner’s license agreement that is part of the record in this case unit or products served in order to assure that licensee operates in strict accordance with such stan- dards licensee shall purchase the goods listed on schedule a ii attached directly from licensor or from such sources as licensor may designate in writing from time to time licensor’s obligations licensor agrees to provide at its own expense a an on-site manager to train li- censee and or its employees and staff on food produc- tion customer service staffing and training and b all materials and information needed by licensee to open and maintain the business using the trademarks and licensed rights other than inventory to be used or consumed by licensee in the operation of the business during the year at issue mr ciarrocchi performed a variety of services for petitioner including designing the layout of petitioner’s bar restaurant developing the food products to be served at petitioner’s bar restaurant hiring all the employees of petitioner’s bar restaurant and ordering all the supplies for petitioner’s bar restaurant during the last six months of the year at issue petitioner paid mr ciarrocchi a so-called royalty fee of dollar_figure under petitioner’s license agreement payment under petitioner’s license agreement during the year at issue petitioner also paid mr ciarrocchi a salary of dollar_figure and a management fee of dollar_figure petitioner filed form_1120 u s_corporation income_tax return for the year at issue in that return petitioner inter alia claimed a deduction of dollar_figure for the payment under petitioner’s license agreement respondent issued a notice_of_deficiency notice to peti- tioner in the notice respondent determined to disallow the deduction of dollar_figure that petitioner claimed for the payment under petitioner’s license agreement opinion although respondent must have commenced respondent’s exami- nation of petitioner’s return for the year at issue after date the parties do not address sec_7491 on the record before us we find that petitioner has failed to carry its burden of establishing that it satisfied the applicable require- ments of sec_7491 on that record we conclude that petitioner’s burden_of_proof see rule a 290_us_111 does not shift to respondent under sec_7491 moreover with respect to the deduction that petitioner is claiming for the year at issue deductions are strictly a matter of legislative grace and petitioner bears the burden of proving that it is entitled to the deduction claimed 5all section references are to the internal_revenue_code in effect for the year at issue all rule references are to the tax_court rules_of_practice and procedure 503_us_79 on brief respondent concedes that petitioner is entitled to deduct as a royalty fee for the year at issue dollar_figure of the dollar_figure that petitioner claimed as a deduction for the payment under petitioner’s license agreement however it is respon- dent’s position that petitioner has failed to establish that it is entitled to a deduction in excess of the amount that respon- dent concedes in support of that position respondent asserts mr ciarrocchi testified that he believed that peti- tioner should pay a higher royalty fee than ogden paid under the ogden license agreement because he had developed additional recipes for petitioner’s use however both agreements the ogden license agree- ment and petitioner’s license agreement contain the same terms concerning the use of mr ciarrocchi’s family recipes there is nothing in the ogden licensing agreement that limits the number of recipes covered by the agreement nor did mr ciarrocchi testify that there were any such limita- tions therefore there is no basis for concluding that the right granted to petitioner under petitioner’s license agreement to use mr ciarrocchi’s recipes had any greater value than the same right granted to ogden under ogden’s license agreement to the extent that mr ciarrocchi provided services to petitioner that he did not provide to ogden he did so as an officer and employee of petitioner and not pursuant to the license agreement 6respondent states on brief respondent concedes that the ogden license agreement was negotiated at arm’s length and thus is extremely probative evidence of the fair_market_value of the rights conveyed to petitioner under petitioner’s license agreement consequently respondent concedes that petitioner is entitled to deduct a royalty fee of dollar_figure which is equal to of its gross_sales as that term is defined in petitioner’s license agreement fn ref omitted finally there is no evidence in the record to support petitioner’s contention that the disallowed portion of the royalty fee should be treated as deduct- ible compensation_for services rendered while sec_162 allows a taxpayer to deduct compensation paid the taxpayer must establish that the parties intended the payment to be compensation_for services rendered and that the amount_paid is reasonable here since the payment was made pursuant to petitioner’s license agreement it is clear that it was not intended as compensation_for the services mr ciarrocchi rendered as petitioner’s officer employee in any event petitioner has provided no evidence to support the contention that it would be reasonable to allow additional compensation exceeding the dollar_figure mr ciarrocchi received as salary and management fees from petitioner for the services he performed as peti- tioner’s officer and employee if the balance ie dollar_figure of the royalty fee exceeding the amount conceded by respondent is allowed as compensation then mr ciarrocchi’s compensation_for the taxable_year ended date would be dollar_figure the record contains no frame of reference from which to even begin the analysis the courts engage in when determining whether compensation is reasonable and thus deduct- ible under sec_162 fn ref omitted it is petitioner’s position that it is entitled to deduct the entire dollar_figure payment under petitioner’s license agreement and not just the dollar_figure that respondent concedes in support of that position petitioner asserts taxpayer petitioner is providing royalties to the person mr ciarrocchi who provided italian recipes and tradi- tional family information along with trade secrets and methods in operating this type of restaurant the amount_paid to mr ciarrocchi by the taxpayer was and is reason- able it is well established that for a payment to be deductible the payer must have intended the payment to be compensation_for services rendered and it must be reasonable in amount the complete test for royalty fees is that they are fair and reasonable and are paid for services rendered mr ciarrocchi had entered into a fair and reason- able arm’s-length license agreement with ogden enter- tainment prior into sic his entering into a fair and reasonable license agreement with the taxpayer peti- tioner since ogden was willing to pay of gross revenues plus a dollar_figure up-front bonus to mr ciarrocchi for his minimal participation then the taxpayer in this matter should have expected to pay much more for mr ciarrocchi’s full participation and creativity in further support of petitioner’s position petitioner asserts ogden was permitted to use the name chickie’s and pete’s and the crabfries product only chickie’s and pete’s inc petitioner was permitted to use the name and all of the many and varied products recipes spices and tech- niques these additional items should more than double and maybe even triple the amount of royalty paid_by petitioner the higher percentage royalty for a larger amount and vari- ety of items is fair and reasonable we turn first to petitioner’s contention that pursuant to the ogden license agreement ogden was allowed to use in addi- tion to the name chickie’s and pete’s only the crabfries product and not any of the other many and varied products recipes spices and techniques that petitioner claims it was permitted to use under petitioner’s license agreement on the record before us we reject that contention ogden’s license agreement did not in any way limit the products of chickie’s and pete’s that ogden was permitted to sell at ogden’s veterans stadium concessions in fact mr ciarrocchi’s testimony estab- lishes that there was no limit on the products that ogden was permitted to use under ogden’s license agreement mr ciarrocchi testified with the development of the products and chickie’s and pete’s we opened up in veteran’s sic stadium in april of and i went into an agreement that you spoke of before with ogden ie ogden’s license agreement where i would sell my products at the stadium they would use my name my recipes and they would pay me a royalty for using them ogden entertainment they came to me and asked if they could sell my products in their stadium and i said sure that’d be great and we discussed the price and we negotiating sic how much it would cost it wa sec_11 percent of the gross_sales of the sta- dium of anything that was sold with the chickie’s and pete’s name we turn now to petitioner’s contentions that mr ciarrocchi performed more services for petitioner under petitioner’s license agreement than inc performed for ogden under ogden’s license agreement and that consequently it was reasonable for mr ciarrocchi to receive percent of gross_sales under peti- tioner’s license agreement instead of percent of gross_sales which was the fee that inc was to receive under ogden’s 7see supra note license agreement although not altogether clear it appears that petitioner may be arguing that it made a portion of the dollar_figure payment under petitioner’s license agreement in order to compensate mr ciarrocchi for services rendered to petitioner and that that portion is deductible under sec_162 a payment is deductible as compensation under sec_162 if it is for services actually rendered to the payor in or before the year of payment and is reasonable in amount e g 281_us_115 sec_1_162-7 income_tax regs on the record before us we find that peti- tioner has failed to carry its burden of showing that any portion of the dollar_figure payment that it made to mr ciarrocchi in excess of the amount that respondent concedes is deductible as a royalty 8pursuant to ogden’s license agreement ogden also agreed to make at the inception of that agreement a nonrefundable payment to inc of dollar_figure 9in determining whether compensation is reasonable we have applied the so-called multifactor test see eg 95_tc_525 affd 965_f2d_1038 11th cir viewed through the lens of an independent investor where a case is appealable to a u s court_of_appeals which has neither adopted nor rejected the so-called independent_investor_test established by the u s court_of_appeals for the seventh circuit in 196_f3d_833 7th cir revg heitz v commissioner tcmemo_1998_220 see eg haffner’s serv stations inc v commissioner tcmemo_2002_38 affd 326_f3d_1 1st cir the instant case is appealable to the u s court_of_appeals for the third circuit that court_of_appeals has not adopted the so-called independent_investor_test but has endorsed the traditional multifactor test see 725_f2d_945 3d cir revg and remanding on other grounds tcmemo_1982_98 under sec_162 constitutes compensation_for services rendered that is deductible under sec_162 based upon our examination of the entire record before us we find that petitioner has failed to carry its burden of estab- lishing that it is entitled to deduct for the year at issue the portion of the dollar_figure payment under petitioner’s license agreement in excess of the amount that respondent concedes we have considered all of the contentions and arguments of the parties that are not discussed herein and we find them to be without merit irrelevant and or moot to reflect the foregoing and the concession of respondent decision will be entered under rule reporter’s note this report was modified by order dated date


internal_revenue_service number release date index number ------------------------ ----------- --------------------------------- -------------------- -------------------------------- in re --------------------------------- legend department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no --------------- ---------------- telephone number -------------------- refer reply to cc psi b05 plr-109693-15 date date taxpayer -------------------------------------------------- ----------------------------------- ----------------------------------------------------------------------------------------- bin address ------------------------------------------------------------------------------------------------------------ ---------------------------------------------------------------------------------------------------------- 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----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- year --------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ dear --------------- this letter responds to taxpayer’s authorized representative’s letter dated date and subsequent correspondence requesting an extension of time to make an plr-109693-15 election under sec_42 of the internal_revenue_code pursuant to sec_301_9100-1 of the procedure and administration regulations according to the information submitted taxpayer a partnership for federal_income_tax purposes placed buildings identified by bin address in service in year taxpayer inadvertently failed to make a timely election under sec_42 to begin the credit_period for the buildings in year sec_42 defines the credit_period of any building as the period of taxable years beginning with the taxable_year in which the building is placed_in_service or at the taxpayer’s irrevocable election the succeeding taxable_year but in either case only if the building is a qualified_low-income_building at the close of the first year of the credit_period sec_301_9100-8 provides that the election under sec_42 generally must be made for the taxable_year in which the project is placed_in_service or the succeeding taxable_year if the sec_42 election is made to defer the start of the credit_period and must be made in the certification required to be filed pursuant to sec_42 and sec_301_9100-8 provides that the election under sec_42 is irrevocable specifically the election under sec_42 is made pursuant to the certification requirement of sec_42 which provides that following the close of the first taxable_year in the credit_period with respect to any qualified_low-income_building the taxpayer shall certify to the secretary at such time and in such form and in such manner as the secretary prescribes such other information as the secretary may require sec_1_42-1 of the income_tax regulations provides that a completed form_8609 low-income_housing_credit allocation and certification must be filed by the building owner with the irs the requirements for completing and filing form_8609 are addressed in the instructions to the form completion of the relevant portions of form_8609 satisfy the certification requirement of sec_42 and the instructions to form_8609 provide that the building owner must make a one- time submission of form_8609 to the low-income_housing_credit lihc unit at the irs philadelphia campus the building owner must file the original of the form_8609 with the lihc unit no later than the due_date including extensions of its first tax_return with which it is filing form 8609-a annual_statement for low-income_housing_credit sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election plr-109693-15 sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government in the instant case based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been met accordingly taxpayer is granted an extension of time to make the elections under sec_42 for the buildings identified by bin address by filing within days from the date of this letter amended forms that include the intended elections the amended forms along with a copy of this letter must be filed with the lihc unit at the following address provided in the instructions to form department of the treasury internal_revenue_service center philadelphia pa by making the elections under sec_42 for the buildings identified by bin address taxpayer is electing to begin the credit_period for the buildings identified by bin address in year accordingly taxpayer must file its federal_income_tax returns including the forms 8609-a and the schedules k-1 for year and all subsequent years as is necessary to reflect the proper amount of sec_42 credits no opinion is expressed or implied regarding the application of any other provisions of the code or regulations specifically we express no opinion on whether the buildings identified by bin address otherwise qualify for the low-income_housing_credit under sec_42 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent plr-109693-15 in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to taxpayer’s authorized representatives sincerely associate chief_counsel passthroughs special industries by _______________________ christopher j wilson senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service index no number release date sep cc dom p si - plr-109990-99 trust a b date x state dear this responds to your letter dated date submitted on behalf of trust requesting a ruling under sec_1361 of the internal_revenue_code the information submitted states that trust was established on date by a grantor for the benefit of b the spouse of b the issue of b the respective spouses of the issue of b the brothers and sisters of b the respective spouses of the brothers and sisters of b the issue of the brothers and sisters of b and the respective spouses of such issue trust currently holds stock in x a state limited_liability_company the trust trustees propose to contribute trust’s interest in x to a newly formed corporation that will elect s_corporation status in exchange for the stock of the newly formed corporation trust represents that trust has not made an election to be a qualified_subchapter_s_trust trust is not exempt from tax under subtitle a of the code and each trust_beneficiary is an individual article one of trust provides that the trustees shall hold manage invest and reinvest the trust property shall collect the income therefrom and shall pay the net_income in convenient installments in such proportions and with such exclusions as the trustees shall deem advisable among the following class of persons b the spouse of b the issue of b the respective spouses of the issue of b the brothers and sisters of b their respective spouses their issue and the respective spouses of such issue or the trustees shall have the right to and are authorized to accumulate any or all of such net_income as they shall deem advisable and add the same to the principal or the trust property any payments of net_income may be made by the trustees either directly to or indirectly in trust or otherwise for the benefit of the beneficiary concerned article one further provides that in the event that any payment of income authorized under article one to any individual beneficiary shall be insufficient in the opinion of the trustees to defray the expenses of any illness accident or other emergency or to provide for the proper maintenance support and education of such beneficiary the trustee are authorized to use from time to time so much of the principal of the trust property as the trustee may deem advisable therefor article two of trust provides that trust shall continue in effect unless sooner terminated until twenty-one years after the death of the last to die of the four children of grantor living at the date of trust or until the earlier failure of all living takers in the class of persons described in article one of trust article two of trust further provides that upon the termination of trust the trustees shall transfer deliver and pay over the then trust property to b if b is then living and if not to the then living issue of b per stirpes failing such then living issue the then trust property shall be divided equally among and added to the other three trusts established by grantor on the same day trust was established and failing all such then living takers the then trust property shall be transferred delivered and paid over to such charitable_organization or organizations as the trustees shall select sec_1361 of the code provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect sec_1362 of the code provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 c have a nonresident_alien as a shareholder and d more than one class of stock under sec_1361 of the code an electing_small_business_trust is an eligible shareholder of an s_corporation sec_1361 defines electing_small_business_trust sec_1361 of the code provides that except as provided in sec_1361 the term electing_small_business_trust means any trust if i such trust does not have as a beneficiary any person other than i an individual ii an estate or iii an organization described in paragraph or of sec_170 ii no interest in such trust was acquired by purchase and iii an election under sec_1361 applies to such trust sec_1361 of the code provides that the term electing_small_business_trust shall not include i any qualified_subchapter_s_trust as defined in sec_1361 if an election under sec_1361 applies to any corporation the stock of which is held by such trust ii any trust exempt from tax under subtitle a of chapter and iii any charitable_remainder_annuity_trust or charitable_remainder_unitrust as defined in sec_664 sec_1361 of the code provides that for purposes of sec_1361 the term potential_current_beneficiary means with respect to any period any person who at any time during such period is entitled to or at the discretion of any person may receive a distribution from the principal or income of the trust notice_97_49 1997_2_cb_304 provides that for purposes of sec_1361 the term beneficiary does not include a distributee trust but does include those persons who have a beneficial_interest in the property held by the distributee trust furthermore the notice provides that for purposes of sec_1361 if a distributee trust becomes entitled to or at the discretion of any person may receive a distribution from principal or income of the esbt then the trust will become a potential_current_beneficiary and the s_corporation_election will terminate unless the distributee trust is a_trust described in sec_1361 accordingly based on the representations made and the information provided and the assumption that the interest of any contingent charitable_beneficiary of trust described in sec_170 is so remote as to be negligible and that such contingent charitable beneficiaries are therefore not beneficiaries of trust as described in sec_1361 we conclude that for purposes of sec_1361 the beneficiaries of trust are individuals and are qualified beneficiaries with respect to the power given to the trustees under article one to make certain distributions either directly to or indirectly in trust or otherwise for the benefit of the beneficiary concerned this is a power to make a distribution for purposes of sec_1361 however since there are currently no distributee trusts identified or currently in existence the power to distribute to these trusts will be disregarded for purposes of e thus there is no distributee trust that is a potential_current_beneficiary if a distributee trust is identified or otherwise comes into existence in any period then the distributee trust will become a potential_current_beneficiary and the s_corporation_election will terminate unless the distributee trust is a_trust described in sec_1361 furthermore the beneficiary of any such new trust must satisfy the shareholder restrictions of sec_1361 accordingly upon trust making a valid and timely election under sec_1361 trust will satisfy the requirements of sec_1361 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney of file with this office we are forwarding a copy of this letter to trust sincerely yours j thomas hines senior technician reviewer branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c q tax exempt government e division and ntities nov u i l to er c-k tr ‘ d xxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxaxxxx legend taxpayer a xxxxxxxxxxxxxxxxxxx ira x xxxxxxxxxxxxxxxxxxx company b xxxxxxxxxxxxxxxxxxx company c xxxxxxxxxxxxxxxxxxxx company f amount d amount e date date date dear xxxxxx xxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxk this letter is in response to your request dated xxxxxxxxx submitted on your behalf by your authorized representative in which you request a waiver of the day rollover requirement contained in sec_408 of the internal_revenue_code the code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a represents that she received a distribution from ira x totaling amount d taxpayer a asserts that her failure to accomplish a rollover within the 60-day period prescribed by sec_408 was due to the misleading instructions given to her by representatives of company b and company c which led to amount d being placed into non-ira accounts taxpayer a further represents that amount d has not been used for any other purpose taxpayer a maintained ira x with company f in may 20__ taxpayer a decided to move ira x to two new iras at company b and company c to reduce the ira management fees taxpayer a requested a distribution from ira x and company f issued a check totaling amount d representing the balance of ira x taxpayer a called both company b and company c and spoke with service representatives and discussed her desire to rollover the distribution from ira x to another ira with their company the retirement_plan service representatives of company b and company c directed taxpayer a to fill out their online forms for completing the rollover in doing so they instructed taxpayer a to visit their respective websites to open her new ira account however the service representatives at company b and company c did not tell her that there would be a difference between the forms for setting up an ira account versus a non- ira account taxpayer a went to their company websites and completed the forms that she thought would open an ira account at company b and company c taxpayer a followed the instructions that were given to her by going to the website addresses to complete the rollover taxpayer a did not have experience in online forms and was unaware that the forms she completed were for non-ira accounts taxpayer a sent the completed forms and two checks each in the amount of amount e to company b and company c the first check was deposited by company c on date into a non-ira account and the second check was deposited by company b on date into a non-ira account taxpayer a did not realize that the accounts she had opened were not ira accounts until she met with her accountant in toprepare her tax_return based upon the foregoing facts and representations taxpayer a requests that the internal_revenue_service waive the day rollover requirement with respect to the distribution of amount d sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code - sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if- i ii the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual received the payment or distribution or the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not included in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary may waive the day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity and good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occur after date are eligible for the waiver under sec_408 of the code ‘ revproc_2003_16 i r b provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability or hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a is consistent with her assertion that her failure to accomplish a rollover of amount d was caused by the misleading directions given her by service representatives of company b and company c therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount d from ira x taxpayer a is granted a period of days from the issuance of this ruling letter to contribute amount d into a rollover ira provided all other requirements of code sec_408 except the 60-day requirement are met the contribution of amount d will be considered a rollover_contribution within the meaning of sec_408 of the code this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 of the code no opinion is expressed as to the tax treatment of the transactions described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent a copy of this letter is being sent to your authorized representative pursuant to a power_of_attorney on file in this office if you have any questions concerning this ruling please contact xxxxxxxxxxxxx se t ep ra t3 at xxxxxxxxxxxxxxx sincerely yours laura b warshawsky manager employee_plans technical group enclosures deleted copy of letter_ruling notice co xxxxxxxxxxxxxxxxx


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 corp b06 plr-123917-14 date date legend distributing ------------------------------------------------------------------------ --------------------------------------------------------------------- ------------------------------------------ controlled --------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------------- -------------------------- preferred_stock entity --------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------------- ----------------------------- sub1 ------------------------------------------------------------------------ --------------------------------------------------------------------- ------------------------------------------------- sub2 ------------------------------------------------------------------------ --------------------------------------------------------------------- ------------------------------------- sub3 ---------------------------------------- plr-123917-14 ------------------------------------------------------------------------ --------------------------------------------------------------------- llc1 ------------------------------------------------------------------------------------------------ --------------------------------------------------------------------- ----------------------------------------------------------------------- llc2 ------------------------------------------------------------------------------------------------ --------------------------------------------------------------------- ----------------------------------------------------------------------- llc3 ---------------------------------------------------------------------------------------------- ---------------------------------------------------------- ---------------------------------------------- llc4 ---------------------------------------------------------------------------------------------- --------------------------------------------------------------------- -------------------------------------------- llc5 ---------------------------------------------------------------------------------------------- ---------------------------------------------------------- ------------------------------------- llc6 --------------------------------------------- ----------------------------------------------------------------------------------------- --------------------------------------------------------------------- llc7 ------------------------------------------------------------------------------------------------ --------------------------------------------------------------------- ----------------------------------------------------------------------- llc8 ------------------------------------------------------------------------------------------------ --------------------------------------------------------------------- ----------------------------------------------------------------------- p sec_1 ---------------------------------------------------------------------------------------------- --------------------------------------------------------------------- ------------------------------------------------------ shareholder business ----------- ------------------------------ plr-123917-14 busine sec_1 ----------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------- busine sec_2 ------------------------------------------------------------------------------------- ------------------------------------------------------------------------ segment a ------------------------------------------------------------------------ --------------------------------------------------------------------------------- ------------------------------------ segment b ----------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------ ----------------------------------------------------------------------------------------- segment c division a ------------------------------------------------------------------------ ------------------------------- expansion assets ----------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------ circumstances adjust bankruptcy court ------------------------------------------------------------------------ ------------------------ ------------------------------------------------------------------------ acquisition ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------ swaps ----------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------- agreement ----------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- plr-123917-14 -------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------- settlement claim obligation ----------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------ ---------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- state a state b date date date date date date date month month month month year a --------- -------------- ------------------------ -------------------- -------------------- ----------------- ------------------ ----------------- ---------------------- ------------------- ---------------------- ------------------- -------------------- ------- ---- plr-123917-14 b c d e f g h i j k l m n o p q -- -------- -------- ---------------- --- -------------- -------------- ---------------- ---------------- ---------------- -------------- ---------------- -------------- -- ---------------- ---- dear ----------------- this letter responds to your request submitted by your authorized representatives for rulings on certain u s federal_income_tax consequences of a proposed transaction the proposed transaction as described below the material information submitted in that request and in subsequent correspondence is summarized below plr-123917-14 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalties 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 this letter is issued pursuant to section dollar_figure of revproc_2016_1 2016_1_irb_1 regarding one or more significant issues under sec_355 and sec_368 the rulings contained in this letter only address one or more discrete legal issues involved in the proposed transaction this office expresses no opinion as to the overall tax consequences of the proposed transaction or as to any issue not specifically addressed by the rulings below organizational structure facts distributing a privately held state a corporation is the common parent of an affiliated_group_of_corporations that join in the filing of a consolidated federal_income_tax return the distributing group shareholder owns almost all approximately a of distributing’s sole class of stock and certain current and former directors and employees of distributing and its subsidiaries own the remaining approximately b collectively the distributing shareholders distributing owns all of the stock of sub1 and sub2 and all of the membership interests of llc1 llc1 owns all of the membership interests of llc2 which in turn owns all of the membership interests of llc3 llc4 llc5 and llc6 and newly formed controlled and preferred_stock entity in addition to indirect ownership of equity interests in other entities not relevant here llc6 owns all of the stock of sub3 each of llc1 llc2 llc3 llc4 llc5 llc6 controlled and preferred_stock entity is an entity disregarded as separate from distributing for federal_income_tax purposes distributing also owns all of the membership interests of llc7 which owns all of the membership interests of llc8 each of llc7 and llc8 is an entity disregarded as separate from distributing for federal_income_tax purposes llc8 owns c greater than one-third of the interests of p sec_1 a limited_liability_company that is treated as a partnership for federal_income_tax purposes the remaining d of the interests of p sec_1 is owned by unrelated third parties distributing through its separate_affiliated_group as defined in sec_355 the distributing sag is engaged in business which includes busine sec_1 and busine sec_2 plr-123917-14 busine sec_1 has been actively conducted by the distributing group for a period in excess of five years and consists of segment a which includes division a segment b and segment c distributing conducts busine sec_1 through llc1 and its lower-tier entities in particular llc2 and its lower-tier entities are directly engaged in the operation of busine sec_1 on date distributing through a disregarded subsidiary of llc2 acquired the expansion assets in a transaction treated as a taxable asset purchase for federal_income_tax purposes the expansion assets are in the same line_of_business as busine sec_1 and represent an expansion of busine sec_1 within the meaning of sec_1 b ii distributing’s operation of division a is under circumstances in light of these circumstances distributing may adjust a portion of its division a operations before or shortly after the proposed transaction the division a partial adjustment busine sec_2 has been actively conducted by the distributing group for a period in excess of five years distributing conducts busine sec_2 through llc7 and its lower-tier entities in particular p sec_1 and its lower-tier entities are directly engaged in the operation of busine sec_2 bankruptcy proceeding -- restructuring of distributing group debt on date the predecessor to distributing then a publicly traded corporation was acquired by a group of private investors the investors in the acquisition a transaction that is not part of the same plan as the proposed transaction the investors own indirectly through shareholder nearly all of the stock of distributing on date each of distributing llc1 llc2 and llc7 and certain of their respective subsidiaries excluding llc8 and p sec_1 collectively the debtors filed voluntary petitions for relief under chapter of the united_states bankruptcy code with the bankruptcy court the bankruptcy proceeding llc2 debt on date llc2 had approximately dollar_figuree of outstanding first lien debt the llc2 first lien debt and the creditors with respect to such debt the llc2 first lien creditors after accounting for the acceleration of obligations under the swaps on date distributing held less than f of the llc2 first lien debt and such debt has since been cancelled in connection with an intercompany settlement agreement currently llc2 has approximately dollar_figuree of outstanding llc2 first lien debt taking into account the swaps plr-123917-14 the llc2 first lien debt consists of i debt issued pursuant to a senior secured credit facility the llc2 credit agreement and such debt the llc2 credit agreement debt ii debt issued to the public the llc2 first lien notes and iii obligations issued pursuant to the swaps the llc2 first lien debt is secured and has been secured since issuance by substantially_all of the assets of llc2 and its lower-tier entities substantially_all of the llc2 first lien debt outstanding as of date can be directly or indirectly traced to debt incurred in connection with the acquisition the llc2 credit agreement debt further consists of a initial term loans the initial term loans b delayed draw term loans the delayed term loans c deposit letter_of_credit term loans the letter_of_credit term loans d revolving credit facility loans and e incremental term loans the llc2 credit agreement gives the holders of these various debts significant control_over the conduct of llc2 and its operation of busine sec_1 the initial term loans were issued on date and had a maturity_date of month a portion of which was extended to month as part of a global debt restructuring in year the year debt restructuring the vast majority of the initial term loans was issued to fund the acquisition the first tranche of delayed term loans was issued on date and had a maturity_date of month a portion of which was extended to month as part of the year debt restructuring this first tranche was issued for capital improvements to busine sec_1 facilities the second tranche of delayed term loans was issued between date and month and had a maturity_date of month a portion of which was extended to month as part of the year debt restructuring this second tranche was issued to construct busine sec_1 facilities the letter_of_credit term loans were issued on date and had a maturity_date of month which was extended to month as part of the year debt restructuring the letter_of_credit term loans were issued for general corporate purposes the llc2 first lien notes are senior secured notes issued pursuant to an indenture the indenture dated date the llc2 first lien notes have a maturity_date of date and were issued in conjunction with the year debt restructuring to effect certain repayments and pay certain associated transaction fees the indenture gives the holders of the llc2 first lien notes significant control_over the conduct of llc2 and its operation of busine sec_1 on date llc2 also had approximately dollar_figureg of outstanding second lien debt and unsecured debt collectively the llc2 junior debt and the creditors with respect to such debt the llc2 junior creditors on date distributing and llc7 held a small amount of the llc2 junior debt and such debt has since been cancelled in connection plr-123917-14 with an intercompany settlement agreement llc2 currently has approximately dollar_figureh of outstanding llc2 junior debt llc1 has unconditionally guaranteed all of the llc2 first lien debt and llc2 junior debt with the exception of dollar_figurei of llc2 junior debt consisting of certain unsecured revenue bonds pursuant to an order of the bankruptcy court on date llc2 entered into a debtor-in- possession financing facility the llc2 dip facility currently approximately dollar_figurej is outstanding under the llc2 dip facility however it is expected that additional_amounts may be drawn under the facility to fund the cash needs of busine sec_1 repayment of the llc2 dip facility is currently expected to occur prior to the llc2 effective date defined below using all or a portion of the proceeds from a new debtor- in-possession financing facility to be entered into by llc2 the new llc2 dip facility on or about month there also exist certain general unsecured claims such as claims held by trade creditors and potential litigation claims against llc2 that are currently estimated to total approximately dollar_figurek the trade claims and the holders of such claims the trade claimants llc2 also has outstanding administrative and priority obligations the administrative and priority claims and the holders of such claims the administrative and priority claimants administrative claims are claims against llc2 that have arisen since date as part of the bankruptcy proceeding as well as certain claims based on goods that were delivered a short_period of time before date but are still treated as administrative claims under applicable bankruptcy law priority claims are unsecured claims against llc2 that arose prior to date and that are entitled under applicable bankruptcy law to priority over other types of unsecured claims against llc2 the priority claims further consist of senior claims the senior priority claims and junior claims in an undetermined but likely very small amount if any the junior priority claims and the holders of such claims the junior priority claimants other distributing group debt on date llc7 had approximately dollar_figurel of outstanding first lien second lien and unsecured debt and distributing had approximately dollar_figurem of outstanding unsecured debt the distributing debt excluding dollar_figuren of distributing debt held by llc7 which has since been cancelled in connection with an intercompany settlement agreement other bankruptcy proceeding matters on date distributing on behalf of itself and its debtor subsidiaries filed with the bankruptcy court a joint plan_of_reorganization pursuant to chapter of the united_states bankruptcy code and a related disclosure statement setting forth the terms of a plr-123917-14 the restructuring of the distributing group the bankruptcy plan_of_reorganization contemplates bankruptcy plan of proposed reorganization that distributing may proceed with the proposed transaction which will effect a separation of distributing’s busine sec_1 and busine sec_2 without regard to the timing or precise nature of any transactions that distributing and llc7 may undertake with respect to their remaining assets and subsidiaries including their indirect interest in p sec_1 and their remaining outstanding debt the terms of any such subsequent transactions have not yet been determined the bankruptcy plan_of_reorganization has been modified from time to time since date prior to the proposed transaction distributing certain of distributing’s subsidiaries controlled and certain of controlled’s subsidiaries will enter into a tax_matters_agreement restricting the parties from engaging in transactions that would prevent the proposed transaction from qualifying as a reorganization under sec_368 and a distribution under sec_355 the bankruptcy plan_of_reorganization contemplates that until such time as distributing and llc7 have emerged from bankruptcy court protection the tax_matters_agreement will be enforceable by court order and neither distributing nor llc7 will be permitted to reject or terminate the tax_matters_agreement in the bankruptcy proceeding in addition prior to the proposed transaction controlled or a disregarded subsidiary thereof may enter into the agreement under which controlled or a disregarded subsidiary thereof will be obligated to make future cash payments including interest on such payments to the holders of rights under the agreement the agreement is intended to be effective on the llc2 effective date proposed transaction as part of the restructuring in the bankruptcy proceeding distributing has proposed the following transaction the proposed transaction which will be effected pursuant to the bankruptcy plan_of_reorganization confirmed by the bankruptcy court the steps of the proposed transaction will occur in the following order and except as otherwise indicated will occur on the effective date for this portion of the restructuring in the bankruptcy proceeding the llc2 effective date i ii prior to or on the llc2 effective date distributing will contribute the stock of sub1 and sub2 to llc1 which will contribute such stock to llc2 prior to or on the llc2 effective date sub3 will convert into a state a limited_liability_company and llc6 will dissolve as a result llc2 will directly own all of the membership interests of sub3 and sub3 will be an entity disregarded as separate from distributing plr-123917-14 iii iv v vi vii viii llc2 will transfer to controlled the entities operating busine sec_1 including among others llc3 llc4 llc5 sub1 sub2 sub3 and preferred_stock entity in exchange for a additional equity interests of controlled b the right to receive cash payments from controlled under the agreement if any c cash from the new llc2 dip facility in excess of that used to repay the llc2 dip facility the new dip facility cash if any and d the assumption by controlled of the new llc2 dip facility and the operating liabilities associated with busine sec_1 controlled will not assume any of the llc2 first lien debt or the llc2 junior debt and the assets transferred to controlled will not be subject_to such debt step iii is intended to be disregarded controlled will transfer to llc3 the entities operating busine sec_1 including among others llc4 llc5 sub1 sub2 sub3 and preferred_stock entity step iv is intended to be disregarded llc3 will transfer to llc4 the entities operating busine sec_1 including among others llc5 sub1 sub2 sub3 and preferred_stock entity step v is intended to be disregarded llc4 will transfer to llc5 the entities operating busine sec_1 including among others sub3 and preferred_stock entity step vi is intended to be disregarded preferred_stock entity will convert into a state b corporation as a result of which llc5 will own all of the outstanding common_stock of preferred_stock entity llc5 will transfer to preferred_stock entity certain entities engaged in segment a and all entities engaged in segment b including sub3 the value of the assets of which will compose an insignificant part less than of the value of the assets of preferred_stock entity collectively the preferred_stock entity assets in exchange for a additional shares of common_stock of preferred_stock entity b all of the shares of a newly issued class of non-voting preferred_stock of preferred_stock entity the preferred_stock and c the assumption by preferred_stock entity of a portion of the operating liabilities associated with segment a and all of the operating liabilities associated with segment b the preferred_stock entity liabilities and the exchange the preferred_stock entity exchange preferred_stock entity will not assume any of the llc2 first lien debt or the llc2 junior debt and the assets transferred to preferred_stock entity will not be subject_to such debt step viii is intended to be treated as distributing transferring the preferred_stock entity assets to preferred_stock entity in exchange for preferred_stock entity common_stock the preferred_stock and the assumption by preferred_stock entity of the preferred_stock entity liabilities plr-123917-14 ix x xi pursuant to a preexisting binding agreement llc5 will sell all of the preferred_stock to unrelated third parties none of which will include any of the llc2 first lien creditors in exchange for cash the preferred_stock sale and the cash proceeds therefrom the preferred_stock proceeds and the preferred_stock proceeds will be distributed by llc5 through llc4 llc3 and controlled to llc2 based upon third-party valuations the value of the preferred_stock will represent at least o of the equity value of preferred_stock entity on or about the llc2 effective date step ix is intended to be treated as distributing selling the preferred_stock and retaining the preferred_stock proceeds controlled will convert into a state b corporation the controlled conversion step x is intended to be treated as distributing contributing to controlled all entities engaged in segment a other than those segment a entities contributed to preferred_stock entity in the preferred_stock entity exchange and in segment c collectively the controlled assets and all of the common_stock of preferred_stock entity in exchange for the following a all of the stock of controlled b the right to receive cash payments from controlled under the agreement if any and c the assumption by controlled of the new llc2 dip facility and the operating liabilities associated with the controlled assets the deemed exchange the contribution llc2 will transfer to the llc2 first lien creditors in exchange for their llc2 first lien debt with each claim being exchanged for the same ratio of stock to non-stock consideration all of the stock of controlled the preferred_stock proceeds additional cash on hand if any the right to receive cash payments from controlled under the agreement if any and the right to receive recoveries under the settlement claim obligation step xi is intended to be treated as a transfer by distributing to the llc2 first lien creditors in exchange for their llc2 first lien debt xii on and or after the llc2 effective date depending on when the trade claims administrative claims priority claims are finally determined in accordance with the bankruptcy claims resolution process llc2 will transfer any remaining new dip facility cash and additional cash if necessary to a the llc2 junior creditors in exchange for their llc2 junior debt b the trade creditors in exchange for their trade claims and c the administrative and priority claimants in exchange for their administrative and priority claims the aggregate amount of cash received by the llc2 junior creditors the trade claimants and the junior priority claimants will be dollar_figurep less certain specified settlement deductions and fees step xii is intended to be treated as a transfer by distributing to the llc2 junior creditors the trade creditors and the administrative and priority claimants in exchange for their respective debts or claims such transfers together with the transfer in step xi collectively the plr-123917-14 distribution and reorganization the distribution together with the contribution the following the proposed transaction all of the stock of controlled will be owned by the llc2 first lien creditors and all of the stock of distributing will continue to be owned by the distributing shareholders it is expected that at the time of the distribution the aggregate consideration received by the llc2 junior creditors the trade creditors and the junior priority claimants if any will be less than q of the value of the controlled stock received by the llc2 first lien creditors in addition following the proposed transaction the distributing sag will continue to conduct busine sec_2 and controlled through its separate_affiliated_group as defined in sec_355 the controlled sag will continue to conduct busine sec_1 representations a b c d e f distributing is currently under_the_jurisdiction_of_the_bankruptcy_court in a title_11_or_similar_case within the meaning of sec_368 and will be under_the_jurisdiction_of_the_bankruptcy_court in a title_11_or_similar_case within the meaning of sec_368 at the time of the proposed transaction the proposed transaction will occur pursuant to the bankruptcy plan_of_reorganization and will be confirmed by the bankruptcy court as part of the bankruptcy proceeding the preferred_stock will be stock for federal_income_tax purposes and will possess no voting rights except upon the future occurrence of certain contingencies each modification of the initial term loans the delayed term loans the letter_of_credit loans and the llc2 first lien notes in the year debt restructuring as described above was an exchange of securities that constituted a recapitalization within the meaning of sec_368 in no event will preferred_stock entity be liable for or be expected to satisfy any of the llc2 first lien debt or llc2 junior debt and the preferred_stock entity assets received by preferred_stock entity in the preferred_stock entity exchange will not be subject_to any of the llc2 first lien debt or llc2 junior debt in no event will controlled be liable for or be expected to satisfy any of the llc2 first lien debt or llc2 junior debt and neither the controlled assets nor the plr-123917-14 common_stock of preferred_stock entity received by controlled in the contribution will be subject_to any of the llc2 first lien debt or llc2 junior debt the llc2 first lien creditors will be the most senior class of creditors to receive controlled stock in the reorganization in satisfaction of their claims for purposes of this representation claims with respect to the llc2 dip financing the administrative claims and the senior priority claims are treated as senior to the claims of the llc2 first lien creditors none of the llc2 first lien debt was issued in anticipation of the distribution for federal_income_tax purposes the agreement is an obligation of controlled and the settlement claim obligation is an obligation of distributing g h i rulings based solely on the information submitted and the representations set forth above we rule as follows the initial term loans the delayed term loans the letter_of_credit term loans and the llc2 first lien notes constitute securities of distributing for purposes of sec_368 and sec_355 for purposes of sec_1001 in the preferred_stock entity exchange distributing will have an amount_realized with respect to the preferred_stock entity assets equal to the fair_market_value of the property received for such assets for purposes of the preceding sentence no portion of the llc2 first lien debt or the llc2 junior debt will be treated as an amount_realized in connection with the transfer of the preferred_stock entity assets distributing will be respected as the seller of the preferred_stock in the preferred_stock sale for federal_income_tax purposes and distributing’s sale of the preferred_stock will be taken into account for purposes of determining whether the control requirement of sec_351 is satisfied with respect to the preferred_stock entity exchange for federal_income_tax purposes the order of steps vii through xii of the proposed transaction will be respected and therefore the preferred_stock entity exchange and distributing’s sale of the preferred_stock will be treated as occurring prior to the contribution and distribution plr-123917-14 no portion of the llc2 first lien debt or the llc2 junior debt will be treated as assumed by controlled in the contribution for purposes of sec_357 and d neither the transfer of the preferred_stock entity assets by controlled to preferred_stock entity nor the potential division a partial adjustment will prevent the reorganization from qualifying as a reorganization under sec_368 or prevent the distribution from qualifying as a distribution under sec_355 each of the llc2 first lien creditors the llc2 junior creditors the trade claimants and the junior priority claimants if any will be treated as an owner of the enterprise with respect to distributing prior to the reorganization and their interests in distributing in addition to the interests in distributing held by the distributing shareholders will be taken into account in determining whether the continuity_of_interest requirement of sec_1_355-2 is satisfied see sec_1_355-2 cf sec_1_368-1 the continuity_of_interest requirement of sec_1_368-1 will not prevent the reorganization from qualifying as a reorganization under sec_368 see sec_1_368-1 for purposes of sec_355 the llc2 first lien creditors will not be treated as a single_person under sec_355 solely because such creditors participated in formulating a plan for a reorganization in the bankruptcy proceeding see sec_1_355-6 sec_355 will not apply to the distribution sec_355 under state law limitations on liability distributing is not personally liable on any portion of the llc2 first lien debt or the llc2 junior debt and such debt will be treated as nonrecourse liabilities of distributing the cancellation of the llc2 first lien debt and the llc2 junior debt in the distribution will result in an amount_realized under sec_1001 with respect to the property transferred by distributing to the llc2 first lien creditors and the llc2 junior creditors in the amount of such outstanding debt see 461_us_300 sec_61 and sec_108 are not applicable provided the reorganization qualifies as a reorganization under sec_368 distributing will not recognize any gain_or_loss with respect to the property transferred to the llc2 first lien creditors and llc2 junior creditors in the distribution including any gain_or_loss attributable to the amount_realized under sec_1001 with respect to such property as provided in the preceding ruling sec_361 plr-123917-14 provided the distribution qualifies as a distribution under sec_355 distributing’s earnings_and_profits if any will be allocated between distributing and controlled in accordance with sec_312 and sec_1_312-10 provided the reorganization qualifies as a reorganization under sec_368 controlled will be treated as a member of the distributing group upon the conversion of controlled to a corporation in the controlled conversion see sec_1_1502-76 provided the basis of the preferred_stock entity assets received by preferred_stock entity in the preferred_stock entity exchange is not determined directly or indirectly in whole or in part by reference to the basis of such assets in the hands of distributing and steps vii through xi all occur on the llc2 effective date preferred_stock entity will not be treated as having been a member of the distributing group see sec_1_1502-76 caveats no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter except as specifically addressed by the rulings above in particular no opinion is expressed concerning any aspect of any transaction or item occurring as part of the bankruptcy proceeding whether prior to or following the proposed transaction or the effect of any such transaction or item on the rulings above temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling may 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 section dollar_figure of revproc_2016_1 2016_1_irb_1 however when the criteria in section dollar_figure of revproc_2016_1 2016_1_irb_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances procedural statements 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-123917-14 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 frances l kelly senior counsel branch office of associate chief_counsel corporate cc


department of the treasury internal_revenue_service washington d c t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n tax years contact person contact number identification_number form required to be filed employer_identification_number number release date uil date date dear ------------- this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final because you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file file the returns in accordance with their instructions and do not send them to this office failure_to_file the returns timely may result in a penalty we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice if you agree with our deletions you do not need to take any further action in accordance with code sec_6104 we will notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed adverse letter you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter if you have any questions about your federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is enclosures notice redacted proposed adverse determination_letter redacted final adverse determination_letter lois g lerner director exempt_organizations rulings agreements sincerely t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n date date department of the treasury internal_revenue_service washington d c contact person identification_number contact number fax number e mail address employer_identification_number legend l m x y dear ------------- we have considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code as an organization described in sec_501 based on the information submitted we have concluded that you do not qualify for exemption under that section the basis for our conclusion was set forth in our date letter an additional basis for our conclusion is set forth below this letter supplements our letter to you dated date facts government organization authorized by the state legislature you were incorporated under the x nonprofit corporation act on y by l a nine-county you operate as a purchasing alliance under the authority of a state statute the all of the members of your board_of directors are members of l and are county according to your articles of incorporation your purpose is to encourage community- focused health care delivery that improves the overall health and economic well being of the communities you serve to offer small_business and farm families a new option for healthcare coverage and to support l in fulfilling the obligations of grants received from the x department of health and other federal state and local_government entities commissioners from three of the nine counties that your serve community purchasing arrangements act you are a registered purchase alliance under applicable provisions of this law the purchasing alliance concept is being used statewide for the purpose of filling the gap between those who qualify for government subsidized programs and those who have adequate employer-sponsored insurance coverage the state statute permits a group of purchasers of any size to join together to negotiate with a licensed health plan for a community-focused product that is affordable to rural and small businesses including businesses of one and farm families the target population is the small employers particularly the working uninsured and under-insured employees and their dependents under the laws of the state of x except for a purchasing alliance farm families and businesses consisting of one person can only purchase health insurance in the individual market which does not offer guaranteed issue policies costs that currently face small businesses non-profits and farmers you serve small businesses industry farmers non-profits and local_government entities in nine counties in southwest x a mostly rural_area with many low-income residents thus you enable these employers to purchase health insurance that otherwise would not be available or affordable by the employers or by their employees employers at the rate of one percent of the premiums_paid and grants from the x department of health over a three-year period you expect that the administrative fees will comprise about percent of your total revenues and government grants will comprise about percent agreement with m a non-profit non-exempt health_maintenance_organization that is licensed by the state of x under the agreement which has a term of three years employees of your employer members may join m and may purchase the healthcare insurance offered by m which provides healthcare services performed by m’s network of healthcare providers your grant from the x department of health provides that you will develop a wellness and education plan for area businesses and clients you state that you operate a wellness program under which you provide regular health education for employers and their employees so that you can increase the wellness of employees and minimize medical_expenses your revenues come from two sources an administrative fee paid_by member in essence your objective is to develop a regional solution to today’s high health care in date you entered into a health care delivery program agreement the law requirements be organized and operated exclusively for certain purposes an organization described in sec_501 of the code must among other sec_1_501_c_3_-1 of the income_tax regulations states in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 of the regulations states an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the regulations states i an organization may be exempt as an organization described in sec_501 if it is organized and operated exclusively for one or more of the following purposes b charitable ii an organization is not organized or operated exclusively for one or more of the purposes specified in subdivision i of this subparagraph unless it serves a public rather than a private interest thus to meet the requirement of this subdivision it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1_501_c_3_-1 of the regulations provides that an organization is not organized or operated exclusively for one or more of the purposes specified in subdivision i of this subparagraph unless it serves a public rather than a private interest an organization that serves a private interest other than incidentally is not entitled to exemption under sec_501 thus although an organization’s operations may be deemed to be beneficial to the public if it also serves private interests other than incidentally it is not entitled to exemption the word incidental has both qualitative and quantitative connotations for a benefit to be qualitatively incidental it must be a necessary concomitant of the activity which benefits the public at large that is the benefit to the public cannot be achieved without necessarily benefiting certain private individuals for example in revrul_70_186 1970_1_cb_128 an organization was formed to preserve a lake as a public recreational facility and to improve the condition of the water in the lake to enhance its recreational features although the organization clearly benefited the public at large there necessarily was also significant benefit to the private individuals who owned lake front property in this ruling the irs determined that the private benefit was incidental in a qualitative sense stating the benefits to be derived from the organization’s activities flow principally to the general_public through the maintenance and improvement of public recreational facilities any private benefits derived by the lake front property owners do not lessen the public benefits flowing from the organization’s operations in fact it would be impossible for the organization to accomplish its purposes without providing benefits to the lake front property owners there is also a quantitative connotation to the term incidental for example in revrul_76_152 1976_1_cb_151 a group of art patrons formed an organization to promote community understanding of modern art trends the organization selected modern art works of local artists for exhibit as its gallery which was open to the public and for possible sale if an art work was sold the gallery retained a commission of ten percent and paid the remainder to the artist in this ruling the irs concluded that since ninety percent of all sales proceeds are turned over to the individual artists such direct benefits are substantial and the organization’s provision of these benefits is not merely incidental to its other purposes and activities in 92_tc_1053 the tax_court held that an organization that as its primary activity operated a school to train individuals for careers as political campaign professionals was not operated exclusively for exempt purposes as described in sec_501 of the code because the school’s activities conferred impermissible private benefit the court defined private benefit as nonincidental benefits conferred on disinterested persons that serve private interests rationale your primary activity consists of facilitating access to health insurance by your member employers and their employees you contract with m a health_maintenance_organization to offer your members and their employees and dependents access to health insurance at affordable rates many of your member employers primarily individual businesses and small employers could not afford to purchase health insurance for themselves or for their employees by pooling a large group of these employers and contracting with m you enable these employers to purchase health insurance for themselves and their employees and their dependents in return for these services your member employers pay you a fee of one percent of the premiums_paid thus you enable your members the owners of small businesses to purchase low-cost health insurance for its employees thereby reducing the business’ healthcare expenses and improving its profits by enabling a business to offer this benefit to its employees this enables the business to attract and retain qualified employees which also is likely to improve its profits this potential for improved profits constitutes a benefit to these businesses that is more than incidental thus similar to the organizations in revrul_70_186 supra revrul_76_152 supra and in american campaign academy v commissioner supra you violate the prohibition against impermissible private benefit in sec_1_501_c_3_-1 of the regulations the economic benefit that you provide to your members is no different than a purchasing alliance that enables small businesses to purchase any necessary product or service at a lower cost the fact that the services here consist of healthcare insurance does not change the conclusion that your activities result in providing your members with an impermissible private benefit contrary to the prohibition in the regulations conclusions based on all the facts and circumstances we conclude that your activities do not further an exempt_purpose under sec_1_501_c_3_-1 of the regulations therefore you do not operate exclusively for an exempt_purpose as required under sec_1_501_c_3_-1 accordingly you do not qualify for exemption under sec_501 of the code as an contributions to you are not deductible under sec_170 of the code you have the right to protest this ruling if you believe it is incorrect to protest you organization described in sec_501 and you must file federal_income_tax returns should submit a statement of your views to this office with a full explanation of your reasoning this statement signed by one of your officers must be submitted within thirty days from the date of this letter you also have a right to a conference in this office after your statement is submitted you must request the conference if you want one when you file your protest statement if you are to be represented by someone who is not one of your officers that person will need to file a proper power_of_attorney and otherwise qualify under our conference and practices requirements revenue service as a failure to exhaust available administrative remedies sec_7428 of the code provides in part that a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted administrative remedies available to it within the internal_revenue_service if you do not protest this ruling in a timely manner it will be considered by the internal if we do not hear from you within days this ruling will become final and a copy will be forwarded to the ohio tax exempt and government entities te_ge office thereafter any questions about your federal_income_tax status should be directed to that office either by calling a toll free number or sending correspondence to internal_revenue_service te_ge customer service p o box cincinnati oh the appropriate state officials will be notified of this action in accordance with code sec_6104 under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions and do not intend to protest our denial of exempt status you should follow the instructions in notice shown below if you also disagree with our proposed deletions you should send your comments on the deletions with your protest statement and not to the address shown in notice if you decide to protest this ruling your protest statement should be sent to the address in the event this ruling becomes final it will be made available for public inspection internal_revenue_service se t eo ra t constitution ave n w washington d c if you do not intend to protest this ruling and if you agree with our proposed deletions as if you have any questions please contact the person whose name and telephone shown in the letter attached to notice you do not need to take any further action number are shown in the heading of this letter service we are sending a copy of this letter to your authorized representative in accordance with the power_of_attorney currently on file with the internal revenue steven b grodnitzky sincerely acting manager exempt_organizations technical group