department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division contact person identification_number telephone number employer_identification_number uniform issue list number release date date date legend plan hosl2ital year year year dear this responds to your letter of date in which you request rulings on the application of the federal tax laws to the transactions described below you are exempt from federal income_taxation under sec_501 a of the internal_revenue_code as an organization described in sec_501 c for foundation classification purposes you are a supporting_organization within the meaning of sec_509 your mission is to promote health by acting as the parent of a nonprofit health care system and by raising funds and otherwise supporting the health care system you are the sole member of various health care corporations that are exempt from federal income_taxation under sec_501 a as an organization described in sec_501 c the affiliates including two acute care hospitals a specialty hospital that operates a medicare-certified psychiatric hospital that provides outpatient services a corporation that provides outpatient and inpatient physician services through employed physicians a fundraising foundation and a corporation that operates a radiation therapy center none of these affiliates is a private_foundation within the meaning of sec_509 of the code plan is a nonprofit_hospital plan corporation that provides fully insured products and administers employer-funded health care plans to residents in the region of the state in which you operate plan represents the largest nongovernmental payer for patient services provided by your affiliates xxxxxxxxxxxxxxxxxxxxxxxx your affiliates maintain a self-funded health insurance plan for their employ es and covered dependents each affiliate contributes funds to the self-funded health insurance plan on a monthly basis to cover health care claims and related fees and expenses including third party administrator tpa services plan provides the tpa services for this self-funded health insurance plan plan began providing these tpa services pursuant to a 5-year agreement with you effective in july of year you selected plan to be tpa after putting out a bid for these services and determining that plan offered the best overall proposal in terms of pricing capabilities and services among the bidders square feet of new hospital space including new you have undertaken an approximately dollar_figure5 capital improvement project the project that will involve critically needed health care facilities and equipment improvements expansions and updates for the affiliates at one affiliate hospital the project will result in a newly remodeled hospital campus with space for emergency services imaging services and surgical services a new acute-care bed patient tower enabling the transition of all multi-patient rooms to single occupancy and a new hospital entrance at another affiliate hospital the project will result in the expansion of medical oncology services the expansion and renovation of the radiation therapy area including the installation of state-of-the-art stereotactic technology and other upgrades throughout the facility at a third affiliate hospital the project will include the remodeling of inpatient rooms and a new addition to the main entrance to the long-term care center to provide a family visitation center you state that the project is needed to improve health care for patients enhance delivery and service capabilities enhance patient safety increase patient privacy increase staff effectiveness health and safety through a better workplace and improve building operating efficiencies in year plan and the state insurance department entered into an agreement requiring plan to make a specified annual financial commitment to providing health insurance through state approved programs for persons of low income and other community benefit activities approved by the insurance department this agreement resulted in plan seeking ways to reinvest its surplus funds in community health projects in that context plan offered you financial assistance for the project this financial assistance was provided pursuant to an agreement the agreement between you and plan the parties under the agreement which was effective in january of year effective date plan agreed to make available to you and your affiliates a total amount of dollar_figure the funding pursuant to the agreement plan paid your affiliate hospital the total amount of the funding over a one year period to cover the costs and expenses associated with construction of hospital's new acute-care bed patient tower and remodeling of hospital's campus with square feet of new hospital space including new space for emergency services imaging services and surgical services the funding was also used in the development construction of a new energy service_center and a new hospital entrance the funding was contributed to and booked by hospital not you under the agreement the funding is conditioned on you and your affiliates meeting the following seven obligations first during the first three years of the agreement's five-year term xxxxxxxxxxxxxxxxxxxxxxxx the term you and your affiliates that has employees with health coverage agreed to continue to use plan as the exclusive tpa for their self-funded health insurance plan provided the terms and conditions offered by plan were commercially reasonable the agreement allows you to hire an independent actuary mutually agreeable to the parties to analyze and validate the reasonableness of the rates offered by plan if the independent actuary determines that plan's rates are not reasonable plan is required to either adjust its rates in accordance with the evaluation of the independent actuary or elect not to accept the rates of the independent actuary and permit you and your affiliates not to use plan as their administrative services provider without you being in default under the agreement although the agreement required you and your affiliates to use plan as your tpa for the first three years of the term you and your affiliates were already obligated to use plan to perform this function for the first half of this three-year period under the five-year agreement that had been effective since july of year when the five-year term of the agreement effective july of year expired you negotiated a one-year and then a three-year extension of the contract on an arm's length basis these negotiations and renewal processes were conducted without regard to and independent of the agreement which had been consummated and completed by the time the negotiations took place you state that the extensions provided for fair and reasonable administrative fees that remained within the reasonable range of administrative fees by reference to the bids you had previously received for these administrative services more generally you represent that all the fees paid to plan for administrative and related_services have been and continue to be commercially reasonable developed through arm's length negotiations for fair_market_value and comparable to or below what similarly-situated entities would be paid for equivalent services second you agreed to enter into mutually-agreed extensions to the current terms or to establish mutually-agreed new terms of certain provider agreements between plan and your affiliates the system provider agreements under the agreement the specified system provider agreements will have their current terms extended or have agreed new terms for a period at least equal to the agreement's term and continuing through the natural expiration of any relevant provider agreement that has a natural expiration longer than term you represent that the mutually-agreed-upon new terms of the system provider agreements with plan were commercially reasonable developed by the parties through arm's length negotiations and provide for fair and reasonable reimbursements for your affiliates' provision of healthcare services third you agreed to establish a committee of your board_of directors the liaison committee to meet with a committee established by plan's board_of directors up to four times a year during term the purpose of such meetings is for the liaison committee to provide the plan's committee with information on the use of the funding and information on current and future plans and programs that affect plan members the meetings are for discussion purposes only and do not involve in any way a delegation of authority by you to plan fourth you agreed to provide a change_of control notice to plan in the event you receive an offer for a change_of control transaction for yourself or certain enumerated affiliates during the agreement defines a change_of control transaction as any sale_or_other_disposition of all or xxxxxxxxxxxxxxxxxxxxxxxx the term and granted plan the right to either i notify you of its approval of your entering into the change_of control transaction on the condition that the party that offered the transaction assume all of your obligations under the agreement or ii notify you of its disapproval of your entering into the transaction proceeding with the change_of control transaction after notice of plan's disapproval would constitute a default under the agreement fifth you agreed to adopt and provide to plan certain performance metrics including financial and clinical milestones the performance metrics which are to be developed by you in your complete discretion were required to be provided to plan on or before effective date and are reviewed and updated by your board_of directors at least annually during the term in the event that you fail to materially meet your annual performance metrics during the term the agreement provides that you will develop and share with plan action plans that allow you to achieve the performance metrics in the event that you fail to meet performance metrics for two consecutive years during the term plan may require you to hire an independent consultant to recommend ways for you to achieve minimum performance metrics your refusal to either hire an independent consultant after being directed to do so by plan or to timely prepare and submit performance metrics and updates to plan would be a default under the agreement you state that you developed and adopted these performance metrics and reported them to plan primarily to demonstrate that the funding provided under the agreement was being used to further your sec_501 c charitable purposes specifically addressing your goals of providing high quality healthcare services and improving clinical performance all in a financially viable manner sixth you agreed to cooperate with a new medical college described under sec_501 c to develop and implement mutually-agreed-upon student rotations residency and or teaching programs at you and your affiliates you have no obligation under the agreement to provide any financial assistance to the medical college you state that you view the medical college as an integral partner in carrying out your tax-exempt healthcare mission principally with respect to alleviating the increasingly severe shortage of physicians in some of the areas you serve you believe that having physician instructors and the medical college's students on site will have an overall positive impact on the medical staff of your hospitals as well as on the care they provide you also believe that by introducing medical students to clinical practice in your service area this cooperation will continue to provide you with an enhanced ability to recruit and retain well trained and highly-qualified physicians and allow you to carry out your sec_501 c healthcare mission seventh within twelve months of effective date you and plan agreed to identify and initiate specific mutually-agreed-upon projects including regional information_technology projects and clinical quality improvement projects you state that your only obligation under the agreement was to seek mutually-agreed-upon opportunities in good_faith and that there was no affirmative obligation for you to agree to or fund any specific project you engaged in discussions and planning with plan to develop a health information exchange which you say would have been substantially_all of the assets or any merger consolidation or other similar transaction that results in any individual or entity other than you or your board having the authority to appoint or elect a majority of the board_of directors or similar managing body of yours or any of your affiliates however a change_of control transaction does not include any transaction with a tax-exempt locally controlled provider as defined in the agreement that is not in the insurance_business xxxxxxxxxxxxxxxxxxxxxxxx important to improving your delivery of healthcare but you and plan never implemented that exchange because a similar health information exchange became operational first you did not identify or initiate any other projects within_12_months of the effective date and have not identified or initiated any other projects since you state that the failure to identify and initiate a mutually-agreed-upon project was a not a default under the agreement because any obligation to pursue a project was contingent on mutual agreement being reached you state further that you would not have agreed to initiate any project that was not in furtherance of or substantially related to your exempt purposes a failure to fulfill any of these seven obligations during the term would result in a default meaning that you would need to repay an amount up to the amount of funding received without interest as an alternative to repayment plan may seek alternative remedies including a decree compelling specific performance under the agreement or orders restraining and enjoining any act that would constitute a breach under the agreement rulings requested the following rulings have been requested by entering into the agreement and fulfilling your obligations thereunder you will not jeopardize your status as an organization described in sec_501 c by entering into the agreement and fulfilling your obligations thereunder you will not jeopardize your classification as a supporting_organization described in sec_509 the funding you received under the agreement will not constitute unrelated_business_taxable_income within the meaning of lr c sec_501 a exempts from federal income_taxation organizations described in sec_501 c among others sec_501 c describes corporations trusts and associations organized and operated exclusively for charitable and other enumerated exempt purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_507 provides that the term substantial_contributor means any person who contributed or bequeathed an aggregate amount of more than dollar_figure0 to the organization if such amount is more than percent of the total contributions and bequests received by the organization before the close of the taxable_year of the organization in which the contribution or bequest is received by the organization from such person sec_509 defines the term private_foundation as a domestic or foreign organization described in sec_501 c other than an organization described in sec_509 or lr c sec_509 describes an organization which xxxxxxxxxxxxxxxxxxxxxxxx a b is organized and at all times thereafter is operated exclusively for the benefit of to perform the functions of or to carry out the purposes of one or more specified organizations described in sec_509 or is i operated supervised or controlled in connection with one or more organizations described in sec_509 or ii supervised or controlled in connection with one or more such organizations or iii operated in connection with one or more such organizations and c is not controlled directly or indirectly by one or more disqualified persons as defined in sec_4946 other than foundation managers and other than one or more organizations described in sec_509 or lrc sec_511 imposes a tax for each taxable_year on the unrelated_business_taxable_income of organizations described in sec_501 c lrc sec_512 defines unrelated_business_taxable_income as the gross_income derived by any organization from any unrelated_trade_or_business regularly carried on by it less allowable deductions which are directly related to the carrying on of such trade_or_business both computed with the modifications provided in sec_512 lrc sec_513 defines the term unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its charitable or other purpose or function constituting the basis for its exemption under sec_501 lrc sec_4946 provides that disqualified_person includes a person who is a substantial_contributor to the organization as defined in sec_507 sec_1 c -1 c provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in sec_501 c an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1 c -1 d ii provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus it is necessary for an organization to establish that it is not organized and operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1_501_c_3_-1 provides that the term charitable is used in sec_501 c in its generally accepted legal sense the promotion of health has long been recognized as a charitable purpose see restatement second of trusts sec_368 sec_372 iv scott on trusts sec_368 sec_372 3rd ed and revrul_69_545 c b xxxxxxxxxxxxxxxxxxxxxxxx sec_1_502-1 b provides that if a subsidiary_organization of a tax-exempt_organization would itself be exempt on the ground that its activities are an integral part of the exempt_activities of the parent organization its exemption will not be lost because as a matter of accounting between the two organizations the subsidiary derives a profit from its dealings with its parent organization for example a subsidiary_organization which is operated for the sole purpose of furnishing electric power used by its parent organization a tax-exempt educational_organization in carrying on its educational activities however the subsidiary_organization is not exempt from tax if it is operated for the primary purpose of carrying_on_a_trade_or_business which would be an unrelated_trade_or_business that is unrelated to exempt_activities if regularly carried on by the parent organization sec_1 a -40 provides that an organization will be considered controlled for purposes of sec_509 if disqualified persons by aggregating their votes or positions or authority may require such organization to perform any act which significantly affects its operations or may prevent such organization from performing such act sec_1_513-1 provides that unless one of the specific exceptions of sec_512 or sec_513 is applicable gross_income of an exempt_organization subject_to the tax imposed by sec_511 is includible in the computation of unrelated_business_taxable_income if it is income from trade_or_business such trade_or_business is regularly carried on by the organization and the conduct of such trade_or_business is not substantially related other than through the production of funds to the organization's performance of its exempt functions sec_1_513-1 provides that for purposes of sec_513 the term trade_or_business has the same meaning it has in sec_162 and generally includes any activity carried on for the production_of_income from the sale_of_goods or performance of services sec_1_513-1 provides that a trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activity has a causal relationship to the achievement of exempt purposes other than through the production_of_income and it is substantially related for purposes of sec_513 only if the causal relationship is a substantial one thus for the conduct of trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes whether activities productive of gross_income contribute importantly to the accomplishment of any purpose for which an organization is granted exemption depends in each case upon the facts and circumstances involved revrul_78_41 1978_1_cb_148 concerns a_trust created by a sec_501 c tax-exempt hospital for the sole purpose of accumulating and holding funds to be used to satisfy malpractice claims against the hospital and from which the hospital directs the bank-trustee to make payments to claimants by serving as a repository for funds paid in by the hospital and by making payments at the direction of the hospital to persons with malpractice claims against the hospital the trust is operating as an integral part of the hospital of equal importance is the fact that the trust is performing a function that the hospital could do directly accordingly the organization is operated exclusively for charitable purposes and thus is exempt from federal_income_tax under xxxxxxxxxxxxxxxxxxxxxxxx sec_501 c analysis issue whether by entering into the agreement and fulfilling your obligations thereunder you jeopardize your status as an organization described in sec_501 you have been recognized as an organization described in sec_501 c because by serving as the corporate parent of your sec_501 c affiliates you perform an essential service for your affiliates and therefore your activities are an integral part of the exempt charitable activities of your affiliates within the meaning of sec_1_502-1 b revrul_78_41 by entering into the agreement and fulfilling the obligations thereunder your activities will continue to support your affiliates and be an integral part of their healthcare activities in furtherance of charitable purposes your affiliate hospital used the funding received under the agreement to improve the quality of patient care expand hospital facilities and advance medical training education and research programs as for the obligations under the agreement you represent that the extensions of your administrative services contact and system provider agreements with plan were negotiated at arm's length and resulted in reasonable fair_market_value compensation the agreement specifically stipulates that your use of plan as the tpa for your affiliates' self-funded health insurance plan would be on commercially reasonable terms and gives you the right to hire an independent actuary to analyze and validate the reasonableness of rates offered by plan in the event an actuary were engaged under this provision either plan must accept the actuary's rates or you are relieved of the obugation to hire plan as an administrative services organization without being in default under the agreement the agreement also requires that the extensions of the system provider agreements be mutually agreed upon by you and plan and you represent that the system provider agreement terms you negotiated at arm's length and agreed upon ensure your affiliates fair and reasonable reimbursements for their provision of health care services to patients insured by plan thus any private benefit to plan as a result of your agreeing to extend your administrative services contract and the system provider agreements is insubstantial and incidental to the essential services you provide in fulfillment of the exempt purposes of your affiliates the agreement's requirements that you establish a liaison committee to provide plan with information on the use of the funding and to adopt and report on financial and clinical milestones that were developed solely at your discretion appear to be reasonable precautions to ensure that the funding would be used to further sec_501 c purposes by promoting the health of the community as do the agreement's provisions regarding change_of control transactions during the term the student rotations residency and or teaching programs you agreed to develop and implement in cooperation with the medical college were to be mutually agreed upon and require no financial commitment from you moreover these activities are consistent with your purpose of providing services in fulfillment of the exempt purposes of your affiliates because they positively impact patient care and help to train and recruit qualified physicians xxxxxxxxxxxxxx xxxxxxxxxx finally your agreement to identify and initiate a mutually-agreed-upon project within the first months after effective date did not require you to identify and initiate any project that you did not agree to and you have represented that you would not agree to any project that did not further your exempt purposes thus by entering into the agreement and fulfilling your obligations thereunder you will not jeopardize your status as an organization described in sec_501 c issue whether by entering into the agreement and fulfilling your obligations thereunder you jeopardize your classification as a supporting_organization described in sec_509 for purposes of private_foundation classification you are classified as a supporting_organization described in sec_509 because you are organized and operated exclusively for the benefit of to perform the functions of or to carry out the purposes of your affiliates which are classified as organizations described in sec_509 you will not cease to be organized and operated exclusively for the benefit of to perform the functions of or to carry out the purposes of your affiliates as a result of entering into the agreement and fulfilling the obligations thereunder the agreement also will not affect whether you are operated supervised or controlled by or in connection with your affiliates to be described in sec_509 you also must not be controlled directly or indirectly by one or more disqualified persons you state that all of the funding was designated for and paid to and for_the_use_of hospital and that it was hospital not you that booked the funding on its balance_sheet for accounting purposes you state that because plan did not contribute any funds to you under the agreement plan did not become a substantial_contributor to you and thus is not a disqualified_person however even if plan were considered a substantial_contributor and thus a disqualified_person with respect to you the agreement did not result in you or your affiliates being controlled directly or indirectly by plan within the meaning of sec_509 taken together your obligations under the agreement do not give plan the ability to require you or your affiliates to perform any act which significantly affects your or your affiliates' operations or to prevent you or your affiliates from performing such act while the provisions related to change_of control transactions could affect your operations they do not give plan the power to prevent you from entering into such transactions rather even if plan objects to a change in control transaction you can proceed with the transaction as long as you repay certain amounts of the funding that plan paid to you consequently by entering into the agreement and fulfilling your obligations thereunder you will not jeopardize your classification as a supporting_organization described in sec_509 issue whether the funding you received under the agreement constitutes unrelated_business_taxable_income within the meaning of you state that the funding was contributed to and booked by hospital not you thus you did xxxxxxxxxxxxxxxxxxxxxxxx not receive any income which could be unrelated_business_taxable_income with respect to you however even if the funding had been contributed to you your obligations under the agreement either do not constitute a trade_or_business within the meaning of sec_1_513-1 b or are substantially related to your exempt purposes within the meaning of sec_1_513-1 to the extent a portion of the funding constitutes a payment to extend your contract with plan to provide tpa services for your affiliates' self-funded health insurance plan for the first three years of the term such payment would only serve as a reduction to the price you pay in exchange for plan's services it would not constitute your performance of services or sale_of_goods in exchange for income the obligation to enter into mutually-agreed-upon extensions of the system provider agreements relates to your negotiation of the compensation your affiliates receive in exchange for their provision of the health care services constituting the basis of their exemption under sec_501 c and hence is substantially related to your exempt purposes your agreement to cooperate with a medical college to develop and implement mutually agreed-upon student rotations residency or teaching programs is also substantially related to your exempt_purpose the obligations to inform plan via the liaison committee on the use of the funding and to adopt and report on certain clinical and financial performance metrics appear to be reasonable precautions to ensure that the funding would be used to further sec_501 c purposes by promoting the health of the community as do the agreement's provisions regarding change_of control transactions during the term finally the obligation to identify and initiate a project was contingent on your reaching a mutual agreement with plan on a project and you represent you would not have agreed to any project that was not substantially related to your exempt_purpose thus the funding you received under the agreement will not constitute unrelated_business_taxable_income within the meaning of rulings based on the information submitted we rule as follows by entering into the agreement and fulfilling your obligations thereunder you will not jeopardize your status as an organization described in sec_501 c by entering into the agreement and fulfilling your obligations thereunder you will not jeopardize your classification as a supporting_organization described in sec_509 the funding you received under the agreement will not constitute unrelated_business_taxable_income within the meaning of this ruling will be made available for public inspection under sec_6110 after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should xxxxxxxxxxxxxxxxxxxxxxxx follow the instructions in notice this ruling is directed only to the organization that requested it sec_611 o k provides that it may not be used or cited by others as precedent this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because it could help resolved questions concerning your federal_income_tax status this ruling should be kept in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative sincerely michael seto manager eo technical enclosure notice


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 b1 plr-104933-07 date date -------------------- ---------------------- ------------------------ legend x -------------------------------------------------- country date dear ------------ time pursuant to sec_301_9100-3 of the procedure and administration regulations to file an election to treat x as an entity disregarded as separate from its owner for federal tax purposes under sec_301_7701-3 facts this is in response to a letter dated date requesting an extension of according to the information submitted x is an entity organized under the laws of country x intended to make an election to be treated as a disregarded_entity effective date however due to an oversight form_8832 entity classification election was not timely filed law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with a single owner can elect either to be classified as an association and thus a corporation under sec_301_7701-2 or to be disregarded as an entity separate from its owner plr-104933-07 sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally unless the entity makes an election to be treated otherwise a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability if a foreign eligible_entity has only one owner it may elect to be treated as a disregarded_entity pursuant to the rules in sec_301_7701-3 if a foreign eligible_entity has more than one owner it may elect to be treated as a partnership pursuant to the rules in sec_301_7701-3 sec_301_7701-3 further provides that an entity classification election must be filed on form_8832 entity classification election and can be effective up to days prior to the date the form is filed or up to months after the date on which the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election with a deadline 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 elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 based solely upon the information submitted we conclude that the requirements conclusion of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result an extension of days from the date of this letter is granted to elect to treat x as a disregarded_entity for federal tax purposes effective date the entity classification election should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose plr-104933-07 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 s 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 representatives sincerely william p o’shea associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


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 intl b02 plr-103726-13 date date ty ------ legend taxpayer trustee fc country a year year ---------------------------------------------------------- --------------- -------------- ------------------------------------------ ---------- ------ ------ tax firm c ------------------------------ tax firm d ---------------------------------- dear ---------------------------------------------------------- this is in response to a letter dated date and supplemental documentation submitted by taxpayer’s authorized representative that requested the consent of the commissioner of the internal_revenue_service commissioner for taxpayer to make a retroactive qualified_electing_fund qef election under sec_1295 of the internal_revenue_code code and sec_1_1295-3 with respect to taxpayer’s investment in fc plr-103726-13 the ruling contained in this letter is based upon information and representations submitted on behalf of taxpayer by its authorized representatives and accompanied by a penalties of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of this request_for_ruling such material is subject_to verification on examination the information submitted in the request is substantially as set forth below facts taxpayer is a domestic charitable_trust that owns an interest in fc a publicly-traded foreign_corporation incorporated in country a that constitutes a passive_foreign_investment_company pfic within the meaning of sec_1297 of the code taxpayer initially acquired its interest in fc in year and has acquired additional shares since year since year taxpayer has engaged tax firm c for the preparation of its u s tax_return tax firm c is qualified to provide tax_advice on international tax matters including issues related to pfics tax firm c advised taxpayer with regard to u s federal_income_tax matters including with respect to taxpayer’s ownership of fc taxpayer relied on tax firm c to provide advice with respect to filing and reporting requirements in general as well as any elections or statements that would be necessary to elect specific tax treatment tax firm c did not identify fc as a pfic and as such did not advise taxpayer regarding any potential pfic reporting requirements or available elections in year another shareholder in fc contacted taxpayer about the potential pfic status of fc which led taxpayer to consult further with tax firm c after discussing the issue with tax firm c taxpayer retained tax firm d to help taxpayer come into compliance based on the determination that fc had likely been a pfic since before year taxpayer requested tax firm d to submit a private_letter_ruling request on taxpayer’s behalf to make a retroactive qef election with respect to fc under sec_1_1295-3 retroactive to year taxpayer has submitted an affidavit under penalties of perjury describing the events that led to the failure to make the qef election by the election due_date including the role of tax firm c taxpayer provided information regarding its ownership of fc to tax firm c and tax firm c had access to all relevant information with respect to fc taxpayer represents that in the relevant years fc was not identified as a pfic and taxpayer did not receive any advice regarding the availability of a qef election with respect to fc taxpayer has submitted an affidavit from tax firm c corroborating the representations made by taxpayer with respect to the discovery of fc’s pfic status plr-103726-13 taxpayer represents that as of the date of this request_for_ruling the pfic status of fc has not been raised by the irs on audit for any of the taxable years at issue ruling requested taxpayer requests the consent of the commissioner to make a retroactive qef election with respect to fc under sec_1_1295-3 retroactive to year law sec_1295 of the code provides that a pfic will be treated as a qef with respect to a taxpayer if an election by the taxpayer under sec_1295 applies to such pfic for the taxable_year and the pfic complies with such requirements as the secretary may prescribe for purposes of determining the ordinary_earnings and net capital_gains of such company under sec_1295 a qef election may be made for any taxable_year at any time on or before the due_date determined with regard to extensions for filing the return for such taxable_year to the extent provided in regulations such an election may be made after such due_date if the taxpayer failed to make an election by the due_date because the taxpayer reasonably believed the company was not a pfic under sec_1_1295-3 a shareholder may request the consent of the commissioner to make a retroactive qef election for a taxable_year if the shareholder reasonably relied on a qualified_tax professional within the meaning of sec_1_1295-3 granting consent will not prejudice the interests of the united state sec_3 government as provided in sec_1_1295-3 the request is made before a representative of the internal_revenue_service raises upon audit the pfic status of the corporation for any taxable_year of the shareholder and the shareholder satisfies the procedural requirements of sec_1 f the procedural requirements include filing a request for consent to make a retroactive election with and submitting a user_fee to the office of the associate chief_counsel international sec_1_1295-3 additionally affidavits signed under penalties of perjury must be submitted that describe the events that led to the failure to make a qef election by the election due_date the discovery of such failure the engagement and responsibilities of the qualified_tax professional and plr-103726-13 the extent to which the shareholder relied on such professional sec_1_1295-3 and iii conclusion based on the information submitted and representations made with taxpayer’s ruling_request we conclude that taxpayer has satisfied sec_1_1295-3 accordingly consent is granted to taxpayer to make a retroactive qef election with respect to fc for year provided that taxpayer complies with the rules under sec_1_1295-3 regarding the time and manner for making the retroactive qef election except as specifically set forth above no opinion is expressed or implied concerning the u s federal tax consequences of the facts described above under any other provision of the code this private_letter_ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter_ruling must be attached to any federal_income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to taxpayer’s authorized representative sincerely jeffery g mitchell branch chief branch international


internal_revenue_service number release date index number -------------------- ---------------------------------------------- ---------------------------------------------- ------------------------------------------- ---------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------ id no ------------- telephone number --------------------- refer reply to cc corp b04 plr-133014-11 date date parent newco seller subsidiary target target sub ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- -------------------------------------------------- ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- --------------------------------------------- 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----------------------------------------------- ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ----------------------------------------------- ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ----------------------------------------------- stock exchange ------------------------------------ industry segment a segment b ------------------------------------------- ------------------------ ------------------------------------------- plr-133014-11 business c ------------------------------------------------------------------------------- -------------------------------------------------------- asset ------------------------------------------------------ intellectual_property ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- --------- month year year year date date date date date date date date -------------- ------- ------- ------- ---------------------- -------------------------- ------------------------- -------------------------- ---------------------- -------------------------- ---------------------- -------------------------- submission date ----------------------- acquisition_date ---------------------- a b c -------------- -------------- --------- plr-133014-11 d e f g h i j k l m n o p q r s t u --------------- -------- -------- -------- -------- -------------- -------------- -------------- --------------- -------- -------------- ------------- --------------- ------------- ------------- -- ---- ---- dear --------------- this letter responds to your date request submitted by your authorized representative for rulings regarding certain federal_income_tax consequences of the proposed transaction defined below the information submitted in that request and in later correspondence is summarized below summary of facts plr-133014-11 parent is the common parent of an affiliated_group_of_corporations filing a consolidated_return the parent group parent’s common_stock is publicly traded on stock exchange as well as other exchanges the parent group operates predominantly in industry which is comprised of segment a and segment b seller is a direct wholly-owned subsidiary of parent and is a member of the parent group seller is a holding_company and is engaged indirectly through its subsidiaries in segment a subsidiary is an indirect wholly-owned subsidiary of parent and is a member of the parent group subsidiary is engaged directly in segment b seller owns all of the outstanding common_stock of target a member of the parent group target also has outstanding two classes of market auction preferred_stock that is described in sec_1504 the target preferred_stock the target preferred_stock was issued in month of year to unrelated third-party investors for funding purposes target is engaged directly in business c the predecessor to target was formed in year and its assets were acquired by target on date pursuant to a forward subsidiary merger intended to qualify for nonrecognition treatment under sec_368 on date parent contributed all of target’s then outstanding common_stock to subsidiary on date target issued an additional a shares of its common_stock to parent for dollar_figureb on date parent transferred all of its recently purchased a shares of target common_stock to seller in exchange for c shares of seller common_stock the parent intercompany transfer and subsidiary transferred d shares of its target common_stock representing e of target’s then outstanding common_stock to seller in exchange for f shares of seller series a preferred_stock the subsidiary intercompany transfer and together with the parent intercompany transfer the intercompany transfers immediately following the intercompany transfers seller owned g of target’s common_stock and subsidiary owned h of target’s common_stock parent and subsidiary intended that the intercompany transfers qualify for nonrecognition treatment under sec_351 and the transfers were reported as such on the parent group’s year federal_income_tax return if it were determined that the subsidiary intercompany transfer did not qualify for nonrecognition treatment subsidiary would have recognized gain of approximately dollar_figurei which would not have been taken into account pursuant to sec_1_1502-13 on date target issued an additional j shares of its common_stock to seller for dollar_figurek on date subsidiary sold all l shares of target common_stock it held representing approximately m of target’s then outstanding common_stock to seller for approximately dollar_figuren the intercompany sale subsidiary recognized gain of approximately dollar_figureo on the intercompany sale but it was not taken into account pursuant to sec_1_1502-13 plr-133014-11 as a result of the foregoing transactions seller currently owns all of target’s p shares of outstanding common_stock target has a number of direct and indirect wholly-owned subsidiaries target sub through target sub target’s direct and indirect wholly-owned subsidiaries existing on the submission date and any such subsidiaries that are formed between the submission date and the date of the exchange described below that are domestic corporations for federal_income_tax purposes and for which elections under sec_338 are expected to be made are referred to herein collectively as the indirectly transferred target subs and individually as an indirectly transferred target sub a sec_338 election is not intended to be made for acquired sub all of the outstanding_stock of which was acquired by target sub on acquisition_date each of target sub sec_1 through described below is a member of the parent group each of target sub sec_1 through target sub target sub sec_30 through target sub and target sub sec_40 through is engaged directly in business c target sub is a holding_company for target sub which is engaged directly in business c target sub is a holding_company for acquired sub which is engaged directly in business c target sub is a holding_company for target sub which is engaged directly in business c target sub is a holding_company for target sub which is in turn a holding_company for target sub sec_49 through each of which is engaged directly in business c target sub is a holding_company for target sub which is in turn a holding_company for target sub which is in turn a holding_company for target sub which is in turn a holding_company for target subs through each of which is engaged directly in business c target sub is a holding_company for target sub which is in turn a holding_company for target sub which is in turn a holding_company for target sub and target sub sec_109 through each of which is engaged directly in business c target sub is a holding_company for target sub which is engaged directly in business c target sub is a holding_company for target sub sec_119 through each of which is engaged directly in business c plr-133014-11 target sub is a holding_company for target sub which is engaged directly in business c in addition to its tangible assets the value of which principally relates to asset target owns or will own as of the date of the exchange described below intangible assets which will include the intellectual_property and may include purchase contracts licenses favorable financing workforce in place computer_software information base customer-based intangibles supplier-based intangibles knowhow goodwill and going_concern_value as well as other intangible assets yet to be identified newco is a newly organized corporation created by seller to participate in the proposed transaction described below newco is authorized to issue both common_stock and preferred_stock as a result of the proposed transaction newco will own all of the common_stock of target proposed transaction for what are represented to be valid business reasons parent plans to exit its investment in business c as part of this plan parent and seller each will adopt a plan of divestiture of the business c operations conducted by target the indirectly transferred target subs and the acquired sub collectively the plan of divestiture pursuant to which parent will cause seller to dispose_of target through the following proposed transaction in accordance with the plan of divestiture parent and seller have taken or will take the following series of steps comprising an integrated transaction collectively the proposed transaction i ii iii on date seller formed newco with a minimal amount of capital and on date an initial registration_statement was filed with the securities_and_exchange_commission the sec with respect to the newco common_stock pursuant to an assignment of intellectual_property agreement the assignment agreement parent will transfer to target its entire right title and interest both statutory and at common_law in the intellectual_property all of which relates to business c seller will enter into a binding contractual agreement the exchange_agreement with newco to transfer all of target’s common_stock to newco contingent on the execution of a firm commitment underwriting agreement with the underwriters iv the newco registration_statement will be finalized and thereafter declared effective by the sec plr-133014-11 v vi prior to the exchange as described in step vii below target will distribute to seller one or more intercompany notes the target notes and or cash in an amount not to exceed dollar_figureq seller will execute a firm commitment underwriting agreement with the underwriters pursuant to which seller will be obligated to effect the sale of newco common_stock in the initial_public_offering as described in step viii below in addition seller may enter into one or more binding contractual agreements to dispose_of additional newco common_stock pursuant to one or more privately negotiated sales such sales the private_placement vii pursuant to the exchange_agreement seller will transfer of target’s common_stock to newco in exchange for the issuance by newco to seller of preferred_stock the newco preferred_stock and additional shares of newco common_stock the exchange newco will not then have any stock_or_securities issued or outstanding other than its common_stock and the newco preferred_stock the newco preferred_stock will be nonvoting nonconvertible and mandatorily redeemable and is expected to have a liquidation preference of at least dollar_figurer parent and newco will enter into the appropriate contractual arrangements including a tax_matters_agreement and any other transitional and service agreements customary proper or otherwise advisable in these circumstances viii in accordance with the firm commitment underwriting agreement and any other binding contractual agreement executed in step vi above seller will sell to the underwriters for cash for resale to the public the initial_public_offering and to the purchasers in any private_placement in the aggregate more than of the newco common_stock acquired in step vii above collectively the initial sales newco will neither sell any stock to the public in the initial_public_offering or to any purchaser via private_placement nor receive any funds from the public or from any purchaser in exchange for stock in connection with the initial sales the initial sales will be completed within approximately s business days of the completion of step vii except for the transfer of minimal capital in step i and the transfer of target common_stock in step vii no money or other_property will be transferred to newco in connection with the initial sales ix a timely election under sec_338 with respect to newco’s acquisition of the target common_stock in the exchange will be made by or on behalf of seller and newco timely elections under sec_338 will also be made with respect to the deemed acquisitions of the stock of each of the indirectly transferred target subs x parent will make a timely election in accordance with sec_1_1502-13 to permit seller to recognize loss pursuant to sec_1_1502-13 on the deemed liquidation of old target in connection with plr-133014-11 the election under sec_338 with respect to newco’s acquisition of the target common_stock the deemed liquidation xi within t months after completion of step viii seller will undertake one or more follow-on public offerings privately negotiated sales and or alternative or additional transactions the additional transactions to dispose_of newco stock that together with the initial sales will reduce the parent group’s direct and indirect ownership of newco stock to less than of the value of newco stock this threshold of stock ownership as it pertains to newco stock shall hereinafter be referred to as less than or below xii within u months after completion of step viii seller will undertake one or more additional transactions to dispose_of newco stock that together with the initial sales will reduce the parent group’s direct and indirect ownership of newco stock to or less of the vote and value of newco stock without regard to any stock described in sec_1563 this threshold of stock ownership as it pertains to newco stock shall hereinafter be referred to as or less and seller thereafter intends to dispose_of any remaining newco stock the proposed transaction will result in newco owning of the common_stock of target after step vii and seller owning less than of the value of the stock of newco within t months after step viii in addition the proposed transaction will result in seller owning or less of the vote and value of the stock of newco without regard to any stock described in sec_1563 within u months after step viii representations parent has made the following representations in connection with the proposed transaction a b parent and seller plan to dispose_of more than of the value of newco stock in the proposed transaction a sale of or less of the value of newco stock after the target common_stock has been transferred by seller to newco would not achieve the objectives of parent and seller in connection with the planned disposition of target in addition parent and seller would not effect the exchange and the initial sales without being reasonably certain based on advice received from the underwriters that they will be able to effect a disposition of sufficient additional shares of newco stock to reduce the parent group’s ownership of newco stock below through one or more additional transactions c newco and target have not purchased and have no plan to purchase any stock of parent or seller other than any shares of parent common_stock acquired by target in connection with its deferred_compensation program all shares of plr-133014-11 d e f g h i j k parent common_stock acquired under such program have been distributed and no additional acquisitions or distributions are contemplated all of the common_stock of target will be acquired by newco in a single transfer by seller as described in step vii of the proposed transaction each class of target preferred_stock satisfies all of the requirements of stock described in sec_1504 the target notes if any will constitute indebtedness of target for federal_income_tax purposes the newco preferred_stock will satisfy all of the requirements of stock described in sec_1504 and sec_1563 seller is a member of the selling_consolidated_group as defined in sec_338 of which parent is the common parent and will be so for the taxable_period that includes the date of the exchange for the taxable_period that includes the date on which newco will acquire target target will be a consolidated target within the meaning of sec_1_338_h_10_-1 newco has been formed in step i of the proposed transaction with a nominal amount of cash solely to permit registration of its stock with the sec enable it to enter into the exchange_agreement described in step iii of the proposed transaction and acquire all of the common_stock of target at the closing of step vii of the proposed transaction except for activities incident to these actions newco will have no activities and will carry on no business prior to step vii of the proposed transaction the terms of the underwriting agreement pursuant to which seller will sell the newco common_stock in the initial_public_offering and the terms of any binding contractual agreements pursuant to which seller will sell newco common_stock in any private_placement will be determined pursuant to arm’s-length negotiations with the underwriters and purchasers respectively l the fair_market_value of target’s assets will exceed its liabilities at the closing of steps vii and viii of the proposed transaction m except for any asset described in sec_1_338-8 neither newco nor any other member of the newco affiliated_group within the meaning of sec_338 has any plan or intention to acquire from any target or from any direct or indirect subsidiary of any target any asset described in sec_1 b after application of sec_1_338-8 plr-133014-11 n o p q r s t u there is no plan or intention for seller newco or target to cease to remain in existence as separate corporations seller has no plan or intention to liquidate or to distribute newco stock to parent newco target and the indirectly transferred target subs will cease to be members of the parent group at the end of the day upon which more than of the newco common_stock is disposed of in the initial sales as described in step viii of the proposed transaction the transfers of newco stock pursuant to the initial sales and the additional transactions as described in step viii and step xi respectively of the proposed transaction will not be to persons whose ownership of newco would be attributed to seller pursuant to sec_318 in measuring attributed ownership under sec_318 there shall be taken into account all events occurring or contemplated during the period beginning with step vii and ending with the completion of step xi of the proposed transaction and newco stock shall not be attributed to seller solely because parent or any other member of the parent group and a person otherwise unrelated to parent or any other member of the parent group that purchases such newco stock are partners in one or more of the same partnerships newco has no plan or intention to dispose_of the common_stock of target target will have been a member of the parent group throughout the period beginning with date the date of the intercompany transfers and ending with the completion of the deemed liquidation parent and seller plan to dispose_of at least of the vote and value of the newco stock without regard to any stock described in sec_1563 in the proposed transaction including any additional transactions within u months of the initial_public_offering immediately after all of the sales and other transfers of newco stock described in step viii step xi and step xii of the proposed transaction neither parent and newco nor seller and newco will be members of a controlled_group as defined in sec_267 applied by substituting percent for percent in measuring attributed ownership for purposes of applying sec_267 there shall be taken into account all events occurring or contemplated during the period beginning with step vii and ending with the completion of step xii of the proposed transaction and the constructive_ownership rules of sec_1563 as modified by sec_267 shall apply in lieu of sec_267 plr-133014-11 v the acquisition of intangible assets of target and the indirectly transferred target subs pursuant to the elections under sec_338 in the proposed transaction is not being undertaken to avoid the operation of the anti-churning_rules of sec_197 and sec_1_197-2 rulings based solely on the information submitted and on the representations set forth above we rule as follows assuming completion of steps vi through xi of the proposed transaction newco’s acquisition of all of target’s common_stock from seller in the exchange will be a qualified_stock_purchase within the meaning of sec_338 assuming completion of steps vi through xi of the proposed transaction seller and newco will be eligible to make or have made on their behalf the election under sec_338 with respect to newco’s acquisition of the target common_stock in the exchange assuming an election under sec_338 is timely made with respect to its direct shareholder whether target or another indirectly transferred target sub as applicable the deemed sale of stock of an indirectly transferred target sub resulting from the deemed asset sale of the indirectly transferred target sub’s direct shareholder will qualify as a qualified_stock_purchase within the meaning of sec_338 assuming an election under sec_338 is timely made with respect to its direct shareholder whether target or another indirectly transferred target sub as applicable the relevant selling member and the relevant acquiring member will be eligible to make or to have made on their behalf the election under sec_338 with respect to the qualified_stock_purchase of the stock of the applicable indirectly transferred target sub assuming an election in accordance with sec_1_1502-13 is timely made under sec_1_1502-13 seller will recognize as a corresponding_item any loss or deduction it would recognize if sec_331 applied to the deemed liquidation subject_to the limitations imposed by sec_1_1502-13 provided that neither parent and newco nor seller and newco are members of a controlled_group immediately after the completion of step xii of the proposed transaction the anti-churning_rules of sec_197 and sec_1_197-2 will not apply to any sec_197 intangible deemed acquired under sec_338 from target or any indirectly transferred target sub for purposes of the preceding sentence step xii shall be completed no more plr-133014-11 than u months after the initial_public_offering the term controlled_group shall be as defined in sec_267 applied by substituting percent for percent and the term sec_197 intangible shall be as defined in sec_1_197-2 caveats except as expressly provided in the rulings above no opinion is expressed or implied regarding the federal_income_tax treatment of the proposed transaction under other provisions of the code and regulations or the federal_income_tax treatment of any aspect of any transaction or item otherwise discussed or referenced in this letter in particular no opinion is expressed or implied regarding i the consequences resulting from the sec_338 elections ii whether the target preferred_stock or the newco preferred_stock constitutes preferred_stock within the meaning of sec_1504 iii whether the newco preferred_stock is described in sec_1563 iv the federal_income_tax treatment of the transfer of the intellectual_property by parent to target pursuant to the assignment agreement as described in step ii of the proposed transaction v the federal_income_tax treatment of the intercompany transfers and the intercompany sale and vi the existence or amount of any loss or deduction recognized by seller as a result of the deemed liquidation the effectiveness of this letter_ruling is conditioned upon parent seller newco target and each indirectly transferred target sub agreeing if requested to an extension of their respective statutes of limitations on assessment with respect to any issues raised by this letter_ruling provided the extension is for a period acceptable to the service furthermore rulings through are conditioned upon seller owning less than of the value of newco stock within t months after the initial sales and ruling is conditioned upon the parent group actually disposing of or more of its direct and indirect ownership of the vote and value of the newco stock without regard to any stock described in sec_1563 within u months after the initial_public_offering procedural statements 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 this office has not verified any of the material submitted in plr-133014-11 support of the request for rulings verification of the information representations and other data may be required as part of the audit process this letter is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely ___________________________ frances l kelly acting branch chief branch associate chief_counsel corporate