department of the treasury int ernal revenue service washington d c date cc psi br7 tl-n-2406-00 of f i c e of c h i e f c ou n s e l number release date uilc internal_revenue_service national_office field_service_advice memorandum for lmsb division counsel from associate chief_counsel passthroughs and special industries cc psi subject research_and_experimental_expenditures this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be used or cited as precedent disclosure statement field_service_advice is chief_counsel_advice and is open to public inspection pursuant to the provisions of sec_6110 the provisions of sec_6110 require the service to remove taxpayer identifying information and provide the taxpayer with notice of intention to disclose before it is made available for public inspection sec_6110 and i sec_6110 also authorizes the service to delete information from field_service_advice that is protected from disclosure under u s c sec_552 and c before the document is provided to the taxpayer with notice of intention to disclose only the national_office function issuing the field_service_advice is authorized to make such deletions and to make the redacted document available for public inspection accordingly the examination appeals or counsel recipient of this document may not provide a copy of this unredacted document to the taxpayer or their representative the recipient of this document may share this unredacted document only with those persons whose official tax_administration duties with respect to the case and the issues discussed in the document require inspection or disclosure of the field_service_advice legend tl-n-2406-00 taxpayer x y z issue whether expenditures incurred by taxpayer’s design and prototype department relating to the design development modification and improvement of athletic footwear constitute research_and_experimental_expenditures under sec_174 conclusion expenditures incurred by taxpayer's design and prototype department relating to the design development modification and improvement of athletic footwear constitute research_and_experimental_expenditures under sec_174 only if such expenditures are attributable to activities intended to eliminate uncertainty concerning the development or improvement of the footwear products and if such expenditures are not otherwise excludable under sec_174 facts taxpayer is in the trade_or_business of designing developing selling and distributing athletic footwear products taxpayer’s design and prototype department design department is engaged in all activities related to the design development modification and improvement of taxpayer’s footwear products taxpayer’s product development and or improvement cycle begins with the design phase during which each member of taxpayer’s design department attempts to conceptualize and design either a new footwear product or an improvement to an existing footwear product each design department member produces drawings containing ideas or concepts of what product or improvement might appeal to a particular market segment because trends in athletic footwear change frequently taxpayer is never certain of what might appeal to the current market the design department members then draft and evaluate detailed technical blue print design drawings of footwear components including cut-away views illustrating how each of the product's components fit together the design department will discard the majority of drawings while approximately ten percent of the drawings will be redrafted and reevaluated until certain design concepts are tl-n-2406-00 identified as potential designs for the coming year’s product line design department activities include tasks related to nonfunctional aspects of the product such as evaluating colors or positioning insignia or more complex tasks related to functional aspects of the product such as designing a new footwear component eg a tread pattern or lace hook or improving the functionality of an existing footwear component eg an improved tread or a more water-resistant boot design department activities may also include developing a new footwear product which would include activities related to both functional and nonfunctional aspects of the product as soon as the design department arrives at a tentative agreement on the designs for the coming year’s product line the proposed designs are reviewed and evaluated by taxpayer’s management for those designs approved by taxpayer’s management the design department determines the necessary components for manufacturing as well as the appropriate methods of manufacturing each product upon final approval of the component and or footwear product design the design department evaluates the appropriate manufacturing process for that new design once these various design elements are finalized and approved taxpayer then asks a foreign manufacturer to construct a prototype pairs of the footwear design taxpayer does not manufacture either the components used in the construction of the footwear or the footwear itself as part of the design process however the design department frequently constructs a rough prototype of a proposed product or product component while experimenting with different design features the rough prototypes are constructed from various scrap materials including discarded prototype models and returned merchandise when the a prototype pairs of footwear are constructed by the foreign manufacturer they are returned to taxpayer where the design department inspects them for inherent design flaws such design flaws may be functional ie generally relating to the product's purpose action or performance or non-functional ie generally relating to color or style once taxpayer approves the design the prototypes are marketed to taxpayer's customers when and if the prototypes are successfully marketed taxpayer submits an order to its foreign manufacturer for further production of the product the term functional is defined in webster's dictionary to mean of connected with or being a function and designed or developed chiefly from the point of view of use webster's ninth new collegiate dictionary the functionality of a product or feature is addressed in the first restatement of torts which states that a feature is functional if it affects the product’s purpose action or performance a feature is nonfunctional if it does not have any of these effects american law institute first restatement torts sec_742 a functional modification therefore may entail a technological advancement while a nonfunctional modification may relate to a more pleasing appearance or color tl-n-2406-00 taxpayer performs no internal testing to determine how the footwear will hold up to sustained use and instead relies upon the ultimate consumer to test its product thus design flaws that are not identified upon inspection during the design evaluation process become apparent only when the consumer has purchased used and returned the product to the store where it was purchased if a product has a correctable problem members of the design department evaluate and attempt to eliminate the problem the design department addresses diverse problems ranging from the color of the shoe the placement of the insignia the overall design of the tread or the design of the entire footwear product taxpayer has claimed all costs incurred by the design department for the x y and z taxable years as research or experimental expenditures under sec_174 taxpayer's accounting for the costs incurred by the design department does not delineate the nature of the costs incurred law prior to the tax laws authorized no specific treatment for research_and_experimental_expenditures in order to provide guidance to taxpayers on the proper accounting treatment of research_and_experimental_expenditures as well as to encourage taxpayers to carry on research_and_experimentation congress enacted sec_174 effective for expenses_incurred after date sec_174 generally provides that research_and_experimental_expenditures paid_or_incurred during the taxable_year in connection with a taxpayer’s trade_or_business may at the taxpayer’s election be deducted currently rather than capitalized sec_174 generally provides that sec_174 will not apply to any expenditure for the acquisition or improvement of land or for the acquisition or improvement of property to be used in connection with the research or experimentation and of a character which is subject_to the allowance for depreciation under sec_167 sec_1_174-2 provides in relevant part that the term research or experimental expenditures means expenditures incurred in connection with the taxpayer's trade_or_business which represent research_and_development costs in the experimental or laboratory sense the term generally includes all such costs incident to the development or improvement of a product further expenditures represent research_and_development costs in the experimental or laboratory sense if they are for activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a product uncertainty exists if the information available to the taxpayer does not establish the capability or method for developing or improving the product or the appropriate design of the tl-n-2406-00 product whether expenditures qualify as research or experimental expenditures depends on the nature of the activity to which the expenditures relate not the nature of the product or improvement being developed or the level of technological advancement the product or improvement represents sec_1_174-2 provides that the term product includes any pilot_model process formula invention technique patent or similar_property and includes products to be used by the taxpayer in its trade_or_business as well as products to be held_for_sale lease or license sec_1_174-2 provides that the term research or experimental expenditures does not include expenditures for-- i the ordinary testing or inspection of materials or products for quality control quality control testing ii efficiency surveys iii management studies iv consumer surveys v advertising or promotions vi the acquisition of another's patent model production or process or vii research in connection with literary historical or similar projects sec_1_174-2 provides that for purposes of sec_1_174-2 testing or inspection to determine whether particular units of materials or products conform to specified parameters is quality control testing however quality control testing does not include testing to determine if the design of the product is appropriate sec_1_174-2 contains rules relating to certain expenditures with respect to land and other_property sec_1_174-2 provides that expenditures by the taxpayer for the acquisition or improvement of land or for the acquisition or improvement of property which is subject_to an allowance for depreciation under sec_167 are not deductible under sec_174 irrespective of the fact that the property or improvements may be used by the taxpayer in connection with research or experimentation however allowances for depreciation of property are considered as research or experimental expenditures_for purposes of sec_174 tl-n-2406-00 to the extent that the property to which the allowances relate is used in connection with research or experimentation if any part of the cost of acquisition or improvement of depreciable_property is attributable to research or experimentation whether made by the taxpayer or another see sec_1_174-2 and sec_1_174-2 provides in relevant part that expenditures_for research or experimentation which result as an end product of the research or experimentation in depreciable_property to be used in the taxpayer's trade_or_business may subject_to the limitations of sec_1_174-2 be allowable as a current_expense deduction under sec_174 sec_1_174-2 provides in relevant part that if expenditures_for research or experimentation are incurred in connection with the construction or manufacture of depreciable_property by another they are deductible under sec_174 only if made upon the taxpayer’s order and at his risk no deduction will be allowed i if the taxpayer purchases another’s product under a performance guarantee whether express implied or imposed by local law unless the guarantee is limited to engineering specifications or otherwise in such a way that economic utility is not taken into account or ii for any part of the purchase_price of a product in regular production however see sec_1_174-2 sec_1_174-2 provides in relevant part that the deductions referred to in sec_1_174-2 for expenditures in connection with the acquisition or production of depreciable_property to be used in the taxpayer's trade_or_business are limited to amounts expended for research or experimentation thus amounts expended for research or experimentation do not include the costs of the component materials of the depreciable_property the costs of labor or other elements involved in its construction and installation or costs attributable to the acquisition or improvement of the property see 184_f3d_522 6th cir aff’g tcmemo_1997_318 holding that the cost incurred for the purchase of a used car engine is not deductible under sec_174 because the engine is of a character subject_to an allowance for depreciation analysis the issue in this request for field_service_advice is whether expenditures attributable to taxpayer's design development sale and distribution of athletic footwear are research or experimental expenditures under sec_174 the materials accompanying the incoming request do not state whether taxpayer’s accounting for the costs incurred by the design department include expenses attributable to property that is subject_to an allowance for depreciation inasmuch tl-n-2406-00 as we have been advised that taxpayer has classified all costs of the design department as sec_174 expenses we believe we should address this issue briefly sec_1_174-2 generally provides that expenditures by the taxpayer for the acquisition or improvement of property which is subject_to an allowance for depreciation under sec_167 are not deductible under sec_174 irrespective of the fact that the property or improvements may be used by the taxpayer in connection with research or experimentation sec_1_174-2 provides in relevant part that expenditures_for research or experimentation which result as an end product of the research or experimentation in depreciable_property to be used in the taxpayer’s trade_or_business may subject_to the limitations of sec_1_174-2 be allowable as a current_expense deduction under sec_174 these rules describe two types of expenses expenses_incurred for activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a product and expenses attributable to the component material labor or other elements involved in the construction and installation of a product the former type of expense to the extent it can be traced to activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a product are deductible for purposes of sec_174 the latter type of expense to the extent it represents costs for the construction of a depreciable asset is not deductible see revrul_73_275 1973_1_cb_134 holding that costs attributable to the development and design of an automated manufacturing system as distinguished from costs attributable to the production of the manufacturing system are deductible under sec_174 therefore if the facts of this case suggest that the rough prototypes produced by taxpayer’s design department for use in taxpayer’s trade_or_business are property of a character subject_to the allowance for depreciation then the cost of the component materials to produce these prototypes are not deductible under sec_174 sec_1_174-2 generally provides that if expenditures_for research or experimentation are incurred in connection with the construction or manufacture of depreciable_property by another they are deductible under sec_174 only if made upon the taxpayer's order and at his risk the materials accompanying the incoming request for field_service_advice contain no information concerning taxpayer's contractual arrangement with the foreign manufacturer if it is determined that the prototypes are depreciable_property however then the contract s should be examined to determine which party bears the risk of loss tl-n-2406-00 assuming that some if not all of the costs incurred by taxpayer's design department do not include expenses attributable to property that is subject_to an allowance for depreciation then we must consider other bases for disallowance under sec_174 as noted above neither the code nor the regulations provide an explicit definition of the term research or experimental expenditures existing case law is likewise unhelpful and generally predates the amendments to the regulations at sec_1_174-2 see eg 41_tc_582 aff'd on other grounds 357_f2d_209 5th cir holding that the regulatory definition of research or experimental expenditures was reasonable and consistent with congress' intent to limit deductions to those expenditures of an investigative nature expended in developing the concept of a product kollsman instrument corp v commissioner tcmemo_1986_66 aff'd on other grounds 870_f2d_89 2d cir denying sec_174 treatment because the contracts in question did not require the taxpayer to invent develop the concept of or design any product agro science co v commissioner tcmemo_1989_687 aff'd but opinion withdrawn 927_f2d_213 5th cir finding that research requires an element of experimentation rather than simply a repetition of what has already been done crouch v commissioner tcmemo_1990_309 finding that the amounts expended by petitioner were paid to research write publish and promote an ordinary literary work and thus were not research costs in the experimental or laboratory sense 96_tc_903 examining for sec_44 research_credit purposes such terms as laboratory and experimental under sec_174 at best we are able to discern from this line of cases together with the statute and regulations that the term research or experimental encompasses the notion that scientific research_and_development includes an attempt to develop or improve a product or develop or improve upon a technique or procedure the amendments support the notion that scientific research is distinguishable from research of other types in that the amendments provide that expenditures represent research_and_development costs in the experimental or laboratory sense if the expenditures are for activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a pilot_model process formula invention technique patent or similar_property see sec_1_174-2 see also h_r rep no pincite s rep no pincite in delineating the scope of the term research or experimental the amendments clarify that uncertainty exists if the information available to the taxpayer does not establish the capability or method for developing or improving the product sec_1_174-2 however the term uncertainty must be limited to technological or scientific uncertainty in that a taxpayer must be uncertain as to whether it will be able to develop or improve its product in the scientific or laboratory sense put differently the taxpayer must be uncertain as to whether it tl-n-2406-00 will be able to achieve its product development objective through its research activities conversely uncertainty attributable to business or market concerns is not determinative of the existence of research_and_experimentation for purposes of sec_174 the sec_174 regulations provide several exclusions from the definition of research or experimental expenditures_for example the term does not include expenditures such as those for the ordinary testing or inspection of materials or products for quality control or those for efficiency surveys management studies consumer surveys advertising or promotions sec_1_174-2 significantly these exclusions are related to activities that generally occur after the research is completed in that the purpose of such activities is to evaluate and disseminate the results of the research for example once a product such as a shoe is developed the existence of this shoe must be promoted and advertised advertising in this respect is the publication or announcement to the public of the availability of a new or improved product the fact that these excluded activities tend to occur after the research is completed is further supported by the clarification in the amendments to the exclusion for quality control testing sec_1_174-2 provides that the exclusion for quality control testing does not apply to testing to determine whether the design of the product is appropriate if a taxpayer finds that the design of its product is inappropriate then the research is not completed and the taxpayer must resume its research activities in reviewing the materials accompanying the request for field_service_advice we note that a distinction appears to be drawn between the functional and nonfunctional aspects of the footwear product prior to the finalization of the amendments to the sec_174 regulations this distinction was relevant the sec_174 regulations proposed in provided six exclusions in addition to the exclusions contained in the regulations in relevant part the proposed_regulations excluded costs incurred in connection with activities not directed at the functional aspects of a product including expenses relating to style taste cosmetic or seasonal design factors see prop sec_1_174-2 the amendments while retaining the exclusions contained in the final regulations did not retain the six additional exclusions proposed in therefore expenditures_for any of these six activities qualify as research or experimental expenditures if they fall within the general definition of the term research or experimental expenditure and are not covered by one of the existing exclusions see explanation of provisions to the proposed_regulations fed reg in this case the fact that taxpayer’s activities are with respect to the development or improvement of any nonfunctional aspects of the footwear product is by itself not a supportable basis for disallowance under sec_174 rather the costs incurred must represent research_and_development costs in the experimental or tl-n-2406-00 laboratory sense and must be attributable to activities intended to eliminate uncertainty concerning the development of the product case development hazards and other considerations it is our understanding that the service’s position in this case is that the expenditures in question do not represent research_and_development costs in the experimental or laboratory sense this position appears to be based in large part upon the fact that the activities of the design department are not those typically associated with scientific research and moreover appear to be focused entirely upon developing a product that will appeal to a particular market segment the fact that members of the design department all of whom are talented artists and not engineers or doctors simply draw and redraw pictures of the various footwear products clearly implies that nonscientific activities are taking place and we agree that such costs on their face should not qualify under sec_174 unfortunately taxpayer’s failure to delineate the nature of the costs incurred by the design department prevents the service from distinguishing between expenses that may be deductible from those expenses that clearly are not deductible under the facts of this case it appears that some of taxpayer's costs attributable to the efforts of the design department to design a product or product line regardless of whether such efforts are with respect to the functional or nonfunctional aspects of the product may be allowed to the extent that taxpayer is uncertain as to whether it will be able to achieve its product development objective through its research activities it is important to remember however that the term research or experimental expenditures includes all such costs incident to the development or improvement of a product thus notwithstanding the absence of any regulatory distinction between the functional and nonfunctional aspects of a product we do not believe the service should allow a deduction for costs attributable to merely aesthetic alterations to a footwear product where such alterations i have only an incidental impact upon the development or improvement of such product and ii are intended only to reflect current consumer fads further we believe there is regulatory support for the disallowance of a portion of taxpayer's claimed costs as long as taxpayer can identify specifically all costs incurred by the design department for example taxpayer's expenses attributable to its inspection of the a prototype pairs of footwear for inherent design defects are not deductible if they are incurred to determine if the footwear conforms to the manufacturing parameters described to the foreign manufacturer in addition taxpayer's expenses attributable to the promotion and marketing of its footwear products are not deductible sec_174 expenses see sec_1_174-2 also costs attributable to the marketing of the prototypes must be excluded id further it is stated in the revenue agent’s memorandum accompanying the request for field_service_advice that the long term goals of tl-n-2406-00 taxpayer’s development department is to train and improve abilities of staff members if any claimed expenses are attributable to management studies and efficiency surveys and the like these also must be excluded from sec_174 consideration id finally as noted above costs attributable to the construction of the rough prototypes must be identified and excluded assuming such prototypes are property of a character subject_to the allowance for depreciation see sec_1_174-2 as you know the amendments to the regulations at sec_1_174-2 represent a clarification of the definition of research or experimental expenditures adopted in the final regulations to the extent the amendments do not contain the six exclusions that were contained in the proposed_regulations in relevant part the exclusion for activities not directed at the functional aspects of a product they could be considered a liberalization of the definition of research or experimental expenditures in view of the fact that many taxpayers claim both the sec_174 deduction and the sec_41 research_credit we are confident that certain costs that may be includable for sec_174 purposes will be disallowed under sec_41 eg costs attributable to style taste cosmetic or seasonal design factors under sec_41 it is important to bear in mind however that sec_174 is very specific about the sort of expense that does not qualify for this reason we hope that the taxpayer in this case can be prevailed upon to specify the nature of the costs for which it is claiming the deduction please call if you have any further questions by joseph h makurath senior technician reviewer branch passthroughs and special industries


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 conex-128612-06 uilc number info release date the honorable richard j durbin united_states senator ------------------------------ ---------------------- attention ---------------------- dear senator durbin i apologize for the delay in responding to your inquiry dated date on behalf of your constituent ---- --------------------- and the ---------------------------------------- ---- -------- ----------- asked for guidance on the proper tax treatment of payments to volunteer firefighters as reimbursements for expenses i hope the following general explanation of our regulations governing the treatment of amounts intended to reimburse expenses is helpful whether a payment intended to reimburse an expense constitutes income and wages is controlled by whether the employer pays the reimbursement under an accountable_plan sec_62 of the internal_revenue_code the code the accountable_plan rules apply equally to volunteers as they do to paid employees if the employer has the right to direct and control the volunteer on how he or she performs the volunteer services an employer can exclude payments made under an accountable_plan from an employee’s gross_income and not report them on the employee’s form_w-2 these payments are exempt from employment_taxes however if an employer makes payments under a nonaccountable_plan the employer must include them in the employee’s gross_income and report them as wages or other compensation on the employee’s form_w-2 these payments are subject_to employment_taxes sec_1_62-2 of the treasury_department regulations the law treats a reimbursement or other expense allowance arrangement as an accountable_plan if it meets the requirements of business connection substantiation and returning amounts in excess of substantiated expenses sec_62 of the code and sec_1_62-2 of the regulations an arrangement meets the business connection requirement if the employer pays advances allowances or reimbursements only for deductible business_expenses that the employee pays or incurs in connection with performing services for the employer if however an employer pays an employee regardless of whether the employee incurs or is reasonably expected to incur bona_fide business_expenses the arrangement does not satisfy the business connection requirement to meet the substantiation requirement an arrangement must require the employee to substantiate each business_expense to the payor within a reasonable period of time the employee must submit enough information to allow the employer to identify the specific nature of each expense and attribute the expense to the employer’s business activity generally the employee must submit an expense account or other written_statement to the employer showing the b usiness nature and amount of each of his or her expenses it is not enough for the employee to aggregate expenses into broad categories or report individual expenses using vague non-descriptive terms such as miscellaneous expenses we have optional simplified methods known as deemed substantiation for an employee to substantiate either the amount of his or her vehicle expenses when performing services for the employer revenue_procedure or the amount of his or her lodging and meal and incidental_expenses incurred on business travel away from home revenue_procedure we explain these optional substantiation methods in publication circular_e employer’s tax guide the relevant pages are enclosed the deemed substantiation methods still require the employee to substantiate the time purpose and number of actual miles driven or the time location and purpose of days traveled away from home to meet the return of excess requirement the employee must return to the employer within a reasonable period of time any amount the employer paid in excess of the employee’s substantiated or deemed substantiated expenses an employer may choose to reimburse employee_expenses however if the expense reimbursement plan does not satisfy the requirements of an accountable_plan the reimbursements are includible in income and are subject_to employment_tax again i hope this information is helpful if you have any questions please call me or --- ----------------- at ----- ------------- sincerely catherine e livingston assistant chief_counsel exempt_organizations employment_tax government entities tax exempt government entities department of the treasury - internal_revenue_service enclosure cc macro form rev


internal_revenue_service number release date index number -------------------------- ------------------- ------------------------------------------- ------------------------------- in re ----------------------- department of the treasury washington dc person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc intl - plr-168533-03 date date legend -------------------------- -------------------------- ------------------------- -------- ----------------------- taxpayer ------------------------------------------------------------------ entity a ------------------------------------------------------------------ country a individual a individual b cpa firm a cpa firm b date a date b date c date d date e dear ------------------- ---------------------- ---------------------- ---------------------- --------------------- --------------------- --------------------- -------------------------- in re plr-168533-03 this replies to letters dated date and date in which taxpayer requests an extension of time under sec_301_9100-3 to file the election agreement described in sec_1_1503-2 the g i agreement for the tax years ended on dates a b c d and e with respect to entity a’s dual consolidated losses and the annual certification statements described in sec_1_1503-2 g vi b certification for tax years ended on dates b c d and e with respect to entity a’s dual consolidated losses_incurred in each of the prior tax years ended on dates a b c and d the information submitted for consideration is substantially as set forth below the ruling contained in this letter is predicated upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as a part of the audit process taxpayer is a united_states_corporation and the common parent of a consolidated_group entity a is a country a subsidiary of taxpayer taxpayer states that pursuant to a previous election entity a is treated as a branch for united_states income_tax purposes entity a generated losses for taxpayer’s tax years ended on dates a b c d and e these losses were dual consolidated losses within the meaning of sec_1503 taxpayer used the losses generated by entity a to offset its income for those years taxpayer engaged cpa firm a to prepare taxpayer’s international tax filings for the tax years ended on dates a b c and d taxpayer engaged cpa firm b to prepare taxpayer’s international tax filings for the tax years ended on date e individual a is the executive vice president chief financial officer and treasurer of taxpayer individual b is the partner of cpa firm b responsible for coordinating the tax services that cpa firm b provides to taxpayer the affidavits of individual a and individual b and the facts submitted show that cpa firm a failed to file or advise taxpayer to file the g i agreement for the tax years ended on dates a b c and d and the g vi b certifications for the tax years ended on dates b c and d and that cpa firm b failed to file or advise taxpayer to file the g i agreement and the g vi b certifications for the tax_year ended on date e sec_301 -1 b provides that an election includes an application_for relief in respect of tax and defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement in re plr-168533-03 sec_301_9100-1 provides that the commissioner has discretion to grant a taxpayer a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government in the present situation the agreements described in sec_1_1503-2 are regulatory elections as defined in sec_301_9100-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer an extension of time provided that taxpayer satisfies the rules set forth in sec_301_9100-3 based on the facts and information submitted we conclude that taxpayer satisfies sec_301_9100-3 accordingly taxpayer is granted an extension of time of days from the date of this ruling letter to file the election agreement described in sec_1_1503-2 for the tax years ended on dates a b c d and e with respect to entity a’s dual consolidated losses and an extension of time of days from the date of this ruling letter to file the annual certification required under sec_1_1503-2 for tax years ended on dates b c d and e with respect to entity a’s dual consolidated losses_incurred in each of the tax years ended on date a b c and d the granting of an extension of time is not a determination that taxpayer is otherwise eligible to file the g i election agreements and the g vi b certifications sec_301_9100-1 a copy of this ruling letter should be associated with the g i agreements and the g vi b certifications this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent no ruling has been requested and none is expressed as to the application of any other section of the code or regulations to the facts presented in re plr-168533-03 pursuant to a power_of_attorney on file in this office a copy of this ruling letter is being furnished to taxpayer and its second representative sincerely associate chief_counsel international by s allen goldstein allen goldstein reviewer enclosure copy for purpose --- ------------------------------------------- ------------------------------ ------------ ------------------------------------ ---------------------------------- ----------------------- ------------------------------------- ----------------------------------- ---------------------------------- ---------------------------- ------------- -------------------------------- --------- --------------------------------- ---------------------- ------------------------------- ------------ --------------------------------


significant index nos department of thetreasury internal_revenue_service washington d c o72 tax_exempt_and_government_entities_division feb tcp ra tad re dear’ drop state this letter is in response to your request for a ruling conceming the plan which was submitted by your authorized representative on date as amended on date conceming the drop under the plan specifically you asked us to ‘tule on the following issues the drop is not a separate defined contribution pian the limitation for defined benefit plans under sec_415 of the i emal revenue code code applies to the drop rather than the limitation for defined contribution plans under sec_415 of the code and the annuity equivalent of the drop single sum plus the normal annuity benefit under the plan will be tested for purposes of sec_415 the drop complies with the definitely determinable requirement of sec_401 of the code the mere fact that participant contributions that are already being picked-up under the plan pursuant to sec_414 of the code will co unchanged during participation in the drop will not resutt in said contributions being ineligible for pick-up credits to a participant's drop account are not distributions from the plan and are not subject_to current income taxes or to the additional early distributions under sec_72 of the code tax on single sum distributions from a participant's drop account will be eligible for rollover under sec_402 c of the code the system is an instrumentality of political subdivisions of the state and was established under chapter of the code of the state state code the plan is a governmental_plan within the meaning of sec_414 of the code and a defined_benefit_plan under sec_414 of the code the system provides pension benefits to its participants who are police officers and firefighters employed by participation political subdivisions of the state there are approximately active participants in the system participation in the plan is required as a condition_of_employment cities whose police officers and or firefighters are appointed under the civil service ow of the state are generally required to participate in the system the plan received a favorable determination_letter regarding its qualified status under sec_401 of the cade ina letter dated date sec_411 of the state code describes the various definition of terms used in the plan in determining retirement benefits sec_411 defines actuarial equivalent as a benefit of equal value when computed upon the basis of mortality tables adopted by the plan and interest computed at the rate established by the system's actuary sec_411 defines average final compensation as the average earnabl compensation of the member during the three years_of_service the member earned the member's highest salary as a police officer or firefighter or if the member has less than three years_of_service the average eamable compensation of the member's orks period_of_service sec_411 defines city as any city participating in the statewide fire and police retirement_system sec_411 defines earnable compensation as the annual compensation which a member receives for service rendered as a police officer or firefighter in the course of employment with a participating city however the term shall not include amounts received for overtime compensation meal or travel_expenses uniform allowances fringe_benefits severance_pay or any amount received upon termination or retirement in payment for accumulated sick leave or vacation contributions made by a member from the member’s eamable compensation to a plan of deferred_compensation shall be included in this term sec_411 defines firefighter’ as only the members of a fire department who have passed a regular mental and physical civil service examination for firefighters and who shall have been duly appointed to such a position we are accepting the taxpayer's representation that it is a governmental_plan within the meaning of sec_414 of the code we have neither analyzed this issue nor are we ruling on this issue ha ited sec_411 defines member as a member of the system as defined by sec_411 of the state code sec_411 defines membership service as service as a police officer of firefighter rendered for a city which is credited for service pursuant to sec_411 of the state code sec_411 defines nension as the annual payments for life derived oe appropriations provided by the participating cities and the state and from contributions of the members which are deposited in the system all pensions shall be paid in equal monthly installments sec_411 defines police officer’ as only members of a police departm nt who have passed a regular mental and physical civil service examination and who been duly appointed to such positions shall have sec_411 defines retirement allowance as the pension granted to a member upon retirement sec_411 of the state code states that all persons who become police officers or firefighters after the date the city is required to come under the retirement_system shall become members of the plan as a condition_of_employment sec_411 of the state code states that service of fewer than six months ofa year is not creditable as service service of six months or more of a year is equivalent to one year_of_service sec_411 of the state code describes benefits under the plan section states that any member in service may retire upon written application to the system setting forth a date of retirement not less than thirty days but not more than ninety days from the date of the application however the member must have attained age fifty-five and have served twenty-two years or more upon the selected date of retirement sec_411 a states that the service retirement allowance for a member who terminates service other than by death or disability prior to date shall consist of a pension which equals fifty percent of the member's average final compensation sec_411 b states that the service retirement allowance for a member who terminates service other than by death or disability on or after date but prior to date shall consist of a pension which equals fifty-four percent of the member's average final compensation sec_411 c states that commencing date for members who terminate service other than by death or disability on or after that date but prior to date the system shall increase the percentage multiplier of each member's average final es seh compensation by an additional two percent each july until reaching sixty percent of the member's average final compensation the applicable_percentage multiplier shall be the rate in effect on the date of the member's termination from service sec_411 d states that upon retirement from service on or after date a member shall receive a service retirement allowance which will consist of a perision which equals sixty-six percent of the member's average final compensation sec_411 e sets forth an additional benefit for members with more thar service years_of_service if a member has completed more than years of creditable the service retirement allowance shall consist of a pension which equals the amounts provided in sec_411 a b c or d plus an additional percentage set forth below for amember who terminates service other than by death or disability onor after date but before date and who does not withdraw the members contributions upon the member's retirement there shall be added three-tenths percent of the member's average final compensation foreach year_of_service over twenty-two years excluding years_of_service after the member's fifty-fifth birthday but not more than eight years_of_service foramember who terminates service other than by death or disability on or after date but before date and who does not withdraw the members contributions upon the member's retirement there shall be for added six-tenths percent of the member's average final compensation after each year_of_service over twenty-two years excluding years_of_service the member's fifty-fifth birthday but not more than eight years_of_service for amember who terminates service other than by death or disability on or after date but before date and who does not wandraw the members contributions upon the member's retirement there shall be added six-tenths percent of the member's average final compensation_for each year_of_service over twenty-two years but not more than eight years_of_service fora member who terminates service other than by death or disabity on or after date but before date and who does not withdraw the members contributions upon the member's retirement there shall be added one and one-half percent of the member's average final compensation_for each year_of_service over twenty-two years but not more than eight service years of for amember who terminates service other than by death or disability on or after date and who does not withdraw the members contributions upon the member's retirement there shall be added two percent of the member's average final compensation_for each year_of_service over twenty- two years but not more than eight years_of_service sec_411 provides for an annual readjustment similar to a cost-of-living _ increase to the pension sec_411 6a provides optional forms of benefit under the plan sec_411 6b of the state code provides for the rollover of a member's accrued_benefit to an eligible_retirement_plan the state legislature amended chapter of the state code in to add the drop 6c of as a distribution option under the system the drop is codified as sec_41 the state code the legislature conditioned implementation of the drop on the receipt of favorable ruling from the service sec_411 6c a defines applicable_percentage as the percentage not greater than one hundred percentage points equal to fifty-two percentage points plus two percentage points for each month for the period between the eligible member's plan eligibility month and the month the eligible member commences membership in the drop sec_411 6c b defines drop benefit as an amount credited to the participant's multiplied account each applicable_month equal to the member's applicable_percentage by the member's participant retirement amount sec_411 6c c defines eligible member’ as a member who has attained fifty-five ears of age with at least twenty-two years of membership service sec_411 6c d defines participant account’ as the administrative record maintained by the system reflecting the participant's accumulated drop benefit sec_411 6c e defines participant retirement amount as the amount equal to the monthly retirement allowance the eligible member would have received under gection of the state code if the member retired on the date the eligible member commenced participation in the drop based on eamings through the previous full quarter of earnable compensation earned by the member sec_411 6c g defines plan eligibility month as the first full calendar month in which the participant is an eligible member sec_411 6c a states that an eligible member may elect to participate in the drop a decision by an eligible member to participate in the drop is irrevocable upon commencing membership in the drop the member shall remain an active member in the system and shall have credited to a participant account on behalf of the member the drop benefit for each month the member participates in the dr p the amounts credited will be invested by the system in risk-free assets of a short-term nature and interest and earnings shall not be credited to the member's participant account but remain in the system the annual readjustment to pensions under sec_411 of the state code shall not apply to the participant's drop benefit or to amounts credited to the member’ participant account sec_411 6c b states that upon termination of an eligible member's participation in the drop the eligible member shall be deemed to be retired under the system as of that date for purposes of the system and shall begin receiving a retirement allowance equal to the member's participant retirement amount or such optional rotrement benefits based upon that amount pursuant to sec_411 6a of the state code in addition the eligible member shall receive the moneys credited to the member's participant account while participating in the drop the eligible member shall select whether to receive the amount in the member's participant account in the form of a single sum distribution or as a rollover to an eligible_retirement_plan as defined h sec_411 6b of the state code sec_411 6c c states that if an eligible member terminates participation in the drop prior to the date selected by the member upon commencing membership in the drop ad the termination is not due to the death or disability of the member then the system shall assess a twenty-five percent penalty on the amount credited to th member's participant account prior to distributing the amount to the member the penalty amount shall be transferred to and remain with the system the administrative rules implementing this section provided that an amount equal to seventy-five percent of the member's drop benefit shall accrue to the benefit of the member for each month of participation in the drop and that an amount equal to twenty-five percent of t member’s accumulated drop benefit shall accrue to the benefit of the member upon the occurrence of any of the following events termination of participation inthe drop on the selected plan termination_date termination of participation prior to the selected drop termination_date as the result of entitlement to a disability benefit under either sec_411 or sec_411 of the state code or death prior'to the selected drop termination_date le sec_411 6c provides that to participate in the drop the eligible member must make written application to the system the application shall include the following a the month the eligible member intends to commence participation in the drop b the eligible member's selection of a drop termination_date the drop termination_date shall be either three four or five years after the date the eligible member commences membership in the drop however for the two-year period beginning with the first of the month following the implementation date of the drop an eligible member between sixty-two and sixty-four years of age may also select a plan termination_date that is one or two years after the date the eligible member commences participation in the drop ths bobst sec_411 6c provides that the members’ contribution rate shall be increased as necessary if the drop has been determined by the system's actuary to increase the actuarial cost to the system sec_411 6c provides that the drop will not be implemented until the system has received a favorable ruling from the service sec_411 of the state code describes the financing of the plan sec_411 g provides for mandatory member contributions to the plan sec_411 f and h specify the percentages of these mandatory_contributions sec_411 i provides that beginning date for federal_income_tax purposes and beginning date for state_income_tax purposes member contributions to the plan required under sec_411 f or h which are picked up by the city shall be considered employer contributions for federal and state income’ tax purposes and each city shall pick up the member contributions to be made under sec_411 f or h by its employees each city shall pick up these contributions by reducing the salary of each of its covered employees by the amount which eac employee is required to contribute under sec_411 f or h and shail pay th amount picked up in lieu of the member contributions to the board_of trustees sec_411 i provides that member contributions picked up by each city under sec_411 shall be treated as employer contributions for federal and state_income_tax purposes only and for all other purposes shall be treated as employee contributions and deemed part of the employee's earnable compensation or salary sec_72 of the code provides that gross_income includes any amounts received as ‘an annuity under an annuity endowment or life_insurance_contract sec_72 of the code imposes a percent additional tax on early distributions from qualified_retirement_plans sec_401 of the code provides the requirements for a qualified_pension plan sec_401 of the code provides that a defined benefit pension_plan shall not be treated as providing definitely determinable benefits unless whenever the amount of any benefit is to be determined on the basis of actuarial assumptions such assumptions are specified in the plan in a way which precludes employer discretion sec_401 of the code provides that a_trust shall constitute a sec_401 qualified_trust only if the plan of which such trust is a part provides that if the distributee of any eligible_rollover_distribution i elects to have such distribution paid directly to an eligible_retirement_plan and ii specifies such eligible_retirement_plan to which such distribution is to be paid in such form and at such time as the plan_administrator may ted pis w prescribe such distribution shall be in the form of a direct trustee-to-trustee transfer to the eligible_retirement_plan so specified sec_402 of the code provides that any amount actually distributed to a distributee by any employees’ trust described in sec_401 which is exempt from tax under sec_501 shall be taxable to the distributee in the taxable_year in which distributed under sec_72 related to annuities sec_402 c of the code provides that the term eligible_rollover_distribution means any distribution to an employee of all or any portion of the balance_to_the_credit - of the employee in a qualified_trust except the following distributions a any distribution which is one of a series of substantially_equal_periodic_payments not less frequently than annually made i for the life or life expectancy of the employee or the joint lives life expectancies of the employee and the employee's designated_beneficiary or joint or ii for a period of years or more b any distribution to the extent the distribution is required under sec_401 and c any distribution which is made upon hardship of an employee sec_414 of the code provides in part that the term governmental_plan means a plan established and maintained for its employees by a state or political_subdivision thereof esa an in that case the contributions so sec_414 of the code provides in general that amounts contributed to a plan qualified under sec_401 shall not be treated as having been made by the employer if they are designated as employee contributions sec_414 provides an exception to sec_414 in the case of any plan established by the government of a state or political_subdivision thereof where the contributions or eplyeas employing unit are picked up by the employing unit picked up shall be treated as employer contributions sec_414 of the code provides that the term defined_benefit_plan is any plan that is not a defined_contribution_plan sec_414 of the code provides that the term defined_contribution_plan means a plan which provides for an individual_account for each participant and for benefits based solely on the amount contributed to the participant's account and any income expenses gains and losses and any forfeitures of accounts of other participants which may be allocated to such participant's account sec_414 provides that a defined_benefit_plan which provides a benefit derived from employer contributions which is based partly on the balance of the separate_account of a participant shall _ for purposes of sec_410 relating to minimum_participation_standards be treated as a defined contribution pian x cul for purposes of sec_72 relating to treatment of employee contributions as separate contract a a relating to minimum vesting standards relating to limitations on benefits and - contributions under qualified_plans and m relating to nondiscrimination tests for matching requirements and employee contributions be treated as consisting of a defined contribution the extent benefits are based on the separate_account of a participant and benefits as a defined_benefit_plan with respect to the remaining portion of under the plan and to for purposes of sec_4975 relating to tax on prohibited_transactions be treated as a defined_benefit_plan sec_415 of the code provides for certain limitations on contributions and b nefits which a under qualified_plans sec_415 of the code limits the annual_additions to participant may be entitled under a defined_contribution_plan during any limitation_year sec_415 of the code limits the annual_benefit to which a participant may be entitled under a defined benefit pension_plan during any limitation_year sectio the b provides that in general benefits with respect to a participant exce limitation if such annual_benefit is greater than the lesser_of a dollar_figure or b percent of the participant’s average compensation_for the participant's high years hi botelt sec_415 of the code provides that in general the term annual_benefit for purposes of sec_415 means a benefit payable annually as a straight life_annuity with no ancillary_benefits under a plan to which employees do not contribute and under which no rollover_contributions are made sec_415 of the code provides that if the benefit under the plan is payable in any form other than the form described in sec_415 or if the employees contribute to the plan or make rollover_contributions the determinations as to whether the limitation described in sec_415 has been satisfied shall be made in accordance with regulations prescribed by the secretary_of_the_treasury by adjusting such benefit so that it is equivalent to the benefit described in sec_41 b a sec_415 of the code provides that for purposes of paragraph the term annual_addition means the sum for any year of a employer contributions b the employee contributions and c forfeitures for the purposes of this paragraph employee contributions under subparagraph b are determined without regard rollover_contributions as defined in sec_402 sec_403 sec_403 sec_408 and sec_415 provides that in general contributions and other additions with respect to a participant exceed the limitation of this subsection if when expressed as an annual_addition within the meaning of paragraph to the participant's eccount such annual_addition is greater than the lesser_of a dollar_figure or b percent ofthe participant's_compensation to any e without regard to employee contributions to a simplified_employee_pension which are excludable from gross_income under sec_408 subparagraph b of paragraph shall not apply to any contribution for medical benefits within the meaning of sec_419a after separation_from_service which is treated as an annual_addition sec_1_401-1 of the regulations provides that a pension_plan within m meaning of code sec_401 is a plan established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to its employees over a period of years usually for life after retirement retirement benefits are generally measured by and based on such factors as years_of_service and compensation received by employees a plan designed to provide benefits for employees or their beneficiaries to be paid upon retirement or over a period of years pension after retirement will for the purposes of code sec_401 be considered a plan if the employer contributions under the plan can be determined actuarially on the basis of definitely determinable benefits sec_1 a -1 q a-1 of the regulations provides that for purposes of sec_401 of the code eligible_rollover_distribution has the meaning set forth in sec_402 of the code and sec_1_402_c_-2 of the regulations sec_1_402_c_-2 q a-3 a of the regulations provides that unless specifically excluded an eligible_rollover_distribution means any distribution to an employee of all or any portion of the balance_to_the_credit of the employee in a qualified_plan sec_1_402_c_-2 q a-3 b of the regulations provides that an eligible_rollover_distribution does not include the following any distribution that is one of a series of substantially equal periodic p 4yments eriods-- made not less frequently than annually over any one of the following i the life of the employee or the joint lives of the employee and the employee's designated_beneficiary ii the life expectancy of the employee or the joint life and last survivor expectancy of the employee and the employee's designated_beneficiary or iii a specified period of ten years or more any distribution to the extent the distribution is a required_minimum_distribution under sec_402 of the code or the portion of any distribution that is not includible in gross_income sec_1_402_c_-2 q a-4 of the regulations provides that an eligible rollove distribution does not include the following elective_deferrals as defined in sec_402 that pursuant to sec_1 b iv are returned as a result of the application of the sec_415 limitations together with the income allocable to these corrective distributions rhe et corrective distributions of excess_deferrals as described in sec_1_402_g_-1 together with the income allocable to these corrective distributions corrective distributions of excess_contributions under a qualified_cash_or_deferred_arrangement described in sec_1_401_k_-2 and excess_aggregate_contributions described in sec_1_401_m_-2 together with the income allocable to these distributions loans that are treated as deemed distributions pursuant to sec_72 dividends_paid on employer_securities as described in sec_404 the costs of life_insurance coverage p s costs similar items designated by the commissioner in revenue rulings notices and other guidance published in the internal_revenue_bulletin - sec_1_402_c_-2 q a-6 a of the regulations provides that a payment is treated as independent of the payments in a series of substantially equal payments and thus not part of the series if the payment is substantially larger or smaller than the other_payments in the series an independent payment is an eligible_rollover_distribution if it is not otherwise excepted from the definition of eligible_rollover_distribution this is the case regardless of whether the payment is made before with or after payments series for example if an employee elects a single payment of half of the account balance with the remainder of the account balance paid over the life expectancy of the distributee the single payment is treated as independent of the payments in the series and is an eligible_rollover_distribution unless otherwise excepted in the sec_1 a of the regulations provides that the annual_benefit to which a participant is entitled at any time under a defined_benefit_plan may not during the te limitation_year exceed the dollar and compensation limitations of sec_41 the code sec_1 c provides the rules conceming the adjustment of limitations of sec_415 of the code where the form of benefit is other than a straight fife annuity of the revrul_69_427 1969_2_cb_87 provides that benefits are not definitely determinable if such benefits are contingent upon the amount of actual employer contributions to the plan revrul_72_97 1972_1_cb_106 provides that pre-retirement death_benefits are not definitely determinable if such benefits are based on the amount of pension benefits funded at each participant's death revrul_74_385 1974_2_cb_130 provides that in the case of a defined_benefit_plan the definitely determinable requirement of sec_1 bx i of the regulations is satisfied where the benefits for each participant can be computed in accordance with an express formula contained in the plan that is not subject_to the discretion of the employer revrul_79_90 1979_1_cb_155 provides that whenever the amount of a benefit ina defined_benefit_plan is to be determined by some procedure such as actuarial equivalent actuarial reserve or actuarial reduction which require the use of actuarial assumptions interest mortality etc the assumptions to be used must be specified within the plan in a manner which preciudes employer discretion for the purposes of that revenue_ruling employer discretion includes discretion of the employer plan_administrator fiduciary actuary etc revrul_2006_43 2006_35_irb_329 provides what actions are required in ofder fora state or political_subdivision thereof or an agency_or_instrumentality of any of the foregoing to pick up employee contributions to a plan qualified under sec_401 of the code so that the contributions are treated as employer contributions pursuant to sec_414 under the authority of sec_7805 of the code the service will not treat any plan that on or before date includes designated employee contributions that were intended to be picked up as employer contributions pursuant to sec_414 as failing to meet the requirements of such section prior to date solely on account of the failure to satisfy the requirement that the pick-up be pursuant to a formal action by a person duly authorized to take such action with respect to the employing unit that is evidenced by contemporaneous writing but only if the following conditions are satisfied the employing unit has taken contemporaneous action evidencing an intent to establish a pick-up eg pravided information to employees relating to the establishment of the pick-up and has operated the plan accordingly and the employing unit takes formal action in writing prior to date with respect to future contributions to specify that the contributions although designated as employee contributions are being paid ay the employer for this purpose the employing unit must take formal action to provide that the contributions on behalf of a specific class of employees of the employing u although designated as employee contributions will be paid_by the employing lieu of employee contributions a person duly authorized to take such action with respect to the employing unit must take such action the action must apply only prospectively and be evidenced by a contemporaneous written document e g minutes of a meeting a resolution or an ordinance meet the requirements set forth above in paragraph of law and analysis in the revenue_ruling it unit in issue under the terms of the plan a police officer or firefighter who has reached th and ha sec_22 years of creditable service is eligible for a retirement allowance su police officer or firefighter is also eligible to participate in the drop at the same the eligible member elects to participate in the drop the member remains an active member in the system however his retirement allowance is then frozen as of the date of participation in the drop and this frozen retirement allowance becomes the participant's retirement amount after participation in the drop commences a drop benefit equal to the member's applicable_percentage multiplied by the member's participant retirement amount shall have credited to a participant account on behalf of time if age of the member the drop benefit for each month the member participates in the the amounts credited will be invested by the system in risk-free assets of a short-term nature and interest and earnings on such amounts shall not be credited to the member's participant account but remain in the system the annual readjustment to pensions under sec_411 of the state code shall not apply to the participant's drop benefit or to amounts credited to the member’ participant account drop sec_414 of the code provides that the term defined_contribution_plan means a plan which provides for an individual_account for each participant and for benefits based solely on the amount contributed to the participant's account and any income _ expenses gains and losses and any forfeitures of accounts of other panicipanis which may be allocated to such participant's account where the amounts placed in account for a participant do not receive their share of the actual earnings and losses of the plan the account is not an individual_account within the meaning of section i the drop benefit is based solely on the amounts contributed to the participant's drop account which is not adjusted for income expenses and gains and losses of the invested_assets accordingly the plan after the drop amendment is a not a separate defined_contribution_plan the plan is also not a defined_benefit_plan which provides a benefit derived from employer contributions which is based partly on the balance of the separate_account of a participant as described in sec_414 of the code an _ issue under sec_411 6c b of the state code upon termination of an eligible nember’s participation in the drop the eligible member shall be deemed to be retired under the system as of that date for purposes of the system and shall begin receiving a retirement allowance equal to the member's participant retirement amount or such of the optional retirement benefits based upon that amount pursuant to sec_411 6a state code in addition the eligible member shall receive the moneys credited to the member's participant account while participating in the drop the eligible member shall select whether to receive the amount in the member's participant account in the form of a single sum distribution or as a rollover to an eligible_retirement_plan as defined in sec_411 6b of the state code hence the drop benefit under the plan allows a participant to elect an optional form of payment benefit which provides for a retirement allowance from the plan and a separat from the drop since the plan after the drop amendment is a defined_benefit_plan that does not provide any benefits based partly on the balance of a separate_account for applies a participant the limitation on annual benefits under sec_41 b of the code to the entire benefit under the plan furthermore for purposes of testing whether the member's benefit exceeds the limitation under sec_415 of the code the annuity equivalent of the drop single sum plus the normal annuity benefit under the plan will be tested for purposes of sec_415 issue once a member under the plan has attained age and years_of_service the member is eligible to elect to participate in the drop under sec_41 6c a of the state code if a member elects to participate in the drop the member receives a participant retirement amount and a drop payment the calculation of the drop payment is described above the calculation of the drop payment does not include interest and the drop payment is never placed in a separate_account sec_411 6c of the state code clearly defines the calculation of the eh an retirement allowance and drop payment for each member in accordance with express formula that is not subject_to employer discretion the benefit under the drop is not contingent upon the amount of actual employer contributions to the plan the benefit under the drop is also not based on the amount of pension benefits funded at each member's retirement date furthermore sec_411 defines the actuarial assumptions used for calculating actuarial equivalent benefits under the plan in accordance with sec_401 of the code and revrul_79_90 because the benefit under the drop is based on a member's service and compensation and upon contributions paid_by the member while he participated in the plan is plan is not contingent upon the amount of actual employer contributions to th not based on the amount of pension benefits funded at each member's retirement date and the employer and employee contributions under the plan can be determined actuarially by projecting service and compensation to an assumed retirement age the plan with the drop meets the definitely determinable requirement for pension plans under sec_1_401-1 of the income_tax regulations issue sec_411 i of the state code provides that beginning date for federal_income_tax purposes and beginning date for state_income_tax purposes member contributions to the plan required under sec_411 f on h which are picked up by the city shall be considered employer contributions for federal and state_income_tax purposes and each city shall pick up the member contributions to be made under sec_411 f or h by its employees sec_411 i provides that member contributions picked up by each city ee sec_411 shall be treated as employer contributions for federal and state_income_tax purposes only and for all other purposes shall be treated as employee co ributions and deemed part of the employee’s earnable compensation or salary revrul_2006_43 2006_35_irb_329 provides what actions are required in order for a state or political_subdivision thereof or an agency_or_instrumentality of any of the foregoing to pick up employee contributions to a plan qualified under sec_401 of the code so that the contributions are treated as employer contributions pursuant to sec_414 generally any plan that includes designated employee contributions his poked that were intended to be picked up as employer contributions pursuant to sec_414 will meet the requirements of such section if the following conditions are satisfied the employing unit has taken contemporaneous action evidencing an intent to establish a pick-up eg provided information to employees relating to the establishment of the pick-up and has operated the pian accordingly and the employing unit takes formal action in writing with respect to future contributions to specify that the contributions although designated as employee contributions are being paid_by the employer the plan meets the conditions of revrul_2006_43 because the state code clearly spells out an intent to establish a pick up and the plan has been operated accordingly and the provision does not permit a participating employee to have a cash or deferred election with regard to the designated employee contributions after the drop is adopted participant contributions for participants in the drop will continue at the same rates as spelled out in sec_411 of the state code and these provisions apply equally to participants who participate in the drop and those that do not furthermore drop participant contributions will be credited to system agsets and not participant accounts hence the mere fact that participant contributions that are le will already being picked-up under the plan pursuant to sec_41 h of the continue unchanged during participation in the drop will not result in said con ributions being ineligible for pick-up issue under sec_411 6c b the drop benefit is credited to the participant's account during the participation period such amounts are held in the system and remain assets of the system no part of the drop benefit is distributed to a member until the member terminates participation in the drop accordingly the crediting of th drop the benefit to the participant’s account is not a plan distribution to the member from plan hence the drop benefit is neither subject_to tax under sec_402 of the code nor the percent additional tax under sec_72 of the code prior to ithe time when an actual distribution takes place issue from sec_411 6b of the state code provides for the eligible rollover of distributions the plan to another eligible_retirement_plan in accordance with sec_401 of the code as already discussed above the benefit under the drop allows the member to elect an optional form of benefit which provides for a participant retirement amount and drop payment under sec_411 6c b upon termination of participation in the drop the distribution of the drop payment must be either in the form of a single sum distribution or as a rollover to an eligible_retirement_plan as described in sec_411 6b 2uv721022 the drop payment is independent of the participant retirement amount and is substantially larger than the monthly participant retirement amount hence in accordance with sec_1_402_c_-2 q a-6 a of the regulations the drop p yment is treated as independent of the monthly participant retirement amount payments which monthly are a series of substantially equal payments and thus not part of the series of participant retirement amount payments because the drop payment is substantially larger than the monthly participant retirement amount payments since the drop payment is an independent payment it is in accordance with this same section of the regulations an eligible_rollover_distribution if it is not otherwise excepted from the definition of eligible_rollover_distribution this is the case regardless of whether the drop payment is made before with or after the monthly annuity payments commence furthermore the drop payment is not a distribution required under sec_401 of the code made upon the participant's hardship or otherwise excluded from the term eligible rollover distributions by sec_402 of the code or sec_4 c -2 of the regulations hence because the drop payment is a distribution to the all or any portion of the balance_to_the_credit of the member in the plan the drop payment is an eligible_rollover_distribution within the meaning of sec_402 of the code and sec_1_402_c_-2 of the regulations likewise in accordance sec_1_401_a_31_-1 q a-1 of the regulations the drop payment is an eligible_rollover_distribution for purposes of sec_401 of the code member of with based on the foregoing analysis of the issues presented in your ruling_request the following ruling is issued the drop is not a separate defined_contribution_plan to the limitation for defined benefit plans under sec_415 of code be the plan with the drop the plan with the drop satisfies the defined_benefit_plan limitations under sec_415 of the code as long as the provisions continue to be interpreted and administered as described above the plan with the drop meets the definitely determinable requirement for pension plans under sec_1_401-1 of the income_tax regulations as the plan is currently written the mere fact that participant contributions that are already being picked-up under the plan pursuant to sec_414 of the code will continued unchanged during participation in the drop will not result in said contributions being ineligible for pick-up credits to a participant's drop account are not distributions from the plan and are not subject_to current income taxes or to the additional tax on early distributions under sec_72 of the code 20v72 single sum distributions from a participant’s drop account will be eligible for rollover under sec_401 of the code this ruling is directed only to the taxpayer that requested it sec_61 k of the code provides that it may not be used or cited by others as precedent we have sent a copy of this letter to your authorized representative pursuant tp a power of attomey on file in this office if you require further assistance in this matter please contact sincerely yours maller james e holland jr manager employee pians technical


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 3-plr-145509-01 date date legend parent subsidiary foreign_country date date dear this letter responds to a letter dated date and subsequent correspondence requesting a ruling under sec_301_9100-3 of the procedure and administration regulations to file an election for subsidiary to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted parent is the only member of subsidiary subsidiary was formed in foreign_country on date subsidiary is considered to be an entity under the laws of foreign_country at all times after the formation of subsidiary parent intended subsidiary to be treated as a disregarded_entity for federal tax purposes on or about date a date more than days after subsidiary was formed during the preparation of the tax returns for parent it was discovered that a form_8832 entity classification election inadvertently had not been filed law and application sec_301_7701-2 generally provides that a business_entity is any entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code sec_301_7701-3 further provides that a business_entity with only one owner is classified as a corporation or is disregarded if it is disregarded then the entity’s plr-145509-01 activities are treated in the same manner as a sole_proprietorship branch or division of the owner sec_301_7701-3 provides that so long as a business_entity is not classified as a corporation under sec_301_7701-2 or it may elect its classification for federal tax purposes sec_301_7701-3 provides that unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_9100-1 permits the commissioner to grant a reasonable extension of time for making certain elections sec_301_9100-3 provides that an extension of time to file certain elections will be granted if the taxpayer is able to establish that it acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the facts and representations submitted we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied accordingly subsidiary is granted an extension of time of days from the date of this letter to file form_8832 with the appropriate service_center with an effective date of date a copy of this letter should be attached to the election and is enclosed for this purpose except for the specific ruling above no opinion is expressed or implied concerning the federal_income_tax consequences of the facts of this case under any other provision of the internal_revenue_code this ruling is directed only to the taxpayer requesting it 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 the requested tax representative sincerely paul f kugler associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


department of the treasury internal_revenue_service u y washington d c coa exempt and division aug uniform issue list 45e t-ep rat legend custodian a bank b ira c tra d custodian e amount f amount g dear the following facts and representations have been submitted under penalty of perjury in this letter is in response to a request for a letter_ruling dated date in which you have applied for a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code code support of the ruling requested you maintained ira c an individual_retirement_account ira under code sec_408 with custodian a during indicates they sent you notification of the need to rollover the proceeds from ira c they also indicate that since they received no instructions from you they liquidated ira c and sent you a check dated march check or any correspondence from bank b r for the you state that you never received this in j anuary bank b resigned as trustee of ira c bank b taxable_year showing a distribution of amount f from ira c you received a form you immediately contacted bank b who confirmed that the distribution check was never cashed on june anew check totaling amount g was issued this was equal to amount f less federal_income_tax withholding of ten percent on june rolled over amount f into ira d sponsored by custodian e you based on the above facts and representations you request that the internal_revenue_service waive the 60-day rollover requirement with respect to the distribution of amount f on march equity or good conscience because the failure to waive such requirement would be against code sec_408 provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 - cotte sec_408 defines and provides the rules applicable to ira_rollovers code sec_408 provides that sec_408 does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if - i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 code sec_408 provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time 20u447042 during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 d from an ira which was not includible in gross_income because of the application of sec_408 code sec_408 provides a similar 60-day rollover period for partial rollovers code sec_408 provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 revproc_2003_16 2003_4_irb_359 provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to code sec_408 d the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented indicates that ira c was liquidated by bank b and a distribution check was issued dated march a replacement check was issued dated june could not reasonably satisfy the requirement that amount f be deposited in an ira within days of its distribution by bank b on march you never received this check and under these circumstances you therefore pursuant to code sec_408 the service hereby waives the 60-day rollover requirement with respect to the distribution of amount f from your ira account with custodian a provided all other requirements of sec_408 except the day requirement are met the deposit of amount f into ira d on date will be considered a rollover_contribution within the meaning of sec_408 no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it code sec_6110 provides that it may not be used or cited as precedent 2uu in accordance with the provisions of a power_of_attorney on file with this office we are sending a copy of this letter_ruling to your authorized representative if you wish to inquire about this ruling please contact at 9e t ep ra t1 ld sincerely yours cplten ff hiateins manager employee_plans technical group _ enclosures deleted copy of this letter notice of intention to disclose notice cc