department of the treasury internal_revenue_service washington d c number release date cc intl br6 tl-n-6611-99 uilc internal_revenue_service national_office field_service_advice date date memorandum for bettie n ricca associate area_counsel washington d c cc lm mct was attention karen chandler special litigation assistant from subject jacob feldman special counsel cc intl this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be used or cited as precedent legend agency a contract contract contract contract corp a corp a-fsc corp b tl-n-6611-99 corp c country group a date date date date date date date date month month organization a predecessor product product type a quantity a quantity b quantity c quantity d quantity e subsidiary tax_year tax_year tax_year united_states location a united_states possession a x y tl-n-6611-99 z year year year year year year year year year year year year year year year year issue whether receipts attributable to sales of the product1 to agency a by corp b through a fsc are excluded from status as foreign_trading_gross_receipts under sec_924 and temp sec_1 a -1t g i conclusion on the facts presented sales of the product by corp b to agency a for its own use do not generate foreign_trading_gross_receipts within the meaning of sec_924 because agency a was required_by_law or regulation to purchase products manufactured in the united_states within the meaning of sec_924 and temp sec_1 a -1t g i the exception for programs where sales are open to competitive bidding under temp sec_1 a -1t g iii b does not apply facts corp a also referred to as taxpayer is a domestic_corporation corp a- fsc is a wholly-owned subsidiary of corp a is incorporated in united state sec_1 you have advised that some sales for the tax years at issue involved spare parts this memorandum relates only to sales of the product itself and does not address any issues uniquely associated with spare parts tl-n-6611-99 possession a on date and acts as a commission agent for corp a’s export sales subsidiary is a wholly-owned domestic subsidiary of corp a for all tax years at issue corp a-fsc had in place a valid election to be treated as a foreign_sales_corporation fsc pursuant to sec_922 and sec_927 and in all other respects continuously maintained its status as a fsc as defined in sec_922 pursuant to service and commission agreements corp a and subsidiary undertake to perform on behalf of corp a-fsc and bill corp a-fsc for the foreign economic processes and activities required under sec_924 and sec_924 with respect to sales generating foreign_trading_gross_receipts within the meaning of sec_924 these agreements also obligate corp a and subsidiary as related suppliers to pay to corp a-fsc the largest commission permitted for federal_income_tax purposes in month agency a an instrumentality of the united_states government issued a request for proposal for the development of a prototype of product type a a type of military equipment and shortly thereafter selected corp b and corp c to develop competing prototypes three years later following a demonstration of the two prototypes agency a awarded contract to corp b on date for the full- scale development of what ultimately became the product contract also granted agency a options to procure production versions as distinct from the developmental prototypes of the product for year sec_1 and as well as an option to purchase quantity a of the product for use by foreign governments in month shortly following the award of contract the united_states government entered into a memorandum of understanding mou with the governments of country group a regarding establishment of a program to develop the product the mou contemplated purchases of the product by agency a and by the other signatory countries from corp b one of the stated objectives of the mou was to facilitate standardization rationalization and interoperability of product type a within organization a an international_organization of which the united_states as well as the countries in country group a are voting members as to production of the product for agency a the mou called for industry in country group a to be granted subcontracts for a small portion x percent of the procurement value of quantity b of the product to be sold to agency a with final assembly in the united_states higher percentages of foreign industrial participation were provided with respect to product production for the country group a signatories with final assembly to be abroad the mou provided that procurement of equipment and services for the product program shall be consistent with department of defense regulations but that with respect to the non-domestic x percent industrial participation called for in the mou o ffers shall be evaluated without applying price differentials such as those required by ‘buy american’ and ‘balance of payment’ laws and regulations tl-n-6611-99 approximately five years later in year agency a requested that corp b analyze potential cost savings of using multi-year contracts for the product corp b surveyed its subcontractors and suppliers to determine whether and by how much it could negotiate lower prices for larger purchases and higher production volume corp b also evaluated potential labor and overhead savings at the production facility for the product on date in the following year as required by procurement regulations agency a issued a request for proposal inviting corp b to submit comparative proposals for the production of quantity c of the product under the alternatives of a series of annual contracts or a multi-year contract based on corp b’s response and other data agency a concluded that the price of the product could be reduced significantly under a multi-year contract later that year on date upon securing congressional approval and as negotiated pursuant to the sole-source provisions of former u s c a agency a entered into contract with corp b which followed on contract and provided for the production of quantity c of the product spread evenly over each of year sec_5 and approximately three years later corp b and agency a entered into contract effective date providing for production of quantity d of the product over years and like contract contract was negotiated on a sole-source basis approximately four years later corp b and agency a entered into contract effective date providing for production of quantity e of the product over years and contract was negotiated pursuant to u s c c u s c c and u s c providing authority for using other than full and open competition receipts attributable to contract sec_2 and are at issue several clauses are common to each of these three contracts for example each contract incorporates by reference numerous clauses from regulations promulgated by the department of defense in both the dar and far series these incorporated clauses relate to military security requirement sec_2 the walsh-healey public contracts act prescribing minimum wages and working condition sec_3 affirmative action for disabled veterans and veterans of the vietnam era4 utilization of dar far dar far dar far tl-n-6611-99 business and small disadvantaged business concern sec_5 equal opportunity6 clean air and water7 and utilization of labor surplus area8 concerns some of these provisions are explicitly made inapplicable to that limited portion of work performed outside the united_states by foreign subcontractors as distinct