department of the treasury_department of the treasury internal_revenue_service internal_revenue_service washington d c washington d c date number release date cc ebeo tl-n-183-99 wli uilc internal_revenue_service national_office field_service_advice memorandum for district_counsel attention from subject chief branch cc ebeo medical resident fica student exception claim request for field_service_advice this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend university state state retirement_system issue sec_1 whether university medical residents’ services are covered under the state’s sec_218 agreement and are therefore subject_to fica tl-n-183-99 wli if the medical residents’ services are not covered under the state’s sec_218 agreement whether the residents’ services are excepted from the fica based upon the student fica exception conclusion sec_1 university medical residents appear not to be covered under the state’s sec_218 agreement the facts indicate that university medical residents were not eligible to participate in the state retirement_system and therefore were not members of the state retirement_system coverage group because university medical residents appear not to be covered under the state’s sec_218 agreement the service must determine whether the residents’ services are excepted from fica based upon the student fica exception we will soon provide guidance to field personnel on the facts to be developed in identifying the entity that is the common_law employer and whether a medical resident is a student who is enrolled and regularly attending classes facts the university sponsors a graduate medical education gme program the university has agreements with many hospitals to provide the hospitals with medical resident services in return the hospitals have agreed to act as teaching hospitals the university filed a claim_for_refund of fica_taxes it withheld and paid with respect to remuneration paid to university medical residents during the years through in the state entered into an agreement under sec_218 of the social_security act the act with the social_security administration ssa to cover certain of its employees under social_security sec_218 agreement in the state modified its sec_218 agreement to include as a coverage group members of the state retirement_system this modification excludes the services of student sec_1this memo refers to all participants in the university gme program as residents first year residents are often referred to as interns internship programs were discontinued across the country in and residency programs including the university’s have since included medical school graduates in their first year of graduate medical education 2for purposes of this memo the term hospital means any facility that has as its purpose the provision of medical_care to patients including outpatient medical clinics that provide outpatient services tl-n-183-99 wli which would be excluded if performed for a private employer in the sec_218 agreement was modified to include services performed by university employees in positions covered by the state retirement_system this modification was made retroactive to between and medical residents and interns were considered students by the state and thus their positions were not considered eligible for membership in the state retirement_system thus the state did not consider medical residents to be members of the state retirement_system coverage group for sec_218 agreement coverage purposes in a state law was enacted to provide that effective january the state began paying medicare_tax with respect to medical residents’ services effective july the state began paying both the medicare and oasdi portions of social_security with respect to medical residents’ services law and analysis the student fica exception sections of the internal_revenue_code impose federal_insurance_contribution_act fica_taxes on the wages of employees fica_taxes consist of an old-age survivors and disability insurance portion oasdi usually called social_security_tax and a medicare portion sec_3121 of the code excepts from the definition of employment for fica purposes services performed in the employ of a school_college_or_university s c u whether or not that organization is exempt from income_tax or an affiliated organization that satisfies sec_509 of the code in relation to the s c u related sec_509 organization if the service is performed by a student who is enrolled and regularly attending classes at that s c u thus the student fica exception applies to services only if both the employer status and student status requirements are met determining the common_law employer the first step in determining whether a medical resident’s services are subject_to the fica is to identify the resident’s common_law employer sec_31_3121_b_10_-2 of the employment_tax regulations provides that the status of the employee as a student performing the services shall be determined on the basis tl-n-183-99 wli of the relationship of such employee to the organization for which the services are performed thus the identity of the common_law employer is essential to determining whether the exclusion under sec_3121 applies because the common_law employer must be a s c u or a related sec_509 organization identifying the common_law employer is also essential to determining whether the resident is covered by a sec_218 agreement discussed below the university gme program has agreements with many teaching hospitals to provide the hospitals with medical resident services the question therefore arises whether the university or the hospital s where the services are performed is the resident’s common_law employer the common_law employer is the party that has direction and control_over the medical resident direction and control is the test not just for determining whether the worker is an employee versus independent_contractor but also determines which party is the employer when the worker has a relationship with more than one entity the field agent should refer to the training materials that the agent should have received on employee versus independent_contractor status independent_contractor or employee training rev tpds 84238i the facts developed thus far are insufficient to determine whether the university or the participating hospitals would be the common_law employer s of the medical residents the national_office will soon provide guidance to field personnel on the facts to be developed with respect to this question coverage under the state’s sec_218 agreement if it is concluded that the university is the common_law employer with respect a resident’s services it must determined whether those services are covered by the state’s sec_218 agreement when a state enters into a sec_218 agreement with the ssa employees of the state and its political subdivisions are brought under the agreement in groups known as coverage groups the act gives each state the right to decide which coverage groups to include under its sec_218 agreement coverage groups fall into two categories employees who are not covered under a state or local retirement_system and employees who are covered under a retirement_system for example one possible coverage group is the employees of each institution_of_higher_education who are covered under the state retirement_system the services of certain employees who are members of a coverage group may be optionally or mandatorily excluded from coverage under the state’s sec_218 agreement sec_218 of the act provides for certain mandatory and optional exclusions in the case of any coverage group from coverage under a sec_218 agreement for example under sec_218 a state has the option of excluding the tl-n-183-99 wli services of students sec_218 provides that the optional exclusion will apply only to students who would be excluded under the general student exclusion provided under a section a provides for a general exclusion from social_security coverage for services performed for a s c u or an organization that is a related sec_509 organization with respect to the s c u by a student who is enrolled and regularly attending classes at the s c u but if a state chooses not to exclude student services under its agreement those services will be covered under social_security notwithstanding the general student exclusion under a of the act thus in determining whether an employee is covered under a state’s sec_218 agreement the service must first determine whether the employee is a member of a coverage group that is included under the state’s sec_218 agreement if an employee is not a member of a coverage group the employee is not covered under the sec_218 agreement if the employee is a member of a coverage group the question then becomes whether the employee’s services are excluded under either a mandatory or optional exclusion in the instant case the state has never treated medical residents as eligible to participate in the state retirement_system whether employees in a particular position are eligible for membership in a state retirement_system is generally a question of state law thus it appears that the medical residents are not members of the state retirement_system coverage group and are therefore not covered under the state’s sec_218 agreement accordingly for purposes of determining sec_218 agreement coverage it is irrelevant whether the medical residents were students within the meaning of a of the act if the services of a state and local_government employee such as a medical resident are not covered under the state’s sec_218 agreement those services will be generally be covered under the fica unless the employee is a member of a state retirement_system since the university medical residents are not members of the state retirement_system a resident’s services would generally be covered under the fica unless the student fica exception requirements are met 3section a of the act is the parallel provision to sec_3121 of the code sec_3121 effective with respect to services performed after date tl-n-183-99 wli the employer status and student status requirements under sec_3121 the student fica exception is available only with respect to services performed in the employ of a s c u or a related sec_509 organization sec_31_3121_b_10_-2 of the regulations provides that the term school_college_or_university for purposes of the student fica exception is to be construed in its commonly or generally accepted sense a medical school will clearly qualify as a s c u however if the hospital where services are performed is the common_law employer the question arises whether the hospital qualifies as a s c u or a related sec_509 organization in addition to the employer status requirement a resident with respect to whom the refund claim is filed must be a student who is enrolled and regularly attending classes at the s c u sec_31_3121_b_10_-2 of the regulations provides that whether an employee has the status of a student is determined on the basis of the employee's relationship with the s c u for which the services are being performed an employee who performs services in the employ of a s c u as an incident to and for the purpose of pursuing a course of study at the s c u has the status of a student in the performance of those services if an employee has the status of a student then the amount of remuneration for services performed by the employee the type of services performed by the employee and the place where the services are performed are immaterial for purposes of the student fica exception the national_office is developing further guidance on these issues case development hazards and other considerations the following reates to case development in her letter dated administrator refers to a letter dated the division of coverage office of retirement and insurance benefits advising that interns and residents should be subject_to medicare_tax this letter was in response to a request for advice from the state we have requested copies of these letters from ssa and will forward them to you after we receive them the state social_security from the then director of cid cid tl-n-183-99 wli the national_office will provide guidance on the implications with respect to the employer status requirement if a resident performs services for a university hospital or a faculty practice plan please call if you have any further questions jerry e holmes chief branch employee_benefits and exempt_organizations cid


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-151953-07 date date legend decedent date date date date spouse family_trust ----------------------- ------------------------- ----------------------- -------------------------- ----------------------- --------------------- ----------------------------------------------------------------------------------------- ------------------------------------------------- -------------------------- daughter granddaughter ------------------ ------------------ grandson attorney --------------------- dear -------------- this is in response to your submission dated date in which you request an extension of time under sec_301_9100-3 of the procedure and administration regulations to sever a_trust into an exempt and nonexempt trust under sec_26 b of the generation-skipping_transfer gst tax regulations and to make a reverse qualified_terminable_interest_property qtip_election under sec_2652 of the internal_revenue_code with respect to the exempt trust decedent died testate on date survived by spouse spouse was appointed executor of decedent’s estate decedent's will executed on date provided that decedent’s residuary_estate be distributed to the family_trust an inter_vivos revocable_trust established by decedent and spouse plr-151953-07 under the terms of the family_trust on decedent’s death the corpus is to be divided into three separate trusts the survivor’s trust funded with spouse’s separate and community_property the marital trust funded with the minimum amount necessary to reduce the estate_tax to zero and the credit trust funded with the balance of the corpus under the terms of the marital trust spouse is entitled to all trust income payable no less frequently than annually and the trustee has the discretion to distribute corpus to provide for spouse’s health support and maintenance on spouse’s death the marital trust corpus is to be distributed to the trustees of the credit trust to be disposed of under the terms of that trust the terms of the credit trust provide that all trust income is to be paid to spouse for her life and the trustee has the discretion to distribute corpus in such amounts necessary to provide for spouse’s health maintenance and support on spouse’s death the credit trust provides for certain pecuniary bequests the balance of the credit trust corpus is to be distributed to daughter if living and if not equally to granddaughter and grandson or their descendants in the event of their prior death decedent’s form_706 united_states estate and generation-skipping tax_return was timely filed on date and subsequently supplemental information was filed on date on the form_706 spouse as executor elected to treat the property passing to the marital trust as qualified_terminable_interest_property qtip under sec_2056 spouse’s attorney did not advise spouse to sever the marital trust into an exempt trust and a nonexempt trust to make the reverse_qtip_election or to allocate decedent’s gst_exemption accordingly the marital trust was not severed and on schedule r of form_706 no reverse_qtip_election was made it is represented that spouse daughter granddaughter and grandson are currently living and that there have been no generation-skipping transfers from the marital trust you have requested an extension of time under sec_301 to divide the marital trust into a gst exempt qtip_trust a to be funded with an amount equal to decedent’s unused gst_exemption after taking into account the amount of exemption automatically allocated under sec_2632 to the credit trust and a gst non-exempt qtip_trust b to be funded with the balance of the marital trust you have also requested an extension of time under sec_301 to make the reverse_qtip_election under sec_2652 with respect to the gst exempt qtip_trust a sec_2601 imposes a tax on every generation-skipping_transfer made by a transferor to a skip_person plr-151953-07 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 under sec_2631 and c for purposes of determining the inclusion_ratio every individual is allowed a gst_exemption equal to the applicable_exclusion_amount under sec_2010 which may be allocated by the individual or his executor to any property with respect to which the individual is the transferor sec_2631 provides that any allocation once made shall be irrevocable sec_2632 provides that any allocation by an individual of the individual’s 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 provides in part that an allocation of a decedent's unused gst_exemption by the executor of the decedent's_estate is made on the appropriate united_states estate and generation-skipping_transfer_tax return form_706 or form 706na filed on or before the date prescribed for filing the return by sec_6075 including any extensions actually granted an allocation of gst_exemption to a_trust whether or not funded at the time the form_706 or form 706na is filed is effective if the notice of allocation clearly identifies the trust and the amount of the decedent's gst_exemption allocated to the trust sec_2632 provides that any portion of such individual's gst_exemption which has not been allocated within the time prescribed by sec_2632 shall be deemed to be allocated as follows first to property that is the subject of a direct_skip occurring at such individual's death and second to trusts with respect to which such individual is the transferor and from which a taxable_distribution or taxable_termination might occur at or after such individual's death under sec_2652 and sec_26_2652-1 the transferor for gst tax purposes is generally the individual with respect to whom the property was last subject_to the federal estate or gift_tax an individual is treated as transferring any property with respect to which such individual is the transferor sec_2652 provides in part that in the case of any trust with respect to which a deduction is allowed to the decedent’s estate under sec_2056 the estate may elect to treat all of the property in such trust for purposes of chapter as if the election to be treated as qualified_terminable_interest_property had not been made a reverse_qtip_election sec_26_2652-2 provides that an election under sec_2652 is made on the return on which the qtip_election is made plr-151953-07 sec_26_2654-1 provides in part that the severance of a_trust that is included in the transferor's gross_estate into two or more trusts is recognized for purposes of chapter if the trust is severed pursuant to discretionary authority granted under the governing instrument or under local law the terms of the new trusts must provide in the aggregate for the same succession of interests and beneficiaries as provided under the original trust the severance must occur or a reformation proceeding be commenced prior to the date prescribed for filing the federal estate_tax_return for the estate of the transferor the trusts must be severed either on a fractional basis or a pecuniary basis if so required by the governing instrument if severed on a fractional basis the separate trusts need not be funded with a pro_rata portion of each asset held by the undivided trust under sec_301_9100-1 the commissioner may 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 months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-3 provides in part that 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 requests for relief subject_to 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 the grant of relief will not prejudice the interests of the government sec_301_9100-3 provides in part except as provided in sec_301_9100-3 through iii 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 advise the taxpayer to make the election sec_301_9100-3 provides in part that the commissioner will grant a reasonable extension of time to make a regulatory election only when the interests of the government will not be prejudiced by the granting of relief based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly an extension of time of days from the date of this letter is granted to sever the marital trust into gst exempt marital trust a and gst non-exempt marital trust b and to make the reverse_qtip_election with respect to gst exempt marital trust a as a result of the severance of the marital trust and the reverse_qtip_election with respect to marital trust a decedent's remaining gst_exemption will be allocated between the gst exempt qtip_trust a and the credit trust in accordance with the rules provided in sec_2632 the election should be made and the severance reported on a supplemental form_706 the supplemental form_706 should be filed with the internal_revenue_service center plr-151953-07 cincinnati ohio a copy of this letter should be attached to the form a copy is enclosed for this purpose except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely william p o'shea associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter


release number release date internal_revenue_service te_ge technical_advice_memorandum uil date area manager - taxpayer's name taxpayer's address taxpayer's identification_number years involved conference heid legend t company 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 a b c sale of accidental death and dismemberment ad d insurance sale of credit life and credit disability insurance nonmember automated teller machines atm fees 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 is limited to employees family members of those employees or retirees of company 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 ad d insurance and credit life and credit disability insurance available to members the different types of insurance are described in more detail below t also charges atm fees to nonmembers that use t’s atms all of these insurance 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 year at issue t made the following types of loans personal mortgage vehicle and other secured and unsecured loans the majority of the loans were personal mortgage and vehicle no information was provided regarding total number of loans and percentage of such loans that were collateralized additionally no information was provided regarding the default rate on these loans as a percentage of total loans for the year at issue t filed form 990-t unrelated_business_income_tax return for the year at issue 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 ad d insurance t offers ad d insurance to its members t states that providing this insurance is an activity that is beyond the scope of services directly associated with members’ monetary deposits and loans made to members rather the provision of ad d insurance is a financial security activity that is offered to members under the terms of the ad d policy if the member has an accident that triggers a claim meeting the terms of the policy then the member or the member's beneficiary receive specified insurance payments under the policy in the case of accidental death the member's beneficiary would receive payments in the case of dismemberment the member would receive payments t markets and sells ad d insurance to its members under a policy issued by an independent insurance_company t makes its members aware of the purpose and availability of ad d insurance answers members’ questions about the product refers the member to the independent insurance_company for additional information if coverage premium payment and claims t receives an administrative allowance for ad d insurance based on services provided by t the reimbursement i sec_15 of gross premiums collected it is needed and obtains and submits applications for no information was provided regarding number of policies sold during the year at issue or the percentage of members that elected ad d insurance coverage b 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 life and 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 credit 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 the policy limit the maximum loan duration covered was not provided however only credit_union members are eligible protection home equity loans and real_estate loans t does not offer credit disability insurance in connection with overdraft 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 e 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 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 of the premiums written for 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 t’s commission for life_insurance is dollar_figure per policy issued no information was provided regarding loans covered by credit life and credit disability insurance during the year at issue additionally no information was provided regarding what percentage of these loans to total loans made by t during that year c nonmember atm fees t owns and operates atms which allow members and nonmembers to obtain cash and perform other account functions almost all atms whether owned by credit unions or other types of financial institutions are linked through electronic networks these networks allow each machine to be used by anyone with a network-accessible card which may be a credit card debit card or dedicated atm card regardless of whether the person is a member or customer of the particular credit_union or other institution that owns the atm credit unions and other financial institutions that are members of an atm network pay monthly or annual fees to the operator of the network visa mastercard star or other organization to compensate it for maintaining the network also each financial_institution whose customer accesses the atm of another institution in the network usually pays a per transaction fee to the atm owning institution these various kinds of institution-to-institution fees are called wholesale fees in addition an atm owning institution may charge a separate per-transaction fee to individual users who access its machines ordinarily exempting users who are members or customers of the atm owning institution these transaction fees imposed on individual atm users are retail fees references to atm fees throughout this memorandum will be referring to both the wholesale fees and the retail fees t allows nonmembers to access their atms so that other financial institutions in the atm network will let t's members access their atms on a national or global basis t states that nonmember use of atms constitutes only a small proportion of the atm operations 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 purposes of credit unions existing at that time the attorney general’s opinion described the 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 has but one vote after review of the features and operations of these early 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 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 loan associations cooperative banks and mutual_savings_banks the legislative_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 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 of advancing the credit_union movement 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 member of the league may enjoy benefits both a 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 as 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 than perform discrete services for individuals see 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 are 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 pfomoting 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 business table income for the following reasons 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 revrul_60_228 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'l 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 leaque 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'l ins agents of michigan supra we address each of the activities below ad d insurance t argues that making ad d insurance available to members is substantially related to the credit union’s exempt_purpose of promoting thrift by providing basic financial protection to members on a mutual basis t also argues that ad d insurance facilitates prompt repayment of loans on a mutual basis by protecting the individual member's financial security the facts do not show how t’s sales of ad d insurance contribute directly and importantly to t’s exempt purposes t has not demonstrated that sales of ad d insurance encourage savings by members who purchase it t has also not provided information showing that the sale of ad d insurance aids a member in obtaining credit or reduces the cost of providing credit to members the facts do not demonstrate that the sale of ad d insurance to individual members advances t’s mutual operation ad d insurance provides a financial protection to an individual the individual’s purchase of the ad d insurance does not provide a benefit to the members as a whole the legislative_history of sec_501 of the code indicates that mutuality is tied to the same members being the borrowers and lenders in loan transactions rather than the general principles that t espouses s rep no date t has not stated how the sale of ad d insurance to an individual provides a mutual benefit to t members the facts also do not show how sale of ad d insurance benefits the members of the credit_union as a whole a member may purchase ad d insurance without obtaining credit or a loan from t of t receives accidental dismemberment insurance payments the member may use the insurance payments as he or she wishes rather than saving them or paying off an obligation to t beneficiary may or may not be a member of t and also may use the payments as he or she desires in the case of accidental death the member’s if a member in alabama central credit_union supra the court stated in dicta several factors cited above relevant to the substantially related inquiry in this case t earns commissions for servicing ad d 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 which issued the policies the sale of the insurance policies referred to has no substantial causal relationship to ts exempt purposes and the sale of the policies bears 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 ad d insurance do not contribute importantly to accomplishing t’s exempt purposes the ad d insurance sold benefits an individual and t receives no benefit other than the production_of_income therefore the sale of ad d insurance is not substantially related to t’s exempt purposes and amounts received therefrom are subject_to unrelated_business_income_tax ubit credit life and credit disability t argues that the sale of 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 credit life and credit disability insurance is not required for the approval of a loan in fact credit life and credit disability insurance is not 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 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 life and 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 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 pincite of premiums_paid for credit disability and dollar_figure cents per credit life policy sold because the insurance is voluntary and has no bearing on the approval of a loan the individual benefit-to the selling employee-is the primary benefit of offering the insurance 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 credit life and credit disability insurance the sale of credit 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 nonmember atm fees t argues that atm fee revenue received from nonmembers is irrelevant so long as the trade_or_business activity itself is substantially related to the tax- exempt_purpose t argues that providing full service reciprocally accessible networked atms is substantially related to the credit union’s exempt purposes so all revenue derived from that activity including nonmember fees is exempt from ubit t also argues that many of its members are also customers of other unrelated financial institutions and have such financial institution's atm card member of t uses t’s atm in such circumstances with the other financial institution’s atm card it would be recorded by t as a nonmember transaction from the other financial_institution ifa the facts do not show how fees charged to nonmember atm users contribute directly and importantly to accomplishing t’s exempt purposes the nonmember benefits in that he or she can access an atm while there is also a benefit to the individual members by allowing them to use the atms of other financial institutions the facts do not show how the nonmember atm fees contributes importantly and directly to accomplishing t’s exempt purposes other than through the production_of_income availability of atms by nonmembers does not encourage savings or assist t in offering low cost credit t can easily avoid the result that transactions by members using cards from other institutions in t’s atms would be recorded as a nonmember transaction by asking its members to use only cards issued by t in t’s atms applying the factors of alabama central credit_union supra t earns revenue for providing nonmembers access to its atms derives little benefit from nonmember use at its atms charging fees for nonmember use at t’s atms has no substantial causal relationship to t’s exempt purposes the nonmember atm usage referred to has no substantial causal relationship to t’s exempt purposes and the nonmember atm usage bears no relationship to t’s function as a credit_union looking at the facts with respect to nonmember atm fees such fees are not substantially related to t’s exempt purposes the available information indicates that the fees generated from nonmember usage are primarily for the purpose of generating income to t and for the benefit of the nonmember user rather than for the benefit of t's membership based on all of the facts and circumstances t’s activities with respect to the nonmember atm fees do not contribute importantly to accomplishing t’s exempt purposes therefore the nonmember atm fees are not substantially related to t's exempt purposes and amounts received therefrom are subject_to ubit 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 sale of ad d insurance sale of credit life and credit disability insurance nonmember atm fees 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 -


department of the treasury internal_revenue_service washington d c contact person identification_number telephone number ty - g date nov no third party contact sin employer_identification_number legend t- x-- y- dear sir or madam this is in reference to your ruling_request concerning a proposed restructuring and its effect on your tax exempt status under sec_501 of the internal_revenue_code and your unrelated_business_income_tax liability under sec_511 through as described below t is an organization described in sec_501 of the code and is not a private_foundation as described in sec_509 t currently provides services through two divisions the family social service counseling services division and the home health services division x is an organization described in sec_501 and is an organization described in sec_509 and sec_170 y is an organization described in sec_501 and is an organization described in sec_509 t created x and y pursuant to a pian of reorganization t plans on reorganizing its structure in order to separate the family social service counseling services and home health agency services lessen exposure of endowment funds pledge receivables and real_property to third party liability provide more efficient centralized planning and program development administration and fund raising that are subject_to coordination through x as the patent entity and improve the quality of programming attract high quality personnel and increase the ability of the organizations to attract the attention of national funding sources that may have an interest in one or more of the family social service counseling services or home health agency services pursuant to the proposed plan of restructuring t will continue to operate the family social service counseling services division and will transfer and convey to y the assets related to the operation of the home health agency services subject_to existing mortgages liens and encumbrances provided that y has obtained all licenses and permits for the operation of the home health agency services y will assume the lease and continue to occupy space that is currently leased by t from an unrelated third party t will transfer to x any outstanding contribution pledge receivables parcels of real_property and all assets and personnel related to the operation of administration program development and fund raising activities subject_to the existing mortgages liens and encumbrances x will be the sole member of y and t creating a parent-subsidiary relationship between the entities under the terms of the restructuring any existing and future endowment funds and contribution pledge receivables could be held be either x yort although x will coordinate fundraising activities of all of the taxpayers y and t may also do separate fundraising x will provide services related to the development and enhancement of programs which will then be implemented by y and t x will occupy a portion of its existing_building and will lease a portion of its building to t after the restructuring n the future x may construct additional buildings and lease all or a portion of the buildings to y reimburse x for the cost of the building all leases will be at rental rates designed to all records files lists of contributors and other items related to fund raising of t x and y will be transferred from t to x it is expected that y and t will raise funds from contributions that each entity receives in some cases an organization may make distributions of funds and or assets or provide services to either x or t distribute portions of the contributions it receives to t and y based upon directions given by the donors or the needs of the particular entity as determined by x x may also provide assets and services to y and t including program enhancements fundraising coordination and assistance with staff recruiting in addition it is expected that x will also engage in fundraising and may you are requesting the following rulings the restructuring of t and transfer of some of its home health division assets liabilities and activities to y and the transfer of its endowment assets and administrative activities to x will not adversely affect the determination of tax-exempt status of x y or t nor will restructuring of y result in the classification of x y or t as a private_foundation under sec_509 of the code the restructuring and transfer of assets pursuant thereto will not give rise to unrelated_business_taxable_income pursuant to sec_511 through of the code to x y or t the sharing of assets and services and transfer of funds among x y and t after the reorganization will not give rise to unrelated_business_taxable_income under sec_511 through for either x y or t ot law sec_501 of the code provides in part for the exemption from federal_income_tax of organizations that are organized and operated exclusively for religious charitable scientific or educational_purposes provided no part of their net_earnings inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the income_tax regulations provides that the term charitable is used in code sec_501 in its generally accepted legal sense the promotion of health has long been recognized as a charitable purpose see restatement second of trusts sec_368 sec_372 iv scott on trusts sec_368 sec_372 3rd ed and revrul_69_545 1969_2_cb_117 sec_509 of the code provides that the term private_foundation means a domestic or foreign organization described in sec_501 other than an organization described in sec_170 other than in clauses vii and viii sec_511 of the code imposes a tax on the unrelated_business_taxable_income of organizations exempt from federal_income_tax under sec_501 c sec_512 of the code defines the term unrelated_business_taxable_income as gross_income derived by an organization from any unrelated_trade_or_business regularly carried on by it less the deductions directly attributable to such business activity sec_513 of the code defines the term unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of the organization for income or funds or the use it makes of the profits derived to the exercise or performance by an organization of the purpose or function constituting the basis for its exemption sec_1_513-1 of the reguiations defines unrelated_business_taxable_income to mean gross_income from any unrelated_trade_or_business regularly carried on sec_1 b states that the phrase trade_or_business includes activities carried on for the production_of_income and which possess the characteristics of a trade_or_business within the meaning of sec_162 of the code finally sec_1_513-1 explains that regularly carried on has reference to the frequency and continuity of the conduct of an activity and the manner in which the activity is pursued z sec_1_513-1 of the regulations provides that a trade_or_business is related to exempt purposes only where the conduct of the business activity has a causal relationship to the achievement of any exempt_purpose and is substantially related for purposes of sec_513 only if the causal relationship is a substantial 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 purposes sec_514 of the code provides for the taxation under sec_512 of the code of income from debt-financed_property sec_514 of the code however provides that the definition of debt-financed_property does not include any property substantially_all the use of which is substantially related to the exercise or performance by such organization of its charitable purposes constituting the basis for its exemption under sec_501 revrul_69_545 1969_2_cb_117 sets forth standards under which a nonprofit_hospital may qualify for recognition of exemption under sec_501 of the code this revenue_ruling gave consideration to two separate hospitals only one of which was determined to qualify for exempt status under sec_501 by weighing all the relevant facts and circumstances the revenue_ruling analyzed whether both the contro and use of the hospitals were for the benefit of the public or for the benefit of private interests the hospital that qualified for exemption was found to be organized and operated to further the charitable purpose of promoting health by satisfying a community benefit standard that included among other factors a board_of directors that broadly represented the interests of the community the hospital that did not qualify for recognition of exemption was found to be operating for the private benefit of those who controlled it rather than for the benefit of the public revrul_72_209 1972_1_cb_148 provides that a nonprofit organization formed to provide low cost home health care for people of a community may qualify for exemption under sec_501 of the code as a charitable_organization the revenue_ruling concludes that by providing home nursing and therapeutic care in the manner described the organization serves many of the same health care needs of the community that hospitals traditionally serve and therefore is promoting health within the meaning of the general law of charity revrul_78_41 1978_1_cb_148 concludes that a_trust created by a hospital to accumulate and hold funds to pay malpractice claims against the hospital qualified for exemption under sec_501 of the code as an integral part of the hospital the hospital provided the funds for the trust and the banker-trustee was required to make payments to claimants at the direction of the hospital the organization conducted an activity that the hospital could perform itself since t will continue to operate the family social service counseling division its current tax-exempt status under sec_501 of the code and classificaticn as not a private_foundation will not be affected by the reorganization the restructuring of t arg transfer of assets to x and y will not adversely affect their exempt status x and y will perférm the same functions that t formerly performed or could have performed consistent with its exempt purposes any transfer of assets and or funds will be one time transfers and therefore will not possess the characteristics of a trade_or_business regularly carried on following the proposed reorganization the sharing of services and facilities whether or not a fee is charged and transfers of cash and assets among the exempt_organizations will be substantially related to the exercise or performance of the exempt purposes of the involved corporations and will therefore not constitute unrelated_trade_or_business activities subject_to tax therefore each corporation will be merely supplying a related charitable_organization with a service or facility ar necessary for and in the furtherance of the performance of exempt functions under sec_501 c based on all the facts and circumstances described above we rule as follows the restructuring of t and transfer of some its home health division assets liabilities and activities to y and the transfer of its endowment assets and administrative activities to x will not adversely affect the tax -exempt status of x y or t under sec_501 nor affect the status of x y or t as nota private_foundation under sec_509 the restructuring and transfer of assets pursuant thereto will not give rise to unrelated_business_taxable_income pursuant to sec_511 through of the code for either x y or t the sharing of assets and services and transfer of funds among x y and t after the restructuring will not give rise to unrelated_business_taxable_income under sec_511 through for either x y or t we have not been asked and we express no opinion on whether payments of rent by y and t to x which would otherwise be excluded from the computation of unrelated_business_taxable_income pursuant to sec_512 of the code would be subject_to tax by reason of sec_512 except as specifically ruled upon above no opinion is expressed concerning the federal_income_tax consequences of the transactions described above under any other provision of the code this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as precedent if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely e o signed marvin friediandet marvin friedlander manager eo technical group


e a m ' internal_revenue_service department of dollar_figure index number washington dc ce don pest plr-119 74p-92 person to contact telephone number refer reply to date sep - date date state i o i t h dear - this letter responds to your letter dated as modified by your letters dated ruling under sec_197 of the internal_revenue_code and ' submitted on behalf of w requesting a facts w represents the facts are as follows h died on date a date after date at the time of h’s death h and w were husband and wife living in state a community_property_state during the period from date to h's death h and w owned a business proprietorship as community_property as determined for federal estate_tax purposes the fair market vaiue of both h and w’s community_property interests in this business proprietorship at the time of h’s death is dollar_figurea of this amount dollar_figureb is attributable to tangible assets and dollar_figurec to intangible assets the intangible assets are goodwill going_concern_value workforce in place information base knowhow customer-based intangibles supplier- based intangibles and licenses permits and other rights granted by governmental units on h's death h’s one-half interest in the community_property including the business proprietorship was passed to w h’s surviving_spouse and was includible in h’s gross_estate for federal estate_tax purposes w will continue to own and operate the business proprietorship ruling requested w is entitled to an amortization deduction under sec_197 of the code with respect to the intangibles attributable to both h and w's community_property interests in the business proprietorship law and analysis sec_197 of the code provides that a taxpayer is entitled to an amortization deduction with respect to any amortizable sec_197 intangible the amount of the deduction is determined by amortizing the adjusted_basis for purposes of determining gain of the intangible ratably over the 15-year period beginning with the month in which the intangible was acquired sec_197 of the code provides that the term amortizable sec_197 intangible generally means any sec_197 intangible that is acquired by the taxpayer after date and that is held in connection with the conduct_of_a_trade_or_business or an activity described in sec_212 sec_197 and b of the code provides that the term sec_197 intangible includes goodwill and going_concern_value sec_197 and d of the code provides that the term sec_197 intangible also includes workforce in place information base knowhow customer- based intangibles supplier-based intangibles and licenses permits and other rights granted by governmental units sec_197 of the code provides that the term amortizable sec_197 intangible shall not include any sec_197 intangible that is described in sec_197 or b or for which depreciation or amortization would not have been allowable but for sec_197 and that is acquired by the taxpayer after date if the intangible was held or used at any time on or after date and on or before date by the taxpayer or a related_person under sec_197 sec_267 and sec_267 of the code a spouse of an individual is a related_person sec_197 of the code provides that sec_197 shall not apply to the acquisition of any property by the taxpayer if the basis of the property in the hands of the taxpayer is determined under sec_1014 sec_1014 of the code provides that except as otherwise provided in this section the basis_of_property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall if not sold exchanged or otherwise_disposed_of before the decedent's death by such person be the fair_market_value of the property at the date of the decedent's death sec_1014 of the code provides that for purposes of sec_1014 the following property shall be considered to have been acquired from or to have passed_from_the_decedent in the case of decedents dying after date property that represents the surviving spouse's one-half share of community_property held by the decedent and the surviving_spouse under the community_property_laws of any state or possession_of_the_united_states or any foreign_country if at least one-half of the whole of the community interest in such property was includible in determining the value of the decedent’s gross_estate under chapter of subtitle b sec_2001 and following relating to estate_tax or sec_811 of the code sec_167 of the code provides that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion wear_and_tear including a reasonable allowance for obsolescence of property_used_in_the_trade_or_business or held_for_the_production_of_income sec_1_167_a_-3 of the income_tax regulations provides that if an intangible asset is known from experience or other factors to be of use in the business or in the production_of_income for only a limited period the length of which can be estimated with reasonable accuracy such an intangible asset may be the subject of a depreciation allowance examples are patents and copyrights an intangible asset the useful_life of which is not limited is not subject_to the allowance for depreciation no allowance will be permitted merely because in the unsupported opinion of the taxpayer the intangible asset has a limited useful_life no deduction for depreciation is allowable with respect to goodwill 6s in 507_us_546 the supreme court held that the taxpayer had borne successfully its substantial burden of proving that paid subscribers constitutes an intangible asset with an ascertainable value and a limited useful_life the duration of which can be ascertained with reasonable accuracy the taxpayer had proved that the asset is not self-regenerating but rather wastes as the finite number of component subscriptions are canceled over a reasonably predictable period of time in the present case w acquired the intangibles attributable to h’s one-half interest in the community_property by reason of h’s death which was after date further w represents that she will continue to own and operate the business proprietorship accordingly these intangibles are amortizable sec_197 intangibles however w had an interest in the intangibles attributable to her one-half interest in the community_property on date and at the time of h’s death consequently w neither acquired these intangibles after date nor by reason of h’s death thus the intangibles are not amortizable sec_197 intangibles conclusions accordingly based solely on the representations and relevant law and analysis as set forth above we conclude that wis entitled to an amortization deduction under sec_197 of the code with respect to the intangibles attributable io h’s one-half interest in the community_property that was passed to w with respect to the intangibles attributable to w's one-half interest in the community_property w is not entitled to an amortization deduction under sec_197 of the code however w may be able to amortize these intangibles other than goodwill and going_concern_value under sec_167 if w can establish that the intangibles have an ascertainable value and a limited useful_life the duration of which can be ascertained with reasonable accuracy except as specifically ruled upon above no opinion is expressed or implied regarding the application of any other provisions of the code or regulations specifically we express no opinion on the fair_market_value useful_life or basis of the intangibles this ruling is directed only to the taxpayer who requested it sec_61 k of the code provides that it may not be used or cited as precedent temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet b been adopted therefore this ruling may be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in this ruling see section dollar_figure of revproc_99_1 l r b however when the criteria in section dollar_figure of revproc_99_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances in accordance with the power_of_attorney on file with this office we are sending a copy of this letter_ruling to w sincerely kathleen reed senior technician reviewer branch office of assistant chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes


internal_revenue_service number release date index no department of the treasury p o box ben franklin station washington dc person to contact telephone number refer reply to cc psi -- plr-139443-03 date date legend taxpayer generator utility power marketer project intertie dear this letter responds to your letter dated date and subsequent correspondence submitted on behalf of taxpayer requesting a letter_ruling concerning whether a transfer of an intertie from generator to taxpayer is a nonshareholder contribution_to_capital excludable from income under sec_118 of the internal_revenue_code taxpayer represents that the facts are as follows facts generator is building project generator has entered into an interconnection agreement with utility that provides for the interconnection of project with utility’s transmission grid the interconnection agreement has a 20-year term taxpayer owns plr-139443-03 a short portion of utility’s transmission grid located some distance from the point of interconnection taxpayer is building and will own the modifications and upgrades to its portion of utility’s transmission grid the intertie generator is reimbursing taxpayer for the cost of the intertie generator will sell the electricity from project to power marketer title to all power that is wheeled from project will transfer to power marketer prior to its transmission on utility’s grid taxpayer represents that generator will treat the cost reimbursements as basis in an intangible asset and recover its basis using the straight-line method over years taxpayer also represents that the amount of power flowing back over the intertie to generator will be less than five percent of the projected power flows in both directions over the intertie during taxpayer’s first ten tax years after the intertie is placed_in_service taxpayer will not put the intertie into its rate base further taxpayer represents the following the contribution by generator to taxpayer will become a permanent part of taxpayer’s capital generator’s contribution was not compensation_for services provided to generator by taxpayer the contribution was a bargained-for-exchange the contribution will benefit taxpayer in an amount commensurate with its value and the contribution is expected to generate additional income for taxpayer law and analysis sec_61 and sec_1_61-1 of the income_tax regulations provide that gross_income means all income from whatever source derived unless excluded by law sec_118 provides that in the case of a corporation gross_income does not include any contribution_to_the_capital_of_the_taxpayer sec_118 as amended by a of the tax_reform_act_of_1986 the act and a of the small_business job protection act of provides that for purposes of subsection a except as provided in subsection c the term contribution to the capital of taxpayer does not include any contribution_in_aid_of_construction ciac or any other contribution as a customer or potential customer sec_1_118-1 provides in part that sec_118 also applies to contributions to capital made by persons other than shareholders for example the exclusion applies to the value of land or other_property contributed to a corporation by a governmental_unit or by a civic group for the purpose of enabling the corporation to expand its operating facilities however the exclusion does not apply to any money or property transferred to the corporation in consideration for goods or services rendered or to subsidies paid to induce the taxpayer to limit production the legislative_history to sec_118 indicates that the exclusion_from_gross_income for nonshareholder contributions to capital of a corporation was intended to apply to those contributions that are neither gifts because the contributor expects to derive indirect benefits nor payments for future services because the anticipated future_benefits are plr-139443-03 too intangible the legislative_history also indicates that the provision was intended to codify the existing law that had developed through administrative and court decisions on the subject h_r rep no 83rd cong 2d sess s rep no 83d cong 2d sess notice_88_129 1988_2_cb_541 as modified and amended by notice_90_60 1990_2_cb_345 and notice_2001_82 2001_2_cb_619 provides specific guidance with respect to the treatment of transfers of property to regulated public_utilities by qualifying small power producers and qualifying cogenerators collectively qualifying facilities as defined in sec_3 of the federal power act as amended by section of the public_utilities regulatory policies act of purpa the amendment of sec_118 by the act was intended to require utilities to include in income the value of any ciac made to encourage the provision of services by a utility to a customer see h_r rep no 99th cong 2d sess conference_report in a ciac transaction the purpose of the contribution of property to the utility is to facilitate the sale of power by the utility to a customer in contrast the purpose of the contribution by a qualifying_facility to a utility is to permit the sale of power by the qualifying_facility to the utility accordingly the fact that the amendments to sec_118 render ciac transactions taxable to the utility does not require a similar conclusion with respect to transfers from qualifying facilities to utilities notice_88_129 provides in part that with respect to transfers made by a qualifying_facility to a utility exclusively in connection with the sale of electricity by the qualifying_facility to the utility a utility will not realize income upon transfer of an intertie by a qualifying_facility an intertie may include new connecting and transmission facilities or modifications upgrades or relocations of a utility’s existing transmission network the possibility that an intertie may be used to transmit power to a utility that will in turn transmit the power across its transmission network for sale by the qualifying_facility to another utility wheeling will not cause the contribution to be treated as a ciac further the notice provides in part that a transfer from a qualifying_facility to a utility will not be treated as a qualifying_facility transfer qf transfer under this notice to the extent the intertie is included in the utility’s rate base moreover a transfer of an intertie to a utility will not be treated as a qf transfer under this notice if the term of the power purchase contract is less than ten years notice_88_129 also provides in part that a utility that constructs an intertie in exchange for a cash payment from a qualifying_facility pursuant to a purpa contract will be deemed to construct the property under contract and will recognize income from the construction in the same manner as any other taxpayer constructing similar_property under contract subsequent to the construction of the property the qualifying_facility will be deemed to transfer the property to the utility in a qf transfer that will be treated in exactly the same manner as an in-kind qf transfer in addition the notice provides in part that the contribution of a dual-use intertie to a utility will be treated as a qf transfer and therefore nontaxable if in light of all plr-139443-03 information available to the utility at the time of transfer it is reasonably projected that during the first ten taxable years of the utility beginning with the year in which the transferred property is placed_in_service no more than five percent of the projected total power flows over the intertie will flow to the qualifying_facility notice_2001_82 amplifies and modifies notice_88_129 notice_2001_82 extends the safe_harbor provisions of notice_88_129 to include transfers of interties from non- qualifying facilities and transfers of interties used exclusively or in part to transmit power over the utility’s transmission grid for sale to consumers or intermediaries wheeling the notice requires that ownership of the electricity wheeled passes to the purchaser prior to its transmission on the utility’s transmission grid this ownership requirement is deemed satisfied if title passes at the busbar on the generator’s end of the intertie further notice_2001_82 provides that a long-term interconnection agreement in lieu of a long-term power purchase contract may be used to satisfy the safe_harbor provisions of notice_88_129 in wheeling transactions finally notice_2001_82 requires that the generator must capitalize the cost of the property transferred as an intangible asset and recovered using the straight-line method over a useful_life of years in the instant case the transfer of the intertie is subject_to the guidance set forth in notice_88_129 notice_90_60 and notice_2001_82 for the following reasons the project is a stand-alone generator as contemplated under notice_2001_82 generator and utility have entered into a long-term interconnection agreement the intertie will be used in connection with generator’s sale of electricity wheeled over utility’s transmission grid the cost of the intertie will not be included in taxpayer’s rate base the intertie is a dual-use intertie however based on all available information during the ten taxable years beginning with the year in which the intertie was placed_in_service no more than five percent of the total power flows over the intertie will flow to generator ownership of the electricity wheeled will not be with generator prior to its transmission on the grid and the cost of the intertie will be capitalized by generator as an intangible asset and recovered using the straight-line method over a useful_life of years thus we conclude that the transfer by generator to taxpayer meets the safe_harbor requirements of notice_88_129 as amended and modified by notice_90_60 and notice_2001_82 next we must decide whether the contribution qualifies as a contribution_to_capital under sec_118 the legislative_history of sec_118 provides in part as follows this sec_118 in effect places in the code the court decisions on the subject it deals with cases where a contribution is made to a corporation by a governmental_unit chamber of commerce or other association of individuals having no proprietary interest in the corporation in many such cases because the contributor expects to derive indirect benefits the contribution cannot be called a gift yet the anticipated future_benefits may also be so intangible as to not warrant treating the contribution as a payment for future services plr-139443-03 s rep no 83d cong 2d sess in 319_us_98 the court held that payments by prospective customers to an electric utility company to cover the cost of extending the utility’s facilities to their homes were part of the price of service rather than contributions to capital the case concerned customers’ payments to a utility company for the estimated cost of constructing service facilities primary power lines that the utility company otherwise was not obligated to provide the customers intended no contribution to the company’s capital later in 339_us_583 the court held that money and property contributions by community groups to induce a shoe company to locate or expand its factory operations in the contributing communities were nonshareholder contributions to capital the court reasoned that when the motivation of the contributors is to benefit the community at large and the contributors do not anticipate any direct benefit from their contributions the contributions are nonshareholder contributions to capital id pincite finally in 412_us_401 the court in determining whether a taxpayer was entitled to depreciate the cost of certain facilities that had been funded by the federal government held that the governmental subsidies were not contributions to the taxpayer’s capital the court recognized that the holding in detroit edison co had been qualified by its decision in brown shoe co the court in chicago burlington quincy railroad co found that the distinguishing characteristic between those two cases was the differing purpose motivating the respective transfers in brown shoe co the only expectation of the contributors was that such contributions might prove advantageous to the community at large thus in brown shoe co since the transfers were made with the purpose not of receiving direct services or recompense but only of obtaining advantage for the general community the result was a contribution_to_capital the court in chicago burlington quincy railroad co also stated that there were other characteristics of a nonshareholder contribution_to_capital implicit in detroit edison co and brown shoe co from these two cases the court distilled some of the characteristics of a nonshareholder contribution_to_capital under both the and codes first the payment must become a permanent part of the transferee’s working_capital structure second it may not be compensation such as a direct payment for a specific quantifiable service provided for the transferor by the transferee third it must be bargained for fourth the asset transferred foreseeably must benefit the transferee in an amount commensurate with its value fifth the asset ordinarily if not always will be employed in or contribute to the production of additional income and its value assured in that respect chicago burlington quincy railroad co u s pincite based on the facts represented we conclude that the transfer by generator to taxpayer possesses the characteristics of a nonshareholder contribution_to_capital as described in chicago burlington quincy railroad co therefore the transfer of the intertie by generator to taxpayer will be a contribution_to_capital under sec_118 plr-139443-03 accordingly based solely on the foregoing analysis and the representations made by taxpayer and generator we rule that the transfer of the intertie by generator to taxpayer will not constitute a contribution_in_aid_of_construction under sec_118 and will be excludable from the gross_income of taxpayer as a nonshareholder contribution_to_capital under sec_118 except as specifically set forth above no opinion is expressed or implied concerning the federal_income_tax consequences of the above described facts under any other provision of the code or regulations specifically no opinion is expressed or implied as to whether taxpayer’s representation that less than five percent of the total projected power flows over the dual-use intertie from taxpayer to generator is a reasonable projection for purposes of the five percent test in notice_88_129 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 walter h woo walter h woo senior technician reviewer branch office of associate chief_counsel passthroughs and special industries enclosure copy cc