department of the treasury internal_revenue_service washington d c cc ebeo wta-n-106046-99 number release date uilc date memorandum for from subject assistant chief_counsel employee_benefits and exempt_organizations by jerry e holmes income_tax_withholding on compensation paid to nonresident_alien this memorandum relates to the issue of whether the included-excluded rule_of sec_3402 of the code applies to remuneration paid to nonresident_aliens who perform a portion of their services within the united_states and the remainder of their services outside the united_states this memorandum replaces a prior field_service_advice that was issued and withdrawn introduction under the included-excluded rule_of sec_3402 if remuneration paid_by an employer to an employee for services performed during one-half or more of any payroll_period of not more than consecutive days constitutes wages then all the remuneration paid_by such employer to such employee for such period is deemed to be wages conversely if the remuneration paid_by an employer to an employee for services performed during more than one-half of any such payroll_period does not constitute wages then none of the remuneration paid_by such employer to such employee for such period is deemed to be wages if nonresident_aliens perform less than half of their services in the united_states the practical effect of applying sec_3402 is that withholding on remuneration for services performed within the united_states by the nonresident_aliens would be under sec_1441 rather than sec_3402 wta-n-106046-99 for purposes of this memorandum we assume that the compensation of the nonresident_aliens is not exempt from united_states federal_income_tax or employment_tax withholding under an income_tax convention or a social_security totalization_agreement issue whether sec_3402 applies when a nonresident_alien employee performs a portion of his or her services as an employee within the united_states and the remainder of the services outside the united_states conclusion sec_3402 is inapplicable when a nonresident_alien employee performs a portion of his or her services as an employee within the united_states and the remainder of the services outside the united_states broad overview income_tax_withholding sec_3402 provides for withholding on wages paid_by employers the amount of withholding is determined pursuant to tables in publication circular_e employer’s tax guide these tables and withholding under sec_3402 are generally designed to provide for withholding commensurate with the employee’s liability for federal_income_tax under sec_1 withholding under sec_3402 is reported on form_941 employer’s quarterly federal tax_return and the employee is provided with a form_w-2 wage and tax statement sec_1441 generally provides for a percent withholding_tax on united_states source compensation paid to nonresident_aliens withholding under sec_1441 is not required on a payment if the payment is subject_to_withholding under sec_3402 sec_1441 withholding is reported by the withholding_agent on form_1042 annual withholding_tax return for u s source income of foreign persons and the recipient of the income receives from the withholding_agent form 1042-s foreign person’s u s source income subject_to_withholding wta-n-106046-99 discussion law and regulations wage withholding under sec_3402 as noted above sec_3402 requires every employer making payment of wages to deduct and withhold a tax determined in accordance with tables or computational procedures prescribed by the secretary sec_3401 defines wages as all remuneration for employment with certain specific exceptions sec_31_3401_a_-2 of the employment_tax regulations provides that the term wages does not include any remuneration for services performed by an employee for his or her employer which is specifically excepted from wages under sec_3401 sec_3401 provides an exception from the definition of wages for such services performed by a nonresident_alien_individual as may be designated by regulations prescribed by the secretary sec_31_3401_a_6_-1 of the regulations provides that all remuneration paid after date for services performed by a nonresident_alien_individual that would otherwise constitute wages within the meaning of sec_31_3401_a_-1 and that is effectively connected with the conduct_of_a_trade_or_business within the united_states is subject_to_withholding under sec_3402 unless otherwise excepted from wages under this section two specific exceptions are provided first sec_31_3401_a_6_-1 of the regulations provides that remuneration paid to a nonresident_alien_individual other than a resident of puerto rico for services performed outside the united_states is excepted from wages and hence is not subject_to_withholding second sec_31_3401_a_6_-1 provides that remuneration paid for services performed within the united_states by a nonresident_alien_individual is excepted from wages and hence is not subject_to_withholding if such remuneration is or will be exempt from the income_tax imposed by chapter of the code by reason of a provision of the internal_revenue_code or an income_tax convention to which the united_states is a party sec_3402 contains the included-excluded rule that is the focus of this memorandum as noted it provides that if the remuneration paid_by an employer to an employee for service performed during one-half or more of any payroll_period of not more than consecutive days constitutes wages all the remuneration paid_by the employer to the employee for the period is deemed to be wages but if the remuneration paid_by the employer to the employee for services performed during more than one-half of the payroll_period does not constitute wages then none of wta-n-106046-99 the remuneration paid_by such employer to such employee for such period is deemed to be wages sec_31_3402_e_-1 of the regulations provides that for purposes of the included-excluded rule the relative amounts of time spent performing services that generate sec_3401 wages and non- sec_3401 remuneration determine whether all the remuneration for services performed during the payroll_period is treated as included or excluded sec_31_3402_e_-1 of the regulations provides that if one half or more of the employee's time in the employ of a particular employer in a payroll_period is spent performing services the remuneration for which constitutes wages then all the remuneration paid the employee for services performed in that payroll_period is deemed to be wages conversely sec_31_3402_e_-1 of the regulations provides that if less than one half of the employee's time in the employ of a particular employer in a payroll_period is spent performing services the remuneration for which constitutes wages then none of the remuneration paid the employee for services performed in that payroll_period is deemed to be wages the regulation contains two examples neither of which involves amounts excepted from wages under sec_3401 example of sec_31_3402_e_-1 of the regulations concerns an employer who operates a store and a farm and hires an employee to perform services in connection with both enterprises the regulations state that the remuneration paid for services on the farm is excepted as remuneration for agricultural_labor and the remuneration for services performed in the store constitutes wages the employee is paid on a monthly basis during each month the employee performs some services for the farm and some for the store the example illustrates that because of the included-excluded rule the determination of whether the total remuneration is subject_to income_tax_withholding depends upon whether the employee's hours_of_service for the store during the payroll_period are equal to or greater than the hours_of_service for the farm during the payroll_period example of sec_31_3402_e_-1 contains another fact situation illustrating the included-excluded rule under this example the employee performs services in the same payroll_period for the same employing individual in the office and domestic_service in the employer's private home under sec_3401 at the time the regulation was promulgated remuneration for agricultural_labor was excepted from wages under current sec_3401 remuneration for agricultural_labor is excepted unless the remuneration for such labor is fica wages as defined in sec_3121 wta-n-106046-99 the remuneration for services in the home is excepted from the definition of wages by sec_3401 and the remuneration for services in the office constitutes wages the example again provides that the application of the included-excluded rule depends on the relative hours_of_service performed in each type of employment in the payroll_period sec_1441 regulations sec_1_1441-4 require sec_30 percent withholding_tax on amounts paid to nonresident_aliens as u s source effectively connected compensation unless that compensation is subject_to_withholding under sec_3402 or would be subject_to_withholding under sec_3402 but for the provisions of sec_3401 other than the exception for a sec_1_1441-4 allows a nonresident_alien who has united_states source effectively connected compensation and is subject_to sec_1441 withholding to enter into a withholding agreement with the office of the assistant_commissioner international to reduce his her withholding amount to reflect the personal_exemption and the graduated rate_of_tax under sec_1 the new regulations under sec_1441 provide another option for the nonresident_alien if that person’s united_states source effectively connected compensation is exempt from withholding under sec_3402 because of the included excluded rule_of sec_3402 sec_1_1441-4 in that case the employer and employee may enter into a withholding agreement under sec_3402 consequently the employer is relieved from withholding under sec_1441 and instead withholds under the wage withholding tables that apply for purposes of sec_3402 the new regulations are not yet in effect fica rule -- revrul_79_318 and inter-city truck lines fica tax is imposed on wages which is defined in sec_3121 as all remuneration for employment unless specifically excepted sec_3121 defines employment for fica purposes as any service of whatever nature performed a by an employee for the person employing him irrespective of the citizenship or residence of either i within the united_states or ii on or in connection with an american_vessel or american_aircraft under a contract_of_service which is entered into within the united_states or during the performance of which and while the employee is employed on the vessel_or_aircraft it touches at a port in the united_states if the employee is employed on and in connection with such vessel_or_aircraft when outside the united_states or wta-n-106046-99 b outside the united_states by a citizen or resident_of_the_united_states as an employee for an american_employer or c if it is service which is designated as employment pursuant to a totalization_agreement entered into under section of the social_security act thus if a nonresident_alien employee performs services in connection with an american_vessel or american_aircraft under a contract_of_service which is entered into within the united_states the employee’s services are subject_to fica_taxes regardless of whether the services are performed within or without the united_states thus fica_taxes would apply to all the remuneration received by such employees if sec_3121 imposes fica_taxes on all remuneration for services of a nonresident_alien the included-excluded rule would not apply however it is important to note that the fica has an included-excluded rule in sec_3121 that is similar to the rule for income_tax_withholding purposes sec_3121 provides that if the services performed during one half or more of any pay_period by an employee constitute employment all of the services performed during such period shall be deemed to be employment but if the services performed during more than one half of a pay_period by an employee do not constitute employment then none of the services shall be deemed to be employment in revrul_79_318 1979_2_cb_352 the service considered the application of the included-excluded rule_of the fica to services performed within the united_states by canadian citizen employees working for a canadian employer under the facts of the ruling in every pay_period each employee performed services for less than one-half of the pay_period within the united_states the ruling concludes that the included-excluded rule found in sec_3121 does not apply to this situation the ruling states that the included-excluded rule in sec_3121 applies only to services that are performed within the united_states or services that are performed without the united_states by a united_states citizen for an american_employer and that the specific exceptions provided in sec_3121 are used to determine whether amounts are included or excluded sec_3121 provides an exception from employment for services performed by an individual on or in connection with a vessel not an american_vessel or on or in connection with an aircraft not an american_aircraft if a the individual is employed on and in connection with such vessel_or_aircraft when outside the united_states and b i such individual is not a citizen_of_the_united_states or ii the employer is not an american_employer this exception is not applicable if the vessel is an american_vessel or if the aircraft is an american_aircraft wta-n-106046-99 revrul_79_318 cites and is based on the facts of 408_f2d_686 ct_cl the court in that case rejected a literal reading of sec_3121 which seemingly supported the plaintiff’s position the court examined the legislative_history and the contemporaneous construction of the provision by the service f 2d pincite the court held that the included-excluded rule applies only where the employee is performing both services that fall within the basic definition of employment contained in sec_3121 and other services that fall within the basic definition of employment contained in sec_3121 but are excluded by one of the specific enumerated exceptions although revrul_79_318 and inter-city truck lines provide direct authority for the interpretation of the fica and futa included-excluded rules the wording of the income_tax_withholding included-excluded rule and the structure of the provisions defining wages under the income_tax_withholding provisions raise the issue of whether the result should be different under the income_tax_withholding provisions in both the fica and the futa wages is defined as remuneration for employment and a separate subsection exists concerning the definition of employment no such definition of employment exists for income_tax_withholding purposes further the fica and futa included-excluded rule relates to employment whereas the income_tax_withholding rule relates to wages despite these distinctions there is authority for interpreting the income_tax_withholding rule in the same manner as the fica and futa for this purpose legislative_history the income_tax_withholding provisions had their origin in the revenue act of 56_stat_884 many of the income_tax_withholding exceptions were designed to be the contemporaneous construction referred to by the court was contained in s s t 1940_2_cb_252 the ruling stated as follows pincite c b in the opinion of the bureau section c and section d supra were not intended to include as employment services performed outside the united_states or to exclude from employment services performed within the united_states on the basis of the relations in quantity of services performed within the united_states to the entire services performed both within and without the united_states the references to section c and section d are to the predecessors of sec_3121 and sec_3306 sec_3306 contains the federal_unemployment_tax_act futa included-excluded rule wta-n-106046-99 similar to the fica and futa_tax exceptions senate rep no 77th cong 2d sess stated as follows with respect to some exceptions from wages in the original income_tax_withholding provisions these exceptions are identical with the exceptions extended to such services for social_security_tax purposes and are intended to receive the same construction and have the same scope the act also provided an additional exception from the definition of wages for services performed as an employee while outside the united_states unless the major part of the services performed during the calendar_year by such employee for such employer are performed within the united_states see sec_465 of act the committee reports state that t he exception does not extend to wages paid an employee whose services are performed partly within and partly without the united_states if the major portion of such employee’s services during the year are performed within the united_states sen_rep no at page the act also added the included-excluded rule for income_tax_withholding purposes with similar wording to the current sec_3402 the legislative_history states that in order to avoid administrative difficulties section h provides that if the remuneration paid for services performed during one-half or more of any pay- roll period constitutes wages all the remuneration paid for such period shall be deemed to be wages but if the remuneration paid for services performed during more than one-half of such pay-roll period does not constitute wages then none of the remuneration paid for such period shall be deemed to be wages the rule prescribed is similar to that adopted for social_security_tax purposes h_r rep no 77th cong 2d sess sen_rep no 77th cong 2d sess a similar desire for ease of administration by having similar exceptions for purposes of the fica the futa and federal_income_tax withholding was also evidenced in the legislative_history of the current tax_payments act of which enacted income_tax_withholding provisions that replaced the revenue act of provisions see s rep no 78th cong 1st sess h_r rep no 78th cong 1st sess the act changed the included- excluded rule by limiting its application to payroll periods of not more than consecutive days h_r rep no pincite the act also provides an exception from the definition of wages remuneration paid for services performed by a nonresident_alien_individual other than a resident of a contiguous country who wta-n-106046-99 enters and leaves the united_states at frequent intervals see sec_2 of act in congress changed the taxation of remuneration for services performed by nonresident_aliens see public law no 89th cong 2d sess formerly the services of nonresident_aliens within the united_states had been subject_to_withholding only under sec_1441 sec_3401 as presently worded was added to the code by sec_103 of publaw_89_809 to provide for an exception from wages for such services as may be designated by regulations prescribed by the secretary or_his_delegate the legislative_history is illuminating as to the concern of congress in making the change your committee believes that withholding at the 30-percent rate should only be required in the case of income which is taxed at that rate therefore income which is effectively connected to the conduct of a u s trade_or_business should not be subject_to this withholding_tax at a 30-percent rate this is particularly important in the case of compensation paid a nonresident_alien s ince the regular graduated rates on small incomes are less than percent this rate may result in substantial overwithholding in many cases where regular income_tax rates apply although an alien may obtain a refund of the excess withholding when he files his return at the end of the year overwithholding in these circumstances can create a substantial hardship for the alien h_r report no 89th cong 2d sess see also sen_rep no 89th cong 2d sess wta-n-106046-99 rationale for not applying the included-excluded rule application of the included-excluded rule would frustrate the effect of the regulations under sec_31_3401_a_6_-1 by overriding the result in the regulations it would frustrate the intent of sec_31_3401_a_6_-1 of the regulations if the included-excluded rule were applied in this context sec_3401 provides an exception from wages only for such services performed by nonresident_aliens as may be designated by regulations prescribed by the secretary the language at the beginning of sec_31_3401_a_6_-1 of the regulations which were published in and subsequently amended indicates that the regulations are intended to include within the definition of wages only that remuneration that is for services that are effectively connected with the conduct_of_a_trade_or_business within the united_states services performed outside the united_states are in many cases not effectively connected with the conduct_of_a_trade_or_business within the united_states applying the included-excluded rule would however also exclude remuneration for services within the united_states ie effectively_connected_income if less than percent of the remuneration was for services performed within the united_states thus applying the included-excluded rule in the current context would unreasonably expand the exception from wages provided under sec_3401 for services performed by nonresident_aliens beyond the scope of what was intended by the regulations a conclusion that the included-excluded rule_of sec_3402 does not apply in this situation is consistent with revenue rulings and case law applying the similar fica rule in determining whether the income_tax_withholding included-excluded rule is applicable it is necessary to consider relevant authority under the fica dealing with the included-excluded rule the authority under the fica indicates that the included-excluded rule does not apply to sec_3401 type wages revrul_79_318 and the inter-city truck lines hold that the fica included-excluded rule does not apply in the situation where a nonresident_alien employee is performing services within and outside the united_states consistency in interpretation between the fica and the income_tax_withholding provisions is suggested in the legislative_history of the act and promotes simplicity and ease of administration in most case under this interpretation a nonresident_alien performing some services within the united_states and other services outside the united_states would generally be treated similarly for fica and income_tax_withholding wta-n-106046-99 under this conclusion only amounts that are subject_to united_states income_tax are wages for federal_income_tax withholding purposes if the included-excluded rule is applied all remuneration including remuneration for services performed outside the united_states is treated as wages for income_tax_withholding purposes however generally nonresident_aliens are not subject_to united_states income_tax on remuneration from services performed outside the united_states thus if the included-excluded rule is applied and the employee had just over percent of remuneration during a payroll_period from services performed in the united_states withholding would nonetheless apply to percent of the payment of remuneration this discrepancy caused by the application of the rule in this context is entirely different from the ordinary application of the rule_of administrative convenience under sec_3402 in the examples under the sec_3402 regulations the amounts received by the employees whether remuneration for services included in or excluded from wages are in either event included in gross_income adopting an approach that aligns income_tax_withholding with amounts included in gross_income is consistent with the service approach to employer-provided accident_and_health_insurance which is excluded from gross_income under sec_106 revrul_56_632 1956_2_cb_101 states that the value of the insurance coverage is not included in wages for income_tax_withholding purposes even though such amounts are undoubtedly remuneration for employment and no specific exception from the definition of wages applies further because the application of the included-excluded rule in this context is based on the assumption that the basic definition of wages includes amounts that are not included in gross_income its application is counter to the general concept that amounts that are not subject_to federal_income_tax are not includible in the definition of wages see 452_us_247 in rowan the court stated that wages is a narrower concept that income u s pincite however because the included-excluded rule is applied on a payroll_period basis an employee who performed just over the percent in the united_states in one payroll_period may be just under percent in the next period in addition withholding on the entire amount could be justified because an individual who is performing services within the united_states for the majority of time for payroll_period after payroll_period could lose his or her nonresident_alien status based on the substantial_presence_test the rowan case overturned a longstanding tax regulation subjecting certain meals_and_lodging that were excludable from gross_income to fica tax the court held wta-n-106046-99 at least three circuits have indicated that generally amounts not includible in income do not fall within the basic definition of fica wages 929_f2d_648 fed cir 87_f3d_682 5th cir and 164_f3d_1015 6th cir although the service does not agree that amounts excluded from income are necessarily excluded from fica wages these cases are appellate decisions if these cases were interpreted to apply to the definition of wages for federal_income_tax withholding purposes the payments to the nonresident_aliens for services performed outside the united_states would not be included in the basic definition of wages and there would be a direct analogy to inter-city truck lines an argument that amounts that are excludable from gross_income are subject_to federal_income_tax withholding purposes is legally even less compelling than an argument that amounts that are excludable from gross_income are subject_to fica tax fica tax is based on the objectives of the social_security system which can differ from those of the income_tax_withholding system the income_tax_withholding that the definitions of wages under the fica and the futa and the definition of wages for income_tax_withholding purposes should be interpreted in tax regulations in the same manner in the absence of statutory provisions to the contrary the service’s position is that after the social_security amendments of 1983_2_cb_309 amounts that are not subject_to federal_income_tax can nevertheless be subject_to fica tax see sec_3121 for example if the services of the nonresident_alien worker are specifically included in the definition of employment for fica tax purposes under sec_3121 there are strong reasons to hold that remuneration of the worker even if excluded from gross_income should be subject_to fica tax given the policy reasons for such a coverage provision in the social_security amendments of pub_l_no congress attempted to override the broad rationale of the rowan decision while incorporating the narrow holding of the case that amounts excludable under sec_119 are not subject_to fica_taxes the anti-rowan amendment is found in the penultimate sentence of sec_3121 the committee reports in connection with this amendment state as follows since the social_security system has objectives which are significantly different from the objectives underlying the income_tax_withholding rules your committee believes that the amounts exempt from income_tax_withholding should not be exempt from fica unless congress provides an explicit fica tax exclusion s rep no 98th cong 1st sess p wta-n-106046-99 provisions are designed to provide for income_tax_withholding equivalent to income_tax_liability see notice_92_6 1992_1_cb_495 treating amounts that are excludable from gross_income as falling within the basic definition of wages for federal_income_tax withholding purposes makes little sense in light of the purpose of sec_3402 withholding this conclusion is consistent with congressional intent that income of nonresident_aliens that is subject_to taxation at the graduated income_tax rates should be subject_to the graduated income_tax_withholding tables the discussion of the legislative_history in connection with the legislative changes indicates that one of congress’ principal concerns in making the change in sec_3401 to allow income_tax_withholding under sec_3402 to apply to wages of nonresident_aliens was to have the graduated income_tax_withholding of sec_3402 apply to income of the nonresident_alien that is subject_to graduated income_tax under sec_1 application of the included-excluded rule frustrates this congressional intent by subjecting income that is subject_to graduated income_tax under sec_1 to percent withholding under sec_1441 this conclusion avoids overwithholding consideration of the scope of the included-excluded rule must also acknowledge the practical effect of applying the rule to a nonresident_alien performing only a portion of his or her services in the united_states as noted in notice_92_6 1992_1_cb_495 t he principal purpose of wage withholding is to assure current payment of the correct amount of federal income taxes the federal_income_tax withholding regime under sec_3402 is designed to have the withholding approximate the income_tax_liability of the recipient thus in income_tax_withholding tables were revised because the previous tables were resulting in substantial overwithholding ie the amounts withheld were substantially in excess of the income_tax liabilities of the recipients see notice_92_6 absent a withholding agreement under sec_1441 as described earlier it is generally agreed that applying the included-excluded rule_of sec_3402 in a situation in which a nonresident_alien performs only a small portion of his services within the united_states together with sec_1441 will produce overwithholding withholding on nonresident_aliens who perform less than percent of their services in the united_states will be at a percent rate which will usually result in overwithholding also in the case of nonresident_aliens who perform a significant part of their services outside of the united_states but who perform percent or more of their services within the united_states withholding under sec_3402 on the entire amount of their remuneration will result in overwithholding because the remuneration for services outside the united_states will generally be exempt from united_states income_tax we do not believe that this overwithholding was wta-n-106046-99 what congress intended with the passage of the included-excluded rule in contrast our conclusion that the rule does not apply in this situation results in graduated withholding on the nonresident alien’s remuneration for services within the united_states that will better correlate with the portion of his or her income_tax_liability that is computed under the graduated income_tax tables under sec_1 this conclusion is supported by the original rationale for the included-excluded rule administrative simplicity application of the included-excluded rule to the remuneration of nonresident_aliens undercuts the original rationale for the included- excluded rule applying sec_3402 in this situation would also undercut the original rationale for the application of the rule creating administrative simplicity for employers if the rule applies an employer that had a worker who performed less than percent of his or her services within the united_states in some payroll periods but percent or more of his or her services outside the united_states in other payroll periods would have withholding under sec_1441 in some payroll periods and withholding under sec_3402 in the other payroll periods this would require maintenance of two withholding systems two sets of reporting to the service and two sets of reporting to the employee the employer would have to include amounts paid the worker on form_941 and form_1042 and would be required to give the employee form_w-2 and form 1042-s this is directly counter to the administrative simplicity that was the rationale for the rule in the first place under this position only one set of returns would be required to be filed and all amounts includible in income would be reported on form_w-2 we also note that in any case where any part of the remuneration of the nonresident_alien is subject_to fica tax the fica wages and fica tax withheld would have to be reported on form_941 and form_w-2 in the case of nonresident_aliens performing certain transportation services all services are treated as within the definition of fica employment see sec_3121 also in a fact situation such as revrul_79_318 where the included-excluded rule is not applied for purposes of fica tax and the employee performs a portion of his or her services within the united_states the employer would have to file form_941 and form_w-2 with respect to the fica wages paid to the employee thus application of the included-excluded rule for income_tax_withholding purposes would necessitate filing two sets of returns in virtually every case where less than half of the services were performed in the united_states in contrast under the position of this memorandum the employee’s remuneration subject_to fica taxation the remuneration subject_to united_states income_taxation and the income_tax_withholding would simply be reported on form_w-2 and form_941 thus the original rationale of the included-excluded rule strongly supports our conclusion wta-n-106046-99 summary the argument has been made that the statute is clear on its face and sec_3402 should apply under the literal language of the statute however the withholding statute should not be applied without consideration of the legislative_history and case law in the withholding area consideration of inter-city truck lines revrul_79_318 the legislative_history of sec_3402 the purposes of wage withholding the income_tax_withholding regulations and the overwithholding potentially produced by application of the rule in this context provide strong support for not applying sec_3402 to nonresident_aliens who perform a portion of their services within the united_states thus we conclude that sec_3402 does not apply in this context case development hazards and other considerations if you have any questions contact the branch number


internal_revenue_service department of the treasury number release date index number in re washington dc person to contact telephone number refer reply to cc intl plr-118803-99 date date legend taxpayer drc drc a tax years b tax years cpa firm dear this replies to a letter dated date in which taxpayer requests an extension of time under sec_301_9100-3 as follows to file the agreement and certification described in sec_1_1503-2a d with respect to drc for tax years and of a tax years and with respect to drc for tax years through of b tax years to replace such agreements and certifications with the agreement described in sec_1_1503-2 as provided in sec_1_1503-2 and to file the agreement and certification described in sec_1_1503-2 with respect to drc for tax years and of a tax years and with respect to drc for tax years through of b tax years additional information was submitted in letters dated date and date plr-118803-99 the ruling contained in this letter is predicated upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as a part of the audit process taxpayer does not have an internal tax department thus taxpayer relied upon cpa firms and for the preparation of taxpayer’s consolidated federal_income_tax returns to ensure that all relevant statutory and regulatory federal_income_tax requirements were adequately addressed however there was a failure to comply with the requirements of sec_1_1503-2a d and sec_1_1503-2 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the standards set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301 -1 b defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement sec_301_9100-3 provides standards for extensions of time for making regulatory elections when the deadline for making the election is other than a due_date prescribed by statute sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government in the present situation the election that is the subject of this ruling_request is a regulatory election as defined in sec_301_9100-1 therefore the commissioner has discretionary authority pursuant to sec_301_9100-3 to grant taxpayer an extension of time provided that taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government based on the facts and circumstances of this case we conclude that taxpayer satisfies the standards of sec_301_9100-3 accordingly taxpayer is granted an extension of time until days from the date of this ruling letter as follows plr-118803-99 to file the agreement and certification described in sec_1_1503-2a d with respect to drc for tax years and of a tax years and with respect to drc for tax years through of b tax years to replace such agreements and certifications with the agreement described in sec_1_1503-2 as provided in sec_1_1503-2 and to file the agreement and certification described in sec_1_1503-2 with respect to drc for tax years and of a tax years and with respect to drc for tax years through of b tax years the granting of an extension of time to file the agreements and certifications for the years at issue is not a determination that taxpayer is otherwise eligible to make the election sec_301 -1 a no ruling has been requested and none is expressed as to the application of any other section of the code or regulations to the facts presented a copy of this ruling letter should be associated with the agreements and certifications this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to taxpayer and the other authorized representative sincerely s allen goldstein reviewer office of the associate chief_counsel international


internal_revenue_service number release date index number ------------------------------------------------- -------------------------------------------------- -------------------------------------------- ----------------------------------- legend department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-130411-10 date date x ---------------------------------------------------------------------------------------------- ---------------------------------------------------- ------------------------- d1 state ------------------ -------------- dear ----------------- this responds to the letter dated date and subsequent correspondence submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts x was incorporated on d1 under the laws of state the shareholders of x intended that x be treated as an s_corporation effective on d1 but the election to be treated as an s_corporation was not timely filed accordingly x requests a ruling that it will be treated as an s_corporation effective d1 law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first plr-130411-10 two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one-half months of a corporation's taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed sec_1362 provides that if no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply x did not timely file an election to be treated as an s_corporation under sec_1362 x has however established reasonable_cause for not making a timely s election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective d1 if within days from the date of this letter x submits a properly completed form_2553 with a copy of this letter attached to the appropriate service_center except as specifically set forth above no opinion is expressed or implied as to the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely cornelia j schynder cornelia j schynder senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury index no washington dc contact person pag dom p si - plr-113745-98 oct t n i z i p i accounting firm law firm dear t i w t t i w this responds to your date letter requesting that the service grant x an extension of time under sec_301 of the procedure and administration regulations to elect to treat l m and n as qualified subchapter_s subsidiaries under sec_1361 b of the internal_revenue_code the information submitted states that x l m and n were incorporated on dl sec_1362 to be an s_corporation beginning on di each of the four corporations elected under on d2 x acquired all of the outstanding_stock of l m and a m as vice president of x represents that x n intended l after the stock acquisition firm upon whom l advise them that x needed to file elections to treat l as qualified subchapter_s subsidiaries and n relied for tax_advice failed to and n to continue to be governed by subchapter_s however accounting firm and law and n m m l m and n sec_1361 b defines the term qualified_subchapter_s_subsidiary qsss as a domestic_corporation that is not an ineligible_corporation if percent of the stock of such corporation is held by an corporation and the s_corporation elects to treat such corporation as a qsss provision does not provide guidance regarding the manner in which the qsss election is to be made or the effective date of the election the statutory notice_97_4 1997_1_cb_351 provides a temporary procedure for making a qsss election under notice_97_4 a taxpayer makes a qs8ss election with respect to a subsidiary by filing a form_966 corporate dissolution or liquidation subject_to certain modifications with the appropriate service_center may be effective on the date the form_966 is filed or up to days prior to the filing of the form provided that date is not before the parent's first taxable_year beginning after date and that the subsidiary otherwise qualifies as a qssss for the entire period for which the retroactive election is in effect the election section sec_301_9100-1 of the procedure and administration regulations provides that the commissioner has the discretion to grant a reasonable extension of the time under the rules set forth in election sec_301_9100-1 defines regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-2 and sec_301_9100-3 to make a regulatory sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that reasonably and in good_faith and granting relief will not prejudice the interests of the government the taxpayer acted in the present case the requirements of sec_301_9100-3 have consequently x is granted an extension of time been satisfied until days following the date of this letter to elect to treat l be made by following the procedure set forth in notice_97_4 copy of this letter should be attached to the form_966 the elections should a and n as qssss effective d2 m q except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed concerning whether x is an s_corporation or whether l qs8sss for federal tax purposes or n otherwise qualify as m this ruling is directed only to the taxpayer on whose behalf sec_6110 provides that it may not be it was requested used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being forwarded to x sincerely yours fal fg hin paul f kugler assistant chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c mar number release date cc tege eoeg et1 - cor-102272-01 uilc memorandum for from subject office of division counsel associate chief_counsel tax exempt and government entities cc tege eoeg et1 - cor-102272-01 railroad retirement act tax status in accordance with the coordination procedure established between the service and the railroad retirement board rrb the rrb has provided us with its opinion that the following business became a rail carrier employer under the railroad retirement act and the railroad unemployment insurance act effective date we have reviewed the opinion of the rrb and based upon the information submitted to the rrb we also conclude that became an employer under the railroad_retirement_tax_act effective date please take the appropriate action regarding this business will e mcleod cc


internal_revenue_service number release date index number ------------------------------------ -------------------------------------- -------------------------------------- ------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ----------------- ----------------------------------------------------- telephone number ---------------------- refer reply to cc psi b3 plr-106543-17 date date legend x trust trust trust trust trust state d1 d2 d3 d4 ---------------------------------------- ----------------------------------------------------------------------------------------- ------ ------------------------- -------------------------------------------------- -------------------------------- ---------------------------------------------------- -------------------------------------- ---------------------------------------------------- -------------------------------- -------------------------------------------------------- ------------------------- ----------------------------------------------------- ------------------------- ---------- ----------------------- ---------------------- ----------------------- --------------------------- plr-106543-17 dear -------------- this letter responds to a letter dated date submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code code the information submitted states that x was incorporated under the laws of state on d1 and elected to be an s_corporation effective d2 in d3 each of trust trust trust trust and trust were created each of trust trust trust trust and trust received shares of x on d4 trust trust trust trust and trust have been shareholders of x at all times since d4 x represents that each of trust trust trust trust and trust have been eligible to elect qualified_subchapter_s_trust qsst treatment under sec_1361 however the respective beneficiaries of the trusts inadvertently failed to timely make a qsst election with respect to these trusts x represents that the respective failures to file qsst elections were inadvertent and not motivated by tax_avoidance or retroactive tax planning x further represents that from d4 x and its shareholders have filed all returns consistent with x’s status as an s_corporation x and its shareholders have agreed to make such adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary sec_1361 of the code provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that in the case of a qsst for which a beneficiary makes an election under sec_1361 the trust is treated as a_trust described in sec_1361 and for purposes of sec_678 the beneficiary of the trust shall be treated as the owner of that portion of the trust that consists of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1361 provides that a beneficiary of a qsst may elect to have sec_1361 apply sec_1_1361-1 provides that the current income_beneficiary of a qsst must make the election under sec_1361 by signing and filing with the service_center with which the corporation files its income_tax returns the applicable form or a statement including the information listed in sec_1_1361-1 plr-106543-17 sec_1362 provides that a in general an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation and b any termination under sec_1362 shall be effective on and after the date of cessation sec_1362 provides in part that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the required shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary based solely on the facts submitted and the representations made we conclude that x’s s_corporation_election terminated on d4 because of the failure of the beneficiaries of trust trust trust trust and trust to make the required qsst elections with respect to the trusts we further conclude that this termination of x’s s_corporation_election was an inadvertent termination within the meaning of sec_1362 accordingly pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d4 and thereafter provided x’s s_corporation_election was valid and not otherwise terminated under sec_1362 this ruling is contingent upon the respective beneficiaries of trust trust trust trust and trust filing qsst elections for trust trust trust trust and trust with an effective date of d4 with the appropriate service_center within days of the date of this ruling a copy of this letter should be attached to each of the qsst elections if x or its shareholders fail to treat x as described above this letter_ruling will be null and void except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x is a small_business_corporation under sec_1361 or whether trust trust trust trust or trust is a qsst within the meaning of sec_1361 plr-106543-17 the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file a copy of this letter is being sent to x’s authorized representative sincerely bradford r poston senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number info release date index number ------------------------- --------------------------- ----------------------------------- department of the treasury washington dc person to contact --------------------------- id no ------------- telephone number --------------------- refer reply to cc psi - genin-117161-04 date date this letter is in response to a letter dated date submitted on request to revoke sec_179 election ------------------------------------- in re in re ---------------------------------- tax years ------------------- dear -------------- taxpayer’s behalf to the commissioner of internal revenue requesting permission to revoke the election made under sec_179 of the internal_revenue_code on taxpayer’s and federal_income_tax returns for certain property placed_in_service in respectively in order for us to respond to your specific request you must submit a request for a private_letter_ruling the request must comply with all the requirements of section of revproc_2004_1 2004_1_irb_1 a copy of selected selections of revproc_2004_1 has been enclosed for your reference we hope that you find the following general information to be helpful that section you may find sec_179 of particular interest under sec_179 an election made under sec_179 with respect to a taxable_year beginning in and any specification contained in any such election may not be revoked except with the consent of the commissioner such consent to revoke an election under sec_179 however will be granted only in extraordinary circumstances emphasis added see sec_1_179-5 of the income_tax regulations revproc_2004_1 provides the general procedures the internal_revenue_service follows in issuing private letter rulings and the related instructions for the submission of private_letter_ruling requests by taxpayers in addition taxpayers are we are enclosing a copy of sec_179 of the code and the regulations under genin-117161-04 required by statute to pay user fees for requests for private letter rulings under sec_15 of revproc_2004_1 the user_fee must accompany the request in order to be processed by the service in general the user_fee is dollar_figure for private letter rulings however there is a reduced fee of dollar_figure for a request involving a business-related tax issue from a taxpayer with a gross_income of less than dollar_figure million see appendix a of revproc_2004_1 also note that sec_15 of revproc_2004_1 provides that if a request for a private_letter_ruling involves several unrelated transactions each transaction is treated as a separate request for a private_letter_ruling and that as a result a separate fee will apply for each unrelated transaction if you should decide to request a private_letter_ruling section dollar_figure of revproc_2004_1 provides information as to where to send the request also as we have noted above section of revproc_2004_1 provides general instructions for requesting a private_letter_ruling this letter has called your attention to certain principles of tax law it is intended for informational purposes only and does not constitute a ruling see sections dollar_figure and dollar_figure of revproc_2004_1 we hope the materials enclosed will be helpful to you however if you should have any additional questions or comments please contact our office at -------------------- letter is being sent to your authorized representative mark pitzer enclosures mark pitzer senior counsel branch office of associate chief_counsel passthroughs and special industries in accordance with the power_of_attorney on file with this office a copy of this sincerely yours


number release date id office uilc cca_2009022416113442 -------------- from ------------------------ sent tuesday date pm to --------------------- cc subject fw question --------------------please see the below response to your question from ----------------- sent tuesday date pm to ------------------------ subject re question the exception applies only to the pre-11 request any modification request after that date is subject_to the disclosure requirements the pre-11 request remains excepted however if the requester includes a copy of the previous determination or incorporates it by reference that document would be treated as part of the newer request


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi br4 - plr -144018-01 date date in re legend decedent trust a_trust trust gst exempt a_trust gst nonexempt a_trust gst exempt b_trust gst nonexempt b_trust trustees beneficiary beneficiary date date date state state code dear this is in reply to your letter of date requesting the following rulings the division and severance of trust into gst exempt a_trust and gst nonexempt a_trust will constitute a qualified_severance under sec_2642 of plr-144018-01 the internal_revenue_code the division and severance of trust into the gst exempt b_trust and the gst nonexempt b_trust will constitute a qualified_severance under sec_2642 of the internal_revenue_code gst exempt a_trust will have an inclusion_ratio of zero for generation-skipping_transfer_tax purposes gst exempt b_trust will have an inclusion_ratio of zero for generation-skipping_transfer_tax purposes gst nonexempt a_trust will have an inclusion_ratio of one for generation-skipping_transfer_tax purposes gst nonexempt b_trust will have an inclusion_ratio of one for generation-skipping_transfer_tax purposes the proposed division and severance will not cause the interest of beneficiary in gst exempt a_trust or the gst nonexempt a_trust to be includible in his gross_estate under sec_2033 and sec_2036 through of the code the proposed division and severance will not cause the interest of beneficiary in the gst exempt b_trust or the gst nonexempt b_trust to be includible in his gross_estate under sec_2033 and sec_2036 through of the code the proposed division and severance will not cause beneficiary to have made a taxable gift_for purposes of the federal gift_tax under chapter of the code the proposed division and severance will not cause beneficiary to have made a taxable gift_for purposes of the federal gift_tax under chapter of the code transfers to gst exempt a_trust pursuant to the proposed division and severance will not be generation-skipping transfers and will not be subject_to tax under sec_2601 of the code transfers to gst exempt b_trust pursuant to the proposed division and severance will not be generation-skipping transfers and will not be subject_to tax under sec_2601 of the code the proposed division and severance will not cause gst exempt a_trust gst nonexempt a_trust or any beneficiary of either of such trusts to recognize gain_or_loss from the sale_or_other_disposition of property under sec_61 or sec_1001 of the code the proposed division and severance will not cause gst exempt b_trust gst plr-144018-01 nonexempt b_trust or any beneficiary of either of such trusts to recognize gain_or_loss from the sale_or_other_disposition of property under sec_61 or sec_1001 of the code pursuant to sec_1223 of the code the holding_period with respect to each asset received by gst exempt a_trust and gst nonexempt a_trust will include trust 1’s holding_period for each such asset pursuant to sec_1223 of the code the holding_period with respect to each asset received by gst exempt b_trust and gst nonexempt b_trust will include trust 2’s holding_period for each such asset pursuant to sec_1015 of the code the basis of each asset received by gst exempt a_trust and gst nonexempt a_trust from trust will be trust 1’s basis for each such asset pursuant to sec_1015 of the code the basis of each asset received by gst exempt b_trust and the gst nonexempt b_trust from trust will be trust 2’s basis for each such asset facts decedent died testate on date prior to her death decedent and her pre- deceased spouse had created trust a a revocable_trust that became irrevocable on decedent’s death under the terms of trust a as amended on date on decedent’s death the trust estate was to be divided into two equal shares one share to be held in trust for the benefit of beneficiary and his descendants and one share to be held in trust for the benefit of beneficiary and his descendants under the terms of decedent’s will one-half of the residuary_estate passed to trust and one-half passed to trust trust provides that all trust income is to be distributed to beneficiary and or his issue in such amounts as the trustees deem advisable for their support and care trust further provides for distributions of corpus to beneficiary 1's issue as may be needed for their health education and support upon beneficiary 1's death trust continues for the benefit of beneficiary 1's issue until each of beneficiary 1's issue dies or reaches the age of years during the continuation of the trust the trustees are to administer trust for the equal use and benefit of said issue distributing to each of them such part of the income or corpus of the trust estate belonging to such issue as may be needed for his or her health education and support one half of each issue’s share is to be distributed when that issue reaches age and the balance when that issue reache sec_45 upon the death of an issue before age that issue’s interest will pass to his or her issue free of trust or if no issue are then living to the other descendants of beneficiary per stirpes to be administered as part of his or her trust trust provides that all trust income to be distributed to beneficiary and or his plr-144018-01 issue in such amounts as the trustees deem advisable for their support and care trust further provides for distributions of corpus to beneficiary 2’s issue as may be needed for their health education and support after beneficiary 2’s death trust continues for the benefit of beneficiary 2’s issue during the continuation of the trust the trustees are to administer trust for the equal use and benefit of the issue of beneficiary the trustees are to distribute to each issue such part of the income or corpus of the trust estate belonging to such issue as may be needed for his or her health education and support one half of each issue’s share is to be distributed as that issue reaches age and the balance when that issue reache sec_45 upon the death of an issue before age that issue’s interest will pass to his or her issue per stirpes and free of trust or if no issue are then living to the other descendants of beneficiary to be administered as part of his or her trust the trustees of trust propose to sever trust into two new trusts gst exempt a_trust and gst nonexempt a_trust the terms of the two new trusts will be identical to the terms of trust and will provide for the same succession of interests of beneficiaries as are provided for in trust trust will be divided and severed on a fractional basis and each severed trust will receive a pro_rata portion of each asset held by trust gst exempt a_trust will receive a fraction of each asset held by trust the numerator of which is equal to one-half of decedent’s available gst_exemption and the denominator of which is equal to the total fair_market_value determined as of decedent’s date of death of the assets passing to trust gst nonexempt a_trust will be funded with the balance of the trust assets similarly the trustees of trust propose to sever trust into two new trusts gst exempt b_trust and gst nonexempt b_trust the terms of the two new trusts will be identical to the terms of trust and will provide for the same succession of interests of beneficiaries as are provided for in trust trust will be divided and severed on a fractional basis and each severed trust will receive a pro_rata portion of each asset held by trust gst exempt b_trust will receive a fraction of each asset held by trust the numerator of which is equal to one-half of decedent’s available gst_exemption and the denominator of which is equal to the total fair_market_value determined as of the date of decedent’s death of the assets passing to trust gst nonexempt b_trust will receive the balance of the trust assets under state code the trustees may unless expressly prohibited by the terms of the instrument establishing the trust divide a_trust into two or more separate trusts without a judicial proceeding if the trustee reasonably determines that the division of the trust could result in a significant decrease in federal income or transfer_taxes under the statute the terms of the separate trusts must be identical to the terms of the original trust trust assets must be allocated to the separate trusts on a fractional pro_rata basis the form_706 united_states estate and generation-skipping_transfer_tax return has not yet been filed by decedent’s estate the return is due on date plr-144018-01 law and analysis ruling sec_1 and sec_2601 imposes a tax on every generation skipping transfer gst the term generation skipping transfer is defined under sec_2611 as a taxable_distribution a taxable_termination or a direct_skip sec_2603 provides that in the case of a taxable_termination the trustee is liable for the payment of the gst tax in the case of a taxable_distribution the transferee is liable under sec_2602 the amount of the gst tax is determined by multiplying the taxable_amount by the applicable_rate under sec_2641 the applicable_rate is the maximum rate_of_tax on an estate_tax transfer multiplied by the inclusion_ratio the inclusion_ratio is defined in sec_2642 as the excess of over the applicable_fraction for the trust from which the transfer is made or for the direct_skip the applicable_fraction is a fraction in which the numerator is the gst_exemption allowable under sec_2631 allocated to the trust or direct_skip and the denominator is the value of the property transferred to the trust or involved in the direct_skip reduced by any federal estate_tax or state death_tax actually recovered from the trust and any charitable deduction allowed under sec_2055 or sec_2522 with respect to such property under sec_2631 for purposes of determining the inclusion_ratio every individual is allowed a gst_exemption of dollar_figure adjusted for inflation as provided in sec_2631 which may be allocated by the individual or the individual's executor to any property with respect to which the individual is the transferor for gst tax purposes sec_2642 provides that if a_trust is severed in a qualified_severance the trusts resulting from such severance shall be treated as separate trusts thereafter for purposes of the gst tax sec_2642 defines a qualified_severance as the division of a single trust and the creation by any means available under the governing instrument or by local law of two or more trusts if - i the single trust was divided on a fractional basis and ii the terms of the new trusts in the aggregate provide for the same succession of interests of beneficiaries as are provided in the original trust in this case trust and trust will be severed in accordance with applicable state law further as severed gst exempt a_trust and gst nonexempt a_trust provide for the same succession of interests and beneficiaries as are provided in trust similarly gst exempt b_trust and gst nonexempt b_trust provide for the same succession of interests and beneficiaries as are provided in trust finally trust and trust will be severed on a fractional basis and each severed trust will receive a pro_rata portion of each asset held in trust or trust as the case may be plr-144018-01 accordingly the severance of trust and trust as proposed will be a qualified_severance under sec_2642 therefore assuming sufficient gst_exemption is allocated to gst exempt a_trust and gst exempt b_trust as provided in sec_2632 these trusts will have an inclusion_ratio of zero ruling sec_2033 provides that the value of the gross_estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death sec_2036 generally requires the inclusion of property in the gross_estate where a decedent has transferred property but retained the right to the income possession or enjoyment of the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the transferred property or the income therefrom sec_2037 provides generally that the gross_estate shall include the value at the date of decedent’s death of any interest in property transferred by the decedent if the possession or enjoyment the property can be obtained only by surviving the decedent and the decedent must retain a reversionary_interest in the property and the value of the reversionary_interest exceed sec_5 of the value of the transferred property sec_2038 includes in the gross_estate the value of all property transferred by the decedent where the enjoyment of the property was subject at the date of death to any change through the decedent’s exercise of a power to alter amend revoke or terminate in the instant case under the terms of trust and after the severance of trust into gst exempt a_trust and gst nonexempt a_trust the interest of beneficiary will terminate on his death and the corpus will be held in further trust for the benefit of beneficiary 1's issue similarly under the terms of trust and after the severance of trust into gst exempt b_trust and gst nonexempt b_trust the interest of beneficiary will terminate on his death and the corpus will be held in further trust for the benefit of beneficiary 2's issue further neither beneficiary nor beneficiary has transferred the property in trust or trust respectively for purposes of sec_2036 sec_2037 or sec_2038 accordingly we conclude that gst exempt a_trust and gst nonexempt a_trust will not be includible in beneficiary 1's gross_estate under sec_2033 sec_2036 sec_2037 or sec_2038 further gst exempt b_trust and gst nonexempt b_trust will not be included in beneficiary 2's gross_estate under sec_2033 sec_2036 sec_2037 or sec_2038 ruling sec_2501 imposes a tax for each calendar_year on the transfer of property by plr-144018-01 gift during such calendar_year by any individual resident or nonresident sec_2511 provides that subject_to certain limitations the gift_tax applies whether the transfer is in trust or otherwise direct or indirect and whether the property transferred is real or personal tangible or intangible following the division of trust into gst exempt a_trust and gst nonexempt a_trust the beneficiary will have the same rights to the same property as he did prior to the severance of trust and no other individuals will have any additional rights with respect to the income or corpus of trust therefore no transfer of property will be deemed to occur as a result of the proposed severance of trust into gst exempt a_trust and gst nonexempt a_trust and the proposed severance will not have any gift_tax consequences with respect to beneficiary similarly following the division of trust into gst exempt b_trust and gst nonexempt b_trust the beneficiary will have the same rights to the same property as he did prior to the severance of trust and no other individuals will have any additional rights to the income or corpus of trust therefore no transfer of property will be deemed to occur as a result of the proposed severance of trust into gst exempt b_trust and gst nonexempt b_trust and the proposed severance will not have any gift_tax consequences with respect to beneficiary ruling sec_61 of the code provides that gross_income includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property is the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss is the excess of the adjusted_basis provided in sec_1011 over the amount_realized sec_1001 provides that except as otherwise provided in subtitle a the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained for the purposes of sec_1001 in an exchange of property each party to the exchange gives up a property interest in return for a new or additional property interest such an exchange of property is a disposition under sec_1001 see sec_1_1001-1 of the income_tax regulations an exchange of property results in the realization of gain under sec_1001 if the properties exchanged are materially different 499_us_554 a material difference exists when the exchanged properties embody legal entitlements different in_kind or extent or if they confer different rights and powers id pincite plr-144018-01 based on the information submitted and the representations made in the ruling_request the assets and liabilities of the trust and trust will be divided and severed pursuant to the authority granted in state code the co-trustees will hold the same property after severance as before and each beneficiary will possess the same succession of interests as under trust and trust accordingly no sale_or_exchange under sec_1001 will occur as a result of the severance and no gain_or_loss will be realized by the trusts or by beneficiary or beneficiary as a result of the severance ruling sec_1223 provides that in determining the period for which a taxpayer has held property however acquired there shall be included the period for which such property was held by any other person if such property has the same basis in whole or in part in the taxpayer’s hands as it would have in the hands of such other person see also sec_1_1223-1 of the regulations thus to determine whether the new trusts will have holding periods in the assets received from the two original trusts which include the holding periods of the two original trusts in these assets it is necessary to determine the basis of the new trusts in the assets received from the two original trusts sec_1015 provides the basis rules for property acquired by a transfer in trust as discussed below the basis of any property transferred to gst exempt a_trust and gst nonexempt a_trust is the same as the basis in that property in the possession of trust immediately prior to the transfer under sec_1015 furthermore under sec_1015 the basis of any property transferred to gst exempt b_trust and gst nonexempt b_trust is the same as the basis in that property in the possession of trust immediately prior to the transfer therefore the holding periods of the two original trusts trust and trust in their assets will be included in calculating the period for which the trust assets have been held by the new trusts under sec_1223 ruling sec_1015 provides that if property was acquired after date by a transfer in trust other than by a transfer in trust by a gift bequest or devise the basis shall be the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on such transfer under the law applicable to the year in which the transfer was made in this case the basis of any property transferred to gst exempt a_trust and gst nonexempt a_trust is the same as the basis in that property in the possession of trust immediately prior to the transfer the basis of any property transferred to gst exempt b_trust and gst nonexempt b_trust is the same as the basis in that property in the possession of trust immediately prior to the transfer except as expressly provided herein no opinion is expressed or implied plr-144018-01 concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant in accordance with the powers of attorney on file with this office copies of this letter are being sent to the taxpayers sincerely george masnik chief branch office of associate chief_counsel passthroughs and special industries enclosure copy for purposes