from work performed in the united_states by the prime contractor and or united_states subcontractors each of the three contracts at issue required that the product be manufactured by corp b’s division located in a government-owned contractor- operated manufacturing_facility in united_states location a corp b was authorized to use this facility on a rent-free basis an employee of agency a the administrative contracting officer aco was responsible for day-to-day administration of the contracts the aco was stationed at united_states location a the contracts explicitly provide the contractor agrees that in the performance of this contract or any major subcontract hereunder that no direct or indirect_costs will be incurred for the duplication of work or support capacity which the government determines is available at or through any agency a installation where this contract will be performed without prior written approval of the contracting officer accordingly the contractor agrees to use or cause to be used on subcontracts if any all government or government-controlled working space equipment supplies materials services including automatic data processing or other support including communication services excluding use of autovon lines which the government determines can be made available at or through any agency a installation where this contract will be performed far in this regard contract further states corp b's intention to invest in modern manufacturing facilities at united_states location a the contract recites the projected amount of such investment to be dollar_figurey dar a far dar a far far dar a far tl-n-6611-99 each contract incorporates by reference the requirements of the buy american act and balance of payments program contract sec_3 and additionally state that these provisions are inapplicable to that portion of the work performed outside the united_states by foreign subcontractors as distinct from work performed in the united_states by the prime contractor and or united_states subcontractors a memorandum from agency a dated date provides that certain requested far deviations are approved with respect to contract among the requested deviations approved is a waiver from department of defense regulations clause buy american act and the balance of payments program certain clauses are included in some but not all of the contracts at issue under the heading security information contract sec_3 and provide the contractor is governed by dod 5220-22s comsec supplement to the industrial security manual access to comsec material information is restricted to u s citizens holding final u s government clearance and is not releasable to personnel holding only a reciprocal clearance under the heading special requirement for classified foreign subcontracts contract sec_3 and further provide solicitation and or award of any lower tier subcontracts requiring the use of or access to any classified material shall require prior approval from the prime contractor with the concurrence of the contracting officer under the same heading these contracts provide restrictions on use of or access to classified information and equipment for use in foreign countries in accordance with security safeguards adopted by organization a under the heading subcontract management_contract sec_3 and further provide the contractor's management of the subcontract effort shall be continually reviewed by the contracting officer contract contains a clause entitled foreign nationals which provides dar far tl-n-6611-99 in the event that the contractor anticipates soliciting foreign sources for any work under this contract the contractor shall notify the contracting officer co working days before either applying for an export license under international traffic in arms regulation itar cfr sections or before solicitation of the foreign sources whichever shall occur first this notification shall include detailed description of the government data equipment to be exported and a copy of the application_for an export license if such application has been made contract also contains a clause entitled foreign nationals which provides the contractor acknowledges that equipment technical data generated or delivered in performance of this contract is controlled by the international traffic in arms regulations itar cfr sections and may require an export license before assigning any foreign national to perform work under this contract or before granting access to foreign nationals to any equipment technical data generated or delivered in performance of this contract see cfr section dollar_figure in this regard the contractor agrees to notify the contracting officer co working days prior to assigning or granting access to any work equipment or technical data generated or delivered in performance of this contract on date corp a10 acquired from corp b all contracts and other assets and liabilities related to the production of the product subsequently during tax_year sec_1 and agency a paid to corp a portions of the contract_price whose calculation had been deferred under corp b's accounting_method and the formulas set forth in the contracts agency a also paid corp a for product warranty and repair services that corp a had assumed in the acquisition in its original income_tax returns filed for tax_year sec_1 and corp a did not claim deductions for commissions payable to corp a-fsc with respect to sales of the product or related_services subsequently however corp a determined that agency a used some of the product outside the united_states for the period of time required by temp sec_1_927_a_-1t see temp treas reg you have advised us that the taxpayer that made this acquisition and filed the original returns under audit was predecessor and that corp a has succeeded to all of predecessor’s federal_income_tax attributes as the surviving entity in a subsequent corporate_reorganization all references to corp a or taxpayer in this memorandum are to be understood as including both corp a and predecessor tl-n-6611-99 sec_1 a -1t g corp a now claims refunds of income taxes pursuant to temp sec_1 a -1t e based on a redetermination of its commissions payable to corp a-fsc for tax_year sec_1 and resulting from adding certain_sales of the product under contract sec_2 and to those reported as eligible for fsc treatment this claim is grounded on corp a's position that such quantities of the product constitute export_property within the meaning of sec_927 and that receipts attributable to such sales of the product and related_services constitute foreign_trading_gross_receipts within the meaning of sec_924 for purposes of this advice we assume that the product constitutes export_property and that the receipts attributable thereto would constitute foreign_trading_gross_receipts but for the application of sec_924 and temp sec_1 a - 1t g i dollar_figure law and analysis overview under the fsc provisions a fsc may exclude a portion of its gross_income attributable to foreign_trading_gross_receipts sec_921 sec_923 sec_923 foreign_trading_gross_receipts generally include gross_receipts from the sale of export_property received by a principal for whom a fsc acts as a commission agent sec_924 sec_925 temp sec_1 a -1t b b -1t e sec_924 excludes certain receipts from this general definition the sole issue to be addressed in this advice is the applicability of one of these exclusions sec_924 provides that