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 b01 plr-113650-05 date june ----------------------------------- distributing ------------------------------------------------------------------- ----------------------------------------------------------- controlled ------------------------------------------------------------------- ----------------------------------------------------------- sub -------------------------------------- --------------------------------- --------------------------- ------------------------------------- -------------------------------- --------------------------- ------------------------------------------------------------------- ----------------------------------------------------------- sub ------------------------------------------------------------------- ----------------------------------------------------------- sub ------------------------------------------------------------------- ----------------------------------------------------------- sub ------------------------------------------------------------------- ----------------------------------------------------------- sub ------------------------------------------------------------------- ----------------------------------------------------------- ----------------------- ---------------------------------- ------------------------------------------------- ----------------------- -------------------------- ------------------------------------------- plr-113650-05 sub ----------------------------- ------------------------------------------------------------------- ----------------------------------------------------------- sub ------------------------------------------------------------------- ----------------------------------------------------------- sub ------------------------------------------------------------------- ----------------------------------------------------------- sub ------------------------------------------------------------------- ----------------------------------------------------------- sub ------------------------------------------------------------------- ----------------------------------------------------------- corp x ------------------------------------------------------------------- ----------------------------------------------------------- lp ----------------------------------------------------------------------------- ----------------------------------------------------------- llc ------------------------------------------------------------------------------------ -------------------------------------------------- llc ------------------------------------------------ ------------------------------------------------------------------------------------ -------------------------------------------------- llc ----------------------------------------------------------------------------------- ----------------------------------------------------------- llc ----------------------------------------------------------------------------------- --------------------------------------------------- ------------------------------------ --------------------------------- ------------------------ ----------------------- ------------ ------------------------- -------------------------------------------------- plr-113650-05 llc -------------------------------------------------------------------------------------- ----------------------------------------------------------- sub llc ------------------------------------------------------------------------------------ ----------------------------------------------------------- sub llc ------------------------------------------------------------------------------------ ----------------------------------------------------------- sub llc ------------------------------------------------------------------------------------ ----------------------------------------------------------- ------------------------------------ business a ------------------------------------ ----------------------------------- -------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------- -------------------------------- business b -------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------- business c -------------------------------------------------------------- ----------------------------------------------------------------------------- business line -------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ---------------------------------------------------------- --------------------------------------------- industry d w x shareholder a a ---- -- -------------------------- ------ ------ ---- ---- --- ---- ---- -- -------------------------------- ------------------- ---------------- ---------------- ------------------ ------------- ------------- ------------ plr-113650-05 b c d e f g h i date date date date state a state b state c dear ---------------- this letter responds to your date request for rulings on certain federal_income_tax consequences of the proposed transactions defined below additional information was received in letters dated date date date date date and date the material information provided for consideration is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in plr-113650-05 support of the request for rulings verification of the information representations and other data may be required as part of the audit process in particular this office has not reviewed any information pertaining to and has made no determination regarding whether the distribution defined below i satisfies the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii is used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both see sec_355 of the internal_revenue_code and sec_1 d or iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in distributing or controlled see sec_355 and sec_1_355-7 summary of facts distributing is the common parent of an affiliated_group whose includible corporations join in filing a consolidated federal_income_tax return the distributing group distributing has outstanding two series of voting common_stock series w common_stock and series x common_stock both series are publicly traded and listed on an exchange based on public securities filings distributing believes that i no person beneficially owns five percent or more of the outstanding distributing series w common_stock and ii shareholder a is the only beneficial_owner of five percent or more of the outstanding distributing series x common_stock distributing wholly owns llc and sub and llc wholly owns llc llc owns all the stock of controlled and sub a percent of the common_stock of sub b percent of the preferred_stock of sub and all of the ownership interests in llc and llc llc recently acquired the sub preferred_stock from unrelated persons for cash a person unrelated to any member of the distributing group owns the remaining common and preferred_stock of sub sub wholly owns sub sub wholly owns sub sub wholly owns sub and sub wholly owns sub sub owns c less than percent of the stock of sub persons unrelated to any member of the distributing group own the remaining sub stock sub owns d percent of the membership interests in llc a limited_liability_company that is treated as a partnership for federal_income_tax purposes llc owns e percent of the capital and profits interests in lp a limited_partnership sub wholly owns sub and sub sub owns f percent of the capital and profits interests in lp sub owns g percent and sub owns h percent of the stock of corp x sub and sub together own less than percent of the stock of corp x distributing controlled sub sub sub sub sub sub sub sub and sub are members of the distributing group and are affiliated with distributing under sec_1_355-3 each of llc llc llc and llc is an entity intended to be disregarded as separate from its owner for federal tax purposes under plr-113650-05 sec_301_7701-3 of the procedure and administrative regulations a disregarded_entity controlled was formed in connection with the proposed transactions distributing through llc llc and llc is directly engaged in business a and is indirectly engaged in other businesses sub and lp are directly engaged in business b and sub is directly engaged in business line one of the business c lines of business business a business b and business c are all in industry d financial information submitted by distributing indicates that business a as conducted by distributing through llc llc and llc and business line as conducted directly by sub each has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years business b and business c are being separated from business a because distributing believes and its investment_advisor concurs that the distribution will significantly reduce the discount to the underlying value of distributing's businesses and assets applied by the public markets to the trading value of distributing's equity and equity linked securities the holding_company discount this will i allow distributing to issue equity and equity-linked securities on significantly more favorable terms ii make the stock of distributing a significantly more attractive and efficiently priced acquisition currency and iii increase the value of equity and equity-linked compensation of the employees and management of distributing in addition distributing and its investment_advisor believe that the distribution will allow controlled to issue equity on significantly more favorable terms than is presently possible as a subsidiary of distributing thereby allowing controlled to raise capital and pursue acquisitions using its more efficiently priced equity securities finally the distribution will allow controlled to incur additional indebtedness as may be required for the growth of business b business c or any potential strategic opportunities without affecting distributing's target capital structure proposed transactions to effect the separation of business b and business c from business a the distributing group has proposed and partially undertaken the following series of related transactions the proposed transactions i on date llc formed controlled ii on date llc formed llc a single member limited_liability_company that will be a disregarded_entity iii on date llc contributed all of the sub stock that it owned to llc iv on date sub merged into llc under state c law the sub merger the holder of the minority common and preferred_stock interests in sub will receive cash in exchange for its sub shares because the sub stock held within the plr-113650-05 distributing group before the merger was treated as owned directly by distributing through llc llc and after step iii llc for federal tax purposes sub is treated in this step as merging directly into distributing v llc will distribute the stock of sub to llc because the sub stock will be treated for federal tax purposes as owned by distributing before and after this distribution this step will be disregarded for federal_income_tax purposes vi sub will change its name vii distributing will contribute the stock of sub to llc viii llc will contribute the stock of sub to llc because the sub stock will be treated for federal tax purposes as owned by distributing before and after steps vii and viii these steps will be disregarded for federal_income_tax purposes ix sub will convert under state a law from a corporation to a single member limited_liability_company that will be a disregarded_entity the sub conversion sub will change its name to sub llc x sub will convert under state b law from a corporation to a single member limited_liability_company that will be a disregarded_entity the sub conversion sub will change its name sub llc xi sub will convert under state b law from a corporation to a single member limited_liability_company that will be a disregarded_entity the sub conversion sub will change its name to sub llc xii sub will merge into sub under state b law the sub merger xiii distributing will transfer i dollars in cash to sub xiv distributing will contribute to sub sub and sub respectively any intercompany receivable owed to distributing by such entity xv llc will contribute all the stock of sub sub and sub collectively the contributed assets to controlled in exchange solely for controlled series w common_stock and controlled series x common_stock the contribution because the contributed assets and controlled will be treated for federal tax purposes as owned directly by distributing through llc and llc before this contribution this step will be treated for federal tax purposes as a contribution of the contributed assets by distributing directly to controlled xvi controlled will contribute all the stock of sub and sub to sub in deemed exchange for additional sub stock the second contribution plr-113650-05 xvii llc will distribute all the stock of controlled to llc xviii llc will distribute all the stock of controlled to distributing because the controlled stock will be treated for federal tax purposes as owned directly by distributing before and after steps xvii and xviii these steps will be disregarded for federal_income_tax purposes xix distributing will distribute pro_rata i all the controlled series w common_stock to the holders of distributing series w common_stock and ii all the controlled series x common_stock to the holders of distributing series x common_stock collectively the distribution distributing will distribute cash in lieu of issuing a fractional share to any shareholder that would otherwise be entitled to receive a fractional share of controlled common_stock steps xv through xviii will occur on or before the date of and prior to this step xix it is expected that controlled will adopt a shareholder rights plan the rights plan under the rights plan each shareholder of record on a specified date will receive one right for each share of common_stock of controlled collectively the rights initially the rights will not be traded separately from controlled's common_stock and will not be exercisable the rights will become exercisable only if a person or group obtains or announces an offer to acquire ownership of shares as defined in the rights agreement to be entered in to between controlled and a rights agent representing f percent or more of the value of controlled's common_stock when exercisable a holder of a right other than the acquiring person or group would be entitled i to buy at a price representing one-half of the then current market price additional common shares of controlled of the same series as the share with respect to which that right was received and ii in the event of a merger or other acquisition of controlled to buy common shares of the acquiring entity also at a price representing one-half of the market price of those shares it is expected that the rights plan will exempt from its terms the ownership or acquisition of controlled common_stock by current owners to the extent described in the rights agreement rights may be redeemed at a nominal price at any time before their becoming exercisable by action of controlled's board_of directors at the time the rights are attached to the controlled stock and at the time of the distribution the likelihood that the rights would be exercised will be both remote and uncertain in connection with the proposed transactions the distributing group and the controlled_group will enter into agreements for i transitional administrative services back office services for a period not expected to exceed two years the transition_period following the effective time of the distribution ii tax sharing and allocations and iii certain other contractual relationships the terms of which will be negotiated at arm’s length collectively the transition agreements the back office services may be compensated on a cost_basis during the transition_period but will be compensated on an arm’s-length basis if the service period is extended plr-113650-05 it is expected that the terms of certain compensatory stock_options restricted shares of stock and stock appreciation rights together the employee rights on distributing series w common_stock that are outstanding at the time of the distribution will be adjusted and that some of the employee rights on distributing series w common_stock will be converted into employee rights on distributing series w common_stock and controlled series w common_stock together the employee rights modifications representations sub merger distributing makes the following representations regarding the sub merger described above in step iv a1 distributing through llc and llc and following the contribution described in step iii llc on the date of adoption of the plan_of_liquidation merger and at all times until the effective time of the sub merger will be the owner of at least percent of the total combined voting power of all classes of sub stock entitled to vote and the owner of at least percent of the total value of all classes of sub stock excluding nonvoting_stock that is limited and preferred as to dividends and otherwise meets the requirements of sec_1504 b1 no shares of sub stock will have been redeemed during the three years preceding the adoption of the plan of complete_liquidation merger of sub c1 all distributions from sub to distributing through llc and llc pursuant to the plan of complete_liquidation merger will be made within a single taxable_year of sub d1 sub will cease to exist for federal_income_tax purposes at the effective time of the sub merger e1 sub will not have acquired assets in any nontaxable_transaction at any time except for acquisitions occurring more than three years before the date of adoption of the plan_of_liquidation merger f1 no assets of sub have been or will be disposed of by either sub or distributing through llc llc and llc except for i dispositions in the ordinary course of business and ii dispositions occurring more than three years before the adoption of the plan_of_liquidation merger g1 except in the contribution described in step xv above the liquidation of sub will not be preceded or followed by the reincorporation in or transfer or sale to a recipient corporation of any of the businesses or assets of sub if persons holding plr-113650-05 directly or indirectly more than percent in value of the sub stock also hold directly or indirectly more than percent in value of the stock in the recipient corporation for purposes of this representation ownership is determined by application of the constructive_ownership rules of sec_318 as modified by sec_304 following the distribution h1 before the adoption of the plan_of_liquidation merger no assets of sub will have been distributed in_kind transferred or sold to distributing through llc llc or llc except for i transactions occurring in the normal course of business and ii transactions occurring more than three years before adoption of the plan_of_liquidation merger i1 sub will report all earned_income represented by assets that will be distributed to its shareholders such as receivables being reported on a cash_basis unfinished construction contracts commissions due etc j1 the fair_market_value of the assets of sub will exceed its liabilities both at the date of the adoption of the plan of complete_liquidation merger and immediately before the sub merger the total fair_market_value of the assets of sub transferred to distributing through llc llc and llc by sub will exceed the sum of a the amount of liabilities assumed by distributing through llc llc and llc in connection with the liquidation and b the amount of liabilities owed to distributing through llc llc and llc k1 there is no intercorporate debt existing between distributing or llc llc or llc and sub and none has been cancelled forgiven or discounted except for i transactions that occurred more than three years before the date of adoption of the plan_of_liquidation merger and ii an open account intercompany balance between sub and distributing or llc llc or llc attributable to the normal business operations of each company l1 distributing is not an organization that is exempt from federal_income_tax under sec_501 or any other provision of the code m1 the fair_market_value of the consideration received by distributing and the minority shareholder for each share of sub stock will approximately equal the fair_market_value of that stock n1 none of the assets being distributed by sub to the minority shareholder i has a fair_market_value greater than its basis in the hands of sub ii is an installment_obligation iii is property described in the recapture provisions of the code or iv is property for which sub obtained a deduction plr-113650-05 o1 all other transactions undertaken contemporaneously with in anticipation of in conjunction with or in any way related to the sub merger have been fully disclosed contribution and distribution distributing makes the following representations regarding the contribution and distribution described above in steps xv and xix a2 controlled will not be indebted to distributing after the distribution b2 no part of the consideration distributed by distributing in the distribution will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing except for shares of controlled stock received by holders of distributing restricted_stock c2 the five years of financial information submitted on behalf of business a as conducted by distributing through llc and business c as conducted by sub represents the present operations of each business and regarding each business there have been no substantial operational changes since the date of the last financial statements submitted d2 immediately after the distribution at least percent of the fair_market_value of the gross assets of controlled will consist of the stock and securities of a controlled_corporation sub that is engaged in