internal_revenue_service number release date index number ------------------------------- ----------------------------- ------------------------- ----------------------------------------------- department of the treasury washington dc person to contact ------------------------------- --------------------- ----------------------------------------------------- telephone number -------------------- refer reply to cc psi plr-133618-07 date date ------ legend taxpayers -------------------------- ----------------------------------------------------- ------------------ ------------------------------------------------- ----------------------------------------------------- year dear --------------------------------- correspondence submitted on behalf of taxpayers by their authorized representative requesting a ruling that they be granted an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_469 of the internal_revenue_code and sec_1_469-9 of the income_tax regulations to treat all interests in rental real_estate as a single rental real_estate activity filed their tax returns jointly taxpayers represent that in year they were in a real_property business as defined by sec_469 and were qualified under sec_469 to make an election to treat all interests in rental real_estate as a single rental real_estate activity however taxpayers having relied on a professional tax_return_preparer who failed to advise them of the availability and benefits of an election under sec_469 filed their joint_return for year without the statement required under sec_1_469-9 according to the information submitted taxpayers are married individuals who this responds to a letter dated date together with subsequent under sec_301_9100-1 the commissioner may grant a reasonable under sec_469 the term passive_activity generally includes any rental sec_1_469-9 provides that a qualifying taxpayer makes the election to plr-133618-07 activity sec_469 provides a limited exception to this rule for taxpayers in a real_property business specifically sec_469 provides that if a taxpayer meets the requirements of sec_469 the taxpayer's rental real_estate activity will no longer be presumptively passive by its terms the exception under sec_469 is to be applied as if each interest of the taxpayer in rental real_estate were a separate activity however under sec_469 a taxpayer may elect to treat all interests in rental real_estate as a single activity treat all interests in rental real_estate as a single rental real_estate activity by filing a statement with the taxpayer's original income_tax return for the taxable_year sec_1_469-9 describes the information that must be contained in the statement extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a regulation published in the internal_revenue_bulletin commissioner will use to determine whether to grant an extension of time to make an election elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 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 sec_301_9100-3 when a taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election the taxpayer will be deemed to have acted reasonably and in good_faith based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result taxpayers are sec_301_9100-3 provides that subject_to paragraphs b i through iii of sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be sec_301_9100-2 provides automatic extensions of time for making certain sec_301_9100-1 through provide the standards that the except as specifically provided herein no opinion is expressed or implied this ruling is directed only to the taxpayer requesting it sec_6110 plr-133618-07 granted an extension of time of sixty days from the date of this letter to make an election under sec_469 to treat all their interests in rental real_estate as a single rental real_estate activity effective year the election must be in the form of the statement required by sec_1_469-9 and attached to an amended_return for year a copy of this letter should be attached to the election concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether taxpayers satisfy the requirements under sec_469 or whether taxpayers materially participate in any activity provides that it may not be used or cited as precedent being sent to your authorized representative enclosures william p o’shea associate chief_counsel passthroughs and special industries pursuant to the power_of_attorney on file with this office a copy of this letter is copy of this letter copy for sec_6110 purposes sincerely


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 tege eb qp2 plr-105003-18 date august taxpayer ------------------------- decedent ------------------------ trust date date ---------------------------------------- ------------------ ---------------------------- dear ---------------- this is in response to your letter dated date submitted on your behalf by your authorized representative in which you requested a series of rulings under sec_408 of the internal_revenue_code the following facts and representations have been submitted under penalties of perjury in support of the rulings requested taxpayer established the trust a revocable_living_trust on date taxpayer is the sole trustee of the trust and reserves the sole right to amend or revoke the trust and to distribute all income and the entire corpus for her own benefit decedent was married to taxpayer until his death after his required_beginning_date on date decedent maintained an ira with a custodian at the time of his death and named the trust as the primary beneficiary of decedent’s ira the assets of decedent’s ira were transferred via a trustee-to-trustee transfer to an ira for the benefit of the trust the ira taxpayer intends to distribute the assets of the ira to herself as sole beneficiary of the trust and roll over the distribution into one or more iras in her own name based on the preceding facts taxpayer requests the following rulings plr-105003-18 taxpayer as decedent’s spouse will be treated as having acquired the ira directly from decedent and not from the trust taxpayer is eligible to roll over the ira distribution to one or more iras established and maintained in her own name pursuant to sec_408 provided that the rollover occurs no later than the sixtieth day following the day the proceeds of the ira are received and taxpayer will not be required to include in gross_income for federal tax purposes for the year in which the distribution from the ira is made any portion of the proceeds distributed from the ira which are timely rolled over to one or more iras set up and maintained in taxpayer’s name with respect to your ruling requests sec_408 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 sec_408 provides that sec_408 does not apply to a rollover_contribution if such contribution satisfies the requirements of sec_408 and sec_408 sec_408 provides that sec_408 does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the account is maintained if i 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 60th day after the day on which he receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan for the benefit of such individual not later than the 60th 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 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 one-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 includible in his gross_income because of the application of sec_408 sec_408 provides in pertinent part that in the case of an inherited ira sec_408 shall not apply to any amount received by an individual from such account an no amount transferred from such account to another ira shall be excluded from gross_income by reason of such transfer and such inherited account shall not be treated as an ira for purposes of determining whether any other amount is a rollover_contribution plr-105003-18 sec_408 provides that an ira shall be treated as inherited if the individual for whose benefit the account is maintained acquired such account by reason of the death of another individual and such individual was not the surviving_spouse of such other individual sec_1_408-8 q a-5 provides that a surviving_spouse of an individual may elect to treat the spouse’s entire_interest as a beneficiary in the individual’s ira as the spouse’s own ira in order to make this election the spouse must be the sole beneficiary of the ira and have an unlimited right to withdraw amounts from the ira if a_trust is named the beneficiary of the ira this requirement is not satisfied even if the spouse is the sole beneficiary of the trust under the preceding facts decedent’s ira passed to the trust upon decedent’s death under these circumstances taxpayer as the surviving_spouse of the decedent is not permitted to treat the ira as her own because the trust was named the beneficiary of decedent’s ira however because taxpayer is the trustee and sole beneficiary of the trust and is entitled to all income and the entire corpus of the trust for purposes of applying sec_408 to the ira taxpayer is effectively the individual for whose benefit the account is maintained accordingly if taxpayer receives a distribution of the proceeds of the ira she may roll over the distribution other than amounts required to have been distributed or to be distributed in accordance with sec_401 into one or more iras established and maintained in her name therefore with respect to your ruling requests we conclude taxpayer as decedent’s spouse will be treated as having acquired the ira directly from decedent and not from the trust taxpayer is eligible to roll over the ira distribution to one or more iras established and maintained in her own name pursuant to sec_408 provided that the rollover occurs no later than the sixtieth day following the day the proceeds of the ira are received and taxpayer will not be required to include in gross_income for federal tax purposes for the year in which the distribution from the ira is made any portion of the proceeds distributed from the ira which are timely rolled over to one or more iras set up and maintained in taxpayer’s name this ruling does not authorize the rollover of amounts that are required to be distributed under sec_401 and is subject_to the limitation in sec_408 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter plr-105003-18 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 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party as specified in revproc_2018_1 2018_1_irb_1 section b this office has not verified any of the material submitted in support of the request_for_ruling and such material is subject_to verification on examination the associate office will revoke or modify a letter_ruling and apply the revocation retroactively if there has been a misstatement or omission of controlling facts the facts at the time of the transaction are materially different from the controlling facts on which the ruling was based or in the case of a transaction involving a continuing action or series of actions the controlling facts change during the course of the transaction see revproc_2018_1 sec_11 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely keith r kost senior technician reviewer qualified_plans branch office of associate chief_counsel tax exempt and government entities