foreign_trading_gross_receipts shall not include receipts of a fsc from a transaction involving export_property that is for use by the united_states or any instrumentality thereof and such use of export_property is required_by_law or regulation temp sec_1 a - 1t g i elaborates foreign_trading_gross_receipts of a fsc do not include otherwise qualifying gross_receipts if a sale of export_property is for use by the united_states or an instrumentality thereof in any case in which any law or regulation requires in any manner the purchase of the acquisition of contracts by corp a from corp b raises certain issues related to application of the basic definition of foreign_trading_gross_receipts under sec_924 as well as the foreign economic processes tests of sec_924 sec_924 and sec_924 and the restrictions on use of administrative pricing rules under sec_925 those issues are not addressed herein and no inference is to be drawn with respect to them tl-n-6611-99 property manufactured produced grown or extracted in the united_states for example a sale by a fsc of export_property to the department of defense for use outside the united_states would not produce foreign_trading_gross_receipts for the fsc if the department of defense purchased the property from appropriated funds subject_to either any provision of the department of defense federal acquisition regulations supplement cfr chapter or any appropriations act for the department of defense for the applicable_year if the regulations or appropriations act requires that the items purchased must have been grown reprocessed reused or produced in the united_states the department of defense’s regulations do not require that items purchased by the department for resale in post or base exchanges and commissary stores located on united_states military installations in foreign countries be items grown reprocessed reused or produced in the united_states therefore receipts arising from the sale by a fsc to those post or base exchanges and commissary stores will not be excluded from the definition of foreign_trading_gross_receipts by this paragraph g emphasis added temp sec_1 a -1t g iii b provides an exception to this rule if the purchase is pursuant to a program whether bilateral or unilateral under which sales to the united_states government are open to international competitive bidding emphasis added summarizing these provisions receipts attributable to sales of export_property to the united_states government for its own use are generally excluded from the definition of foreign_trading_gross_receipts where the government is required in any manner by law or regulation to purchase items produced in the united_states unless the sales were pursuant to a program open to international competitive bidding the regulation sets forth as the principal example of such a law or regulation the department of defense federal acquisition regulations dfars in title of the code_of_federal_regulations the dfars in turn incorporate by reference many other specific laws and regulations and require that procurement contracts include clauses implementing such legal authority analysis of the fsc regime necessarily involves examination of the earlier domestic_international_sales_corporation disc regime which included parallel provisions sec_993 grants the secretary authority to exclude receipts from the general definition of qualified_export_receipts a disc concept parallel to fsc foreign_trading_gross_receipts through such exclusions congress intended that disc treatment be denied to enumerated types of transactions h_r rep no tl-n-6611-99 92d cong 1st sess reprinted in 1972_1_cb_498 s rep no 92d cong 1st sess reprinted in 1972_1_cb_559 sec_993 specifically authorizes an exclusion for sales to the united_states government for its own use that are required_by_law or regulation in the process of developing the disc regulations treasury carefully implemented and refined a carve-out of sales to the government that are required in any manner the proposed_regulations gave an example in which purchases of domestic goods for resale at military commissaries abroad would be ineligible for disc treatment subject_to the exclusion because such purchases were found subject_to department of defense procurement regulations while purchases of goods for resale at military post or base exchanges pxs would be eligible for disc treatment not subject_to the exclusion because they were believed not subject_to procurement regulations prop sec_1 j i fed reg date during the ensuing several years further research and numerous comments received on the proposed_regulations revealed that in fact commissary purchases were excepted from the baa bpp provisions of procurement regulations accordingly the final_regulation dropped the commissary px example and clarified that only those purchases in fact subject_to such restrictions would be subject_to the disc exclusion sec_1_993-1 technical memorandum t d tm lexi sec_65 pincite date the eligibility of commissary purchases for disc purposes was later confirmed by revrul_88_11 1988_1_cb_296 and for fsc purposes was confirmed by the last two sentences of temp sec_1 a -1t g i when congress replaced disc with the fsc regime the legislative_history clarified that congress generally intends excluded_receipts to be the same as excluded_receipts under the disc rules s rep no vol 98th cong 2d sess moreover the preamble to the fsc regulations provides the detailed definitions of foreign_trading_gross_receipts of a fsc are taken in all important respects from the definition of qualified_export_receipts of a disc at sec_1_993-1 t d 1987_1_cb_184 specifically the fsc government-sale exclusion at sec_924 and temp sec_1 a -1t g i quoted above and here at issue are parallel to their disc counterparts congress and treasury thus have continued in the fsc regime to carve out sales to the united_states government for its own use where required in any manner by law or regulation application of government-sale exclusion you have identified several legal and regulatory provisions that potentially restricted agency a to domestic sources in its acquisition of the product in a way that would exclude taxpayer’s receipts attributable to such sales from foreign tl-n-6611-99 trading gross_receipts under sec_924 and temp sec_1 a -1t g i we consider these laws and regulations in turn among the laws referenced in the dfars are the buy american act u s c 10a-d and the related balance of payments program collectively baa bpp the buy american act generally provides that only property manufactured in the united_states may be acquired by the united_states government for use within the united_states the balance of payments program generally provides that the united_states government may acquire only products made in the united_states for use outside the united_states c f_r sec_25 a the dfars implement these laws by imposing a pricing preference whereby the offering price of a foreign-made product is increased by for purposes of evaluating the offer against offers of domestic goods c f_r d dollar_figure where applicable this pricing preference operates as a substantial restriction on governmental purchase of foreign products we consider that such a preference requires in any manner the purchase of domestic products within the meaning of temp sec_1 a -1t g i taxpayer argues that the restrictions under the baa bpp did not apply to any of the contracts or