internal_revenue_service number release date index number -------------------------- ------------------------------------ ----------------------------------------------- ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc corp b05 plr-117996-12 date date legend parent ---------------------------------------------------------------------------- ---------------------------------------------------------------------- -------------------------------------- distributing ---------------------------------------------------------------------------- ---------------------------------------------------------------------- ------------------------- controlled ----------------------------------------------------------------------------------------------------- ----------------------- individual individual individual equity fund equity fund state a business a business b -------------------------------------------------------- -------------------------------------------------- ---------------------------------------------------------- --------------------------- ---------------------------- ------------- ------------------------------------------------------------------------ ----------- -------------------------------------------------------- plr-117996-12 controlled debt continuing arrangements a b c d e f g h i ------------------------------------------------------------------------ ---------------------------------------------------------- ------------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------------------------------------------------------ -------------------- ----- ---- -- ---- -- --------------- -------------- -- -- dear ------------------ this letter responds to your letter dated date and subsequent correspondence in which you requested rulings regarding certain federal_income_tax consequences of a proposed transaction the information submitted in that request and in later correspondence is summarized below 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 plr-117996-12 this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process in particular no determination has been made regarding whether the internal or external distribution defined below i satisfies the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii is used principally as a device for the distribution of the earnings_and_profits of parent distributing or controlled see sec_355 of the internal_revenue_code and sec_1_355-2 or iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest in parent distributing or controlled see sec_355 and sec_1_355-7 summary of facts parent is a state a corporation that is a holding_company that uses the accrual_method of accounting parent is the common parent of an affiliated_group_of_corporations that files a consolidated federal_income_tax return distributing is a state a corporation and is an accrual_method taxpayer that at all times relevant to this request has joined with parent in filing a consolidated federal_income_tax return with a calendar_year end distributing is directly engaged in business a and business b approximately a percent of parent’s outstanding common_stock is held by individual approximately b percent is held by individual and approximately c percent is held by individual individual individual and individual are the shareholders approximately d percent of parent’s outstanding convertible preferred_stock preferred_stock is held by equity fund and approximately e percent is held by equity fund there are f warrants issued to the holders of preferred_stock equity fund and are the preferred_stock and warrant holders parent currently has outstanding_stock options issued under its stock_option plan the outstanding options consist of incentive stock_options granted to individual to purchase g shares of parent common_stock the outstanding options business a has had gross_receipts and operating_expenses representative of the active_conduct_of_a_trade_or_business for each of the past five years business b constitutes an expansion of business a and does not constitute a new or different business proposed transaction for what are represented to be valid business purposes parent and distributing propose to undertake the following steps the proposed transaction i distributing will form controlled a state a corporation plr-117996-12 ii iii iv v vi distributing will contribute the assets and liabilities constituting business b as currently conducted by distributing to controlled in exchange for shares of controlled common_stock shares of convertible preferred_stock and warrants which will represent percent of the controlled common and convertible preferred_stock and warrants outstanding the contribution distributing and controlled will execute a debt facility agreement creating the controlled debt distributing will distribute all its shares of controlled common and convertible preferred_stock and warrants representing percent of the controlled common and convertible preferred_stock and warrants outstanding to parent the internal distribution parent will distribute all of its shares of controlled common and convertible preferred_stock and warrants representing percent of the controlled common convertible preferred_stock and warrants outstanding to the shareholders and the preferred_stock and warrant holders in identical proportion to their ownership of parent the external distribution the outstanding options will be exchanged for new incentive stock_options subject_to the same terms and vesting schedule as the related outstanding options individual will surrender his outstanding options and receive in exchange adjusted stock_options in parent new parent options and controlled new controlled options the new parent and new controlled options will preserve the economic value of the outstanding options the exercise price of the new parent options and the new controlled options will bear the same percentage relationship to the market price of parent and controlled common_stock after the external distribution as the exercise price of the outstanding options bore to the market price of parent stock before the proposed transaction vii to accommodate controlled’s business needs individual and individual both employees of distributing will serve as employees for distributing and controlled after the external distribution viii to accommodate controlled’s business needs three of the five directors for distributing will also serve as three of the five directors for controlled the overlapping directors controlled intends that within h years of the external distribution as a result of the addition of new directors the resignation by overlapping directors the removal of overlapping directors from the controlled board or other means the overlapping directors will constitute a minority of controlled’s board_of directors plr-117996-12 ix a b c d e f g h in connection with the proposed transaction distributing and controlled will enter into certain agreements concerning continuing business arrangements relating to business a and business b the continuing arrangements the continuing arrangements are expected to exist for less than i years representations business b is an expansion of business a an existing business as contemplated by sec_1_355-3 none of the controlled convertible preferred_stock will be nonqualified_preferred_stock within the meaning of sec_351 there are no accumulated but unpaid dividends to the preferred_stock there is no regulatory legal contractual or economic compulsion or requirement that distributing fund part or all of the controlled debt as a condition of the distribution of controlled the exercise price of and the number of parent shares subject_to the outstanding options will be adjusted to reflect the change in value of parent shares as a result of the proposed transaction in a manner that on a share- by-share basis a preserves the aggregate spread between the exercise price of the outstanding options and the fair_market_value of the underlying parent stock immediately before the adjustment and b produces a ratio of the exercise price of the new parent options and new controlled options to the fair_market_value of the underlying parent or controlled stock immediately after the external distribution that is equal to the ratio of the exercise price of the outstanding options to the fair_market_value of the underlying parent common_stock immediately before the proposed transaction contribution and internal distribution the indebtedness if any owed by controlled to distributing after the internal distribution will not constitute stock_or_securities no part of the consideration to be distributed by distributing will be received by parent as a creditor or in any capacity other than that of a shareholder of distributing the five years of financial information with regard to business a and less than five years of financial information with regard to business b has been submitted on behalf of distributing and is representative of distributing's present operations and with regard to such operations there have been no plr-117996-12 i j k l m substantial operational changes since the date of the last financial statements submitted neither business a nor control of an entity conducting this business will have been acquired during the five-year period ending on the date of the internal distribution in a transaction in which gain_or_loss was recognized or treated as recognized under proposed sec_1_355-3 in whole or in part throughout the five-year period ending on the date of the internal distribution distributing has been the principal_owner of the goodwill and significant assets of business a and will continue to be the principal_owner following the internal distribution following the internal distribution distributing will continue the active_conduct of business a and controlled will continue the active_conduct of business b both of which were conducted by distributing prior to consummation of the proposed transaction and independently and with their separate employees except as provided by the continuing arrangements the internal distribution will be carried out for the following corporate business purposes i simplifying and clarifying the operational structure of business a and business b streamlining management reporting and administration and achieving strategic coherence and ii using equity incentives to enable business a and business b to attract retain and properly provide incentives to management the corporate business purposes the distribution of the common_stock convertible preferred_stock and warrants of controlled is motivated in whole or substantial part by one or more of these corporate business purposes the internal distribution is not used principally as a device for the distribution of the earnings_and_profits of distributing see sec_355 for purposes of sec_355 immediately after the internal distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the internal distribution n for purposes of sec_355 immediately after the internal distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total plr-117996-12 o p q r s value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of internal distribution or ii attributable to distributions on distributing stock_or_securities that were acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the internal distribution the internal distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation no person will hold immediately after the internal distribution a percent or greater interest in any disqualified_investment_corporation as defined in sec_355 that such person did not hold before the internal distribution taking into account sec_355 and g the total adjusted_basis and the fair_market_value of the assets transferred to controlled in the contribution will equal or exceed the sum of i the total liabilities assumed within the meaning of sec_357 by controlled and ii the total amount of any money and the fair_market_value of any other_property within the meaning of sec_361 received by distributing and transferred to its creditors in connection with the reorganization the liabilities assumed within the meaning of sec_357 by controlled in the contribution if any and the liabilities to which the transferred assets are subject if any were incurred in the ordinary course of business and are associated with the assets being transferred the total fair_market_value of the assets transferred by distributing to controlled in the contribution will exceed the sum of i the amount of any liabilities assumed within the meaning of sec_357 by controlled in connection with the exchange ii the amount of any liabilities owed to controlled by distributing that are discharged or extinguished in connection with the exchange and iii the amount of cash and the fair_market_value of any other_property other than stock and securities permitted to be received under sec_361 without the recognition of gain received by distributing in connection with the exchange the fair_market_value of the assets of controlled will exceed the amount of its liabilities immediately_after_the_exchange t the aggregate fair_market_value of the assets transferred to controlled in the plr-117996-12 contribution will equal or exceed the aggregate adjusted_basis of these assets except for indebtedness that may be created in the ordinary course of business or in connection with the continuing arrangements or the controlled debt no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the internal distribution at the time of the internal distribution distributing will not have an excess_loss_account in the controlled stock immediately before the internal distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before publication of t d 1995_2_cb_147 and as currently in effect sec_1_1502-13 as published by t d payments made in connection with all continuing transactions between distributing and controlled including the continuing arrangements will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length no two parties to the transaction are investment companies as defined in sec_368 and iv parent distributing and controlled will each pay their own expenses if any incurred in connection with the internal distribution u v w x y z external distribution aa the indebtedness if any owed by controlled to parent after the external distribution will not constitute stock_or_securities bb except with respect to new parent options and new controlled options received in respect to the outstanding options no part of the consideration to be distributed by parent in the external distribution will be received by any shareholder of parent as a creditor employee or in any capacity other than that of a shareholder of parent cc following the external distribution distributing and controlled will conduct their respective businesses independently with their separate employees except under the certain arrangements where certain employees will be shared on an interim basis for any employee who is shared by distributing plr-117996-12 and controlled such employee's compensation will be shared by these corporations based upon the amount of time spent in each corporation’s respective business and each corporation will issue a separate form_w-2 to any such employee dd the external distribution will be carried out for the corporate business purposes the external distribution is motivated in whole or substantial part by one or more of the corporate business purposes ee the external distribution is not being used principally as a device for the distribution of the earnings_and_profits of parent or controlled see sec_355 ff gg for purposes of sec_355 immediately after the external distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of parent stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the external distribution for purposes of sec_355 immediately after the external distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the external distribution or ii attributable to distributions on controlled stock_or_securities that were acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the external distribution hh the external distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest within the meaning of sec_355 in controlled including any predecessor or successor of any such corporation ii immediately after the external distribution neither parent nor distributing nor controlled will be a disqualified_investment_corporation within the meaning of sec_355 plr-117996-12 jj kk no intercorporate debt will exist between parent and controlled at the time of or subsequent to the external distribution immediately before the external distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before publication of t d 1995_2_cb_147 and as currently in effect sec_1_1502-13 as published by t d further distributing's excess_loss_account with respect to the controlled stock if any will be included in income immediately before the external distribution see sec_1_1502-19 ll payments made in connection with all continuing transactions if any between parent and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm's length mm no two parties to the transaction are investment companies as defined in sec_368 and iv nn parent distributing controlled the shareholders and the preferred_stock and warrant holders will each pay their own expenses if any incurred in connection with the external distribution oo the income_tax_liability for the taxable_year in which investment_credit_property including any building to which sec_47 applies is transferred will be adjusted pursuant to sec_50 or a or sec_47 as in effect before amendment by public law title 104_stat_1388 if applicable to reflect an early disposition of the property rulings the contribution followed by the internal distribution will qualify as a reorganization within the meaning of sec_368 distributing and controlled will each be a_party_to_a_reorganization within the meaning of sec_368 no gain_or_loss will be recognized by distributing on the contribution sec_357 and sec_361 no gain_or_loss will be recognized by controlled on the contribution sec_1032 plr-117996-12 the basis controlled has in each asset received in the contribution will equal the basis of that asset in the hands of distributing immediately before the contribution sec_362 the holding_period controlled has in each asset received in the contribution will include the period during which distributing held that asset sec_1223 no gain_or_loss will be recognized by distributing on the internal distribution sec_361 no gain_or_loss will be recognized by and no amount will be included in the income of parent upon its receipt of the controlled stock and securities in the internal distribution sec_355 no gain will be recognized by parent on the external distribution sec_355 no gain_or_loss will be recognized by and no amount will be included in the income of the common_stock preferred_stock and warrants holders upon their respective receipt of the controlled stock and securities in the external distribution sec_355 the basis of the controlled shares and the distributing shares in the hands of parent immediately after the internal distribution will be the same as the basis in distributing shares held immediately before the internal distribution allocated in proportion to the fair_market_value of each in the manner described in sec_1_358-2 sec_358 b and c sec_1_358-1 the basis of the controlled shares and the parent shares in the hands of common_stock preferred_stock and warrants holders immediately after the external distribution will be the same as the basis in parent shares held immediately before the external distribution allocated in proportion to the fair_market_value of each in the manner described in sec_1_358-2 sec_358 b and c sec_1_358-1 the holding_period of the controlled common_stock received by the respective common_stock shareholders in the external distribution will include the holding_period of the parent stock on which the distribution is made provided that the shareholders held such parent common_stock as a capital_asset on the date of the external distribution sec_1223 plr-117996-12 the holding_period of the controlled preferred_stock and warrants received by the respective preferred_stock and warrant holders in the external distribution will include the holding_period of the parent preferred_stock and warrants on which the distribution is made provided that the shareholders and preferred_stock and warrant holders held such parent preferred_stock or securities as a capital_asset on the date of the external distribution sec_1223 earnings_and_profits if any will be allocated between distributing and controlled in accordance with sec_312 and sec_1_312-10 and sec_1_1502-33 earnings_and_profits if any will be allocated between parent and controlled in accordance with sec_312 and sec_1_312-10 and sec_1_1502-33 caveats 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 in particular no opinion is expressed regarding i the qualification of any options under sec_422 including the effect of the proposed amendment to such options and whether the substitution of outstanding options for new parent options and new controlled options held by an employee of distributing and controlled after the external distribution will constitute a modification extension or renewal of the options within the meaning of sec_424 ii sec_409a iii whether the controlled debt is characterized as debt or equity under sec_385 and iv the federal_income_tax consequences and effects of any transactions consummated under the continuing arrangements procedural statements this ruling is directed only to the taxpayer requesting it sec_6110 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 alternatively any taxpayer filing its return electronically may satisfy this requirement by plr-117996-12 attaching a statement to the return that provides the date and control number of this letter_ruling in accordance with the power_of_attorney on file in this office a copy of this ruling letter will be sent to the taxpayer and other authorized representatives sincerely _isaac w zimbalist_________ isaac w zimbalist senior technician reviewer branch office of associate chief_counsel corporate


of f i c e of c h i ef c ou n sel department of the treasury i n t e r n al r e v e n u e s e r v i c e w ashington d c date cc ita b4 conex-123311-09 number info release date uil the honorable christopher j dodd united_states senator lewis street suite hartford ct attention ------------ dear senator dodd this letter responds to your enquiry dated date submitted on behalf of your constituent ------------------------- she asked whether she can take the first-time_homebuyer_tax_credit for a purchase before the date effective date congress added sec_36 to the internal_revenue_code the code in section of the economic and housing recovery act of public law number stat to provide a credit to first-time homebuyers for purchases made in congress amended sec_36 in section of the american reinvestment and recovery tax act of public law number stat to provide different rules for purchases made in rules for home purchases on or after date and before date a first_time_homebuyer who purchased a home on or after date and before date can take a credit on his or her federal_income_tax return equal to percent of the purchase_price of the residence up to a maximum of dollar_figure taxpayers who take this credit for purchases made in must repay the credit in equal installments over fifteen years see former sec_36 sec_36 and sec_36 of the code rules for home purchases on or after date and before date for taxpayers who purchased their home on or after date and before date the law increases the maximum credit to dollar_figure taxpayers who take the credit for purchases made in and use the residence as their principal conex-123311-09 residence for at least three years beginning on the date of purchase are not required to repay the credit see sec_36 sec_36 and sec_36 of the code as amended because ----------------bought her residence on date before the effective date she does not qualify for either the or credit unfortunately the statute does not grant the internal_revenue_service the authority to expand the scope of the credit administratively i hope this information is helpful if you have any questions please contact ----------- ---- ---------- at -------------------- sincerely michael j montemurro branch chief office of associate chief_counsel income_tax accounting


tcmemo_2010_66 united_states tax_court kevin russell derby petitioner v commissioner of internal revenue respondent docket no filed date kevin russell derby pro_se michael s hensley for respondent memorandum findings_of_fact and opinion foley judge after concessions the issues for decision are whether derby inc correctly reported gross_receipts and cost_of_goods_sold whether derby inc is entitled to deductions relating to car and truck expenses and whether petitioner is liable for a sec_6662 a accuracy-related_penalty relating to findings_of_fact in petitioner incorporated derby inc derby his landscaping and construction business as an s_corporation during petitioner was the sole shareholder of derby at all relevant times derby maintained a checking account bank account with washington mutual bank and employed cheryl haimsohn of sdc tax and business services inc to maintain derby’s books_and_records ms haimsohn prepared and timely filed petitioner’s and derby’s federal_income_tax returns collectively the returns on its return derby reported dollar_figure of gross_receipts dollar_figure of cost_of_goods_sold and dollar_figure of total income in addition derby deducted dollar_figure as car and truck expenses in the internal_revenue_service conducted an audit of the returns respondent’s revenue_agent steven oloya was assigned to the case during the examination mr oloya performed a bank_deposits and cash expenditures analysis to reconstruct derby’s income on date respondent issued petitioner a 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure notice_of_deficiency relating to in the notice_of_deficiency respondent determined that derby underreported gross_receipts by dollar_figure in addition respondent disallowed for lack of substantiation dollar_figure of cost_of_goods_sold and dollar_figure of deductions relating to car and truck expenses respondent further determined a dollar_figure deficiency and a dollar_figure sec_6662 accuracy-related_penalty on date petitioner while residing in california filed his petition with the court opinion petitioner as derby’s sole shareholder is required to take into account all of derby’s items of income loss deduction or credit see sec_1363 sec_1366 respondent determined that derby had dollar_figure of unreported gross_receipts relating to respondent as part of his analysis evaluated derby’s cash expenditures and contends that dollar_figure of the expenditures were made with income not previously deposited respondent and petitioner agree that petitioner had dollar_figure of cash expenditures but respondent contends that this amount was never taken into account as gross_receipts petitioner however established that the dollar_figure had previously been deposited was reported and was subsequently used to make cash expenditures therefore we reject respondent’s determination with respect to dollar_figure of the alleged gross_receipts cost_of_goods_sold is an offset to gross_receipts in determining gross_income 88_tc_654 sec_1_61-3 income_tax regs respondent disallowed for lack of substantiation dollar_figure of derby’s cost_of_goods_sold petitioner however established that derby is entitled to dollar_figure of the cost_of_goods_sold disallowed by respondent respondent also disallowed for lack of substantiation a portion of derby’s deductions relating to car and truck expenses with respect to the disallowed deductions petitioner has not met the sec_274 substantiation requirements and thus we sustain respondent’s determination see sec_162 sec_274 sec_280f sec_1_274-5t temporary income_tax regs fed reg date respondent further determined that petitioner is liable for a sec_6662 accuracy-related_penalty sec_6662 imposes a 20-percent penalty on the portion of an underpayment_of_tax which is attributable to a substantial_understatement of 2pursuant to sec_7491 petitioner has the burden_of_proof unless he introduces credible_evidence and satisfies other requirements that would shift the burden relating to that issue to respondent see rule a our conclusions however are based on a preponderance_of_the_evidence and thus the allocation of the burden_of_proof is immaterial see 124_tc_95 income_tax see sec_6662 petitioner substantially understated his income_tax see sec_7491 116_tc_438 sec_6664 however provides that no penalty shall be imposed if there was reasonable_cause for the underpayment and the taxpayer acted in good_faith ms haimsohn maintained derby’s books_and_records and prepared petitioner’s and derby’s returns given petitioner’s inexperience with and minimal knowledge of tax law we conclude that petitioner took reasonable efforts to assess his proper tax_liability and reasonably relied on ms haimsohn’s expertise see 89_tc_849 affd 904_f2d_1011 5th cir affd 501_us_868 sec_1_6664-4 income_tax regs thus petitioner acted in good_faith had reasonable_cause for the underpayment and is not liable for a sec_6662 accuracy-related_penalty contentions we have not addressed are irrelevant moot or meritless to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number -------------------------- --------------------------------------------------------- ----------------------------------------------------- ------------------------------------------ ---------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------------- id no -------------- ----------------- telephone number ---------------------- refer reply to cc ita b04 plr-138563-12 date date ty date dear ------------------- this letter responds to your request dated date for a ruling concerning whether --------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- 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--------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- applicable law and analysis sec_61 of the internal_revenue_code generally provides that gross_income means all income from whatever source derived including but not limited to ------------------------------------------------------------------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- plr-138563-12 compensation_for services including fees and similar items gross_income derived from business gains derived from dealings in property and interest sec_162 provides a deduction for all ordinary and necessary business_expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business sec_461 provides that the amount of any deduction or credit is taken for the taxable_year that is the proper taxable_year under the method_of_accounting used in computing taxable_income sec_1_461-1 of the income_tax regulations provides that under an accrual_method of accounting a liability is incurred and generally is taken into account for federal_income_tax purposes in the taxable_year in which all events have occurred that establish the fact of the liability the amount of the liability can be determined with reasonable accuracy and economic_performance has occurred with respect to the liability see also sec_1_446-1 sec_1_461-4 provides guidance with respect to certain liabilities for which payment is economic_performance ie payment liabilities sec_1_461-4 provides in part that in the case of liabilities described in paragraphs g through g of this section economic_performance occurs when and to the extent that payment is made to the person to which the liability is owed sec_1_461-4 provides that in the case of a taxpayer’s liability for which economic_performance rules are not provided elsewhere economic_performance occurs as the taxpayer makes payments in satisfaction of the liability to the person to which the liability is owed sec_1_461-5 provides that except as otherwise provided in paragraph c of this section a taxpayer using an accrual_method of accounting may adopt the recurring_item_exception described in paragraph b of this section as a method_of_accounting for one or more types of recurring items incurred by the taxpayer see also sec_461 sec_1_461-5 provides that the recurring_item_exception does not apply to any liability of a taxpayer described in among others paragraphs paragraph g other liabilities of sec_1_461-4 in determining what constitutes income the supreme court has stated that sec_61 brings within the definition of income any undeniable accessions to wealth clearly realized and over which the taxpayers have complete dominion 348_us_426 see also burke v 504_us_229 the court has also consistently held that when a taxpayer acquires earnings lawfully or unlawfully without the consensual recognition expressed or implied of an obligation to repay and without restriction as to their disposition ‘he has plr-138563-12 received income ’ 366_us_213 quoting 286_us_417 in a more recent case the court has held that in determining whether a taxpayer enjoys ’complete dominion’ over a given sum the crucial point is not whether his use of the funds is unconstrained during some interim period the key is whether the taxpayer has some guarantee that he will be allowed to keep the money 493_us_203 when a taxpayer receives money or property for someone else’s use or benefit such receipt is not income to the taxpayer in revrul_74_321 1974_2_cb_16 a regulated farm credit production association received credit insurance premiums from member borrowers for payment to an insurer the association also received dividends from the insurer that were used for the benefit of members to reduce future premiums the service held that neither the payments nor the dividends received by the association are includible in the income of the association because the payments were earmarked and retained for the benefit of the member borrowers not the association from the time received until expended see also 14_tc_965 acq in result 1974_2_cb_1 concluding that a manufacturer’s receipt of funds from participating bottlers for a national advertising campaign was includible in gross_income because the funds benefitted the payors not the manufacturer similarly if a taxpayer receives a payment under a binding legal_obligation to remit the payment to another or as an agent receiving amounts on behalf of a principal the taxpayer is deemed to be a mere conduit of those funds and is not required to include the payment in income see revrul_76_479 1976_2_cb_20 revrul_69_274 1969_1_cb_36 revrul_65_282 1965_2_cb_21 and revrul_58_220 1958_1_cb_26 for instances in which the service has held that a taxpayer does not have gross_income upon receipt of a payment because the taxpayer receives the payment as a conduit for the ultimate recipient --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- the service acquiesced only in the result of seven-up co on the ground that the correct party to be charged with the income and deductions for the advertising was an unincorporated association consisting of the manufacturer and bottlers the action on decision states that the entity has income in the amounts contributed by the bottlers because it has the power to exercise day-to-day business judgments and to control the details respecting the manner in which the funds shall be expended in achieving the overall purpose of the fund aod lexi sec_264 date ----------------------- 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--------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------- this is supported by revrul_74_321 which concluded that since a credit association acted as an agent for borrowers to collect and pay insurance premiums and to hold insurance dividends it therefore is not required to include the payments by the borrowers or the insurance dividends in its gross_income and it is not entitled to a deduction for the annual premium payment emphasis added in contrast expenditures are deductible in circumstances where a determination is made that the taxpayer is not an agent or conduit for the ultimate recipient see revrul_66_377 1966_2_cb_21 university faculty members who engage in private practice must report fees as income since they were not acting as agents of university but may deduct fees they were contractually required to turn over to the university under sec_162 plr-138563-12 --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------- rulings ----------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------ -------------------- ------------------------------------------------------------------------------------------------------------ ---------------------------------------------------------------------------- disclaimers except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent you must attach a copy of this letter to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely michael j montemurro branch chief branch income_tax accounting internal_revenue_service cc attn industry director lb_i f financial services plr-138563-12 broadway 12th floor new york ny --------------------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------- ----------------------------------------


internal_revenue_service number release date index number ------------------- ----------------------------- ----------------------------------- ------------------------ ---------------------------------------- -------------------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ------------- telephone number --------------------- refer reply to cc ita b04 plr-125724-06 date date legend ------------------- husband ------------------------ wife -------------------------------- corporation -------------------------- date ----------------------- date ------------- date ------------------ date x --------- ----------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------- y z court dear --------------------------------------------- this responds to your joint request dated date for a private_letter_ruling regarding sec_1041 and sec_2512 of the internal_revenue_code code specifically you request whether sec_1041 will apply to the proposed transfer by husband to wife of certain shares in corporation and whether sec_2512 will apply to the proposed transfer facts on date husband and wife executed a separation and property settlement agreement first agreement providing for a division of property in settlement of their --- --- ------------------------------------------------------------------ plr-125724-06 marital and property rights on date the first agreement was approved by the court and husband and wife were granted a divorce on that date at the time of the divorce husband was president and chief_executive_officer of corporation a publicly traded company and he owned approximately of the outstanding shares of corporation paragraph f of the first agreement obligates husband to include in his last will and testament a provision that if wife survives husband then wife is to receive a certain number of shares of common_stock in corporation determined on a formula described in paragraph f paragraph f provides an alternative bequest of cash or other_property if husband does not own any corporation shares at his death husband now wishes to eliminate the obligation regarding the transfer of corporation stock at his death on date he began negotiations with wife regarding the transfer of corporation stock during his lifetime on date husband and wife executed a document entitled agreement in partial satisfaction of contingent claim second agreement under the second agreement when the second agreement becomes effective husband will transfer to wife of the number of shares in corporation that would be payable under paragraph f of the first agreement if husband died on the effective date of the second agreement in exchange wife agrees to release and extinguish one-half of her claim under paragraph f such that if she survives husband the number of corporation shares that husband’s estate would be obligated to pay wife under paragraph f would be reduced by one-half the second agreement is conditioned on receipt of a favorable ruling from the internal_revenue_service on the rulings requested in this private_letter_ruling request the second agreement provides that in the event the service issues a favorable ruling the parties will submit the second agreement to the court for approval to amend first agreement husband is currently age and wife is currently age it has been represented that on the date the second agreement was executed husband and wife were in good health that husband and wife have been negotiating at arm’s length in arriving at the terms of the second agreement that each has been represented by independent legal counsel of his or her own selection and that there is no agreement express or implied regarding how wife will use the property transferred to her pursuant to the second agreement husband and wife request two rulings that the proposed transfer of corporation stock will not result in taxable_income or gain to either husband or to wife and that the proposed transfer of corporation stock will not result in a taxable gift by either husband or wife plr-125724-06 law and analysis issue 1-income tax consequences on transfer of corporation stock sec_1041 of the code provides that no gain of loss is recognized on the transfer of property from an individual to or in trust for the benefit of a spouse or a former spouse but only if the transfer is incident to the divorce sec_1041 of the code provides that in the case of any transfer of property described in sec_1041 the property shall be treated as acquired by the transferee by gift and the basis of the transferee in the property shall be the adjusted_basis of the transferor sec_1041 of the code provides that for purposes of sec_1041 a transfer of property is incident to the divorce if the transfer occurs within year after the date on which the marriage ceases or is related to the cessation of the marriage q a-7 of sec_1_1041-1tof the temporary income_tax regulations provides that a transfer of property is treated as related to the cessation of the marriage if the transfer is pursuant to a divorce_or_separation_instrument as defined in sec_71 of the code and the transfer occurs not more than six years after the date the marriage ceases the regulations provide that a divorce_or_separation_instrument includes a modification or amendment to the decree or instrument the regulations further provide that any transfer not pursuant to a divorce_or_separation_instrument and any transfer occurring more than six years after the cessation of the marriage is presumed to be not related to the cessation of the marriage the regulations allow a taxpayer to rebut the presumption by showing that the transfer was made to effect the division of property owned by the former spouses at the time of the cessation of the marriage sec_71 of the code provides that the term divorce_or_separation_instrument means a decree of divorce or separate_maintenance or a written instrument incident to such a decree a written_separation_agreement or a decree not described in subparagraph requiring a spouse to make payments for the support or maintenance of the other spouse in the present case it has been represented that the parties will elect to have the provisions sec_1041 apply under the first agreement the parties originally contemplated that husband would make a testamentary gift of corporation stock not an inter_vivos gift of corporation stock to wife the facts submitted and the representations made indicate that the parties will modify the first agreement to effectuate the transfer of property owned at the time of the cessation of the marriage with court approval under the temporary regulations a divorce_or_separation_instrument includes a modification or amendment to such decree or instrument consequently any order from the divorce court that modifies an original divorce_or_separation_instrument must be considered plr-125724-06 related to the cessation of the marriage even if the order occurs years after the divorce in addition under the regulations a transfer made to effect the division of property owned by the former spouses at the time of the cessation of the marriage is considered related to the cessation of the marriage accordingly based on facts of the case and the representation made we conclude that the proposed transfer by husband to wife of corporation stock owned by the parties at the time of the cessation of the marriage will qualify for non-recognition under sec_1041 as a transfer of property incident_to_divorce thus the proposed transfer of corporation stock will not result in taxable_income or gain to either husband or to wife issue 2-gift tax consequences of transfer of corporation stock sec_2511 of the code provides that the gift_tax shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2512 of the code provides that where property is transferred for less than an adequate_and_full_consideration in money_or_money's_worth the amount by which the value of the property exceeds the value of the consideration shall be deemed a gift sec_2516 of the code provides that where a husband and wife enter into a written_agreement relative to their marital and property rights and divorce occurs within the three-year period beginning on the date one-year before the agreement is entered into whether or not the agreement is approved by the divorce decree any transfers of property or interests in property made pursuant to the agreement to either spouse in settlement of his or her marital or property rights or to provide a reasonable allowance for the support of issue of the marriage during minority shall be deemed to be transfers made for a full_and_adequate_consideration_in_money_or_money's_worth prior to amendment by sec_425 of the deficit_reduction_act_of_1984 the act and effective before date sec_2516 of the code provided that where a husband and wife enter into a written_agreement relative to their marital and property rights and divorce occurs within two years thereafter whether or not such agreement is approved by the divorce decree any transfers of property or interests in property made pursuant to the agreement to either spouse in settlement of his or her marital or property rights or to provide a reasonable allowance for the support of issue of the marriage during minority shall be deemed to be transfers made for a full_and_adequate_consideration_in_money_or_money's_worth the act expanded the application of sec_2516 to include agreements entered into within one year after the divorce occurs sec_25_2516-1 of the gift_tax regulations provides that transfers of property or interests in property made under the terms of a written_agreement between spouses in settlement of their marital or property rights are deemed to be for an adequate and full plr-125724-06 consideration in money_or_money's_worth whether or not the agreement is approved by a divorce decree if the spouses obtain a final decree of divorce from each other within two years after entering the agreement sec_2053 of the code provides that the value of the taxable_estate shall be determined by deducting from the value of the gross_estate such amounts for claims against the estate as shall be allowable by the laws of the jurisdiction under which the estate is being administered under sec_2053 the deduction allowed for claims against the estate when founded on a promise or agreement is limited to the extent the claim was contracted bona_fide and for an adequate_consideration in money or moneys worth sec_2043 of the code provides a general_rule that for estate_tax purposes the relinquishment or promised relinquishment of marital rights in a decedent's property or estate is not considered to any extent a consideration in money_or_money's_worth however sec_2043 provides effective in the case of estates of decedents dying after date that for purposes of sec_2053 a transfer of property that satisfies the requirements of sec_2516 shall be considered to be made for an adequate_consideration in money_or_money's_worth see also revrul_60_160 1960_1_cb_374 regarding the deduction of amounts paid pursuant to a property settlement agreement to which sec_2516 does not apply in the present case husband and wife executed the first agreement relative to their marital and property rights on date and on date the court issued the decree of divorce therefore husband's obligation to make the testamentary transfer under the agreement is within the purview of sec_2516 of the code further under sec_2043 the transfer of stock to be made to wife at husband's death pursuant to paragraph f of the settlement agreement would be treated as made for adequate_and_full_consideration in money_or_money's_worth for purposes of sec_2053 thus if husband were to die survived by wife the value of the stock subject_to the transfer required under paragraph f would be deductible under sec_2053 as a claim against the estate for estate_tax purposes as discussed above under the terms of second agreement husband agrees to transfer currently to wife of the number of shares in corporation that would otherwise be payable under paragraph f if husband died on the agreement effective date in exchange wife is relinquishing her right to receive on husband’s death provided she is then living one-half of the number of shares otherwise payable pursuant to paragraph f as noted above the payments to be made pursuant to paragraph f of settlement agreement come within the purview of sec_2516 and therefore would be treated as made for adequate_and_full_consideration for gift and estate_tax purposes plr-125724-06 husband is aged and wife is aged and it has been represented that both were in good health on the date the second agreement was executed that the second agreement was the product of arm’s length negotiation and that both parties have been represented by counsel according in view of the terms of the settlement and based on the facts submitted and representation made we conclude that the proposed transaction will constitute transfers by husband and wife for adequate_consideration that will not result in a taxable gift by either husband or wife compare revrul_79_118 1979_1_cb_315 concluding under the circumstances presented that additional_amounts paid pursuant to the donor's voluntary agreement to increase support payments made under a separation agreement constituted taxable_gifts by the donor the rulings contained in this letter are based upon information and representations submitted by the taxpayers and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination caveats a copy of this letter must be attached to any income_tax return to which it is relevant we enclose a copy of the letter for this purpose also enclosed is a copy of the letter_ruling showing the deletions proposed to be made in the letter when it is disclosed under sec_6110 of the code except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used as precedent donna welch senior technician reviewer branch office of associate chief_counsel income_tax accounting sincerely


number release date internal_revenue_service index number ---------------------------- ------------------------------------------------- ---------------------------- ----------------------- ----------------------------- ------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ------------- telephone number -------------------- refer reply to cc fip plr-105345-06 date date ------------------ ---------------------- ------------------------------ ---------------------------------- legend taxpayer ---------------------------------------------------------------------------- foreign parent insurance subsidiary insurance manager jurisdiction f foreign_country g h i j k l reinsurer m ---------------------------------------------------------------------------------------------------------- --------------------------------- ------------------------------ ------------------------------ ----------------------- ---------------------- --------------- ----------- -------------------------------------------------------------- -------------- ---------------- ------------------ plr-105345-06 jurisdiction n insurance subsidiary o foreign_country p subsidiary ---------------------------------------------------------------------------- subsidiary ---------------------------------------------------------------------------- subsidiary ---------------------------------------------------------------------------- subsidiary ---------------------------------------------------------------------------- subsidiary ---------------------------------------------------------------------------- subsidiary ---------------------------------------------------------------------------- subsidiary ---------------------------------------------------------------------------- subsidiary --------------------- ---------------------------------------------------------------------------- subsidiary ---------------------------------------------------------------------------- subsidiary ---------------------------------------------------------------------------- subsidiary ---------------------------------------------------------------------------- subsidiary ---------------------------------------------------------------------------- subsidiary ---------------------------------------------------------------------------- subsidiary ------------------ --------------------------------------------------- ----------------------------------------- -------------------------------- ---------------------------- ------------------------------------- ----------------------------------------------------- ---------------------------------------------- -------------------------------------- ------------------------------------- ---------------------------------------- --------------------------------------------- ---------------------------------- ------------------------------------------ -------------------------------------------- -------------------------------------------- plr-105345-06 ---------------------------------------------------------------------------- subsidiary ---------------------------------------------------------------------------- subsidiary ---------------------------------------------------------------------------- subsidiary ---------------------------------------------------------------------------- subsidiary -------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------- subsidiary ---------------------------------------------------------------------------- subsidiary ---------------------------------------------------------------------------- subsidiary --------------------- ---------------------------------------------------------------------------- subsidiary ---------------------------------------------------------------------------- number w number x number y amount z year year year year ---------------------------------------- ------------------------------ --------------------------- ------------------ ------- ------- ------- ------- ----- ----- -- plr-105345-06 dear -------------------- this is in reply to a letter dated date submitted on behalf of taxpayer and certain of its subsidiaries requesting a ruling that for purposes of determining the deduction for business_expenses under sec_162 of the internal_revenue_code the amounts paid for product_liability and other coverages by taxpayer and its subsidiaries to an affiliate are treated as insurance premiums additional information was submitted in letters dated march and date taxpayer is a wholly owned subsidiary of foreign parent foreign parent which is incorporated in foreign_country g is a world leader of h products foreign parent has diverse business operations that may be categorized into three broad areas the first area involves the creation development manufacture and marketing of a wide range of products that restore maintain and improve h the second involves the discovery development manufacture and marketing of i products such as j the third area involves the development manufacture and marketing of k foreign parent operates through number w affiliates in number x countries within the united_states foreign parent's operations are conducted by taxpayer taxpayer operates through corporate operating subsidiaries subsidiary through which join in the filing of taxpayer's consolidated_return as a result of a significant loss event in year impacting the insurance industry a wave of asbestos claims and high profile i litigation losses insurers increased the premiums for excess liability insurance and drastically reduced the coverage they were willing to provide the increasing difficulty of obtaining insurance relating to i risks was commonly reported in insurance publications foreign parent suffered from the effects of this changing insurance market when at the end of year foreign parent's insurers cancelled foreign parent's insurance program as a result foreign parent was forced to secure insurance on significantly less favorable terms confronted with continually escalating expenses and risk exposure foreign parent began to explore alternatives to the increasing risk-adverse insurance markets for its worldwide insurance needs including the creation of an insurance subsidiary plr-105345-06 in late year insurance subsidiary a jurisdiction f insurance_company was formed as an indirect wholly owned subsidiary of foreign parent to insure its worldwide operations insurance subsidiary is subject_to l insurance regulation in jurisdiction f and is adequately capitalized under l law principally the risks covered are product_liability and other commercial risks of foreign parent's diverse group of subsidiaries and affiliates including foreign parent's united_states operations conducted by taxpayer and its subsidiaries neither taxpayer nor its subsidiaries has an ownership_interest in insurance subsidiary subsequent to its initial formation insurance subsidiary is funded solely through the receipt of premiums and the return on its investments typically insurance subsidiary issues a minimum of four claims-made policies annually each providing insurance for losses in excess of a specified threshold the policies cover product_liability and other common commercial risks of the insureds including property damage and business interruption the risks covered by the insurance subsidiary's policies are similar to the risks covered by other commercial insurance_companies underwriting the foreign parent's group however the coverage is in different layers of the policies issued annually one typically is issued to foreign parent as the named insured and covers the losses of foreign parent and all its subsidiaries and affiliates worldwide including those in the united_states the other policies issued by insurance subsidiary provide that taxpayer is a named insured the policies explicitly state that all the subsidiaries of named insureds are insureds under the policies the limits on the policies were chosen to reflect the level of insurance that was in place through year that is foreign parent wanted to be restored to its year position of having on average number y dollars of insurance coverage for each dollar_figure in sales insurance subsidiary's underwriting operations are managed by insurance manager insurance manager is an independent third party which is a leading provider of risk management services insurance and reinsurance brokerage and other services the risks inherent in insurance subsidiary's policies were found to be reasonable taking into consideration the balanced spread of risk of geographic exposure and product diversity insurance subsidiary has also entered into reinsurance agreements with reinsurer m a jurisdiction n insurance_company which is also a wholly owned indirect subsidiary of foreign parent neither taxpayer nor subsidiarie sec_1 through has an ownership_interest in reinsurer m currently insurance subsidiary bills subsidiarie sec_1 through directly for their respective portions of the premiums the billing is accomplished on the basis of a l from time to time promulgates directives concerning various aspects of insurance_company regulation all member states are required to comply with these directives the member states do so by passing local legislation and regulations which comply with the l directives while there is some variation among the member states' interpretations they all comply with the directives under this regime jurisdiction f legislation and regulation comply with all l insurance directives plr-105345-06 percentage of sales insurance subsidiary receives payment of the amount of the premium billed via wire transfers which is the equivalent of cash settlements the premiums were calculated with the assistance of insurance manager and were also based upon the cost of insurance provided by unrelated commercial insurance_companies determined from quotes foreign parent had been recently able to obtain from third party insurers insurance subsidiary has had claims activity on its policies for example in year it was notified of several claims by subsidiary in year it paid a substantial claim in the gross amount of amount z to subsidiary however percent of that claim was reimbursed by reinsurer m insurance subsidiary's operations are independent of the operations of foreign parent taxpayer and subsidiarie sec_1 through for example insurance subsidiary manages its own investments which are investment grade fixed-income instruments eg those issued by the united_states treasury and other governmental entities and other_securities of issuers unrelated to foreign parent and its affiliates except for an investment in all of the stock of insurance subsidiary o which is an insurance_company licensed under the laws of foreign county p insurance subsidiary does not invest in affiliates further insurance subsidiary does not lend money to foreign parent or any of its subsidiaries in connection with this ruling_request it is represented as follows insurance subsidiary's obligations are not guaranteed in any form by foreign parent or any of its subsidiaries insurance subsidiary is adequately capitalized considering its risk exposures and reinsurance coverage no one company of the number w insured companies has more than percent of the total risks covered by insurance subsidiary the amount of premiums_paid by taxpayer and its subsidiaries reflect commercial rates for the insurance involved sec_162 of the code provides in part that there shall be allowed as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business no portion of the value of the stock of insurance subsidiary o was in fact included by insurance subsidiary for purposes of satisfying its jurisdiction f insurance_company solvency requirements plr-105345-06 sec_1_162-1 of the income_tax regulations provides in part that among the items included in business_expenses are insurance premiums against fire storms theft accident or other similar losses in the case of a business neither the code nor the regulations define the term_insurance or insurance_contract in 312_us_531 however the united_states supreme court explained that in order for an arrangement to constitute insurance for federal_income_tax purposes both risk shifting and risk_distribution must be present risk shifting occurs if a person facing the possibility of an economic loss transfers some or all of the potential loss to the insurer see revrul_92_93 1992_2_cb_45 if an insured has shifted its risk to the insurer then a loss by or a claim against the insured does not affect the insured because that loss is offset by the proceeds of an insurance payment 811_f2d_1297 9th cir risk_distribution allows the insurer to reduce the possibility that a single costly claim will exceed the amount taken in as premiums and set_aside for the payment of such a claim by assuming numerous relatively small independent risks that occur randomly over time the insurer smooths out losses to match more closely its receipt of premiums 811_f2d_1297 9th cir risk_distribution necessarily entails a pooling of premiums so that a potential insured is not in significant part paying for its own risks see 881_f2d_247 6th cir in humana the sixth circuit held that arrangements between the parent_corporation and its insurance subsidiary did not constitute insurance for federal_income_tax purposes the court also held that arrangements between the insurance subsidiary and several dozen other subsidiaries of the parent operating an even greater number of hospitals qualified as insurance for federal_income_tax purposes because the requisite risk shifting and risk_distribution were present further in 40_fedclaims_42 the court of federal claims concluded that an arrangement between the captive insurance subsidiary and each of the operating subsidiaries of the same parent constituted insurance for federal_income_tax purposes in the present case number w covered companies shifted to insurance subsidiary their product_liability and other common commercial risks these risks were insurance risks and the arrangements were regulated as insurance and constituted insurance in the commonly accepted sense insurance subsidiary distributed these risks by accepting premiums determined at arms length from those numerous insureds and agreeing to indemnify those insureds in the event of loss accordingly the arrangements qualify as insurance contracts for federal_income_tax purposes see revrul_2002_90 2002_2_cb_985 based solely on the information submitted and the representations made we conclude that for purposes of determining the deduction for ordinary and necessary business_expenses under sec_162 the amounts paid for product_liability plr-105345-06 and other coverages by taxpayer and its operating subsidiaries to insurance subsidiary are treated as insurance premiums except as expressly provided herein no opinion is expressed under the provisions of any other section of the code or regulations no opinion is expressed as to whether or not the amount of premiums charged by insurance subsidiary has been calculated correctly no opinion is expressed as to whether insurance subsidiary or reinsurer m is an insurance_company for federal_income_tax purposes this ruling letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter should be attached to any federal_income_tax return to which it is relevant plr-105345-06 in accordance with the power_of_attorney on file in this office we are sending a copy of this letter to your authorized representative sincerely yours s mark smith chief branch office of associate chief_counsel financial institutions products


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 b02 plr-137743-09 date december legend x ---------------------------------------------------------------------- ----------------------------- y -------------------------------- ----------------------------- state ------------- date -------------------------- year1 ------- year2 ------- dear ----------- this responds to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to file an entity classification election to be classified as a disregarded_entity for federal tax purposes the information submitted states that x is a limited_liability_company formed under the laws of state on date x is owned entirely by y x is not classified as a corporation under sec_301_7701-2 or x intended to be classified as a disregarded_entity effective on date however x did not timely file form_8832 entity classification election electing to be treated as a disregarded_entity instead x inadvertently elected to be treated as an association taxable as a plr-137743-09 corporation effective date in year1 and year2 x and y filed their income_tax returns consistent with x being a disregarded_entity sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes elections are necessary only when an eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification sec_301_7701-3 provides that unless the entity elects otherwise a domestic eligible_entity is a partnership if it has two or more members sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing form_8832 entity classification election with the appropriate service_center under sec_301 c iii this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed and cannot be more than months after the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election 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 the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied accordingly x is granted an extension of time of days from the date of this letter to file a form_8832 entity classification election with the appropriate service_center and elect to be treated as a disregarded_entity for federal tax purposes effective beginning date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose plr-137743-09 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 internal_revenue_code and the regulations thereunder 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 while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination in accordance with the power_of_attorney on file with this office copies of this letter are being sent to your authorized representatives sincerely curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------------------------ -------------------------------------------------------- ------------------------------ ------------------ ----------------------------------- in re ------------------------------------------ ------------------ ------------------------------ ------------------ ---------------------------- ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc ita b5 plr-128509-07 date date this is in reference to a form_1128 application to adopt change or retain a dear taxpayer tax_year submitted on behalf of the above-named taxpayer requesting permission to change its annual_accounting_period for federal_income_tax purposes from a taxable_year ending june to a taxable_year ending december effective for the tax_year beginning date and ending date the taxpayer has requested that the form_1128 be considered timely filed under the authority contained in sec_301_9100-3 of the procedure and administration regulations the taxpayer's form_1128 requesting a change in accounting_period to a tax_year ending date was due on or before date but was not timely filed however the form and the request for discretionary administrative relief were filed within days of such due_date the information furnished shows that the taxpayer intended to make the change and to file form_1128 on a timely basis due to an error or misunderstanding however the form was not timely filed the error was not due to any lack of due diligence or prompt action on the part of the taxpayer sec_1_442-1 of the income_tax regulations provides that in order to secure the commissioner's consent to a change in annual_accounting_period the taxpayer must file an application on form_1128 with the commissioner within such time and in such manner as is provided in administrative procedures published by the commissioner but for a timely filing the taxpayer’s form_1128 would be subject_to the automatic consent procedures of revproc_2006_45 2006_45_irb_851 and due on or before the due_date including extensions of the return of tax required for the short_period date sec_301_9100-3 of the regulations provides that requests for extensions of based on the facts and information submitted and the representations made it is plr-128509-07 time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions such as the instant case must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government held that the taxpayer has acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government accordingly the requirements of the regulations for the granting of relief have been satisfied in this case and taxpayer's late-filed form_1128 requesting permission to change to a tax_year ending december effective for the tax_year beginning date is considered timely filed the taxpayer must file a federal_income_tax return for the short_period necessary to effect the change within days of the date of this ruling a copy of this ruling should be attached to that return furnished by the taxpayer and is limited to the filing of form_1128 except as specifically addressed herein no opinion is expressed regarding the tax treatment of the subject transaction under the provisions of any other sections of the code or regulations that may be applicable thereto this office has not verified any of the material submitted in support of the requested ruling verification of factual information representations and other data is within the examination jurisdiction of the taxpayer's irs industry director the ruling contained in this letter is based upon facts and representations a copy of this letter_ruling and taxpayer's form_1128 are being forwarded to the service_center where the taxpayer files its federal_income_tax returns with instructions that the form_1128 be considered timely filed and processed in accordance with established procedures under revproc_2006_45 plr-128509-07 this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent sincerely yours s george f wright george f wright senior technician reviewer branch office of associate chief_counsel income_tax accounting enclosures copy of this letter copy for sec_6110 purposes ------------------------------------------- --------------------------------------- ---------------------------------- ------------------------------------ ----------------------------------


department of the treasury internal_revenue_service washington d c office of the chief_counsel date number info release date uil the honorable amy klobuchar united_states senate washington dc dear senator klobuchar cc ita b04 conex-116329-10 am responding to your letter of date on behalf of your constituent he asked why money that he could not pay to his credit card company is income to him for federal_income_tax purposes as you requested responded directly to response lam enclosing a copy of my hope this information is helpful if you need further assistance please call me or at sincerely michael j montemurro chief branch office of associate chief_counsel income_tax accounting enclosure department of the treasury internal_revenue_service washington d c date cc ita b04 conex-116329-10 office of the chief_counsel uil dear am responding to your inquiry of date to senator amy klobuchar who asked me to respond directly to you you asked why money that you could not pay back to your credit card company is considered income for federal_income_tax purposes hope the following general information is helpful congress has provided that gross_income includes all income from whatever source derived including income_from_discharge_of_indebtedness sec_61 of the internal_revenue_code code a taxpayer who receives a cash payment generally must include it in income by contrast a taxpayer who receives cash through a loan does not recognize the receipt of the cash as income because the taxpayer has an offsetting obligation to repay the cash if however the taxpayer’s obligation to repay the cash is cancelled either formally or constructively through noncollection the taxpayer has income because the reason for excluding the receipt of the cash from income that is the obligation to repay no longer exists a taxpayer who purchases property with a credit card is like a taxpayer who purchases property with proceeds of a cash loan does not include the value of the property in income because the taxpayer has an offsetting obligation to pay the credit card company for the extension of credit that is the loan credit extended then the taxpayer must recognize the income at the time of the cancellation if the credit card company later cancels the taxpayer’s obligation to repay the thus a taxpayer who buys property on credit congress however has provided certain exclusions for discharge_of_indebtedness income for example a debtor who is insolvent immediately before the discharge of the debt can exclude discharge_of_indebtedness income to the extent he or she is insolvent sec_108 of the code a taxpayer is insolvent to the extent that his or her liabilities exceed the fair_market_value of his or her assets sec_108 conex-116329-10 if you have any questions please contact identification_number at sincerely michael j montemurro chief branch office of associate chief_counsel income_tax accounting cc the honorable amy klobuchar


o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date --------------------------- number release date conex-101217-16 uil the honorable tom emmer member u s house of representatives quaday avenue ne otsego mn attention dear representative emmer i am responding to your inquiry dated date on behalf of your constituents ---------------------------------------------------- about contributions to a health_savings_account hsa the question from your constituents is about the maximum hsa contribution for the year they reach age you can find the rules covering contributions for hsas in sec_223 of the internal_revenue_code we published the contributions limits for in revproc_2015_30 according to revproc_2015_30 for calendar_year the annual_limit on contributions for an individual with self-only coverage under a high_deductible_health_plan is dollar_figure for calendar_year the annual_limit on contributions for an individual with family_coverage under a high_deductible_health_plan is dollar_figure under sec_223 the amount of the maximum hsa contribution deduction in the year an individual reaches age is prorated based on the number of months that the individual is an eligible_individual in particular the maximum contribution is based on the number of months that the person in not enrolled in medicare assuming that the and no disqualifying coverage during for the months that they have family hdhp coverage before the wife enrolls in medicare they would be allowed an hsa contribution of dollar_figure dollar_figure x that could be divided between the couple’s hsas however they agree in addition the spouse turning in april would be allowed a catch-up contribution of dollar_figure dollar_figure x into her hsa the spouse turning in have coverage by a high_deductible_health_plan hdhp -------------- conex-101217-16 october assuming he continues with self-only hdhp coverage would be allowed an additional hsa contribution of dollar_figure dollar_figure x also that spouse would be allowed a catch-up contribution of dollar_figure dollar_figure x into his hsa i hope this information is helpful if you have any questions please call me at --------------------- -------------------- ----------------- or at sincerely christine ellison acting chief health and welfare branch office of associate chief_counsel tax exempt and government entities