internal_revenue_service national_office technical_advice_memorandum index uil no obe case mis no tam-110546-99 ce- oom ps sl b2 taxpayer's name taxpayer's address taxpayer's identification no years involved date of conference legend p p41 p2 p3 p4 partnership bank bonds note d1 d2 d3 d4 d5 d6 d7 d8 d9 dollar_figurea dollar_figureb dollar_figurec dollar_figured dollar_figuref dollar_figuree dollar_figureg dollar_figureh tam-110546-99 issue s whether the transfer of note by p1 to partnership was a disguised sale under sec_707 conclusion the transfer of note by p1 to partnership was a disguised sale under sec_707 of note by p to partnership for federal tax purposes facts p is a parent company that owns numerous other corporations on d1 p sold its for the stock sold the face_amount of note was dollar_figurea note was due on d9 but the terms of the interest in certain corporations to h from h note provided that it could be prepaid at up to dollar_figuref per year following the first anniversary date or prepaid in larger amounts with months written notice to p secured_by an irrevocable letter_of_credit dated d1 the fetter of credit was in turn secured_by mortgages on certain property owned by h the installment_method of payment p elected to report the sale on the entire dollar_figurea is a deferred gain taxable in the year of receipt p received cash and note note was h in order to remove the mortgages on the property securing the letter_of_credit approached p in ds about prepaying note agreement pursuant to which h transferred dollar_figurea to bank securing note was now secured_by a compensating cash deposit with bank as opposed to mortgages on h’s property as a result the letter_of_credit on d6 h and p entered into an on d2 approximately years later p in the first step for transferring note to partnership transferred note and the underlying letter_of_credit to p1 a newly formed subsidiary of p approximately a week later on d3 p1 transferred note and the underlying letter_of_credit to a newly formed partnership partnership the partners of partnership were p1 m a1 and a2 a1 and a2 each contributed dollar_figureb to partnership for their respective partnership_interest also on d3 the following transactions occurred partnership contributed dollar_figurec to p2 a newly formed corporation in exchange for all the stock in p2 a wholly-owned subsidiary of p p3 loaned dollar_figured to p2 loaned the dollar_figurec to p3 tam-110546-99 p and also loaned dollar_figuree to p4 a wholly-owned subsidiary of p contributed the p4 loan to the capital of p4 off an inter-company debt it had to p accordingly eight days after the cash contribution to partnership by a1 and a2 and on the same day that the note and the letter_of_credit were contributed to partnership the dollar_figurec that partnership had transferred to p2 as a purported equity contribution ended up with p p4 used the dollar_figuree received from p3 to pay p3 subsequently following the contribution of dollar_figurec by partnership to p2 the assets of partnership consisted of note the underlying letter_of_credit dollar_figureg invested in bonds and an equity_interest in p2 partnership's sole activity has been collecting the payments made on note and the interest payment from bonds for the years following partnership's contribution to p2 through the tax_year p2 conducted no activity and had no earnings partnership received no economic d7 benefit from its investment in p2 partnership's earnings through d7 were derived solely from note and the investment in bonds on d4 years after the formation of partnership note and the underlying letter_of_credit were distributed to a1 and a2 in liquidation of their respective interests in partnership also in the same year m's interest in partnership was liquidated and a new partner p5 a wholly-owned subsidiary of p was admitted to partnership at the end of d7 the partners of partnership were p1 and p5 wholly-owned subsidiaries of p at the end of d7 the only assets held by partnership were its investment in p2 and an investment account with a brokerage firm with a value of dollar_figureh the intent of the parties that formed partnership as evidenced by the action of the parties and by the partnership_agreement was to minimize the economic risk of a1 and a2 and to provide the dollar_figurec that would ultimately be transferred to p under article of the first amended and restated agreement of partnership for partnership_agreement a1 and a2 are entitled to a first priority return on their respective contributions of to partnership under article vi of agreement net_cash_flow is to be distributed semiannually in an amount equal to the net taxable_income of partnership for the previous quarter first to a1 and a2 in proportion to their respective positive capital_account balances in an amount equal to the sum of their respective annual priority return under section dollar_figure of article v of agreement losses are allocated first to p1 and to m a1 and a2 collectively the intent of the arrangement between the partners of partnership was that a1 and a2 could suffer an economic loss only if the bank that provided the letter_of_credit securing note failed tam-110546-99 section a of article vii of agreement provides that following the formation of partnership the partnership shall contribute dollar_figurec to the capital of p2 law and analysis sec_721 of the internal_revenue_code provides that no gain_or_loss is recognized by a partner or a partnership when the partner contributes property to the partnership in exchange for a partnership_interest sec_707 of the code provides that if there is a direct or indirect transfer of money or other_property by a partner to a partnership there is a related direct or indirect transfer of money or other_property by the partnership to such partner and the transfers when viewed together are properly characterized as a sale_or_exchange of property then such transfers shall be treated either as a partner engaging ina transaction with a partnership other than in his capacity as a member of such partnership or as a transaction between or more partners acting other than in their capacity as members of the partnership sec_1_721-1 of the income_tax regulations provides in part that sec_721 does not apply to a transaction between a partnership and a partner not acting in his capacity as a partner since such a transaction is governed by sec_707 contributing property to a partnership a partner may sell property to the partnership or may retain the ownership of property and allow the partnership to use it the substance of the transaction will govern rather than its form in all cases rather than as noted by the tax_court in 96_tc_577 the legislative_history of sec_707 indicates that ijn the case of disguised sales the committee is concerned that taxpayers have deferred or avoided tax on sales of property including partnership interests by characterizing sales as contributions of property including money followed or preceded by a related partnership_distribution although treasury regulations provide that the substance of the transaction should govern court decisions have allowed tax-free treatment in cases which are economically indistinguishable from sales of property to a partnership or another partner the committee believes that these transactions should be treated in a manner consistent with their underlying economic_substance tam-110546-99 staff of the j comm on taxation general explanation of the revenue provisions of the cong 2d sess deficit_reduction_act_of_1984 pincite j comm print in order to re-characterize a transfer of property to a partnership as a sale of the property to the partnership or as a transaction between or more partners acting other than in their capacity as members of the partnership sec_707 requires that three elements must be satisfied first there must be a direct or indirect transfer of money or other_property by a partner to a partnership p1 a1 and a2 each transferred money and property to partnership p did not directly transfer money or property to partnership therefore in order to satisfy the first requirement of sec_707 it must be shown that the transfer of property by p1 to partnership was in substance a transfer by p to partnership second it must be shown that there is a related direct or indirect transfer of money or other_property by the partnership to such partner the parties to partnership carefully structured the transfer of money from partnership to avoid a direct transfer of money from partnership to p therefore to satisfy the second requirement of sec_707 it must be shown that the transfer of money from partnership to p2 was intended by the parties to be an indirect transfer of money to p third tt must be shown that the transfers to the partnership and the transfer from the partnership to the partner when viewed together are properly characterized as a sale_or_exchange of property between p and partnership therefore to satisfy the third requirement of sec_707 b it must be shown that the transfer of the property by p1 to partnership and the transfer of money from partnership to p2 was in substance a sale_or_exchange between p and partnership clearly the form chosen by p in structuring the investment in partnership and the transfer of money from partnership to p2 was intended to insure that sec_707 did not apply to the transfer of note to partnership p created a new subsidiary p1 with the transfer of note and the underlying letter_of_credit solely to ensure that p1 and not p was considered the partner in partnership partnership transferred dollar_figurec dollar_figurec wa sec_80 of dollar_figurea to p2 a newly created corporation on the same date as the contribution by p1 to partnership followed immediately by p2 loaning the dollar_figurec to p3 which in turn loaned dollar_figured to p and dollar_figuree to p4 with p4 using the dollar_figuree to pay an inter-company loan to p was intended to result in p receiving dollar_figurec from partnership and still avoid the application of sec_707 to the transaction tam-110546-99 in interpreting sec_707 the tax_court noted that in order to fit within a particular provision of the statute a transaction must comply not only with the letter of the section but must have a business_purpose other than to avoid taxes that falls within its spirit as well see jacobson supra pincite although the form selected by the partners in the formation of partnership was intended to avoid the application of sec_707 to the transfer of note to partnership on d3 the service is not required to follow this form the tax_court in 91_tc_793 noted that although the statutory scheme under subchapter_k gives partners great latitude in selecting the form the partnership takes and in allocating economic benefits and tax burdens of partnership transactions among partners this flexibility is not unlimited the court also noted that labels semantics technicalities and formal documents do not necessarily contro the tax consequences of a given transaction the form of the transaction must be in keeping with its true substance and the intent of the parties in this regard the provisions of written documents are not necessarily conclusive for tax purposes 272_f2d_176 cir nor will a label attached by a tax-conscious litigant contro the proper characterization of a transaction jupiter corp v united_states cl_ct partners may attempt to structure the substance of their transactions choosing it