internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si 4-plr-103349-99 date date re legend grantors child a child b child c trusts trusts trustee plr-103349-99 dear this responds to your letter of date and prior correspondence in which you requested rulings concerning the income estate and generation-skipping_transfer_tax consequences of the proposed merger of several trusts in grantors established the trusts for the benefit of their daughters child a child b and child c under the power granted in sec_2 of the trust instrument the trustee trustee divided the trust property into three equal shares one for each daughter each daughter is the primary beneficiary of her share each share is to be held and administered as a separate trust for the primary beneficiary and the issue of the primary beneficiary in dividing the trust estate into separate shares or trusts or in distributing the same the trust instrument gives the trustee the power to divide or distribute in cash in_kind or partly in cash and partly in_kind using different properties according to their value and or undivided interests in the same properties as the trustee shall think fit the trustee also has the power for any purpose including division or distribution to value the trust estate or any part thereof reasonably and in good_faith sec_2 of the trust instrument grants the trustee the power to accumulate income or to distribute income or principal for the comfort and welfare of the primary beneficiary for whom the trust is named and for the issue of the primary beneficiary section dollar_figure of the trust instrument creates a_trust committee consisting of three individuals if the membership of the trustee committee is reduced to less than three individuals because a member ceases or fails to serve then the remaining members shall appoint by majority vote a sufficient number of persons to bring the total membership to three individuals during the lifetime of either grantor the trust committee may not consist of a membership more than half of whom are parties that are related or subordinate to the grantors as such terms are defined in sec_672 section dollar_figure also provides that the trust committee in carrying out its duties must act in a fiduciary capacity under dollar_figure of the trust instrument the trust committee has the power in its sole discretion at any time or times to remove the trustee and to appoint a successor trustee but may not appoint any person who is a_related_or_subordinate_party with respect to the grantors as that term is defined in sec_1 above sec_2 of the trust instrument provides that each trust terminates upon the earliest to occur of the following termination by the trust committee the death of the primary beneficiary and all the issue of such primary beneficiary or years and months after the death of the last to die of a specified group of individuals who were living at the time the trust was established on termination principal and plr-103349-99 undistributed_income are to be distributed among the primary beneficiary and any issue of the primary beneficiary as the trust committee shall determine in its discretion the trusts grant the trustee the power to either merge and commingle all of the principal and undistributed_income held in any trust created under the trust instrument with or into any trust created or authorized in any other trust or may merge and commingle all of the principal and undistributed_income in any other trust with any trust created or authorized in the trust instrument if the trustee of any trust created or authorized in the trust instrument is also the trustee of any other trust created or authorized in any will or other trust instrument executed by either or both of the grantors this power given to the trustee is exercisable without the consent of the beneficiaries and without judicial consent the trusts were established prior to and were irrevocable on date you have represented that there have been no additions to the trusts after date and that no modifications have been made to the trusts you also represent that the grantors have not established multiple_trusts for substantially the same primary beneficiary or beneficiaries with a principal purpose of avoiding income_tax grantors propose to establish the trusts under sec_2 of the trust instrument the trustee will divide the assets contributed to the trusts in three equal shares one share for each daughter and the separate shares will be administered as separate trusts each daughter is the primary beneficiary for the separate trust created for her the trustee then proposes to merge each daughter’s separate share in the trusts into the daughter’s separate share of the trusts the trusts contain substantially identical dispositive provisions as the trusts unlike the trusts however dollar_figure of the trusts provides for an investment trustee and an independent_trustee trustee will serve as the independent_trustee for each separate trust and each daughter will serve as the investment trustee of her separate trust section dollar_figure of the trust instrument provides that the independent_trustee shall have the sole authority to exercise certain powers defined as the tax sensitive powers section dollar_figure defines tax sensitive powers and includes all powers over distribution of income and principal no trustee has the power to participate in any decision relating to a distribution of either principal or income to provide any benefit for any beneficiary which such trustee is legally obligated to support the trusts cannot continue beyond the perpetuities period that would otherwise apply to the trusts the grantors have represented that they intend to allocate sufficient generation- skipping transfer_tax exemptions to the trusts to cause the trusts to have an inclusion_ratio of zero plr-103349-99 you have requested the following rulings the proposed merger of the trusts into the corresponding trusts will not constitute transfers subject_to generation-skipping_transfer_tax under sec_2601 following the proposed merger each of the trusts will thereafter consist of two portions a non-chapter portion and a chapter portion the non-chapter portion will represent the value of each of the trusts immediately prior to the merger and will have an inclusion_ratio of zero likewise any post merger increase in value of the non-chapter portion will continue to have an inclusion_ratio of zero provided that the grantors timely allocate their respective generation-skipping_transfer_tax exemptions to the trusts in an amount equal to the fair_market_value of the original contribution on the date of the contribution and provided that no post merger additions are made to the trusts the inclusion_ratio for the chapter portion of the trusts will be zero and any generation-skipping transfers from the trusts which are deemed to come pro_rata from the non-chapter portion and the chapter portion will not be subject_to generation-skipping_transfer_tax no gain_or_loss under sec_1001 will be realized by the trusts the trusts or any of the beneficiaries as a result of the proposed merger of the trusts into the corresponding trusts the assets transferred from the trusts to the corresponding trusts will have the same basis and holding periods under sec_1015 and sec_1223 before and after the merger the transfer of assets from the trusts into the corresponding trusts will not constitute an accumulation_distribution under sec_665 child a child b and child c each acting as an investment trustee of the trust held for her benefit will not hold a general_power_of_appointment as defined in sec_2041 or sec_2514 ruling requests nos through generation-skipping_transfer_tax consequences sec_2601 imposes a tax on every generation-skipping_transfer made by the transferor to a skip_person sec_2611 defines a generation-skipping_transfer as a taxable_termination a taxable_distribution or a direct_skip sec_2612 provides that a taxable_termination means a termination by death lapse of time release of a power or otherwise of an interest in property held in a_trust where the property passes to a skip_person sec_2612 provides that a taxable_distribution means any distribution from a_trust to a skip_person other than a plr-103349-99 taxable_termination or a direct_skip sec_2612 provides that a direct_skip means a transfer subject_to a tax imposed by chapter sec_11 or sec_12 of an interest in property to a skip_person in general under sec_2602 the amount of generation-skipping_transfer_tax imposed on a transfer is equal to the taxable_amount multiplied by the applicable_rate sec_2641 defines the applicable_rate of tax on a generation-skipping_transfer to be the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer sec_2642 provides that the inclusion_ratio is the excess if any of over the applicable_fraction determined for the trust from which the transfer is made or in the case of a direct_skip the applicable_fraction determined for the skip the applicable_fraction is a fraction in which the numerator is the generation-skipping_transfer_tax_exemption allocated to the trust or in the case of a direct_skip allocated to the property transferred and the denominator is the value of the property transferred to the trust or transferred in the direct_skip reduced by any federal estate_tax or state death_tax actually recovered from the trust attributable to the property and any charitable deduction allowed under sec_2055 and sec_2522 with respect to the property sec_2631 provides that for purposes of determining the inclusion_ratio every individual is allowed a generation-skipping_transfer_tax_exemption of dollar_figure which may be allocated by the individual or his executor to any property with respect to which the individual is the transferor section b a of the tax_reform_act_of_1986 the act vol c b and sec_26_2601-1 of the generation-skipping_transfer_tax regulations provide that the generation-skipping_transfer_tax shall not apply to any generation- skipping transfer under a_trust that was irrevocable on date but only to the extent that such transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added sec_26_2601-1 provides that any trust in existence on date will be considered an irrevocable_trust except as provided in sec_26_2601-1 or c which relate to property includible in a grantor's gross_estate under sec_2038 and sec_2042 sec_26_2601-1 provides that if an addition is made after date to an irrevocable_trust which is excluded from chapter the generation- skipping transfer_tax by b a of the act a pro_rata portion of subsequent distributions from and terminations of interests in property held in the trust is subject_to the provisions of chapter if an addition is made the trust is thereafter deemed to consist of two portions solely for purposes of chapter a portion not subject_to plr-103349-99 chapter the non-chapter portion and a portion subject_to chapter the chapter portion each with a separate inclusion_ratio the non-chapter