tax years at issue taxpayer asserts that such restrictions were waived by the department of defense under the dfars and or specific deviations and waivers granted with respect to the mou and the contracts at issue based solely on the material submitted by taxpayer we are not convinced that these laws were effectively waived with respect to the contracts at issue first we agree that the law is clear that in appropriate cases the department of defense may effectively waive the baa bpp but the regulations and case law cited by taxpayer are equally clear that the official case-specific determination and finding is the operative legal document that effects a waiverdollar_figure taxpayer has not produced any determination and finding by the secretary of defense implementing such waivers with respect to the contracts or the product second taxpayer’s indirect evidence in the form of the date memorandum from agency a referring to a baa bpp waiver with respect to contract appear sec_12 except where indicated we cite to the current version of laws and regulations you have preliminarily determined and taxpayer does not dispute that substantially_similar laws and regulations were applicable with respect to each contract and tax_year at issue defense acquisition circular 492_fsupp_1267 s d n y e-systems inc u s comp gen lexis pincite tl-n-6611-99 to be reflected in contract itself as being limited to the relatively small portion x percent of the procurement value that the mou mandates be subcontracted to foreign businesses third contrary to taxpayer’s position that the waiver was originally provided in the mou the plain language of that document waives the baa bpp only with respect to foreign subcontractors not with respect to the final product fourth taxpayer points to the adoption of c f_r a which provides a as a result of memoranda of understanding and other international agreements the dod has determined it inconsistent with the public interest to apply restrictions of the buy american act balance of payments program to the acquisition of defense equipment which is mined produced or manufactured in any of the following countries referred to in this part as qualifying countries each country in country group a is among the enumerated qualifying countries to which this blanket baa bpp waiver is applied with respect to the acquisition of defense equipment however taxpayer fails to demonstrate that this provision was intended to apply retroactively to existing contracts such as those involved in this case in this regard taxpayer relies only on vague assertions that the dfar change was adopted in response to prior mous and serves to validate the asserted waivers in the mou and contract documents moreover this regulatory waiver provision itself is subject_to discretion and restrictions for example c f_r c provides the determination in paragraph a of this subsection does not limit the authority of the cognizant secretary to restrict acquisitions to domestic sources or reject an otherwise acceptable offer from a qualifying_country source in instances where considered necessary for national defense reasons thus it may be expected that in cases involving national security the department of defense might choose to enforce the baa bpp restrictions despite the general waiver in c f_r a absent adequate substantiation of a waiver the baa bpp appears to be one of the several laws and regulations that effectively require in any manner manufacture of the product in the united_states within the meaning of temp sec_1 a -1t g i tl-n-6611-99 the arms export control act u s c imposes a system of constraints and procedural conditions on the export of military equipment generally such equipment may not be exported or otherwise transferred to the control or possession of a foreign_person without an export license issued by the department of state in conjunction with the departments of defense and treasury u s c b g g violation of these rules is a criminal offense u s c c in considering such transfers special emphasis shall be placed on procurement in the united_states u s c a export transactions are scrutinized on a host of statutory criteria including the portion of the defense articles which is of united_states origin and the extent to which such sale might contribute to an arms race or increase the possibility of outbreak or escalation of conflict or prejudice the development of bilateral or multilateral arms control arrangements id procurement may be outside the united_states only if the president determines that such procurement will not result in adverse effects upon the economy of the united_states or the industrial mobilization base with special reference to any areas of labor surplus or to the net position_of_the_united_states in this balance of payments with the rest of the world which outweigh the economic or other advantages to the united_states of less costly procurement outside the united_states u s c c in the manufacture of military equipment such as the product we understand that it is necessary for the manufacturer and to a lesser degree subcontractors to gain access to data specifications components equipment and technology that normally are available only to the united_states government or that are proprietary to a united_states manufacturer where the manufacturer or a subcontractor is foreign the foregoing statutory and regulatory provisions would require an export license to authorize the foreign_entity to gain such access the facts in this case involve a united_states manufacturer subcontracting the production of some components to foreign subcontractors as contemplated by the mou accordingly contract contains detailed clauses quoted above recognizing the need for an export license taxpayer argues that foreign entities not only performed the limited functions of subcontractors but also legally could have served as the manufacturer of the product however in the latter case taxpayer ignores the fact that the export control laws and regulations would pose a significant obstacle to foreign manufacture it is questionable whether an export license would be granted with tl-n-6611-99 respect to data specifications components equipment and technology having a high degree of strategic significancedollar_figure without access to these items it would be impossible to manufacture the military product at issue we consider that these kinds of export control restrictions in themselves require domestic manufacture in any manner within the meaning of sec_924 and temp sec_1 a -1t g i another set of laws applicable to the sales of the product are the sole source_rules of former u s c a which provided that a purchase of technical or special property could be negotiated on a sole-source basis where the agency head determines that the contract requires a substantial initial investment or an extended period of preparation for manufacture and for which he determines that formal advertising would be likely to result in additional cost to the government by reason of duplication of investment or would result in duplication of necessary preparation which would unduly delay the procurement of the property similarly sec_3 of the armed service procurement regulations aspr provided the authority of sec_3 may be used for procurement of technical or specialized supplies -- for example aircraft tanks radar guided missiles rockets and similar items of equipment major components of any of the foregoing and any supplies of a technical or specialized nature which may be necessary for the use or operation of any of the foregoing such procurement generally involves a b high starting costs which already have been paid for by the government or by the supplier preliminary engineering and development work that would not be useful to or usable by any other supplier c elaborate special tooling already acquired taxpayer argues that an american manufacturer theoretically could locate its plant abroad free of export controls even if this is true export control laws still represent a substantial restriction for purposes of this regulation because often it would be a foreign manufacturer that undertakes production activity outside the united_states tl-n-6611-99 d e substantial time and effort already expended in developing a prototype or an initial production model and important design changes which will continue to be developed by the supplier the authority of sec_3 will in general be used in situations where it is preferable to place a production contract with the supplier who had developed the equipment and thereby either assure the government the benefit of the techniques tooling and equipment already acquired by that supplier or avoid undue delay arising from a new supplier having to acquire such techniques tooling and equipment emphasis added the evolution of the product from the time of corp b's development of the prototype of the product through the time of corp b's role in the initial production of the product precisely match the situation contemplated by these sole-source rules in fact contract sec_2 and were negotiated and awarded to corp b under these rules similarly contract was negotiated and awarded to corp b under the similar provisions of u s c d which additionally provide that where normal procurement procedures would result in duplication of costs or delays in the case of a follow-on contract for the continued development or production of a major system or highly specialized equipment such property may be deemed to be available only from the original source and may be procured through sole-source procedures substantially_similar language is used in the procedural title of the statute see u s c d in the instant case the application of the sole-source laws and regulations resulted in manufacture of the product in the united_states by a domestic producer corp b the contracts entered into under those laws and regulations designated as the place of manufacture the production facilities owned by agency a at united_states location a moreover the mou expressly provided that the product produced for agency a be assembled in the united_states by corp b with american components representing almost all z percent of the procurement valuedollar_figure therefore at no time was it legally possible for the product to be manufactured such assembly is a key indicator of a manufacturing process within the meaning of the fsc provisions see temp sec_1_927_a_-1t sec_1_954-3 tl-n-6611-99 outside the united_states we consider that the sole-source laws and regulations in enabling that result require in any manner manufacture in the united_states consequently the receipts attributable to the contracts are excluded as foreign_trading_gross_receipts under sec_924 and temp sec_1 a -1t g i you note that many laws incorporated by reference in the dfars and in contract sec_2 and such as the walsh-healey public contracts act and the laws regarding affirmative action for disabled veterans small disadvantaged business equal opportunity clean air and water and utilization of labor surplus may be premised on manufacture in the united_states we have not independently reviewed these laws however assuming that compliance with these laws would not be possible or required as a factual matter if manufacture occurred outside the united_states then considering these laws in the aggregate the dfars should be read as contemplating manufacture in the united_states consequently receipts attributable to the contracts at issue could be excluded from foreign_trading_gross_receipts under temp sec_1 a -1t g i because these laws as incorporated in the dfars would be among those that require in any manner manufacture in the united_states exception for international competitive bidding in the alternative taxpayer argues that even if manufacture in the united_states would otherwise be considered required_by_law or regulation within the meaning of temp sec_1 a -1t g i taxpayer’s situation falls within the international competitive bidding exception of temp sec_1 a -1t g iii b this exception would remove receipts attributable to sales of the product to agency a from the regulatory exclusion if the purchase is pursuant to a program whether bilateral or unilateral under which sales to the united_states government are open to international competitive bidding taxpayer's reliance on the exception is misplaced the plain language of the exception requires competition with respect to sales the only competition in the history of the product occurred in the development of a prototype of product type a resulting in the selection of corp b’s prototype over corp c’s prototype such development activity did not include sales of the product or any other kind of transaction as defined in sec_927 relevant here the production portion of the product program was never open to competitive bidding international or otherwise there was no bidding or other competitive process of any kind for any contract to supply agency a with the product corp b was exclusively granted all sale contracts without further competition once its prototype was selected consistently the sole-source procedures under which the contracts at issue were negotiated are referred to as noncompetitive procedures in the statute see u s c c the only foreign participation consisted of subcontracts for tl-n-6611-99 components in the small amount x percent of procurement value predetermined on a noncompetitive basis in the mou accordingly the exception under temp sec_1 a - 1t g iii b does not apply because the requirement that the program at issue be open to competitive bidding was not met in this case narrow construction of tax exclusions deductions our conclusion is consistent with well-established principles of tax policy and statutory construction the fsc provisions confer a partial exclusion of income from the tax_base the tax_court has applied the doctrine_of narrow construction of tax exclusions and deductions to issues under the disc regime see napp systems inc v commissioner tcmemo_1993_196 s ince the regulation results in a tax deduction we are required to construe it narrowly applying the same principle to this case the scope of foreign_trading_gross_receipts should be narrowly construeddollar_figure this doctrine has been consistently applied in a variety of tax cases by the supreme court and circuit courts of appeal see 504_us_229 title vii back-pay award held not within scope of sec_104 exclusion of damages for personal injury exclusions from income must be narrowly construed 489_us_726 in construing provisions such as sec_356 in which a general statement of policy is qualified by an exception we usually read the exception narrowly in order to preserve the primary operation of the provision 356_us_260 rate exception for capital_gain has always been narrowly construed so as to protect the revenue against artful devices 350_us_46 since capital_gain treatment is an exception from the normal_tax requirements of the internal_revenue_code the definition of a capital_asset must be narrowly applied 336_us_28 the income taxed is described in sweeping terms and should be broadly construed in accordance with an obvious purpose to tax income comprehensively the exemptions on the other hand are specifically stated and should be construed with restraint in the light of the same policy 292_us_435 o nly in exceptional situations clearly defined has there been provision for an allowance for losses suffered in an earlier year 123_f3d_1342 10th cir w e must narrowly construe the 'reasonable cause' exception to sec_6672 liability in order to further the basic purpose of sec_6672 to protect government revenue 86_f3d_1045 11th cir because the terminable property rule is an exception to this general_public policy it should be narrowly construed 914_f2d_586 4th cir continued tl-n-6611-99 product type a is in its nature and scale wholly unlike the commissary px merchandise that is eligible for fsc treatment because specifically exempted from dfars restrictions unlike that merchandise the product was subject_to export control restrictions sole-source procurement provisions and other constraints as reflected in agency a’s contract with a domestic manufacturer to manufacture the product in the united_states the only permitted foreign participation was with respect to components provided by subcontractors and then only to the extent of a small amount x percent of procurement value as predetermined on a noncompetitive basis in the mou accordingly based on the information provided we conclude that the receipts attributable to sales of the product to agency a for its own use do not generate foreign_trading_gross_receipts within the meaning of sec_924 because agency a was required_by_law or regulation to purchase products manufactured in the united_states within the meaning of sec_924 and temp sec_1 a -1t g i we further conclude that the exception for programs where sales are open to competitive bidding under temp sec_1 a - 1t g iii b does not apply case development hazards and other considerations continued defamation damages held not within scope of sec_104 exclusion of damages for personal injury it is a well-recognized even venerable principle that exclusions to income are to be narrowly construed 412_f2d_494 6th cir deferral of gain on residence denied income_tax provisions which exempt taxpayers under given circumstances from paying taxes or as here postponing them are strictly construed 394_f2d_631 6th cir dividend credit denied i t is standard tax law that income deductions and tax_credits are narrowly construed and the taxpayer has the burden of showing he comes within the provision relied upon 364_f2d_38 8th cir income of native american lessee of tribal land not entitled to statutory exemption relating to fee interests exemptions from taxation are matters of legislative grace while here there was no treaty or statute expressly or impliedly exempting such income 324_f2d_702 5th cir this treatment is an exception to the general_rule of taxing all net_income as ordinary_income and as an exception it should be narrowly construed o'gilvie v united_states ustc big_number d kan mot for rec66_f3d_1550 10th cir aff’d 519_us_79 punitive_damages held not within scope of sec_104 exclusion i t is a cardinal rule_of taxation that exclusions to income are to be narrowly construed tl-n-6611-99 tl-n-6611-99 if you have any further questions please call or jacob feldman field service special counsel associate chief_counsel international


internal_revenue_service department of the treasury index number washington dc person to contact d telephone number refer reply to cc dom corp 4-plr-114200-98 date oct sec_1 newco newco dollar_figure dollar_figure bf1 bf4 newco bf1 business b1 plr-114200-98 business b2 country b dear this letter responds to your date request that we supplement our ruling letter dated date the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by penalties of perjury statements executed by appropriate parties the internal_revenue_service may require verification of the facts and representations as part of the audit process summary of facts p a domestic_corporation is the common parent of a consolidated_group p wholly owns dollar_figure and newco both domestic corporations newco wholly owns dollar_figure and newco sec_3 both domestic corporations except for nominal interests held by affiliates and individuals to meet foreign_country legal requirements nominal interests p also wholly owns bf1 a country b corporation and newco also wholly owns newco bf1 a country b corporation we have received financial information indicating that business b1 and business b2 of newco bf1 each has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past years proposed transaction to save substantial country b taxes the following transaction is proposed i newco dollar_figure will form a new country b company newco bf3 with a cash contribution funded by a cash contribution from newco sec_2 will hold a nominal interest in newco bf3 to qualify newco bf3 as a limitada under country b law plr-114200-98 ii newco bf3 will use the cash from step i to purchase from newco bf1 the business b2 assets subject_to liabilities following the transfer newco bf3 will be responsible for the operation of business b2 and newco bf1 will be responsible for the operation of business b1 iii newco bf1 will distribute to newco the cash received from newco bf3 in step ii representations p makes the following representations concerning the transfer of business b2 assets subject_to liabilities by newco bf1 to newco bf3 followed by the distribution of newco bf3 stock by newco bf1 to newco and the transfer of newco bf3 stock by newco to newco sec_3 based on the characterization of steps i through iii above by ruling below a no part of the consideration distributed by newco bf1 to newco will be received by newco as a creditor employee or in any capacity other than that of a shareholder of newco bf b the five years of financial information submitted on behalf of business b1 and business b2 represents the present operation of each business and with regard to each there have been no substantial operational changes since the date of the last financial statements submitted c following the transaction newco bf1 and newco bf3 will each continue the active_conduct of its business independently and with its separate employees d the distribution of newco bf3 stock is being carried out as part of a plan to minimize country b taxes the distribution of newco bf3 stock is motivated in whole or substantial part by this corporate business_purpose e apart from the contribution by newco of the newco bf3 stock to newco sec_3 there is no plan or intention on the part of newco to sell exchange transfer by gift or otherwise dispose_of any stock in or securities of either newco bf1 or newco bf3 after the transaction f there is no plan‘or intention by either newco bf1 or newco bf3 directly or through any subsidiary corcoration to purchase any of its outstanding_stock after the transaction g there is no plan or intention to liquidate either newco bf1 or newco bf3 plr-114200-98 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 h the total adjusted_basis and the fair_market_value of the assets transferred to newco bf3 by newco bf1 each equals or exceeds the sum of i the liabilities assumed by newco bf3 ii any liabilities to which the transferred assets are subject and iii the fair_market_value of any other_property including money distributed to newco bf1 shareholders under the plan_of_reorganization or to newco bf1 creditors in connection with the reorganization i the liabilities assumed in the transaction and the liabilities to which the transferred assets are subject were incurred in the ordinary course of business and are associated with the transferred assets j no intercorporate debt will exist between newco bf1 and newco bf3 at the time of or after the distribution of newco bf3 stock k payments made in all continuing transactions among bf newco bf1 and newco bf3 will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm's length i no two parties to the transaction are investment companies under sec_368 and iv of the internal_revenue_code m newco bf1 and newco bf3 are foreign_corporations that are controlled_foreign_corporations as defined in sec_957 neither corporation is or will become as a result of the transaction a passive foreign investment corporation rulings based solely on the information submitted and the representations set forth above and provided that i newco bf1 and newco bf3 are foreign_corporations and ii the requirements of paragraphs c and d of b -1 of the temporary income_tax regulations and all the conditions and requirements of b -4 through b -12 are met we rule as follows on the transaction described above in steps i through iii for federal_income_tax purposes the proposed transaction described in steps i through iii above will be treated as if i newco bf1 had formed newco bf3 and transferred its business b2 to newco bf3 in exchange for newco bf3 stock and plr-114200-98 the assumption by newco bf3 of related liabilities the contribution ii newco bf had distributed all the stock of newco bf3 to newco the distribution and iii newco had transferred the stock of newco bf3 to newco sec_3 rev_rul c b the contribution followed by the distribution will be a reorganization under sec_368 newco bf1 and newco bf3 will each be a_party_to_a_reorganization under sec_368 no gain_or_loss will be recognized by newco bf1 on the contribution sec_361 and sec_357 no gain_or_loss will be recognized by newco bf3 on the contribution sec_1032 the basis of each business b2 asset received by newco bf3 will equal the basis of that business b2 asset in the hands of newco bf1 immediately before the contribution sec_362 the holding_period of each business b2 asset received by newco bf3 from newco bf newco bf1 sec_1223 will include the period during which that business b2 asset was held by no gain_or_loss will be recognized by and no amount will otherwise be included in the income of newco on its receipt of the newco bf3 stock in the distribution sec_355 no gain_or_loss will be recognized by newco bf1 on the distribution sec_361 the holding_period of the newco bf3 stock received by newco will include the holding_period of the newco bf1 stock on which the distribution is made provided newco held the newco bf1 stock as a capital_asset on the date of the distribution sec_1223 the exchange described in ruling is a transaction to which b - c of the temporary regulations applies and the requirements of paragraphs d through j of b -10 must be satisfied the earnings_and_profits of newco bf3 to the extent attributable to such stock under sec_1_1248-2 or sec_1_1248-3 whichever is applicable that were accumulated in taxable years beginning after date during the period newco held the plr-114200-98 newco bf3 stock or was considered as holding it by reason of the application of sec_1223 while newco bf3 was a controlled_foreign_corporation will be attributable to such stock held by newco sec_3 sec_1_1248-1 caveats we express no opinion on the tax effects of the transaction under any other provisions of the code or regulations or the tax effects of any condition existing at the time of or effect resulting from the transaction that is not specifically covered by the above rulings described above in ruling iii will qualify under sec_351 in particular no opinion is expressed on i whether the transfer procedural matters this ruling is directed only to the taxpayer who requested it sec_61 j provides that it may not be used or cited as precedent each taxpayer involved in this transaction should attach a copy of this letter to the taxpayer's federal_income_tax return for the taxable_year in which the transaction is consummated in accordance with the power_of_attorney on file in this office a copy of this letter is being sent to your representative


internal_revenue_service number release date index number 468a ---------------------------------- ------------------------------------------------------------- --------------------------- -------------------------- -------------------------------- department of the treasury washington dc person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi b06 - plr-101913-09 date date legend taxpayer company a company b ------------------------------ ------------------------ ------------------------------------------------- ------------------------ --------------------------------------------------------- ------------------------ company c -------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------ -------------------------------------------------------------------------------- company d ------------------------------------------------------------ --------------------------------------------------- company e ------------------------------------------------------------ ------------------------------------------------------- parent ------------------------------------------------------------ ------------------------------ state a state b plant plant -------------- ------------- -------------------------------- ---------------------------------------------------------------------- plr-101913-09 plant location location commission a commission b a year y dear -------------------- -------------------------------------------------------------------- ------------------------------------------------------- ------------------------------------ ------------------------------------------- ----------------------------------------------------- ------------------ ------- this letter responds to your request for private_letter_ruling dated -------------------------- you requested that we rule on certain tax consequences under sec_468a of the internal_revenue_code of the restructuring discussed below facts parent has represented the following facts and information relating to the ruling_request parent a corporation organized in state a is the parent of an affiliated_group of subsidiary corporations company a also organized in state a is wholly-owned by transferor and is a member of the affiliated_group company b a limited_liability_company llc organized under the laws of state a and wholly-owned by parent has elected to be treated as a corporation for federal_income_tax purposes company d an llc disregarded for federal_income_tax purposes is wholly-owned by company b company c an llc organized under the laws of state a that has elected to be treated as a corporation for federal tax purposes is also wholly-owned by company b company e an llc organized under the laws of state a that has elected to be disregarded for federal tax purposes is wholly-owned