significant index no dollar_figure department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division sep set aat hm in re plan taxpayer section c of the plan dear this is in response to the request for rulings with regard to the limitations on benefits under sec_415 of the internal_revenue_code code the plan is a defined_benefit_plan and is intended to be a qualified_plan under sec_401 of the code the plan is a governmental_plan within the meaning of sec_414 of the code benefits under the plan are determined based on service and compensation the plan also provides under section c of the plan for cost_of_living_adjustments for all retired participants of three percent compounded annually commencing on the first day of the january following the third anniversary of the retirement of the participant you have requested the following rulings that the maximum benefit payable under sec_415 of the code payable at retirement is not reduced to reflect the value of the cost of living adjustment provided for under section c of the plan and that a retired participant may automatically receive an enhanced benefit reflecting the cost of living adjustment provided for under section c of the plan as long as the benefit for the calendar_year does not exceed the maximum benefit for the calendar_year sec_415 computed without regard to the cost of living adjustment or in the alternative that the maximum benefit payable under sec_415 of the code payable at retirement is not reduced to reflect the value of the cost of living adjustment provided for under section c of the plan until the cost of living adjustment provided for under section c of the plan begins to take effect on the january following the third anniversary of the participant's retirement date or in the alternative that the maximum benefit payable under sec_415 of the code payable at retirement is reduced to reflect the value of the cost of living adjustment provided for under section c of the plan even though the adjustment does not begin until the january following the third anniversary of the participant's retirement date that the plan is not required to recoup payments if any that have been made to a retired participant prior to this ruling_request in excess of the amount payable under sec_415 of the code by suspending or reducing the retirement benefit paid to the participant in the future law sec_401 of the code provides that a_trust shall not constitute a qualified_trust under that section if the plan of which such trust is a part provides for benefits or contributions which exceed the limitations of sec_415 sec_415 of the code provides that the benefits with respect to a participant exceed the limitations of that subsection if wnen expressed as an annual_benefit within the meaning of paragraph such annual_benefit is greater than the lesser_of a dollar_figure or b percent of the participant's average compensation_for his high years sec_415 of the code provides in general that for purposes of paragraph the term annual_benefit means a benefit payable annually in the form of a straight life_annuity with no ancillary_benefits under a plan in which employees do not contribute and under which no rollover_contributions as defined in sec_402 sec_403 sec_403 sec_408 and sec_457 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 subparagraph a or if employees contribute to the plan or make rollovers contributions as defined in sec_402 sec_403 sec_403 sec_408 and sec_457 the determinations as to whether the limitation described in paragraph has been satisfied shall be made in accordance with regulations prescribed by the secretary by adjusting such benefit so that it is equivalent to the benefit described in subparagraph a any ancillary benefit which is not directly related to retirement income benefits shall not be taken into account and that portion of any joint_and_survivor_annuity which constitutes a qualified_joint_and_survivor_annuity as defined in sec_417 shall not be taken into account for purposes of that subparagraph b sec_415 of the code provides that the secretary shall adjust annually a the dollar_figure amount in subsection b a b in the case of a participant who separated from service the amount taken into account under subsection b b and c the dollar_figure amount in subsection c a for increases in the cost-of-living in accordance with regulations prescribed by the secretary sec_1 c i of the regulations provides that where a defined_benefit_plan provides a retirement benefit in any form other than a straight life_annuity the plan benefit is adjusted to a straight life_annuity beginning at the same age which is the actuarial equivalent of such benefit in accordance with rules determined by the commissioner sec_1 c iii of the regulations provides that for purposes of the adjustment described in sec_1 c of the regulations the value of benefits provided by the plan which reflect post-retirement cost of living increases to the extent that such increases are in accordance with sec_415 and sec_1 are not taken into account sec_1 a of the regulations which were issued in and have not yet been modified for subsequent changes in law provides that under sec_415 the dollar limitation under sec_415 applicable to defined benefit plans for limitation years to which sec_415 applies is adjusted annually to take into account increases in the cost of living the adjustment of the dollar limitation is made by multiplying an annual adjustment factor by dollar_figure the statutory dollar limit in for purposes of that paragraph the annual before adjustment for the cost of living adjustment is to be determined by the commissioner sec_1 a of the regulations provides that the adjusted dollar limitation applicable to defined benefit plans is effective as of january of each calendar_year and applies with respect to limitation years ending with or within that calendar_year sec_1 c of the regulations provides that a defined_benefit_plan may include a provision for an annual automatic cost-of-living adjustment of the dollar limitation described in sec_415 in accordance with sec_1 a of the regulations however the provision may only provide for scheduled annual increases in the dollar limitation which become effective no sooner than the date determined in accordance with sec_1 a of the regulations analysis sec_415 of the code provides for a dollar limitation expressed in the form of an annual_benefit with respect to the benefit of a participant in a defined_benefit_plan sec_415 of the code provides that for purpose of the limitations of sec_415 benefits must be in the form of a straight life_annuity sec_415 further provides that if benefits are not in the form of a straight life_annuity such benefits must be adjusted so that they are in the form of a straight life_annuity generally an annuity that provides for an increasing benefit would require an adjustment however if the increase in benefit is merely because of a dollar limitation increase then the annuity form is still considered straight life section c of the plan provides for all retired participants for three percent benefit increases commencing with the first day of january next following the third anniversary date of retirement under the terms of the plan there are no restrictions or conditions accordingly the cost_of_living_adjustments provided on the three percent increase under section c of the plan are a part of the form of retirement benefit provided under the plan of the regulations sec_1 c of the regulations provides that a defined_benefit_plan may include a provision for an annual automatic cost-of-living adjustment of the dollar limitation described in sec_415 of the code in accordance with sec_1 a in the instant case section c of the plan differs from the provision described in sec_1 c of the regulations in that section c of the plan provides for benefit increases for all participants of the plan whereas the provision in sec_1 c provides for increases merely for those participants whose benefits are limited by the provisions of sec_415 of the code therefore the provisions of section c of the plan must be taken into account when determining the straight life_annuity actuarial equivalents of participants’ benefits for purposes of sec_1 c of the regulations consequently the maximum benefit under sec_415 payable at retirement must be reduced to reflect the value of the cost of living adjustment provided for under section c of the plan sec_401 of the code provides that a_trust shall not constitute a qualified_trust if the plan of which such trust is a part provides for benefits that exceed the limitations of sec_415 of the code accordingly payments if any by the plan in excess of the limitations of sec_415 would cause the plan to fail to satisfy the requirements of sec_401 therefore the plan must correct for any payments in excess of the amounts payable under sec_415 if revproc_2003_44 2003_1_cb_1051 it is to continue to be a qualified_plan see conclusions the maximum benefit payable under sec_415 of the code payable at retirement must be determined taking into account the value of the cost of living adjustment provided for under section c of the plan a retired participant may not automatically receive an enhanced benefit reflecting the cost of living adjustment provided for under section c of the plan merely because the benefit in the calendar_year of enhancement does not exceed the maximum benefit for that calendar_year under sec_415 computed without regard to the cost of living adjustment the maximum benefit payable under sec_415 of the code payable at retirement must be reduced at retirement to reflect the value of the cost of living adjustment provided for under section c of the plan even though the cost of living adjustment provided for under section c of the plan begins to take effect on the january following the third anniversary of the participant's retirement date the plan must correct for payments if any in excess of the amounts payable under sec_415 of the code if it is to continue to be a qualified_plan this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited by others as precedent we are furnishing a copy of this letter to the enrolled_actuary for the plan in accordance with a power_of_attorney form on file a copy of this letter is also being sent to the manager employee_plans classification in if you have any questions concerning this matter please contact not a toll free number sincerely f james e holland jr manager employee_plans technical


internal_revenue_service significant index no department of the treasury washington 0c contact person telephone number in meterence to daleep ra t2 aug legend grantor ira x custodianc beneficiary e beneficiary f dear this is in response to your request for a private_letter_ruling dated submitted on your behalf by your authorized representative in support of your request you have submitted the following facts and representations grantor was born on arrangement ira x with custodian c ira x was established on on that date grantor designated_beneficiary e and beneficiary f as equal beneficiaries of ira x to take remaining ira x assets upon grantor’s death beneficiary e was bom on‘ and beneficiary f was born on and maintained an individual retirement grantor attained age during the calendar_year and her date of death was grantor’s required_beginning_date with respect to the commencement of required minimum distributions under sec_401 of the internal_revenue_code code from ira x was date in the calendar_year in which grantor attained age beneficiary e had the shortest life expectancy of the two designated beneficiaries her single life expectancy wa sec_35 in and her temaining term-certain life expectancy as of calendar_year i sec_26 years p page on custodian c and indicated that she wanted minimum distributions to be calculated based on her grantor filled out a minimum tequired distribution form with based on the above you request the following letter rulings that beneficiary e is a designated_beneficiary for purposes of sec_401 of the code with respect to ira x that beneficiary e was timely selected as grantor’s designated_beneficiary of ira x for purposes of sec_401 of the code - that grantor’s use of the single recalculated life expectancy in determining her required minimum distributions during her lifetime does not preclude the use of the term-certain life expectancy of the oldest designated_beneficiary in the calendar_year after the death of the grantor that in determining the required minimum distributions after the death of grantor beneficiary e may use her remaining term-certain life expectancy commencing with distributions in the calendar_year and reduced by one for each calendar_year thereafter sec_408 of the code defines an individual_retirement_account as a_trust which meets the requirements of sec_408 through a sec_408 of the code states that under regulations prescribed by the secretary rules similar to the rules of sec_401 and the incidental death_benefit requirements of sec_401 shall apply to the sec_401 of the code provides that a_trust shall not constitute a qualified_trust under this subsection unless the plan provides that the entire_interest of each employee will be distributed beginning not later than the tequired beginning date in accordance with regulations over the life of such employee or over the lives of such employee and a designated fo page beneficiary or over a period not extending beyond the life expectancy of such employee or the life expectancy of such employee and a designated_beneficiary sec_401 of the code provides that for purposes of this paragraph the term required_beginning_date means april of the calendar_year following the later of i the year in which the employee attains age ' or ii the calendar_year in which the employee retires sec_401g id does not apply to distributions received from an ira sec_401 of the code provides that where distributions have begun under subparagraph a ii a_trust shall not constitute a qualified_trust under this section unless the plan provides that if ll the distribution of the employee’s interest has begun in accordance with subparagraph a ii and the employee dies before his entire_interest has been distributed to him the remaining portion of such interest will be distributed at least as rapidly as under the method of distributions being used under subparagraph a ii as of the date of his death sec_1_401_a_9_-1 of the proposed income_tax regulations proposed_regulations q a d-2 a provides in pertinent part that designated beneficiaries are only individuals who designated as a beneficiary under the plan either by the terms of the plan or if the plan provides in the present case beneficiary e was named as a beneficiary under ira x by an affirmative election specifying the beneficiary by grantor dated ' beneficiary e is entitled to a portion of grantor’s benefit contingent on grantor’s death since beneficiary e was named a beneficiary on which was before grantor’s required_beginning_date of date beneficiary e was selected ina timely manner for purposes of calculating the distribution period described in sec_401 of the code page accordingly with regard to ruling_request one we conclude that beneficiary e isa designated_beneficiary for purposes of sec_401 with respect to ira x with respect to tuling request two we conclude that beneficiary e was timely selected as a designated_beneficiary of ira x for purposes of sec_401 of the code sec_401 of the code permits an employee and his spouse to recalculate their life expectancies annually sec_1_401_a_9_-1 of the proposed_regulations q a e-8 a provides guidance on how an employee’s life expectancy is recalculated and provides that upon the death of the employee the recalculated life expectancy of the employee or the employee’s surviving_spouse will be reduced to zero in the calendar_year following the calendar_year of death in any calendar_year in which the last applicable life expectancy is reduced to zero the plan must distribute the employee's entire remaining interest prior to the last day of such year in order to satisfy sec_401 sec_1_401_a_9_-1 of the proposed_regulations q a e-8 b provides guidance on calculating the applicable life expectancy when the employee’s life expectancy is being recalculated and the life expectancy of his designated_beneficiary is not recalculated it provides in relevant part that if the designated_beneficiary is not the employee’s spouse and the life expectancy of the employee is being recalculated annually the applicable life expectancy for determining the minimum distribution for each distribution calendar_year will be determined by s life expectancy but not recalculating the beneficiary’s life expectancy which corresponds to the designated beneficiary’s applicable life expectancy such age is the adjusted age of the designated_beneficiary as provided in paragraph e-8 a upon the death of the employee the life expectancy of the employee is reduced to zero in the calendar_year following the calendar_year of the employee’s death thus for determining the minimum distribution for such calendar_year and subsequent calendar years the applicable life expectancy is the applicable life expectancy of the designated_beneficiary determined under this paragraph sec_1_401_a_9_-1 of the proposed_regulations q a e-1 a provides generally that for required distributions under sec_401 of the code life expectancies are calculated using the employee’s and the designated beneficiary’s attained age as of the employee’s birthday and the designated beneficiary’s birthday in the calendar_year in which the employee attains age ve page sec_1_401_a_9_-1 of the proposed regulation q a e-5 a provides generally that if more than one individual is designated as a beneficiary with respect to an employee as of shortest life expectancy will be the designated_beneficiary for purposes of determining the distribution period since grantor’s life expectancy was being recalculated annually upon her death in accordance with q a e-8 a of sec_1_401_a_9_-1 of the proposed_regulations her life expectancy was reduced to zero in the calendar_year following the calendar_year of death ie although grantor’s life expectancy was paid in the form of a single life expectancy upon her death her life expectancy was not the last applicable life expectancy because she timely designated her beneficiaries by her required_beginning_date in accordance with q a d-3 a of sec_1_401_a_9_-1 of the proposed_regulations for purposes of determining the minimum distribution in the calendar_year after the death of grantor the applicable life expectancy is the life expectancy of the designated_beneficiary as determined under that section given that more than one individual was designated as a beneficiary with respect to the grantor as of date pursuant to sec_1_401_a_9_-1 of the proposed_regulations q a e-5 a the beneficiary who is the oldest and correspondingly who has the shortest life expectancy will be the designated_beneficiary for purposes of determining the distribution period under ira x thus with regard to tuling request three we conclude that grantor’s use of the single recalculated life expectancy in determining the required minimum distributions during her lifetime does not preclude the use of the term-certain life expectancy of the oldest designated_beneficiary in the calendar_year after grantor’s death beneficiary e had the shortest life expectancy of the two designated beneficiaries on grantor’s required_beginning_date date therefore she should be the designated_beneficiary whose life expectancy will be used when determining the minimum distribution period under ira x for the calendar_year commencing after the year of grantor’s death and for all subsequent years pursuant to q as e-1 a and e-8 b of sec_1_401_a_9_-1 of the proposed_regulations beneficiary e’s applicable life expectancy is calculated based on her attained age as of her birthday in the calendar_year in which grantor attained age ie reduced by one for each calendar_year which has elapsed since that calendar_year her single life expectancy in the year that grantor attained age wa sec_35 years therefore as of the calendar_year the remaining term-certain period with respect to beneficiary e i sec_26 years in accordance with q a e-8 b this period is reduced by one for each calendar_year subsequent to page therefore with respect to ruling_request four we conclude that in determining the required_minimum_distribution after the death of grantor beneficiary e may use her remaining term- certain life expectancy commencing with distributions in the calendar_year and reduced by one for each calendar_year thereafter the above ruling is contingent upon the continuation of ira x as one described under sec_408 of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited by others as precedent in accordance with a power_of_attorney on file with this office a copy of this ruling is being sent to your authorized representative sincerely yours srt 36rd spine joyce e floyd manager employee_plans technical group tax_exempt_and_government_entities_division enclosures deleted copy of letter_ruling notice of intention to disclose ce