legend org organization name release date org address department of the treasury internal_revenue_service commerce street dallas tx uil date april z007 address address xx date taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear this is our final adverse determination_letter as to your exempt status under ilr c sec_501 of the internal_revenue_code our adverse determination was made because for the year s of the examination you were not operated as an insurance_company within the meaning of sec_501 of the internal_revenue_code your exempt status is revoked effective january 20xx we have enclosed a copy of our report of examination further explaining why we believe an adjustment of your organization’s exempt status is necessary we have also enclosed publication exempt_organization appeal procedures for unagreed issues and publication the examination process these publications include information on your rights as a taxpayer they explain appeal rights and the procedure for obtaining technical_advice both technical_advice and appeals procedures require a minimum of days remaining on the statute_of_limitations in order to take advantage of appeal rights or technical_advice procedures a taxpayer might be asked to execute a consent to extend the statute_of_limitations to permit appeals consideration or submission of a request for technical_advice that was the situation in this case internal revenue agents discussed with you the possible referral of this matter for technical_advice you declined that option internal revenue agents also requested statute extensions you elected not to extend the applicable statutes as you are aware the time remaining on the statutes does not allow for usual appeal procedures or submission of the case for technical_advice because this case involves exemption under sec_501 you cannot contest the adverse determination in a declaratory_judgment action under sec_7428 you can however contest the revocation of exempt status in the context of any related deficiency case involving adjustments that flow from the loss of exemption thus you may file suit in united_states tax_court the united_states court of federal claims or united_states district_court from any deficiency_notice issued in this case or a related case after satisfying procedural and jurisdictional requirements as described in publications and you are required to file federal_income_tax returns for the tax period s shown above for all years still open under the statute_of_limitations and for all later years file the federal tax_return for the tax period s shown above with the within days from the date of this letter unless a request for an extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns service_center you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you thank you for your cooperation if you write please provide a telephone number and sincerely marsha a ramirez director eo examinations enclosures publication publication report of examination schedule no or exhibit year period ended form 886a department of the ass - internal_revenue_service explanation of items name of taxpayer org legend org organization name companyl country3 motto brand1 director country eountr v motto company directorl 20xx co co nyl i director xyz state xx date ntrys 20xx ry2 di r ' tor4 director issues is org providing insurance to its parent’s customers is org an insurance_company exempt from federal tax as an organization described under internal_revenue_code irc sec_501 for taxable years 20xx 20xx is org's primary and predominant activity that of insurance or investment activity can org rely on the determination_letter granted by the service allowing it to claim tax exempt status pursuant to sec_501 is org entitled to relief under internal_revenue_code sec_7805 or another other code section if org cannot rely on its determination_letter what is the effective date of revocation if org can rely on its determination_letter is it subject_to revocation of exemption based on any other sections of the internal_revenue_code facts org org was formed on december 19xx in the state of xyz its articles of incorporation states that it is organized to transact any and all lawful business for which corporations may be organized under the xyz business corporation act at the time of formation org was a wholly-owned subsidiary of company company a publicly traded company the officers and directors of org held less than of company stock form 886-a rev department of the treasury - internal_revenue_service page -1- aan 886a department of the ‘treasury - internal revenue servicl explanation of items name of taxpayer org 20xx 20xx 2uuzu8u3 schedule no or exhibit year period ended organization name legend org companyl count ry motto motto brandl director2 director direct pirector sec_1 company te countr brand brand2 company di rector ae i di xx date xyz state contry2 country ry mth company designed manufactured marketed sold and serviced motto for security and surveillance industrial and medical video and professional audit markets company worked through various subsidiaries and product lines in the country country country country and country company sold its commercial products through various independent distributors dealers and its consumer products through mass merchants in addition company sold add-on products through phone sales at its phone service_center the consumer products group accounted for approximately of company 1’s total sales the consumer projects were sold under the name brands brand brand and brand company 1’s commercial products were sold under the company name brand commercial accounted for approximately of company 1's total sales company provided a standard year manufacturer’s warranty on each product through the creation of org company began issuing an extended warranty agreement ewa on its consumer projects to its customers the ewa program provided coverage for an advancement replacement of the covered product for covered mechanical and electrical defects only the ewa extended the coverage provided by the manufacturer for a period of two or three years commencing on the expiration date of the original warranty period and ending on the date of expiration stated on the ewa since the ewa was an advancement replacement program when a consumer experienced and reported a covered defect org would immediately provide replacement equipment to the consumer org would pay company for the replacement inventory upon the formation of org a business plan was created highlights of the business plan included the following e e e company designs manufactures markets sells and services innovative motto for the security surveillance industrial medical video and professional audio markets worldwide company provides a standard manufacturer's warranty of one year with all company products company operates through various subsidiaries and product lines form 886-a rrev department of the treasury - internal_revenue_service page -2- epon 886a department of the trees - internal_revenue_service explanation of items name of taxpayer org schedule no or exhibit year period ended 20xx 20xx legend org ltry sunt y con company ' brand brand3 company2 compar brand directori rector3 director directord i dire director plus extended warranty agreements to company customers issue of an extended warranty agreement to its customers org responsible for the overall administration of ewa program sell shareholder- company directors- director director and director officers- director director director contractual relationship between org and the customer to comply with certain state law requirements as well as the terms of the agreement between will in the future purchase reinsurance from an company subsidiary company insurance_company ltd uicl which will be licensed insurance_company uicl will be required to indemnify percentage of the losses on replacements made pursuant to the warranties _ and independent dealers and distributors for an agreed will remain primarily liable to the holders of the contracts _ org will implement a step claims control program designed to maximize return loss ratio capitalized with marketable_securities and cash totaling dollar_figure balance_sheet through 20xx- estimated premiums by 20xxx- dollar_figure examples of products insured and prices per product on january 20xx org filed application form_1024 application_for recognition of exemption under sec_901 with the service included with the application form was a copy of the business plan articles of incorporation and the extended warranty program org indicated that they were registering in various states as an administrator obligor such registration permitted org to offer the ewa and avoid regulation as an insurance_company for state law purposes org stated that an administrator obligor operated much like an intersurer and performs administrative accounting and other business functions based on the information supplied in its application form and other documents org was issued a determination_letter dated march 20xx granting them exemption under sec_501 of the internal_revenue_code_of_1986 at the time of granting the exemption the reinsurance company that was mentioned in the business plan had not been created form 886-a rev department of the treasury - internal_revenue_service page -3- oon 886a department of the ie internal_revenue_service explanation of items name of taxpayer org 2u08 schedule no or exhibit year period ended legend org organization name companyl country3 motto motto brandl director2 director5 director countryl country country4 4t country director director4 director director director3 - brand directorl company2 company company country date country contry2 country5 brand brand3 brand brand2 address addre sec_1 director xyz state company companyl country xx 20xx 20xx org reported the following income on its form_990 for the taxable_year 20xx 20xx form_990 information premiums total investment_income gain on sales of property other income 20xx_ 20xx total revenue total assets notes loans receivable the majority of org's income during 20xx 20xx was attributable to investment_income as can be seen below only a very small portion of the income was attributable to org's insurance activity due to the lack of information provided by org the number of policies issued for each year could not be determined revenue 20xx 20xx premiums total revenue percentage- total premiums to total revenue number of policies issued _-- the form_990 for year ending december 20xx was selected for an examination an information_document_request idr along with a cover letter and publication was mailed to the organization on march 20xx the idr requested information on the activities of the organization as well as some financial information to verify that the organization qualified as an organization exempt under sec_501 of the code and filed an accurate form_990 form 886-arev department of the treasury - internal_revenue_service page -4- oon 886a department of the ‘l'reasury - internal_revenue_service name of taxpayer explanation of items org schedule no or exhibit year period ended 20xx 20xx legend org organization name companyl country3 motto motto brandl brand brand2 prand brand3 director2 director5 director director director4 director director director3 - brand directorl1 company country contry2 country5 countryl country4 address addre sec_15 director company country company xyz state company2 companyl xx date country a4‘h coi y only a small portion of the information requested was able to be secured information_document_request was prepared and mailed august 20xx requesting the same information that was not provided in the prior idr as well as some additional questions through numerous phone calls letters and a conference call with the organization and its powers of attorney it was stated that org ceased conducting business in 20xx and filed a filed a final return for the year ending december 20xx the decision to cease operations was largely based upon the level of business achieved which was considerably less than the business plan one of the main reasons given for org to cease operations was that in 20xx company lost its main contract with to sell its equipment through their locations after the loss of the contract company sold of its business and exited the security and surveillance business without this business there were no products for org to provide extended warranties on after the sale of of its business_company merged the remaining assets with company company upon dissolving of org all assets were also merged with company as indicated by the chart above org had total assets of dollar_figure for 20xx and dollar_figure for 20xxx of these total assets a majority were in notes loans receivables in 20xx was in notes loans while for 20xx was in notes loans copies of the note loan agreements were not provided however through the examination it was determined that the loans were made to the parent company first company and then company as stated above a large amount of the items requested in the two idr’s were not provided by the organization in a letter dated august 20xx it was stated that org's parent company company has undergone substantial downsizing and restructuring over the past years the operational and management personnel originally associated with org’s business are no longer employed by company or any of its subsidiaries many of the records requested were archived in long term storage in phone conversations with director of company it was stated that it would take an enormous amount of time to try to find the records requested short of hiring back people that were involved in org and company form 886-a rev department of the treasury - internal_revenue_service page -5- 2uu8vu80 schedule no or exhibit year period ended form 886a department of the ‘treasury - internal_revenue_service explanation of items org name of taxpayer 20xx 20xx legend org organization name companyl country3 motte motto brandl director2 directors company country director brand brand2 countryl iress address contry c ly companyl country py oran v5 y4 rector director3 - director direct yr ompar rectorl xx date xyz state country country director t jirector in a letter from company dated september 20xxx it stated that all of the assets of org were processed as a tax free distribution and cancellation of stock with the sole shareholder this included the loans indicated on the forms the effective date of the distribution was at the close of business december 20xx the final return for the organization as of december 20xx reflected the ending assets at the moment prior to the distribution and there is not a filing to be made for 20xxx law and analysi sec_1 is org providing insurance to its parent’s customers the first issue is whether org is providing insurance to its parent’s customers determining whether this qualifies as insurance will assist in determining whether org can qualify for exemption pursuant to sec_501 neither the internal_revenue_code nor the regulations specifically define the term_insurance contract the courts have generally required that a transaction involve both risk shifting from the insured’s perspective and risk_distribution from the insurer's perspective in order to be characterized as insurance 312_us_531 914_f2d_396 risk shifting occurs when a person facing the possibility of a loss transfers some or all of the financial consequences of the loss to the insurer revrul_88_72 1988_2_cb_31 clarified by revrul_89_61 1989_1_cb_75 the risk transferred pursuant to an insurance_contract must be a risk of economic loss 66_tc_1068 affd 572_f2d_1190 439_us_835 cir cert_denied cir corp y risk shifting issues frequently arise in the case of captives in 811_f2d_1297 cir the court defined a captive in footnote on page as a corporation organized for the purpose of insuring the liabilities of its owner at one extreme is the case presented here where the insured is both the sole shareholder and only customer of the captive there may be other permutations form 886-arrev department of the treasury - internal_revenue_service page -6- zuvususu schedule no or exhibit year period ended rote 886a department of the ‘lreasury - internal revenue se rice explanation of items name of taxpayer org ization name company 20xx address 20xx involving less than ownership or more than a single customer although at some point the term captive is no longer appropriate risk_distribution refers to the operation of the statistical phenomenon known as the the law of large numbers when additional statistically independent risk exposure units are insured although the potential total losses increase there is also an increase in the predictability of average loss this increase in the predictability of the average loss decreases the amount of the capital that an insurance_company needs per risk unit to remain at a given solvency level see revrul_89_61 1989_1_cb_75 the courts have not spent a great deal of time explaining what they mean by risk_distribution no court has squarely held that there can be no risk_distribution if there is only one or a few insureds a fair reading of the court opinions addressing the issue however supports the irs’s position see 801_f2d_984 cir risk distributing is the spreading of the risk of loss among the participants in an insurance program see also 183_f2d_288 cir such spreading is effectuated by pooling among unrelated insureds r isk distribution means that the party assuming the risk distributes his potential liability in part among others 797_f2d_920 cir risk_distribution is accomplished where the risk is distributed among insureds other than the entity that incurred the loss see 401_f2d_464 cir the sixth circuit touched on the issue of risk_distribution in 881_f2d_247 cir noting that there was adequate risk_distribution where the captive insures several separate corporations within an affiliated_group and losses can be spread among the several distinct corporate entities the ninth circuit has also measured risk_distribution by explaining i nsuring many independent risks in return for numerous premiums serves to distribute risk by assuming numerous relatively small independent risks that occur randomly over time the insurer smoothes out losses to match more closely its receipt of premiums 811_f2d_1297 cir in revenue_ruling 20xx-90 20xx-2 cb the question was raised on whether a subsidiary’s arrangement to provide liability insurance coverage to of its parent company’s subsidiaries constituted insurance contracts for federal tax purposes and form 886-a rev department of the treasury - internal_revenue_service page -7- schedule no or exhibit year period ended oon 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org legend org organization name companyl company countty3 co untry motte motte brand directer2 director di rector3 - director5 brand brand3 director director4 county yl country4 a brand brand2 20xx pany2 company director address irector 20xx anyl stat b ce s director thus the amounts paid as premiums by each subsidiary were deductible as business_expenses under the arrangement the subsidiaries were charged arm's length premiums according to customary industry ratings and none had liability coverage of less than percent or more than percent of the total risk insured by the subsidiary as a result the professional liability risks of the subsidiaries were shifted to the insurer subsidiary as required to constitute an insurance_contract for federal tax purposes the common ownership of the subsidiaries including the insurer by the parent did not affect the determination that the arrangements constituted insurance contracts due to the lack of information that org provided it could not be determined whether there was either adequate risk shifting or risk_distribution org did not provide any information on who was insured and how many were insured without this information there is no way to determine if there was any risk shifting or risk_distribution org was created to provide an extended warranty on products manufactured by its parent company company and sold through distributors phone sales and the internet based on the information provided in its application form org received exempt status under sec_501 c of the code during the years under audit it could not be determined if the extended warranty was being provided to company 1's customers or how many customers actually purchased the warranties idr and idr both requested an estimate on the number of policies sold in 20xx and what the estimated maximum exposure was in the same year this information was not provided as stated in revrul_89_61 1989_1_cb_75 risk_distribution refers to the operation of the statistical phenomenon known as the the law of large numbers when additional statistically independent risk exposure units are insured although the potential total losses increase there is also an increase in the predictability of average loss this increase in the predictability of the average loss decreases the amount of the capital that an insurance_company needs per risk unit to remain at a given solvency level in the present case there is no information on the number of policies insured to determine if there is the statistical phenomenon known as the law of large numbers form 886-a rev department of the treasury - internal_revenue_service page -8- form 886a department of the taeastery internal_revenue_service name of taxpayer explanation of items org legend org organization name companyl country3 motto motto brandl director2 director sec_2 director director3 - director sompanyl brand brand2 brand br and3 director director4 contry2 country brand directorl country country countryl country4 address addre sec_15 directo r director xyz state com pany xx date pany company2 country mpe schedule no or exhibit year period ended 20xx 20xx there is no way to determine if there is any risk_distribution let alone adequate risk_distribution due to the lack of information org provided it can not be determined if there is adequate risk shifting or risk_distribution without being able to determine if there is adequate risk shifting or risk_distribution it can not be determined that org was providing insurance without org being able to show that they were providing insurance it can only be assumed that no insurance was being provided is org an insurance_company exempt from federal tax as an organization described under internal_revenue_code irc sec_501 for taxable_year 20xx the second issue is whether org is an insurance_company exempt from tax pursuant to sec_501 for the taxable years 20xx 20xx r c sec_501 provides that certain entities are exempt from taxation included in these entities are ‘ ijinsurance companies or associations other than life including interinsurers and reciprocal underwriters if the net written premiums or if greater direct written premiums for the taxable_year do not exceed dollar_figure r c sec_501' a definition of an insurance_company neither sec_501 nor its corresponding regulations define an insurance_company subchapter_l of the code l r c sections however addresses the taxation of insurance_companies the term_insurance company has the same meaning under sec_501 as it does in subchapter_l see h conf_rep no cong sess vol ii reprinted in vol c b sec_816 formally sec_801 defines a life_insurance_company as part of this definition r c sec_816 provides the term ‘insurance company’ means ek kk 'ifan entity is part of a consolidated_group all net written premiums or direct written premiums of the members of the group are aggregated to determine whether the insurance_company meets the requirements of i r c section so1 c a lr c dollar_figure c b in this case there are no other premiums to aggregate with the premiums org received during 20xx 20xx pursuant to lr c c b form 886-a rev department of the treasury - internal_revenue_service page -9- oe 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org 20xx 20xx 20uu808034 schedule no or exhibit year period ended xyz state any company more than half of the business of which during the taxable_year is the issuing of insurance or annuity_contracts or the reinsuring of risks underwritten by insurance_companies sec_1_801-3 defines an insurance_company as a company whose primary and predominant business activity during the taxable_year is the issuing of insurance or annuity_contracts or the reinsuring of risks underwritten by insurance_companies thus though its name charter powers and subjection to state insurance laws are significant in determining the business which a company is authorized and intends to carry on it is the character of the business actually done in the taxable_year which determines whether a company is taxable as an insurance_company under the internal_revenue_code sec_1_801-3 emphasis added see also 285_us_182 prior to 20xxx the internal_revenue_service had not ruled on whether the more stringent greater than half test set forth in r c applies to an insurance_company other than a life_insurance_company instead to determine whether a non-life insurance_company qualifies as an insurance_company for tax purposes the primary and predominant business activity test set forth in sec_1_801-3 applies see revrul_68_27 1968_1_cb_3145 the courts and the irs have also at times looked to whether the transaction has characteristics traditionally associated with insurance and whether the company conducts business like an insurance_company in order for org to be considered an insurance company’ entitled to tax exempt status under r c c for the taxable years 20xx 20xx its primary and predominant business activity during that year must have been issuing insurance contracts or reinsuring insurance risks see r c sec_816 sec_1_801-3 several court cases have addressed the issue of whether a company qualifies as an insurance_company based on the company’s primary and predominant business activity the seminal case addressing this issue is 285_us_182 in bowers the supreme court determined that the taxpayer was form 886-a rev department of the treasury - internal_revenue_service page -10- yu8 ana 886a department of the ‘ reasuary - internal_revenue_service explanation of items schedule no or exhibit year period ended name of taxpayer org 20xx 20xx legend org organization name companyl country3 motts motto brandl director2 director director3 director5 company country countryl country4 companyl director address addre sec_1 country country company xx date xyz state contry2 country5 country country brand brand2 brand brand company2 2s company brand directorl director director director4 qt director primarily engaged in the lending of money on real-estate security the sale of bonds and mortgages given by borrowers and use of the money received from purchasers to make additional loans similarly secured bowers u s pincite although the taxpayer in bowers earned premiums that amounted to approximately one-third of its income for the taxable years at issue these premiums were attributable to the excess of the interest_paid to the taxpayer by borrowers over the amount the taxpayer paid the purchasers to whom it subsequently sold bonds and mortgages id pincite n the premiums also included fees the taxpayer charged for guaranteeing mortgage loans which it did not make or sell id pincite the court noted that the premiums the taxpayer earned included agency and other services provided by the taxpayer which were not generally provided under traditional insurance contracts id pincite because the taxpayer's premium income was incidental to its business of lending money the bowers court held that the taxpayer was not an insurance_company for tax purposes id pincite the court explained t he lending fees extension fees and accrued interest appertain to the business of lending money rather than to insurance and may not reasonably be attributed to the subordinate element of guaranty in taxpayer's mortgage loan business id pincite cf 285_us_191 holding that the taxpayer was insurance_company where taxpayer derived over of its income from the insurance of titles and guarantees of mortgages in 56_tc_497 aff'd per curiam f g cir the taxpayer issued and reinsured and insurance policies earning premiums of dollar_figure dollar_figure dollar_figure and dollar_figure during the taxable years and respectively inter-american t c pincite virtually all of the reinsurance contracts issued by the taxpayer came from another insurance_company which was owned by the same two shareholders as the taxpayer id similarly almost all of the directly written insurance policies issued by the taxpayer were issued to the same two shareholders of the taxpayer id the taxpayer also engaged in the sale of real_estate and stock earned investment_income totaling dollar_figure dollar_figure dollar_figure and dollar_figure over the four years at issue id in inter-american the tax_court compared the taxpayer's income from other activities and held that the taxpayer was not an insurance_company according to the tax_court the insurance premiums the taxpayer earned were de_minimis comprising less than form 886-a crev department of the treasury - intemal revenue service page -11- 2uu808034 schedule no or exhibit year period ended form 886a department of the treasury - internal revenue servier explanation of items name of taxpayer org legend org organization name companyl country3 company country director director3 - countryl country4 brand brand3 - country 4h brand brand address addre sec_12 20xx xyz state country companyl xx date contry2 company country 20xx motte director director5 director in addition the taxpayer had no of the taxpayer's gross_investment_income d sales force in place to sell insurance contracts id the tax_court concluded that because the taxpayer's primary and predominant source_of_income was from its investments and because the taxpayer did not focus its primary and predominant efforts in pursuit of its insurance_business it was not an insurance_company id pincite the tax_court also acknowledged that it was cognizant of the problems indigenous to new life_insurance_companies in particular that the initial years of a new life_insurance company's operations are generally difficult because the initial expenses_incurred in ‘putting policies on the book’ are greater than the premium received id citing s rept no cong ' sess c b the court explained however that it was basing its decision on the fact that the taxpayer did not focus its capital and efforts primarily on its insurance_business not on the fact that the taxpayer's insurance_business was not profitable id citing 300_fsupp_387 n d tex in 300_fsupp_387 n d tex rev'd on other grounds 425_f2d_1328 cir the taxpayer earned no income from insurance in two of the five years under examination and earned and of its total income from insurance during the remaining three taxable years at issue cardinal life f_supp pincite instead the taxpayer earned a majority of its income from dividends interest rent and capital_gains like inter-american the taxpayer in cardinal life failed to employ any brokers solicitors agents or salesmen id it did however pay an actuary on a fee basis to determine the amount of its premiums id the court noted that the taxpayer's income from insurance policies was insignificant compared to the total income earned by the taxpayer explaining while plaintiffs insurance activities were insignificant it was generating substantial income from dividends on stocks rental income on real_estate rental income on trailers interest_income and capital_gains upon disposal of real_estate and stocks these types of income constitute personal_holding_company_income which congress has specifically stated is subject_to a tax in addition to ordinary_income tax the plaintiff is seeking to remove itself from the grasp of the personal_holding_company provisions by claiming life_insurance_company status through the issuance of a small and insignificant amount of insurance contracts id form 886-a crev department of the treasury - internal_revenue_service page -12- eon 886a department of the ‘i'reasury - internal revenue sen ice name of taxpayer explanation of items org schedule no or exhibit year period ended 20xx 20xx organization name legend org companyl company country3 country motto motto brandl director2 directors brand brand director director3 - director countryl country4 addre sec_1 director directordé brand brand3 country ayz state country -ompanyl date company lirect ry2 xx j t cc a ec id pincite in 344_fsupp_870 d s c aff'd per curiam 481_f2d_609 cir the fourth circuit rejected the taxpayer’s claim that it was an insurance_company where the taxpayer earned of its income from selling credit life_insurance and issuing life_insurance policies to its officers and the balance of its income from its investment portfolio and the sale and leasing of real_estate the court explained it is obvious from the financial information that the premium income from these years was small when compared with the income from real_estate mortgages and investment it is also important to note that more than half of the premium income came from policies on the lives of the only officers and stockholders of the company id pincite the court likened the facts of industrial life to those of cardinal life id by contrast in 189_fsupp_282 d neb aff'd on other grou293_f2d_78 cir the court held that the taxpayer was an insurance_company where it had over dollar_figure worth of life_insurance on its books over big_number individual policies in force and approximately dollar_figure in premium income over a four year period id pincite the service life court acknowledged that whether a company is considered an insurance_company turns on the character of the business conducted by the company not any percentage of income id pincite the court did however compare the taxpayer's premium income to its investment_income to determine the business activity of the taxpayer id pincite although the taxpayer also generated income from mortgage loans and investments over half of the taxpayer's income was from its insurance premiums and over half of its income producing assets was held for insurance_policy reserves id i org earned a substantial amount of its income during 20xx 20xx from its investment activity org should not be classified as an insurance_company for tax purposes because its primary and predominant activity during the taxable years 20xx 20xx was its form 886-a rev department of the treasury - internal_revenue_service page -13- eo 886a department of the preasury internal_revenue_service explanation of items schedule no or exhibit year period ended name of taxpayer org 20xx 20xx legend org organization name companyl country3 motto motte brandl director2 director director - director5 company country companyl director address address countryl country country4 country 4x date xyz state contry2 country5 country country brand brand2 brand brand brand directorl company2 company company director directer4g 4th director director investment activity not its insurance activity this is evidenced by the sources of org income during the years at issue org reported the following income on its forms for the taxable years 20xx 20xx form_990 information premiums 20xx 20xx total investment_income gain on sales of property other income total revenue total assets notes loans receivable the majority of org’s income during 20xx 20xx was attributable to investment_income as can be seen below only a very small portion of the income was attributable to org's insurance activity due to the lack of information provided by org the number of policies issued for each year could not be determined revenue total revenue premiums pberconigce total premiums _to total revenue __number of policies issued 20xx 20xx _ ii org failed to use its capital and efforts primarily to earn income from its insurance activity form 886-a rcv department of the treasury - internal_revenue_service page -14- schedule no or exhibit year period ended oon 886a department of the fess - internal_revenue_service explanation of items name of taxpayer org 20xx legend org organization name companyl country3 motto motto brand director2 directors company country brand brand2 brand director director3 director countryl count ry4 companyl address address country ' bran qireat ccontry2 ce xx date xy z country country state company ectorl 1i director director in addition to focusing on the sources of a company’s income to determine if the company qualifies as an insurance_company for tax purposes courts have also considered the manner in which the company conducts its business activities a taxpayer must use its capital and efforts primarily in earning income from the issuance of contracts of insurance cardinal life f_supp pincite during 20xx 20xx org purported to operate as an insurance_company insuring contracts with customers of its parent based on the following however org has failed to demonstrate that it concentrated its capital and efforts primarily on its insurance_business org was extremely overcapitalized org devoted little if any time to developing and marketing its insurance products org did not employ anyone to solicit insurance_business it had no employees org devoted little time to its insurance activities first relying on bowers org asserts that it held passive investments to secure the risks it undertook through its insurance activities some investment_income is undoubtedly required to support a company’s insurance activities see bowers u s pincite explaining ‘premiums’ are characteristic of the business of insurance and the creation of ‘investment income’ is generally if not necessarily essential to it fact one would expect an insurance_company to have investment_income attributable to investing its premiums while awaiting claims submitted by its policyholders the issue is how much investment_income did org require to support the risk it assumed by entering into its insurance contracts org held passive investments worth approximately dollar_figure assets approximately dollar_figure organization claims that would be filed over of the assets held by org were tied up with the parent company and were not available for use if claims were filed even though org did not provide detailed information on the number of policies outstanding and the maximum exposure of those risks it would appear that based on the assets held there was only a small amount of risk involved the imbalance of investment_assets to org's risk shows that org’s primary and predominant business activity during 20xx 20xx was its investment activity it's loans to its parent not its insurance activity was in the form of loans to the parent was available each year to cover any to cover anticipated insurance claims of these only approximatelydollar_figure in form 886-a rev department of the treasury - internal_revenue_service page -15- ome 886a department of the treasys internal_revenue_service explanation of items name of taxpayer org 20uu8u8u34 schedule no or exhibit year period ended legend org organization name companyl country3 motto motto l country country address address xyz state xx date countryl country4 contry2 count ry5 company2 country country -ampany companyl company brand brand2 prand brand brand directorl com j director director director3 - dire cter directord director 20xx 20xx second org devoted little time to developing and marketing its insurance products it was stated in a conference call with company and its poa’s that in 20xx the contract with was lost after that company sold a majority of its business and merged with company there has been no indication that any new business was developed or marketed org did not make any effort to promote or increase business once the contract was lost with operations this resulted in org not having anyone to supply extended warranties to no effort was made to seek extended warranties on other products or seek other types of insurance or reinsurance business_company proceeded to dissolve its third org did not employ anyone to solicit new insurance_business in both cardinal life and inter-american life where the courts determined that the primary and predominate business of each company was not insurance neither company employed a sales force in cardinal life although the taxpayer sold some reinsurance contracts during the years at issue the district_court noted plaintiff did not have an active sales force soliciting or selling insurance policies each of the insurance policies actually written by plaintiff was as the result of reinsurance agreements wherein other companies ceded to plaintiff certain amounts of insurance written by them these reinsurance contracts were negotiated either by the president and sole stockholder of plaintiff and or the company’s actuary who rendered services to plaintiff on a fee basis plaintiff otherwise did not have any employees brokers agents or salesmen soliciting and selling insurance for it and the only insurance written by piaintiff was through insurance agreements cardinal life f_supp pincite similarly in inter-american life the court considered the fact that the taxpayer did not maintain an active sales staff soliciting or selling insurance policies during the taxable years at issue as evidence of the taxpayer's lack of concentrated effort on the insurance_business inter-american life 96_tc_497 org had no employees no sales or clerical staff no effort was made by anyone to solicit new business fourth org spent an insignificant amount of time on its insurance activity only a small amount of premiums were received no new insurance contracts were sold after fotm 886-a rev department of the treasury - internal_revenue_service page -16- oon 886a department of the ‘l'reasury - internal_revenue_service schedule no or exhibit yeat period ended explanation of items name of taxpayer org 20xx 20xx co organization name legend org companyl country3 motto motto brandl director2 director director3 directors y country brand brar countryl country4 companyl director address address xx date xyz state country country contry2 country count rys country company brand brand3 company2 company brand directorl director director4 4t director director - account according to the forms for 20xx 20xx no the loss of the claims were filed org continued to receive a substantial amount of investment_income org also provided additional money in the form of loans to its parent company parent was significant compared to its time on its insurance activity the amount of time spend on its investment activity including loans to its is org’s primary and predominant activity that of insurance or investment activity primary and predominant business activity was its investment activity during 20xx 20xx org received a small amount of its income from its insurance activity as stated above it could not be determined how many policies were sold during part of 20xx or how many policies were outstanding during 20xx 20xx during the years org did maintain investments including loans to its parent organization although org generated some premium from the policies outstanding a majority of the income earned was from the investment activity the primary and predominant activity conducted by org was maintaining its investments not insurance activity can org rely on the determination_letter granted by the service allowing it to claim tax exempt status pursuant to sec_501 under sec_501 of the code organizations described in sub sec_501 are exempt from federal_income_tax unless such exemption is denied under sec_502 or sec_503 for taxable years prior to 20xx ilr c sec_501 provides that certain entities are exempt from taxation included in these entities are i nsurance companies or associations other than life including interinsurers and reciprocal underwriters if the net written premiums or if greater direct written premiums for the taxable_year do not exceed dollar_figure sec_501 sec_501 of the code provided that when an entity was part of a controlled_group all net written premiums or direct written premiums or net written premiums of the members of the group were aggregated to determine whether the insurance_company met the requirements under sec_501 form 886-a crev department of the treasury - internal_revenue_service page -17- eo 886a department of the ‘ reasury - internal_revenue_service explanation of items name of taxpayer org schedule no or exhibit year period ended legend org organization name company country3 motto motto brandl director2 director5 director director director3 - director director4 director contry2 country seuntry5 st country brand brand2 brand brand3 company2 company brand directorl countr y country company country countryl country4 address address xyz state xx date director company company 20xx 20xx neither sec_501 of the code nor the regulations under that section define an insurance_company accordingly the term_insurance company has the same meaning under sec_501 as it does in subchapter_l see h conf_rep no cong sess vol il reprinted in vol c b based on the facts presented above and the application of the law to those facts it was determined that org was not an insurance_company therefore org did not qualify for recognition of exemption from federal_income_tax under sec_501 a of the code as an organization described in sec_501 c during 20xx and 20xx therefore org cannot rely on its determination_letter granted by the service allowing it to claim tax exempt status pursuant to sec_501 therefore like cardinal life org is seeking to avoid tax by claiming tax exempt small insurance_company status through r c c based on its minimal amount of insurance activity is org entitled to relief under internal_revenue_code sec_7805 or another other code section an organization may ordinarily rely on a favorable determination_letter received from the internal_revenue_service regulation sec_1_501_a_-1 rev_proc 20xx-4 dollar_figure cross-referencing dollar_figure et seq 20xx-1 c b an organization may not rely on a favorable determination_letter however if the organization omitted or misstated a material fact in its application or in supporting documents in addition an organization may not rely on a favorable determination if there is a material_change inconsistent with exemption in the organization’s character purposes or methods of operation after the determination_letter is issued regulation sec_601_201 revproc_90_27 1990_1_cb_514 any such changes must be reported to the service so that continuing recognition of exempt status can be evaluated the commissioner may revoke a favorable determination_letter for good cause regulation sec_1_501_a_-1 a a favorable determination_letter may be revoked by written notice to the organization to whom the determination originally was issued regulation sec_601_201 cross-referencing reg revproc_90_27 1990_1_cb_514 form 886-a rev department of the treasury - internal_revenue_service page -18- 20u308034 schedule no or exhibit year period ended name of taxpayer org earn 886a department of the ‘tre ury - internal revenue servic explanation of item sec_12 20xx 20xx legend org organization name companyl country3 motto motto brandl director2 director director3 - director5 director company country countryl country4 companyl ' brand brand2 brand brand3 company address address xx date xyz state country country contry2 country country5 h country company2 company brand directorl director director4 director director lf the commissioner revokes the tax exempt status of an organization the remaining question is whether the revocation should be applied prospectively or retroactively generally revocation of a determination_letter is prospective rev_proc 20xx-4 dollar_figure cross-referencing dollar_figure et seq revocation of a determination_letter may however be retroactive if the organization omitted or misstated a material fact or operated in a manner materially different from that originally represented regulation sec_601_201 revproc_90_27 rev_proc 20xx-4 dollar_figure cross-referencing dollar_figure et seq in cases where the organization omitted or misstated a material fact revocation may be retroactive to all open years under the statute regulation sec_601_201 in cases where revocation is due to a material_change inconsistent with exempt status in the character the purpose or the method of operation revocation will ordinarily take effect as of the date of the material_change regulation sec_601_201 revproc_90_27 in any event revocation will ordinarily take effect no later than the time at which the organization received written notice that its exemption ruling or determination_letter might be revoked regulation sec_601 n i under certain circumstances however the commissioner may in his discretion grant relief from retroactive revocation under sec_7805 of the code sec_7805 of the internal_revenue_code provides application to rulings the secretary may prescribe the extent if any to which any ruling including any judicial decision or any administrative determination other than by regulation relating to the internal revenue laws shall be applied without retroactive effect sec_301_7805-1 b of the regulations delegates authority grated by r c b to the commissioner or the commissioner's delegate to request sec_7805 relief the organization must submit a statement in support of this application of r c b as described in rev_proc 20xx-4 see also rev_proc 20xx-5 the organization's statement must expressly assert that the request is being made pursuant to r c b the organization's statement must also indicate the relief requested and give reasons and arguments in support of the relief requested it must also be accompanied by any documents bearing on the request the organization’s explanation and arguments should discuss the five factors bearing on retroactivity listed in rev_proc 20xx-4 cross-referencing form 886-a rev department of the treasury - internal_revenue_service page -19- ie oern 886a department of the ‘treasury - internal revenue serve explanation of items name of taxpayer org 20xx 20xx schedule no or exhibit year period ended as they relate to the situation at issue these five items are in effect the same as the factors provided in regulation sec_601 -201 i and m statement of procedural rules which states except in rare or unusual circumstances the revocation or modification of a ruling will not be applied retroactively with respect to the taxpayer to whom the ruling was originally issued or to a taxpayer whose tax_liability was directly involved in such a ruling if there has been no misstatement or omission of material facts the facts at the time of the transaction are not materially different from the facts on which the determination_letter was based there has been no change in applicable law the determination_letter was originally issued for a proposed transaction and the taxpayer directly involved in the determination_letter acted in good_faith in reliance upon the determination_letter and revoking or modifying the determination_letter retroactively would be to the taxpayer's determinant s if relief is granted under r c b the effective date of revocation of a determination_letter is no later than the date on which the organization first received written notice that its exemption might be revoked regulation sec_601_201 n i 85_tc_743 aff'd 799_f2d_903 cir this does not preclude the effective date of revocation being earlier than the date on which the organization first received written notice that its exemption might be revoked virginia education fund v commissioner t c pincite the supreme court has held that the commissioner has broad discretion under lr c b and its predecessor in deciding whether to revoke a ruling retroactively 353_us_180 see also 381_us_68 the commissioner's determination is reviewable by the courts only for abuse of that discretion 85_tc_743 in this case org did conduct itself as indicated in its original application form until it lost its contract with in 20xx since that time org has been operating form 886-a crev department of the treasury - internal_revenue_service page -20- llega 886a department of the treasury - inte mal revenue service explanation of items org name of taxpayer 20xx 20xx schedule no or exhibit year period ended xx date xyz state cy2 yo country 5‘ country organiz legend org companyl country3 motto motte brandl direc di rector5 irector2 wre q brand brand more as an investment_company receiving a substantial amount of its income from investments and loaning of its assets to its parent organization therefore org is not entitled to relief under sec_7805 org is also not entitled to any other relief that may be found under and other code sections if org cannot rely on its determination_letter what is the effective date of revocation the effective date of denial of exemption should be january 20xx if org can rely on its determination_letter is it subject_to revocation of exemption based on any other sections of the internal_revenue_code internal_revenue_code sec_6033 states that except for the mandatory exceptions every organization_exempt_from_taxation under sec_501 shall file an annual return stating specifically the item_of_gross_income receipts and disbursements and such other information for the purpose of carrying out the internal revenue laws as the secretary may by forms or regulations prescribe and shall keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary may from time to time prescribe revrul_59_95 1959_1_cb_627 states in part that failure or inability to file the required information_return or otherwise to comply with the provision of sec_6033 of the code and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status reg h states that every organization which is exempt from tax whether or not it is required to file an annual information_return shall submit such additional information as may be required by the internal_revenue_service for the purpose of inquiring into its exempt status org was issued two information document requests requesting information pertaining to the examination of the organization and its activities through various correspondence and telephone calls with the organization it was determined that org form 886-a rev department of the treasury - internal_revenue_service page -21- a - 2uvu803034 orm 886a department of the tiemann internal_revenue_service name of taxpayer explanation of items schedule no or exhibit year period ended 20xx 20xx org addre sec_1 countr y country ax date ayz state contry2 count ry5 countr y country company -ompany2 lirector director4 brand directorl qt director director was unable to provide a majority of the information requested in the idr’s org’s inability to provide the necessary information resulted in an incomplete examination org’s inability to provide the necessary information to conduct a complete examination shows non-compliance with the internal_revenue_code and regulations therefore if org is allowed to rely on its determination_letter as an insurance_company its exemption should still be revoked for not meeting the requirements of internal_revenue_code sec_6033 and reg h effective date of this revocation should be january 20xx conclusion org is not providing insurance to its parent’s customers org is not an insurance_company exempt from federal tax as an organization described under internal_revenue_code irc sec_501 for taxable years 20xx 20xxx activity i primary and predominant activity is its investment org can not rely on the determination_letter granted by the service allowing it to claim tax exempt status pursuant to sec_501 org is not entitled to relief under internal_revenue_code sec_7805 or another other code section exemption is denied effective for years beginning january 20xx if org is allowed to rely on the determination_letter granted by the service based on being an insurance_company it can not rely on the determination_letter based on failure to meet the requirements of internal_revenue_code sec_6033 and applicable regulations form 886-a rev department of the treasury - internal_revenue_service page -22- department of the treasury internal_revenue_service front street suite grand rapids mi november address address xx date taxpayer_identification_number form_990 tax_year s ended person to contact id number contact numbers telephone fax government entities mt legend org organization name org address dear we have enclosed a copy of our report of examination explaining why we believe an adjustment of your organization’s exempt status is necessary we have also enclosed publication exempt_organization appeal procedures for unagreed issues and publication the examination process these publications include information on your rights as a taxpayer including administrative appeal procedures within the internal_revenue_service if you request a conference with appeals we will forward your written_statement of protest to the appeals_office and they will contact you for your convenience an envelope is enclosed if you and appeals do not agree on some or all of the issues after your appeals_conference the appeals_office will advise you of its final_decision if you elect not to request appeals consideration but instead accept our findings please sign and return the enclosed form 6018-a consent to proposed adverse action we will then send you a final letter modifying or revoking your exempt status under r c sec_501 if we do not hear from you within days from the date of this letter we will process your case on the basis of the recommendations shown in the report of examination and send a final letter advising of our determination in either situation outlined in the paragraph above execution of form 6018-a or failure to respond within days you are required to file federal_income_tax returns for the tax period s shown above for all years still open under the statute_of_limitations and for all later years file the federal tax_return for the tax period s shown above with this agent within days from the date of this letter unless a request for an extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation sincerely r c johnson director eo examinations enclosures publication publication form 6018-a report of examination envelope


internal_revenue_service number release date index number 453b -------------------------- --------------------- ---------------------------------- in re -------------------------- -------------------------- legend department of the treasury washington dc person to contact ---------------- id no ------------- telephone number -------------------- refer reply to cc ita br05 - plr-105080-11 date august -------------------------- taxpayer -------------------------- company a ------------------------------------------- state m amounts k dollar_figure----------------- l dollar_figure--------------------- m dollar_figure--------------- n1 dollar_figure-------------- n2 dollar_figure------------- o ----- p --- r -- s ------ dates ------------------------- ---------------------- ---------------------- ---------------------- ---------------------- dear ------------------ this is in response to your authorized representative’s letter of date and other correspondence and submissions in which he requested on your sometimes herein the taxpayer behalf a private_letter_ruling regarding the proper federal income plr-105080-11 tax treatment of a certain proposed transaction more fully discussed below we are pleased to address your concerns facts the information submitted indicates that taxpayer is the chief_executive_officer of a a state m corporation engaged in business-to-business brand marketing activities taxpayer was the sole shareholder of a owning o shares of a common_stock as part of taxpayer’s business succession planning taxpayer agreed to sell p shares of a common_stock in varying portions to company a employees new shareholders the total purchase_price of the p shares of a common_stock at dollar_figuren1 per share was to be dollar_figurel on or about date the new shareholders individually entered into stock purchase agreements with taxpayer for the purchase and sale of their respective number of shares at dollar_figuren1 per share executed promissory notes for the stated principal amounts in favor of taxpayer at a stated_interest rate of r per annum and executed stock pledge agreements in favor of the taxpayer taxpayer sold the p shares of a common_stock to the new shareholders in accordance with the terms of the stock purchase agreements pursuant to the promissory notes each new_shareholder was to pay taxpayer i nine consecutive equal annual payments of principal and interest on the outstanding principal balance at the r interest rate amortized over a period of years on the last day of each august beginning on date and ii a final payment of the outstanding principal balance of the promissory note and all accrued interest and any other sums payable by a new_shareholder pursuant to the promissory note on date it was the intent of the new shareholders that a portion of company a’s annual distributions to its shareholders would be used to make the payments due to taxpayer under the promissory notes however because of unanticipated economic downturn commencing in the year of the sale a experienced and continues to experience financial difficulties as a result the new shareholders were only able to make their initial payments due taxpayer under the promissory notes dollar_figurek with distributions from a taxpayer believes that the present_value of the p shares sold to the new shareholders is only dollar_figurem taxpayer desires to amend the terms of the promissory notes and stock purchaser agreements at issue herein to inter alia i reduce the purchase_price to dollar_figurem or dollar_figuren2 per share ii reduce the interest rate under the promissory notes to a s for the period of time from date to the date of amendment and b the lower_of s or the then lowest applicable_federal_rate for the period of time from the date of amendment forward and iii modify the annual payments due under the promissory notes as follows a one installment of principal and interest in the aggregate amount of dollar_figurek due and paid on date b nine consecutive equal annual payments of principal plr-105080-11 and interest on the outstanding principal balance at the interest rate as amended amortized over a period of years on the last day of each august beginning on date and c a final payment of the entire outstanding principal balance of the promissory note and all accrued interest and any other sums payable by the new shareholders to taxpayer pursuant to the promissory notes on date taxpayer requests a ruling that the described modification of the terms of the promissory notes and the stock purchase agreements by reducing the purchase_price and interest rate and modifying the payment dates is not a disposition or satisfaction of an installment_obligation within the meaning of sec_453b of the code law analysis sec_453 of the code provides that income from an installment_sale shall be taken into account under the installment_method under the installment_method a portion of the total gross_profit from an installment_sale is included in income in each year in which the seller receives payment sec_453b provides that if an installment_obligation is satisfied at other than its face value or distributed transmitted sold or otherwise_disposed_of gain_or_loss shall result to the extent of the difference between the basis of the obligation and the amount_realized in the case of satisfaction at other than face value or a sale_or_exchange or the fair_market_value of the obligation at the time of distribution transmission or disposition in the case of the distribution transmission or disposition otherwise than by sale_or_exchange in short if an installment_obligation is satisfied at its face value or if it is distributed transmitted sold or otherwise_disposed_of the seller must recognize gain_or_loss at that time the issue in this case is whether the modification of the promissory notes and stock purchase agreements is a disposition or satisfaction of an installment_obligation within the meaning of sec_453b the commissioner has ruled that certain modifications of the terms of an installment_obligation do not amount to a disposition of the obligation in revrul_68_419 1968_2_cb_196 the parties agreed to modify the terms of a note so that each installment of principal due by the original terms of the note would be deferred for a period of five years in addition the rate of interest was increased from six percent to seven percent per annum revrul_68_419 specifically holds that the modification of the terms of a purchaser's note by deferring the dates of payment of principal and increasing the rate of interest is not a disposition or satisfaction of an installment_obligation within the meaning of sec_453 the predecessor of current sec_453b see also revrul_55_429 1955_2_cb_252 reaching similar results plr-105080-11 in revrul_75_457 1975_2_cb_196 a taxpayer sold real_estate to an individual for cash a deed_of_trust and a promissory note providing for monthly payments over a 15-year term the terms of the deed and note allowed the individual to resell the property provided that the subsequent buyer executed a new note under the same terms and conditions as the original deed_of_trust the original obligor subsequently sold the property to a successor individual who assumed the obligation by executing a new deed_of_trust and note in favor of the taxpayer under the same terms and conditions as the original deed_of_trust and note the original obligor was released from liability on the original note revrul_75_457 holds that the substitution of obligors deeds of trust and promissory notes without any other changes was not to be considered a satisfaction or disposition of an installment_obligation under sec_453 of the code likewise revrul_82_122 1982_1_cb_80 holds that the substitution of a new obligor and a change in the rate of interest will not be considered a satisfaction or disposition of an installment_obligation for purposes of sec_453b accordingly under existing law modification of an installment_obligation by changing payment terms such as increasing the rate of interest or deferring or increasing the payment dates will not constitute a disposition for purposes of the installment_sales provisions moreover where the original installment note is replaced the substitution of a new promissory note without any other changes is not sufficient for the original note to be treated as disposed of conclusions based upon the facts and representations presented and the above analysis of applicable law we conclude that the described modification of the terms of the promissory notes and the stock purchase agreements by reducing the purchase_price and interest rate and modifying the payment dates is not a disposition or satisfaction of an installment_obligation within the meaning of sec_453b of the code this letter_ruling is based on facts and representations furnished by the taxpayer and its authorized representative and is limited to the matters specifically addressed except as specifically ruled upon we express or imply no opinion concerning the federal tax consequences of the transactions described in the facts under any other provision of the code because it could help resolve future federal tax issues a copy of this letter should be maintained with the taxpayer’s permanent records and attached to any federal_income_tax return to which it might be relevant pursuant to a power_of_attorney on file with this office copies of this letter_ruling are being sent to the taxpayer’s authorized representative plr-105080-11 this ruling is directed only to the taxpayer who requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent sincerely s william a jackson william a jackson branch chief branch office of associate chief_counsel income_tax accounting enclosures copy of this letter copy for sec_6110 purposes


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 tege eoeg teb presp-144254-06 date date dear ----------------- this letter is in response to your application_for an allocation of authority to issue dollar_figure------- ----------------- in clean renewable energy bonds crebs under sec_54 of the internal_revenue_code the code sec_54 of the code imposes a limitation of dollar_figure on the amount of crebs which may be issued to finance qualified projects the limitation sec_54 provides that the limitation is to be allocated by the secretary of treasury in such manner as the secretary deems appropriate except that no more than dollar_figure of the limitation may be allocated to finance qualified projects of qualified borrowers which are governmental bodies section of notice_2005_98 2005_52_irb_1211 provides that the limitation will be allocated among qualified projects for which a share of such limitation has been requested beginning with the project s requesting the smallest share in dollar amount and continuing with the project s requesting the next-smallest share until the total limitation has been exhausted however in the event that dollar_figure has been allocated to qualified projects of qualified borrowers that are governmental bodies the remaining shares of the limitation will be allocated under the methodology described in the previous sentence only to qualified projects of qualified borrowers that are not governmental bodies for purposes of allocating the limitation among projects all qualified projects located at the same site and owned by the same qualified_borrower are treated as a single project and each project is treated as requesting a single allocation an allocation of shares of the limitation cannot be made with respect to the project owned by the borrower listed in appendix a because the limitation has been exhausted presp-144254-06 by allocation of shares to finance qualified projects owned by qualified borrowers requesting a smaller share of the limitation we appreciate your submission of the application_for our consideration and encourage you to continue to pursue your plans for constructing a clean renewable energy project sincerely assistant chief_counsel exempt_organizations employment_tax government entities tax exempt government entities by timothy l jones senior counsel tax-exempt_bonds branch presp-144254-06 appendix a borrower name project type project location -------------------- wind facility -------------------------------- ------- amount requested ----------------- ---------------------------------- ------------------------------------------------ ------------------------------------------------- -------------------------- -------------------------------------------- ---------------------------


department of the treasury internal_revenue_service washington d c date cc el gl br1 number release date uilc memorandum for district_counsel north central district st paul from subject michael r arner senior technician reviewer branch general litigation taxpayer x payment to chapter trustee pursuant to post petition refund stipulation this responds to your memorandum regarding the above subject this document is not to be cited as precedent legend taxpayer x date a date b date c date d date e date f date g date h date i date j issue s was the prepetition portion of a tax_refund for the year of bankruptcy property of the estate where the debtor did not make an election pursuant to sec_1398 to terminate the tax_year did the taxpayers have a right to elect application of a prepetition tax_refund for the year of bankruptcy to be applied to a subsequent tax_year after signing a stipulation only with the trustee but not the internal_revenue_service irs to turnover the refund to the bankruptcy_estate was the internal_revenue_service irs required to turnover the tax_refund to the trustee pursuant to a stipulation with the taxpayer but not the irs conclusion the prepetition portion of the refund for the year of bankruptcy was arguably property of the bankruptcy_estate the irs is required to turnover the funds that constitute property of the bankruptcy_estate to the chapter trustee facts the taxpayers filed a chapter bankruptcy on date a on date b they executed a tax_refund stipulation with the trustee but not the irs in which they agreed to turnover of their federal_income_tax refund to the trustee after filing their return the taxpayers were entitled to of the refund if the trustee received the entire refund directly from the irs the trustee would disburse their allocation to the taxpayers if the taxpayers received the refund check directly from the irs they were to endorse the check to the trustee who would disburse their share to them subsequent to the stipulation the taxpayers filed a tax_return for date c electing to have the dollar_figure overpayment credited to their date d liability the trustee mailed a copy of the stipulation to the irs on date e however the irs did not enter a freeze code on the account by letter of date f the irs informed the trustee that it would not process the stipulation and asserted the legal argument that the date c refund was not property of the estate on date g the trustee responded stating that the refund was property of the estate and that he would file a motion for turnover if the irs did not cooperate when the debtors filed their date c federal_income_tax return they elected to apply the refund to the date d tax_year the irs applied the refund to the date d tax_year on date h in response to the trustee’s assertions the district sought legal advice from district_counsel who advised on date i that the irs could accept tax_refund stipulations if they were in writing signed by both parties and the irs received a copy of the stipulation the opinion came too late to input a freeze code on the taxpayers’ account for date c finally on date j the trustee again demanded that the irs forward the date c tax_refund law and analysis when individual debtors file a chapter petition in bankruptcy a bankruptcy_estate is created to which all the property of the estate is transferred the definition of property of the estate is broad in scope and consists of all legal and equitable interests of the debtor in property as of the commencement of the case u s c sec_541 the united_states supreme court held that the right to a refund is property of the estate in a bankruptcy act case 382_us_375 the court extended the segal holding to individuals in 417_us_642 segal has been consistently followed and applied to internal_revenue_code cases involving income_tax refunds even though the opinion in segal v rochelle was issued prior to the effective date of the bankruptcy code it is cited with approval in the legislative_history t the result of segal v rochelle is followed and the right to a refund is property of the estate h_r rep no 95th cong 2d sess citations omitted its holding is followed under the bankruptcy code in re canon 130_br_748 bankr n d tex in re orndoff br bankr e d cal matter of 672_f2d_831 11th cir the question is whether the debtor has any legal or equitable interests in the refund as of the petition date some district_counsel offices as well as the department of justice have argued that the right to a refund does not arise until the end of the taxable_year unless the debtor has made an election pursuant to sec_1398 to split the tax_year the entire refund is post-petition and hence not property of the estate in light of sec_1398 which was enacted after the segal case segal should no longer be applicable to cases involving income_tax refunds because its treatment results in wholly inconsistent treatment of chapter debtors’ tax_liabilities and tax refunds for the year during which the bankruptcy petition is filed this argument seems to be consistent with our position regarding filing proofs of claims for tax periods straddling the petition year see memorandum to gulf coast district_counsel dated date proofs of claim in mississippi bankruptcy cases gl-608348-98 cca199907016 memorandum to virginia- west virginia district_counsel dated date chapter trustees’ requests for turnover of tax refunds gl-600999-98 and letter to the department of justice dated date in david browning canon n d tex gl-0860-91 recommending appeal in addition to its position that income_tax liabilities arise on the last day of the tax_year this memorandum also takes the position that a refund arises on the last day of the taxable_year for purposes of setoff pursuant to b c sec_553 we now turn to the liability of the service with respect to the tax_refund stipulation although the debtors entered into a tax_refund stipulation with the trustee the service was not a party to the stipulation the stipulation is an agreement between the debtors and the trustee and is enforceable only as between them c j s stipulations it does not appear that the government not being a party to the agreement could be held liable for the terms and conditions therein further the anti-assignment act u s c b provided that an assignment of a claim or of an interest in any claim against the united_states government may be made only after a claim is allowed the amount of the claim is decided and a warrant for payment of the claim has been issued one of the purposes of the act is to protect the government to prevent possible multiple payment of claims to make unnecessary the investigation of alleged assignments and to enable the government to deal with the original claimant 338_us_366 see also 300_us_588 at the time the parties executed the stipulation they failed to comply with the requirements of the anti-assignment act which rendered the agreement ineffective as to the government nevertheless the service is liable to turnover the prepetition portion of the refund to the trustee because under numerous court decisions it is property of the bankruptcy_estate in re wilson 49_br_19 bankr n d tex the final issue is whether the debtors had the right to elect application of their tax_refund for date c to a later year after filing a petition in bankruptcy the taxpayers signed a tax_refund stipulation with the trustee agreeing that of the refund was property of the estate therefore the taxpayers did not have the right to make an election to have their income_tax refund for date c applied to date d according to the rationale of 110_br_907 d minn taxpayer had no right to apply refunds that were property of the bankruptcy_estate to later tax_year the taxpayers are personally liable to the trustee for the amount of the refund we recommend that the service wait for the trustee to file a turnover motion agree to the turnover and attempt to fashion an agreed stipulation that would require the debtors to repay the amount of the date d taxes that were originally satisfied by the refund case development hazards and other considerations we can identify no other litigating hazards that would change or qualify the conclusions reached in this memorandum if you have any further questions please call susan watson pincite-3610