does not the form of the transactions 70_tc_312 aff'd per curiam 634_f2d_1046 cir ordinarily the taxpayers are bound by the form of their transaction while the government can attack that form if represent the substance of the transaction newhall unitrust v commissioner 104_tc_236 mere formalisms arranged by the parties are not binding in the application of the tax laws 88_tc_435 citing 324_us_331 the form chosen by p allowed p to receive from partnership of the cash contributed by a1 and a2 to partnership immediately following p's transfer of note to partnership without the recognition of gain on the transaction the seventh circuit stated in 765_f2d_643 cir affg 80_tc_955 the freedom to arrange one's affairs to minimize taxes does not include the right to engage in financial fantasies with the expectation that the internal_revenue_service and the courts will play along the commissioner and the courts are empowered and in fact duty- bound to look beyond the contrived forms of transactions to their economic substances and to apply the tax laws accordingly clearly the form chosen by p the contribution by p of note and the letter_of_credit to p1 followed shortly thereafter by p1 transferring note and the letter_of_credit to partnership served no economic purpose other than to avoid having p considered a partner in partnership y es tam-110546-99 although p is not formally identified as a partner in partnership the formation of p1 with the contribution of note by p to p1 followed by p1 transferring note to pa served no purpose other than to avoid the application of sec_707 furthermore although partnership did not transfer money directly to p the transfer of dollar_figurec to p2 served no economic purpose other than to avoid a direct transfer of money from partnership to p the tax statutes apply only to transactions entered upon for commercial purposes and ‘not to transactions entered upon for no other motive but to escape taxation 270_f2d_294 3d cir quoting 176_f2d_570 2d cir the only acknowledged business_purpose for p’s and p1's involvement in the transaction was to enable p to receive cash from partnership p could not directly transfer note to partnership and then take the cash_out of partnership for this would clearly fall within the ambit of sec_707 therefore p1 was formed to be the partner that contributed note and p2 was formed to receive the dollar_figurec from partnership as a purported equity contribution however the economic_substance of the transaction was that p contributed note to partnership in exchange for dollar_figurec the sole business_purpose for the creation of p2 was to allow the transfer of dollar_figurec out of partnership without the cash going directly to p further although the dollar_figurec contributed to p2 represented of the cash contributed by a1 and a2 to partnership and although the investment in p2 never generated any economic return to the partnership neither p nor a1 or a2 acted ina manner consistent with normal business practices concerning the investment in p2 whether p2 ever generated a return on the investment was irrelevant to p a1 and a2 al's and a2's investment in partnership was secure because of the note and letter_of_credit and p’s investment in partnership was also secure because it already withdrew dollar_figurec on the day it contributed the note and the balance was held by partnership in the form of the bonds which in time when a1 and a2 withdrew from partnership was owned by p through its subsidiaries p1 and p5 thus even if partnership’s investment in p2 never generated any return no partner would suffer any true economic loss therefore based upon the economic_substance of the transaction and not the form adopted by the parties to the transaction we conclude that for purposes -of the disguised sales rule under sec_707 the transfer of note to partnership is properly characterized as a transfer by p of note to partnership followed by a transfer of dollar_figurec by partnership to p accordingly the transfer of note to partnership was a sale of note by p to partnership in exchange for dollar_figurec on d3 no opinion is expressed regarding whether p should recognize gain on the dollar_figurea the amount remaining in partnership in d7 when a1 and a2 withdrew from partnership tam-110546-99 appeals also requested guidance regarding the application of sec_451 to this transaction this issue will be addressed in a separate technical_advice_memorandum caveat s except as specifically ruled upon above no opinion is expressed or implied as to the federal tax consequences of the transaction described above under any other provision of the code a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division dec uniform issue list ‘ _-- legend taxpayer a ira x amount a date date date date financial_institution b individual dear this is in response to your request dated date as supplemented by correspondence dated date submitted on your behalf by your authorized representative in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested page taxpayer a age represents that he received a distribution from ira x totaling amount a taxpayer a states that his failure to accomplish a rollover within the 60-day period prescribed by sec_408 of the code was due to an error committed by financial_institution b which led to the placement of amount a into a non-ira account taxpayer a further asserts that amount a has not been used for any other purpose taxpayer a represents that on date he withdrew amount a from ira x for a temporary investment opportunity with the intent to redeposit the funds into ira x instructed financial before the 60-day rollover period expired on date taxpayer a institution b through a written order to move amount a to ira x during the 60-day rollover period financial_institution b moved all of its client’s accounts including taxpayer a’s accounts to a new broker and failed to carry out taxpayer a’s instructions taxpayer a discovered that amount a had been deposited into a non-ira account only when he received a notice from the internal_revenue_service on date on date individual the chief operating officer of financial_institution b provided documentation indicating that financial_institution b incorrectly deposited amount a into a non-ira account based on the facts and representations you request a ruling that the internal_revenue_service waive the 60-day rollover requirement contained in sec_408 of the code with respect to the distribution of amount a sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if- i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 page sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary may waive the day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 r b date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a is consistent with his assertion that his failure to accomplish a timely rollover of amount a was caused by an error committed by financial_institution b therefore pursuant to sec_408 of the code the service hereby is granted a period of days waives the 60-day rollover requirement with respect to the distribution of amount a from ira x taxpayer a letter to contribute amount a to a rollover ira provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contribution amount a will be considered a rollover_contribution within the meaning of sec_408 of the code this ruling does not authorize the rollover of any amounts that are required to be distributed by sec_401 of the code from the issuance of this ruling lo page no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter is being sent to your authorized representative in accordance with form_2848 on file in this office if you wish to inquire about this ruling please contact at please address all correspondence to se t ep ra t3 sincerely laura b warshawsky manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose


internal_revenue_service number release date index number ----------------- ------------------------------------------ --------------------------- ---------------------------------------- ------------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------------ id no ------------------ telephone number ---------------------- refer reply to cc corp b02 plr-133542-16 date september legend distributing controlled acquiring mergersub ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ----------------------- ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ -------------------------------------- ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ----------------------- ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ----------------------- business a ---------------------- state a -------------- date date date date ------------------- ------------------------ -------------------- ----------------------- plr-133542-16 a ------ investment_advisor ---------------------- dear --------------- this letter responds to a letter dated date submitted on behalf of distributing requesting a ruling on a significant issue presented under sec_355 of the internal_revenue_code the code the information provided in that request and in subsequent correspondence is summarized below this letter is issued pursuant to section dollar_figure of revproc_2016_1 2016_1_irb_1 regarding one or more significant issues under sec_355 of the internal_revenue_code the code the ruling contained in this letter only addresses one or more discrete legal issues involved in the transaction this office expresses no opinion as to the overall tax consequences of the transactions described in this letter or as to any issue not specifically addressed by the ruling below the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the ruling_request such materials are subject_to verification on examination summary of facts acquiring and distributing are each publicly traded state a corporations that are not related to each other controlled is a state a corporation that was formed to effectuate the distribution described below and was wholly owned by distributing until date mergersub was a state a corporation wholly owned by acquiring that was formed to effectuate the acquisition of controlled described below on date distributing controlled and acquiring entered into an agreement separation agreement to effectuate the separation of business a from the other businesses of distributing also on date distributing controlled acquiring and mergersub entered into an agreement merger agreement pursuant to which acquiring would acquire controlled pursuant to the separation agreement and merger agreement the following steps were undertaken i distributing contributed the assets and liabilities associated with business a to newly formed controlled in exchange for the controlled stock plr-133542-16 ii iii distributing made a pro_rata distribution the distribution of the controlled stock to its shareholders the historic distributing shareholders immediately after the distribution mergersub merged with and into controlled with controlled surviving as a wholly owned subsidiary of acquiring the merger the distribution and merger were completed on date the historic distributing shareholders received approximately a of acquiring’s common_stock as consideration in the merger acquiring has engaged in open market repurchases of its common_stock for several years acquiring recently adopted a new share repurchase plan that provides for share repurchases share repurchases following the merger the share repurchases will be conducted through a broker who will have full discretion with respect to the execution of all purchases and will be made on the open market all acquiring shareholders will be allowed to participate in and benefit from the share repurchases and acquiring is indifferent as to which shareholders participate in the share repurchases on date investment_advisor filed a schedule 13g with respect to acquiring indicating beneficial_ownership of more than ten percent of acquiring’s common_stock item on that schedule 13g stated that no one person’s interest in the common_stock of acquiring was more than five percent of the total outstanding common shares representations distributing makes the following representations the share repurchases are motivated by a business_purpose the stock to be repurchased in the share repurchases will be widely held and the share repurchases will be made in the open market the share repurchases are not motivated to any extent by a desire to increase or decrease the ownership percentage of any particular shareholder or group of shareholders because the share repurchases will be made on the open market through a broker acquiring will not know the identity of any shareholder from which acquiring stock is repurchased during the two years before the merger neither distributing nor acquiring had any controlling shareholders within the meaning of sec_1_355-7 a plr-133542-16 controlling shareholder and acquiring has had no such controlling shareholders since the merger as of date except for investment_advisor which filed a schedule 13g on date no shareholder of acquiring has filed a form_3 form_4 schedule 13d or schedule 13g indicating that it owns enough shares to be a ten-percent shareholder within the meaning of sec_1_355-7 a ten-percent shareholder since the merger and acquiring has no actual knowledge of any ten-percent shareholders since the merger actual knowledge means the actual knowledge of the vice president of investor relations the general counsel or a successor position at acquiring of the existence of a controlling shareholder or ten-percent shareholder ruling based solely on the information submitted and representations made we rule that to the extent the share repurchases are treated as part of a plan or series of related transactions with the distribution for purposes of sec_355 the share repurchases will be treated as being made from all public shareholders of acquiring common_stock defined as shareholders who are neither controlling shareholders nor ten-percent shareholders on a pro_rata basis for the purpose of testing the effect of the share repurchases on the distribution under sec_355 for purposes of this ruling each acquiring common_stock shareholder will be treated as a public shareholder until five business days after either actual knowledge or the filing of a schedule 13d schedule 13g form_3 or form_4 indicating it holds enough shares to be considered a five-percent shareholder within the meaning of sec_1_355-7 and it actively participates in the management or operation of acquiring as described in sec_1_355-7 or a ten-percent shareholder for purposes of determining whether a ten-percent shareholder exists acquiring may disregard a schedule 13g unless item reports such a shareholder or is left blank or the filer discloses its status as a ten-percent shareholder on form_3 or form_4 caveats except as expressly provided herein no opinion is expressed or implied concerning the tax treatment of the transactions described herein under any provision of the code and regulations or the tax treatment of any condition existing at the time of or effects resulting from these transactions that is not specifically covered by the above rulings plr-133542-16 procedural statements 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 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely ________________________________ susan e massey assistant to the branch chief branch office of associate chief_counsel corporate cc


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp b05-plr-125533-02 date date corporation shareholder a shareholder b shareholder c shareholder d shareholder e shareholder f shareholder g shareholder h shareholder i plr-125533-02 shareholder j shareholder k shareholder l shareholder m shareholder n shareholder o shareholder p shareholder q shareholder r shareholder s shareholder t shareholder u state a brand x company x x shares plr-125533-02 y shares x y z year a year b year c year d year e date a a shares b shares c shares d shares e shares f shares g shares h shares i shares j shares k shares l shares plr-125533-02 m shares n shares o shares p shares q shares r shares s shares t shares u shares v shares w shares x shares dollar_figurea dear this letter responds to your date request for rulings concerning the federal_income_tax consequences of a proposed transaction the information submitted for consideration is summarized below corporation is incorporated in state a and is the state-wide distributor of brand x it uses an accrual_method of accounting and computes income on a calendar_year basis for federal_income_tax purposes corporation has outstanding two classes of stock x shares of class a voting common_stock and y shares of class b non-voting common_stock the class a voting common_stock is currently voted according to a voting_trust agreement under the voting_trust agreement shareholder f and shareholder m are assigned the vote of all of the corporation’s class a voting common_stock as trustees under the voting_trust agreement shareholder m votes x of the shares while shareholder f votes y of the shares all of the shareholders of the corporation are the descendants of the founder their spouses and or trusts established plr-125533-02 for their benefit in year a company x informed corporation of a change in policy regarding the distribution of brand x the new policy is informally characterized as a single set of eyes theory meaning that company x desired to have one individual referred to as a dealer principal to look to for distributor decisions the new policy requires that a dealer principal own at least z of the vote and value of the corporation the old policy had only required that the dealer principal hold z of the vote of the corporation not value to comply with this new policy the corporation will engage in the following transaction shareholder m will be named dealer principal_shareholder m and shareholder k will each purchase a shares of the corporation’s class b non-voting common_stock from shareholder d shareholder f will purchase from shareholder a and shareholder c their b shares of the corporation’s class a voting common_stock the corporation will then purchase for cash or for cash and the corporation’s promissory note all of the outstanding shares of class b non-voting stock owned by the following shareholders shareholder shareholder a shareholder b shareholder c shareholder d shareholder e shareholder h shareholder i shareholder j shareholder o shareholder p shareholder q shareholder r shareholder s shares of class b non-voting common_stock owned and redeemed c shares d shares e shares f shares g shares h shares i shares j shares k shares l shares k shares l shares o shares plr-125533-02 shareholder shareholder t shareholder u shares of class b non-voting common_stock owned and redeemed k shares l shares during the period year b through year a shareholder p shareholder r and shareholder u received gifts of class b non-voting common_stock from shareholder d and shareholder e totaling x shares each during the period year b through year c shareholder l and shareholder n received gifts of class b non-voting common_stock from shareholder d and shareholder e totaling w shares each in year e shareholder m received v shares of class a voting common_stock as a gift from shareholder d and shareholder e the taxpayers have made the following representations concerning the proposed transaction a b c d e there are no outstanding options or warrants to purchase the corporation’s stock nor are there any outstanding debentures or other obligations that are convertible into the corporation’s stock or would be considered the corporation’s stock notes or other obligations of the corporation may be distributed to one or more of the redeemed shareholders in no event will the last payment on any note or other obligation be made more than years after the date_of_issuance of the note or other obligation the amount to be paid including interest is a fixed amount payable at a fixed time and the amount and the time of payment are not subject_to any change or adjustment none of the consideration from the corporation including interest consists entirely or partly of the corporation’s promise to pay an amount that is based on or contingent on future earnings_of the corporation an amount that is contingent on working_capital being maintained at a certain level or any other similar contingency f any note or other obligation to be issued to a redeemed shareholder will not be subordinated to claims of general creditors of the corporation g in the event of default on any note or other obligation no shares of stock plr-125533-02 h i j will revert to or be received by a redeemed shareholder nor will any redeemed shareholder be permitted to purchase the stock at public or private sale no shareholder of the corporation has been or will be obligated to purchase any of the stock to be redeemed the redemption described in this ruling_request is not an isolated transaction it is related to shareholder f’s purchase of all the voting_stock owned by shareholder a and shareholder c and to the purchases by shareholder k and shareholder m of a shares each of non-voting common_stock from shareholder d the impact of this related transaction is that coupled with the redemption it fully divests shareholder a shareholder c shareholder d and shareholder e of any stock of the corporation and it enables the three family members who are active in the business on an ongoing basis to have equal ownership in the non-voting equity of the corporation the corporation has had changes in its outstanding equity in the past five years in date a each shareholder of voting preferred_stock of the corporation exchanged his or her voting preferred shares for a number of voting common shares such that before and after the exchange the voting percentage owned by each exchanging shareholder was the same more specifically shareholder a exchanged m shares of class b voting preferred_stock having a stated_value of dollar_figurea per share for n shares of class a voting common_stock shareholder c exchanged p shares of class b voting preferred_stock having a stated_value of dollar_figurea per share for q shares of class a voting common_stock shareholder k exchanged r shares of class b voting preferred_stock having a stated_value of dollar_figurea per share for s shares of class a voting common_stock shareholder m exchanged t shares of class b voting preferred_stock having a stated_value of dollar_figurea per share for u shares of class a voting common_stock as a result of these exchanges the corporation has outstanding only one class of common_stock with differing voting privileges so that if the shareholders so elect the corporation may be treated as an s_corporation beginning in year d in year c the corporation purchased all the outstanding shares of its class a non-voting preferred_stock as either part of a sec_303 redemption_of_stock_to_pay_death_taxes or as a purchase from shareholders who were beneficiaries of the estate k other than the proposed redemption and with the exception of additional shares that may be issued to shareholder m in compliance with the company x requirements regarding the dealer principal the corporation has no plans or intention to issue redeem or exchange additional shares plr-125533-02 of stock l there will be no distributions redemptions or issuances of the stock of any related corporation m other than the contemplated purchases all described above by shareholder f shareholder k and shareholder m and other than through gifts made by shareholder d to his children in each of the years year b through year c no redeemed shareholder or a related_party has sold or acquired or intends to sell or acquire any stock of the corporation or any related corporation either directly or constructively within five years of redemption but shareholder m may acquire additional shares within such five year period in connection with the requirements of company x the purchases by shareholder f shareholder k and shareholder m have been considered consummated for purposes of computing the ownership of stock after the redemption the corporation will not be liable directly or indirectly for any part of their obligations in the purchase of such stock n o p q r the only relationship or transactions affecting a redeemed shareholder’s percentage of ownership of any class of the corporation’s stock are the purchases at fair_market_value by shareholder k and shareholder m of certain shares of class b non-voting common_stock and by shareholder f of certain shares of class a voting common_stock although some of the stock to be redeemed was acquired by some redeemed shareholders within the 10-year period preceding the redemption from a person whose stock would be attributed under sec_318 to such redeemed shareholders at the time of redemption the acquisition did not have as one of its principal purposes the avoidance of federal_income_tax after the redemption no redeemed shareholder will have any interest in the corporation including an interest as officer director or employee other than an interest as a creditor as described in sec_1_302-4 and constructive_ownership under sec_318 shareholder a shareholder b shareholder c shareholder d and shareholder e will execute and file the agreement required by sec_302 with respect to the acquisition of any interest in the corporation within years from the date of the redemption the only partnership estate_trust or corporation that is a redeemed shareholder and has stock attributed to it under sec_318 from a related_person is shareholder b the related_person to shareholder b plr-125533-02 is shareholder f none of the stock to be redeemed was acquired by shareholder b within the 10-year period preceding the redemption from a person whose stock would be attributed under sec_318 to shareholder b at the time of redemption moreover no person whose stock would be attributed to shareholder b under sec_318 will own stock of the corporation after the redemption if the stock was acquired by that person from shareholder b within 10-years preceding the redemption after the redemption shareholder b will not have any interest in the corporation including an interest as officer director or employee other than an interest as a creditor as described in sec_1_302-4 and constructive_ownership under sec_318 shareholder b and each related_person will agree to be jointly and severally liable for any deficiency including interest and additional tax resulting from an acquisition by shareholder b of an interest in the corporation within 10-years from the date of redemption none of the stock to be redeemed is sec_306 stock within the meaning of sec_306 the stock to be redeemed is common_stock but it was not received in exchange for preferred_stock there are no declared but unpaid dividends or funds set apart for dividends on any of the stock to be redeemed the redemption will be financed with notes of the corporation or from funds on hand or borrowed from a third party lender the corporation intends to borrow the funds necessary for the cash redemption from third party financial institutions such as banks or insurance_companies none of whom will be related to the corporation or its shareholders in addition the corporation may utilize its ongoing unsecured line of credit from an unrelated banking institution to fund part of the cash purchase money obligation for the redemptions no party other than the corporation will hold the stock to be redeemed no redeemed shareholder owes any amount to the corporation at the time of the exchange the fair_market_value of the consideration to be received by each redeemed shareholder will be approximately equal to the fair_market_value of the corporation’s stock to be exchanged therefor the price to be paid for the corporation’s stock to be redeemed will not result in a loss with respect to those shares of stock the proposed redemption will satisfy the definition of installment_sale as s t u v w x y z plr-125533-02 defined in sec_453 it is a disposition of property where at least one payment will be received after the close of the taxable_year in which the disposition occurs moreover the proposed redemption of the corporation’s stock i is not a disposition of personal_property on the installment_plan by a person who regularly sells or otherwise disposes of personal_property on the installment_plan and ii is not a disposition of personal_property of a kind required to be included in the inventory of any redeemed shareholder at the close of the taxable_year any note or other obligation to be issued to a redeemed shareholder will not be issued in any form designed to render it readily_tradable on an established_securities_market aa the redeemed shareholders will receive from the corporation either united_states cash or notes or other obligations of the corporation the amount received by each redeemed shareholder will be the fair_market_value of each redeemed shareholder’s shares as determined by independent appraisal the amount received by each redeemed shareholder will be the fair_market_value of each redeemed shareholder’s shares as determined by independent appraisal the corporation will not distribute any inventory or appreciated_property to the redeemed shareholders no liabilities of the corporation will be assumed by a redeemed shareholder and none of the property distributed will be subject_to a liability the corporation will not distribute to a redeemed shareholder as part of the redemption any of the following any appreciated_property any assets representing earned but unreported income or other assets resulting in an anticipatory_assignment_of_income any installment_obligation from a third party any property described in the recapture provisions of the code any property for which the corporation obtained a deduction any property described in sec_1256 contracts marked to market or sec_1276 market_discount bonds or any receivable the redeemed shareholders have no plan or intention to sell lease or otherwise dispose_of any notes received in the redemption based solely on the information submitted and on the representations set forth above we hereby rule as follows sec_318 shall not apply in determining ownership of the corporation’s shares immediately after the redemptions to any redeemed shareholder who files the election required by sec_302 each redemption shall be treated as a complete redemption of stock within the meaning of sec_302 for each redeemed shareholder each redeemed shareholder shall be treated as having received in the plr-125533-02 redemption a distribution in part or full payment in exchange for the stock redeemed under sec_302 any gain recognized by each selling or redeeming shareholder shall be treated as gain from the sale of a capital_asset as defined in sec_1221 shareholders receiving the corporation’s promissory note as consideration for the redemption of their shares may qualify to report the gain under the installment_method under sec_453 in determining whether or the extent to which a selling and or redeeming shareholder has made a gift under applicable federal gift_tax law the fair_market_value of each selling and or redeeming shareholder’s shares will be determined with reference to the shares sold and or redeemed by that shareholder and not with reference to the shares sold and or redeemed in the aggregate by all shareholders in determining whether or the extent to which a shareholder both selling shares and having shares redeemed in the transaction has made a gift under applicable federal gift_tax law the fair_market_value of each such shareholder’s shares will be determined with reference to the shares sold and redeemed by that shareholder this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent it is important that a copy of this letter be attached to the federal_income_tax returns of the taxpayers involved for the taxable years in which the transaction covered by this letter is consummated pursuant to a power_of_attorney on file in this office a copy of this letter has been sent to your authorized representative sincerely yours debra carlisle branch chief branch associate chief_counsel corporate cc plr-125533-02


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 tege eoeg teb tl-n-3124-94 uilc internal_revenue_service national_office field_service_advice memorandum for from mary oppenheimer assistant chief_counsel cc tege eoeg teb subject reissuance of tax-exempt_bonds 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 disclosure statement field_service_advice is chief_counsel_advice and is open to public inspection pursuant to the provisions of sec_6110 the provisions of sec_6110 require the service to remove taxpayer identifying information and provide the taxpayer with notice of intention to disclose before it is made available for public inspection sec_6110 and i sec_6110 also authorizes the service to delete information from field_service_advice that is protected from disclosure under u s c sec_552 b and c before the document is provided to the taxpayer with notice of intention to disclose only the national_office function issuing the field_service_advice is authorized to make such deletions and to make the redacted document available for public inspection accordingly the examination appeals or counsel recipient of this document may not provide a copy of this unredacted document to the taxpayer or their representative the recipient of this document may share this unredacted document only with those persons whose official tax_administration duties with respect to the case and the issues discussed in the document require inspection or disclosure of the field_service_advice legend issuer act state year bonds refunding bonds trustee trustee corporation underwriters date date date date date date date date date date year year year year dollar_figurea b dollar_figurec dollar_figured e dollar_figuref dollar_figureg dollar_figureh dollar_figurei dollar_figurej dollar_figurek dollar_figurel dollar_figurem dollar_figuren dollar_figurep dollar_figureq dollar_figurer s t dollar_figureu dollar_figurev dollar_figurew issue whether the financial benefit an issuer of tax-exempt_bonds received including payments from a bondholder in connection with alterations the issuer made to the terms of such bonds results in a reissuance of the bonds conclusion taking into account the alterations that were made to the terms of the bonds the issuer’s financial benefit and the payments the issuer received from a bondholder in connection with such alterations there was a reissuance of the bonds facts the issuer was formed on or about date under the act the act authorizes the issuer to issue revenue bonds for the purpose of assisting its member school districts in financing qualifying facilities services or improvements any school district in state can become a member of the issuer year issuance on date the issuer issued its year bonds in the amount of dollar_figurea the year bonds were issued pursuant to a master indenture of trust the master indenture and a supplemental indenture of trust the first supplemental indenture between the issuer and trustee the stated purpose of the year bonds was to provide a pool of funds for financing projects permitted under the act the program members borrowing from the pool participating members were to enter loan agreements with the issuer the agreements on the date_of_issuance the proceeds of the year bonds were deposited into the program fund created under the master indenture no costs of issuance were paid on the date_of_issuance instead costs of issuance were deferred to the date loans were made from proceeds of the year bonds and would be paid proportionately to the amount of loans financed also on date the issuer entered into a guaranteed investment contract the gic with corporation the gic yielded b percent and was funded with the proceeds deposited in the program fund the terms of the gic included a no- earlier-than draw schedule pursuant to which funds could be withdrawn from the gic to make loans to participating members from the date_of_issuance of the year bonds to the expiration date of the gic on date pursuant to the master indenture the provider of the gic was required to have a rating of no less than aaa by standard poor’s s p as of the date of execution the year bonds are limited obligations of the issuer payable from payments made by participating members under loan agreements with the issuer from amounts in the funds created under the master indenture including amounts on deposit in the program fund and invested in the gic and investment earnings thereon the year bonds were issued in two maturities dollar_figurec in term bonds due_date and dollar_figured in term bonds due_date the yield on the year bonds for purposes of sec_148 was approximately e percent under the master indenture the year bonds are subject_to mandatory redemption from principal repayments under any agreements between the issuer and participating members if all of the proceeds were converted to loans there would be no redemption of the year bonds until and as the underlying loans were repaid if none of the proceeds were converted to loans then there would be a total redemption of the bonds on date when the gic matured further under the terms of the master indenture and the first supplemental indenture the year bonds are also subject_to redemption by application of sinking account prepayments beginning in year under the master indenture whenever less than all of the bonds of a series of the year bonds are to be redeemed trustee is required to make the selections by lottery and to mail notice of such selection to the holders no later than thirty days prior to the redemption date the gic matured on date on that date dollar_figuref of the year bonds had been previously redeemed pursuant to the mandatory sinking_fund redemption provisions the remaining dollar_figureg of the year bonds were redeemed when the gic matured no loans were made to any member school districts from the proceeds of the year bonds under the master indenture the rights and obligations of the issuer and holders of the year bonds may be modified by an indenture or supplemental indenture with the written consent of the owners of a majority of the then outstanding bonds in addition the issuer and the trustee may without the consent of or notice to any bond holder enter into any indenture or supplements to the indenture for purposes including the following a to provide for the issue of a series of bonds and to provide for the rate or rates of interest maturity and terms of redemption for such series of bonds b to add to the covenants of the issuer in the master indenture to pledge or assign additional security for the year bonds or to surrender any right or power reserved to or conferred upon the issuers in the indenture c to make provisions for the curing of any ambiguity inconsistency or omission or of curing or correcting any defective provision in the master indenture or as to any other provisions of the indenture as the issuer may deem necessary or desirable in any case which does not adversely affect the security for the year bonds d to modify amend or supplement the master indenture in such manner as to cause interest on the year bonds to be excludable from gross_income for purposes of federal income_taxation e to modify any of the requirements of the master indenture having to do with the terms and provisions of any loan agreement between the issuer and a participating member provided that prior to any such modification there was filed with the trustee written evidence that such modification will not result in the reduction or withdrawal of the rating on the year bonds year transactions according to the issuer by year it recognized that declining interest rates made it unlikely that loans would be made from the proceeds of the year bonds as represented by the issuer the prevailing market conditions impacted the year bonds in two ways first they traded at a premium because their interest rate was generally higher than the interest rate on recently issued tax-exempt_bonds second they traded at a lower price than bonds with the same interest rate but shorter maturities than their scheduled maturities that is because an investor in order to value any of the year bonds would have to assume that he would be able to receive interest on the bond as scheduled at least until date and would then take into account by discounting the price the fact that approximately of the date maturity and approximately of the date maturity would be randomly called for sinking_fund redemption prior to date because the determination as to which bonds would be redeemed early had not been made all of the year bonds were impacted on date the issuer directed trustee to discontinue the use of the book- entry only system and to register the year bonds in the individual names of the owners pursuant to the master indenture prior to this date the record_owner of the year bonds had been a nominee holder new bonds were then signed and sealed by the issuer and delivered to trustee for transfer to the beneficial owners on or about date the issuer removed trustee as trustee and appointed trustee notice of the change was mailed to the registered holders of year bonds on date the underwriter mailed notices of tender offers to the owners of the year bonds two days later on date trustee held a lottery to determine which of the year bonds would be called on the applicable redemption dates in year through year rather than holding a separate lottery in year and each subsequent year to determine which bonds would be redeemed in that particular year trustee held one lottery in year to identify the bonds that would be redeemed in each year all of the year bonds were included in the lottery process the process allocated sinking_fund maturities for the year bonds from year through their maturity dates new cusip numbers were assigned to each sinking_fund redemption date the results of the lottery were not immediately provided to the record bondholders but were immediately reported to the underwriter on date the underwriters purchased dollar_figureh of the outstanding year bonds maturing on date pursuant to their tender offer at a combined price of dollar_figurei or pincite also on date the issuer issued its refunding bonds in the amount of dollar_figurej the stated purposes for the issuance of the refunding bonds were advance refunding dollar_figurej principal_amount of the outstanding year bonds financing the issuer’s cost of acquiring and constructing an administration office building and initially funding a subsidy fund to reduce the borrowing costs of member school districts only the year bonds purchased by the underwriters were refunded by the refunding bonds the refunding bonds were not issued as tax-exempt in a memo from the underwriter to the issuer prior to the issuance of the refunding bonds the underwriter describes the gic profit that can be generated with the refunding of the year bonds the underwriter detailed how the differential in interest rates between the gic and the refunding bonds created a profit opportunity that could be capitalized the underwriter proposed that the refunding bonds would be structured so that they would not be subject_to redemption before the date on which the excess earnings on the gic would be captured the refunding bonds were tender option bonds due_date the refunding bonds were also issued on date proceeds in the amount of dollar_figurek were used to pay the underwriting fee and other costs of issuance on the date_of_issuance of the refunding bonds dollar_figurel was deposited into the administration building subaccount of the construction fund in addition dollar_figurem was deposited into the subsidy fund the remaining proceeds dollar_figuren were used to fund the advance refunding escrow the refunding escrow the refunding escrow fully defeased the year bonds purchased by the underwriters the year refunded bonds the stated purpose of the subsidy fund was to reimburse the issuer for program expenses or to disburse moneys to the issuer to be used pursuant to the program guidelines the term program expenses was defined to include fees and expenses relating to the refunding bonds and the subsidy fund incurred by trustee and the issuer relating to the administration of the refunding bonds and financial losses sustained as a result of the liquidation of any securities to make funds available to a participating member under an agreement the program guidelines provided that amounts on deposit in the subsidy fund would be used to subsidize members for their issuance costs on other financings in a memo from the underwriter to the issuer prior to the issuance of the refunding bonds the underwriter explained that the profit generated from refunding the year bonds would finance the amounts deposited in the subsidy fund and the construction fund the subsidy fund was not pledged as security for the refunding bonds in addition the refunding bonds were not secured_by a lien on the issuer’s administration building which was constructed out of the proceeds deposited in the construction fund simultaneously with the issuance of the refunding bonds the issuer adopted its second supplemental bond indenture the second supplemental indenture the purpose of the second supplemental indenture was to effectuate certain amendments to the master indenture the issuer’s representative acknowledged in correspondence that the issuer received a financial benefit of at least dollar_figurew the aggregate of the amounts deposited in the construction and subsidy funds the representative characterized this benefit as a payment from bondholders to remove the redemption uncertainty of the year bonds the amendments to the master indenture caused by the second supplemental indenture included providing that moneys on deposit in the year program fund and invested in the gic could be withdrawn subject_to satisfying current obligations to pay year bonds to make payments on the refunding bonds prohibiting the payment of costs of issuance out of the proceeds of the year bonds and restricting the amount of loans under agreements with participating members to the principal_amount of year bonds outstanding with respect to the redemption provisions of the year bonds language was added to the master indenture providing that a lottery could be called by the trustee more than days prior to the date set for redemption on or about the issue_date of the refunding bonds the underwriters purchased us treasury strips to be held in the refunding escrow for a combined price of dollar_figurep the securities in the refunding escrow were sold to the issuer for dollar_figureq resulting in a loss to the underwriters of dollar_figurer the yield on the refunding escrow based on the dollar_figureq cost of the securities to the issuer equals approximately s percent the yield on the refunding escrow based on the dollar_figurep cost of the securities to the underwriters equaled approximately t percent after the issuance of the refunding bonds trustee was authorized by the issuer to give notice of the redemption of the year bonds and all the bonds were officially called for redemption pursuant to the sinking_fund lottery results in addition pursuant to the terms of the escrow agreement for the year refunded bonds the escrow agent was to mail a second notice of sinking account redemption to each registered owner of the year refunded bonds within days of the actual redemption date once the refunding bonds were issued the underwriter remarketed the year refunded bonds to the public the remarketing memorandum for the year refunded bonds specified the scheduled redemption dates established by the lottery the remarketing memorandum indicated that all the year refunded bonds would be redeemed by year at the latest the year refunded bonds were remarketed for dollar_figureu for a profit of dollar_figurev to the underwriter the remarketed bonds were sold pursuant to a new official statement new year bond certificates were delivered to a new nominee holder for the benefit of the bondholders the holding of the lottery to establish sinking_fund redemption dates for the year bonds the underwriters purchase of year bonds and the subsequent defeasance and remarketing of the year bonds are referred to collectively as the year transaction law and analysis sec_1001 of the internal_revenue_code governs for determining when securities received in exchange for securities surrendered in a transaction gives rise to a gain_or_loss the standard under sec_1_1001-1 for determining whether an exchange of property is a disposition is whether the properties exchanged differ materially either in_kind or extent the modification of a debt_instrument constitutes a deemed exchange under sec_1001 if the modified debt_instrument is materially different from the original debt_instrument revrul_89_122 1989_2_cb_200 where changes in the terms of an outstanding security are so material as to amount virtually to the issuance of a new security the same income_tax consequences should follow as if a new security were actually issued revrul_81_169 1981_1_cb_429 if the modifications constitute a deemed exchange then the resulting instrument has customarily been treated as newly issued for federal_income_tax purposes the receipt of bonds containing materially different terms from those contained in bonds surrendered is a taxable_event under sec_1001 id for purposes of sec_103 and sec_141 through the consequence of a reissuance of tax-exempt_bonds is that the law in effect on the date of the reissuance will apply to the reissued bonds with respect to whether such material changes have been or will be made each case must be governed by its own facts revrul_73_160 1973_1_cb_365 moreover resolution of the question of whether there was a material_change does not turn on whether there was a physical exchange the economic_substance of a transaction rather than its form governs for tax purposes 293_us_465 the characterization of a transaction by the parties is not determinative for federal tax purposes 469_us_131 some of the factors that the service and the courts have considered in determining whether modifications to a debt_instrument result in a reissuance include changes to the interest rate or yield the timing of payments and the amount of payments for example in revrul_73_160 the service determined that the mere extension of the maturity_date of notes accompanied by an agreement of some of the holders not to resort to the underlying_security until other holders had been paid does not constitute in substance the exchange of the notes for new and materially different notes thus the change to this one factor for alterations of the terms of a debt_instrument on or after date sec_1_1001-3 addresses when a modification of a debt_instrument is deemed to cause an exchange for purposes of sec_1_1001-1 of the regulations the provisions of this section may also be relied on for alterations of the terms of a debt_instrument after date and before date the parties agree that sec_1_1001-3 is inapplicable here was determined to be insufficient for the modification of the note to qualify as a taxable_exchange under sec_1001 id in contrast in revrul_81_169 a taxpayer owned a municipal_bond bearing interest pincite percent and subject_to sinking_fund payments the taxpayer exchanged that bond for a bond of equal face_amount bearing interest pincite percent not subject_to a sinking_fund provision and maturing years later the service determined that the changes in the terms of the bonds taken together were material therefore the exchange was taxable under sec_1001 in revrul_87_19 1987_1_cb_249 the service ruled that a change in the interest rate on a bond that occurred pursuant to the terms of the bond did not trigger a reissuance in the cited ruling a taxpayer owned municipal_bonds bearing interest pincite percent that contained an interest adjustment clause that triggered an increase in the interest rate on the bonds in the event of a decrease in the maximum marginal federal_corporation income_tax rate prior to the date the increase would have been triggered the bondholder waived its rights under the interest adjustment clause thus the bonds continued to bear a percent interest rate rather than dollar_figure percent interest rate that would have resulted under the interest adjustment clause in its ruling the service concluded that an adjustment to the interest rate on an issue of bonds pursuant to an interest adjustment clause does not result in an exchange although the interest payable on the bonds changes as a result of the adjustment the adjustment is fixed by the terms of the bonds upon issuance however the waiver of the adjustment was a material_change in the terms of the bonds resulting in a deemed reissuance id in revrul_89_122 a debt_instrument issued by a bank was modified in two different situations in situation the interest rate was reduced from percent to dollar_figure percent but the principal_amount of dollar_figure remained unchanged in situation the stated principal_amount was reduced from dollar_figure to dollar_figure the service stated that in general the modification of a debt_instrument constitutes a deemed exchange of debt instruments under sec_1001 if the modified debt_instrument is materially different from the original debt_instrument both modifications represented a material_change in the terms of the obligations and resulted in a deemed exchange of the instruments a change in the yield of a debt_instrument as opposed to a change in the nominal interest rate is also a relevant factor in determining whether a reissuance occurs in 166_f2d_773 3d cir the taxpayer surrendered city of philadelphia bonds pursuant to a city of philadelphia refunding plan in exchange the taxpayer received new bonds with an earlier maturity_date and a later optional maturity_date than the old bonds the new bonds had the same interest rate until the maturity_date of the old bonds and a lower interest rate thereafter the new bonds also had a higher fair_market_value the court determined that these were important basic differences between the old and the new bonds in addition the court stated that the difference in yield on the obligations was not inconsequential id pincite as a result the court affirmed the lower court's finding that the exchange was taxable the question of what constitutes a material difference for purposes of sec_1001 of the code was addressed by the supreme court in an opinion issued prior to the transaction in issue in 499_us_554 the court held that the taxpayer a savings and loan association realized a deductible loss in when it exchanged a participation interest in a pool of residential mortgage loans for an unrelated thrift’s similar interest in a pool of its residential mortgage loans the mortgages in each pool had similar financial features interest rates terms to maturity etc and were secured_by homes located within the same state the court in cottage savings applied the materially different requirement set forth in sec_1_1001-1 the court also looked to case law to give meaning to the material difference test and determined that property exchanged for other_property was materially different as long as the exchanged properties embody legally distinct entitlements id pincite this standard may be met where the property entitlements are not identical thus allowing both the commissioner and the transacting taxpayer to easily fix the appreciated or depreciated values of the property relative to their tax bases id pincite the court determined that the taxpayer received entitlements that were materially different from those that it gave up because the participation interests that it received were made to different obligors and were secured_by different homes therefore the transaction was taxable and the taxpayer realized a loss on the exchange the interests that were exchanged were considered substantially identical for federal banking regulatory purposes but that fact did not affect the tax treatment of the exchanged instruments id in the instant case the issuer asserts that the year transaction was designed to eliminate the uncertainty regarding the redemption dates of the year bonds by determining in a year lottery precisely which bonds would be redeemed earlier under the sinking_fund provisions and assuring holders that the year bonds would be called in year the parties to the year transaction were able to enhance the market_value of the year bonds this coupled with the defeasance of the year refunded bonds enabled the underwriters to remarket a portion of the year bonds at a significant premium the issuer contends that the alterations to the year bonds made in connection with the year transaction were legally insignificant and did not alter the rights or obligations of either the issuer or the bondholders in addition it asserts that modifications to the master indenture in year merely clarified rights it already possessed under the original documents for example establishing the sinking_fund maturity dates for all the year bonds in year the issuer maintains was merely an exercise of a unilateral right it purportedly held under the original master indenture in support of its argument the issuer points to the fact that it did not obtain bondholder consent prior to amending the bond documents or holding the early lottery despite the issuer’s assertions whether the changes to the year bonds made in year were preauthorized by the master indenture is not determinative under the current facts rather the question of whether the modifications resulted in a reissuance must be based on a realistic view of the overall year transaction considering each of the interrelated steps that have legal or economic significance it is incontrovertible that the issuer obtained a financial benefit from its participation in the year transaction regardless of whether the early lottery was authorized by the bond documents the lottery was held in connection with the underwriter’s tender offer for the year bonds the parties concede that the lottery enhanced the value of all the year bonds including those purchased by the underwriter however the results of the lottery were not immediately provided to the record bondholders but were reported to the underwriter simultaneously with the underwriter’s purchase of the year bonds the issuer issued its refunding bonds the proceeds of which were used to defease the year refunded bonds each of these steps enabled the remarketing of the year refunded bonds for dollar_figureu a profit of dollar_figurev to the underwriter the evidence shows that evaluating the facts and circumstances of a transaction is also consistent with the approach applied in the current regulations under sec_1_1001-3 a significant modification of a debt_instrument results in an exchange of the original debt_instrument for a modified instrument that differs materially either in_kind or in extent paragraphs e through of sec_1_1001-3 provide specific rules for determining the significance of certain types of modifications however sec_1_1001-3 provides the general_rule that except as otherwise provided in paragraphs e through e a modification is a significant modification only if based on all facts and circumstances the legal rights or obligations that are altered and the degree to which they are altered are economically significant in making a determination all modifications to the debt_instrument other than modifications subject_to paragraphs e through of this section are considered collectively so that a series of such modifications may be significant when considered together although each modification if considered alone would not be significant dollar_figurer of this profit was passed on to the issuer through the discounting of the refunding escrow securities the issuer’s representative has stated that this amount was paid as reasonable_compensation to the issuer for undertaking to defease dollar_figureh of the year bonds in addition to the benefit obtained from the below market sale of the refunding escrow securities the issuer acknowledges that it received an additional sum at the time of the issuance of the refunding bonds in the amount of dollar_figurew this amount is the aggregate of the amounts deposited in the construction fund and subsidy fund and was referred to in a memorandum from the underwriter to the issuer describing the gic profit that resulted from the differential in interest rates and how that profit could be realized by refunding a portion of the year bonds moreover correspondence from the issuer’s representative characterizes the financial benefit received by the issuer as payment from bondholders to remove the redemption uncertainty of the year bonds in attempting to separate the actions of the issuer in connection with those of the underwriters the issuer has argued that the underwriter was acting on its own behalf not as an agent of the issuer when it conducted the tender offer and subsequent remarketing we believe this point is irrelevant it appears beyond dispute that the underwriter’s engagement in the year transaction was motivated by the potential for profit the consequence of this conclusion however is that a holder of the year bonds the underwriter was essentially paying the issuer for the removal of the redemption uncertainty4 and the subsequent defeasance of the tendered year bonds this is evidenced most directly by the below market sale of the refunding escrow the effect of a bondholder paying an issuer to alter the terms of debt_instrument is a change in the yield of the underlying debt_instrument in arguing that the dollar_figurew in funds the issuer received that was deposited into the construction and subsidy funds did not significantly alter the yield on the year bonds the issuer prepared a calculation that the change in the yield on all the year bonds as a result of such payment would be approximately basis points this initial computation however fails to take into account the below market sale of the refunding escrow securities taking into account the dollar_figurer that the issuer received as reasonable_compensation for defeasing the dollar_figureh of the bonds purchased by the underwriter in addition to the dollar_figurew specified above the change in the yield of all the year bonds is substantially greater than the basis points determined by the issuer as stated above in correspondence the issuer’s representative makes the argument that the benefit received by the issuer should be viewed as payment to remove the redemption story considering the alterations to the year bond documents and the financial benefit the issuer received in connection with those alterations there is an argument that under cottage savings and prior_law all the year bonds were materially different as a result of the year transaction the modifications to the master indenture the changes to the redemption provisions and the change in yield arguably results in an obligation with legally distinct entitlements from those as originally issued for the reasons discussed below however it is our opinion that the year transaction resulted in a reissuance of only the year refunded bonds our determination rests primarily on the fact that the financial benefits the issuer received in connection with the year transaction are directly attributable to the underwriter a holder of only the year refunded bonds prior to the remarketing as discussed above the financial benefit realized by the issuer through the below market sale of the refunding escrow is essentially a payment from a holder of the year bonds the issuer through its representative has also stated that the benefits received by the issuer were essentially payments from a bondholder for the removal of the redemption uncertainty and the defeasance of the year refunded bonds through the issuance of the refunding bonds while alterations to the master indenture were clearly made in connection with the year transaction that impacted all the year bonds the impact upon the year bonds that were not defeased and remarketed was incidental to the parties primary objective of modifying the year refunded bonds purchased by the underwriter the modifications to the year refunded bonds purchased by the underwriter enabled it to remarket those bonds at a premium and to pass a portion of the profit along to the issuer accordingly the financial benefit the issuer received is more appropriately viewed as consideration for modifying the year refunded bonds held by the underwriter viewing the financial benefits received by the issuer as attributable to only the year refunded bonds also impacts the change in yield between the unmodified and modified obligations by applying the amounts that the issuer received in connection with the year transaction to the year refunded bonds the change in the yield on those bonds would constitute a significant modification not only under cottage savings and prior_law but it would fail to meet the safe_harbor for a change in yield discussed under the current regulations under sec_1_1001-3 a change in the yield of a debt_instrument is a significant modification if the yield varies from the annual yield on the unmodified instrument determined as of the date of the modification by more than the greater of a of one percent basis points or b percent of the annual yield of the unmodified instrument dollar_figure x annual yield under these regulations any change in yield on the year bonds would have to exceed approximately basis points to fall the payments the issuer received in connection with the year transaction also contradicts the issuer’s contention that the alterations to the year bonds resulted from the exercise of a unilateral option although conceding that sec_1_1001-3 is inapplicable in this case the issuer argues that certain standards set forth in the regulation should be considered here in particular the issuer points to sec_1_1001-3 which provides that an alteration that results from the exercise of a unilateral option provided to an issuer or a holder to change a term of a debt_instrument is not a modification under sec_1_1001-3 an option is unilateral only if under the terms of an instrument or under applicable law the exercise of the option does not require consideration other than incidental costs and expenses relating to the exercise of the option unless on the issue_date of the instrument the consideration is a de_minimis amount a specified amount or an amount that is based on a formula that uses objective_financial_information as defined in sec_1_446-3 to view the alterations made to the year bonds as merely pursuant to the exercise of a unilateral option would be to ignore the financial benefits realized by the issuer regardless of whether any alterations to the year bonds were preauthorized by the master indenture it is clear that the issuer received consideration from a holder of the year bonds in connection with those alterations the receipt of a payment in connection with the alterations to the year bonds makes it unlikely that the exception for unilateral options under the current regulations would apply accordingly it is our opinion that as a result of the year transaction the changes to the year refunded bonds were so material as to amount virtually to the issuance of new securities the legal entitlements enjoyed by the holders of the year refunded bonds after the year transaction were sufficiently distinct from the legal entitlements of the holders prior to the transaction to cause a disposition of the year refunded bonds case development hazards and other considerations outside of the safe-harbor similarly the payment received by the issuer and the resulting impact on the yield of the refunded bonds also refutes the argument that the establishment of sinking_fund redemption dates for all the bonds pursuant to the early lottery was at most only a change in the maturity of the bonds which would not cause a reissuance under prior_law relying principally on the supreme court’s opinion in cottage savings the district’s determination is that all the year bonds were reissued as a result of the year transaction as discussed herein the evidence compiled by the district supports such a determination we believe that there is a compelling argument that the year refunded bonds were reissued in year this is based primarily on our opinion that the most egregious aspect of this case is the financial benefit the issuer received to alter the terms of the year refunded bonds a court considering all the facts and circumstances is likely to view the issuer’s financial benefit as consideration