internal_revenue_service number release date index number ---------------------------- --------------------------- ------------------------------- re --------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ---------------- telephone number -------------------- refer reply to cc psi b4 plr-104177-14 date date legend settlor grandchild ------------------ ---------------------------- trust date ------------------------- ------ ---------------- ------------------ ----------------------------------------------------------------------- dear --------------- this letter responds to your letter dated date submitted on your behalf by your authorized representative requesting a ruling on the application of sec_2041 of the internal_revenue_code facts settlor died on date grandchild is the beneficiary of trust a_trust created under article 10c of settlor’s last will paragraph of article 10c provides that during grandchild’s life the trustees of trust are to make discretionary payments of the net_income and principal to or for the benefit of grandchild and grandchild’s issue paragraph of article 10c provides that upon the death of grandchild the trustees of trust are to pay over the principal as then constituted and any accumulated or undistributed_income to such among settlor’s issue as grandchild shall validly appoint in grandchild’s last will any balance of trust remaining and not effectively appointed by grandchild in grandchild’s last will is disposed of pursuant to paragraph sec_2 and of article 10c of settlor’s last will plr-104177-14 rulings requested grandchild has requested the following rulings the testamentary_power_of_appointment granted to grandchild in trust does not constitute a general_power_of_appointment within the meaning of sec_2041 and the existence exercise failure to fully exercise or partial or complete release of grandchild’s power to appoint the principal and any accumulated or undistributed_income of trust will not cause the value of the property in trust to be included in grandchild’s gross_estate under sec_2041 law and analysis sec_2041 provides that the value of the gross_estate includes the value of all 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 the property would be includible in the decedent’s gross_estate under sec_2035 to inclusive for purposes of sec_2041 the power_of_appointment is considered to exist on the date of the decedent’s death even though the exercise of the power is subject_to a precedent giving of notice or even though the exercise of the power takes effect only on the expiration of a stated period after its exercise whether or not on or before the date of the decedent’s death notice has been given or the power has been exercised sec_2041 provides with exceptions not relevant here that the term general_power_of_appointment means a power that is exercisable in favor of the decedent his estate his creditors or the creditors of his estate sec_20_2041-1 of the estate_tax regulations provides that the term general_power_of_appointment as defined in sec_2041 means any power_of_appointment exercisable in favor of the decedent his estate his creditors or the creditors of his estate sec_20_2041-1 provides that a power_of_appointment is not a general power if by its terms it is exercisable only in favor of one or more designated persons or classes other than the decedent or his creditors or the decedent’s estate or the creditors of his estate in this case grandchild may appoint by will the principal and accumulated or undistributed_income of trust to the class consisting of settlor’s issue because grandchild’s power_of_appointment is a testamentary power grandchild may not appoint any part of trust to grandchild or to grandchild’s creditors during grandchild’s life in addition based on the terms of trust the reference to such among settlor’s plr-104177-14 issue as a permissible class of appointees of grandchild’s testamentary power is properly viewed as not including grandchild’s estate or the creditors of grandchild’s estate after grandchild’s death accordingly based on the information submitted and the representations made we conclude that grandchild’s testamentary_power_of_appointment over the principal and accumulated or undistributed_income of trust does not constitute a general_power_of_appointment within the meaning of sec_2041 and the existence exercise failure to fully exercise or partial or complete release of grandchild’s power to appoint the principal and accumulated or undistributed_income of trust will not cause the value of the property in trust to be included in grandchild’s gross_estate under sec_2041 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative 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 melissa c liquerman chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


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 -------------------- telephone number -------------------- refer reply to cc eee eb hw plr-116667-18 date date legend taxpayer -------------------------- trust a -------------------------------------------------------------------------------------------------------- ------ trust b -------------------------------------------------------------------------------------------------------- plan a -------------------------------------------------------------------------------------------------------- ----- plan b ----------------------------------------------------------------------- plan c ------------------------------------------------------- date -------------------- date --------------------- date --------------------------- dollar_figurea -------------- dollar_figureb -------------- dollar_figurec -------------- dollar_figured -------------- plr-116667-18 year ------- year ------ year ------- dear -------------- this responds to your representative’s letter dated date and later correspondence requesting a ruling regarding the tax consequences under sec_419 and sec_419a and sec_4976 of the internal_revenue_code code of amendments to trust a and trust b as described in greater detail below the amendments would allow certain assets in trust a and trust b to which taxpayer contributed in order to provide postretirement medical benefits for taxpayer’s employees to be used to provide current medical benefits for taxpayer’s employees facts taxpayer sponsors trust a which was established on date and holds assets that are used to provide postretirement medical benefits under plan a for taxpayer’s retired non-bargaining unit employees trust a received a determination_letter dated date stating that it is a voluntary employees’ beneficiary association veba under sec_501 taxpayer represents that it contributed dollar_figurea to trust a between year and year and deducted the contributions in accordance with sec_419 and sec_419a including sec_419a trust a holds dollar_figureb as of date dollar_figureb is more than dollar_figurea taxpayer represents that current_assets in trust a greatly exceed the actuarial liability for postretirement medical benefits under plan a for taxpayer’s retired non-bargaining unit employees taxpayer also sponsors trust b which was established on date and holds assets that are used to provide postretirement medical benefits under plan a for taxpayer’s retired bargaining unit employees trust b received a determination_letter dated date stating that it is a veba under sec_501 taxpayer represents that at all times since its establishment trust b has been a separate welfare_benefit_fund under a collective bargaining agreement within the meaning of sec_419a and sec_1_419a-2t of the income_tax regulations regulations taxpayer represents that it contributed approximately dollar_figurec to trust b between year and year and deducted the contribution sec_1 the assets in trust a greatly exceed the actuarial liability for postretirement medical benefits under plan a for taxpayer’s retired non-bargaining unit employees due to taxpayer’s large initial contributions a large settlement gain resulting from freezing benefits under plan a increased cost-shifting to participants lower participation and changes to the design of plan a plr-116667-18 in accordance with sec_419 and sec_419a including sec_419a trust b holds dollar_figured as of date dollar_figurec is more than dollar_figured taxpayer represents that current_assets in trust b greatly exceed the actuarial liability for postretirement medical benefits under plan a for taxpayer’s retired bargaining unit employees plan b provides medical benefits for taxpayer’s active non-bargaining and bargaining unit employees taxpayer currently funds benefits provided under plan b from its general assets plan a and plan b will be merged to form plan c in year plan c will provide postretirement medical benefits for taxpayer’s retired non-bargaining and bargaining unit employees and medical benefits for taxpayer’s active non- bargaining and bargaining unit employees following the merger taxpayer will amend trust a in year to permit as of the effective date of the amendment dollar_figurea of the assets in trust a to be used to provide postretirement medical benefits for taxpayer’s retired non-bargaining unit employees under plan c and medical benefits for taxpayer’s active non-bargaining unit employees under plan c taxpayer also will amend trust b in year to permit the value of assets in trust b to be used to provide postretirement medical benefits for taxpayer’s retired bargaining unit employees under plan c and medical benefits for taxpayer’s active non-bargaining unit employees under plan c trust a and trust b each provide that no amendment may be made that would cause any part of the income or corpus of the trust fund to be used for or diverted to purposes other than for the exclusive benefit of the participants or their eligible beneficiaries taxpayer represents that all amounts in trust a and trust b will at all times continue to be held for the exclusive benefit of the participants and beneficiaries of trust a and trust b as applicable_taxpayer further represents that the proposed amendments to trust a and trust b will be effective prospectively and will apply only with respect to active non-bargaining unit employee medical benefits incurred on or after the effective date of the amendments to trust a and trust b ie the amendments to trust a and trust b will only apply with respect to medical benefits newly payable on a prospective basis after the effective date of the amendments taxpayer represents that its taxable_year is the calendar_year with respect to trust a taxpayer represents that it will include dollar_figurea in gross_income in year under the tax_benefit_rule with respect to trust b taxpayer represents that it will include the value of assets in trust b on the effective date of the amendment in gross_income in year under the tax_benefit_rule taxpayer represents that no portion of the tax_benefit income the assets in trust b greatly exceed the actuarial liability for postretirement medical benefits under plan a for taxpayer’s retired bargaining unit employees due to taxpayer’s large initial contributions a large settlement gain resulting from freezing benefits under plan a increased cost-shifting to participants lower participation and changes to the design of plan a plr-116667-18 with respect to the assets in trust a or trust b is excludable under the exclusionary part of the tax_benefit_rule taxpayer represents that a contributions have been made to trust a and trust b by retired employees and the disbursements under each plan have exceeded the retired employee contributions to each respective trust on an annual basis b no active employee contributions have been made to trust a or trust b c the assets in trust a to be used for medical benefits for active non-bargaining unit employees will be limited to dollar_figurea d the assets in trust b to be used for medical benefits for active non-bargaining unit employees will not be limited and e neither trust a nor trust b have at any time since their establishment received a transfer of assets from another veba or another welfare_benefit_fund rulings requested taxpayer requests the following rulings ruling_request the amendment of trust a and the use of trust a assets to provide medical benefits to active non-bargaining unit employees will not be treated as a disqualified_benefit under sec_4976 and will not in and of itself result in excise_tax under sec_4976 ruling_request the amendment of trust b and the use of trust b assets to provide medical benefits to active non-bargaining unit employees will not be treated as a disqualified_benefit under sec_4976 and will not in and of itself result in excise_tax under sec_4976 ruling_request the amount of trust a assets that will be used to provide medical benefits for active non-bargaining unit employees under plan c and that will be included in taxpayer’s gross_income in the tax_year in which the trust a amendment is effective will be treated as a contribution within the meaning of sec_419 to trust a in that tax_year and taxpayer will be permitted to take deductions with respect to such trust a contributions used for medical benefits under plan c for active non- bargaining unit employees to the extent permitted by sec_419 and sec_419a ruling_request the amount of trust b assets that will be used to provide medical benefits for active non-bargaining unit employees under plan c and that will be included in taxpayer’s gross_income in the tax_year in which the trust b amendment is effective will be treated as a contribution within the meaning of sec_419 to trust b in that tax_year and taxpayer will be permitted to take deductions with respect to such trust b contributions used for medical benefits under plan c for active non- bargaining unit employees to the extent permitted by sec_419 and sec_419a law plr-116667-18 sec_61 of the code provides that unless otherwise excepted gross_income includes all income from whatever source derived sec_111 provides that gross_income does not include income attributable to the recovery during the taxable_year of any amount deducted in any prior taxable_year to the extent that the amount did not reduce the amount of tax_imposed_by_chapter_1 of the code generally the tax_benefit_rule requires a taxpayer who received a tax_benefit from a deduction in an earlier year to recognize income in a later year if an event occurs that is fundamentally inconsistent with the premise on which the deduction was initially based 460_us_370 see also 70_f3d_16 5th cir cert_denied 517_us_1208 the term tax_benefit_rule encompasses two concepts an inclusionary part and an exclusionary part 101_tc_35 the inclusionary part has been developed in the courts and requires a taxpayer to include a previously deducted amount in the current year’s income when a fundamentally_inconsistent_event has occurred the exclusionary part is partially codified at sec_111 and permits a taxpayer to exclude an amount that did not previously provide a tax_benefit when it was deducted the exclusionary part cannot apply unless the inclusionary part applies the tax_benefit_rule allays some of the inflexibilities of the annual accounting system under specific circumstances hillsboro national bank u s pincite the general purpose of the tax_benefit rules is to approximate the results produced by a tax system based on transactional rather than annual accounting id pincite the tax_benefit_rule will cancel out an earlier deduction when a later event is fundamentally inconsistent with the premise on which the deduction was initially based even in situations where there is no actual recovery_of funds id pincite one must consider the facts and circumstances of each case in light of the purpose and function of the provisions granting the deductions id pincite although it is usually helpful to determine whether the later event would have foreclosed the deduction if it had occurred within the same tax_year that inquiry is not an exclusive test see 267_f3d_1344 fed cir sec_419 provides that contributions paid_or_accrued by an employer to a welfare_benefit_fund are not deductible under chapter but if they would otherwise be deductible are subject_to the limitation of sec_419 deductible under sec_419 for the taxable_year in which paid sec_419 limits the employer's deduction under sec_419 to a welfare_benefit fund's qualified_cost for the taxable_year the qualified_cost of a welfare_benefit_fund for a taxable_year is defined in sec_419 as the sum of the qualified_direct_cost for plr-116667-18 the taxable_year and subject_to the limitation of sec_419a any addition to a qualified_asset_account for the taxable_year under sec_419 the qualified_cost for any taxable_year is reduced by the welfare_benefit fund's after-tax_income for the taxable_year sec_419 provides that the term qualified_direct_cost means with respect to any taxable_year the aggregate amount including administrative expenses that would have been allowable as a deduction to the employer with respect to the benefits provided during the taxable_year if those benefits were provided directly by the employer and the employer used the cash_receipts_and_disbursements_method of accounting sec_419 provides that for purposes of sec_419 a benefit is treated as provided when that benefit would be includible in the gross_income of the employee if provided directly by the employer or would be so includible but for any provision of chapter of the code excluding that benefit from gross_income sec_419 defines the term welfare_benefit_fund to include any fund through which the employer provides welfare benefits to employees or their beneficiaries the term fund is defined in sec_419 to include an organization described in sec_501 sec_419a defines the term qualified_asset_account to include any account consisting of assets set_aside to provide for the payment of medical benefits sec_419a provides that no addition to any qualified_asset_account may be taken into account under sec_419 to the extent the addition results in the amount of the account exceeding the account limit sec_419a provides that except as otherwise provided in this subsection the account limit for any qualified_asset_account for any taxable_year is the amount reasonably and actuarially necessary to fund a claims incurred but unpaid as of the close of the taxable_year for benefits referred to in subsection a and b administrative costs with respect to the claims sec_419a provides that the account limit for any taxable_year may include a reserve funded over the working lives of the covered employees and actuarially determined on a level basis using assumptions that are reasonable in the aggregate as necessary for post-retirement medical benefits to be provided to covered employees determined on the basis of current medical costs sec_419a provides that no account limits shall apply in the case of any qualified_asset_account under a separate welfare_benefit_fund under a collective bargaining agreement plr-116667-18 sec_1_419a-2t q a-1 of the regulations provides that contributions to a welfare_benefit_fund maintained pursuant to one or more collective bargaining agreements and the reserves of such a fund generally are subject_to the rules of sec_419 sec_419a and sec_512 of the code however neither contributions to nor reserves of such a collectively bargained welfare_benefit_fund shall be treated as exceeding the otherwise applicable limits of sec_419 sec_419a or sec_512 until the earlier of i the date on which the last of the collective bargaining agreements relating to the fund in effect on or ratified on or before the date_of_issuance of final regulations concerning such limits for collectively bargained welfare_benefit funds terminates determined without regard to any extension thereof agreed to after the date_of_issuance of such final regulations or ii the date years after the issuance of such final regulations sec_4976 imposes a percent excise_tax if an employer maintains a welfare_benefit_fund and there is a disqualified_benefit provided during any taxable_year sec_4976 defines the term disqualified_benefit to include any portion of a welfare_benefit_fund reverting to the benefit of the employer analysis and conclusions tax_benefit_rule as explained above the tax_benefit_rule is implicated when a taxpayer has taken a deduction in a prior year and in a subsequent year an event occurs that is fundamentally inconsistent with the premise of the deduction taxpayer made contributions to trust a for the purpose of providing postretirement medical benefits for taxpayer’s retired non-bargaining unit employees taxpayer deducted the contributions in accordance with sec_419 and sec_419a including sec_419a the proposed amendment to trust a will allow as of the effective date of the amendment dollar_figurea of the assets in trust a to be used to provide medical benefits to taxpayer’s active non-bargaining unit employees this use is fundamentally inconsistent with the premise of the previously taken deductions the amendment of trust a therefore will implicate the tax_benefit_rule taxpayer represents that it will include dollar_figurea in gross_income in year under the tax_benefit_rule furthermore taxpayer represents that no portion of the tax_benefit income with respect to the assets in trust a is excludable under the exclusionary part of the tax_benefit_rule taxpayer made contributions to trust b for the purpose of providing postretirement medical benefits for taxpayer’s retired bargaining unit employees taxpayer deducted the amount of those contributions in accordance with sec_419a the proposed amendment to trust b will allow the assets in trust b to be used to provide current medical benefits to taxpayer’s active non-bargaining unit employees this use is fundamentally inconsistent with the premise of the previously taken deductions the amendment of trust b therefore will implicate the tax_benefit_rule taxpayer represents that it will include the value of assets in trust b on the effective date of the amendment plr-116667-18 in gross_income in year under the tax_benefit_rule furthermore taxpayer represents that no portion of the tax_benefit income with respect to the assets in trust b is excludable under the exclusionary part of the tax_benefit_rule ruling_request sec_1 and as explained above sec_4976 imposes a percent excise_tax if an employer maintains a welfare_benefit_fund and there is a disqualified_benefit provided during any taxable_year a disqualified_benefit is defined in sec_4976 to include any portion of a welfare_benefit_fund reverting to the benefit of the employer based on the information submitted by taxpayer the amendment of trust a and trust b or the use of trust a and trust b assets to provide medical benefits to active non-bargaining unit employees will not result in any portion of either trust a or trust b reverting to the benefit of taxpayer thus the amendment of trust a and trust b and the use of trust a and trust b assets to provide medical benefits to active non-bargaining unit employees will not result in a disqualified_benefit within the meaning of sec_4976 and the transaction will not in and of itself cause taxpayer to be liable for the excise_tax imposed by sec_4976 ruling_request sec_3 and the amount of trust a and trust b assets that are used to provide medical benefits under plan c and that will be included in taxpayer’s gross_income in year will be treated as a contribution within the meaning of sec_419 to trust a and trust b respectively in that tax_year and taxpayer may take deductions with respect to such contribution to the extent permitted by sec_419 and sec_419a taxpayer will not be considered to have contributed to trust a or trust b any amount that exceeds the amount that taxpayer is taking into income under the tax_benefit_rule pursuant to this ruling accordingly the total amount that taxpayer may deduct under sec_419 and sec_419a as a result of the amendments of trust a and trust b cannot exceed the amount taken into income under the tax_benefit_rule as a result of the amendments we assume without expressing an opinion for purposes of this ruling that trust a and trust b may be amended as described and that the proposed amendments otherwise can be effectuated and do not fail to meet the requirements of other applicable federal and state law 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 specifically no opinion is expressed regarding the amount of any deductions under sec_419 and sec_419a this ruling is directed only to the taxpayer requesting it specifically no opinion is expressed regarding the tax consequences to trust a and trust b of the proposed amendments including for example under sec_1001 nor is any opinion expressed regarding the status under sec_501 of trust a or trust b sec_6110 provides that this ruling may not be used or cited as precedent plr-116667-18 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 janet a laufer senior technician reviewer health welfare branch office of associate chief_counsel employee_benefits exempt_organizations and employment_taxes cc


jokismol favirus dene cc dom p si plr-104487-99 ‘sul re request for a revised schedule of ruling amounts parent taxpayer plant location commission a commission b fund district dear this letter responds to the request of taxpayer dated date and supplemental information submitted by taxpayer for a revised schedule of ruting amounts pursuant to sec_1_468a-3 of the income_tax regulations taxpayer was previously granted a revised schedule of ruling amounts on date information was submitted pursuant to sec_1_468a-3 we understand the facts as presented by taxpayer to be as follows plr-104487-99 taxpayer is a wholly-owned subsidiary of parent and files a consolidated federal_income_tax return with its parent taxpayer as one of the owners of the plant has a interest in the plant which is situated in location the plant's operating taxpayer proposes to decommission the plant using license expires on the prompt removal dismantling method taxpayer is under the jurisdiction of the district_director of the district currently the taxpayer is subject_to the jurisdiction of commission a which covers commission b has jurisdiction over the remaining sales this request relates only to the commission a jurisdictional portion of the plant of taxpayer’s total sales and taxpayer is obligated severally and not jointly to pay all expenditures_for operation and maintenance of the plant in proportion to its ownership_interest and is entitled to its proportionate share of the electric power produced by the plant the taxpayer represents that an election to be excluded from the application of subchapter_k of the internal_revenue_code was filed for the plant commission a in the plant of is based on a site-specific study prepared by an outside firm the estimated cost of decommissioning the plant is is decommissioning the plant commission a expressed the projected total cost of of which taxpayer's share provided for decommissioning cost for the decommissioning cost for the plant provided for decommission cost of service for ratemaking purposes commission a did not take into account the provisions of the energy policy act of to be included in taxpayer's cost of the commission the funding_period and level_funding limitation period extends from the estimated_useful_life of the plant is estimated period for which the fund will be in effect is therefore the qualifying percentage as calculated by taxpayer is and the at the present time there are no proceedings pending before the commission that may result in an increase or decrease in the amount of decommissioning costs for the plant to be included in taxpayer's cost of service for ratemaking purposes sec_468 of the code provides that a taxpayer may elect to deduct the amount of payments made to a qualified nuclear decommissioning fund however sec_468a limits the amount_paid into the fund for any_tax year to the lesser_of the amount of nuclear decommissioning costs allocable to the fund that is included in the taxpayer's cost of service for ratemaking purposes for the tax_year or the ruling_amount applicable to this year oll plr-104487-99 sec_468a of the code provides that no deduction shall be allowed for any payment to the nuclear decommissioning fund unless the taxpayer requests and receives from the secretary a schedule of ruling amounts the ruling_amount for any_tax year is defined under sec_468a as the amount which the secretary determines to be necessary to fund that portion of nuclear decommissioning costs which bears the same ratio to the nuclear power plant as the period for which the fund is in effect bears to the estimated_useful_life of the plant this term is further defined to include the amount necessary to prevent excessive funding of nuclear decommissioning costs or funding of these costs at a rate more rapid than level_funding taking into account such discount rates as the secretary deems appropriate sec_468a of the code provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of the tax_year if the payment is made on account of this tax_year within months after the close of the tax_year sec_1_468a-1 of the regulations provides that an eligible_taxpayer may elect to deduct nuclear decommissioning costs under sec_468a of the code an eligibie taxpayer as defined under sec_1_468a-1 is a taxpayer that has a qualifying interest in a nuclear power plant as defined under sec_1_468a-1 a qualifying interest is among other things a direct ownership_interest including an interest held as a tenant in common or joint tenant sec_1_468a-2 of the regulations provides that the maximum amount of cash payments made or deemed made to a nuclear decommissioning fund during any_tax year shall not exceed the lesser_of the cost of service amount applicable to the nuclear decommissioning fund for such tax_year or the ruling_amount applicable to the nuclear decommissioning fund for such tax_year sec_1_468a-3 of the regulations provides that in general a schedule of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that over the tax years remaining in the funding_period as of the date the schedule first applies will result in a projected balance of the nuclear decommissioning fund as of the last day of the funding_period equal to and in no event more than the amount of decommissioning costs allocable to the fund sec_1_468a-3 bases the schedule of ruling amounts on the reasonable assumptions and determinations used by the applicable public_utility commission s in establishing or approving the amount of decommissioning costs to be included in the cost of service for ratemaking purposes taking into account amounts that are otherwise required to be included in the taxpayer's income under sec_88 of the code and the plr-104487-99 regulations thereunder each schedule of ruling amounts shall be based on the public_utility commission's reasonable assumptions concerning i the after-tax rate of return to be earned by the amounts collected for decommissioning ii the total estimated cost of decommissioning the nuclear power plant and iii the frequency of contributions to the nuclear decommissioning fund for a tax_year sec_1_468a-3 of the regulations provides that the ruling_amount specified in a schedule of ruling amounts for any_tax year in the level_funding limitation period shall not be less than the ruling_amount specified in such schedule for any earlier tax_year under sec_1_468a-3 the level_funding limitation period begins on the first day of the first tax_year for which a deductible payment is made to the nuclear decommissioning fund and ends on the last day of the tax_year that includes the estimated date on which the nuclear power plant will no tonger be included in the taxpayer's rate base for ratemaking purposes sec_1_468a-3 of the regulations provides that the amount of decommissioning costs allocable to a nuclear decommissioning fund is the taxpayer's share of the total estimated cost of decommissioning the nuclear power plant multiplied by the qualifying percentage sec_1_468a-3 of the regulations provides that in general the total estimated cost of decommissioning a nuclear power plant is the reasonably estimated cost of decommissioning used by the applicable public_utility commission in establishing or approving the amount of these costs to be included in cost of service for ratemaking purposes sec_1_468a-3 of the regulations provides that a taxpayer's share of the total estimated cost of decommissioning a nuclear power plant equals the total estimated cost of decommissioning such plant multiplied by the taxpayer's qualifying interest in the plant sec_1_468a-3 of the regulations provides that the internal_revenue_service shall not provide a taxpayer with a schedule of ruling amounts for any nuclear decommissioning fund unless the public_utility commission that establishes or approves the rates for electric energy generated by the plant has determined the amount of decommissioning costs to be included in the taxpayer's cost of service for tatemaking purposes and has disclosed the after-tax rate of return and any other assumptions and determinations used in establishing or approving the amount plr-104487-99 sec_1_468a-3 of the regulations provides that a taxpayer is required to request a revised schedule of ruling amounts for a nuclear decommissioning fund if a any public_utility commission that establishes or approves rates for the furnishing or sale of electric energy generated by a nuclear power plant to which the nuclear decommissioning fund relates increases the proposed period over which the decommissioning costs of the nuclear power plant will be included in cost of service for ratemaking purposes adjusts the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes or reduces the amount of decommissioning costs to be included in cost of service for any_tax year and b the taxpayer's most recent request for a schedule of ruling amounts did not provide notice to the service of such action by any public_utility commission sec_1_468a-3 of the regulations provides that any taxpayer that has previously obtained a schedule of ruling amounts can request a revised schedule of ruling amounts such a request must be made in accordance with the rules of sec_1_468a-3 the internal_revenue_service shall not provide a revised schedule of ruling amounts applicable to a tax_year in response to a request for a schedule of ruling amounts that is filed after the deemed deadline date for such tax_year section of the energy policy act of public law act eliminated for tax years beginning after date the investment restrictions contained in sec_468a of the code that section also revised sec_468a by lowering the tax_rate applicable to a nuclear decommissioning fund we have examined the representations and data submitted by the taxpayer in relation to the requirements set forth in the code and the regulations based solely on these representations of the facts we reach the following conclusions taxpayer has a qualifying interest in the plant and is therefore an eligible_taxpayer under sec_1_468a-1 of the regulations the commission has determined the amount of decommissioning costs to be included in the taxpayer's cost of service for ratemaking purposes as required by sec_1_468a-3 of the regulations taxpayer as one of the owners of the plant has calculated its share of the decommissioning costs under sec_1_468a-3 of the regulations taxpayer has proposed a schedule of ruling amounts which meets the requirements of sec_1_468a-3 and of the regulations the oe plr-104487-99 annual payments specified in the proposed schedule of ruling amounts are based on the reasonable assumptions and determinations used by the commission and will result in a projected fund balance at the end of the funding_period equal to or less than the amount of decommissioning costs allocable to the fund taxpayer has determined that pursuant to sec_1_468a-3 of the regulations the qualifying percentage is the maximum amount of cash payments made or deemed made to the fund during any_tax year is restricted to the lesser amount of the decommissioning costs applicable to such fund or the ruling applicable to this fund as set forth under sec_1 468a- b of the regulations based on the above determinations we conclude that the taxpayer's proposed schedule of ruling amounts satisfies the requirements of sec_468a of the code approved schedule of ruling amounts tax years year commission a total each year through the approved schedule of ruling amounts for commission a is being limited to a five year period as a result of the statutory changes made by the act the elimination of the investment restrictions and the reduction of the tax_rate applicable to income earned by the fund may result in a greater after-tax rate of return than was estimated prior to the enactment of the act by commission a which based its determinations as to the approved after-tax rate of return on restricted investments and a higher tax_rate this increased after-tax rate of return would over the life of the fund result in a balance in the fund on the last day of the funding_period that would exceed the amount of decommissioning costs allocable to the fund in order to prevent the excess accumulation in the fund this schedule of ruling amounts is limited to a five year period for commission a eo plr-104487-99 approval of the schedule of ruling amounts is contingent on there being no change in the facts and circumstances known or assumed at the time the current ruling is issued if any of the events described in sec_1_468a-3 of the regulations occur in future years the taxpayer must request a review and revision of the schedule of ruling amounts generally the taxpayer is required to file such a request on or before the deemed payment deadline date for the first tax_year in which the rates reflecting such action became effective when no such event occurs the taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline of the 10th tax_year following the close of the tax_year in which the most recent schedule of ruling amounts was received the approved schedule of ruling amounts is relevant only to those payments made to the fund payments allocable to any funds other than the fund cannot qualify for purposes of the deduction under the provisions of sec_468a of the code as stated earlier payments made to such fund can qualify only to the extent that they do not exceed the lesser_of the decommissioning costs applicable to such fund or the ruling amounts applicable to this fund in the tax_year this ruling is directed only to the taxpayer who requested it section 6i10 k of the code provides it may not be used or cited as precedent pursuant to sec_1_468a-7 of the regulations a copy of this letter must be attached with the required election statement to the taxpayer's federal_income_tax return for each tax_year in which the taxpayer claims a deduction for payments made to the fund sincerely yours fach peter c friedman assistant to the chief branch office of assistant chief_counsel passthroughs and special industries a2


internal_revenue_service number release date index number ------------------------------ ------------------------- --------------------- ----------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------------ id no ------------ ----------------- telephone number ---------------------- refer reply to cc psi b01 plr-139256-16 date date legend x --------------------------------------------------- ------------------------------------------------------------------- a --------------------------------------------------- -------------------------------------------- date date state ---------------------- -------------------------- ----------- dear -------------- this responds to a letter dated date submitted on behalf of x by x’s authorized representative requesting relief pursuant to sec_301_9100-3 of the procedure and administration regulations that x be granted an extension of time to elect to treat a as a qualified_subchapter_s_subsidiary qsub under sec_1361 of the internal_revenue_code the code facts according to the information submitted and representations within x elected to be treated as an s_corporation effective date a was incorporated under the laws of state on date as a wholly-owned subsidiary of x x represents that it intended to elect to treat a as a qsub effective date however due to inadvertence x failed to plr-139256-16 file form_8869 qualified_subchapter_s_subsidiary election x represents that x and a have filed tax returns for all tax years consistent with the treatment of a as a qsub law and analysis sec_1361 generally provides that a qsub shall not be treated as a separate corporation and all assets liabilities and items of income deduction and credit of a qsub shall be treated as assets liabilities and such items as the case may be of the s_corporation sec_1361 defines a qsub as a domestic_corporation which is not an ineligible_corporation if percent of the stock of the corporation is owned by the s_corporation and the s_corporation elects to treat the corporation as a qsub sec_1_1361-3 of the income_tax regulations prescribes the time and manner for making an election to be classified as a qsub sec_1_1361-3 provides that an election may be effective up to two months and days prior to the date the election is filed or not more than months after the election is filed the proper form for making the election is form_8869 qsub election sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly x is granted an extension of time of days from the date of this letter to elect to treat a as a qsub effective date the election should be made by filing form_8869 with the appropriate plr-139256-16 service_center and a copy of this letter should be attached to the election a copy is enclosed for that purpose except as specifically set forth above we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provision of the code specifically we express or imply no opinion concerning whether x is a valid s_corporation or whether a is eligible to be a qsub 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 mailed to x’s authorized representative sincerely john p moriarty acting associate chief_counsel passthroughs special industries faith p colson by ________________________________ faith p colson senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service national_office technical_advice_memorandum date --------------------------------- -------------------------------------------- ----------------------------- -------------------------- ----------------- -------------- ------------------------ tam-145318-03 cc psi number release date index uil no case-mis no -------------------------------------- --------------------------------------------------------- taxpayer's name taxpayer's address taxpayer's identification no date of death date of conference legend ------------------------------------------ ------------------------- ---------------------------- ---------------------- ----------------------------------------- -------- ---------------------- -------------------- ------------------ ------ ---------- decedent child a child b accountant partnership state date date date year dollar_figureh dollar_figurei --------------- --------------- dollar_figurej --------------- dollar_figurek dollar_figurel --------------- dollar_figurem ------------------- dollar_figuren a x --------------- ------ ------ issue tam-145318-03 is the loan interest stated in a note executed for an advance from partnership to the estate deductible as an expense of administration under sec_2053 conclusion the loan interest stated in a note executed for an advance from decedent died testate on date approximately 5-½ years after formation of decedent and his spouse formed partnership a limited_partnership on date partnership to the estate is not deductible as an expense of administration under sec_2053 facts decedent contributed of his assets to partnership in exchange for a general_partnership interest and a limited_partnership_interest his spouse contributed dollar_figureh in cash in exchange for a general_partnership interest decedent transferred a general_partnership interest to child a decedent’s child subsequently in year decedent and his spouse were divorced at that time the partnership purchased her general_partnership interest partnership generated income each year partnership under paragraph sec_1 and b of decedent’s will the estate residue is to be distributed in equal shares to one trust for the benefit of child a and another trust for the benefit of decedent’s child child b both trusts provide for distributions of income and principal in the trustee’s discretion for support maintenance and health of child a or child b respectively the trustee may also distribute to child a or child b as the case may be such additional_amounts as the trustee deems appropriate the trustee may also distribute income and principal from either trust in his discretion to child a’s descendants on the death of child a and child b respectively the remaining corpus of the deceased child’s trust is to be distributed pursuant to exercise of a testamentary general_power_of_appointment granted to the child residue of the estate the estate child a and accountant were appointed as executors of the estate accountant is also designated as the trustee of the trusts established for child a and child b the estate residue consisted primarily of decedent’s interest in partnership at decedent’s death approximately of the partnership assets or dollar_figuren consisted of publicly traded stocks bonds and cash these assets reflected accumulated income of the four prior years of dollar_figurel the remaining partnership assets consisted primarily of real_property and personal notes that had been issued to the partnership on the sale of real_property previously owned by the partnership under paragraph of decedent’s will all estate_taxes are to be paid from the on date child a and accountant as executors and child a as general tam-145318-03 partner executed a promissory note describing the estate as the borrower and partnership as the lender the note is described as an advancing line of credit pursuant to which funds up to the designated principal_amount will be advanced to the borrower by the lender once the principal_amount of the note is advanced no further loan advances will be made the principal_amount of the note is dollar_figurei and the annual interest is x the note is to mature years from date principal that is advanced and all accrued interest is to be paid in a lump sum on the maturity_date prepayment of principal or interest is prohibited the estate’s partnership_interest was pledged as security pursuant to a separate security_agreement the security_agreement the security_agreement acknowledges that partnership has loaned funds to the estate as evidenced by a promissory note dated date and that in order to secure the liability the estate grants partnership a continuing security_interest in the estate’s partnership_interest in partnership and all of the estate’s distributive_share of partnership income profits etc as well as the estate’s distributive_share of partnership assets upon dissolution in the event of a default partnership has the right to receive the estate’s share of income and distributions from partnership the estate is prohibited from selling assigning or transferring its interest in partnership without the written consent of partnership on date the date the note was signed the prime interest rate was one percent less than x the average interest rate for 15-year mortgage loans was three percent less than x pursuant to the loan arrangement partnership advanced dollar_figurej to the estate the advance was later increased to dollar_figurem two checks were drawn on the estate’s account one payable to the united_states treasury_department and another to the state treasurer on the federal estate_tax_return filed for the estate the executors claimed a deduction under sec_2053 for the dollar_figurek in interest that is to be paid on the due_date of the note law and rationale determined by deducting from the value of the gross_estate such amounts for administration_expenses sec_20_2053-1 provides that an item may be entered on the return for deduction though its exact amount is not then known provided it is ascertainable with reasonable certainty and will be paid no deduction may be taken upon the basis of a vague or uncertain estimate gross_estate as ‘administration expenses’ are limited to such expenses as are sec_2053 provides in part that the value of the taxable_estate shall be sec_20_2053-3 provides that the amounts deductible from a decedent’s in general the courts and the irs have concluded that interest_expense incurred tam-145318-03 actually and necessarily incurred in the administration of the decedent’s estate that is in the collection of assets payments of debts and distribution_of_property emphasis added by an estate on funds borrowed by the estate can be a deductible administration expense provided the loan was reasonably and necessarily incurred in the administration of the estate rev_rul c b because the loan was obtained to avoid a forced sale of assets the loan was reasonably and necessarily incurred in administering d’s estate 57_tc_288 the estate did not own any liquid_assets at the time and that if the estate liquidated some of its nonliquid assets these would have had to have been sold at reduced prices estate of thompson v commissioner tcmemo_1998_325 we are convinced that the financial position of the estate at the time of the borrowing was insufficient to make the required tax_payments and provide for the maintenance of cane mill business property owned by the estate mckee v commissioner tcmemo_1996_362 the executors determined that it was preferable to preserve all of decedent’s closely-held stock and to borrow funds in order to better ensure the estate’s ability to pay its obligations estate of graegin v commissioner tcmemo_1988_477 t o avoid a forced sale of its assets the estate had to borrow money to satisfy its federal estate_tax liability 36_bta_698 t he issuance of the notes avoided the necessity of sacrificing the assets of the estate by immediate or forced sale see also 581_f2d_741 9th cir have not yet accrued however before the administrative expense deduction may be allowed in addition to satisfying other requirements sec_2053 and the regulations the estimated amount must be i ascertainable with reasonable certainty and ii certain to be paid sec_20_2053-1 81_tc_246 estate of graegin v commissioner t c memo interest that is due to be paid on the maturity_date of the note which is years from date for the reasons discussed below we do not believe the interest constitutes a deductible administration expense for purposes of sec_2053 as noted above the estate claimed a deduction under sec_2053 for dollar_figurek in a deduction may be allowable under sec_2053 for estimated interest payments that first we do not believe the transaction whereby the estate purportedly borrowed dollar_figurem from partnership can properly be viewed as necessary to the administration of the estate as the case law and revenue rulings noted above indicate the interest_deduction has been allowed where the loan was necessary to preserve the asset value of the estate for example where the estate is illiquid cash is needed to pay the federal and or state estate_tax liability and the loan supplies this cash while avoiding the need tam-145318-03 to sell a family business or otherwise dispose_of estate property at distressed or reduced prices in this case partnership held substantial liquid_assets totaling dollar_figuren or of the partnership assets on his death the estate succeeded to decedent’s partnership_interest child a the co-executor of the estate was the remaining general_partner further the partnership was not engaged in any active business that would necessitate the retention of liquid_assets in addition in view of the estate’s ownership_interest in the partnership and child a’ sec_1 interest there was clearly no fiduciary restraint on child a’s ability to access the funds the funds since the estate possessed only a assignee interest as characterized by the estate and child a in her individual capacity was the remaining general_partner however the situation presented here is very different from the situations presented in estate of todd v commissioner estate of graegin v commissioner and the other cases and revenue rulings cited above in this case it may be argued that the estate could not require the partnership to distribute i the estate owned of the partnership ii child a was the co-executor of the estate and held the remaining partnership_interest as a general_partner iii residuary trusts for child a and child b were to receive the estate’s partnership_interest and of partnership income was payable or would be credited to the trusts iv child a and child b are each to receive for support maintenance health and other_amounts as appropriate the income and principal paid to the partnership and then distributed by the partnership to the trusts and proportionate interests in the estate are virtually identical to their proportionate interests in the partnership stood on all sides of this transaction thus the assets held in partnership were readily available for the purposes of paying the federal estate_tax rather we believe that in view of the availability of the liquid_assets to the estate and its beneficiaries and in view of the structure of the loan 10-year term with prepayment prohibited the only reason the loan transaction was entered into was to obtain an v child a and child b each hold a testamentary general power to appoint a respective half of of partnership along with any income and principal either retained by partnership or paid_by partnership to the trusts but not distributed it seems clear that the same parties closely related family members whose tam-145318-03 upfront estate_tax deduction for the interest_expense an expense which as discussed below is largely illusory however as indicated above in order for the interest_expense to be deductible under sec_2053 the loan must be necessary for the administration of the estate the interest_deduction can not be the justification for an otherwise unnecessary loan thus we do not believe the loan can properly be characterized as necessary to the administration of the estate further we do not believe that the interest_expense is deductible under sec_2053 because it is questionable whether the estate will actually make the payments in accordance with the terms of the arrangement and even if the estate makes the payments in accordance with the terms of the arrangement the payments whether characterized as interest or principal will have no economic impact on the parties involved the deduction for administration_expenses such as interest is limited to in this case other than generating an estate_tax deduction the loan transaction amounts actually paid this requirement ensures that the expense has a real economic impact on the amount ultimately passing to the estate beneficiaries further transactions between family members are carefully scrutinized because the family relationship often makes it possible to shift tax incidence by surface changes of ownership without affecting the dominion and control_over the subject of the transfer 337_us_733 55_tc_172 has no economic_effect upon the parties specifically the estate’s obligation to pay interest and principal will mature years from date on this date if the estate has funds to pay the obligation then absent the loan and interest obligation the beneficiaries ie the trusts for child a and child b would each be entitled to receive one-half of these funds however if the estate uses these funds to pay the interest and principal the estate will simply transfer the funds to partnership in which it owns a interest and in which the estate beneficiaries own a interest the estate’s payment will then be credited to the beneficiaries’ partnership accounts or distributed to them by partnership in virtually equal one-half shares more likely if the estate or the estate beneficiaries does not have the funds necessary to pay the indebtedness and interest partnership will distribute the funds needed if available which funds will immediately be paid back to partnership in satisfaction of the loan indeed partnership may simply cancel the note and avoid the necessity of the circular transfer of funds regardless of the mechanism ultimately selected to satisfy the note on the maturity_date it is clear that the payment of the interest and principal to partnership of which the estate owns a interest and the estate and estate beneficiaries own a interest will not result in any economic detriment or benefit to the estate or the thus from an economic standpoint the loan transaction has no financial tam-145318-03 estate beneficiaries as obligors or the partnership as obligee since the parties have virtually identical interests in the estate and the partnership there is no change in the relative net_worth of these parties as a result of the loan transaction rather other than the favorable tax treatment resulting from the transaction it is difficult to see what benefit will be derived from this circular transfer of funds impact aside from the estate_tax effect if the interest is allowed as a deduction under these circumstances we do not believe the interest constitutes a deductible administration expense under sec_2053 where the courts declined to allow an income_tax deduction for interest under similar circumstances for example in 364_us_361 the court considered a loan transaction in which the taxpayer purchased an annuity with a long-term note and a small amount of cash in a series of circular transfers the taxpayer paid the interest due on the note each year in advance and then immediately borrowed against the annuity_contract in an amount that covered most of the taxpayer’s cash outlay for interest the annual loans negated any possibility that the arrangement would ever generate any net cash_value from which the annuity would be paid in reality the annuity transaction had no economic value for the taxpayer other than to provide an income_tax deduction for his interest payments the court concluded that an income_tax deduction was not allowable for the taxpayer’s interest payment as follows we believe this position is amply supported by numerous income_tax cases when we examine ‘what was done’ here we see that i n form the taxpayer had an annuity_contract with a so-called guaranteed cash_value at maturity of dollar_figure this was a fiction because each year knetsch’s annual borrowings kept the net cash_value on which any annuity or insurance payments would depend at the relative pittance of dollar_figure knetsch’s transaction with the insurance_company did not appreciably affect his beneficial_interest except to reduce his tax for it is patent that there was nothing of substance to be realized by knetsch from this transaction beyond a tax deduction what he was ostensibly lent back was in reality only the rebate of a substantial part of the so- called interest payments knetsch v united_states u s pincite the courts have applied similar reasoning in numerous cases to disallow the deduction of purported expenses see 326_f3d_737 6th cir taxpayer did nothing more than show a deductible expense on paper without actually suffering any of the ordinary economic consequences of paying the money because circular netting transactions obviated the obligations to ever actually repay the underlying loans acm holdings inc v w here the same persons occupy both sides of the bargaining table the in 154_f3d_61 3d cir a case in which the form of a transaction does not necessarily correspond to the intrinsic economic nature of the transaction for the parties may mold it at their will in order to create whatever appearance would be of benefit to them despite the economic reality of the transaction accordingly where the same individuals control both the transferor and the transferee the transaction must be scrutinized according to an objective test of economic reality to determine its true economic nature tam-145318-03 301_f3d_96 3d cir the main question is a simple one absent the tax benefits whether the transaction affected the taxpayer’s financial position in any way 155_f3d_584 2d cir n ot only must the underlying transaction have economic_substance but the debt must be real as well 364_f2d_734 2d cir deduction denied for interest charges in loan arrangements that can not with reason be said to have purpose substance or utility apart from their anticipated tax consequences third circuit rejected the irs’ characterization of a transaction between a_trust and an estate as a loan the court noted geftman v commissioner f 3d pincite emphasis supplied presented in the cases discussed above the estate and the partnership executed a document pursuant to which the partnership distributed funds to the estate and the estate executed a note under which the estate became obligated to pay the partnership_interest and principal on the maturity_date however ninety-nine percent of the partnership was owned by the estate to be transferred to trusts for the benefit of child a and child b and the remaining one percent was owned by child a the co-executor of the estate thus the same parties owned and controlled both the borrower and the lender and were essentially dealing with themselves and sitting on both sides of the table the circular flow of funds presented is readily apparent the netting effect presented either obviates the need to actually pay the interest and principal when due or if in fact funds are transferred in payment of interest the payment will have no economic_effect on the parties after any such payment the parties will be in the same economic position as they were before the payment sec_2053 for the claimed interest amount in this case sec_6110 of the code provides that it may not be used or cited as precedent a copy of this technical_advice_memorandum is to be given to the taxpayer the present case presents a situation that is substantially_similar to those consequently for the reasons discussed above a deduction is not allowed under


internal_revenue_service number release date index number ---------------------------------------- --------------------------------- --------------------------------- ------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-102284-08 date date x -------------------------------------------------------------------------------------------------- ------------------------ grantors -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------- trust trust trust -------------------------------------------------------------------------------------------------- ----------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- -------------------------- d1 d2 ---------------- ---------------- year ------- plr-102284-08 dear ------------------ this responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representatives requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x made an election to be treated as an s_corporation effective d1 a and b created trust on d2 of year and funded it with x stock pursuant to its terms trust immediately divided into trust and trust trust and trust are represented as being eligible to be electing small_business trusts esbts the primary beneficiaries of trust and trust also have withdrawal powers over their respective trusts that would cause them to be the owners of a portion of their respective trusts under sec_671 and sec_678 the trustee of trust and trust failed to make esbt elections x’s s_corporation_election terminated effective d2 of year x represents that the failure_to_file the esbt elections for trust and trust was not motivated by tax_avoidance or retroactive tax planning x and its shareholders have agreed to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation sec_1361 of the code provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that for purposes of sec_1361 an esbt may be a shareholder of an s_corporation sec_1361 defines an esbt sec_1361 provides that except as provided in sec_1362 an esbt means any trust if i such trust does not have as a beneficiary any person other than i an individual ii an estate iii an organization described in sec_170 or or iv an organization described in sec_170 which holds a contingent_interest in such trust and is not a pcb ii no interest in such trust was acquired by purchase and iii an election under sec_1361 applies to such trust sec_1361 provides that an election under sec_1361 shall be made by the trustee sec_1_1361-1 of the income_tax regulations provides that the trustee of an esbt must make the esbt election by signing and filing with the service plr-102284-08 center where the s_corporation files its income_tax return a statement that meets the requirements of sec_1_1361-1 sec_1362 provides that a in general an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation and b any termination under sec_1362 shall be effective on and after the date of cessation sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary based solely on the facts submitted and the representations made we conclude that x’s s_corporation_election terminated on d2 of year and that the termination was inadvertent within the meaning of sec_1362 we further hold that pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d2 of year 1and thereafter provided x’s s_corporation_election was valid and provided that the election was not otherwise terminated under sec_1361 trust and trust will be treated as esbts from d2 of year and thereafter the shareholders of x must include their pro-rata share of the separately_stated and nonseparately computed items of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided in sec_1368 this ruling is conditioned upon the trustee of trust and trust filing appropriately completed esbt elections effective d2 the esbt elections must be filed within days following the date of this letter and a copy of this letter should be attached to the elections it is additionally conditioned on trust trust and their beneficiaries filing within days following the date of this letter amended returns for year and subsequent taxable years consistent with the treatment of trust and trust as esbts and the beneficiaries as the owners of their respective portions of trust and trust under sec_671 and sec_678 a copy of this letter should be attached to each plr-102284-08 such amended_return if x or its shareholders fail to treat themselves as described above this ruling is null and void except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the code in particular we express no opinion on whether trust and trust are otherwise eligible to be esbts this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file copies of this letter are being sent to x’s authorized representatives sincerely melissa c liquerman senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes