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 tege eb hw plr-123396-06 date date legend taxpayer ---------------------------------------------------------- ---------------------------------------- policy a ------------------------- rider a-1 ---------------------------------------- rider a-2 ----------------------------------------------------------------- rider a-3 ------------------------------------------- rider a-4 --------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- rider a-5 -------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- --------------------------------------------------- policy b --------------------------------------------------------------------- rider b-1 ---------------------------------------- rider b-2 ------------------------------------------- rider b-3 -------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- --------------------------------------------------- policy c --------------------------------------- rider c-1 --------------------------------------- rider c-2 -------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------ rider c-3 -------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- --------------------------------------------------- rider c-4 ------------------------------------------------------------------------- rider c-5 ------------------------------------------------------------ policy d ---------------------------------- optional benefit d-1 ------------------------------------------ plr-123396-06 optional benefit d-2 ------------------------------ optional benefit d-3 ---------------------------------- policy e ---------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------ rider e-1 ----------------------------------------- rider e-2 ---------------------------------------- policy f --------- ---------------------------------------------------------------- rider f-1 -------------------------------------- rider f-2 ------------------------------------- policy g --------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------ --------------------------------------- rider g-1 ------------------------------------------------- rider g-2 ---------------------------------------------- rider g-3 -------------------------------------------------- rider g-4 ----------------------------------------- rider g-5 ------------------------------------ rider g-6 ------------------------------------------ rider g-7 ------------------------------------------- rider g-8 -------------------------------------------------------- rider g-9 ---------------------------- policy h --------------------------------------------------------------------------- optional benefit h-1 -------------------------------------------------------------------- optional benefit h-2 -------------------------------------------------- optional benefit h-3 ---------------------------------- policy i -------------------------------------------------------------------------- rider i-1 ----------------------------------- rider i-2 ---------------------------------------------------- rider i-3 ------------------------------------------------------ policy j ----------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- rider j-1 ----------------------------------- rider j-2 ---------------------------------------------------- rider j-3 ------------------------------------------------------ policy k --------------------------------------------------------------------- dear ----------------- this responds to your letter of date requesting rulings on behalf of taxpayer concerning whether certain insurance contracts policies riders and optional benefits constitute permitted_insurance permitted coverage or preventive care within the meaning of sec_223 of the internal_revenue_code the code so that employees who are covered by the policies riders and optional benefits and who are plr-123396-06 otherwise eligible to contribute to a health_savings_account hsa remain eligible to make hsa contributions taxpayer offers its eligible employees health and accident benefits including an accident_and_health_plan that is intended to qualify as a high_deductible_health_plan hdhp within the meaning of sec_223 of the code in addition to coverage under the hdhp taxpayer offers its eligible employees the opportunity to purchase the following policies riders and optional benefits none of which are hdhps within the meaning of sec_223 policy a is a group policy that pays a specified amount upon the first occurrence of most types of cancer excluding skin cancer policy a covers up to specified amounts for comprehensive cancer treatment including hospital confinement drugs diagnostic testing in-hospital private nursing care certain surgeries ambulance transportation and hospice care policy a does not cover conditions or illnesses resulting from cancer or any other diseases rider a-1 is an optional rider to policy a that covers hospitalization in intensive care and ambulance transportation to the intensive care unit for the treatment of cancer rider a-2 is an optional rider to policy a that provides hospitalization benefits for the treatment of cancer up to a specified amount that increases progressively every year for the first five years policy a and rider a-2 are in force rider a-3 is an optional rider to policy a that provides a return of premium after policy a is in force for five years the amount to be returned is determined by a formula based on the individual’s age the length of time the policy is in force and the amount of any claims paid under the policy rider a-4 is an optional rider to policy a that provides hospital intensive care benefits up to a specified amount and ambulance transportation to the hospital intensive care unit for the treatment of cancer benefits are reduced by when the covered_person reaches age rider a-5 is an optional rider to policy a that provides hospital intensive care benefits up to a specified amount and ambulance transportation to the hospital intensive care unit for the treatment of cancer benefits are reduced by when the covered_person reaches age no benefits are paid if cancer or a specified disease is diagnosed within the policy’s initial 30-day waiting_period policy b is a group policy that pays a specified amount upon the first occurrence of most types of cancer policy b covers certain aspects of cancer treatment including continuous hospital confinement and radiation chemotherapy up to specified amounts policy b does not cover conditions or illnesses resulting from cancer or from any other diseases plr-123396-06 rider b-1 is an optional rider to policy b that covers hospitalization in intensive care and ambulance transportation to the intensive care unit for the treatment of cancer rider b-2 is an optional rider to policy b that provides a return of premium after policy b is in force for five years the amount to be returned is determined by a formula based on the individual’s age the length of time the policy is in force and the amount of any claims paid under the policy rider b-3 is an optional rider to policy b that provides hospital intensive care benefits up to a specified amount and ambulance transportation to the hospital intensive care unit for the treatment of cancer benefits are reduced by when the covered_person reaches age no benefits are paid if cancer or a specified disease is diagnosed within the policy’s initial 30-day waiting_period policy c is an individual policy that covers treatment up to specified amounts for the treatment of the first occurrence of cancer and certain other specified diseases policy c covered treatment benefits include hospital confinement surgery in-hospital private duty nursing ambulance transportation and radiation chemotherapy rider c-1 is an optional rider to policy c that pays a specified amount upon the initial diagnosis of cancer rider c-2 is an optional rider to policy c that pays a per_diem amount for each day of confinement in the intensive care unit of a hospital up to days including ambulance transportation to the intensive care unit for the treatment of one of the specified diseases covered by policy c benefits are reduced by when the covered_person reaches age rider c-3 is an optional rider to policy c that pays a per_diem amount for each day of confinement in the intensive care unit of a hospital up to days including ambulance transportation to the intensive care unit for the treatment of a specified disease covered by policy c benefits are reduced by when the covered_person reaches age rider c-3 excludes such benefits if the specified disease is diagnosed within the policy’s initial 30-day waiting_period rider c-4 is an optional rider to policy c that pays up to specified amounts for treatment such as hospital confinement and surgery of the specified diseases covered by policy c rider c-5 is an optional rider to policy c that pays a specified amount for the initial diagnosis of cancer the specified amount increases progressively based on the length of time the rider and policy are in force and pays a surrender_value if no cancer diagnosis occurs within the first five years of coverage the rider terminates after years at which time the guaranteed value is paid plr-123396-06 policy d is a group policy that pays up to a specified amount for the fist occurrence of cancer and certain other specified diseases policy d coverage includes benefits for hospital confinement surgery in hospital private duty nursing ambulance transportation anesthesia and radiation chemotherapy optional benefit d-1 a benefit that is optional to policy d pays a specified amount upon the initial diagnosis of cancer excluding skin cancer optional benefit d-2 a benefit that is optional to policy d pays a per_diem amount for each day of confinement in the intensive care unit of a hospital up to days including a specified amount for ambulance transportation to the intensive care unit for the treatment of one of the specified diseases covered by policy d optional benefit d-3 a benefit that is optional to policy d covers up to a specified amount for certain cancer screening services regardless of whether the covered individual is diagnosed with a specified disease covered cancer screening services include colonoscopy chest x-ray and bone marrow testing policy e is a group policy that pays a specified amount for treatment of a heart attack heart disease or stroke policy e does not cover any disease sickness or incapacity resulting from a heart attack heart disease or stroke benefits covered under policy e’ include hospital confinement drugs and in hospital private nursing rider e-1 is an optional rider to policy e that pays a specified amount for the initial diagnosis of cancer excluding skin cancer rider e-2 is an optional rider to policy e that pays a per_diem amount for confinement in an intensive care unit up to days for the treatment of diseases specified in policy e and ambulance transportation to the intensive care unit for the treatment of such diseases policy f pays up to a specified amount for the initial diagnosis of a disease specified under the policy rider f-1 is an optional rider to policy f that pays a per_diem amount for every day of hospital confinement for up to one year covered confinement may be for the treatment of a sickness or injury that is not a disease specified under policy f rider f-2 is an optional rider to policy f that pays a specified amount for the initial diagnosis of certain types of cancer policy g is a group hospital confinement indemnity policy that pays a specified amount for each day of hospital confinement up to a specified number of days a specified plr-123396-06 amount for each day of confinement in an intensive care unit and a premium waiver during such period of hospital confinement rider g-1 is an optional rider to policy g that pays a specified amount for treatment of a covered individual by a physician outside of a hospital up to a specified number of visits a year rider g-2 is an optional rider to policy g that pays a per_diem amount for treatment by a physician in a hospital other than a surgeon during hospital confinement rider g-3 is an optional rider to policy g that pays a specified amount for medical or surgical treatment in an emergency room up to twice a year rider g-4 is an optional rider to policy g that pays a specified amount for a surgical operation and anesthesia for surgery performed in a hospital or an ambulatory surgical center rider g-5 is an optional rider to policy g that pays a specified amount for a covered individual’s initial confinement to a hospital during a calendar_year this amount is in addition to the per_diem amount for hospital confinement paid under policy g rider g-6 is an optional rider to policy g that pays a per_diem amount for each day that at home nursing care is required following a covered hospital confinement covered at home nursing care must be authorized by an attending physician rider g-7 is an optional rider to policy g that pays a specified amount monthly upon receipt of written proof that the covered individual is totally disabled has been disabled for days and loses income due to such disability rider g-8 is an optional rider to policy g that pays a specified amount monthly upon receipt of written proof that the covered individual is totally disabled due to cancer a heart attack or stroke has been disabled for days and loses income due to such disability rider g-9 is an optional rider to policy g that pays a specified amount for ambulance transportation to a hospital or emergency treatment center and if treatment can not be obtained locally a specified amount for non-local transportation policy h is a group hospital confinement indemnity policy that pays a specified amount for each day of hospital confinement up to a specified number of days a specified amount for each day of confinement in an intensive care unit a premium waiver during hospital confinement and a specified amount for initial hospital confinement additionally policy h pays a specified amount for a surgical operation performed in a hospital or ambulatory surgical center anesthesia for such surgery inpatient care by a physician other than the surgeon medical or surgical care in an outpatient emergency plr-123396-06 treatment center limited to two visits a year an outpatient emergency accident benefit up to five visits a year for any reason for a physician’s treatment outside of a hospital at home nursing care during the period following hospital confinement up to three ambulance trips a year to a hospital or emergency treatment center and non-local transportation required for out-of-area treatment optional benefit h-1 a benefit that is optional to policy h pays up to a specified amount for tests performed for the diagnosis of an injury or sickness suggested by symptoms of an injury or sickness outside of hospital confinement optional benefit h-2 a benefit that is optional to policy h pays up to a specified amount for a routine physical examination or preventive screening services eg bone marrow testing colonoscopy chest x-ray outside of hospital confinement optional benefit h-3 a benefit that is optional to policy h covers up to a specified number of prescription drugs policy i is an individual policy that pays a specified amount for covered losses sustained from an off-the-job accident resulting in accidental death or dismemberment within days from the date of the accident policy i also pays a specified amount for hospital confinement ambulance transportation medical_expenses and payment for total disability resulting from the accident policy i does not cover loss caused by sickness rider i-1 is an optional rider to policy i that pays a specified amount per month for total disability resulting from sickness rider i-2 is an optional rider to policy i that pays a specified amount for each day of hospital confinement due to sickness that does not result from an injury regardless of whether the covered_person is disabled as defined in policy i rider i -3 is an optional rider to policy i that pays a specified amount for treatment by a physician outside of a hospital for any reason and regardless of whether the covered individual is disabled as defined in policy i policy j is an individual policy that pays a specified amount for covered losses sustained from an on-the-job or off-the-job accident resulting in accidental death or dismemberment within days from the date of the accident policy j also pays a specified amount for hospital confinement ambulance transportation medical_expenses and payment for total disability resulting from the accident policy j does not cover loss caused by sickness rider j-1 is an optional rider to policy j that pays a specified amount per month for total disability resulting from sickness plr-123396-06 rider j-2 is an optional rider to policy j that pays a specified amount for each day of hospital confinement due to sickness that does not result from an injury regardless of whether the covered_person is disabled as defined in policy j rider j-3 is an optional rider to policy j that pays a specified amount for treatment by a physician outside of a hospital for any reason and regardless of whether the covered individual is disabled as defined in policy j policy k is an individual policy that pays a specified amount for covered losses sustained from an off-the-job accident resulting in accidental death or dismemberment within days from the date of the accident policy k also pays a specified amount for hospital confinement ambulance transportation medical_expenses and payment for total disability resulting from the accident policy k does not cover loss caused by sickness rulings requested you have requested a ruling that employees who are otherwise eligible to contribute to an hsa remain eligible individuals as defined in sec_223 if they are also covered by any policy rider or optional benefit law and analysis sec_1201 of the medicare prescription drug improvement and modernization act of pub_l_no added sec_223 to the code to permit eligible individuals to establish hsas for taxable years beginning after date sec_223 allows a deduction for the taxable_year of an amount equal to the aggregate amount_paid in cash during such taxable_year by or on behalf of an individual to an hsa the legislative_history of sec_223 states that eligible individuals for hsas are individuals who are covered by a high_deductible_health_plan and no other health plan that is not a high_deductible_health_plan the legislative_history also states that a n individual with other coverage in addition to a high_deductible_health_plan is still eligible for an hsa if such other coverage is certain permitted_insurance or permitted coverage h_r conf_rep no 108th cong 1st sess sec_223 requires that for an individual to be an eligible_individual the individual must be covered under a high_deductible_health_plan hdhp sec_223 defines an hdhp as a health plan that satisfies certain requirements with respect to minimum annual deductibles and maximum annual out-of- pocket expenses generally an hdhp may not provide benefits for any year until the deductible for that year is satisfied plr-123396-06 sec_223 provides that in addition to coverage under an hdhp an eligible_individual may have certain additional coverage including permitted_insurance and other specified coverage permitted coverage sec_223 defines permitted_insurance as insurance for a specified disease or illness sec_223 defines permitted_insurance as insurance that pays a fixed amount per day or other period of hospitalization sec_223 defines permitted coverage as coverage for accidents disability dental care vision care or long-term care whether through insurance or otherwise see also notice_2004_2 q a - 2004_1_cb_269 sec_223 provides a safe_harbor for the absence of a preventive care deductible or a preventive care deductible below the minimum annual deductible that section states a plan shall not fail to be treated as a high_deductible_health_plan by reason of failing to have a deductible for preventive care notice_2004_23 2004_1_cb_725 provides that preventive care for purposes of sec_223 includes screening services for cancer and heart and vascular diseases notice_2004_2 2004_1_cb_269 provides that an eligible_individual means with respect to any month any individual who is covered under an hdhp on the first day of such month is not also covered by any other health plan that is not an hdhp with certain exceptions for plans providing certain limited types of coverage is not entitled to benefits under medicare generally has not yet reached age and may not be claimed as a dependent on another person’s tax_return notice_2004_50 provides that an eligible_individual who is covered by an hdhp may also be covered for any benefit provided by permitted_insurance under sec_223 because sec_223 provides that the term permitted_insurance includes insurance for a specified disease or illness an eligible_individual may be covered by an hdhp and also by permitted_insurance for one or more specific diseases or illnesses such as cancer diabetes asthma or congestive heart failure as long as the principal health coverage is provided by the hdhp notice_2004_50 2004_2_cb_196 revrul_2004_45 2004_1_cb_971 accordingly based on the representations made and authorities cited above we conclude as follows policy a constitutes a specified disease or illness policy within the meaning of sec_223 of the code an individual who is otherwise an eligible_individual as defined by sec_223 of the code remains an eligible_individual if covered under policy a rider a-1 rider a-2 rider a-3 rider a-4 and rider a-5 constitute specified disease or illness policies within the meaning of sec_223 of the code an individual who is otherwise an eligible_individual as defined by sec_223 of the plr-123396-06 code remains an eligible_individual if covered under rider a-1 rider a-2 rider a- rider a-4 and rider a-5 policy b constitutes a specified disease or illness policy within the meaning of sec_223 of the code an individual who is otherwise an eligible_individual as defined by sec_223 of the code remains an eligible_individual if covered under policy b rider b-1 rider b-2 and rider b-3 constitute specified disease or illness policies within the meaning of sec_223 of the code an individual who is otherwise an eligible_individual as defined by sec_223 of the code remains an eligible_individual if covered under rider b-1 rider b-2 or rider b-3 policy c constitutes a specified disease or illness policy within the meaning of sec_223 of the code an individual who is otherwise an eligible_individual as defined by sec_223 of the code remains an eligible_individual if covered under policy c rider c-1 rider c-2 rider c-3 rider c-4 and rider c-5 constitute specified disease or illness policies within the meaning of sec_223 of the code an individual who is otherwise an eligible_individual as defined by sec_223 of the code remains an eligible_individual if covered under rider c-1 rider c-2 rider c- rider c-4 or rider c-5 policy d constitutes a specified disease or illness policy within the meaning of sec_223 of the code an individual who is otherwise an eligible_individual as defined by sec_223 of the code remains an eligible_individual if covered under policy d optional benefit d-1 and optional benefit d-2 constitute specified disease or illness policies within the meaning of sec_223 of the code an individual who is otherwise an eligible_individual as defined by sec_223 of the code remains an eligible_individual if covered under optional benefit d-1 or optional benefit d-2 optional benefit d-3 constitutes preventive care for purposes of sec_223 of the code an individual who is otherwise an eligible_individual as defined by sec_223 of the code remains an eligible_individual if covered under optional benefit d-3 policy e constitutes a specified disease or illness policy within the meaning of sec_223 of the code an individual who is otherwise an eligible_individual as defined by sec_223 of the code remains an eligible_individual if covered under policy e plr-123396-06 rider e-1 and rider e-2 constitute specified disease or illness policies within the meaning of sec_223 of the code an individual who is otherwise an eligible_individual as defined by sec_223 of the code remains an eligible_individual if covered under rider e-1 or rider e-2 policy f constitutes a specified disease or illness policy within the meaning of sec_223 of the code an individual who is otherwise an eligible_individual as defined by sec_223 of the code remains an eligible_individual if covered under policy f rider f-1 constitutes insurance paying a fixed amount per day or other period of hospitalization within the meaning of sec_223 of the code an individual who is otherwise an eligible_individual as defined by sec_223 of the code remains an eligible_individual if covered under rider f-1 rider f-2 constitutes a specified disease or illness policy within the meaning of sec_223 of the code an individual who is otherwise an eligible_individual as defined by sec_223 of the code remains an eligible_individual if covered under rider f-2 policy g constitutes insurance paying a fixed amount per day or other period of hospitalization within the meaning of sec_223 of the code an individual who is otherwise an eligible_individual as defined by sec_223 of the code remains an eligible_individual if covered under policy g rider g-1 rider g-2 rider g-3 rider g-4 rider g-5 and rider g-6 do not constitute permitted coverage permitted_insurance or preventative care under sec_223 of the code an individual who is covered under policy g and also covered by rider g-1 rider g-2 rider g-3 rider g-4 rider g-5 or rider g-6 is not an eligible_individual under sec_223 of the code rider g-7 and rider g-8 constitute permitted accident or disability coverage within the meaning sec_223 of the code an individual who is otherwise an eligible_individual as defined by sec_223 of the code remains an eligible_individual if covered under rider g-7 or rider g-8 rider g-9 does not constitute permitted coverage permitted_insurance or preventative care under sec_223 of the code an individual who is covered under policy g and also covered by rider g-9 is not an eligible_individual under sec_223 of the code policy h does not constitute permitted coverage permitted_insurance or preventative care under sec_223 of the code an individual covered by policy h is not an eligible_individual under sec_223 of the code plr-123396-06 although optional benefit h-1 constitutes preventive care for purposes of sec_223 of the code because the individual is also covered by policy h the individual is not an eligible_individual under sec_223 of the code although optional benefit h-2 constitutes preventive care for purposes of sec_223 of the code because the individual is also covered by policy h the individual is not an eligible_individual as defined by sec_223 of the code optional benefit h-3 does not constitute permitted coverage permitted_insurance or preventative care under sec_223 of the code an individual covered by optional benefit h-3 is not an eligible_individual under sec_223 of the code policy i is permitted accident coverage within the meaning of sec_223 an individual who is otherwise an eligible_individual as defined by sec_223 of the code remains an eligible_individual if covered under policy i rider i-1 is permitted accident coverage within the meaning of sec_223 an individual who is otherwise an eligible_individual as defined by sec_223 of the code remains an eligible_individual if covered under rider i-1 rider i-2 constitutes insurance paying a fixed amount per day or other period of hospitalization within the meaning of sec_223 of the code an individual who is otherwise an eligible_individual as defined by sec_223 of the code remains an eligible_individual if covered under rider i-2 rider i-3 does not constitute permitted coverage permitted_insurance or preventative care under sec_223 of the code an individual who is covered under policy i and also covered by rider i-3 is not an eligible_individual under sec_223 of the code policy j is permitted accident coverage within the meaning of sec_223 an individual who is otherwise an eligible_individual as defined by sec_223 of the code remains an eligible_individual if covered under policy j rider j-1 is permitted accident coverage within the meaning of sec_223 an individual who is otherwise an eligible_individual as defined by sec_223 of the code remains an eligible_individual if covered under rider j-1 rider j-2 constitutes insurance paying a fixed amount per day or other period of hospitalization within the meaning of sec_223 of the code an individual who is otherwise an eligible_individual as defined by sec_223 of the code remains an eligible_individual if covered under rider j-2 rider j-3 does not constitute permitted coverage permitted_insurance or preventative care under sec_223 of the code an individual who is covered under policy j and also covered by rider j-3 is not an eligible_individual under sec_223 of the code plr-123396-06 policy k is permitted accident coverage within the meaning of sec_223 an individual who is otherwise an eligible_individual as defined by sec_223 of the code remains an eligible_individual if covered under policy k if an individual is covered by any policy rider or optional benefit that does not meet the requirements of permitted coverage permitted_insurance or preventative care under sec_223 of the code the individual is not an eligible_individual thus for example even though an individual is covered by a policy that satisfies the requirements of permitted coverage permitted_insurance or preventative care but the individual is also covered by a rider or optional benefit that does not satisfy the requirements for permitted coverage permitted_insurance or preventative care the individual is not eligible to contribute to an hsa conversely if the policy does not meet the requirements for permitted coverage permitted_insurance or preventative care the individual is not an eligible_individual for purposes of sec_223 of the code whether or not the individual is covered by riders or optional benefits that do satisfy the requirements no opinion is expressed or implied concerning the tax consequences of any of the policies riders or optional benefits under any other provision of the code or regulations other than those specifically stated herein 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 as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives harry beker chief health welfare branch office of division counsel associate chief_counsel tax exempt government entities- sincerely


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 plr-130016-18 date april legend x --------------------------- ------------------------- state -------------- year ------- year ------- a ---------------------- llc ----------------------- dear ------------ this responds to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_754 of the internal_revenue_code code facts the information submitted states that x was formed in year as a state limited_liability_company classified as a partnership for federal tax purposes a’s single member llc which was treated as an entity disregarded from a for u s federal_income_tax purposes was a partner in x a died during year x relied on its advisor to file an election under sec_754 however the advisor failed to make an election under sec_754 for year law and analysis plr-130016-18 sec_754 provides in part that if a partnership files an election in accordance with the regulations prescribed by the secretary the basis of partnership property is adjusted in the case of a distribution_of_property in the manner provided in sec_734 and in the case of a transfer of a partnership_interest in the manner provided in sec_743 such an election shall apply with respect to all distributions of property by the partnership to all transfers of interests in the partnership during the taxable_year with respect to which the election was filed and all subsequent taxable years sec_1_754-1 of the income_tax regulations provides that an election under sec_754 to adjust the basis of partnership property under sec_734 and sec_743 with respect to a distribution_of_property to a partner or a transfer of an interest in a partnership shall be made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed not later than the time prescribed by sec_1 e including extensions thereof for filing the return for that taxable_year 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 six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and grant of relief will not prejudice the interests of the government conclusion based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make an election under sec_754 effective for its year taxable_year and thereafter the election should be made in a written_statement filed with the appropriate service_center for association with x’s year tax_return a copy of this letter should be attached to the sec_754 election plr-130016-18 this ruling is contingent on x adjusting the basis of its properties to reflect any sec_734 or sec_743 adjustments that would have been allowable if the sec_754 election had been timely made regardless of whether the statutory period of limitation on assessment or filing for a claim of refund has expired for any year subject_to this grant of late relief any depreciation deduction allowable for an open_year is to be computed based upon the remaining useful_life and using property basis adjusted by the greater of any depreciation deduction allowed_or_allowable in any prior year had the sec_754 election been timely made additionally the partners of x must adjust the basis of their interests in x to reflect what that basis would be if the sec_754 election had been made regardless of whether the statutory period of limitations on assessment or filing a claim_for_refund has expired for any year subject_to this grant of late relief except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion as to whether x is a partnership for federal tax purposes the ruling contained in this letter is based upon information and representations submitted by the taxpayer an accompanied by a penalty of perjury statement executed by the appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification or examination pursuant to a power_of_attorney on file with this office we are sending a copy of this letter to x’s authorized representatives this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely holly porter associate chief_counsel passthroughs and special industries by laura fields laura fields senior technician reviewer branch passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


department of the treasury internal_revenue_service washington d c iep hh 7p- tax_exempt_and_government_entities_division u i l attn legend county a state b plan x group n employees proposed resolution o dear this is in response to a ruling_request submitted by your authorized representative dated date as supplemented by correspondence dated date date date and date with respect to the federal income treatment of certain contributions to plan x under sec_414 of the internal_revenue_code the code’ the following facts and representations have been submitted on your behalf is a political_subdivision of state b and the governmental employer of county a group n employees effective december county a established plan x for the benefit of its group n employees plan x was approved as to form by the counsel for county a county a represents that plan x meets the qualification requirements set forth in code sec_401 and its associated trust is tax exempt under code sec_501 o n i county a added a pick-up feature designed to qualify under sec_414 of the code to plan x pursuant to section employee contributions of appendix b eligible group n employees have a one-time irrevocable option to contribute ten percent of their salary on a pre-tax basis to plan x by submitting a valid election agreement on or before date eligible group n employees hired after or designated as eligible group n employees subsequent to date must make the one-time irrevocable election by submitting a valid election agreement within days from the later of the date of hire or the date of designation as an eligible group n employee contributions under section shall be picked up and deemed to be employer contributions in accordance with sec_414 of the code county a represents that the effective date of the above pick-up provision was date in a letter dated date submitted on your behalf by your authorized representative certain additional information was submitted to the internal_revenue_service for consideration in your request for a ruling first a proposed resolution resolution o drafted by the board_of supervisors of county a to implement the pick up of employee contributions recognizes that county a maintains plan x and desires to pick up the employee contributions to plan x pursuant to code sec_414 proposed resolution o specifically provides that county a will pick up the group n employee contribution made to plan x pursuant to the provisions of plan x and code sec_414 and although the contributions are designated as group n employee contributions county a will pay such contributions in lieu of contributions by the group n employees proposed resolution o further provides that the group n employees participating in plan x will not have the option of choosing to receive the contributions that are picked up directly in lieu of having them paid_by county a to plan x second an amendment has been proposed to plan x withdrawal provisions appendix b that would eliminate the withdrawal privileges associated with pre- tax contributions specifically the proposed amendment provides that pre-tax contributions may not be withdrawn prior to a termination of a group n employee’s employment based upon the aforementioned facts and representations you request the following rulings that the mandatory employee contributions to plan x which are picked for those eligible group n employees who so elect in an irrevocable written election are picked up within the meaning of sec_414 of the code thereby rendering the picked-up contributions excludable from the current gross_income of such o o l employees that the picked-up contributions to plan x are not considered to be wages of employees as defined in sec_3401 of the code for federal_income_tax withholding purposes and that as such federal income taxes need not be withheld on the picked-up contributions sec_414 of the code provides that contributions otherwise designated as employee contributions shall be treated as employer contributions if such contributions are made to a plan described in sec_401 of the code established by a state government or political_subdivision thereof or any agency_or_instrumentality of any one of the foregoing and are picked up by the employing unit the federal_income_tax treatment to be accorded contributions which are picked up by the employer within the meaning of sec_414 of the code is specified in revrul_77_462 1977_2_cb_358 in that revenue_ruling the employer school district agreed to assume and pay the amounts employees were required by state law to contribute to a state pension_plan revrul_77_462 concluded that the school district’s picked-up contributions to the plan are excluded from the employees’ gross_income until such time as they are distributed to the employees the revenue_ruling held further that under the provisions of sec_3401 of the code the school district’s contributions to the plan are excluded from wages for purposes of the collection of income_tax at source on wages therefore no withholding is required from the employees’ salaries with respect to such picked up contributions the issue of whether contributions have been picked up by an employer within the meaning of sec_414 of the code is addressed in revrul_81_35 1981_1_cb_255 and revrul_81_36 c b these revenue rulings established that the following two criteria must be met the employer must specify that contributions although designated as employee contributions are being paid_by the employer in lieu of contributions by the employee and the employee must not be given the option of choosing to receive the contributed amounts directly instead of having them paid_by the employer to the pension_plan furthermore it is immaterial for purposes of the applicability of code sec_414 whether an employer picks up contributions through a reduction in salary an offset against future salary increases or a combination of both in order to satisfy revrul_81_35 and revrul_81_36 with respect to particular contributions revrul_87_10 1987_1_cb_136 provides that the required specification of designated employee contributions must be completed before the period to which such contributions relate if not the f l designated employee contributions being paid_by the employer are actually employee contributions paid_by the employee and recharacterized at a later date the retroactive specification of designated employee contributions as paid_by the employing unit ie the retroactive pick-up of designated employee contributions by a governmental employer is not permitted under sec_414 of the code thus employees may not exclude from current gross_income designated employee contributions to a qualified_plan that relate to compensation earned for services rendered prior to the date of the last governmental action necessary to effect the pick up in this case proposed resolution o satisfies the criteria set forth in revrul_81_35 and revrul_81_36 by specifically providing that county a will pick up the group n employee contributions made to plan x and although these contributions are designated as employee contributions county a will pay such contributions in lieu of contributions by the group n employees proposed resolution o further provides that group n employees participating in plan x will not have the option of choosing to receive the contributions that are picked up directly in lieu of having them paid_by county a to plan x with respect to your first and second ruling requests we conclude assuming proposed resolution o is adopted and implemented as proposed that the mandatory group n employee contributions to plan x that are picked up for those eligible group n employee pursuant to an irrevocable written election although designated as employee contributions will be treated as employer contributions that are picked up by county a within the meaning of code sec_414 and will not be includable in the group n employees’ gross_income for federal_income_tax purposes in the year in which they are contributed to plan x these amounts will be includable in the gross_income of the group n employees or their beneficiaries in the taxable_year in which they are distributed to the extent they represent amounts contributed by county a because we have determined that the picked up amounts are to be treated as employer contributions they are excepted from wages as defined in sec_3401 of the code for federal_income_tax withholding purposes in addition no part of the amounts picked up by county a will constitute wages for federal_income_tax withholding purposes in the taxable_year in which they are contributed to plan x revrul_87_10 provides that employees may not exclude from current gross_income designated employee contributions that relate to compensation earned for services prior to the date of the last governmental action necessary to effect and implement the pick up arrangement in accordance with revrul_87_10 the conclusions reached in this ruling do not apply to any pick up contributions to plan x to the extent the pick up contributions relate to compensation earned before the date of the last governmental action necessary to effect and implement the pick up arrangement as described in proposed n i resolution o that the service has concluded contains the necessary specifications of revrul_81_35 and revrul_81_36 this ruling is limited to the pick up of group n employees’ contributions subsequent to the adoption and implementation of proposed resolution o and does not express an opinion as to the validity of the pick up of group n employees’ contributions prior to the adoption and implementation of proposed resolution o these rulings apply only if the effective date for the commencement of any proposed pick up as described in proposed resolution o is not earlier than the later of the date proposed resolution o is adopted by county a the date proposed resolution o become effective or the date the pick up is put into effect this ruling is based on county a adopting proposed resolution o as submitted with your correspondence dated date this ruling is based on the condition that a group n employee who makes a one- time irrevocable election to participate in the pick up arrangement of plan x within county a’s prescribed election_period may not subsequently alter or amend this election to participate in the pick up arrangement this ruling is also based on the condition that a group n employee who makes a one-time irrevocable election to not participate in the pick up arrangement of plan x within county a’s prescribed election_period may not subsequently alter or amend this election to not participate in the pick up arrangement further a group n employee who fails to elect to make an affirmation election to participate in the pick up arrangement of plan x within county a’s prescribed election_period is deemed to have elected to not participate in that arrangement this deemed_election to not participate in the pick up arrangement is treated as the one-time irrevocable election for such group n employee and for purposes of this ruling and the conclusions reached under code sec_414 may not be subsequently altered or amended this ruling is based on proposed resolution o submitted with your correspondence dated date and the proposed amendment to appendix b submitted with correspondence dated date only to the extent that such amendment once executed by employer a prospectively removes the withdrawal privileges associated with pre-tax contributions no opinion is expressed as to the status of plan x or of the consequences of this provision prior to county a adopting and executing the above amendment no opinion is expressed as to whether the amounts in question are subject_to tax under the federal_insurance_contributions_act no opinion is expressed as to whether the amounts in question are paid pursuant to a salary reduction agreement’ within the meaning of code sec_3121 this ruling only addresses the pick up treatment of contributions under code sec_414 subsequent to the adoption and implementation of proposed resolution o this ruling does not express an opinion as to the qualified status of plan x under code sec_401 nor the effective date of the proposed amendment to appendix b that relates to the withdrawal of pre-tax contributions the determination as to whether plan x including the proposed amendment is qualified under code sec_401 is within the jurisdiction of the employee_plans determinations office of the internal_revenue_service this letter_ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent a copy of this ruling is being sent to your authorized representative in accordance with a power_of_attorney form on file in this office if you have any questions please contact se t ep ra t2 sincerely yours joyce e floyd manager employee_plans technical group enclosures deleted copy of letter_ruling form_437


t c memo united_states tax_court emmett i and shirley sindik petitioners v commissioner of internal revenue respondent docket no filed date emmett i and shirley sindik pro_se lisa m bernardini for respondent memorandum opinion wright judge respondent determined deficiencies additions and penalties with respect to petitioners’ federal_income_tax for taxable years and as follows year deficiency dollar_figure big_number big_number additions to tax and penalties sec_6653 sec_6661 sec_6662 dollar_figure -0- -0- dollar_figure -0- -0- -0- dollar_figure big_number after concessions by the parties which will be given effect in the rule computation the issues for decision are whether petitioners understated gross_receipts for taxable years and in the amounts of dollar_figure dollar_figure and dollar_figure respectively as determined by respondent we hold that they did whether petitioners overstated business_expense deductions for the taxable years at issue as determined by respondent we hold that they did whether petitioners had unreported capital_gain for taxable_year in the amount of dollar_figure as determined by respondent we hold that they did whether petitioners are liable for an addition_to_tax for negligence under sec_6653 for taxable_year and accuracy-related_penalties for negligence under sec_6662 for taxable years and we hold that they are 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure whether petitioners are liable for an addition_to_tax under sec_6661 for a substantial_understatement of tax for taxable_year we hold that they are background petitioners resided in new orleans louisiana at the time the petition was filed petitioners timely filed their joint federal_income_tax returns for the years at issue references to petitioner in the singular are to emmett i sindik petitioner is the sole_proprietor of an import-export business petitioner has been in the business for more than years acting as the middleman between u s and foreign importers and exporters handling u s customs duties ocean freight fees and trucking fees petitioner essentially completes the paperwork involved and charges a fee to his clients for this service he has no monetary interest in the cargo other than his fee petitioner’s clients write checks payable to petitioner as a customs broker for customs duties and various other fees petitioner deposits these checks into his bank account and subsequently issues checks to the appropriate agencies mrs sindik did not participate in petitioner’s business or in the preparation of their returns petitioner failed to maintain complete and accurate records of his income-producing activities and failed to produce complete and accurate records to respondent in connection with the examination of his income_tax returns for the taxable years at issue respondent using the bank_deposits method determined that petitioners had understated gross_receipts and overstated various business_expense deductions for the years at issue respondent further determined that petitioners had unreported capital_gain in the amount of dollar_figure from the sale of stock in petitioners did not stipulate any facts prior to trial provided no documentary_evidence other than their returns for the taxable years at issue and called no witnesses other than mr sindik who did testify on behalf of himself and mrs sindik petitioner testified that he knows exactly the amount of money he makes on every business transaction but when asked by the court if he had any books reflecting these amounts petitioner stated i don’t keep books gross_receipts the first issue for our decision is whether petitioners understated gross_receipts from mr sindik’s business for taxable years and in the amounts determined by respondent respondent claims that petitioner failed to keep adequate_records and as a result respondent reconstructed petitioners’ income for the years at issue using the bank_deposits method it is well established that where a taxpayer fails to maintain adequate_records the commissioner may prove the existence and amount of unreported income by any method that will clearly reflect the taxpayer’s income sec_446 348_us_121 54_tc_1121 the premise underlying this method of income reconstruction is absent some explanation that a taxpayer’s bank_deposits represent taxable_income the total of all deposits is determined by the commissioner to arrive at the taxpayer’s income adjustments are then made to eliminate deposits that reflect nonincome items such as gifts loans transfers between bank accounts and redeposits petitioners bear the burden of proving that respondent’s determinations including unreported income are incorrect rule a 70_tc_1057 petitioners provided no sufficient evidence indicating that the excess deposits into their bank account during the years at issue were attributable to nontaxable sources petitioners argue that respondent’s use of the bank_deposits method does not accurately reflect the amount of unreported income for the years at issue without more than petitioner’s testimony that he believes respondent’s determinations to be incorrect however we have no way of making any adjustments to respondent’s calculations accordingly we find that petitioners have failed to meet their burden_of_proof and respondent’s determination with respect to petitioners’ unreported gross_receipts for the years at issue is sustained business_expense deductions the second issue for our decision is whether petitioners overstated the amount of their business_expense deductions for the taxable years at issue deductions are a matter of legislative grace and petitioners bear the burden of proving their entitlement to any deduction claimed on their returns 503_us_79 a taxpayer is required to maintain records sufficient to establish the amount of his or her income and deductions sec_6001 under certain circumstances in which a taxpayer establishes his or her entitlement to a deduction but does not establish the amount of the deduction we are permitted to estimate the amount allowable 39_f2d_540 2d cir there must be however sufficient evidence in the record to permit us to conclude that a deductible expense was incurred in at least the amount allowed 245_f2d_559 5th cir in estimating the amount allowable we may bear heavily against the taxpayer whose inexactitude is of his or her own making cohan v commissioner supra pincite based upon the record before us in the instant case we find that petitioners have failed to meet their burden of proving entitlement to business_expense deductions for the years at issue in excess of the amounts allowed by respondent petitioners have provided no sufficient evidence to enable us to estimate the amount of any business_expense in excess of the amounts allowed by respondent accordingly respondent is sustained on this issue capital_gain respondent determined that petitioners failed to report a capital_gain on the sale of stock in the amount of dollar_figure for taxable_year petitioners presented no evidence with respect to this issue accordingly we find that petitioners have failed to meet their burden of proving that respondent’s determination is incorrect and respondent’s determination is therefore sustained negligence the next issue for our decision is whether petitioners are liable for an addition_to_tax for negligence under sec_6653 for taxable_year and for an accuracy-related_penalty for negligence under sec_6662 for taxable years and for taxable_year sec_6653 imposes an addition_to_tax equal to percent of the underpayment if any part of the underpayment is attributable to negligence or intentional disregard of rules or regulations with respect to taxable years and sec_6662 imposes an accuracy- related penalty equal to percent of the portion of the underpayment attributable to negligence or disregard of rules or regulations negligence is defined as a lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances 85_tc_934 negligence includes any failure to make a reasonable attempt to comply with the law sec_6653 sec_6662 respondent’s determination that petitioners’ underpayment was due to negligence is presumptively correct and must stand unless petitioners can establish that they were not negligent hall v commissioner 729_f2d_632 9th cir affg tcmemo_1982_337 in the instant case petitioner admitted that he did not keep records with respect to his business activities as stated earlier a taxpayer is required to maintain records sufficient to establish the amount of his or her income and deductions we find that in keeping no records of his business activities petitioner failed to make any reasonable attempt to comply with the law we find further that the underpayment_of_tax for the years at issue is due to petitioner’s failure to do what a reasonable and ordinarily prudent person would do under like circumstances petitioners presented no sufficient evidence to rebut respondent’s determination that the underpayment_of_tax for the years at issue was due to negligence accordingly respondent’s determination is sustained on this issue substantial_understatement respondent determined that petitioners are liable for an addition_to_tax for a substantial_understatement_of_income_tax under sec_6661 for taxable_year the amount of the sec_6661 addition_to_tax for additions assessed after date is equal to percent of the amount of any underpayment attributable to the substantial_understatement omnibus budget reconciliation act of publaw_99_509 100_stat_1951 90_tc_498 a substantial_understatement occurs when an understatement exceeds the greater of dollar_figure or percent of the amount of tax required to be shown on a return sec_6661 an understatement means the excess of the amount of the tax required to be shown on a return over the amount of tax imposed which is shown on the return sec_6661 sec_6661 provides for the reduction of an understatement by that portion of the understatement which is attributable to either the tax treatment of any item by the taxpayer if there is or was substantial_authority for such treatment or any item with respect to which the relevant facts affecting the item’s tax treatment are adequately disclosed in the return or in a statement attached to the return petitioners presented no evidence that there was substantial_authority for the treatment of any item or that any item was adequately disclosed on their returns for the years at issue accordingly respondent is sustained on this issue to reflect the foregoing decision will be entered under rule


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom corp plr-103061-99 date date in re distributing controlled business a business b m n financial advisor date a date b a b c d e dear this is in reply to a letter dated date requesting rulings as to the federal_income_tax consequences of a proposed transaction additional information was provided in letters dated april and date the material submitted for consideration is summarized below distributing is the common parent of an affiliated_group_of_corporations that files a consolidated_return for federal_income_tax purposes distributing has a single class of stock outstanding which is widely held and traded on the m distributing is engaged directly and indirectly through subsidiaries in business a and business b distributing has submitted data indicating that business a and business b each have had gross_receipts and operating_expenses representative of the active_conduct_of_a_trade_or_business for each of the past years the assets and liabilities of business b were transferred from distributing to controlled in date a in connection with this transfer distributing and controlled entered into certain agreements that provide distributing and controlled equal access to certain intellectual_property rights for use in their respective businesses the agreements the agreements cross-license the commonly-used intellectual_property between distributing and controlled the cross-licensing arrangement provides the non-owner with a perpetual non-exclusive royalty-free worldwide license to use the owner’s intellectual_property provided that such use is limited to the non-owner’s business the agreements also provide that with respect to certain intellectual_property developed by distributing or controlled during the 3-year transition_period following the ipo described below the non-owner also will be granted a perpetual non- exclusive royalty-free worldwide license to use such property as limited to the non- owner’s business on date b controlled and distributing completed an initial_public_offering the ipo of controlled pursuant to a combined primary and secondary offering upon completion of the ipo distributing owned and continues to own as of the date hereof approximately a percent of the outstanding_stock of controlled accordingly distributing continues to own an amount of stock of controlled constituting control within the meaning of sec_368 of the internal_revenue_code following the ipo the remainder of the stock of controlled is widely held and publicly traded on the n the outstanding capital stock of controlled consists of b common shares management and the board_of directors of distributing have determined that it is in the best interests of distributing to focus on business a its core business and accordingly to spin-off controlled’s business b to distributing’s shareholders the transfer of business b to controlled in date a achieved some separation between distributing’s core business and business b however the taxpayers have provided sufficient documentation that management systemic and other problems continue to exist because controlled continues to be controlled by distributing for example distributing as an a percent shareholder of controlled currently has the ability to elect all of controlled’s board_of directors four of the seven current directors of controlled are also officers of distributing after the distribution of controlled stock none of distributing’s officers or directors will serve as officers or directors of controlled the separation will allow controlled’s management to make decisions based on factors relevant to controlled’s success without having to seek the approval of distributing’s management having determined that the business_purpose described above can best be achieved through a distribution of the stock of controlled the distribution management and the board_of directors of distributing have been advised by financial advisor that given the size of distributing’s current position in controlled and the relatively small public float of controlled’s common_stock a distribution of distributing’s existing a percent interest in controlled would significantly disrupt the market for shares of controlled stock to the detriment of all controlled shareholders based on this advice distributing believes that prior to the distribution it must make additional public sales of shares of controlled stock to increase controlled’s public float reducing the amount of controlled stock that would be distributed in a split-off transaction either by public or private offerings also would reduce the risk that shareholders of distributing would not tender for all of the controlled stock held by distributing and it may reduce the price at which the exchange ratio must be set to encourage a complete split-off in order to allow distributing to sell additional shares of controlled stock while continuing to own an amount of stock of controlled constituting control within the meaning of sec_368 controlled is filing a proxy statement with the securities_and_exchange_commission seeking amendments to its certificate of incorporation that will among other things create two classes of common_stock i class a common_stock entitling the holders thereof to elect up to c percent of controlled’s board_of directors the class a stock and ii class b common_stock entitling the holders thereof to elect the remaining d percent or more of controlled’s board_of directors the class b stock the class a stock and class b stock will have identical rights in all other matters submitted to a vote of shareholders as well as with respect to the payment of dividends and upon liquidation all of the publicly-held shares of controlled stock will be redesignated as class a stock and all of the shares of controlled stock held by distributing will be exchanged for an equal number of shares of class b stock the above steps are collectively referred to as the recapitalization the class b stock retained by distributing would be convertible on a one-for-one basis into class a stock at any time prior to the distribution in connection with a secondary sale distributing will convert an appropriate number of class b stock into class a stock and immediately sell the class a stock as a result of the distribution the value of distributing options held by employees and other individuals will be reduced by the relative value of the controlled stock distributed in the distribution the taxpayer has demonstrated that for several reasons distributing might not be able to adjust for the decrease in the value of its options solely by changing the terms of the distributing options thus distributing might decide to mitigate this decline in value by retaining shares of controlled stock and providing distributing option holders either with direct rights in such retained shares or rights to receive a cash amount distributing would arrange to obtain controlled class a stock for this purpose the total number of retained shares of controlled class a stock would be less than e percent of the total outstanding shares of controlled stock at the time of the distribution the taxpayer has represented that the retention of the controlled stock will satisfy all of the requirements of appendix b of revproc_96_30 1996_1_cb_696 following the recapitalization and for the business_purpose discussed above distributing proposes to distribute all of the controlled class b stock to its shareholders through a an exchange of controlled class b stock for distributing stock split-off b a pro_rata distribution of controlled class b stock on distributing stock spin-off or c some combination of a and b the means finally selected will depend on market conditions at the relevant time the taxpayers have made the following representations concerning the proposed transaction a b c if the distribution is completed as a split-off the fair_market_value of the controlled class b stock and other consideration to be received by each shareholder of distributing will be approximately equal to the fair_market_value of the distributing stock surrendered by the shareholder in the exchange no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing the years of financial information submitted on behalf of distributing and controlled is representative of each corporation’s present operations d e f g h i j and with regard to each corporation there have been no substantial operational changes since the date of the last financial statements submitted following the distribution distributing and controlled each will continue the active_conduct of its business independently and with its separate employees the distribution of the controlled class b stock is carried out to address significant fit and focus issues under the current structure the distribution is motivated in whole or substantial part by this corporate business_purpose there is no plan or intention by any shareholder who own sec_5 percent or more of the stock of distributing and the management of distributing to its best knowledge is not aware of any plan or intention on the part of any particular remaining shareholder or security holder of distributing to sell exchange transfer by gift or otherwise dispose_of any stock in or securities of either distributing or controlled after the distribution there is no plan or intention by distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the distribution other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 1996_1_cb_696 there is no plan or intention to liquidate either distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the distribution except in the ordinary course of business no intercorporate debt will exist between distributing and controlled at the time of or after the distribution other than payables and receivables arising in the ordinary course of business immediately before the distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_2_cb_147 and as currently in effect sec_1_1502-13 as published by t d further distributing’s excess_loss_account if any with respect to controlled will be included in income immediately before the distribution see sec_1_1502-19 k l m n payments made in all continuing transactions between distributing and controlled other than those transactions contemplated by the agreements will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arms’ length no two parties to the transaction are investment companies as defined in sec_368 and iv the distribution is not part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the total combined voting power of all classes of stock of either distributing or controlled or stock possessing percent or more of the total value of all classes of stock of either distributing or controlled to the best of the knowledge of distributing’s management no person who is not a qualified u_s_person under sec_1_367_e_-1t of the temporary income_tax regulations owns directly indirectly or constructively under sec_1_367_e_-1t c percent or more of the distributing stock with respect to which the distribution will be made o distributing will comply with the reporting requirements of sec_1_367_e_-1t c based on the information submitted and representations made it is held as follows no gain_or_loss will be recognized by distributing upon the distribution of the controlled class b stock to its shareholders sec_355 c no gain_or_loss will be recognized by and no amount will otherwise be included in the income of distributing's shareholders on receipt of the controlled class b stock sec_355 if the distribution is completed only as a spin-off the aggregate basis of the controlled class b stock and the distributing stock in the hands of distributing's shareholders after the distribution will be the same as the basis of the distributing stock held immediately before the distribution allocated in proportion to the fair_market_value of each in accordance with sec_1_358-2 sec_358 if the distribution is completed only as a split-off the basis of the controlled class b stock in the hands of distributing's shareholders will be the same as the basis of the distributing stock surrendered in exchange therefor sec_358 if controlled class b stock is received by distributing shareholders in both a spin-off and a split-off the basis of the controlled class b stock received in the split-off will equal the basis of the distributing stock surrendered therefor and the basis of the controlled class b stock received in the spin-off will equal the shareholder’s remaining basis in the shareholder’s distributing stock held immediately before the spin-off allocated between the shares of distributing stock and controlled class b stock in proportion to the fair_market_value of each in accordance with sec_1_358-2 sec_358 and sec_358 the holding_period of controlled class b stock received by a distributing shareholder in a spin-off will include the holding_period of the distributing stock on which the spin-off is made provided the distributing stock is held as a capital_asset on the date of the spin-off sec_1223 the holding_period of the controlled class b stock received by a distributing shareholder in a split-off will include the holding_period of the distributing stock exchanged therefor provided the distributing stock is held as a capital_asset on the date of the split-off sec_1223 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made under sec_1_312-10 pursuant to the temporary regulations currently in effect under sec_367 if distributing does not distribute controlled stock to its shareholders having a value of more than percent of the total value of the total outstanding controlled class a common_stock and controlled class b common_stock then distributing will recognize gain as computed in sec_1_367_e_-1t b to the extent that the distribution is made to persons who are not qualified u s persons as defined in sec_1_367_e_-1t b i the retention by distributing of up to e percent of controlled’s class a stock as described above will not be in pursuance of a plan having as one of its principal purposes the avoidance of federal_income_tax within the meaning of sec_355 temporary or final regulations pertaining to one or more issues addressed in this ruling letter have not yet been adopted therefore this ruling letter may be revoked or modified in whole or in part on the issuance of the temporary or final regulations or a notice with respect to their future issuance see sec_12 revproc_99_1 1999_1_irb_6 which discusses the revocation or modification of ruling letters however when the criteria in dollar_figure of revproc_99_1 are satisfied a ruling will not be revoked or modified retroactively except in rare or unusual circumstances we express no opinion about the federal_income_tax treatment of this transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above rulings in particular we express no opinion regarding the tax treatment of the recapitalization in addition no rulings were requested and no opinion is expressed concerning the tax treatment of the transfers between distributing and controlled of the perpetual non-exclusive royalty-free worldwide licenses for_the_use_of intellectual_property as described above this ruling has no effect on any earlier documents and is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent each taxpayer involved in this transaction should attach a copy of this ruling letter to the taxpayer’s federal_income_tax return for the taxable_year in which the transaction is completed in accordance with the power_of_attorney on file in this office the taxpayer will receive a copy of this letter sincerely assistant chief_counsel corporate by ______________________________ filiz a serbes assistant to the chief branch