the active_conduct_of_a_trade_or_business as defined in sec_355 e2 following the distribution distributing through llc and controlled through sub will each continue the active_conduct of its business independently and with its separate employees f2 the distribution is being carried out for the following corporate business purposes a to reduce the holding_company discount which is expected to significantly benefit the businesses of distributing by i permitting distributing to issue equity and equity-linked securities on significantly more favorable terms ii making the stock of distributing a significantly more attractive and efficiently priced acquisition currency and iii increasing the value of equity and equity-linked compensation of the employees and management of distributing b to allow controlled to issue equity on significantly more favorable terms than is presently possible as a subsidiary of distributing thus facilitating controlled's ability to raise capital and pursue acquisitions using its more efficiently priced equity securities and c to allow controlled to incur additional indebtedness as may be required for the growth of business b business c or any potential strategic opportunities without affecting distributing's target capital plr-113650-05 structure the distribution is motivated in whole or substantial part by one or more of these corporate business purposes g2 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 transaction except in the ordinary course of business h2 the distribution is not used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both i2 for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution j2 for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution or ii attributable to distributions on distributing stock_or_securities that were acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution distributing will equal or exceed the sum of a the total liabilities assumed within the meaning of sec_357 by controlled and b the total of any money and the fair_market_value of any other_property within the meaning of sec_361 received by distributing and transferred to its creditors in connection with the reorganization k2 the total adjusted_basis of the assets transferred to controlled by l2 other than accounts_payable incurred in the ordinary course of business including those under the transition agreements no intercorporate debt will exist between distributing and controlled at the time of or after the distribution m2 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 any excess_loss_account distributing may have in the controlled stock will be included in income immediately before the distribution to the extent required by regulations see sec_1_1502-19 plr-113650-05 n2 except for payments made for back office services during the transition_period payments made in all continuing transactions between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm's length o2 no two parties to the transaction are investment companies as defined in sec_368 and iv p2 the distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of either corporation q2 the payment of cash in lieu of a fractional share of controlled common r2 the total fair_market_value of the assets transferred to controlled by stock is solely for the purpose of avoiding the expense and inconvenience to controlled of issuing and maintaining fractional shares and will not represent separately bargained for consideration the total cash that will be paid in the transaction to any shareholder in lieu of a fractional share of controlled common_stock will not exceed one percent of the total consideration that will be distributed in the transaction any fractional share interests of each distributing shareholder will be aggregated and it is intended that no distributing shareholder will receive cash in an amount equal to or greater than the value of one full share of controlled common_stock distributing will exceed the sum of a the amount of liabilities assumed within the meaning of sec_357 by controlled in connection with the exchange b the amount of liabilities owed to controlled by distributing that are discharged or extinguished in connection with the exchange and c the amount of any money and the fair_market_value of any other_property other than stock permitted to be received under sec_361 without the recognition of gain received by distributing in connection with the exchange the fair_market_value of the assets of controlled will exceed the amount of its liabilities immediately_after_the_exchange sec_2 shares of controlled stock distributed with respect to shares of distributing restricted_stock will not exceed in the aggregate percent of the voting power of the controlled stock outstanding immediately after the distribution distributing makes the following representations regarding the second contribution described above in step xvi second contribution a3 i no stock_or_securities will be issued for services rendered to or for the benefit of sub in connection with the proposed transaction and ii no stock or plr-113650-05 securities will be issued for indebtedness of sub that is not evidenced by a security or for interest on indebtedness of sub which accrued on or after the beginning of the holding_period of controlled for the debt b3 the transfer is not the result of the solicitation by a promoter broker or investment house c3 controlled will not retain any rights in the property transferred to sub d3 the value of the stock received in exchange for accounts_receivable if any will equal the net value of the accounts transferred ie the face_amount of the accounts_receivable previously included in income less the amount of the reserve for bad_debts e3 any debt relating to the stock being transferred that is being assumed or to which such stock is subject was incurred to acquire such stock and was incurred when such stock was acquired and controlled is transferring all of the stock for which the acquisition_indebtedness being assumed or to which such stock is subject was incurred f3 the total adjusted_basis of the assets transferred to sub by controlled will equal or exceed the total liabilities assumed within the meaning of sec_357 by sub g3 the total fair_market_value of the assets transferred to sub by controlled will exceed the sum of a the amount of liabilities assumed as determined under sec_357 by sub in connection with the exchange b the amount of liabilities owed to sub by controlled that are discharged or extinguished in connection with the exchange and c the amount of any money and the fair_market_value of any other_property other than stock permitted to be received under sec_351 without the recognition of gain received by controlled in connection with the exchange the fair_market_value of the assets of sub will exceed the amount of its liabilities immediately_after_the_exchange h3 any liabilities of controlled assumed within the meaning of sec_357 by sub were incurred in the ordinary course of business and are associated with the assets being transferred i3 there is no indebtedness between sub1 and controlled and there will be no indebtedness created in favor of controlled as a result of the transaction j3 the transfers and exchanges will occur under a plan agreed upon before the transaction in which the rights of the parties are defined k3 all exchanges will occur on approximately the same date l3 there is no plan or intention on the part of sub to redeem or otherwise acquire any stock or indebtedness issued in the proposed transaction plr-113650-05 m3 taking into account the issuance of additional shares of sub stock any issuance of stock for services the exercise of any sub stock_rights warrants or subscriptions a public offering of sub stock and the sale exchange transfer by gift or other_disposition of any of the stock of sub received in the exchange controlled will be in control of sub within the meaning of sec_368 n3 controlled will be deemed to receive stock securities or other_property approximately equal to the fair_market_value of the property transferred to sub or for services rendered or to be rendered for the benefit of sub o3 sub will remain in existence and retain and use the property transferred to it in a trade_or_business p3 there is no plan or intention by sub to dispose_of the transferred property other than in the normal course of business operations q3 each of the parties to the transaction will pay its own expenses if any incurred in connection with the proposed transaction r3 sub will not be an investment_company within the meaning of sec_351 and sec_1_351-1 taking into account changes to sec_351 made by sec_1002 of the taxpayer_relief_act_of_1997 p l sec_3 controlled is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 and the stock_or_securities received in the exchange will not be used to satisfy the indebtedness of such debtor t3 sub will not be a personal_service_corporation within the meaning of sec_269a u3 the aggregate fair_market_value of the contributed assets will exceed the aggregate adjusted bases of the contributed assets immediately after the contribution and the aggregate fair_market_value of the stock of sub and sub will exceed the aggregate adjusted_basis of this stock immediately after the second contribution rulings sub merger sec_3 of revproc_2005_3 2005_1_irb_118 provides that the internal_revenue_service will not rule on the qualification of a transaction as a liquidation under sec_332 unless the service determines that there is a significant issue that is not clearly and adequately addressed by published authority the taxpayer has submitted information indicating that a significant issue exists with respect to the sub plr-113650-05 merger described above in step iv based solely on the information submitted and the representations set forth above we rule as follows on the sub merger the sub merger will qualify as a complete_liquidation of sub under sec_332 distributing will not recognize any gain_or_loss on the sub merger sec_332 sub will not recognize any gain_or_loss on the sub merger sec_336 sec_337 and sec_337 distributing's basis in each asset received from sub in the sub merger will equal the basis of that asset in the hands of sub immediately before the sub merger sec_334 distributing's holding_period in each asset received from sub in the sub merger will include the period during which that asset was held by sub sec_1223 distributing will succeed to and take into account the items of sub described in sec_381 subject_to the conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 and the regulations thereunder sec_381 and sec_1_381_a_-1 except to the extent the earnings_and_profits of sub are reflected in the earnings_and_profits of distributing distributing will succeed to and take into account the earnings_and_profits or deficit in earnings_and_profits of sub as of the date of the sub merger sec_381 sec_1_381_c_2_-1 and sec_1_1502-33 any deficit in the earnings_and_profits of sub or distributing will be used only to offset earnings_and_profits accumulated after the date of the sub merger sec_381 contribution and distribution based solely on the information submitted and the representations set forth above we rule as follows on the contribution and distribution described above in steps xv and xix the contribution followed by the distribution will be a reorganization under sec_368 distributing and controlled will each be a party to the reorganization under sec_368 the second contribution will not prevent the contribution and distribution from qualifying as a reorganization under sec_368 see revrul_2002_85 c b distributing will not recognize any gain_or_loss on the contribution sec_361 and sec_357 plr-113650-05 distributing’s aggregate basis in the controlled stock received in exchange for the contributed assets will equal distributing’s aggregate basis in the contributed assets sec_358 controlled will not recognize any gain_or_loss on its receipt of the contributed assets from distributing in the contribution sec_1032 controlled’s basis in each contributed asset received from distributing will equal the basis of that asset in the hands of distributing immediately before the contribution sec_362 controlled’s holding_period in each contributed asset received from distributing in the contribution will include the period during which distributing held that asset sec_1223 distributing will not recognize any gain_or_loss on the distribution sec_361 the distributing shareholders will not recognize any gain_or_loss and will not otherwise include any amount in income upon receipt of the controlled stock in the distribution sec_355 provided that at the time of the distribution the rights remain contingent non-exercisable and subject_to redemption if issued the receipt of such rights by distributing and its shareholders will not be a distribution or receipt of property an exchange of stock or property either taxable or nontaxable or any other event giving rise to the realization of gross_income by distributing controlled or the distributing shareholders rev_rul c b a shareholder who receives cash in lieu of fractional shares of controlled common_stock will recognize gain_or_loss measured by the difference between the basis of the fractional share received as determined below in ruling and the amount of cash received sec_1001 any gain_or_loss will be treated as capital_gain or loss provided such fractional shares of stock will be held as capital assets on the date of the distribution sec_1221 and sec_1222 each distributing shareholder’s basis in a share of distributing stock as adjusted under sec_1_358-1 shall be allocated between the share of distributing stock with respect to which the distribution is made and the share or shares of controlled stock or allocable portions thereof received with respect to the share of distributing stock in proportion to their fair market values if one share of controlled stock is received in respect of more than one share of distributing stock the basis of each share of distributing stock must be allocated to the shares of controlled stock received in a manner that reflects that to the greatest extent possible a share of controlled stock received is received in respect of shares of distributing stock acquired on the same date plr-113650-05 and at the same price if a distributing shareholder that purchased or acquired shares of distributing stock on different dates or at different prices is not able to identify which particular share of controlled stock or portion thereof is received with respect to a particular share of distributing stock the shareholder may designate which share of controlled stock is received with respect to a particular share of distributing stock provided the terms of the designation are consistent with the terms of the distribution each distributing shareholder’s holding_period in the stock of controlled received in the distribution will include the holding_period of the stock of distributing with respect to which the distribution is made provided that the shareholder holds such distributing stock as a capital_asset on the date of the distribution sec_1223 distributing and controlled will allocate their earnings_and_profits if any in accordance with sec_312 sec_1_312-10 and sec_1_1502-33 based solely on the information submitted and the representations set forth above we rule as follows on the second contribution described above in step xvi second contribution controlled will not recognize any gain_or_loss on the second contribution sec_351 sub will not recognize any gain_or_loss on the second contribution sec_1032 sub 1's basis in the stock of sub and sub will in each instance equal the stock's basis in the hands of controlled immediately before the second contribution sec_362 sub 1's holding_period in the stock of sub and sub will in each instance include the period during which that stock was held by controlled sec_1223 controlled's aggregate basis in the sub stock will equal controlled’s aggregate basis in the stock of sub and sub immediately before the second contribution sec_358 controlled's holding_period in the sub stock will include the holding_period of controlled in the stock of sub and sub immediately before the second contribution provided that the contributed stock was either a capital_asset as defined in sec_1221 or property described in sec_1231 sec_1223 caveats plr-113650-05 we express no opinion about the tax treatment of the proposed transactions under other provisions of the code and regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transactions that are not specifically covered by the above rulings in particular no opinion is expressed regarding i whether the distribution satisfies the business_purpose requirement of sec_1_355-2 ii whether the distribution is used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both see sec_355 and sec_1_355-2 iii whether the distribution and an acquisition or acquisitions are part of a plan or series of related transactions under sec_355 iv the federal tax treatment of the holder of sub stock other than distributing llc llc llc who receives cash in exchange for its shares in the sub merger described above in step iv v whether any of the sub merger the sub conversion the sub conversion and the sub conversion described above in steps ix through xii will qualify under sec_332 vi the federal tax treatment of compensation paid for back office services during the transition_period described above in the penultimate paragraph of the proposed transactions section of this letter and vii the federal tax treatment of the employee rights modifications described above in the last paragraph of the proposed transactions section of this letter procedural statements this ruling letter is directed only to the taxpayers who requested it and applies only to the facts of the proposed transactions sec_6110 provides that it may not be used or cited as precedent a copy of this ruling letter must be attached to the federal_income_tax return of each taxpayer involved in the proposed transactions for the taxable_year in which the proposed transactions are completed under a power_of_attorney on file in this office a copy of this letter is being sent to the taxpayer and to a second taxpayer_representative plr-113650-05 cc sincerely associate chief_counsel corporate by _________________________________ wayne t murray acting deputy associate chief_counsel corporate


department of the treasury certified internal_revenue_service tege appeals programs n los angeles street los angeles ca release number release date date date taxpayer_identification_number - person to contact employee id number tel fax refer reply to in re tax years uil index dear this is a final adverse determination effective date as to your exempt status under sec_501 as an organization described under sec_501 of the internal_revenue_code our adverse determination was made for the following reason s organizations exempt from federal_income_tax under sec_501 of the internal_revenue_code are required to operate exclusively for educational charitable or other exempt purposes an organization is not operated for one or more exempt purposes unless it serves a public rather than a private interest sec_4 c -1 d ii during and 20f organization provided immigration services for a fee in manner comparable to for-profit enterprises we have determined that your further an organization is not operated exclusively for one or more exempt purposes if the net eamings of the organization inure in whole or in part to the benefit of private shareholder or individuals of the organization see sec_1 c - c during 20__ and 2q _ we have determined that your net_earnings inured to the benefit of private individuals by regular payment of auto mortgage and other personal expenses of offers as well as cash withdrawals and personal checks to officers which were recorded as loans that do not appear to be bona-fide and were not contemporaneously recorded as expenditures_for salary or compensation the funds inuring to your officers weére substantial in comparison to your total assets and activities and were multiple or repdated during the years you have not implemented safeguards to prevent a recurrence of funds inuring to your founder as such you have not operated exclusively for exempt purposes and have operated for the benefit of private interests of individuals in ‘contravention of the requirements of sec_1_501_c_3_-1 contributions to your organization are not deductible under code sec_170 you are required to file federal form_1120 for the year s shown above if you decide to contest this determination under the declaratory_judgment provisions of code sec_7428 a petition to the united_states tax_court the united_states court of claims of the district_court of the united_states for the district of columbia must be filed before the ninety-first day after the date this determination ‘was mailed to you contact the clerk of the appropriate court for rules for filing petitions for declaratory_judgment to secure a petition form from the united_states tax_court write to the united_states tax_court second street n w washington d c you also have theright to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown _-above since this person dan access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals procedures etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations or extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this final adverse determination of your exempt status as required by code sec_6104 if you have any questions please contact the person whose name and telephone number are shown in the ‘heading of this letter sincerely karen a aa appeals team manager internal_revenue_service tax_exempt_and_government_entities_division exempt_organizations examinations sw 6th court ms plantation fl department of the treasury date date org address ‘ certified mail - return receipt requested dear taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax we have enclosed a copy of our report of examination expiaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a ' taxpayer and the irs collection process if we issue a determination_letter to you based on technical_advice no further you may also request that we refer this matter for technical_advice as explained in publication administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final letter rev catalog number 34809f revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contaet the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance f you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the if you write please provide a telephone number and the most convenient heading of this letter time to call if we need to contact you thank you for your cooperation sincerely nanette m downing director eo examinations enclosures publication publication report of examination letter rev catalog number 34809f schedule number or exhibit heey january form 886-a explanations of items name of taxpayer org tax identification_number ein year period ended 20xx12 20xx12 legend org - organization name city poa - poa vice president through co-15 - through ra-1 through ra-6 - through ra ' bin ein ‘agent - agent address - address president - president vice president - state - state xx - date companies city - co-1 issues whether org is operated exclusively for exempt purposes described within internal_revenue_code sec_501 whether org is engaged primarily in activities that accomplish an exempt_purpose whether more than an insubstantial part of org’ activities are in furtherance of a non-exempt purpose whether org was operated for the purpose of serving a private benefit rather than public interests whether any part of the net_earnings of org inured to the benefit of any private_shareholder_or_individual background a facts on february 20xx org filed original articles of incorporation with the state secretary of state the articles of incorporation provided that its purpose was to _ provide assistance to lowincome families in form of housing food paralegal services clothing transportation reading writing drug counseling pastoral counseling and assisting in obtaining u s citizenship for those who are from countries that are in violations of human rights assist in the training of seeing eye dogs for those people who are blind assist in the development of good character morals and sportsmanship through the belief in jesus christ the love of jesus christ as our savior and teaching of the art of sailing on june 20xx org filed articles of amendment to its articles of incorporation to add article vil ------ article viii included additional powers purpose and dissolution provisions of the organization form_1023 application on june 20xx org hereinafter org filed a form_1023 application_for recognition of exemption under sec_501 of the internal_revenue_code with the internal_revenue_service hereinafter irs or the service the application represented in part that org's activities will entail providing food and clothing to needy families providing drug and family counseling to needy families and a friend in need dog training for blind the organization expects to receive at least pf its total support from governmental units from contributors made directly or indirectly by the general_public or from a combination of the two the organization's continuous sources of financial support in order of size may be as follows el department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov -page__1 schedule mumber or exhibit form 886-a rev date explanations of items name of taxpayer org year period ended 20xx12 20xx12 tax identification_number ein individual donors business community governmental_unit sec_4 other c public_charities the group may also attract some income from performing exempt_purpose activities which may raise money for our tax exempt_purpose cause and benefit the general_public in response to irs correspondence during the determination process requesting more detailed information about org's activities it stated the following by letter dated november 20xx we form a clothing and fopd drive once and sometime twice a month where we give out the item collected at co-1 in city state and at address our doors are open to anyone who need drug placement and we offer free pastoral counseling to all who come toourdoor - we stopped the dog training for the blind now we only assist in helping the blind to find a good dog to assist them we have people who allow low income families to stay at their homes at no cost we provide transportation help in teaching them to read and write if they don’t know english and we go with people to the u s department of immigration to help them fill out their forms we hold workshop or developing good character and family values and we hold sport activities we have sail boats on city state where we teach teen ages thru the art of sailing in a letter dated january 20xx org was recognized by the service as exempt from federal_income_tax as an organization described in sec_501 of the code program activities in a letter dated december 20xx org was notified that its forms for tax years ended december 20xx and 20xx had been selected for examination the initial field appointment was held on february 20xx with power of attorneys poa and poa at the poa’s office during the meeting the power of attorneys furnished pictures of vice president vice president of org working in country they also provided photos of countryan natives holding signs with org’s name in front of schools and churches later photos provided show the game buildings destroyed after the 20xx earthquake the power of attorneys also provided a letter from ra-1 and ra-2 thanking org for their past assistance and requesting assistance due to tragic earthquake of january 20xx there were several information document requests issued to org during the course of the examination and to date org has not responded completely to the document requests specifically the following requested information has not been furnished idr exhibit -e a listing and description of the programs events activities conducted and services provided during the period to be examined including relevant details such as the date and location held the number of participants detail any fees charged and the purpose of the activity allcontracts and correspondence files including insurance contracts mortgages paid_by organization and contracts detailing terms of payments made by the organization idr 02a exhibit e form 886-a department of the treasury-internal revenue service catalog number 2810w _- publish no irs gov page_2 form_88 a schedule number or exhibit ‘ name of taxpayer org tax identification_number ein year period ended 20xx12 20xx12 to outside parties eg ra-3 pa who was paid large checks of dollar_figure and dollar_figure in 20xx e e copies of any newsletters publications advertisements or pamphlets that were distributed by the organization from january 1st 20xx to present alisting and description of the programs events activities conducted and services provided during the period to be examined including relevant details such as the date and location held the number of participants detail any fees charged and the purpose of the activity idr 02b exhibit how many cliénts paid fees to the organization for immigration services in 20xx how many in 20xx immigration activities e e how are the organization's fees set what is the total income and expense attributable to this activity in 20xx and in 20xx what distinguishes the organization's immigration services from for-profit immigration services what records are kept which document this differentiation during the initgu interview with the power_of_attorney it was mentioned that the organization offers lifetime membership for a fee of dollar_figure to individuals and then provides them with immigration form filing help securing government support for housing education and other services s this correct what records are kept to substantiate these services are these services available to all on the applic on for exemption the organization claimed that it would assist those who are from gountries in violation of human rights in obtaining u s citizenship are all your clients seeking u s immigration on the basis of human rights violations other activities including yachting real_estate services seeing eye dogs drug counseling etc e please describe the types of records kept with respect to each of the services engaged and have all records available for inspection at our next appointment dated below e who were the'recipients who provided the services what files are kept e e what fees were paid to the organization for these services in 20xx and in 20xx what is the total income and expense attributable to each activity in 20xx and in 20xx what distinguisnes these services from similar for-profit services what records are kept which dogument this differentiation are these services available to all department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov page_ schedule number or exhibit form 886-a rev date explanations of items name of taxpayer org idr 02c exhibit yearperiod ended 20xx12 20xx12 please describe the types records kept with respect to cash withdrawals loans personal expenses and remuneration to officers and have all records available for inspection at our next appointment dated below tax identification_number ein e ‘ e e our initial review of the 20xx bank statements and check copies revealed numerous large checks te ra-4 cash counter withdrawals signed by ra-4 and several large payments for potentially personal expenses such as property_tax payments insurance bmw car loan payments several mortgage payments etc please furnish any documentation which explains or excludes from income these payments and provide check copies of the additional 20xx missing checks idr exhibit check for dollar_figure from co-2 acct check for check for check for provide a detailed explanation of the programs and activities your organization conducted during the tax years ended december 20xx and 20xx dollar_figure from co-2 acct dollar_figure from co-2 acct dollar_figure'from co-2 acct e e e e e e provide all employment contracts including any supplements and amendments in effect during the years under examination explain in detail the fee structure for each of your programs for the tax years ended december -20xx and 20xx make client fires for the tax years ended december 20xx and 20xx available for inspection does the orgahization own or lease any vehicles if yes provide a list of all vehicles does the organization own lease or sublease any real_property if so is the property encumbered provide a list af property the organization utilizes e whois authorized to use the organization’s vehicle y debt on its form_990 returns for the tax periods ending december 20xx and 20xx respectively org has described its primary purpose and program achievements as follows 20xx12 primary exempt_purpose help low income families i exempt_purpose achievements _ immigration services ‘ ldollar_figure program service expenses 20xx12 form 886-a catalog number 20810w page_4 _-publish no irs gov department of the treasury-internal revenue service i schedule number or exhibit form 886-a rev date explanations of items yeart period ended 20xx12 20xx12 tax identification_number ein name of taxpayer org program service organization’s mission to provide assistant to low inconie families in form of paralegal services housing food clothing transportation reading writing drug counseling pastoral counseling and assistant in obtaining the us citizenship for those who are from countries that are if violation of hr exempt_purpose achievements paralegal services assist low income families and individuals from foreign countries who are victims of human rights violation to applied for immigration status by referring them to attorneys offices or by assisting them to fill out the appropriate paper works following the attorney's recommendations to provide links between the community and the persons confined in correctional institutions to prepare them to reentry into society sharing the love to god expenses dollar_figure _ based on an interview agent conducted with president president of org on march 20xx it appears that org is a membership_organization which currently has over big_number members all of the income of org comes from members vice president and ra-4 according to vice president e the membership fee is dollar_figure and immigration application fees are deducted from membership fees all members are required to obtain their ged or diploma and also adopt a child in country by providing food and other items when they come to org for assistance e the benefits provided w members of org include assistance with immigration related issues marine diesel mechanics biology and boating classes taught every sunday at co-3 boat rides high school diploma ged paid_by narcotics anonymous alcoholics anonymous and family counseling offered free towing services __ _ffills out grants for members _-- fo e other activities of org include holding religious services providing referral services and preaching at local jails org has built several schools in country which were destroyed during the recent earthquake org still donates food dvd players crock pots generators musical instruments educational and religious materials to country see exhibit for complete letter from agent to’ __-__fecollecting interview org only has pictures and a few letters from pastors to verify charitable expenditures and activities in a letter dated may 20xx org responded to the agent's recollection of interview conducted on march 20xx as described above the letter states that org does ask its members for voluntary membership fee in form of a donation in orderito help pay for expenses in the united_states schools in country homes for orphans and for whatever things members might need the letter further states that the donation or membership fee is not mandatory and no matter what they help members in their situation finally the letter states that all services are free such as drug counseling family counseling boat teaching and many _ more see exhibit for complete response department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov page_5 explanations of items form 886-a rev date name of taxpayer org vice president conducted an interview with co-4 reporter ra-5 on october 20xx to discuss accusations that vice president and org were preying on illegal aliens in the interview vice president stated we don’t take advantage’of anyone and we put in to either re-open a case or to stop a deportation’ when asked if charged money for the service vice president said no we only help our members to be a member of the-org ministry is dollar_figure see exhibit for complete interview yeatiperiod ended 20xx12 20xx12 tax identification_number ein schedule number or exhibit ji during the examination agent reviewed a sample of client files maintained by org all of the files reviewed contained correspondefice from the client to the department of homeland security u s citizenship and immigration services some of the information maintained in the files included application of employment apprdval application to register permanent residence and i-589 application_for asylum and for withholding of removal the clients’ current address listed on all of the applications is address city state the referenced address belongs to org during the years ended december 20xx and 20xx org’s income was generated from membership fees and contributions as evidenced below most of org’s revenue is generated from membership fees which appear to primarily be charged for immigration services per - december 20xx donor constribution membership fee other donations interest cogs - merchandise purchase total total ‘ wo per - december 20xx contributions membership fee interest cash withdrawals the bank account statements of org for 20xx and 20xx were reviewed and cash withdrawals were noted the cash withdrawals were made from org's business checking and business money market accounts at co-5 the majority ef the withdrawals were customer withdrawals made at the bank and one atm withdrawal was made at the co-6 the total withdrawals made were dollar_figure in 20xx see exhibit org stated that vice president and ra-4 were lucky at the casino and would occasionally deposit their winnings into the organization's bank account and make withdrawals org provided a copy of a w-2g for ra-4 which showed dollar_figure in winnings on 20xx and a copy a their co-2 business checking account statement for october 20xx through november 20xx showing a dollar_figure deposit on 20xx as proof of deposits see exhibit there was no documentation provided to show the business_purpose of the cash withdrawals accounts_receivable the general ledger was reviewed for 20xx and 20xx several checks and debit purchases were made to or on behalf of president and ra-4 and reported as accounts_receivable in 20xx the amounts totaled dollar_figure for president and dollar_figure for ra-3 and in 20xx the amounts totaled dollar_figure for president and dollar_figure for ra-3 see exhibit no documentation such as receipts was provided as to the purpose of the expenditures there was no contemporaneous documentation of a loan no security or repayment provisions no interest accrued and no repayment to org the amounts were not reported as compensation to president and ra-4 department of the treasury-internal revenue service form 886-a catalog number 2o sec_1ow publish no irs gov page_6 886-a form rev date _ explanations of items tax identification_number year period ended schedule number or exhibit name of taxpayer org ein 20xx12 20xx12 t auto loan payments _ during the years under examinauon org made auto loan payments on several vehicles org provided documentation which shows a check was written from their account for dollar_figure on 20xx for a bmw z4 roadster for president the documentation also showed ra-4 would be listed as the legal registered owner on the title see exhibit from reviewing the bank statements and general ledger of org there were several payments made to co-7 in 20xx and 20xx in addition org made payments to co-8 for dollar_figure and dollar_figure the cashier's check for dollar_figure noted that ra-4 was the purchaser and it was purchased for ra-6 see exhibit there was no documentation provided to explain of the business_purpose of the vehicles the amounts were not reported as compensation to president or ra-4 mortgages and related expenses the general ledger for the tax years ended december 20xx and 20xx was reviewed org made several mortgage and interest payments to co-9 co-10 co-11 co-12 and co-13 there were also condo association payments made to co-14 and co-15 see exhibit the balance_sheet on org’s forms for 20xx and 20xx does not list any properties buildings or land __as assets no documentation was provided to show the business_purpose of the mortgages and related expenses the amounts were not reported as compensation to president or ra-4 law sec_501 of the code exempts from federal_income_tax organizations organized and operated exclusively for charitable educational and other exempt purposes provided that no part of the organization’s net_earnings inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the regulations provides that in order to be exempt as an organization described in sec_501 of the code the organization must be one that is both organized and operated exclusively for one or niore of the purposes specified in that section sec_1 c -1 c of the regulations provides that an organization will not be regarded as operated exclusively for exempt purposes if more than an insubstantial part of its activities is not in furtherance of exempt purposes sec_1_501_c_3_-1 of thegregulations provides that an organization is not organized or operated purposes unless it serves a public rather than a private interest thus it exclusively for one or more exenipt 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 of the regulations provides that the term charitable is used in sec_501 c of the code in its generally accepted legal sense and includes the relief of the poor and distressed or of the underprivileged as well as the advancement of education department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov page_7 t schedule number or exhibit 886-a form rev date name of taxpayer org explanations of items tax identification_number ein yearperiod ended 20xx12 20xx12 sec_1 c -1 e of the regulations provides that an organization may meet the requirements of sec_501 although it operates a trade_or_business as a substantial part of its activities if the operation of such trade_or_business is in furtherance of the organization’s exempt_purpose or purposes and if the organization is not organized or operated for the primary purposes of carrying on an unrelated_trade_or_business in 326_us_279 the supreme court held that the presence of a single non-exempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes the court found that the trade_association had an underlying commercial motive that distinguished its educational program from that carried out by a university in american institute for economie research v united_states 302_f2d_93 ct_cl the court considered an organization that provided analyses of securities and industries and of the economic climate in general it sold subscriptions to various periodicals and services providing advice for purchases of individual securities the court neted that education is a broad concept and assumed arguendo that the organization had an educational purpose however the totality of the organization's included the sale of many publications as well as the sale of advice for a fee to individuals was indicative of a business therefore the court held that the organization had a significant non-exempt purpose that was not incidental to the educational purpose and was not entitled to be regarded as exempt_activities which purpose rather than a charitable purpose the court considered the in easter house v u s ct_cl aff'd 846_f2d_78 fed cir the court found that adoption services were the primary activity of the organization in deciding that the organization conducted adoption services for a business manner in which the sara oper commercial activity and which were evident in the operations of easter house also the court determined that the organization competed with other commercial organizations providing similar services fees were the only source of revenue it accumulated very substantial profits because it set its fees in order to generate a profit the accumulated capital was substantially greater than the amounts spent on charitable and educational activity and the organization did not solicit and did not plan to solicit contributions the court also found a corporate-type structure in the classes of memberships including a single life member having inherent power that the holder could transfer like stock and dependence on paid employees the record established a number of factors that characterize a revrul_76_205 cb held that an organization formed to aid immigrants in overcoming social cultural and economic préblems by providing personal counseling referrals to helpful agencies social and recreational activities instruction in english and distributing a newsletter containing information on attaining citizenship securing housing and obtaining medical_care is operated exclusively for charitable and educational_purposes the organization relies upon grants and contributions from the general_public and does not charge for its services benefiting private interests internal_revenue_code sec_501 specifies that an exempt_organization described therein is one in which no part of the net of earnings inures to the benefit of any private_shareholder_or_individual the words private_shareholder_or_individual i in sec_501 to refer to persons having a personal and private interest in the activities of the organization sec_1 a -1 c the inurement pe ettion provision is designed to preventithe siphoning of charitable receipts to insiders of the charity united department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov page_ schedule number or exhibit form 886-a rev date explanations of items name of taxpayer org tax identification_number ein year period ended 20xx12 20xx12 cancer council v commissioner 165_f3d_1173 cir reasonable_compensation does not - constitute inurement 276_f2d_476 cir sec_1 c -1 d ii provides that an organization is not organized or operated exclusively for one or more of the purposes specified in subdivision i of this subparagraph unless it serves a public rather than a private interest thus to meet the requirement of this subdivision it is necessary for an organization to establish that it is not organized or 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 fact patterns suggesting inurement also frequently suggest excess_benefit transactions between an exempt_organization and a disqualified_person under sec_4958 the recent regulations issued under sec_501 cx3 at sec_1 c -1 f ii instruct the service to consider a variety of factors to determine whether revocation is appropriate when sec_4958 excise_taxes also apply a the size and scope of the organization's regular and ongoing activities that further exempt purposes before and after the excess_benefit_transaction or transactions occurred b the size and scope of the excess_benefit_transaction or transactions collectively if more than one in relation to the size and scope of the organization's regular and ongoing activities that further exempt purposes - c whether the organization ‘has been involved in multiple excess_benefit transactions with one or more persons d whether the organization nas implemented safeguards that are reasonably calculated to prevent excess_benefit transactioris and e whether the excess benefi t transaction has been corrected within the meaning of sec_4958 -and sec_53 or the organization has made good_faith efforts to seek correction from the disqualified_person s who benefited from the excess_benefit_transaction the commissioner has discretion to weight the factors depending on the particular situation but the latter two factors are weighted heavier only when the organization has taken preemptive steps to correct the excess_benefit_transaction before they were brought to the commissioner's attention sec_1 c -1 f iii pay personal expenses which reduces the funds available to conduct sec_1 c -1 fyiv xample supposes that an organization’s founder diverts significant portions of the organization’s to exempt activity over the course of multiple years the board_of trustees never authorized the organization to pay the founder’s personal expenses and takes no action to seek repayment or terminate the founder’s involvement with the organization contemporaneous documentation exists and no payments of principal or interest were ever made tothe organization based on the factors above the regulations contemplate that not only does the diversion of funds constitute an excess_benefit_transaction under sec_4958 but the prohibition against inurement has been violated and the organization no longer qualified as an organization described in sec_501 the founder claims that the payments represent loans but no excessive_compensation for services is a form of inurement for example in 203_f2d_872 cir the fifth circuit held that the organization’s payment ofa full-time salary for part-time work was inugement department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov page_9 schedule number or exhibit form 886-a rev date explanations of items name of taxpayer org tax identification_number ein year period ended 20xx12 20xx12 the use by insiders of the organization's property for which the organization does not receive adequate_consideration is a form of inurement see eg the 412_f2d_1197 ct_cl holding that the insiders’ use of organization-owned automobiles and housing constituted inurement 222_fsupp_151 d wash holding that the organization's provision of goods services and refreshments to its members constituted inurement ‘ j loans that are financially advantageous to insiders from the organization’s funds particularly unexplained undocumented loans are a form of inurement for example in the founding church of scientology f 2d pincite the claims_court listed unexplained loans to and from insiders among the examples of inurement in 823_f2d_1310 cir the ninth circuit held that debt repayments in the form of percent of the organization’s income made to the organization’s founder allegedly to compensate the founder for the organization's past use of his personal income and capital constituted inurement in 283_fsupp2d_58 d d c 20xx the court held that forgiveness of interest was a form of inurement payment to one person for services performed by another or for services presumed to be performed without any proof of performance is a form of inurement in church of scientology f 2d pincite the court listed royalties received by the organization’s founder on the sale of publications written by others among the improper benefits received by the founder from the organization in the founding church of scientology f 2d pincite the court held that the payment of salary to the founder's daughter without any proof that she actually performed any services for the organization constituted inurement a number of courts have held that unaccounted for diversions of a charitable organization's resources by one who has complete and unfettered control can constitute inurement 365_f2d_792 8th cir 318_f2d_632 7th cir church of scientology f 2d pincite in greg r vinikoor v commissioner tcmemo_1998_152 the tax_court held that whether a financial transaction constitutes a’loan depends on all the facts and circumstances including whether there was a promissqry note or other evidence_of_indebtedness interest was charged there was security of collateral there was a fixed maturity_date a demand for repayment was made any actual repayment was made the transferee had the ability to repay any records maintained by the transferor and or the transferee reflected the transaction as a loan and the manner in which the transaction was reported for federal tax purposes in rameses school of san antorjio texas v commissioner t c memo 20xx-85 the tax_court held that a private school failed to qualify for exemption under sec_501 because it operated for the private benefit of its founder the tax_court stated factors highlighted of a prohibited relationship have included control by the founder over the entity’s funds assets and disbursements use of entity moneys for personal expenses payments of salary or rent to the founder without any accompanying evidence or analysis of the reasonableness of the amounts and purported loans to the founder showing a ready private source of credit nearly all of these factors are present here government's position form 886-a department of the treasury-internal revenue service catalog number 20810w _publish no irs gov page_10 schedule number or exhibit form 886-a rev date name of taxpayer explanations of items tax identification_number ein org based on the examination conduéted it has been concluded that org does not continue to qualify for tax- exempt status as an organization described in sec_501 of the code org does not operate exclusively for sec_501 purposes rather it has a substantial non-exempt purpose does appear that org conducted some charitable activities it's primary activity consists of providing immigration services for a fee and such services are in furtherance of a substantial non-exempt purpose our conclusion is based on the totality of factors that are noted above and discussed below although it year period ended 20xx12 20xx12 org is similar to the organization is american institute for economic research that the court concluded had a significant non-exempt conimercial purpose in that case the organization sold periodicals and provided services to individuals rélating to the purchase of securities org is providing services to individuals relating to immigration issues like the organization in american institute for economic research org is providing services to individuals for a fee while org may provide some counseling services and have some charitable activities the manner in which it operates is indicative of a business rather than an organization described in c of the code in easter house the court decided that the organization conducted adoption services for a business_purpose rather than a charitable purpose in reaching its decision the court considered the manner in which the organization was operated the following factors were established e e e the organization competed with other commercial organizations fees were the only source of revenue the organization accumulated very substantial profits because of its fee structure e the accumulated capital was substantially greater than amounts spent on charitable and educational activity and the organization did not solicit and did not plan to solicit contributions several of the factors present in wie easter house case are also applicable to org during the examination years ended december 20xx and 20xx substantially_all of org’s revenue was derived from fees additionally org did hot provide any documentation to show that they solicited or received further org appears to compete with other commercial entities contributions from the general_public the immigration services that org provides are comparable to some of the services provided by similar for-profit companies é besides a few letters from pastors and pictures org could not substantiate that they conducted any charitable activities client files containing applications and correspondence with the department of homeland security u s citizenship and immigration services were the only records maintained by org several information document requests were issued to identify concrete and specific exempt_activities undertaken by org there were five information document requests either not fully or partially addressed while org may have provided some charitable activities they are incidental when weighed against its immigration services as provided in better business bureau of washington d c inc the presence of a single non-exempt purpose if substantial in nature will destroy the exemption regardless of the number or department of the treasury-internal revenue service form 886-a catalog number 20810w _publish no irs gov page schedule number or exhibit form 886-a rev date explanations of items name of taxpayer org year period ended 20xx12 20xx12 tax identification_number ein importance of truly exempt purposes org immigration services are substantial and commercial in nature and as such the services defeat its claim to be an organization described in sec_501 of the code vice president and ra-4 are officers directors and private shareholders or individuals because they are - persons having a personal and private interest in the activities of the organization as defined in sec_1_501_a_-1 cited above vice president and ra-4 are founders and vice president and president respectively of org they have sole control_over the income disbursements and assets of org vice president and ra-4 diverted org’s funds for their personal benefit as illustrated by the transactions described above they used orgs funds to pay auto loans for personal automobiles and there was no documentation of any business use of the vehicles they also paid several mortgages and related expenses fotaling dollar_figure in 20xx and dollar_figure in 20xx for personal properties vice president and ra-4 used org’s assets for their personal purposes the hundreds of thousands of dollars recorded as accounts_receivable included repeated cash withdrawals payment of personal expenses and checks written to and for the benefit of vice president and ra-4 there is no internal control to ensure that funds were used for exempt purposes vice president and ra-4 had free reign over the following to deposit the income or not deposit the income pay the note on their personal vehicles use org’s debit cards for personal expenses make cash withdrawalg at any time write checks to themselves with no documentation required and amount up receivables to org with no repayment made to date there is no record that the board members questioned vice president and ra-4’ control of the funds analysis under the factors laid out in sec_1_501_c_3_-1 supports the conclusion that revocation of org’s exempt status is appropriate in this case this situation is very similar to example of the regulation the funds available far org’s activities before and after the transactions appear to have been affected vice president and ra diverted thousands of dollars in cash withdrawals and payments of personal expenses yet only had minimal documented charitable activities the size and scope of the transactions are substantial in relation to org exempt_activities the relative size of the total accounts received owed by vice presidentand ra-4 to org’s total assets as reported on the organization’s forms also weighs heavily against org’s continued exempt status the excess_benefit transactions between vice president ra-4 and org multiplied and repeated during the years at issue no loan documentation exists nor is vice president or ra-4 known to have made any payments of principal or interest on the amounts recorded as accounts_receivable there were no internal controls in place the board is non-existent and no safeguards were put in place to prevent the occurrence of excess_benefit transactions no correction is known to have been sought by or made to the organization in summary vice president and ka-4 operated org more like a personal business than an exempt_organization vice president and ra-4 had control_over org’s funds assets and disbursements made use of the funds for personal_use and made no repayments on loans org made to them vice president department of the treasury-internal revenue service form 886-a catalog number 20810w _publish no irs gov page_12 schedule number or exhidit 886-a form rev date name of taxpayer org explanations of items tax identification_number ein yoarperiod ended 20xx12 20xx12 and ra-4 essentially appear to have had access to a zero interest line of credit with no promissory notes terms of repayment or interest charged the income and assets of org inured to the benefit of vice president and ra-4 the vice president and president of the organization thus org was not operating exclusively for exempt purposes as required by sec_501 see rameses school of san antonio texas v commissioner t c memo 20xx-85 the exempt organization’s positién has not been determined taxpayer's position conclusion c in summary org is not operated exclusively for exempt purposes because it does not engage primarily in activities that accomplish an exempt_purpose more than an insubstantial part of org’s activities are in furtherance of non-exempt purposes that are commercial in nature in addition org a more than insubstantial portion of its operation is for the purpose of serving the private interests of its officers vice president and ra-4 it is recommended that org’s tax-exempt status be revoked effective january 20xx - department of the treasury-internal revenue service form 886-a catalog number 20810w _publish no irs gov page_13


department of the treasury internal_revenue_service washington d c oe ee tax_exempt_and_government_entities_division may uniform issue list sé tep 2a t2 legend taxpayer a ira x financial_institution b financial_institution c dear amount e financial_institution d perjury in support of the ruling requested this is in response to your request dated date in which you the following facts and representations have been submitted under penalty of requested a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code code institution d totaling amount e taxpayer a asserts that her failure to accomplish a rollover within the 60-day period prescribed by sec_408 was due toa misdirection within financial b’s website which caused an unintended deposit to a non- ira account taxpayer a further represents that amount e has not been used for any other purpose taxpayer a represents that she received a distribution from ira x at financial on date taxpayer a attempted to rollover ira x to an individual_retirement_account ira at financial_institution b to obtain a more favorable interest rate however amount e was unintentionally electronically transferred to financial_institution c and the funds were deposited into a non-ira account taxpayer a represents that she attempted to open the rollover ira at financial_institution b through financial_institution b’s website became disconnected and was then redirected to financial_institution c’s website where she opened what she believed was a rollover ira new account information was provided to financial_institution d and an electronic transfer was made the withdrawal authorization indicated that the account to which amount e was to be transferred was an ira in date taxpayer a attempted to open a regular certificate of deposit cd account at financial_institution c she was told that she had an existing non-ira cd account with a balance of amount e with interest earnings it was then that she realized that the rollover ira had not been opened at financial_institution b taxpayer a contacted individuals at both financial_institution b and financial_institution c but was told they could not correct the mistake based on the facts and representations you request a ruling that the internal_revenue_service the service waive the day rollover requirement contained in sec_408 with respect to the distribution of amount e sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of d do not apply to any amount required to be distributed under sec_401 of the code sec_408 of the code provides that the secretary may waive the day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement revproc_2003_16 r b date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and the documentation submitted by taxpayer a is consistent with her assertion that her failure to accomplish a rollover of amount e within the 60-day period prescribed by sec_408 of the code was due to a misdirection within financial b’s website which caused an unintended deposit to a non-ira account at financial_institution c therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount e from ira x taxpayer a is granted a period of days from the issuance of this ruling letter to contribute amount e into a rollover ira provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contribution amount e will be considered a rollover_contribution within the meaning of sec_408 of the code this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent if you wish to inquire about this ruling please contact please address all correspondence to se t ep ra t2 sincerely yours sherri m edelman manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose