internal_revenue_service significant index no oepartment of the treasury ool2z7047 washington dg camtant paesan telephone number in reterence to tiep ra t a1 date sep in ce this is in response to your request dated date for a ruling tegarding the above-named trust the trust specifically you asked that we rule as to whether the trust satisfies certain requirements under sec_418a of the internal_revenue_code code facts the version of the trust described herein is the third amended and restated version dated date the trust by its terms provides death and severance benefits to employees who are specified in the adoption_agreement signed by those employers wfio have chosen to participate in the trust death_benefits are provided to all participants in the trust severance benefits are provided only to those participants whose employers elected in the adoption_agreement to provide such benefits each participating employer is declared to be a plan_administrator and is given all discretionary and other authority to control and manage the operation and administration of the trust however the trust requires each plan_administrator to delegate various duties and responsibilities to a contract administrator specified in the trust document amongst the delegated duties and responsibilities are i directing the trust's trustee as to the crediting and distribution of funds ii making claims decisions and iii maintaining accounting_records of death_benefits are equal to a specified percentage of compensation but no less than a minimum dollar amount specified in the trust the specified percentage is chosen by the employer at the time the trust is adopted by the employer the death_benefit provided to each participant is based on compensation at the time the trust is adopted by the employer and thus does not become automatically adjusted for subsequent changes in compensation the trust provides that a participant's right to receive death_benefits is forfeited upon a termination of employment or a discharge for cause also if the employer has elected to provide severance benefits in addition to the death_benefits owners of a significant amount of the total gornbined voting power or value of all classes of stock in the employer forfeit their right to receive death_benefits upon the attainment of the later of i age participation or ii ten years of if death_benefits are forfeited by a participant the participant has the option of purchasing the insurance_policy that was providing the death_benefit severance benefits are payable upon a termination of employment under the provisions of the trust a termination of employment occurs when the participant becomes totally disabled resigns or is discharged without cause a participant who is discharged for cause or voluntarily terminates without good cause forfeits severance benefits a participant's right to receive severance benefits is forfeited upon death or actual retirement for participants wno own at least of the employer severance benefits are forfeited upon the attainment of the jater of i age or ii ten years of participation the amount of an employee's severance benefit is determined under one of several formulas set forth in the trust's adoption_agreement there are four such formulas the particular formula that applies tothe employees of an employer is chosen by the employer at the time the trust is adopted each formula sets the employee's severance benefit equal to a specified percentage of average compensation multiplied by years_of_service as a participant in the trust but subject_to a maximum number of creditable years ' provides a graded_vesting schedule that calls for the total forfeiture of all severance benefits by any employee who has fewer than four years_of_service with the employer for employees with at least four years_of_service but less than ten years the graded_vesting schedule calls for a partial forfeiture of severance benefits under this graded schedule employees with four years_of_service receive of the benefit that would otherwise have been payable to them this percentage increases by ten percentage points for each additional year_of_service after ten years_of_service with the employer the employee is fully vested in the severance benefit in addition the trust ' each of the potential formulas is structured so that the maximum severance benefit will be either or of average_annual_compensation e an employer can withdraw from the trust this action gives rise to termination distributions that are received by those participants who are employed by the withdrawing employer the termination distribution made to a participant is equal to a pro-rated portion of the withdrawing employer's excess_assets the value of the excess_assets is equal to the portion of the employer's allocable share as described in the next paragraph of the trust's assets in excess of the amounts required to pay the benefits earned under the trust as well as any fees costs and other_amounts accrued by the employer termination distributions are also payable'upon termination of the trust itself the trust's assets are invested in individual insurance contracts tax- exempt securities and cash each participating employer has an allocable share of the trust's assets generally equal to the amounts held under the individual insurance contracts covering the employees of that employer plus the value of any additional assets being held in the employer's side fund the trust also provides that some of its assets will be held in certain special-purpose accounts as described in the trust these special-purpose accounts are as follows tax reserve_account this account is funded by amounts withheld at the discretion of the trust's coritract administrator from termination distributions le those that are made on account of either the termination of the trust or the withdrawal from the trust by an employer funds in the tax reserve_account are used to pay various tax_liabilities of the trust professional fee reserve_account this account holds funds that are used to retain professionals on behalf of the trust it is funded by amounts withheld at the discretion of the contract administrator from termination distributions the contract administrator has the authority to require employers to make annual contributions into this account reserve_account this account is used to pay benefits to participants but only to the extent that such benefits have not been funded by the employer of that participant tis funded by one-time contributions made by the employer at the time the employer the trust document contained conflicting statements as to whether the participants would raceive payment of their vested severance benefits prior to the calculation of the excess_assets adopts the trust the amount of the contribution is determined under a formula established by the contract administrator surplus account this account is used to pay benefits to participants but only to the extent that such benefits have not been funded by the empioyer of the participant and only to the further extent that the funds in the reserve_account have been exhausted it is funded by the experience gains of those employers who have achieved full funding of their benefit obligations neither of the terms experience gain and full funding are defined in the trust document however the trust document does describe two situations that might give rise to an experience gain first the non- vested portion of a severance benefit that was otherwise payable to a participant will be forfeited to the surplus account but as just noted only if the employer had already fully funded its benefit obligations second the trust document provides the contract administrator with the authority to withhold a portion of the excess_assets that would otherwise be distributed to participants as part of a termination distribution and to forfeit this portion to the surplus account the trust document does not indicate the circumstances under which the contract administrator may take this action the sample insurance policies provided along with your request are self- described as flexible premium adjustable life policies ie a type of policy commonly known as universal_life_insurance the policy permits the payment of additional premiums at any time during the life of the insured subject_to any maximums or other restrictions that might be imposed by the insurer the policies pay annual dividends which are either paid to the policyholder in cash or added to the policy's account value sec_8_1 of the trust document requires each employer to make contributions in amounts sufficient to pay the severance benefits for its employees if the employer fails to make such required contributions the contract administrator must take whatever actions are necessary to collect the contributions from the employer the contract administrator also may unilaterally terminate the employer's particinaticn in the trust for failure to make required the formula varies depending on whather the employer elects to provide death_benefits only or death_benefits and severance benefits contribution to the reserve_account is equal to one-fourth of of the employer's deposit subject_to a minimum amount equal to the greater of dollar_figure or one-twelfth of the term cost of insurance attributable to the employees of that employer for the employers that provide both death_benefits and severance benefits the contribution to the reserve_account is equal to of the employer's deposit subject_to a minimum amount of dollar_figure for the death_benefit only employers the if an employer has not fully funded its benefit obligations then none of its experience gains are forfeited to the surplus account contributions and may offset the value of such unpaid contributions against an benefit distributions including termination distributions or roll-over payments - furthermore if an owner or highly-compensated employee terminates employment at a time when the employer's allocable share of the trust assets is not sufficient to pay the full severance benefits for all of the employer's employees then the contract administrator shall limit the severance benefit payable to the amount that can be paid from his or her employer's allocable share of the trust's assets as reduced by the amount of severance benefit earned by employees of that employecwhte are not owners or highly- compensated in the case of employers that have chosen to provide death_benefits only and these are the majority of the employers section of the trust document requires the employers to make contributions that the insurer determines to be necessary to fund the death_benefits nonetheless certain marketing material used by the trust described in more detail below states that the funding of death_benefit only plans’ is flexible and further states that there is no maximum contribution under such plans in operation the individual insurance policies purchased under the death_benefit only plans have developed substantial cash values thus indicating that contributions under these policies have been in excess of the amounts needed to provide current insurance protection in support of your requested rulings you provided us with copies of marketing material developed by the trust this material included a brochure entitied increase benefits reduce taxes which contained descriptions of the trust and its operations in question-and-answer format you also provided a document entitled answers to commonly-asked questions the trust is currently in operation you provided us with account summaries and billing invoices for approximately participating employers of these participating employers approximately were providing severance-pay benefits in addition to death_benefits most of the billing invoices were dated at various points in the twelve- month period starting in the second quarter of and ending in the first quarter of inclusive the aggregate amount billed on the invoices was approximately dollar_figure you also provided us with a copy of the trust’s form_5500 filing this filing indicates that contributions received by the trust during were in the amount of approximately dollar_figure dollar_figure sec_12_3 of the trust document permits the roll-over to another wellare benefit plan of amounts that would otherwise have been paid as termination distributions a few invoices were dated earlier than the second quarter of regarding the charge for the reserve accaunt the invoices provided to us showed a charge only for invoices dated date or later although a few invoices with such dates did not show a charge in all cases the charge was dollar_figure even though the formula described in our earlier footnote would have produced a larger amount in some cases one of the invoices called for an insurance premium of approximately dollar_figure this amount is in excess cf of the aggregate amount billed on the invoices provided to us contributions reported on the trust's 3form filing it is also in excess of of the annual the account summaries are provided to the sponsoring employers under the title annual company report hereinafter company report or report’ these reports do not provide any information about the total amount of assets held in the trust rather they contain information on the value of assets allocable to that particular employer for employers who offer severance benefits in addition to death_benefits the company report also indicates whether the severance benefits are overfunded or underfunded each company report also lists the amounts being held in the reserve_account and the professional fee reserve_account the reports provided to us indicated that the reserve_account held assets of approximately dollar_figure they also indicated that the professional fee reserve_account held approximately dollar_figure the reports did not indicate that there were any amounts being held in the surplus account and the tax reserve_account other than the trust's form_5500 filing you did not provide any comprehensive financial statement relating to the trust requested rulings you asked us to rule that the trust provides welfare benefits and is not a plan of deferred_compensation oy the trust is a single_plan and not an aggregation of individual plans and the trust maintains no arrangements for experience rating ‘on the basis of such findings you further asked that we rule that the trust satisfies the requirements of code sec_419a and as a consequence that ail contributions made to the trust by sponsoring employers would be currently deductible at law sec_404 of the code provides that if compensation is paid_or_accrued on account of any employee under a plan deferring the receipt of such compensation such compensation shall not be deductible under chapter of the code but if it would otherwise be deductible it shall be deductible under code sec_404 subject_to various limitations sec_404 of the code provides that if contributions are paid to a plan that is not described in paragraphs or of code sec_404 then such contributions shall be deductible in the taxable_year in which an amount attributable to the contribution is includible in the gross_income of the employees participating in the plan but in the case of a plan in which more than one employee participates only if separate_accounts are maintained for each employee sec_404 a of the code provides that any plan providing for deferred benefits other than compensation_for employees their spouses or their dependents shall be treated as a plan deferring the receipt of compensation sec_404 provides that sec_404 shall not apply to any benefit provided through a welfare_benefit_fund as defined in sec_419 sec_419 of the code prevides that contributions paid_or_accrued by an employer to a welfare_benefit_fund siiall not be deductible under chapter of subtitle a of the internal_revenue_code but if they would otherwise be deductible shall be deductible under code sec_419 for the taxable_year in which paid subject_to the limitation of code sec_419 sec_419 of the code provides that the amount of the deduction allowable under code sec_419 shall be limited to the welfare_benefit fund's qualified_cost for the taxable_year the term qualified cost’ is defined in code sec_419 sec_419 of the code defines the term welfare_benefit to mean any benefit other than a benefit to which code sec_83 code sec_404 determined without regard to sec_404 or code sec_404a applies sec_419a f a of the code provides that subpart d of chapter of subtitle a of the internal revenue cade shall not apply to any welfare_benefit_fund which is part of ten or more employer plan subpart d consists of sec_419 and however sec_419a f a further provides that this exception shall not apply to any plan which maintains experience-rating arrangements with respect to individual employers sec_419a of the code provides that the term ten or more employer plan means a plan to which more than one employer contributes and to which no employer normally contributes more than ten percent of the total contributions contributed under the plan by all employers sec_1_162-10 of the income_tax regulations the regulations provides that amounts paid_or_accrued within a taxable_year for dismissal wages unemployment benefits or a welfare or similar benefit plan are deductible under code sec_162 if they are ordinary and necessary expenses of the trade_or_business however except in the-case c certain negotiated plans such amounts shall not be deductible under code sec_162 if they may be used to provide benefits under a plan of deferred_compensation of the type referred to in cade sec_404 in such event the extent to which these amounts are deductible shall be governed by the provision of code sec_404 and the regulations issued thereunder however regulation sec_1_162-10t q a-2 provides that sec_419 governs the deduction of contributions paid_or_accrued by an employer with respect to a welfare_benefit_fund within the meaning of sec_419 sec_1_404_a_-1 of the reguiations provides that code sec_404 does not apply to contributions to a plan which is solely a dismissal wage or unemployment benefit plan welfare or similar benefit plan or a combination thereof sec_1_404_a_-1 of the regulations provides that if contributions to a plan of deferred_compensation can be used to provide any of the benefits described in sec_1_404_a_-1 a of the regulations then code sec_404 a applies to the entire contribution to the plan except as provided under code sec_404 relating to certain negotiated plans established before date sec_1_404_b_-1t q a-2 a of the regutations provides that for purposes of sec_404 b and d a plan defers the receipt of compensation or benefits to the extent it is one under which an employee receives compensation or benefits more than a brief period of time after the end of the employer's taxable_year in which ths services creating the right to such compensation or benefits are performed sec_1_404_b_-1t q a-2 b of the temporary regulations provides that a plan shall be presumed to be one deferring the receipt of compensation_for more than a brief period of time after the end of an employer's taxable_year to the extent-that compensation is received after the day of the calendar month after the end of the employer's taxable_year in which the related_services are rendered or analysis as a preliminary matter we note that nondeductible constructive distributions to employee owners can take place under arrangements whereby contributions to a_trust are used to pay insurance premiums in amounts that are in excess of those needed to provided current insurance protection for the employee owners see neonatology associates p a et al vs commissioner t c no issued date in the instant case most of the employers have made contributions weil in excess of the amounts needed to provide current protection as we have not been asked to rule as to whether the trust provides for constructive distrioutixns to owner employees we do not consider this question however we note that to the extent the trust provides constructive distributions the issues that you raise and we address below would not need to be considered whether the trust is a plan of deferred_compensation you take the position that the trust is a welfare_benefit_fund within the meaning of sec_419 on the basis that death and severance benefits provided through the trust are welfare benefits within the meaning of sec_419 if those death or severance benefits are deferred benefits other than compensation that would be treated as deferred_compensation under sec_404 they would nevertheless be treated as welfare benefits under sec_419 because they are not within the excaption under sec_419 for benefits to which sec_404 applies they would not be within that exception because the reference in sec_419 to sec_404 is to sec_404 determined without regard to sec_404 however here the trust in effect provides deferred_compensation because of the virtual certainty that the benefits will be provided in one form ar another see 31_f3d_569 cir holding that a severance_pay benefit was actually deferred_compensation because it was payable upon termination for any reason except dishonesty or fraud or if the employee took a leave of absence or converted to part time employment because the trust provides deferred_compensation sec_404 governs the deductibility of the entire contribution to the trust regulation sec_1 a - ay in the remainder of this section we discuss our finding that the trust is providing deferred_compensation we provide separate analyses for those plans that provide only death_benefits and those that also provide severance benefits 92h plans providing only death_benefits n addition to providing benefits on account of death the trust also provides benefits on account of empioyer withdrawal from the trust and on in this regard the information furnished account of termination of the trust itself by you shows that even those employers who have elected to provide only death_benefits have made contributions substantially in excess of the cost of current insurance protection t appears that these excess arnounts to the extent that they are not used to provide insurance protection will become available to participants because the participants will be able to receive termination disttibutions either in cash of in_kind indeed the trust's marketing material states that one of the benefits provided by the trust is a post retirement income stream from your paid up life_insurance_policy - tax free the owners of the participating employers generally possess the ability to cause the employer to withdraw from the trust at will because the trust provides for termination distributions there is not a realistic risk that the excess_contributions described above will be forfeited as a result the death_benefit only plans do not operate to provide insurance in the case of a contingent event rather because of the virtual certainty that the excess_contributions will be provided to the participants in one form or another the plans provide deferred_compensation plans providing severance benefits the severance benefits provided under the trust are payable if a participant becomes totally disabled resigns for good cause or is discharged without cause severance benefits also appear to be available under circumstances that cause the benefits to be provided not as insurance against a contingent event but rather as an expected source_of_income the marketing material distributed by the trust in particular the answers to commonly asked questions provides two examples of such circumstances first when discussing the possibility that severance benefits might be forfeited on account of tetirement the marketing material states there is no reason for forfeiture due to retirement to occur this is an event controlled by the employee he she should delay receiving social_security and other retirement benefits until his her severance benefits expire see the brochure entitled increase benefits reduce taxes of second in its discussion of the definition of severance benefits the marketing material states that such benefits will be paid to owners upon the sale of the - business in addition to its provisions for severance benefits the trust also provides benefits on account of employer withdrawal from the trust and on account of termination of the trust itself an owner in particular would have control_over withdrawal from the trust on the basis of the above there fexitte realistic potential for the forfeiture of benefits accordingly the plans providing severance benefits are providing deferred_compensation we also note that because the termination distributions are payable when the insured is alive and still working for the employer they are not either death or severance benefits but rather constitute a form of deferred_compensation whether the trust is an aggregation of individual plans and is not a single plan pursuant to its sec_11 entitled accounting the trust maintains a separate_accounting of each employer's allocable share of the trust's assets the trust further requires that the severance benefit for an owner or highly- compensated employee be limited to the amount that can be paid from his or her employer's allocable share of the trust's assets as reduced by the amount of severance benefit earned by employees of that employer who are not owners or highly-compensated you assert that the existence of the reserve_account and the surpius account causes the trust to become a single_plan you have not provided any support for this assertion moreover the provisions of the trust that serve to limit the severance benefits that might otherwise be payable to owners and highly- compensated employees on account of insufficient funds in the employer's allocable share of the trust's assets make it very- unlikely that either the reserve_account or the surplus account will ever be called upon to provide substantial amounts of funding this point is stated clearly in the marketing material provided by you in suppor of our request a brochure entitled tn this regard we nate that the same marketing material advises potential participating employers that employees with many years_of_service will gain the most from a establishing a severance_pay plan’ - in ruling we determine that the trust is a plan of deferred_compensation to which sec_404 deduction rules apply rather than the deduction rules of sec_419 given that determination the other issues you raise are arguably moot because the ultimate issue presented is the apptication of sec_419a f we are addressing the alternative reasons that that section does not apply ar increase benefits reduce taxes the brochure contains the questions are participating employers liable to meet employee claims if both the reserve_account and surplus account are exhausted the answer is yes but the answer goes on to state that the contract administrator annually reviews all employer groups to determine if their funding is adequate fa group is underfunded and unable to increase funding the contract administrator has the authority to modify the group's adeption agreement to decrease their benefits thereby insuring the group is funded appropriately also it is unclear whether the reserve_account represents funds that are separate from the allocable shares of the individual employers when describing the reserve_account the brochure states it's funded by a one-time fee from each participating group the fee is deducted from their contribution but remains an asset of their plan even if the reserve_account does consist of funds that are separate from the allocable shares of the individual employers the amount of assets in the account is relatively insignificant according to the individual company reports provided to us the funds in the reserve_account as of the end of date cornprised only about of the total funds held by the trust we have a similar concem about the materiality of the surplus account the financial records provided by you did not reflect’ any funds being held in the surplus account under the terms of the trust i individual employers are given the authority to select many of the relevant terms under which their employees might collect benefits ii each employer's contributions serve to benefit primarily its own employees and not the employees of other employers ili a severed prohibited_group member owner or highly_compensated_employee might receive less the full promised benefit even though the plan as a whole has sufficient assets for paying the full benefit and iv the trust maintains a separate_accounting of the funds contributed by and credited to each employer also the adoption_agreement signed by each employer is very similar to adoption agreements used to establish separate plans under the terms of a master_plan in summary there does not appear to be a substantive mechanism whereby assets or liabilities are pooled shared or distributed among the plans of the various individual employers also the trust has several characteristics that are typical of arrangements in which separate plans share a common administrator consequently the trust is an aggregation of separate plans with a common administrator the contract administrator’ it is not a single_plan pp whether the trust maintains an arrangement for experience rating with respect to individual sponsors the exception under code sec_419a is not available to plans that maintain experience-rating arrangements with respect to individual employers in the instant case we are asked to rule whether the trust maintains any atrangement for experience rating the term experience-ratirig- arrangements is not defined in the code the term experience rating’ is uses szae conference_report accompanying the deficit_reduction_act_of_1984 c b vel pincite although the term is not defined there the conference_report states that under plans that use experience rating the employer's interest with respect to the plan is more similar to the relationship of an employer to a fund than an insured to an insurer’ with regard to owners and highly-compensated employees the trust maintains an arrangement whereby benefits are adjusted to reflect the amounts credited to each employer's account and accordingly maintains an experience rating arrangement see 108_tc_524 as described earlier in this letter article four of the trust entitled severance benefits provides that participants who are either owners or highly-compensated employees do not necessarily receive the severance benefits called for under the employer's adoption_agreement ever f-such participants would otherwise be eligible for those benefits to limit severance benefits to the tesser of i the amount called for under the adoption_agreement and ii the amount of assets that constitutes the employer's allocable share of the trust reduced by the amount of severance benefit that might have been earned by employees who are not owners or highly compensated ’ instead the trust requires the contract administrator this limiting of severance benefits is reinforced in trust sec_8_1 entitled funding of severance benefits which authorizes the contract administrator to offset the amount of any benefit distribution by the amount of any unpaid employer contributions furthermore this trust section clarifies the aforementioned pravisions of article four stating that the limitation of severance benefits to owners and highly-compensated employees shall take place whenever there are not sufficient assets allocable to the employer to pay ail participant employees’ full severance_pay benefits at the time of a participant's termination of employment furthermore the trust's provision for crediting its surplus account with experience gains will take effect with respect to any particular employer only after te ere also see trust sec_11 entitled accounting which requires the contract administrator to maintain accounting_records that reflect each employer's share of the plan's assets nc 2yt that employer has achieved full funding of its benefits prior to such full funding any experience gains that are attributable to the employees of an employer remain within that employer's allocable share of the trust's assets based upon the information you have provided it appears that the net effect of the various trust provisions is to limit the use of an employer's allocable share of the trust's assets essentially to providing benefits for its own employees with respect to death_benefits we ncte that sec_5 a of the trust document provides that death_benefits shall be funded primarily through the purchase of life_insurance contracts from the insurer sec_5 c provides that the insurer or contract administrator shall provide each employer annually with the amount of the minimum premium payments that must be paid to keep the policies in force on the lives of the employer's employee group section further provides that if the employer does not make the required_payments the trustee makes the payments from the side fund assets allocable to the employer's employee group and places a lien on the policy equal to the payments made from the side fund plus interest when such a fien has been placed on the policy the actual death_benefit provided to the beneficiary by the policy will be reduced by the amount of the lien sec_5 c thus the lien provides a mechanism whereby beneficiaries do not necessarily receive the death_benefits called for under the empldyer's adoption_agreement even if such beneficiaries would otherwise be eligible for those benefits thus the trust maintains an arrangement whereby death_benefits might be adjusted to reflect the amounts paid into each employer's account and accordingly maintains an experience rating arrangement with respect to those benefits this the trust's provision for termination distributions also indicates that there is experience rating with respect to individual employers the funds used to make such distributions to the employees of any particular employer represent the excess of contributions made by that employer plus investment earings allocated to that employer's allocable share of the trust's assets over the amounts needed to provide for benefits attributable to the employees of that employer plus related expenses as such the termination distributions function as experience refunds consequently the trust’s provision for the payment of such refunds can be viewed as an arrangement for experience rating you assert that the plan does not maintain any arrangement for experience rating because the reserve_account and the surplus account serve to supplement losses of the individual employers as noted above it is very unlikely that any employer would sustain such losses furthermore as discussed in the previous section neither the reserve_account not the surplus account appear to contain significant amounts of funds and it is unlikely that they would materially affect the amount of benefits provided to participants 2s - based on the above the trust maintains an experience-rating arrangement with respect to individual employers finally as noted above from the information we have it appears that one of the participating employers contributed in excess of ten percent of the total contributions contributed under the plan by all employers f one employer normally contributes more than ten percent of the total contributions the plan fails to satisfy the definition of 10_or_more_employer_plan under sec_419a conclusion based on the material provided we find that the trust assuming that it is not an arrangement that provides constructive distributions to employee owners is a plan of deferred_compensation the trust is an aggregation of individual plans and is not a single_plan and the trust maintains an arrangement for experience rating with respect to individual employers as a consequence of these findings we further find that the trust does not satisfy the requirements of code section 449a f ‘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 by others as precedent a copy of this letter is being sent to your authorized representative pursuant to a power-of-attormey form on file with us sincerely ee james e halland jr manager employee_plans actuarial group tax_exempt_and_government_entities_division


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 b02 plr-138947-13 date date ty ------- legend taxpayer corporation advisor date1 taxable_year dear ---------------------- ----------------- ------------------------------------------ --------------------------------------------------- -------------------------------------------------- -------------- ------- this is in response to the letter dated date requesting permission to attach an election statement to taxpayer’s originally filed federal tax_return for taxable_year the election statement was not included with taxpayer’s originally filed federal tax_return for taxable_year although it was required in order for taxpayer to use a safe_harbor method_of_accounting the request is made in accordance with sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations taxpayer represents the following facts taxpayer incurred transaction costs including success-based fees paid upon closing in taxable_year related to the acquisition of corporation taxpayer capitalized the transaction costs in accordance with sec_263 of the internal_revenue_code and sec_1_263_a_-2 and sec_1_263_a_-5 of the income_tax regulations taxpayer capitalized percent of the success-based fees and deducted the remaining percent on its timely filed taxable_year return prepared by advisor consistent with the safe_harbor plr-138947-13 election provided in revproc_2011_29 2011_18_irb_746 however taxpayer failed to attach the mandatory statement required by revproc_2011_29 to elect to use the safe_harbor method of allocating success-based fees this oversight was uncovered by advisor in date1 and before any discovery by the internal_revenue_service service by date taxpayer had been selected for examination by the service for taxable_year but the success-based fees incurred in taxable_year had not been raised by the examination team after discussions with advisor and the examination team taxpayer determined that in order to perfect the election for safe_harbor treatment under revproc_2011_29 taxpayer would need to request relief pursuant to sec_301_9100-1 and accordingly taxpayer requests that an extension of time be granted solely for the purposes of allowing taxpayer to attach to its taxable_year return the mandatory statement regarding the election to use the safe_harbor method of allocating success-based fees sec_263 and sec_1_263_a_-2 provide that no deduction shall be allowed for any amount_paid out for property having a useful_life substantially beyond the taxable_year in the case of an acquisition or reorganization of a business_entity costs that are incurred in the process of acquisition and that produce significant long-term benefits must be capitalized 503_us_79 397_us_572 under sec_1_263_a_-5 a taxpayer must capitalize an amount_paid to facilitate a business acquisition or reorganization transaction described in sec_1_263_a_-5 an amount is paid to facilitate a transaction described in sec_1_263_a_-5 if the amount is paid in the process of investigating or otherwise pursuing the transaction sec_1_263_a_-5 provides that an amount that is contingent on the successful closing of a transaction described in sec_1_263_a_-5 success-based_fee is presumed to facilitate the transaction and thus must be capitalized a taxpayer may rebut the presumption by maintaining sufficient documentation to establish that a portion of the fee is allocable to activities that do not facilitate the transaction and thus may be deductible a taxpayer's method for determining the portion of a success-based_fee that facilitates a transaction and the portion that does not facilitate the transaction is a method_of_accounting under sec_446 because the treatment of success-based fees was a continuing subject of controversy between taxpayers and the service the service published revproc_2011_29 revproc_2011_29 provides a safe_harbor method_of_accounting for allocating success-based fees paid in business_acquisitions or reorganizations described in regulations sec_1_263_a_-5 in lieu of maintaining the plr-138947-13 documentation required by sec_1_263_a_-5 this safe_harbor permits electing taxpayers to treat percent of the success-based_fee as an amount that does not facilitate the transaction ie amounts that can be deducted the remaining portion of the fee must be capitalized as an amount that facilitates the transaction section dollar_figure of revproc_2011_29 allows the taxpayer to make a safe_harbor election with respect to success-based fees section dollar_figure provides that the service will not challenge the taxpayer’s allocation of success-based fees between activities that facilitate a transaction described in sec_1_263_a_-5 costs that must be capitalized and activities that do not facilitate the transaction cost that may be deductible if the taxpayer does three things first the taxpayer must treat percent of the amount of the success-based_fee as an amount that does not facilitate the transaction and thus may be deductible second the taxpayer must capitalize the remaining amount of the success-based_fee as an amount which does facilitate the transaction finally the taxpayer must attach a statement to its original federal_income_tax return for the taxable_year the success-based feed is paid_or_incurred stating that the taxpayer is electing the safe_harbor indentifying the transaction and stating the success-based_fee amounts that are deducted treated as not facilitating the transaction and capitalized treated as facilitating the transaction it is this last requirement that taxpayer requests permission to accomplish with this ruling_request taxpayer requests permission with this ruling_request to attach the statement required by section dollar_figure of revproc_2011_29 to its return by amending its original filed return and superseding it with a return with the proper election statement completed and attached sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make certain regulatory elections sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 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 that granting relief will not prejudice the interests of the government plr-138947-13 sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment sec_301_9100-3 provides special rules for accounting_method regulatory elections sec_301_9100-3 provides that the interests of the government are deemed prejudiced except in unusual or compelling circumstances if the accounting_method regulatory election for which relief is requested is subject_to the advance consent procedures for method changes requires a sec_481 adjustment would permit a change from an impermissible method_of_accounting that is an issue under consideration by examination or in any other setting or provides a more favorable method_of_accounting if the election is made by a certain date or taxable_year conclusion based upon our analysis of the facts as represented taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government and therefore the requirements of sec_301_9100-1 and sec_301_9100-3 have been met furthermore granting relief will not result in taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than taxpayer would have had if the election had been timely made nor will any closed years be affected therefore the interests of the government will not be prejudiced by granting the request for relief furthermore granting relief will not prejudice the interests of the government associated with the special rules for accounting_method regulatory elections in this case the safe_harbor election for success-based fees the election provided by revproc_2011_29 for allocating the success-based fees is granted on an automatic basis if all proper procedures including the attaching the mandatory statement are followed does not require a sec_481 adjustment is not an issue under consideration and does not provide a more favorable method_of_accounting if the election is made by a certain date or taxable_year taxpayer is granted an extension of days from the date of this ruling to file its mandatory statement as required by section dollar_figure of revproc_2011_29 stating that it is electing the safe_harbor for success-based fees identifying the transaction and stating the success-based_fee amounts that are deducted and capitalized plr-138947-13 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 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 as to whether taxpayer properly included the correct costs as its success-based fees subject_to the retroactive election or whether taxpayer’s transaction was within the scope of revproc_2011_29 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 a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling regards kari l fisher____________________ kari l fisher assistant to the branch chief branch associate chief_counsel income_tax accounting


internal_revenue_service number release date index number -------------------------------------------------- ---------------------------------- ------------------- ------------------------------ department of the treasury washington dc person to contact ------------ -------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-117694-06 date date x ------------------------------------ legend ------------------------------------------------------------ dear -------------------- seeking a ruling concerning the qualified income exception to the publicly_traded_partnership under sec_7704 of the internal_revenue_code this letter is in response to your letter dated date on behalf of x facts based on the materials and representations contained within we understand the relevant facts to be as follows x is engaged in the business of processing packaging and marketing lubricating oil x and its affiliates purchase highly refined petroleum base oils from various refineries and then blends and processes the petroleum base oils into lubricating oils which it then packages and markets to its customers x purchases highly refined petroleum base oils from refineries the petroleum base oil is then blended with latest additive technology to make it more suitable for its intended use as lubricating oil x earns income from the sale of lubricating oil to retailers who then sell the product through their own retailers or in bulk to wholesale distributors law and analysis sec_7704 provides that a publicly_traded_partnership shall be treated as a corporation sec_7704 provides that sec_7704 shall not apply to any publicly sec_7704 provides that the term publicly_traded_partnership means any plr-117694-06 partnership if interests in that partnership are traded on an established_securities_market or interests in that partnerships are readily_tradable on a secondary market or the substantial equivalent thereof traded partnership for any taxable_year if such partnership met the gross_income requirements of sec_7704 for such taxable_year and each preceding_taxable_year beginning after date during which the partnership or any predecessor was in existence requirements of sec_7704 for any taxable_year if percent or more of the gross_income of such partnership for such taxable_year is qualifying_income things income or gains derived from the exploration development mining or production processing refining transportation including pipelines transporting gas oil or products thereof or the marketing of any mineral_or_natural_resource including fertilizer geothermal_energy or timber sec_7704 provides that the term qualifying_income among other sec_7704 explains that a partnership meets the gross_income conclusion based solely on the materials submitted we conclude that the income derived by except as specifically ruled upon above we express no opinion concerning the x from the processing of petroleum base oils into lubricating oils is qualifying_income within the meaning of sec_7704 federal tax consequences of the transactions described above under any other provisions of the code specifically no opinion is expressed as to whether the percent gross_income requirement of sec_7704 is met of the code provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer who requested it sec_6110 plr-117694-06 pursuant to the power_of_attorney on file with this office copies of this letter will be sent to x’s authorized representative sincerely dianna miosi chief branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter for sec_6110 purposes copy of this letter


t c summary opinion united_states tax_court dontez r parks petitioner v commissioner of internal revenue respondent docket no 15672-05s filed date dontez r parks pro_se terry serena for respondent goldberg special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency in petitioner’s federal_income_tax of dollar_figure for taxable_year the issues for decision are whether petitioner is entitled to a dependency_exemption deduction for his niece bmb whether petitioner is entitled to an earned_income_credit and whether petitioner is entitled to both a child_tax_credit and an additional_child_tax_credit background some of the facts were stipulated and are so found the stipulation of facts and attached exhibits are incorporated herein by reference at the time the petition was filed petitioner resided in miamisburg ohio during the taxable_year petitioner held several jobs he worked for burlington coat factory extra help staffing and american building maintenance company abm earning dollar_figure dollar_figure and dollar_figure respectively during the greater part of petitioner worked for abm as an office cleaner at a building that was located across the street from an apartment he lived in with his girlfriend trueshonda carmicle ms carmicle petitioner’s daily work shift was from p m until a m he worked for abm from date until sometime in the court uses only the initials of the minor child ms carmicle worked at a ymca located near her home in an after-school program for to hours per day from the income derived from her job ms carmicle helped pay for the rent food and other expenses she shared with petitioner petitioner has a sister unique parks ms parks who lives in lima ohio with her mother ms parks had a child bmb who was born on date following the birth of her child ms parks began experiencing difficulty in school and was required by school officials to attend summer classes because ms parks was required to attend extra tutoring and eventually summer school care for her child fell upon petitioner’s mother subsequently petitioner’s mother found it difficult to care for ms parks and bmb in addition to her employment as a nursing home aide and her guardianship of several foster children residing already at her residence bmb’s father has been generally uninvolved with his child since her birth and has not provided any form of financial assistance ms parks began receiving assistance vouchers known as wic for her and her baby the vouchers entitled ms parks to a monthly amount of food items such as milk eggs cheese cereal and juice ms parks also received medicaid benefits that entitled bmb to medical_care petitioner’s niece bmb came to live with petitioner and ms carmicle sometime in late date ms carmicle would often take the child to work with her at the ymca if the child was not with ms carmicle petitioner would watch bmb after he returned home from work in the early morning in early petitioner and ms carmicle resided in a one- bedroom apartment in fairborn ohio on date petitioner and ms carmicle had their first child around this time petitioner and ms carmicle moved to a new residence in miamisburg ohio on his tax_return petitioner claimed a dependency_exemption deduction an earned_income_credit and both a child_tax_credit and an additional_child_tax_credit with respect to bmb respondent disallowed the dependency_exemption deduction claimed by petitioner because petitioner did not show that he provided over half of the support for bmb or that bmb resided with him for over one-half of the year as a result of the disallowance respondent further disallowed both the claimed earned_income_credit and child care credits discussion in general the commissioner’s determination set forth in a notice_of_deficiency is presumed correct 290_us_111 in pertinent part rule a provides the general_rule that the burden_of_proof shall be upon the petitioner in certain circumstances however if the taxpayer provides credible_evidence with respect to any factual issue relevant to ascertaining the proper tax_liability sec_7491 places the burden_of_proof on the commissioner sec_7491 rule a credible_evidence is ‘the quality of evidence which after critical analysis the court would find sufficient to base a decision on the issue if no contrary evidence were submitted’ 122_tc_143 quoting 116_tc_438 sec_7491 applies only if the taxpayer complies with substantiation requirements maintains all required records and cooperates with the commissioner for witnesses information documents meetings and interviews sec_7491 with respect to the instant matter petitioner has not raised an argument with respect to shifting the burden_of_proof under sec_7491 further petitioner has not shown that he complied with the threshold requirements thereafter respondent on the other hand argues that petitioner has not fully cooperated with respondent’s requests for information documents and meetings the court concludes on this record that the burden_of_proof remains on petitioner therefore petitioner bears the burden of showing that he is entitled to a dependency_exemption we interpret the quoted language as requiring the taxpayer’s evidence pertaining to any factual issue to be evidence the court would find sufficient upon which to base a decision on the issue in favor of the taxpayer see bernardo v commissioner tcmemo_2004_199 deduction that he is entitled to an earned_income_credit and that he is entitled to a child_tax_credit for the year at issue moreover deductions are a matter of legislative grace and are allowed only as specifically provided by statute 503_us_79 292_us_435 a dependency_exemption sec_151 allows a taxpayer to deduct an annual exemption_amount for each dependent of the taxpayer sec_152 defines the term dependent in pertinent part to include a son or daughter of a brother or sister of the taxpayer sec_152 to prevail on this issue petitioner must show by competent evidence that the individual claimed satisfies the definitional requirements provided in sec_152 the relationship requirement the amount of total support provided for the individual claimed and he provided more than half of such support taken together the support requirement see sec_151 sec_152 in this instance the claimed individual bmb satisfies the definitional requirement of dependent within the meaning of sec_152 specifically bmb is the daughter of petitioner’s sister accordingly the remaining issue is whether petitioner provided more than one-half of his niece’s total support for for this purpose support is defined as including food shelter clothing medical and dental care education etc see sec_1_152-1 income_tax regs sec_1 a i income_tax regs which provides for purposes of determining whether or not an individual received for a given calendar_year over half of his support from the taxpayer there shall be taken into account the amount of support received from the taxpayer as compared to the entire amount of support which the individual received from all sources including support which the individual himself supplied in other words the support_test requires the taxpayer to establish the total support costs for the claimed individual and that the taxpayer provided at least half of that amount 73_tc_963 see cotton v commissioner tcmemo_2000_333 gulvin v commissioner tcmemo_1980_111 affd 644_f2d_2 5th cir toponce v commissioner tcmemo_1968_101 thus a taxpayer who cannot establish the total amount of support costs for the claimed individual generally may not claim that individual as a dependent 56_tc_512 cotton v commissioner supra the amount of total support provided by the taxpayer may be reasonably inferred from competent evidence see 46_tc_515 petitioner testified that bmb resided with him from date until date with respect to the amounts provided for his niece’s support petitioner explained that due to an overcharge on his bank account he was required to deposit his paychecks in his girlfriend’s account he testified that he gave ms parks approximately dollar_figure every weeks to support his niece bmb petitioner further testified that he bought bmb clothes food and diapers he estimated that he spent dollar_figure-35 per week for food for bmb petitioner also stated that he purchased dollar_figure worth of disposable diapers in a box that would last approximately a month according to petitioner ms carmicle would also purchase baby clothes for bmb at trial ms parks confirmed that bmb went to live with petitioner in date while she attended summer school which ended in date for a month period between summer school and the start of the school year in august bmb came and stayed for a little bit according to ms parks bmb sometimes stayed with her at her mother’s house during weekends after the start of the school year ms parks also testified that her mother would help financially when she could in ms parks’ estimation it cost about dollar_figure per month to support bmb we find petitioner’s testimony to be credible as to the fact that he provided support for his niece we also find petitioner’s sister to be credible as well however the record as to the actual amounts provided by petitioner for the care of the child is distressingly vague and incomplete in this regard petitioner did not keep records of how much he spent on bmb while petitioner was able to partially reconstruct for the court an approximate dollar amount of total support provided for his niece there is no documentation with respect to the expended funds in addition petitioner’s mother apparently provided some financial support for bmb although there is also no accounting for these funds moreover petitioner’s sister received wic vouchers and medicaid petitioner also acknowledged that ms carmicle contributed towards rent food and other incidental household_items as well as for some of bmb’s expenses thus we cannot clearly say that petitioner has established the total amount of support for bmb in taxable_year petitioner attempted to show that he provided over half of the support for bmb by submitting his paychecks from abm as well as bank account statements in ms carmicle’s name however the deposits to the bank account do not appear to correlate with petitioner’s paychecks from the information before us we discern that petitioner deposited two abm checks in ms carmicle’s bank account the two checks are date in the amount of dollar_figure which was deposited on date and date in the amount of dollar_figure which was deposited on date we are convinced that during petitioner paid expenses on behalf of bmb and was a caring uncle to his niece however petitioner has failed to provide the court with any significant corroborative evidence establishing the total amount of support or that he provided over half of bmb’s support during the tax_year upon the basis of the record before us respondent’s determination on this issue is sustained b earned_income_credit as previously stated petitioner claimed an earned_income_credit for taxable_year with bmb as the qualifying_child in the notice_of_deficiency respondent disallowed the earned_income_credit subject_to certain limitations an eligible_individual is allowed a credit which is calculated as a percentage of the individual’s earned_income sec_32 earned_income includes wages sec_32 sec_32 in a difficulty is that for about half of the abm paychecks the reported amounts are for gross with the net amounts cut off in the joint exhibits even taking into account net_income calculations the amounts still do not correspond with the amounts deposited for some of the abm paychecks that clearly report net_income there are no corresponding bank deposit statements for example there are no statements for june july september and date pertinent part defines an eligible_individual as any individual who has a qualifying_child for the taxable_year a qualifying_child is one who satisfies a relationship_test a residency test and an age_test sec_32 the pertinent parts of sec_32 provide qualifying_child -- a in general --the term qualifying_child means with respect to any taxpayer for any taxable_year an individual-- i who bears a relationship to the taxpayer described in subparagraph b ii who has the same principal_place_of_abode as the taxpayer for more than one- half of such taxable_year and iii who meets the age requirements of subparagraph c as relevant herein a descendant of a brother or sister who the taxpayer cares for as the taxpayer’s own child satisfies the relationship_test sec_32 therefore we are willing to assume that bmb satisfies the relationship_test however although we find petitioner’s testimony credible that bmb did reside in his residence in miamisburg ohio for a period of time in petitioner did not establish that his residence was the principal_place_of_abode for bmb for more than one-half of the taxable_year ms parks’s testimony shows that bmb frequently stayed with her at her mother’s house in lima ohio we find that bmb fails the residency test of sec_32 accordingly respondent’s determination on this issue is sustained c child_tax_credit as previously stated petitioner claimed a child_tax_credit and an additional_child_tax_credit for the tax_year with bmb as the qualifying_child in the notice_of_deficiency respondent disallowed both the child tax and the additional child tax_credits with respect to bmb sec_24 authorizes a child_tax_credit with respect to each qualifying_child of the taxpayer the term qualifying_child is defined in sec_24 as relevant to these facts a qualifying_child means an individual with respect to whom the taxpayer is allowed a deduction under sec_151 sec_24 we have already held that petitioner is not entitled to the dependency_exemption deduction under sec_151 for bmb accordingly bmb is not considered a qualifying_child within the meaning of sec_24 it follows therefore that petitioner is not entitled to a child_tax_credit under sec_24 d additional_child_tax_credit the child_tax_credit is a nonrefundable personal credit that was added to the internal_revenue_code by the taxpayer_relief_act_of_1997 publaw_105_34 111_stat_796 with a provision for a refundable_credit the additional_child_tax_credit for families with three or more children for taxable years beginning after date the additional_child_tax_credit provision was amended to remove the restriction that only families with three or more children are entitled to claim the credit see sec_24 economic_growth_and_tax_relief_reconciliation_act_of_2001 publaw_107_16 sec c 115_stat_46 in the absence of other nonrefundable personal credits a taxpayer is allowed to claim a child_tax_credit in an amount that is the lesser_of the full child_tax_credit or the taxpayer’s federal_income_tax liability for the taxable_year see sec_26 if the child_tax_credit exceeds the taxpayer’s federal_income_tax liability for the taxable_year a portion of the child_tax_credit may be refundable as an additional_child_tax_credit under sec_24 the refundable and nonrefundable portions of the child_tax_credit cannot exceed the total allowable_amount of the credit petitioner is not entitled to claim an additional_child_tax_credit because he did not qualify for a child_tax_credit in view of the foregoing we sustain respondent’s determination on this issue reviewed and adopted as the report of the small_tax_case division decision will be entered for respondent


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 b04 plr-115249-09 date september ------------------------ ------------------------- son son taxpayer ----------------------- spouse ---------------------- ------- year ----------------------------------------- firm year trust trust ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- dear ---------------- this responds to the letter dated date submitted on behalf of the estate requesting an extension of time under sec_2642 of the internal_revenue_code and sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to make allocations of generation-skipping_transfer gst_exemption to two trusts facts the facts submitted and the representations made are as follows son and son are the children of taxpayer and spouse in year spouse established trust for the benefit of son and son 1’s issue also in year spouse established trust for the benefit of son and son 2’s issue the trusts provide for distributions of income and principal based on an ascertainable_standard for the benefit of the son for whom the trust is named and his spouse and issue during the lifetime of the respective son and the spouse of the respective son on the death of the last to die of the son and that son’s spouse the trust accumulated income and principal is to be paid to that son’s issue by right of representation plr-115249-09 taxpayer and spouse each made transfers to trust and trust in year taxpayer and spouse retained the services of firm to prepare their united_states gift and generation-skipping_transfer_tax returns form sec_709 firm was aware of the intention of taxpayer and spouse to allocate gst_exemption to the transfers so that each trust would have an inclusion_ratio of zero both form sec_709 were timely filed however the returns as filed did not correctly report the amount of the gifts made by each donor and failed to allocate the gst_exemption of taxpayer and spouse to the trusts on their respective form sec_709 taxpayer died in year the failure to allocate gst_exemption to the transfers to trust and trust was discovered by firm in connection with preparing taxpayer’s form_706 united_states estate and generation-skipping_transfer_tax return to date no taxable_distributions taxable terminations or any other events have occurred with respect to the trusts that would give rise to a gst tax_liability on the part of either trust or any of its beneficiaries the executor of taxpayer’s estate now requests an extension of time under sec_2642 and sec_301_9100-3 to allocate taxpayer’s gst_exemption to the transfers made to trust and trust in year and requests a ruling that the gst_exemption allocated to the transfers will be effective as of the date of the transfers law and analysis sec_2601 imposes a tax on every gst a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the tax is the taxable_amount multiplied by the applicable_rate sec_2641 defines applicable_rate as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer sec_2642 provides the method for determining the inclusion_ratio under sec_2642 the inclusion_ratio with respect to any property transferred in a generation- skipping transfer is generally defined as the excess of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of gst_exemption under sec_2631 allocated to the trust or to property transferred in a direct_skip and the denominator of which is the value of the property transferred to the trust or involved in the direct_skip under sec_2631 in effect at the time of the transfer for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption equal to dollar_figure for the year at issue that may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable plr-115249-09 sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual's estate determined with regard to extensions regardless of whether such a return is required to be filed sec_26_2632-1 of the generation-skipping_transfer_tax regulations in effect at the time of the transfer provides that an allocation of gst_exemption to property transferred during the transferor's lifetime other than in a direct_skip is made on form_709 sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph sec_2642 provides that in determining whether to grant relief under this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_2_cb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a gst_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 of the procedure and administration regulations sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except in subtitles e g h and i sec_301_9100-3 provides that in general requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 must be made under the rules of sec_301_9100-3 under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a notice published in the internal_revenue_bulletin in accordance with plr-115249-09 sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an election described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or to advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore taxpayer’s estate is granted an extension of time of sixty days from the date of this letter to allocate taxpayer’s available gst_exemption with respect to the transfers taxpayer made to trust and trust in year although the allocations will be treated as being affirmatively made on the date of the transfers we are specifically not ruling on whether any transfer made by taxpayer is subject_to an estate_tax_inclusion_period under sec_2642 and accordingly we are not ruling on the effective date of the allocations in addition we are specifically not ruling on the transfer_tax value of the year transfers to trust and trust to be used in determining the inclusion_ratio of each trust under sec_2642 the allocations should be made on a form_709 for the year in which the transfers were made and the form_709 should be filed with the internal_revenue_service center cincinnati ohio a copy of this letter should be attached to the returns 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 no opinion is expressed or implied as to the value for federal transfer_tax purposes of the transfers by taxpayer and spouse to trust and trust finally no opinion is expressed or implied as to whether the transfers by taxpayer and spouse are properly characterized as an indirect transfer by taxpayer and spouse of the underlying asset 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-115249-09 this ruling is directed only to the taxpayer 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 your authorized representative sincerely curt g wilson associate chief_counsel passthroughs special industries enclosure copy for sec_6110 purposes


internal_revenue_service department of the treasury index number number release date washington dc person to contact telephone number refer reply to cc intl br1 plr-116079-98 date date in re taxpayer corp t business activity individual a cpa firm tax years dates a through f dear legend cc intl br1 plr-116079-98 this replies to a letter dated date requesting that taxpayer and its consolidated subsidiaries including corp t be granted an extension of time under sec_301_9100-3 to file the certification described in sec_1 2a d for tax years to replace the certification filed under sec_1_1503-2a d with the agreement described in sec_1_1503-2 as provided in sec_1_1503-2 for tax years and to file the agreement described in sec_1_1503-2 for tax years supplementary information was submitted in a letter dated date the information submitted for consideration is substantially as set forth below the ruling contained in this letter is predicated upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as a part of the audit process taxpayer was audited by the internal_revenue_service irs for the taxable years beginning on date a and ending on date b the irs report for tax_year and tax_year was finalized on date c and the report for tax years through was finalized on date d taxpayer agreed to the report’s findings and related adjustments for these years the report for tax years through required all costs incurred by corp t to be capitalized pursuant to sec_263 the report stated that tax_year appeared to be the proper year for the abandonment_loss deduction attributable to costs of the business activity not previously written off as a result of the irs audit adjustments taxpayer filed an amended_return for tax_year on date e which was signed by cpa firm as paid preparer the amended_return claimed an additional loss which consisted of costs previously capitalized for tax years through costs capitalized by the i r s in tax_year and additional capitalized costs that had not been previously written off for tax purposes subsequent to tax_year taxpayer has only deducted the routine costs of the annual administration of the business activity on date f the irs sent a notice_of_deficiency to taxpayer assessing additional tax relative to tax years through the examination_report in support of the notice_of_deficiency disallowed the losses by reason of the loss_disallowance_rules of sec_1503 for tax years through taxpayer annually engaged cpa firm or its predecessor to review and sign taxpayer’s federal_income_tax return prior to filing with the irs to insure compliance with tax laws and elections individual a a partner in cpa cc intl br1 plr-116079-98 firm states in an affidavit that cpa firm inadvertently failed to advise taxpayer in tax_year the year the amended_return for tax_year was prepared and on which these losses were deducted or in subsequent years tax years through when the routine costs were deducted on taxpayer’s originally filed returns that elective relief under sec_1_1503-2 or sec_1_1503-2a d may be necessary to avoid having corp t’s losses disallowed by the irs upon audit sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government sec_301_9100-3 provides that subject_to sec_301_9100-3 through iii a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer-- v reasonably relied on a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election in the present situation sec_1_1503-2a d fixes the time to file the certifications for tax years sec_1_1503-2 fixes the time to replace the certifications filed under sec_1_1503-2a d with an agreement described in sec_1_1503-2 and sec_1 g i fixes the time to file the agreement for tax years therefore the commissioner has discretionary authority pursuant to sec_301_9100-3 to grant taxpayer an extension of time provided that taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government based on the facts and circumstances of this case we conclude that taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government accordingly taxpayer is granted an extension of time under sec_301_9100-3 until days from the date of this ruling letter to file the certification described in sec_1_1503-2a d for tax years to replace the certification filed under sec_1_1503-2a d with the agreement described in sec_1_1503-2 as provided in sec_1_1503-2 for tax years and to file the agreement described in sec_1_1503-2 for tax years no ruling has been requested and none is expressed as to the application of any other section of the code or regulations to the facts presented a copy of this ruling letter should be associated with the tax returns for the tax years at cc intl br1 plr-116079-98 issue this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file in this office a copy of this ruling letter is being sent to taxpayer and to the other authorized representative sincerely associate chief_counsel international by _______________________ allen goldstein reviewer