portion represents the value of the assets of the trust as it existed on date the applicable_fraction as defined in sec_2642 for the non-chapter portion is deemed to be and the inclusion_ratio is the chapter portion of the trust represents the value of all additions made to the trust after date the inclusion_ratio for this portion is determined under sec_2642 a modification of a_trust that is otherwise exempt from the generation-skipping_transfer_tax under the act will generally result in a loss of its exempt or grandfathered status if the modification changes the quality value or timing of any powers beneficial interests rights or expectancies originally provided for under the terms of the trust in the present case the trusts were irrevocable on date and you have represented that there have been no additions actual or constructive to the trusts after date under the trust instrument the trustee of the trusts has broad discretionary power to distribute or accumulate income and principal of the trusts in addition the trustee has the authority to merge the trusts and to determine values and designate particular assets to a beneficiary furthermore the trustee has the power to assign like or unlike properties to different beneficiaries or trusts to create or hold undivided interests in any property of the trust and to make distributions and payments in cash or in_kind or both the trustee proposes to transfer the assets held in the trusts into the trusts as discussed above the substantive and dispositive provisions of the trusts are identical to those contained in the trusts the changes with respect to the trustee provisions are administrative in nature based on the facts submitted and the representations made we conclude that the proposed transaction will not alter the quality value or timing of interests under the trusts will not confer any additional powers or beneficial interests upon any of the beneficiaries and will not create any additional generation-skipping transfers or increase the amount of generation-skipping transfers accordingly the proposed transaction will not cause any distribution from or termination of any interests in the trusts to be subject_to the generation-skipping_transfer_tax under sec_2601 as indicated above the trusts are exempt from the generation-skipping_transfer_tax after the proposed transaction in accordance with sec_26_2601-1 the trusts will be treated for purposes of chapter as consisting of two portions a non-chapter portion and a chapter portion each with a separate inclusion_ratio the inclusion_ratio with respect to the non-chapter portion will be zero the inclusion_ratio with respect to the chapter portion will be determined under sec_2642 it is represented that grantors intend to allocated a sufficient amount of their generation- skipping transfer_tax exemption to the chapter portion so that the portion will have an inclusion_ratio of zero for purposes of the generation-skipping_transfer_tax accordingly plr-103349-99 provided that the grantors timely allocate their respective generation-skipping_transfer_tax exemptions to the trusts in an amount equal to the fair_market_value of the original contribution on the date of the contribution and provided that no post merger additions are made to the trusts the inclusion_ratio for the chapter portion of the trusts will be zero and any generation-skipping transfers from the trusts which are deemed to come pro_rata from the non-chapter portion and the chapter portion will not be subject_to generation-skipping_transfer_tax assuming the trusts are not subject_to inclusion in the gross_estate of any beneficiary see ruling_request below this ruling does not address the inclusion_ratio of the trusts should additions be made to the trusts after the merger ruling_request no gain_or_loss under sec_1001 sec_61 provides that gross_income includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized sec_1_1001-1 provides that except as otherwise provided in subtitle a of the code the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained 499_us_554 concerns the issue of when a sale_or_exchange has taken place that results in realization of gain_or_loss under sec_1001 in cottage savings a financial_institution exchanged its interests in one group of residential mortgage loans for another lender’s interests in a different group of residential mortgage loans the two groups of mortgage loans were considered substantially identical by the agency that regulated the financial_institution the supreme court concluded that sec_1_1001-1 reasonably interprets sec_1001 and an exchange of property gives rise to a realization event under sec_1001 if the properties exchanged are materially different cottage savings u s pincite in defining materially different for purposes of sec_1001 the court stated that properties are different in a sense that is material so long as their respective possessors enjoy legal entitlements that are different in_kind or extent id pincite the court held that mortgage loans made to different obligors and secured_by different homes embodied distinct legal entitlements and that the taxpayer realized losses when it exchanged the loans id pincite thus in order for a transaction to result in a sec_1001 taxable_event the plr-103349-99 transaction must be a sale exchange or other_disposition and if an exchange the exchange must result in the receipt of property that is materially different as defined in cottage savings supra from the disposed property in this case the first element will not be present because the beneficiaries of the trusts do not acquire their interests in those trusts as a result of an exchange of their interests in the trusts but instead by reason of the authority granted to the trusts’ trustee by the grantors at the time the trusts were first created to merge and commingle trust assets ruling_request no basis and holding periods of assets sec_1015 provides that if property is acquired by a transfer in trust other than by a transfer in trust by a gift bequest or devise the basis shall be the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on the transfer sec_1_1015-2 provides that in the case of property acquired by transfer in trust other than by a transfer in trust by a gift bequest or devise the basis_of_property so acquired is the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor upon such transfer under the law applicable to the year in which the transfer was made in addition the principles in sec_1_1015-1 concerning the uniform basis are applicable in determining the basis_of_property where more than one person acquires an interest in property by transfer in trust sec_1_1015-1 provides that property acquired by gift has a single or uniform basis although more than one person may acquire an interest in the property the uniform basis of the property remains fixed subject_to proper adjustment for items under sec_1016 and sec_1017 because the proposed merger of the trusts with the trusts will not result in the realization of gain_or_loss under sec_1001 or income under sec_61 the basis of the assets held in the resulting trusts will be the same as the basis of those assets prior to the merger sec_1223 provides that in determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person if under chapter of the code such property has for purposes of determining gain_or_loss from its sale by the taxpayer the same basis in whole or in part in the taxpayer’s hands as it would have in the hands of the other person as noted above the basis of the assets held in the resulting trusts will be the same as the basis of those assets prior to the merger accordingly under sec_1223 the holding_period of the assets in the resulting trusts will include the holding periods of those assets in the trusts plr-103349-99 ruling_request no accumulation distributions under sec_665 sec_665 through provide rules for the taxation of accumulated income distributions by a_trust sec_665 provides that for purposes of subpart d except as provided in sec_665 the term accumulation_distribution means for any taxable_year of the trust the amount by which the amounts specified in paragraph of sec_661 for such taxable_year exceed distributable_net_income for such year reduced but not below zero by the amounts specified in paragraph of sec_661 sec_661 provides that in any taxable_year there shall be allowed as a deduction in computing the taxable_income of an estate_or_trust other than a_trust to which subpart b applies the sum of any amount of income for such taxable_year required to be distributed currently including any amount required to be distributed which may be paid out of income or corpus to the extent such amount is paid out of income for such taxable_year and any other_amounts_properly_paid_or_credited_or_required_to_be_distributed for such taxable_year but such deduction shall not exceed the distributable_net_income of the estate_or_trust sec_661 provides that the amount determined under sec_661 shall be treated as consisting of the same proportion of each class of items entering into the computation of distributable_net_income of the estate_or_trust as the total of each class bears to the total distributable_net_income of the estate_or_trust in the absence of the allocation of different classes of income under the specific terms of the governing instrument sec_661 provides that no deduction shall be allowed under sec_661 in respect of any portion of the amount allowed as a deduction under sec_661 without regard to sec_661 which is treated under sec_661 as consisting of any item of distributable_net_income which is not included in the gross_income of the estate_or_trust sec_665 provides that for distributions in tax years beginning after date for purposes of subpart d in the case of a qualified_trust any distribution in any taxable_year beginning after the date of the enactment of sec_665 shall be computed without regard to any undistributed_net_income sec_665 defines qualified_trust for the purposes of sec_665 as any trust other than a a foreign_trust or except as provided in regulations a domestic_trust which at any time was a foreign_trust or b a_trust created before date unless it is established that the trust would not be aggregated with other trusts under sec_643 if such section applied to such trust sec_643 provides that for purposes of subchapter_j under regulations plr-103349-99 prescribed by the secretary two or more trusts shall be treated as one trust if such trusts have substantially the same grantor or grantors and substantially the same primary beneficiaries and a principal purpose of such trusts is the avoidance of the tax_imposed_by_chapter_1 the trustee represents that the primary purpose of establishing the trusts is to encourage the primary beneficiaries to participate in investment decisions relating to the trust assets the trustee further represents that avoidance of income_tax is not a primary purpose of the trusts within the meaning of sec_643 determining whether avoidance of income_tax is a primary purpose of the trusts is a question of fact the determination of which must be deferred until the federal_income_tax returns of the parties involved have been examined by the office of the district_director having examination jurisdiction over the tax returns therefore provided it is not determined that tax_avoidance is a primary purpose of the trusts and based solely on the information submitted and representations made we conclude that the merger of the principal and undistributed_income of the trusts into the trusts is not a distribution under sec_661 and that distributions from the trusts or from the trusts after the merger will not be subject_to the accumulation_distribution rules under sec_665 ruling_request no inclusion in gross_estate of beneficiaries sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money or money’s worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or any period which does not in fact end before his death the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any other person to designate the persons who shall possess or enjoy the property or the income therefrom sec_2038 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in the case of a bona_fide sale for an adequate_and_full_consideration in money or money’s worth by trust or otherwise where the enjoyment thereof was subject at his death to any change through the exercise of a power in whatever capacity exercisable by the decedent alone or by the decedent in conjunction with any other person without regard to when or from what source the decedent acquired such power to alter amend revoke or terminate or where any such power is relinquished during the 3-year period ending on the date of the decedent’s death sec_2041 provides that the value of the gross_estate shall include the plr-103349-99 value of all property to the extent of any property with respect to which the decedent has at the time of death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released such a power_of_appointment by a disposition that is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent’s gross_estate under sec_2035 to inclusive sec_2041 provides that a general_power_of_appointment is a power that is exercisable in favor of the decedent the decedent’s creditors or the creditors of the decedent’s estate however a power to consume invade or appropriate property for the benefit of the decedent that is limited by an ascertainable_standard relating to the health education support or maintenance of the decedent shall not be deemed a general_power_of_appointment sec_20_2041-1 provides that a power in a decedent to remove or discharge a trustee and appoint himself may be a power_of_appointment for example if under the terms of a_trust instrument the trustee or his successor has the power to appoint the principal of the trust for the benefit of individuals including himself and the decedent has the unrestricted power to remove or discharge the trustee at any time and appoint any other person including himself the decedent is considered as having a power_of_appointment however the mere power of management investment custody of assets or the power to allocate receipts and disbursements as between income and principal exercisable in a fiduciary capacity whereby the holder has no power to enlarge or shift any of the beneficial interests therein except as an incidental consequence of the discharge of such fiduciary duties is not a power_of_appointment revrul_95_58 1995_2_cb_191 revoking revrul_79_353 1979_2_cb_325 holds that a decedent-settlor’s reservation of an unqualified power to remove a trustee and appoint an individual or corporate successor trustee that is not related or subordinate to the decedent within the meaning of sec_672 is not considered a reservation of the trustee’s discretionary powers of distribution over the property transferred by the decedent-settlor to the trust for purposes of sec_2036 and sec_2038 in the present case the trust committee has the power to remove and replace the trustee child a child b and child c are not members of the trust committee the trust instrument for the trusts designates child a child b and child c as the primary beneficiary of their separate trusts to be the investment trustee with the power to institute investment guidelines and policies child a child b and child c in their capacity as investment trustees are prohibited from exercising certain powers defined in the trust instrument as tax sensitive powers in addition child a child b and child c in their capacity as investment trustees or otherwise do not have the power to remove or replace the independent_trustee therefore we conclude that neither child a child b nor child c in their respective capacities as investment trustee would be treated as holding a general_power_of_appointment for purposes of sec_2041 plr-103349-99 therefore the separate shares created for child a child b and child c in the resulting trusts would not be included in her respective gross_estate as a result of her position as investment trustee of the trust this ruling is limited to the estate_tax consequences if child a child b and child c serve as the investment trustee this ruling does not apply should child a child b or child c serve as a member of the trust committee except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under the cited provisions or any other provisions of the code this ruling is based on the facts and applicable law in effect on the date of this letter if there is a change in material fact or law local or federal before the transactions considered in the ruling take effect the ruling will have no force or effect if the taxpayer is in doubt whether there has been a change in material fact or law a request for reconsideration of this ruling should be submitted to this office this ruling is directed only to the taxpayer s 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 the taxpayer sincerely yours assistant chief_counsel passthroughs and special industries by george masnik chief branch enclosure copy for sec_6110 purposes


office_of_chief_counsel department of the treasury i n t e r n a l r e v e n u e s e r v i c e washington d c date number info release date conex-147244-05 cc tege eb ec uil 409a the honorable j dennis hastert u s house of representatives washington dc attention chris sarley dear mr hastert this letter is in response to your inquiry dated date on behalf of your constituent ---- ------------ ---- ------ wrote to you about the impact of sec_409a of the internal_revenue_code the code on his control of his financial_assets and our position in recent taxpayer guidance on the application of sec_409a to stock appreciation rights the enactment of sec_409a of the code the congress added sec_409a to the code as sec_885 of the american_jobs_creation_act_of_2004 pub law no 118_stat_1418 the law provides that all amounts deferred under a nonqualified_deferred_compensation_plan for all taxable years are includible in gross_income to the extent they are not subject_to a substantial_risk_of_forfeiture and were not previously included in gross_income unless the taxpayer meets certain requirements the law also includes rules applicable to certain trusts or similar arrangements associated with nonqualified_deferred_compensation where such arrangements are outside of the united_states or are restricted to the provision of benefits in connection with a decline in the financial health of the sponsor sec_409a of the code ------------believes that sec_409a violates his financial freedom and prohibits him from directing his financial_assets in ways that allow him to maximize the financial benefit minimize tax consequences adjust to market changes and react to personal financial needs the law contains explicit rules explaining how taxpayers can defer compensation without incurring a n immediate and additional tax_liability including rules about the timing and manner of initial elections to defer compensation the timing a nd manner of payments of deferred_compensation a nd how to change the time or form of a scheduled payment before receiving the payment the legislative_history on sec_409a states the following about the reasoning underlying the adoption of the provision the congress was aware of the popular use of deferred_compensation arrangements by executives to defer current taxation of substantial amounts of income many nonqualified_deferred_compensation arrangements had developed which allowed improper deferral of income executives often used arrangements that allowed deferral of income but also provided security of future payment and control_over amounts deferred for example nonqualified_deferred_compensation arrangements often contained provisions that allowed participants to receive distributions upon request subject_to forfeiture of a minimal amount ie a haircut provision the congress was aware that since the concept of a rabbi_trust was developed techniques had been used that attempted to protect the assets from creditors despite the terms of the trust for example the trust or fund would be located in a foreign jurisdiction making it difficult or impossible for creditors to reach the assets while the general tax principles governing deferred_compensation were well established the determination whether a particular arrangement effectively allowed deferral of income was generally made on a facts and circumstances basis there was limited specific guidance with respect to common deferral arrangements the congress believed that it was appropriate to provide specific rules regarding whether deferral of income inclusion should be permitted the congress believed that certain arrangements that allow participants inappropriate levels of control or access to amounts deferred should not result in deferral of income inclusion the congress believed that certain arrangements such as offshore trusts which effectively protect assets from creditors should be treated as funded and not result in deferral of income inclusion staff of joint comm on taxation 109th cong general explanation of tax legislation enacted in the 108th congre sec_469 comm print subject_to certain transitional rules sec_409a generally is effective for deferrals of compensation occurring on or after date notice_2005_1 - initial taxpayer guidance under sec_409a on date we issued notice_2005_1 i r b published as modified on date as the initial taxpayer guidance on sec_409a notice_2005_1 defined nonqualified_deferred_compensation for purposes of sec_409a so that taxpayers could know which types of arrangements sec_409a covered in addition notice_2005_1 provided certain transition relief some that the statute directed macro form rev department of the treasury - internal_revenue_service us to provide and some that we believed was necessary to provide taxpayers time and flexibility to adapt to the new code provision ----------- has questioned certain statements in notice_2005_1 about the application of sec_409a to stock appreciation rights_stock appreciation rights generally involve arrangements under which an employee or other service provider is granted the right to the payment of an amount equal to the appreciation on a predetermined number o f shares of stock for example an employer may grant an employee a stock_appreciation_right on shares of stock if the stock appreciates by dollar_figure and the employee exercises the right the employee would have the right to a dollar_figure payment stock appreciation rights are often economically similar to stock_options the legislative_history indicates that congress did not intend sec_409a to apply to the grant of an option on employer stock with an exercise price that is equal to or greater than the fair_market_value of the underlying stock on the date of grant if the arrangement does not include a deferral feature other than the option holder’s right to exercise the option in the future h_r conf_rep no pincite based on this lang uage in the legislative_history taxpayers questioned whether the exclusion of certain stock_options from coverage under sec_409a would apply to stock appreciation rights notice_2005_1 q a-4 d extended the exclusion from coverage under sec_409a to certain stock appreciation rights that we felt most closely resembled stock_options this included only stock appreciation rights on employer stock where such stock was traded on an established_securities_market and the payment upon exercise could only be made in stock not in cash accordingly stock appreciation rights on employer stock that was not traded on an established_securities_market could be subject_to taxation under sec_409a recently issued proposed_regulations we received many comments criticizing our position on the application of sec_409a to stock appreciation rights in particular some argued that the application of sec_409a to stock appreciation rights issued by non-publicly traded corporations but not to rights issued by publicly traded corporations created an unfair advantage for publicly traded corporations this was particularly true they argued because many non- publicly traded corporations could not issue stock to employees and thus they did not have the alternative of issuing stock_options that would be excluded from potential taxation under sec_409a of the code we considered all of these comments in formulating the recently issued proposed_regulations under sec_409a see fed reg date the proposed_regulations would exclude from coverage under sec_409a stock appreciation rights that are substantially_similar to stock_options that meet the exclusion requirements this exclusion applies regardless of whether the stock appreciation rights are issued on stock traded on an established_securities_market and regardless of whether the employer settles the stock_appreciation_right in stock or cash macro form rev department of the treasury - internal_revenue_service i hope this information is helpful to ----------- if you have further questions please call me at -------------------- or ------------------------ id ------------- of my staff at -------------- ---- ------- sincerely nancy j marks associate chief_counsel division counsel tax exempt government entities macro form rev department of the treasury - internal_revenue_service


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 fip b05 plr-119191-10 date date legend legend issuer state corporation -------------------------------------------------------------- ------------------------------------- ----------------------------------------- facility ----------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------- -------------------------------------------------------------------------------- a b c d e dear -------------- ----- ----- -------- -- --------------- this letter is in response to your request for a ruling that for purposes of determining whether the bonds described below are private_activity_bonds under sec_141 of the internal_revenue_code the code the output from the issuer’s reserved portion of the facility’s net rated capacity under the power sales contract described below taken by issuer is treated as the government_use portion of the facility under the advance notice of proposed rulemaking published on date fr plr-119191-10 c b the advance notice and the operation agreement described below between issuer and corporation is not treated as a management_contract that results in private_business_use under sec_1_141-3 of the income_tax regulations facts and representations issuer is a political_subdivision of the state issuer owns electric generation transmission and distribution facilities including the facility corporation is a nongovernmental electric cooperative organized under the laws of the state issuer has entered into several arrangements with corporation with respect to the facility only two of which are subject_to this private_letter_ruling the power sales contract and the operation agreement the governing body of the issuer establishes and approves the rates for power produced from issuer’s reserved net rated capacity of the facility and sold to the issuer’s customers under the power sales contract issuer retains the right to reserve a certain amount of net rated capacity of the facility’s total net rated capacity for its use corporation has the right and obligation to take and pay for the remaining net rated capacity of the facility currently issuer has reserved a megawatts of b megawatts of the facility’s net rated capacity which constitutes c percent of such capacity issuer’s reserved net rated capacity may be adjusted by issuer annually up or down in increments of d megawatts the facility’s net rated capacity equals its nameplate_capacity minus the auxiliary power needed to run the facility under this power sales contract for each year issuer has the right to schedule or take the portion of power generated by the facility equal to the percentage of the facility’s net rated capacity reserved by issuer for that year if issuer does not schedule or take all of the output from its reserved portion of the facility’s net rated capacity it must offer the unused output to corporation before offering to third parties under the operation agreement the facility is operated by corporation issuer reimburses corporation on a monthly basis for issuer’s share of the actual and direct expenditures incurred by corporation in the operation and maintenance of the facility issuer’s share of the costs is equal to issuer’s reserved percentage share of the facility’s net rated capacity the costs of the auxiliary power are also shared between issuer and the corporation in proportion to their respective shares of the net rated capacity these reimbursements are the only amounts payable to corporation by issuer for its management and operation of issuer’s share of the facility under the operation agreement issuer is contemplating making various capital improvements to the facility responsibility for financing improvements to the facility is allocated between issuer and corporation on the basis of their respective reservation and allocation of the net rated capacity of the facility under the power sales contract issuer’s resolution authorizes plr-119191-10 the issuance over several years of up to dollar_figuree of bonds the bonds to finance issuer’s portion of the costs of the improvements to the facility issuer represents that while the bonds are outstanding it will a maintain its reserved net rated capacity and b of the total energy generated at the facility take a sufficient amount so that no more than ten percent of the facility’s improvements that are to be financed with the bonds will be used for private_business_use under sec_141 law and analysis sec_103 of the code provides that gross_income does not include interest on any state_or_local_bond sec_103 provides that sec_103 does not apply to any private_activity_bond which is not a qualified_bond within the meaning of sec_141 sec_141 provides that a private_activity_bond is any bond issued as part of an issue that meets either the private_business_use_test of sec_141 and the private_security_or_payment_test of sec_141 or the private_loan_financing_test of sec_141 sec_141 provides that generally a bond issue meets the private_business_use_test if more than percent of the proceeds of the issue are to be used for any private_business_use sec_141 provides that the term private_business_use means use directly or indirectly in a trade_or_business carried on by any person other than a governmental_unit sec_1_141-1 defines a nongovernmental person as a person other than a governmental person a governmental person means a state_or_local_governmental_unit as defined in sec_1_103-1 or any instrumentality thereof sec_1_141-2 provides in part that the private_activity_bond tests serve to identify arrangements that have the potential to transfer the benefits of tax-exempt_financing as well as arrangements that actually transfer these benefits the regulations under sec_141 may not be applied in a manner that is inconsistent with these purposes sec_1_141-3 provides that in determining whether an issue meets the private_business_use_test it is necessary to look to both the indirect and direct uses of proceeds for example a facility is treated as being used for a private_business_use if it is leased to a nongovernmental person and subleased to a governmental person or if it is leased to a governmental person and then subleased to a nongovernmental person provided that in each case the nongovernmental person’s use is in a trade_or_business similarly the issuer’s use of the proceeds to engage in a series of financing transactions for property to be used by nongovernmental persons in their trades_or_businesses may cause the private_business_use_test to be met in addition proceeds are treated as used_in_the_trade_or_business of a nongovernmental person if a nongovernmental person as a result of a single transaction or a series of related transactions uses property acquired with the proceeds of an issue plr-119191-10 sec_1_141-3 provides that both actual and beneficial use by a nongovernmental person may be treated as private_business_use in most cases the private_business_use_test is met only if a nongovernmental person has special legal entitlements to use the financed property under an arrangement with the issuer in general a nongovernmental person is treated as a private business user of proceeds and financed property as a result of ownership actual or beneficial use of property pursuant to a lease or a management or incentive payment contract or certain other arrangements such as a take or pay or other output-type contract under sec_1_141-3 management contracts may result in private use depending on all the facts and circumstances certain arrangements are not treated as management contracts that result in private_business_use one of these described in sec_1 b iii c is a contract to provide for the operation of a facility or system of facilities that consists predominantly of public_utility_property if the only compensation is the reimbursement of actual and direct expenses of the service provider and reasonable administrative overhead expenses of the service provider sec_1_141-1 provides that public_utility_property means public_utility_property as defined in sec_168 sec_168 provides that the term public_utility_property means property used predominantly in the trade_or_business of the furnishing or sale of among other things electrical energy if the rates for such furnishing or sale as the case may be have been established or approved by among other entities a state or political_subdivision thereof the advance notice upon which issuers may rely for bonds sold before the date of publication of the final regulations under sec_1_141-6 or the date specified in the final or future proposed_regulations provides that tax-exempt_bonds may be issued to finance costs attributable to the government_use portion of a mixed-use output_facility plus any costs attributable to de_minimis private_business_use permitted under sec_141 without the bonds being characterized as private_activity_bonds with respect to arrangements for the purchase of output from a power generating facility the government_use portion of a facility is determined based on the percentage of the available output of the facility that is not used for a private_business_use as determined under sec_1_141-7 sec_1 b provides that the available output of a facility financed by an issue is determined by multiplying the number of units produced or to be produced by the facility in one year by the number of years in the measurement_period of that facility for that issue under sec_1_141-7 the number of units produced or to be produced by a generating facility in one year is determined by reference to its nameplate_capacity or its equivalent which is not reduced for reserves maintenance or other unutilized capacity in this case the facility consists of property used predominantly in the trade_or_business of the furnishing or sale of electricity the issuer’s governing body establishes and approves the rates for electricity provided by the issuer from issuer’s reserved plr-119191-10 share of the net rated capacity of the facility therefore to the extent of such share the facility constitutes public_utility_property under sec_168 the allocation of output under the power sales contract based upon reserved net rated capacity of the facility is the equivalent of an allocation based upon the available output of the facility corporation has the right to the output from the remaining net rated capacity of the facility in addition it may purchase some or all of issuer’s output not scheduled or taken the amount or output taken by corporation under these rights is private_business_use of the facility thus issuer’s portion of the net rated capacity of the facility reduced by corporation’s purchases of issuer’s output not scheduled or taken and any other private_business_use of the facility is the government_use portion of the facility therefore in accordance with the advance notice issuer may issue the bonds in an amount to cover the costs of the government_use portion of the facility and its improvements plus any costs attributable to the de_minimis private_business_use permitted under sec_141 the operation agreement is an arrangement with respect to issuer’s share of the facility which is measured by its reserved net rated capacity and which constitutes public_utility_property under the operation agreement only actual and direct expenses_incurred in the operation and maintenance of issuer’s share of the facility are payable to corporation for its management of such share consequently the operation agreement is an arrangement that is not treated as a management_contract that results in private_business_use and which in and of itself does not cause the issuer’s share of the facility to be privately used by corporation conclusion based on the foregoing we conclude that issuer may treat the output from the net rated capacity of the facility reserved for issuer’s use under the power sales contract reduced by corporation’s purchases of issuer’s output not scheduled or taken from such reserved capacity and any other private_business_use of such output as the government_use portion of the facility under the advance notice and the operation agreement between issuer and corporation is not treated as a management_contract that results in private_business_use under sec_1_141-3 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular no opinion is expressed or implied concerning whether a the interest on the bonds will be excludable from gross_income under sec_103 or b other than the operating_agreement to the extent described herein any arrangement including an arrangement that would cause issuer’s portion of the total net rated capacity to be other than that reserved at the time of issuance of the bonds or would cause issuer to sell any amount of energy to which it is entitled to corporation or any plr-119191-10 other private user will not cause the bonds to meet the private_business_use_test under sec_141 of the code 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 representatives the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely associate chief_counsel financial institutions products by __________________________ timothy l jones senior counsel branch cc


internal_revenue_service number release date index number ------------------------------------------------------------ ------------------- ----------------------------------------------------- ----------------------------------------------- ------------------------------ in re ---------------------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b09 plr-111937-05 date june legend husband wife trust trustee date date state court -------------------------- ---------------------- ------------------------------------------------------------------------------ ---------------- ----------------------------------------- -------------------------- -------------------------- ------------------------------------------------------------------------------ ---------------------- dear ---------- this is in response to your letter dated date requesting rulings on the estate and generation-skipping_transfer gst tax consequences of certain proposed modifications to a_trust the facts submitted and the representations made are as follows on date prior to date the grantors husband and wife created an irrevocable_trust trust for the benefit of their children and grandchildren trustee is the current sole trustee of the trust paragraph a of the trust provides that a primary beneficiary or primary beneficiaries as those terms are used in the trust refers to a child or children of husband and wife paragraph b provides that the term issue refers to all children born of or adopted by a primary beneficiary or the primary beneficiaries paragraph a i provides the trustees with the discretionary authority to distribute income to a primary beneficiary while the beneficiary is under age paragraph plr-111937-05 a ii provides the trustees with the discretionary authority to distribute income to the issue of a primary beneficiary who is deceased or who has attained age while the issue is under age paragraph a ii i provides that no primary beneficiary or issue of a primary beneficiary is to receive distributions of income after attaining age and respectively paragraph a ii ii provides that in any one year a primary beneficiary cannot receive income that exceeds an amount of money that is more than the annual net_income divided by the number of primary beneficiaries living and primary beneficiaries deceased survived by issue paragraph a ii iii provides that in the event a primary beneficiary dies prior to attaining age survived by other primary beneficiaries under age then no net_income can be distributed to the issue of the deceased primary beneficiary which exceeds in any one year an amount of money that is more than the fractional share of the annual net_income to which the deceased primary beneficiary would have been entitled if living divided by the number of living issue of the deceased primary beneficiary paragraph a ii iv states that after the last primary beneficiary attains thirty-three years of age or dies prior thereto no net_income shall be paid to or applied for the benefit of an issue of a primary beneficiary which exceeds in any one year an amount of money which is more than the annual net_income divided by the number of the then living issue of all of the primary beneficiaries paragraph b states that this trust shall terminate as to each issue of the primary beneficiaries as hereinafter set forth upon the first to occur of either one of the following events i t he thirty-second 32d birthday of each issue of the primary beneficiaries or ii t he twenty-first 21st year after the date of the last to die of the primary beneficiaries paragraph c states that the trustees shall make a distribution to each of the issue of the primary beneficiaries on the twenty-fifth 25th birthday and thirty- second 32nd birthday of each issue as hereinafter set forth and after each of such distributions the trustees shall retain the then remaining balance of the trust fund as one undivided fund subject_to the terms and conditions of this agreement plr-111937-05 i on the twenty-fifth 25th birthday of each issue the trustees shall separate a pro_rata share of the principal and accumulated income of the trust according to the number of issue then living and one-half of such pro rated share shall be paid over to the issue who then celebrates his or her twenty-fifth 25th birthday ii on the thirty-second 32d birthday of each issue the trustees shall separate a pro_rata share of the principal and accumulated income of the trust according to the number of issue then living and after deducting an amount of money equal to that paid to such issue under subparagraph c i hereof the trustees shall pay the remaining balance of such share to the issue who then celebrates his or her thirty-second 32d birthday iii in the event any of such issue shall die during the continuance of the trust then the share that such deceased issue would have been entitled to receive upon the termination of this trust shall be held in trust until such deceased issue would have attained thirty-two years of age and at that time such share shall be paid over to the lineal_descendants of such deceased issue but if no lineal_descendants then such share shall be held for the benefit of or distributed to the then remaining issue as provided in this paragraph iv in the event this trust should terminate by reason of the twenty-first 21st year after the date of death of the last to die of the primary beneficiaries the trustees shall divide the then remaining balance of the trust and any accumulated income thereon into equal shares according to the number of the then living issue of the primary beneficiaries and shall pay over such shares to such issue absolutely freed and discharged of this trust on date the trustee filed a complaint for declaratory_judgment complaint in state court requesting the court construe paragraph in the complaint the trustee represents that the method for distributing assets in paragraph has a number of ambiguities that must be resolved first it is not clear how the phrase the number of issue then living should be read it could mean all of the living issue or only the living issue who are beneficiaries of the trust second it is unclear whether a deceased issue who is survived by descendants is counted in determining the number of issue then living the literal language suggests that it should not third when the trustee separates a pro_rata share of the trust under paragraph c i it is not clear what is to be done with the portion not distributed fourth if an issue dies before receiving his or her full distribution paragraph c iii directs that the plr-111937-05 share shall be paid to his or her lineal_descendants when the deceased issue would have reached age it is unclear when the share is to be calculated the complaint contains proposed changes to paragraph intended to resolve the ambiguities in this paragraph husband and wife as the grantors of the trust have provided affidavits to support the change in the language to the trust sec_4 will state that after the last primary beneficiary attains thirty-three years of age or dies prior thereto no net_income shall be paid to or applied for the benefit of an issue of a primary beneficiary which exceeds in any one year an amount of money which is more than the annual net_income divided by the number of the then living issue of all of the primary beneficiaries who have not yet attained the age of thirty-two sec_4 will state as follows the trustees shall make a distribution to each of the issue of the primary beneficiaries on the twenty-fifth 25th birthday and thirty- second 32nd birthday of each issue as hereinafter set forth and after each of such distributions the trustees shall retain the then remaining balance of the trust fund as one undivided fund subject_to the terms and conditions of this agreement i on the twenty-fifth 25th birthday of each issue the trustees shall separate for such person a pro_rata share of the principal and accumulated income of the trust and one-half of such pro rated share shall be paid over to the issue who then celebrates his or her twenty-fifth 25th birthday with one-half share not so paid remaining as part of the undivided fund for purposes of this subparagraph the pro_rata share of an issue reaching his or her twenty-fifth 25th birthday shall be calculated by dividing the trust fund by the sum of aa the number of then living issue including deceased issue who have living lineal_descendants for which a share has not yet been created as provided in subparagraph c iii who have not previously become entitled to a distribution under this subparagraph c i including for the avoidance of doubt the issue then reaching his or her twenty-fifth 25th birthday at the relevant time and plr-111937-05 bb one-half of the number of then living issue including deceased issue who have living lineal_descendants for which a share has been created as provided in subparagraph c iii but who are not yet entitled to a distribution of that share who have previously become entitled to a distribution under this subparagraph c i but have not previously become entitled to a distribution under subparagraph c ii below ii on the thirty-second 32nd birthday of each issue the trustees shall separate for such person a pro_rata share of the principal and accumulated income of the trust and one-half of such pro-rated share shall be paid over to the issue who then celebrates his or her thirty-second 32nd birthday for purposes of this paragraph the pro_rata share of an issue reaching his or her thirty-second 32nd birthday shall be calculated by dividing the trust fund by the sum of aa the number of then living issue including deceased issue who have living lineal_descendants as provided in subparagraph c iii who have not previously become entitled to a distribution under subparagraph c i at the relevant time and bb one-half of the number of then living issue including deceased issue who have living lineal_descendants as provided in subparagraph c iii who have previously become entitled to a distribution under subparagraph c i above but have not previously become entitled to a distribution under this subparagraph including for the avoidance of doubt the issue then reaching his or her thirty-second 32nd birthday iii in the event any of such issue shall die prior to having received his or her distributions under both subparagraphs i and ii above then if such deceased issue is survived by lineal_descendants the share or shares that such deceased issue would have been entitled to but plr-111937-05 did not receive under subparagraphs i and ii above and subparagraph iv below had such issue not died shall be created at such time and in such amount as if such issue had not died which for the avoidance of doubt shall be when such deceased issue would have reached the ages of twenty-five and thirty-two as to the shares to which such deceased issue would have been entitled under subparagraphs i and ii above respectively and if earlier at the date of termination of the trust as provided in subparagraph iv below and shall equal in value the shares that would have been created for the deceased issue at such times had such issue not died and such shares shall be held in a separate trust until such deceased issue would have attained thirty-two years of age or until the earlier termination of the trust as provided in subparagraph iv below at that time such shares shall be paid over to the then living lineal_descendants of such deceased issue in equal shares per stirpes it has been represented that all of the primary beneficiaries have reached age and their respective interests in the trust have terminated it has been further represented that there have not been any additions actual or constructive to the trust after date the trustee has requested rulings that the adoption of the proposed language set forth in the complaint will not cause the trust to lose its status as a_trust that is exempt from the gst tax by reason of b a of the tax_reform_act_of_1986 act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations will not cause husband wife or any beneficiary of the trust to be deemed to have made a gift or to be subject_to gift_taxes under chapter of subtitle b of the internal_revenue_code will not cause any of the property of the trust to be included in the gross_estate of any grantor or beneficiary of the trust for federal estate_tax purposes under chapter of subtitle b of the code except to the extent of property that is distributed to such person and remains in his or her estate at the date of death and will not cause any beneficiary of the trust to be a transferor for gst tax purposes with respect to any property of the trust law and analysis plr-111937-05 sec_2033 provides that the value of the gross_estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for adequate_and_full_consideration in money or money’s worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death - the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom sec_2038 provides that to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for adequate_and_full_consideration in money or money’s worth by trust or otherwise where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power in whatever capacity exercisable by the decedent alone or by the decedent in conjunction with any other person without regard to when or from what source the decedent acquired such power to alter amend revoke or terminate or where any such power is relinquished during the 3-year period on the date of the decedent’s death sec_2041 provides that to the extent of any property with respect to which the decedent has at the time of his death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released such a power_of_appointment by a disposition which is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent’s gross_estate under sec_2035 to inclusive sec_2501 imposes a tax on the transfer of property by gift by an individual sec_2511 provides that the tax imposed by sec_2501 applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-2 of the gift_tax regulations provides that as to any property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave in him no power to change its disposition whether for his own benefit or for the benefit of another the gift is complete sec_2601 imposes a tax on every gst made after date a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip plr-111937-05 sec_2612 provides that the term taxable_termination means a termination by death lapse of time release of a power or otherwise of an interest_in_property_held_in_trust where the property passes to a skip_person with respect to the transferor of the property sec_2612 provides that the term taxable_distribution means any distribution from a_trust to a skip_person other than a taxable_termination or a direct_skip under sec_2612 a direct_skip is a transfer subject_to federal estate or gift_tax made by a transferor to a skip_person under a of the act and sec_26_2601-1 the gst is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 the gst does not apply to a transfer under a_trust that was irrevocable on date but only to the extent that such transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax will not cause the trust to lose its exempt status sec_26_2601-1 provides that a judicial construction of a governing instrument to resolve an ambiguity in the terms of the instrument or to correct scrivener's error will not cause an exempt trust to lose its exempt status provided the judicial action involves a bona_fide issue and the construction is consistent with applicable state law that would be applied by the highest court of the state sec_26_2601-1 example provides as follows in grantor established an irrevocable_trust for the benefit of grantor's children a and b and their issue the trust is to terminate on the death of the last to die of a and b at which time the principal is to be distributed to their issue however the provision governing the termination of the trust is ambiguous regarding whether the trust principal is to be distributed per stirpes only to the children of a and b or per capita among the children grandchildren and more remote issue of a and b in the trustee files a construction suit with the appropriate local court to resolve the ambiguity the court issues an order construing the instrument to provide for per capita distributions to the children grandchildren and more remote issue of a and b living at the time the trust terminates the court's construction resolves a bona_fide issue regarding the proper interpretation of the instrument and is consistent with applicable state law as it would be interpreted by the highest court of the state therefore the trust will not be subject_to the provisions of chapter sec_2652 provides that except as provided in this subsection or sec_2653 the term atransferor means the decedent in the case of property subject_to the tax imposed by chapter and the donor in the case of any property subject_to the tax imposed by chapter an individual shall be treated as transferring any property with respect to which such individual is the transferor plr-111937-05 sec_26_2652-1 provides that except as otherwise provided in sec_26_2652-1 the individual with respect to whom property was most recently subject_to federal estate or gift_tax is the transferor of that property for purposes of chapter an individual is treated as transferring any property with respect to which the individual is the transferor thus an individual may be a transferor even though there is no transfer of property under local law at the time the federal estate or gift_tax applies sec_26_2652-1 provides that a transfer is subject_to federal gift_tax if a gift_tax is imposed under sec_2501 without regard to exemptions exclusions deductions and credits a transfer is subject_to federal estate_tax if the value of the property is includible in the decedent's gross_estate as determined under sec_2031 or sec_2103 in domo v mccarthy ohio 3d n e 2d the ohio supreme court stated w e are mindful that one of the fundamental tenets for the construction of a will or trust is to ascertain within the bounds of law the intent of the grantor or settlor the court also indicated that when the language of the trust instrument is uncertain or ambiguous the court may consider extrinsic evidence to ascertain the grantor's intent in the present case the trust was irrevocable on date it has been represented that no additions actual or constructive have been made to the trust after that date the complaint contains proposed language to paragraph of the trust intended to resolve ambiguities relating to the distribution of trust income and principal husband and wife as the grantors of the trust have presented affidavits in support of the proposed language adoption of the proposed language clarifies the interests of the trust beneficiaries rather than creating new interests therefore based upon the facts submitted and the representations made we conclude that the proposed language in the complaint resolves a bona_fide issue regarding the proper interpretation of the instrument and is consistent with applicable state law as it would be interpreted by the highest court of the state accordingly we rule that adoption of the proposed language set forth in the complaint will not cause the trust to lose its status as a_trust that is exempt from the gst tax by reason of b a of the act and sec_26_2601-1 will not cause husband wife or any beneficiary of the trust to be deemed to have made a gift or to be subject_to gift_taxes under chapter of subtitle b will not cause any of the property of the trust to be included in the gross_estate of husband wife or beneficiary of the trust for federal estate_tax purposes under chapter except to the extent of property that is distributed to such person and remains in his or her estate at the date of death and plr-111937-05 will not cause any beneficiary of the trust to be a transferor for gst tax purposes with respect to any property of the trust except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 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 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely james f hogan james f hogan senior technician reviewer branch passthroughs special industries enclosures copy for ' purposes cc


internal_revenue_service number release date index number ------------------------------------ ------------------------------------------- ----------------------------- --------------------------- - department of the treasury washington dc person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b01 - plr-114174-04 date june --------------------- ------------------------------ ------------------------------- ------------------------------------ legend x --------------------------------------------------- a country entity entity date date dear ---------------------- requesting a ruling that x be granted an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts this letter responds to a letter dated date written on behalf of x -------------------------------- -------------------------- -------------------- according to the information submitted a purchased percent of the stock of x a country entity on date x converted to a country entity effective date x represents that it first became an entity eligible to elect under sec_301_7701-3 to be a disregarded_entity for federal_income_tax purposes as of date x inadvertently failed to file timely the form_8832 entity classification election to be treated as a disregarded_entity effective date sec_301_7701-3 provides in part that a business_entity that is not law and analysis classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if a foreign eligible_entity has one owner it may elect to be treated as a disregarded_entity pursuant to the rules in sec_301_7701-3 if a foreign eligible_entity has more than one owner it may elect to be treated as a partnership pursuant to the rules in sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date on which the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a regulation published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic_extension of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301 a conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file form_8832 with the appropriate service_center and elect to be treated as a disregarded_entity for federal tax purposes effective date a copy of this letter should be attached to the election except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transactions described above under any other provision of the code this ruling is directed only to the taxpayer on whose behalf it was requested sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely s heather c maloy heather c maloy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c pate bl employer_identification_number conyact person identification_number telephone number to be dear sir or madam this is in response to your letter dated date in which you requested certain rulings with respect to a proposed transfer of assets from b to c b is exempt under sec_501 of the internal_revenue_code and is classified as a private_foundation under sec_509 c is exempt under sec_501 of the code and is classified as a private_foundation under sec_509 c had no assets as of date d a successful businessman from e who founded f established a park g ona large parcel of land d created g as part of a boyhood dream to create a public park which would provide a tranquil oasis for the people of e throughout his life d was dedicated to the care and development of g d died many years ago in keeping with his dedication to g d's will expressed a desire that the trustees of b continue to support g as d had done during his lifetime the trustees and provided some discretion in the trustees as to how b's funds could be distributed article iv of d's will bequeathed a block of non-voting common_stock of f to b the income of which was to be used first so far as may be necessary in the judgment of the trustees or of their corporate successor toward the cost of operating and maintaining g d did not however tie the hands of the board_of directors of b which has been comprised largely of direct descendants of d has always honored b's dedication to g g is the largest single grantee of b funds today sec_27 consists of formal gardens a carillon tower tracks sports fields and a substantial nature area as the d family has grown larger and more dispersed geographically concern has developed among d directors about the continuing commitment of future directors to support g especially in light of the latitude permitted by the language in d’s will they fear that as time passes directors who are less familiar with d's legacy will not be dedicated to the support of g as current and prior directors have been in light of these concerns d’s directors met in april of to discuss ways to ensure that in october of the d's legacy of support for g could be carried out on a permanent basis directors with advice of counsel approved a method to accomplish this objective first several of the directors of b formed c for the primary purpose of supporting g effective date b directors intend to make a grant of approximately one-fourth of its total assets to c which will be restricted for the benefit of g g and because the grant to c will be for that purpose the directors of d can be sure that d's legacy of support for g will be carried out in perpetuity because c's purpose is to support b represents that it will exercise expenditure_responsibility over its grant to c b also represents that it will comply with the rules regarding capital endowment grants to private_foundations the transfer of assets from b to c will not involve any benefit to a disqualified_person b does not seek to have its status as a private_foundation terminated and does not wish to be treated as a newly created organization sec_507 of the code provides for the voluntary and involuntary termination of private it states in part that except for transfers described in sec_507 an foundation status organization's private_foundation_status will be terminated only if the organization notifies the service of its intent to terminate or there have been either willful repeated acts or failures to act or a willful and flagrant act or failure to act giving rise to liability for tax under chapter sec_507 of the code provides that when a private_foundation transfers assets to another private_foundation pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization the transferee foundation shall not be treated as a new organization sec_1_507-1 of the income_tax regulations provides that neither a transfer of all of the assets of private_foundation nor a significant disposition of assets as defined in sec_1_507-3 by a private_foundation whether or not any portion of such disposition of assets is made to another private_foundation shall be deemed to result in a termination of the transferor private_foundation under sec_507 of the code unless the transferor private_foundation elects to terminate pursuant to sec_507 or sec_507 is applicable sec_1_507-3 of the regulations provides that a transferee organization in the case of a transfer described in sec_507 of the code shall succeed to the aggregate tax benefit of the transferor organization in an amount equal to the amount of such aggregate tax_benefit of the transferor organization multiplied by a fraction the numerator of which is the fair market of the assets less encumbrances transferred to such transferee and the denominator of which is the fair_market_value of the assets of the transferor less encumbrances immediately before the transfer fair_market_value is determined at the time of transfer sec_1_507-3 of the regulations provides that except as provided in sec_1 a which only relates to b transfers where all net assets are transferred to one or more controlled private_foundation a private_foundation is required to meet the distribution_requirements of sec_4942 of the code for any taxable_year in which it makes a sec_507 transfer of all or part of its net assets to another private_foundation such transfer shall itself be counted toward satisfaction to the extent the amount transferred meets the requirements of sec_4942 sec_1_507-3 of the regulations provides that in order for a transfer of assets pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization not to be a taxable_expenditure it must be to an organization described in sec_501 other than an organization described in section sec_509 or treated as described in sec_501 under sec_4947 sec_4941 of the code imposes a tax on each act of self-dealing between a disqualified_person and a private_foundation sec_4942 of the code requires a private_foundation to make specified distributions of income for each taxable_year including the year in which it transfers substantial assets to another private_foundation under sec_507 sec_1_507-3 of the regulations allows the transferor foundation to count the assets transferred under sec_507 toward its sec_4942 distribution requirement to the extent that the transferee foundation itself makes qualifying distributions from corpus under sec_4942 by the end of the transferee s first taxable_year after the year in which it receives the transfer sec_4942 of the code defines qualifying_distribution as a any amount including that portion of reasonable and necessary administrative expenses paid to accomplish one or more purposes described in sec_170 c b other than any contribution to i an organization controlled by the foundation or one or more disqualified persons or ii a private_foundation which is not an operating_foundation except as otherwise provided or b any amount_paid to acquire an asset used directly in carrying out one or more purposes described in sec_170 sec_4942 of the code requires that a grantor private_foundation in order to have a qualifying_distribution for its grant to another private_foundation which is not an operating_foundation under sec_4942 of the code must have adequate_records as required by sec_4942 of the code to show that the grantee private_foundation in fact subsequently made qualifying distributions that were equal to the amount of the grant and that were paid out of the grantee’s own corpus within the meaning of sec_4942 of the code such grantee foundation’s qualifying distributions out of corpus must be expended before the bl close of the grantee’s first tax_year after its tax_year in which it received the grant sec_4945 of the code defines the term taxable_expenditure to include any amount_paid or incurred by a private_foundation as a grant to an organization unless a the organization is described in subparagraphs or of sec_509 of the code or is an exempt_operating_foundation as defined in sec_4940 of the code or b the private_foundation exercises expenditure_responsibility with to such grant in accordance with sec_4945 of the code the exercise of expenditure_responsibility requires the foundation that makes the transfer to keep detailed records of the way the payment is spent by the recipient foundation sec_4945 of the code provides that expenditure_responsibility referred to in subsection d means that the private_foundation is responsible to exert all reasonable efforts and to establish adequate procedures to see that the grant is spent solely for the purpose for which made to obtain full and detailed reports with respect to such expenditures and to make full and detailed reports to the secretary sec_53_4942_a_-3 of the foundation and similar excise_taxes regulations states that a transfer from one private_foundation to another private_foundation will be a qualifying_distribution under sec_4942 of the code if i not later than the close of the first taxable_year in which such contribution is received such donee organization makes a distribution equal to the full amount of such contribution and such contribution and such distribution is a qualifying_distribution within the meaning of paragraph a of this section without regard to this paragraph which is treated under paragraph qd of this section as a distribution out of corpus or would be so treated if such sec_501 organization were a private_foundation which is not an operating_foundation and ii the private_foundation making the contribution obtains adequate_records or other_sufficient_evidence from such donee organization such as a statement by an appropriate officer director or trustee of such organization showing except as otherwise provided in this subparagraph a that the qualifying_distribution described in subdivision i of this subparagraph has been made by such organization b the names and addresses of the recipients of such distribution and the amount received by each and c that the distribution is treated as distribution out of corpus under paragraph d of this section or would be so treated if the donee organization were a private_foundation which is not a operating_foundation sec_53_4945-5 of the regulations refers to the rules relating to the extent to which the expenditure_responsibility_rules contained in sec_4945 and h and this section apply to transfers of assets described in sec_507 sec_53_4945-5 of the regulations provides that if a private_foundation makes a grant described in sec_4945 to a private_foundation which is exempt from taxation under sec_501 for endowment for the purchase of capital equipment or for other capital purposes the grantor foundation shall require reports from the grantee on the use of the principal and income if any from the grant funds the grantee shail make such reports annually for its taxable_year in which the grant was made and the immediately succeeding two taxable years sec_53_4945-6 of the regulations provides that any expenditures_for unreasonable por administrative expenses including compensation consultant fees and other fees for services rendered will ordinarily be taxable_expenditures under sec_4945 unless the foundation can demonstrate that such expenses were paid_or_incurred in the good_faith belief that they were reasonable and that the payment or incurrence of such expenses in such amounts was consistent with ordinary business care and prudence the determination whether an expenditure is unreasonable shall depend upon the facts and circumstances of the particular case sec_53_4946-1 of the regulations provides that for purposes of sec_4941 only the term disqualified_person shail not include any organization which is described in sec_501 other than an organization described in sec_509 based on the above facts following the transfer from b to c charitable activities c will also conduct its charitable activities b will continue to conduct its because b is not terminating its existence and because there has been no willful repeated or flagrant act giving rise to liability under chapter no tax will be imposed on b under sec_507 as a result of the transfer of assets from b to c since a transfer of assets as described in sec_507 will not cause a termination of an organization's private_foundation_status the transfer from b to c will not terminate b's status as a private_foundation under sec_507 because b and c will continue to conduct their individual charitable activities following the transfer of assets from b to c the proposed transfer of assets will not adversely affect the exempt status of b or c b's transfer of assets to c will not be a taxable_expenditure under sec_4945 provided b exercises expenditure_responsibility over the grants made to c pursuant to sec_4945 because b as an organization described in sec_501 of the code is not a disqualified_person or substantial_contributor with respect to c the transfer of assets to c will not constitute an act of self-dealing within the meaning sec_4941 of the code moreover for purposes of self-dealing the directors of b who have voted in favor of a transfer of assets to c are not considered substantial contributors and hence disqualified persons by virtue of their votes provided b obtains the documentation required by sec_4942 of the code b will be able to treat as a qualifying_distribution the amount of corpus which c transfers to g as well as the amount c spends on administrative expenses out of corpus for the year of b's transfer and the year following the transfer provided the expenses_incurred by b and c in the transfer of assets to c meet the good_faith standard of sec_53_4945-6 such expenses will not constitute taxable_expenditures under sec_4945 and will be considered qualifying distributions under sec_4942 accordingly based on the information furnished we rule as follows 3b the transfer of assets of b to c will qualify as a transfer pursuant to sec_507 of the code and will neither result in the termination of b's private_foundation_status under sec_507 nor subject b to the tax imposed by sec_507 of the code the proposed transfer of assets by b to c will not adversely affect the exempt status of b or c under sec_501 of the code provided b exercises expenditure_responsibility over the transferred funds pursuant to sec_53_4945-5 of the regulations the proposed transfer of assets by b to c will not be a taxable_expenditure by b under sec_4945 b will not be deemed to have engaged in an act of self-dealing giving rise to excise_tax under sec_4941 as a result of the transfer by b of one-fourth of its assets to c the reasonable expenditures_for expenses_incurred by b and c in connection with this ruling_request and in effectuating the proposed transfer of assets will not constitute taxable_expenditures under sec_4945 of the code and will be considered qualifying distributions under sec_4942 b's transfer of assets to c may be counted toward satisfaction of b’s own distribution_requirements under sec_4942 of the code to the extent that the requirements of sec_4942 of the code are met bwill not be considered a disqualified_person or a substantial_contributor with respect to c as a result of the transfer members of the board_of directors of b who vote for the proposed transfer will not be considered disqualified persons or substantial contributors with respect to c as a result of the vote we are informing the ohio te_ge office of this action please keep a copy of this ruling in your organization's permanent records this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as precedent pb if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely pp ota v boeke gerald v sack manager exempt_organizations technical group