for altering the terms of the year refunded bonds which were purchased and remarketed by the underwriter the documentation obtained by the district and the issuer’s own admissions provide ample evidence of the parties’ intent to generate a profit from the excess earnings in the gic circumstantial evidence including the removal of trustee the district’s assertion that the results of the lottery in year were provided to the underwriter before other bondholders and the sizing of the refunding bonds to fully defease the year refunded bonds and provide the issuer with an additional profit also casts doubt on the propriety of the year transaction viewing the payment to the issuer as consideration from a specific bondholder the underwriter also results in a change in yield to the year refunded bonds in excess of the safe-harbor amount stated in the current regulations this alleviates the risk of a court attempting to applying the rationale of the regulations despite their inapplicability to the current case the consequence of a reissuance of the year bonds whether all of the bonds or just the year refunded bonds is that the laws in effect on the date of the reissuance will apply to the bonds as the district pointed out the pooled financing rules of sec_149 would then apply just as importantly if the year refunded bonds are reissued in year at a significantly lower yield the consequence of the payment from the underwriter to the issuer the year refunded bonds are arbitrage_bonds under sec_148 because the proceeds in the gic were invested at a materially higher yield for the reasons stated herein it is our opinion that the service has a strong argument that the year refunded bonds were reissued in year and any settlement on this issue should substantially favor the service please call if you have any further questions by timothy l jones assistant to the branch chief tax exempt bond branch


internal_revenue_service number release date index number -------------------------- -------------------------------------- --------------------- --------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc ita b05 plr-119921-08 date date er -------------------------------------- class representatives ----------------------------------------------------------------------- ------------------------------------------------------------------------ ---------------------------------- class counsel state --------------------------------- --------------------------------------------------------------------- ------------- --------------- court ----------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ date date date dollar_figurea dear -------------------- ------------------- ------------------- --------------------- ------------ plr-119921-08 this responds to your letter --------------------------- requesting a private_letter_ruling about the proper federal tax treatment of attorneys’ fees paid in connection with the settlement of an opt-out class action lawsuit in particular you requested rulings that attorneys’ fees paid to class counsel pursuant to the settlement are not includible in the gross_income of class representatives or class members under sec_61 of the internal_revenue_code attorneys’ fees are not subject_to information reporting to the class members or to class representatives under sec_6041 and attorneys’ fees are not subject_to federal employment_taxes facts er is organized under the laws of state class members are employees of er on date class representatives entered into a retainer and or contingency fee arrangement with class counsel for the purpose of filing a complaint against er the contingency fee arrangement provided that if the case was certified as a class action the attorneys’ fees would be set by the court and the payments set forth in the retainer agreement would not apply the separate fee considerations in the agreement would apply only in the event that the lawsuit was not certified as a class action lawsuit on date a class action lawsuit was filed against er in court by class counsel on behalf of class representatives the complaint sought recovery for unpaid vacation pay vacation_leave and attorneys’ fees by order of court on date the lawsuit was certified as an opt-out class action lawsuit meaning that all persons damaged by er's conduct were automatically members of the class unless they affirmatively opted-out only three individuals elected to opt-out class representatives were the only class members to enter into an agreement of any kind with class counsel the parties agreed to terms of settlement that were approved by order of the court class members were successful in their claim for vacation_leave and vacation pay and the court awarded attorneys’ fees of dollar_figurea to class counsel the amount otherwise payable to class members was reduced by the attorneys’ fee award paid to class counsel prior to distribution to the class members law and analysis gross_income defined sec_61 generally provides that gross_income includes all income from whatever source derived gross_income encompasses accessions to wealth clearly realized over which taxpayers have complete dominion 348_us_426 when a payment is made to satisfy the obligation of a taxpayer to a third party the amount of the payment generally is includible in the taxpayer's gross_income 279_us_716 under the rationale of old colony trust a prevailing litigant generally must recognize gross_income when another party pays attorneys' fees for which the litigant is liable litigants or lawyers who recover funds for the common benefit of persons other than themselves or their clients are entitled to a reasonable attorney's fee from the fund as a whole 113_us_116 105_us_527 the equitable doctrine_of common fund is a longstanding exception to the general principle that every litigant is responsible for his or her own attorney's_fees boeing co v van gemert 44_us_472 the common fund doctrine allows spreading the fees among those who benefited from the litigation id pincite typically in class action lawsuits it is a single class representative who hires the class attorney although the other class members may receive a benefit from the litigation no express contractual liability for a fee exists between them and litigating counsel where a taxpayer receives a benefit of litigation but is not liable for payment of attorneys' fees incurred in connection with such litigation the rationale of old colony trust co is not applicable in such opt-out class action lawsuits the attorneys' fees generally are not includible in a class member's gross_income thus the payment of attorneys’ fees to class counsel in the instant case is similar to situation in revrul_80_364 1980_2_cb_294 revrul_80_364 situation involved the settlement of a lawsuit brought by a union against an employer to enforce a collective bargaining agreement in the court-approved settlement the employer paid the union 40x dollars in full settlement of all claims after paying out 6x dollars in attorneys’ fees the union distributed 34x dollars to the employees for back pay the ruling concluded that the portion of the settlement paid_by the union for attorneys’ fees was a reimbursement for expenses_incurred by the union and was not remuneration to the individual employees the ruling held that the attorneys’ fees were not includible in the gross_income of the union members and were not wages for purposes of federal employment_taxes the attorneys' fees in this opt-out class action lawsuit were not awarded to class counsel pursuant to any specific fee or retainer arrangement between counsel and the class members including the class representatives class members were not under any obligation to compensate class counsel rather the attorneys' fees were awarded by court from the class-wide settlement fund under the common fund doctrine we conclude that under sec_61 the attorneys’ fees paid to class counsel pursuant to the settlement agreement are not income to the class members or to the class representatives plr-119921-08 information reporting requirements sec_6041 provides in part that all persons engaged in a trade_or_business and making payment in the course of such trade_or_business to another person of rent salaries wages premiums annuities compensations remunerations emoluments or other fixed or determinable gains profits and income of dollar_figure or more in any taxable_year shall render a true and accurate return to the secretary the word income as used in sec_6041 is not defined by statute or regulation however its appearance in the phrase fixed or determinable gains profits and income indicates that what is referred to is gross_income and not the gross amount_paid thus sec_6041 requires er to report only those payments in excess of dollar_figure includible in the class members' or class representatives’ gross_income in this case the amounts paid from the common fund to class counsel for attorneys' fees are not income to the class members or the class representatives as discussed in the first ruling_request above because income under sec_6041 is interpreted to mean only income includible in gross_income under sec_61 the payment of attorneys’ fees is not subject_to information reporting to any class member or to class representatives under sec_6041 federal employment_taxes federal employment_taxes in this case consist of taxes under the federal_insurance_contributions_act fica the federal_unemployment_tax_act futa and federal_income_tax withholding sec_3121 relating to the fica and sec_3306 relating to the futa provide that the term wages means all remuneration for employment with certain exceptions not relevant here sec_3401 relating to federal_income_tax withholding provides that the term wages means all remuneration for services performed by an employee for his or her employer with certain exceptions not relevant here under the facts in this case the attorney fees are not remuneration to the class members or to the class representatives and therefore are not wages for purposes of federal employment_taxes conclusions based on the facts and information submitted and the representations made the following rulings are issued the attorneys’ fees paid to class counsel from a common fund pursuant to the settlement are not includible in the gross_income of class representatives or class members under sec_61 the attorneys' fees are not subject_to information reporting to the class members or to class representatives under sec_6041 and plr-119921-08 the attorneys' fees are not subject_to federal employment_taxes this letter_ruling is based on facts and representations provided by er no opinion is expressed about the tax treatment of the transactions considered in this letter_ruling under the provisions of any other sections of the code or regulations which may be applicable no rulings were requested and none are issued with respect to the federal income and employment_tax treatment of the awards granted to the class members or to the class representatives under the settlement this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent because it could help resolve federal tax issues a copy of this letter should be maintained with the er’s permanent records pursuant to a power_of_attorney on file with this office copies of this letter_ruling are being sent to your authorized representative sincerely amy j pfalzgraf senior counsel branch income_tax accounting enclosures copy of this letter copy for sec_6110 purposes