internal_revenue_service te_ge technical_advice_memorandum release number release date date uil area manager - taxpayer's name taxpayer's address taxpayer's identification_number years involved conference held legend h c s x issues whether funds derived by t a state-chartered credit_union described in sec_501 of the internal_revenue_code from the following activities should be treated as unrelated_business_taxable_income under sec_511 of the internal_revenue_code p o v o sale of cancer insurance members financial services program mfs program sale of car warranties sale of credit life and credit disability insurance e f sale of collateral protection insurance cpi sale of checks facts established in t is a state-chartered credit_union which is recognized as exempt from federal_income_tax under sec_501 of the internal_revenue_code code as an organization described in sec_501 t's board_of directors supervisory committee and loan committee are comprised entirely of elected members of the credit_union who serve on a voluntary basis without compensation membership in t i employees or retirees of u and five branches ii employees of select companies in those areas that have not been able to form their own credit_union iii individuals who live work worship or attend school in v and iv family members of a t member is limited to t’s purposes as stated in its articles of incorporation are to promote thrift and provide low cost credit for its members t’s activities include accepting deposits from and maintaining the accounts and savings of its members these deposit accounts include savings or share accounts on which members earn periodic dividends credited to the accounts and share draft accounts which are transaction accounts similar to bank checking accounts t represents that its day-to-day business operations differ from conventional banking institutions in several ways t states that it conducts its business to reflect its non-profit mutual structure t makes loans to its members and states that many borrowers have low incomes and might not otherwise qualify for credit from conventional for-profit banks t also represents that it regularly issues loans for very small amounts such as loans for auto repairs which are typically not made by for-profit banks t indicates that it serves smaller communities than those served by for-profit banks t also indicates that because of its mutual non-profit operation all members not just those maintaining high minimum balances are able to earn competitive rates on their deposits and pay low banking fees t represents that in order to maintain its financial viability and continue to satisfy its stated purposes of promoting thrift and providing a source of low cost credit it has endeavored to become a full service financial_institution consequently t offers more than just demand deposits and loans currently t makes cancer insurance mfs program and car warranties available to members other types of insurance t makes available to its members are cpi and credit life and credit disability insurance in connection with several loan programs the different types of insurance are described in more detail below t also sells checks to its members all of these products are underwritten or otherwise provided by third-party insurance_companies or other third-party vendors in each case t makes its members aware of the purpose and availability of these products answers members’ questions about the products or refers the member to the vendor for additional information and with respect to some of the products obtains and submits applications for coverage premium payments and claims during the years at issue t made the following types of loans personal mortgage vehicle and other secured and unsecured loans the majority of the - loans were loans were personal mortgage and vehicle made and loans were made and ' of these loans were collateralized in a total of ofthese loans were collateralized in a total of the default rate on these loans as a percentage of total loans for the years at issue was approximately t filed form 990-t unrelated_business_income_tax return for both years however the amounts derived from the sale of the products discussed herein were not included as income derived from unrelated_trade_or_business a sale of cancer insurance t markets and sells cancer insurance to its membership t collects and remits the premiums to an insurance_company cancer insurance administrative reimbursements are calculated at’ policies are renewed annually for each policy that is renewed the there were atotal of cancer insurance policies sold during the years at issue claims written each payment to a healthcare provider or the insured following diagnosis is treated as a separate claim were for and for b mes program the mfs program is a financial services program that provides services that t does not offer the mfs program is y’s direct response marketing program the mfs program authorizes y to offer insurance products to its members through a local representative product offers include mutual funds variable annuities fixed annuities variable universal life long term care insurance and term and whole_life_insurance t agreed to authorize the marketing of a full range of life health and accident insurance and financial products through direct mail and phone yh ie campaigns promote the mfs program by participating in all scheduled mailings to members positioning the program in newsletters statement inserts and participation in promotional campaigns allow training of t’s staff provide - member information provide t’s logo and the signature of an officer of t for use in direct mail campaigns and not allow another insurer to solicit its customer or membership base for any similar type products - i the mes program has been offered since total claims paid pursuant to the mfs program for the years at issue were’ c sale of car warranties t offers members car warranties w a for-profit entity sells extended car warranties car warranties typically cover the cost of certain types of repairs to a car for a specified amount of time and mileage usually extending the time and mileage of a manufacturer's warranty in the case of a new car or a fairly new used car interested in buying a car warranty to w t has a working arrangement with w to refer members who are t entered into an agreement with w the agreement provides that t would allow w to make its car warranty program available to t’s members along with creating and disseminating marketing materials for w t provides w - with office space on t’s premises to make the marketing materials and applications available to t’s membership during the new and used car loan process 1’s employees offer w car warranties to members t’s employees explain to the member the benefits of purchasing a car warranty they explain the terms of the warranty they provide the member with brochures which assist in selling the warranty they compute the loan payment with and without warranty coverage finally they receive and forward warranty applications to w and assist members in obtaining warranty refunds under the agreement w pays t ‘for each warranty sold car warranties accounted for less than denied based on a member's failure to purchase a car warranty of t’s total gross_income no loans were d sale of credit life and credit disability insurance t offers its member borrowers the opportunity to purchase credit life and credit disability insurance on certain loans t is a party to and beneficiary under standard group credit life and credit disability policies with a third party insurance_company under these policies a member-borrower who obtains a loan - mortgages and other loans secured_by real_estate are often excluded may if he or she chooses obtain credit disability insurance which pays the loan installments during the period of physical disability which impacts the borrower's employment a loan officer informs each member-borrower of the availability of cregit life and credit disability insurance coverage and if the member-borrower elects to obtain the coverage the premium charge is added to the borrower's loan balance obtaining the credit life and credit disability insurance coverage is never a condition of the member's receiving the loan as reflected in the group credit insurance_policy and letter agreements the credit disability coverage is standard coverage that provides that the insurer will repay the balance of a member's loan up to a dollar_figure policy limit the maximum loan duration covered i sec_120 months and only credit_union members are eligible t does not offer credit disability insurance in connection with overdraft protection home equity loans and real_estate loans under the terms of the policy t is also reimbursed for its administrative expenses in connection with its performance of the prescribed duties as the policyholder t’s employees perform the following duties with respect to the credit disability insurance program e e -e e during the loan process and as part of the loan transaction itself explain the insurance program to member-borrowers process insurance applications collect and forward the premiums to the insurance_company receive and forward claims claims can be filed directly by the member- borrower to the insurance_company and answer member-borrowers’ questions t's staff may recommend that the member opt to obtain coverage in situations where coverage appears beneficial based on the level of personal and family resources available for loan repayment in the event of disability the credit life and credit disability insurance coverage requires monthly premium payments the charges are calculated by t and added to the member's loan balance t remits the premiums it has collected less its expenses as noted above to the insurance_company t's commission for its role in coverage issuance and policy administration is percent of the premiums written for credit life and credit disability insurance this percentage is based on an agreement between t and the insurance_company at the time the insurance was purchased t pays bonuses to employees based on an amount per policy sold during the years at issue approximately of t’s member-borrowers th ate ie elected credit life coverage on eligible loans and approximately credit disability coverage on eligible loans in there were disability and credit life claims written however there were the numbers provided by t do not differentiate how many of these claims were for loans made in credit life claims written against the insurance policies and in credit disability and elected _‘ credit _ or i credit life and credit disability insurance has been offered since and respectively e pl as a condition of the loan members are required to maintain car ifa member's insurance insurance on vehicles which are financed through t coverage is canceled or the member cannot otherwise obtain insurance t purchases cpi the cost of the insurance is added to the member's loan the insurance is purchased in order to protect the credit union's interest in the property if the vehicle is damaged or stolen t itself is the insured under the policy a typical cpi policy provides that coverage is triggered with respect to any borrower who fails to maintain insurance against physical damage to his or if a borrower's own insurance on the collateral lapses her own loan collateral through failure to pay insurance premiums or for any other reason cpi is automatically extended to that property this type of insurance is never chosen - by the borrower instead the insurance is force-placed on the borrower that is the borrower is forced to pay the premiums for the insurance once its application is triggered as part of his or her regular loan payment installment or as a separate monthly charge the insurance_policy provides that t will be reimbursed for the administrative expenses associated with operating a cpi tracking and placement program the basis for computing the reimbursement is the number of eligible collateral loans cpi has been offered since cpi reimbursements are calculated at no more than each year during the years at issue with less than claims written each year ‘ of premiums there were less than cpi policies sold of checks f sale -t has an agreement with x whereby t agrees to market and or sell x's checks to its members pursuant to the contract t agrees to use its best efforts for all of its members’ requirements for checks and check-related to place orders products x provides the base price of member's checks and t debits members’ accounts for the cost of the checks t receives a commission from the sales t provides its membership with brochures and order forms and answers questions regarding x’s products t informs members that they can order checks directly from other vendors if a member inquires about purchasing checks from another company t states that it is an option available to the member a member can purchase checks directly from other vendors by mail phone or over the internet the commissions received by t percent of t’s total gross_income for selling checks constituted less than one law sec_501 of the internal_revenue_code code provides in part that organizations described in sec_501 are exempt from federal_income_tax sec_501 of the code specifically exempts from federal_income_tax credit unions without capital stock organized and operated for mutual purposes and without profit sec_1_501_c_14_-1 of the income_tax regulations regulations provides in part that credit unions other than federal credit unions described in sec_501 of the code without capital stock organized and operated for mutual purposes and without profit are exempt from tax under sec_501 a state-chartered credit unions were first acknowledged as exempt from federal_income_tax in a opinion of the attorney_general the attorney_general considered credit unions organized under the laws of the commonwealth of massachusetts the attorney general’s opinion described the purposes of credit unions existing at that time i t is apparent that the purpose of these financial associations is to help people save and to assist those in need of financial help whose credit may not be established at the larger banks in reality they are fundamentally similar and supplemental to the existing agencies for promoting thrift namely the savings banks and cooperative banks except on a much smaller scale the attorney general’s opinion also described some of the operations of credit unions--making loans in appropriate amounts to members on which a low rate of interest is charged and that p rompt payment of obligations is a fundamental requirement the opinion described in detail the procedures by which members’ savings were held by the credit_union and how the members earned interest on their deposits the opinion also pointed to the democratic character of the governance of these early credit unions by their members at the annual meeting of the association each member shareholder and depositor jy y ae i ' ‘ i has but one vote _ after review of the features and operations of these early massachusetts credit unions the attorney general’s opinion held that state-chartered credit unions would be exempt from federal_income_tax see u s op atty gen i - the legal analysis of the attorney general’s opinion was adopted in treasury regulations issued in and this remained the official basis for the tax exempt status of state-chartered credit unions until the revenue act of granted express statutory tax-exempt status to state-chartered credit unions however the revenue act of removed tax exemption from savings and - the legislative loan associations cooperative banks and mutual_savings_banks history of the act suggests that the reason these entities lost their exemption was because of their increasing similarity to commercial banks and the resulting loss of their original characteristic of mutuality specifically referring to the early days of these institutions the legislative_history states the fact that the members were both the borrowers and the lenders was the essence of the mutuality of these organizations see generally s rep no date reprinted in u s code cong ad svc present-day sec_501 - as enacted in - incorporates the requirements of mutuality and non-profit operation which formed the basis for the attorney general's recognition of credit unions’ tax-exempt status in accordingly the basic purposes of the credit_union tax exemption remain essentially the same today as they were in based on the attorney general’s opinion the basis for exemption is the provision of savings accounts and loans to members who may not be served by banks in a non-profit and mutual manner sec_511 of the code imposes a tax on the unrelated_business_taxable_income of organizations otherwise exempt from federal_income_tax under sec_501 sec_512 of the code provides that the term unrelated_business_taxable_income means with certain modifications the gross_income derived by an organization from any unrelated_trade_or_business regularly carried on by it less allowable deductions sec_513 of the code defines the term unrelated_trade_or_business in the case of any organization subject_to tax imposed by sec_511 as any trade_or_business the conduct of which is not substantially related aside from the need of such organization for the income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its exempt_function sec_1_513-1 of the regulations provides that gross_income of an exempt_organization subject_to the tax imposed by sec_511 of the code is with certain exceptions includable in the computation of unrelated_business_taxable_income if it is income from trade_or_business such trade_or_business is regularly carried on by the organization and the conduct of such trade_or_business is not substantially related other than through the production of funds to the organization's performance of its exempt functions sec_1_513-1 of the regulations provides that the term trade_or_business has the same meaning it has in sec_162 of the code and generally includes any activity carried on for the production_of_income from the sale_of_goods or the performance of services sec_1_513-1 of the regulations states that in determining whether a trade_or_business is regularly carried on within the meaning of sec_512 of the code regard must be had to the frequency and continuity with which the activities are conducted and the manner in which they are pursued hence for example specific business activities will ordinarily be deemed regularly carried on if they manifest a frequency and continuity and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations sec_1_513-1 of the regulations provides that gross_income is derived from unrelated_trade_or_business within the meaning of sec_513 of the code if the conduct of the trade_or_business which produces the income is not substantially related other than through the production of funds to the purposes for which exemption is granted the presence of this requirement necessitates an examination of the relationship between the business activities that generate the particular income in question - the activities that is of producing or distributing the goods or performing the services involved - and the accomplishment of the organization's exempt purposes sec_1_513-1 of the regulations provides that a trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has a causal relationship to the achievement of exempt purposes other than through the production_of_income and it is substantially related for purposes of sec_513 only if the causal relationship is a strong one thus for the conduct_of_a_trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those exempt purposes whether activities contribute importantly to an organization’s exempt purposes depends in each case upon the facts and circumstances involved ia in 693_f2d_525 5th cir a business league described in sec_501 of the code engaged in several activities including the endorsement of insurance to its members the court analyzed whether these activities were substantially related to the business league's exempt_purpose under sec_501 c of advancing the credit_union movément in order to determine whether income generated from those activities resulted in unrelated_business_income to the business league in its analysis the -court stated that the substantial relationship’ determination is necessarily a fact- based inquiry id pincite the court also noted that the regulations under sec_513 require a case-by-case identification of the exempt_purpose an analysis of how the activity contributes to that purpose and an examination of the scale on which the activity is conducted the league promoted the purchase of insurance policies from a particular carrier providing the carrier with convenient services in the marketing and administration of its programs the court stated that the league's endorsement of group_insurance plans was principally motivated by a desire to raise revenue the court also discussed at length the distinction between group and individual benefit the court said the distinction between inherently group benefits and individual benefits is analogous to the aggregate entity concept familiar in partnership_taxation just as a member of a partnership may enjoy benefits in his separate capacities as partner and non-partner so may a a member of the league may enjoy benefits both as league member and as an individual credit_union only those activities that benefit the credit unions in their capacities as league members can be considered substantially related to this group benefit standard the league’s exempt_function also accords with the requirement that a business league seek to improve the conditions of an entire line_of_business rather see treas than perform discrete services for individuals reg sec_1_501_c_6_-1 when the activities of a business league are directed toward the achievement of the common business_interest of its members the benefits that accrue to its members are inherently group benefits - id pincite the court continued its analysis by stating that insurance endorsement and administration is not the sort of unique activity that satisfies the substantial relationship_test nor is its benefits group-related id pincite rather than merely advising members of the availability and desirability of insurance coverage to credit unions generally the league promoted the purchase of polices from a particular carrier the court affirmed the district court’s rationale that the league’s insurance activities did little more than generate revenue because the league’s endorsement was basically a fundraising activity it was by definition unrelated business activity under sec_513 id pincite therefore the court concluded that the league’s insurance activities were not substantially related to its tax-exempt purpose of advancing the credit_union movement rather the connection between the furtherance of the credit_union movement and the selling of insurance was at best tangential in 78_tc_246 aff'd 726_f2d_1097 cir the court held that promotional and administrative fees and an experience rating reserve refund received by a business league described in sec_501 of the code for promoting group_insurance programs for its members constituted unrelated_business_taxable_income under sec_512 in holding that the business league’s activities were not substantially related the court considered whether the league’s insurance activities contributed importantly to the league's exempt_purpose of advancing the common business interests of independent insurance agents the court stated the burden is on the taxpayer to show that the challenged activities contribute directly and importantly to the improvement of conditions in a particular line_of_business the court noted that the petitioner's insurance activities did little more than generate revenue for the association and provided members with a convenient and economical service in the operation of their agencies as such they stood in sharp contrast to petitioner's educational and legislative activities which served the broader purpose of improving the general business environment in which insurance agents operated thus the court found petitioner’s activity of promoting insurance was not substantially related to its exempt_purpose - in la caisse popu563_f2d_505 1st cir the government unsuccessfully challenged the exempt status under sec_501 of the code of an organization chartered as a credit_union by the state of new hampshire the government maintained that the organization was not exempt because it offered a wide variety of services typically offered by nonexempt full service banks and was therefore not organized or operated as a credit_union among these services were checking accounts mortgage loans banking by mail safe deposit boxes and a night depository this case focused solely on the taxpayer’s exemption under sec_501 and did not address the provisions of sec_511 through in 646_fsupp_1199 n d ala a credit_union described in sec_501 of the code offered cancer and group_life_insurance to its individual members the issue was whether commissions the credit_union received from servicing these particular types of insurance policies constituted unrelated_business_income under sec_512 the court did not reach the issue for jurisdictional reasons however it stated in a footnote that the petitioner would have lost on the merits of this issue because the policies benefited the insured without any reference to the member's loans or accounts with the credit_union that court stated in dicta that cancer and group_life_insurance offered by a credit_union to its members would result in unrelated - yl eo4aa wie a business table income for the following reasons yi - petitioner earned commissions for servicing cancer and group_life_insurance policies these policies were for the express benefit of the insured without any reference to the member's loans or accounts with the credit_union petitioner derived no benefit from the policies other than commission on the sale of said policies earned from the ‘insurance companies which issued the policies the sale of the cancer and group_life_insurance policies referred to had no substantial causal relationship to petitioner's exempt purposes and the sale of the policies bore no relationship to petitioner's function as a credit_union id pincite n revrul_69_282 1969_1_cb_155 provides that an organization must be formed and operated under the state law governing the formation of credit unions to qualify for exemption under sec_501 of the code as a state- chartered credit_union revrul_72_37 1972_1_cb_152 provides that to qualify as a credit_union_exempt from income_tax under sec_501 a of the code an organization must in addition to being formed and operated under a state credit_union law operate without profit and for the mutual benefit of its members the revenue_ruling clarified revrul_69_282 stating that a state charter is a threshold requirement for exemption but not the sole requirement rey rul 1960_1_cb_200 interprets the substantially related requirement of sec_513 an organization exempt from federal_income_tax as an agricultural_organization described in sec_501 of the code promoted wider insurance coverage among its members and other local farmers including life casualty and fire insurance the insurance programs are provided by several insurance_companies but the organization’s administrative and secretarial staff is assigned to the work the organization receives an overall fee from the insurance_company for office and other services rendered them in connection with the insurance programs the revenue_ruling provides that a trade_or_business is substantially related to an organization's exempt_activities if the principal purpose of the trade_or_business furthers these exempt purposes however in this case such activities are not usually associated with the functions of an agricultural_organization and normally would not be carried on by such an organization in furtherance of its exempt purposes therefore these activities are not substantially related to the organization’s exempt purposes thus the income resulting from these activities is subject_to tax under sec_511 analysis in determining whether an income-producing activity is an unrelated_trade_or_business it is necessary to show that there is a trade_or_business the trade_or_business is regularly carried on and the conduct of the trade_or_business is not substantially related to the organization's exempt_purpose or function see sec_1_513-1 a of the regulations t has agreed that the activities at issue are trades_or_businesses that are regularly carried on therefore the sole issue is whether each activity is substantially related to the organization’s achievement of its exempt purposes gross_income is derived from an unrelated_trade_or_business if the conduct of the trade_or_business is not substantially related other than through production of funds to the purposes for which exemption is granted sec_1_513-1 of the regulations determination of the substantial relationship issue requires an examination of the relationship between the business activities which generate the particular income in question and the accomplishment of the organization's exempt purposes id the regulations further state that for the conduct of trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes sec_1_513-1 of the regulations see also prof ins agents of michigan supra insurance activity was not substantially related because activity did little more than generate revenue and provide members with a service and did not further taxpayer’s exempt_purpose of improving business conditions and louisiana credit_union league supra league's endorsement of group_insurance plans was principally motivated by a desire to raise revenue and at best was only tangentially related to the furtherance of the league’s exempt_purpose of improving business conditions of one or more lines of business the court found the requisite substantial relationship lacking for t’s activities to escape taxation as unrelated_business_income the activities must contribute directly and importantly to the accomplishment of one or more of t’s exempt purposes-promotion of thrift and providing low cost credit for its members through mutual and nonprofit operation sec_1_513-1 of the regulations see also prof ins agents of michigan supra we address each of the activities below cancer insurance t argues that the sale of cancer insurance to members is substantially yi je related to its exempt_purpose of promoting thrift because it provides basic financial protection to members on a mutual basis t further argues that making cancer insurance available to protect t’s members against the potential financial and personal ravages associated with a life-threatening disease contributes importantly to the promotion of thrift and facilitation of prompt repayment of loans on a mutual basis by protecting members’ financial security i the facts do not show how sales of cancer insurance contribute directly and importantly to t’s exempt_purpose t does not state how the sale of cancer insurance provides a mutual benefit to t’s members t has not shown that sales of cancer insurance encourage savings by members who purchase it the insurance does not provide any incentive or support for saving nor does it aid a member in seeking and obtaining a loan there are no facts showing that sale of - cancer insurance has reduced the cost of providing credit to all members or benefited the membership as a whole in any way again a member's purchase of cancer insurance provides financial protection to an individual that does not benefit members as a whole other than through the production_of_income regarding prompt repayment of loans the facts do not show how cancer insurance contributes to the individual member's repayment of loans a member if a member of who has cancer insurance may not even have a loan through t t receives cancer insurance payments the member may spend the insurance payments as he or she wishes rather than saving them or paying off an obligation to t of t and is also free to spend the payments as he or she desires in the case of a beneficiary the beneficiary may or may not be a member applying the factors of alabama central credit_union supra t earns commissions for servicing the cancer insurance policies sells policies for the express benefit of the insured without any reference to the member's loans or accounts with the credit_union derives no benefit from the policies other than commission on the sale of the policies earned from the insurance_companies that issued the policies the sale of the insurance policies referred to has no substantial causal relationship to t’s exempt purposes and the sale of the policies bears no relationship to t’s function as a credit_union a only six cancer insurance policies were sold for and combined however cancer insurance is a product that t continues to offer to members based on all of the facts and circumstances t’s activities with respect to the sale of cancer insurance do not contribute importantly to accomplishing t's exempt purposes the facts do not show how the sale of cancer insurance contributes to t’s exempt purposes of promoting thrift and providing low cost credit the sale of cancer insurance does little more than produce income for t therefore the sale of cancer insurance is not substantially related to t’s exempt purposes and amounts received therefrom are subject_to ubit mes program t argues that because y’s direct response marketing program the mfs program furthers the mutual operations required of credit unions the income resulting therefrom is not subject_to ubit t argues that the provision of mfs program products contributes importantly to the credit union’s exempt_purpose of promoting thrift and providing basic financial protection to members on a mutual basis t also argues the products enhance the core repayment principal of the credit_union movement the facts do not show how sales pursuant to the mfs program contribute directly and importantly to t’s exempt_purpose t does not state how the sale of products pursuant to the mfs program provides a mutual benefit to t’s members t has not shown that sales of products pursuant to the mfs program encourage savings by members who purchase it the mfs program does not provide any incentive or support for saving nor does it aid a member in seeking and obtaining a loan there are no facts showing that the sale of products pursuant to the mfs program has reduced the cost of providing credit to all members or benefited the membership as a whole in any way again a member's purchase of a product pursuant to the mfs program provides financial protection to an individual that does not benefit members as a whole other than through the production_of_income regarding prompt repayment of loans the facts do not show how the mfs program contributes to the individual member's repayment of loans any insurance purchased pursuant to the mfs program is irrelevant to a member in fact approximately loan approval process or the member's accounts with t one out of four loan applicants obtains insurance pursuant to the mfs program because of the disregard of whether an applicant has insurance or not in the approval of the loan the low default rate and because approximately one out of every four applicants have obtained insurance t’s arguments that selling of products pursuant to the mfs program is substantially related fails because the protection of such insurance provided to members is clearly not the motivating goal elements of the agreement by t and y are also indicative of the motivating for instance y obtained a covenant_not_to_compete clause ensuring goals of t that no other company would offer the same type of products to t’s members if t was truly concerned with enhancing the core repayment principal of the credit_union it would offer insurance from all companies to its members so that its members would have the largest selection of benefits and costs applying the factors of alabama central credit_union supra t earns commissions for offering the mfs program sells policies for the express benefit of the insured without any reference to the member's loans or accounts with the credit_union derives no benefit from the policies other than jd aa ot vet commission on the sale of the policies earned from the insurance_companies that issued the policies the sale of the insurance policies referred to has no substantial causal relationship to t’s exempt purposes and the sale of the policies bears no relationship to t’s function as a credit_union -t did not provide information regarding number of products sold pursuant to the ifs program for either or based on all of the facts and circumstances t’s activities with respect to the sale of products pursuant to the mfs program do not contribute importantly to accomplishing t’s exempt purposes the facts do not show how the sale of such products contributes to t’s exempt purposes of promoting thrift and providing low cost credit the sale of products pursuant to the mfs program does little more - than produce income for t therefore the sale of products pursuant to the mfs program is not substantially related to t’s exempt purposes and amounts received therefrom are subject_to ubit car warranties t argues that making car warranties available to members is substantially related to what it believes is the credit union’s tax-exempt purpose of providing basic financial protection to members on a mutual basis that in the case of warranties for automobiles serving as collateral for a credit_union loan the warranty protection contributes importantly to the underlying loan transaction and facilitates repayment in addition t contends the facts do not show how the sales of car warranties contribute directly and importantly to t’s exempt purposes t has not shown that car warranties encourage savings by members who have availed themselves of those programs there are no facts showing that the purchase of a car warranty has reduced the cost of providing credit to all members or benefited the membership as a whole in any way again car warranties provide a financial benefit or financial protection to an individual that does not benefit the members as a whole other than through the production_of_income the car warranties do not provide any incentive or support for saving nor does it aid a member in seeking and obtaining a loan regarding prompt repayment of loans a car warranty is not tied to the it can be purchased with or without the extension of credit by t individual's loan the facts provided by t show that the purchase of a car warranty from t in connection with a loan increases the amount of the loan payment for the individual purchaser even if a car warranty is purchased in connection with a loan from t the warranty merely pays for certain car repairs for an individual's it does nothing to further the credit union’s exempt_purpose of promoting car thrift and providing access to credit ' applying the factors of alabama central credit_union supra t earns fees for selling car warranties car warranties are for the express benefit of the individual without any reference to the member’s loans or accounts with the credit_union derives no benefit from the car warranties other than commission on the sale of car warranties earned from the company that provided the car warranties the car warranties referred to have no substantial causal relationship to petitioner's exempt purposes and the car warranties bear no relationship to t’s function as a credit_union based on all of the facts and circumstances t’s activities with respect to the sale of car warranties do not contribute importantly to t’s exempt purposes therefore the sale of car warranties are not substantially related to t’s exempt purposes and amounts received therefrom are subject_to ubit credit life and credit disability t argues that the sale of credit life and credit disability insurance is directly related to the credit union’s specific exempt purposes of fostering thrift among the members including both the extension of credit to members on reasonable terms and encouraging savings among the members and providing services to members on a mutual basis t further maintains that credit insurance which is an integral part of a member loan transaction is a mechanism for assuring the prompt repayment of debts in situations where the financial resources of the borrower and the borrower's family become strained as a result of disability the facts do not show how sales of credit life and credit disability insurance contribute directly and importantly to accomplishing t’s exempt purposes neither credit life_insurance nor credit disability insurance is required in fact credit life and credit disability insurance are not for the approval of a loan available to members on certain types of loans such as mortgage and other real_estate loans the member decides whether to purchase credit life and or credit disability insurance based on his or her own assessment of whether the insurance will provide a benefit to that individual member the individual member benefits in that the member need not worry about paying a loan to t in the event of death or disability while there is also a benefit to the credit_union as the beneficiary the facts do not show how the sale of credit life and credit disability insurance otherwise contributes importantly and directly to accomplishing t’s exempt purposes other than through the production_of_income availability of credit life and credit disability insurance does not encourage savings or assist t in offering low cost credit t does not take into consideration the need for this insurance by members t performs no studies to determine which members may need credit disability insurance and there is no required corresponding counseling to members who may have more need than others although t’s staff may recommend insurance based on the level of personal and family resources ie these recommendations are not mandatory in specific cases and coverage is not required in these cases ’ additionally t’s arguments do not address the fact that bonuses are paid to employees based on the number of policies sold providing a profit-motive incentive to t’s employees rather than a membership benefit as a whole in addition t’s commissions are high insurance is voluntary and has no bearing on approval approximately of the total amount of loans are covered by credit life_insurance and approximately percent of the total amount of loans are covered by credit disability insurance this fact further shows that individual benefit-to the selling employee-is the primary benefit of offering the insurance percent of premiums_paid because the percent applying the factors of alabama central credit_union supra t earns commissions for providing credit life and credit disability insurance sells policies for the express benefit of the insured albeit with reference to a member's loan with the credit_union derives some benefit from the credit life and credit disability insurance but the primary benefit is production_of_income both through the commission on the sale of the insurance earned and the bonuses paid to t employees the insurance referred to has no substantial causal relationship to t’s exempt purposes and the insurance bears no relationship to t's function as a credit_union looking at the facts with respect to the credit life and credit disability insurance the sale of such insurance is not substantially related to t’s exempt purposes the available information indicates that the sale of insurance is primarily for the purpose of generating income to t and some of its employees and for the benefit of the insured rather than for the benefit of t’s membership based on all of the facts and circumstances t's activities with respect to the sale of credit life and credit disability insurance do not contribute importantly to accomplishing t's exempt purposes therefore the sale of credit life and credit disability insurance is not substantially related to t's exempt purposes and amounts received therefrom are subject_to ubit cpi because the sale of cpi furthers t’s exempt purposes the income resulting therefrom is not subject_to ubit cpi protects t as a lender against physical damage to loan collateral primarily automobiles and real_estate during periods in which a borrower fails to maintain his or her own insurance on the property the borrower is forced to pay the premiums for the cpi once its application is triggered as part of his or her regular loan payment installment or a loan as a separate monthly charge t is the named insured under the policy will not be made unless the member agrees to the imposition of cpi in the event the member is unable to provide proof of valid insurance therefore the sale of cpi to t’s member-borrowers is substantially related to t’s exempt purposes of providing access to credit for its members check sales because the sale of checks furthers t's exempt purposes the income resulting therefrom is not subject_to ubit checks allow members access to their funds held on deposit accepting member funds for deposit including allowing the members access to those funds is obviously a critical and central exempt_function of a credit_union therefore the sale of checks to t member- borrowers is substantially related to t’s exempt purposes conclusion for reasons set forth above we conclude that the income received by a sec_501 credit_union from the activities listed below are not substantially related to the furtherance of t’s exempt purposes and therefore are subject_to ubit a b c d sale of cancer insurance mfs program sale of car warranties sale of credit life and credit disability insurance we also conclude the sale of cpi insurance by t to its members is substantially related to the furtherance of t’s exempt purposes and therefore is not subject_to ubit additionally we also conclude that the sale of checks by t to its members is substantially related to the furtherance of t’s exempt purposes and therefore is not subject_to ubit a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 of the code provides that it may not be used or cited as precedent - end -


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 b03 plr-119610-13 date date trust grantor beneficiary beneficiary beneficiary beneficiary beneficiary beneficiary beneficiary beneficiary legend ---------------------------------------------------- ---------------------------------------------------------------------------------------------------------- ------------ ---------------------------------------------------------------------------------------------------------- ----------- ---------------------------------------------------------------------------------------------------------- ----------- ---------------------------------------------------------------------------------------------------------- ----------- ---------------------------------------------------------------------------------------------------------- ----------- ---------------------------------------------------------------------------------------------------------- ----------- ---------------------------------------------------------------------------------------------------------- ------------ ---------------------------------------------------------------------------------------------------------- ----------- ---------------------------------------------------------------------------------------------------------- ------------------------------------ plr-119610-13 beneficiary distribution committee spouse state trustee date dear ------------------- ---------------------------------------------------------------------------------------------------------- ------------------------------------ ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- --------------------------------------------- ---------------------------- ---------- ------------------------- --------------------- this letter responds to a letter dated date submitted on your behalf by your authorized representative requesting rulings under sec_671 sec_2501 and sec_2514 of the internal_revenue_code facts the facts submitted and representations made are as follows on date grantor created an irrevocable_trust trust for the benefit of herself her stepchildren beneficiary beneficiary beneficiary and beneficiary and children beneficiary beneficiary beneficiary beneficiary and beneficiary and the issue of grantor’s children and stepchildren hereinafter collectively the beneficiaries a corporate trustee trustee is the sole trustee of trust during grantor’s lifetime trustee must distribute such amounts of net_income and principal to grantor and the beneficiaries as directed by the distribution committee and or grantor as follows at any time trustee pursuant to the direction of a majority of the distribution committee members with the written consent of grantor shall distribute to grantor or the beneficiaries such amounts of the net_income or principal as directed by the distribution committee grantor’s consent power at any time trustee pursuant to the direction of all of the distribution committee members other than grantor shall distribute to grantor or the beneficiaries such amounts of the net_income or principal as directed by the distribution committee unanimous member power and at any time grantor in a nonfiduciary capacity may but shall not be required to distribute to any one or more of the beneficiaries such plr-119610-13 amounts of the principal including the whole thereof as grantor deems advisable to provide for the health maintenance support and education of the beneficiaries grantor’s sole power the distribution committee may direct that distributions be made equally or unequally and to or for the benefit of any one or more of the beneficiaries of trust to the exclusion of others any net_income not distributed by trustee will be accumulated and added to principal the distribution committee is initially composed of grantor grantor’s children through appointed guardians acting on their behalf until their majority and grantor’s stepchildren trust provides that at all times the distribution committee must include at least two members other than grantor if at any time the distribution committee does not include at least two members other than the grantor then the vacancy on the distribution committee must be filled by the eldest of grantor’s adult issue other than any issue already serving as a member of the distribution committee or if none of grantor’s issue not already serving as a member of the distribution committee is an adult then such vacancy shall be filled by the eldest of the adult issue of the grantor’s stepchildren if at any time the distribution committee does not include at least two members other than the grantor then the distribution committee shall be deemed not to exist in any event the distribution committee will cease to exist upon grantor’s death in addition at any time or times prior to or upon the distribution date the distribution committee may direct the trustee to distribute to the trustee or trustees of any one or more qualified trusts a_trust defined to be created under a document other than the trust agreement such amounts of the net_income and or principal of trust including the whole thereof as the distribution committee determines any such distribution shall be added to the principal of such qualified_trust and disposed of in accordance with the terms of such qualified_trust no distribution or transfer may be made to a qualified_trust unless made pursuant to the direction of the distribution committee upon the grantor’s death the trustee shall distribute the balance held in trust to or for the benefit of any person or persons or entity or entities other than the grantor’s estate the grantor’s creditors or the creditors of the grantor’s estate as the grantor appoints by will grantor’s testamentary power the balance of the trust funds which the grantor has not effectively appointed by will shall be distributed per stirpes to spouse’s then living issue in further trust if none of spouse’s issue is then living then the trustee will divide the trust assets into two parts the trustee will distribute the first part as if the grantor had died intestate unmarried and survived by no issue the trustee will distribute the second part to the individuals to whom and in the proportions that the property of spouse would be distributed if spouse had died intestate unmarried and survived by no issue to the extent there are no beneficiaries under one of those two categories the entire amount will be distributed under the other category if plr-119610-13 however none of the individuals designated as distributees in either category are living then the amounts will be distributed to charities designated by the trustee you have requested the following rulings so long as the distribution committee is serving no portion of the items of income deductions and credits against tax of trust shall be included in computing under sec_671 the taxable_income deductions and credits of grantor or any member of the distribution committee the contribution of property to trust by grantor is not a completed_gift subject_to federal gift_tax any distribution_of_property by the distribution committee from trust to grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee any distribution_of_property by the distribution committee from trust to any beneficiary of trust other than grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee other than grantor law and analysis ruling sec_671 provides that where it is specified in subpart e of part i of subchapter_j that the grantor or another person shall be treated as the owner of any portion of a_trust there shall then be included in computing the taxable_income and credits of the grantor or the other person those items of income deductions and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under chapter in computing taxable_income or credits against the tax of an individual sec_672 provides that for purposes of subpart e the term adverse_party means any person having a substantial_beneficial_interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust additionally sec_672 provides that the term nonadverse_party means any person who is not an adverse_party sec_673 through specify the circumstances under which the grantor is treated as the owner of a portion of a_trust plr-119610-13 sec_673 provides that the grantor shall be treated as the owner of any portion of a_trust in which the grantor has a reversionary_interest in either the corpus or the income therefrom if as of the inception of that portion of the trust the value of such interest exceed sec_5 percent of the value of such portion sec_674 provides that in general the grantor shall be treated as the owner of any portion of a_trust in respect of which the beneficial_enjoyment of the corpus or the income therefrom is subject_to a power of disposition exercisable by the grantor or a nonadverse_party or both without the approval or consent of any adverse_party sec_674 provides that sec_674 shall not apply to the powers described in sec_674 regardless of by whom held sec_674 provides that sec_674 shall not apply to a power exercisable only by will other than a power in the grantor to appoint by will the income of the trust where the income is accumulated for such disposition by the grantor or may be so accumulated in the discretion of the grantor or a nonadverse_party or both without the approval or consent of any adverse_party sec_674 provides that sec_674 shall not apply to a power to distribute corpus to or for a beneficiary provided that the power is limited by a reasonably_definite_standard which is set forth in the trust instrument under sec_675 and applicable regulations the grantor is treated as the owner of any portion of a_trust if under the terms of the trust agreement or circumstances attendant to its operation administrative control is exercisable primarily for the benefit of the grantor rather than the beneficiary of the trust sec_676 provides that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under any other provision of part i subchapter_j chapter where at any time the power to revest in the grantor title to such portion is exercisable by the grantor or a nonadverse_party or both sec_677 provides in general that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under sec_674 whose income without the approval or consent of any adverse_party is or in the discretion of the grantor or a nonadverse_party or both may be distributed to the grantor or the grantor’s spouse held or accumulated for future distribution to the grantor or the grantor’s spouse or applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor’s spouse sec_678 provides that a person other than the grantor shall be treated as the owner of any portion of a_trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself or such person has previously partially released or otherwise modified such a power plr-119610-13 and after the release or modification retains such control as would within the principles of inclusive subject a grantor of a_trust to treatment as the owner thereof based solely on the facts submitted and representations made we conclude that an examination of trust reveals none of the circumstances that would cause grantor to be treated as the owner of any portion of trust under sec_673 sec_674 sec_676 or sec_677 because none of the other distribution committee members has a power exercisable solely by him or herself to vest trust income or corpus in him or herself none shall be treated as the owner of any portion of trust under sec_678 we further conclude that an examination of trust reveals none of the circumstances that would cause administrative controls to be considered exercisable primarily for the benefit of grantor under sec_675 thus the circumstances attendant on the operation of trust will determine whether grantor will be treated as the owner of any portion of trust under sec_675 this is a question of fact the determination of which must be deferred until the federal_income_tax returns of the parties involved have been examined by the office with responsibility for such examination ruling sec_2 and sec_2501 provides that a tax is imposed for each calendar_year on the transfer of property by gift during such calendar_year by any individual resident or nonresident sec_2511 provides that the tax imposed by sec_2501 applies 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_25_2511-2 of the gift_tax regulations provides that a gift is complete as to any property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave in the donor no power to change its disposition whether for the donor’s own benefit or for the benefit of another but if upon a transfer of property whether in trust or otherwise the donor reserves any power over its disposition the gift may be wholly incomplete or may be partially complete and partially incomplete depending upon all the facts in the particular case accordingly in every case of a transfer of property subject_to a reserved power the terms of the power must be examined and its scope determined sec_25_2511-2 also provides an example where the donor transfers property to another in trust to pay the income to the donor or accumulate it in the discretion of the trustee and the donor retains a testamentary power to appoint the remainder among the donor’s descendants the regulation concludes that no portion of the transfer is a completed_gift however if the donor had not retained a testamentary_power_of_appointment but instead provided that the remainder should go to x or his heirs the entire transfer would be a completed_gift plr-119610-13 sec_25_2511-2 provides that a gift is incomplete in every instance in which a donor reserves the power to revest the beneficial title in himself or herself a gift is also incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed_or_ascertainable_standard sec_25_2511-2 provides that a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial adverse_interest in the disposition of the transferred property or the income therefrom sec_25_2511-2 provides that the relinquishment or termination of a power to change the beneficiaries of transferred property occurring otherwise than by death of the donor is regarded as the event which completes the gift and causes the gift_tax to apply sec_25_2511-2 provides that if a donor transfers property to himself as trustee or to himself and some other person not possessing a substantial adverse_interest as trustees and retains no beneficial_interest in the trust property and no power over it except fiduciary powers the exercise or nonexercise of which is limited by a fixed_or_ascertainable_standard to change the beneficiaries of the transferred property the donor has made a completed_gift and the entire value of the transferred property is subject_to the gift_tax sec_25_2511-2 does not define substantial adverse_interest sec_25_2514-3 provides in part that a taker in default of appointment under a power has an interest that is adverse to an exercise of the power sec_25_2514-3 also provides that a coholder of a power is considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate in 308_us_39 the taxpayer created a_trust for the benefit of named beneficiaries and reserved the power_to_revoke the trust in whole or in part and to designate new beneficiaries other than himself six years later in the taxpayer relinquished the power_to_revoke the trust but retained the right to change the beneficiaries in the taxpayer relinquished the right to change the beneficiaries the court stated that the taxpayer’s gift is not complete for purposes of the gift_tax when the donor has reserved the power to determine those others who would ultimately receive the property accordingly the court held that the taxpayer’s gift was complete in when he relinquished his right to change the beneficiaries of the trust a grantor’s retention of a power to change the beneficial interests in a_trust causes the transfer to the trust to be incomplete for gift_tax purposes even though the power may be defeated by the actions of third parties 37_tc_897 see also 51_tc_352 plr-119610-13 in this case grantor retained the grantor’s consent power over the income and principal of trust under sec_25_2511-2 a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial adverse_interest in the disposition of the transferred property or the income therefrom the distribution committee members are not takers in default for purposes of sec_25_2514-3 they are merely coholders of the power the distribution committee ceases to exist upon the death of grantor under sec_25_2514-3 a coholder of a power is only considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate in this case the distribution committee ceases to exist upon grantor’s death accordingly the distribution committee members do not have interests adverse to grantor under sec_25_2514-3 and for purposes of sec_25_2511-2 therefore grantor is considered as possessing the power to distribute income and principal to any beneficiary himself because he retained the grantor’s consent power the retention of this power causes the transfer of property to trust to be wholly incomplete for federal gift_tax purposes grantor also retained the grantor’s sole power over the principal of trust under sec_25_2511-2 a gift is incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries in this case grantor’s sole power gives grantor the power to change the interests of the beneficiaries accordingly the retention of the grantor’s sole power causes the transfer of property to trust to be wholly incomplete for federal gift_tax purposes further grantor retained grantor’s testamentary power to appoint the property in trust to any person or persons or entity or entities other than grantor’s estate grantor’s creditors or the creditors of grantor’s estate under sec_25_2511-2 the retention of a testamentary power to appoint the remainder of a_trust is considered a retention of dominion and control_over the remainder accordingly the retention of this power causes the transfer of property to trust to be incomplete with respect to the remainder in trust for federal gift_tax purposes finally the distribution committee possesses the unanimous member power over income and principal this power is not a condition_precedent to grantor’s powers grantor’s powers over the income and principal are presently exercisable and not subject_to a condition_precedent grantor retains dominion and control_over the income and principal of trust until the distribution committee members exercise their unanimous member power accordingly this power does not cause the transfer of property to be complete for federal gift_tax purposes see 37_tc_897 51_tc_352 accordingly based on the facts submitted and the representations made we conclude that the contribution of property to trust by grantor is not a completed_gift plr-119610-13 subject_to federal gift_tax any distribution from trust to grantor is merely a return of grantor’s property therefore we conclude that any distribution_of_property by the distribution committee from trust to grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee further upon grantor’s death the fair_market_value of the property in trust is includible in grantor’s gross_estate for federal estate_tax purposes ruling sec_2514 provides that the exercise or release of a general_power_of_appointment created after date shall be deemed a transfer of property by the individual possessing such power sec_2514 provides that the term general_power_of_appointment means a power which is exercisable in favor of the individual possessing the power possessor the possessor’s estate the possessor’s creditors or the creditors of the individual’s estate sec_25_2514-1 provides in part that a power_of_appointment is not a general power if by its terms it is exercisable only in favor of one or more designated persons or classes other than the possessor or his creditors or the possessor’s estate or the creditors of the estate sec_2514 provides that in the case of a power_of_appointment created after date if the power is exercisable by the possessor only in conjunction with the creator of the power such power is not deemed a general_power_of_appointment sec_2514 provides that in the case of a power_of_appointment created after date if the power is not exercisable by the possessor except in conjunction with a person having a substantial interest in the property subject_to the power which is adverse to the exercise of the power in favor of the possessor such power shall not be deemed a general_power_of_appointment for purposes of sec_2514 a person who after the death of the possessor may be possessed of a power_of_appointment with respect to the property subject_to the possessor’s power which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the possessor’s power sec_25_2514-3 provides in part that a coholder of a power has no adverse_interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power however a coholder of a power is considered as having an adverse_interest where he may possess the power after the plr-119610-13 possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate thus for example if x y and z held a power jointly to appoint among a group of persons which includes themselves and if on the death of x the power will pass to y and z jointly then y and z are considered to have interests adverse to the exercise of the power in favor of x similarly if on y’s death the power will pass to z z is considered to have an interest adverse to the exercise of the power in favor of y the powers held by the distribution committee members under the grantor’s consent power are powers that are exercisable only in conjunction with the creator grantor accordingly under sec_2514 the distribution committee members do not possess general powers of appointment by virtue of possessing this power further the powers held by the distribution committee members under the unanimous member powers are not general powers of appointment as in the example in sec_25_2514-3 the distribution committee members have substantial adverse interests in the property subject_to this power accordingly any distribution made from trust to a beneficiary other than grantor pursuant to the exercise of these powers the grantor’s consent power and the unanimous member powers are not gifts by the distribution committee members instead such distributions are gifts by grantor based upon the facts submitted and representations made we conclude that any distribution_of_property by the distribution committee from trust to any beneficiary of trust other than grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee further we conclude that any distribution_of_property from trust to a beneficiary other than grantor will be a completed_gift by grantor except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code specifically we express no opinion on the trust provisions permitting trustee to distribute income or principal to trustees of other qualified trusts decanting in accordance with the power_of_attorney on file with this office copies of this letter are being sent to your authorized representatives 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 plr-119610-13 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely s james a quinn senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes 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 ita b04 plr-163001-02 date date taxpayer ------------------------------------------ k ----------------------- l ----------------- m corp --------------------------- state x ---------- year ------- year ------- x --------------------------- y ------------------- z ----------------------- dear ------------ this responds to your letter dated date requesting a private_letter_ruling as to the application of sec_1031 of the internal_revenue_code to the proposed transaction facts taxpayer is an individual who was married to k together they acquired substantial acreage in timberlands for investment they divorced in year but continued holding this acreage as co-tenants k died in year m corp is a state x holding_company that conducts business through a number of wholly-owned subsidiaries that are engaged principally in owning and managing timberlands harvesting timber and manufacturing and selling various wood products m corp acquired k's undivided one-half interest in the acres of timberlands m corp has two classes of authorized stock voting common and nonvoting common all shares of voting common_stock are held by l the son of k and taxpayer of the x shares now issued and outstanding of nonvoting common taxpayer owns y and l owns z the majority of the remaining shares are held in trust by l for the benefit of the plr-163001-02 lineal_descendants of taxpayer because all shares of the voting common and most shares of the nonvoting common are owned by taxpayer or by or for her family as that term is defined in sec_267 either directly or by attribution pursuant to sec_267 taxpayer is considered the owner of more than percent of the value of the outstanding_stock of m corp therefore m corp and taxpayer are related_persons pursuant to sec_267 and sec_1031 taxpayer desires to hold the timberlands strictly as investment_property in furtherance of its timber business m corp wants to harvest any old-growth timber before it loses its value to accommodate these conflicting interests taxpayer and m corp propose to enter into a like-kind_exchange in which taxpayer s interest in old-growth timberland will be exchanged for m corp s interest in reproduction timberlands of equal value the exchange will allow taxpayer to accommodate the business needs of m corp while continuing to allow taxpayer to hold timberlands for investment issues will the exchange of taxpayer s interest in old-growth timberlands held for investment for m corp s interest in reproduction timberlands also to be held for investment constitute a like-kind_exchange under sec_1031 will the planned cutting by m corp of the old-growth timber whether or not pursuant to sec_631 and b within two years of the exchange require recognition of gain pursuant to sec_1031 law and analysis in hutchins v king 68_us_53 the supreme court stated that timber growing upon the land constituted a portion of the realty additionally in 115_fsupp_931 pincite w d wis growing timber on land was found to be part of the land sec_631 allows a taxpayer who owns or has a contract right to cut timber to elect to treat the cutting of timber as a sale_or_exchange of the timber in the year the timber is cut provided the timber or the contract right to cut the timber is held for more than year sec_631 provides that in the case of the disposal of timber held by the owner for more than year under a contract by which the owner retains an economic_interest in the timber the difference between the amount_realized from the disposal of such timber and the adjusted depletion basis thereof shall be considered as though it were a gain_or_loss on the sale of the timber plr-163001-02 sec_1_631-1 of the income_tax regulations provides that when products of timber are sold after cutting such as logs or lumber the income from such sales are considered ordinary_income sec_1031 provides that no gain_or_loss shall be recognized on the exchange of property held for productive use in a trade_or_business or for investment if such property is exchanged solely for property of like_kind which is to be held either for productive use in a trade_or_business or for investment sec_1031 generally provides that if a a taxpayer exchanges property with a related_person b there is nonrecognition_of_gain_or_loss to the taxpayer under this section with respect to the exchange and c before the date years after the date of the last transfer which was part of such exchange - i the related_person disposes of such property or ii the taxpayer disposes of the property received in the exchange from the related_person which was of like_kind to the property transferred by the taxpayer there shall be no nonrecognition_of_gain_or_loss under this section to the taxpayer with respect to such exchange except that any gain_or_loss recognized by the taxpayer by reason of this subsection shall be taken into account as of the date on which such subsequent disposition occurs revrul_72_515 1972_2_cb_466 provides that the exchange of unencumbered fee title to timberlands that differ in timber quality and quantity qualifies for nonrecognition_of_gain_or_loss under sec_1031 in revrul_72_515 virgin-growth timberlands were exchanged for second-growth timberlands the exchange was determined to be of a like-kind because the quantity quality age and species of the timber growing on the land may influence the grade or quality of the timberland involved in the exchange but does not influence the kind or class of the property exchanged which in this case is land revrul_2001_50 2001_2_cb_343 provides that the cutting of timber during the year recognition_period does not trigger recognition of built-in gains under ' d regardless of whether ' applies to the timber transaction or not sec_1 a provides that ' d applies to any gain recognized during the recognition_period in a transaction treated as a sale_or_exchange for federal_income_tax purposes the age quality and species of the timber growing on the land do not change the class or kind of the property being exchanged which is land accordingly the exchange between taxpayer and m corp of old-growth timberland for reproduction timberland will constitute a like-kind_exchange under ' a disposition of the property exchanged between related_persons within years will cause recognition of gain under ' f under revrul_2001_50 the cutting of timber is not a disposition that causes recognition of built -in gains plr-163001-02 in the instant case after the cutting and disposition of the timber m corp will still own the underlying land that was exchanged in the proposed transaction accordingly the planned cutting of the timber by m corp will not trigger recognition of gain under ' f regardless of whether ' sec_631 or b applies to the transaction 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 ' except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the authorized representative sincerely george f wright assistant branch chief branch office of associate chief_counsel income_tax accounting


department of the treasury internal_revenue_service washington d c t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n contact person identification_number telephone number number release date date significant index no legend y z dear sir or madam implications of the following proposed transactions employer_identification_number we have considered your request dated date concerning the federal tax whether your creation ownership and operation of y would cause you to lose your status as a tax exempt_organization under sec_501 of the internal_revenue_code code whether the dividends you receive from y would be taxable to you as unrelated_business_income under sec_512 of the code you are a non-profit corporation which operates a cemetery and you are recognized as exempt from federal_income_tax under sec_501 of the code according to your articles of incorporation your limited purpose is t he establishment conducting and maintenance of a burial park and cemetery for the internment of human remains in which may be erected suitable memorials and other embellishments and the doing of any and all other acts necessary or helpful in the carrying out of such purpose subject only to the limitations upon such acts now in force or hereafter made a part of the general laws of z you intend to form a for-profit subsidiary_corporation y y will market and sell final expense insurance products you will provide all of y’s initial capital and in return you will receive all of the issued and outstanding_stock of y you will also lease a portion of the building that you own and occupy to y for fair rental value as determined by an independent_appraiser the board_of directors of y will consist of five members including the president of your organization a member of your board_of trustees and three individuals who are not employees officers or directors of your organization the president of your organization will also serve as the president of y until y’s board is fully constituted and appointed at which time the board_of y will select a new president for their organization your president will assist with the establishment of y but will have a very limited role in the day-to-day operation of y y will develop maintain and manage its own financial systems independent of your sec_1_501_c_13_-1 of the income_tax regulations provides that a nonprofit sec_501 of the code provides an exemption from federal_income_tax for revrul_64_109 part c b held that a cemetery_company may not organization y will have at least one full-time_employee who is not also employed by you this employee will be selected by the board_of y and will be responsible for the day-to-day activities of y other individuals who are employed by your organization may assist y in their initial years of operation they will be compensated by y pursuant to a written contract agreement cemetery companies owned and operated exclusively for the benefit of their members or which are not operated for profit and any corporation chartered solely for the purpose of the disposal of bodies by burial or cremation which is not permitted by its charter to engage in any business not necessarily incidental to that purpose provided no part of the organization’s net_earnings inures to the benefit of any private_shareholder_or_individual cemetery_company may be entitled to exemption if it is owned by and operated exclusively for the benefit of its lot owners who hold such lots for bona_fide purposes not for purposes of resale consistent with sec_501 of the code engage in activities not necessarily incidental to its burial purposes the ruling concluded that because operating a mortuary is not necessary to procuring selling holding and using land solely as a burial ground an organization that engaged in such a business was subject_to loss of its exempt status organizations exempt under sec_501 sec_512 of the code defines unrelated_business_taxable_income as the gross_income an organization derives from any unrelated_trade_or_business defined in sec_513 it regularly carries on less allowable deductions with certain modifications taxable_income under sec_512 dividends received by the tax exempt_organization taxable entities so long as the purposes for which the subsidiary is incorporated are the equivalent of business activities or the subsidiary subsequently carries on business activities 319_us_436 britt v united_states for federal_income_tax purposes a parent_corporation and its subsidiaries are separate sec_511 of the code imposes a tax on the unrelated_business_taxable_income of sec_512 of the code excludes from the computation of unrelated business the main issue presented in this case is whether y’s activities are attributable to your in general a parent_corporation and its subsidiary are separate taxable entities so long as f 2d 5th cir that is where a corporation is organized with a bona_fide intention that it will have some real and substantial business function its existence may not generally be disregarded for tax purposes britt f 2d pincite however where the parent_corporation so controls the affairs of the subsidiary that is merely an instrumentality of the parent the corporate entity of the subsidiary may be disregarded 483_f2d_1098 5th cir the purposes for which the subsidiary is formed are for a business_purpose hence the ownership of a subsidiary by an organization exempt under sec_501 does not require attribution of the subsidiary’s activities to the parent for federal_income_tax purposes unless the subsidiary lacks a business_purpose and the subsidiary is an arm or agent of the parent see moline properties and britt supra organization if the activities of y are attributed to you your exemption from federal_income_tax under sec_501 of the code may be in jeopardy attribution occurs where the subsidiary does not have a business_purpose and is merely an arm or agent of the parent the information submitted in this case indicates that y a for-profit organization was formed for the real and substantial business_purpose of selling final expense insurance products whether you are involved in or in control of the day-to-day operations of y must also be considered from the information provided you do not appear to control or to be so involved in the the day-to-day management of y so that y is an agent of your organization y will have its own board_of directors and will keep its own books_and_records a majority of y’s board members are not employees officers or directors of your organization although your president is also the president of y you represent that your president will not be involved in y’s day-to- day operations and that a new president will be selected by y as soon as their board is fully constituted and appointed therefore we conclude that y is not an arm agent or integral part of your organization and the activities of y are not attributable to you computation of unrelated_business_taxable_income the dividends you may receive from y will not be subject_to the tax on unrelated_business_income sec_512 which sets forth special rules for certain amounts received by exempt controlling organizations from their controlled organization does not apply to dividends in accordance with sec_512 of the code dividends are excluded from the based on the facts and the representations made we rule as follows the creation ownership and operation of y will not cause you to lose your status as an exempt_organization under sec_501 of the code dividends you receive from y will not constitute unrelated_business_taxable_income under sec_512 of the code except as we have specifically ruled above we express no opinion as to the federal_income_tax consequences of the transactions described above under any other provision of the code this ruling is based on the understanding that there will be no material changes in the pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to this ruling is directed only to the organization that has requested it sec_6110 of facts upon which it is based your authorized representative you should keep a copy of this letter in your permanent records the code provides that it may not be used or cited by others as precedent telephone number are shown in the heading of this letter jane baniewicz manager exempt_organizations technical group if you have any questions about this ruling please contact the person whose name and sincerely