by company c company b through the disregarded company d is the owner of plant and plant plant is a nuclear power plant located at location plant also located at location has been permanently shut down since a and ---------------------------------------- ----------- company b through and including the disregarded company d is engaged in the generation of electricity produced by plant and the sale of that electricity at plr-101913-09 wholesale to a subsidiary which then resells the electricity to various wholesale customers company b through and including the disregarded company d maintains nuclear decommissioning trusts that are qualified under sec_468a qdt and separate trusts that are not qualified under sec_468a with respect to plant and plant2 company c through the disregarded company e is the owner of plant plant is a nuclear power plant located at location company c through and including the disregarded company e is engaged in the generation of electricity produced by plant and the sale of that electricity at wholesale to a subsidiary which then resells the electricity to various wholesale customers company c through and including the disregarded company e maintains a qdt and a separate trust that is not qualified under sec_468a with respect to plant company b through and including the disregarded company d and company c through and including the disregarded company e are both subject_to the jurisdiction of commission a with regard to the operation and maintenance of plant sec_1 and and to the jurisdiction of commission b with regard to the rates charged to wholesale customers for electricity produced by plant and plant respectively parent will undertake a restructuring of the companies discussed above and their assets followed by a spinoff of the nuclear plants and their respective funds to taxpayer while the date is uncertain parent expects to complete both the restructuring and spinoff described below during year y for the restructuring company c will be liquidated into company b in a transaction represented by parent to be pursuant to sec_332 subsequently company b will be liquidated in company a in a transaction represented by parent to be pursuant to sec_332 subsequent to these liquidations company a will convert under the laws of state a into an llc and will change its name to company a llc company a llc will elect to be disregarded for federal tax purposes and will be wholly-owned by parent as a result of these transactions plant sec_1 and as well as their respective qdts and nonqualified funds will be owned for federal tax purposes by parent following the restructuring parent will contribute company a llc to taxpayer in exchange solely for common_stock and securities of taxpayer in a transaction represented by parent to be under sec_368 as a result of this spinoff plant sec_1 and as well as their respective qdts and nonqualified funds will be owned for federal tax purposes by taxpayer parent has requested the following rulings plr-101913-09 requested ruling the qdts were not disqualified by reason of the restructuring described above requested ruling the qdts will continue to be treated as qdts that satisfy the requirements of sec_468a and sec_1_468a-6t of the temporary income_tax regulations after the restructuring described above requested ruling the qdts will not recognize any gain_or_loss or otherwise take any income_or_deduction into account by reason of the restructuring requested ruling neither parent company a company b nor company c will be required to recognize any gain_or_loss or take any income_or_deduction into account as a result of the transfers of the qdts as a result of the restructuring requested ruling pursuant to sec_1_468a-6t c after the restructuring the qdts will have a tax basis in each of their assets that is the same as the tax basis in those assets immediately prior to the restructuring requested ruling the qdts were not disqualified by reason of the spinoff to taxpayer described above requested ruling the qdts will continue to be treated as qdts that satisfy the requirements of sec_468a and sec_1_468a-6t of the temporary income_tax regulations after the spinoff to taxpayer described above requested ruling the qdts will not recognize any gain_or_loss or otherwise take any income_or_deduction into account by reason of the spinoff to taxpayer described above requested ruling neither parent nor taxpayer will be required to recognize any gain_or_loss or take any income_or_deduction into account as a result of the transfers of the qdts as a result of the spinoff to taxpayer described above requested ruling pursuant to sec_1_468a-6t c after the restructuring the qdts will have a tax basis in each of their assets that is the same as the tax basis in those assets immediately prior to the spinoff to taxpayer described above plr-101913-09 law and analysis sec_468a of the code provides that a taxpayer may elect to deduct payments made to a nuclear decommissioning reserve fund that meets the requirements of sec_468a ie a fund that is a qualified nuclear decommissioning fund sec_468a provides that any amount distributed from a qualified nuclear decommissioning fund during any taxable_year is includible in the taxable_income of the taxpayer for that year sec_468a provides that in addition to contributions to a qualified nuclear decommissioning fund that are deductible under sec_468a there is allowable as a deduction the amount of nuclear decommissioning costs with respect to which economic_performance occurs within the meaning of sec_461 during the taxable_year nuclear decommissioning costs are defined in sec_1_468a-1t b as all otherwise deductible expenses to be incurred in connection with the entombment decontamination dismantlement removal and disposal of the structures systems and components of a nuclear power plant that has permanently ceased the production of electric energy this term includes all otherwise deductible expenses to be incurred in connection with the preparation for decommissioning such as engineering and other planning expenses and all otherwise deductible expenses such term does not include otherwise deductible expenses to be incurred in connection with the disposal of spent nuclear fuel under the nuclear waste policy act of public law an expense is considered otherwise deductible for purposes of sec_1_468a-1t b if it would be deductible under chapter of the code without regard to sec_280b sec_468a provides that for purposes of sec_4951 a qualified nuclear decommissioning fund is treated as a_trust described in sec_501 sec_1_468a-1t b provides that a qualified nuclear decommissioning fund is a fund that satisfies the requirements of sec_1_468a-5t sec_1_468a-5t a sets out the qualification requirements for nuclear decommissioning funds it provides in part that a qualified nuclear decommissioning fund must be established and maintained pursuant to an arrangement that qualifies as a_trust under state law sec_1_468a-5t a iii provides that an electing taxpayer can establish and maintain only one qualified nuclear decommissioning fund for each nuclear power plant plr-101913-09 sec_1_468a-6t provides rules applicable to the transfer of an interest in a nuclear power plant and transfer of the qualified nuclear decommissioning fund where certain requirements are met for purposes of sec_1_468a-6t a nuclear power plant includes a plant that previously qualified as a nuclear power plant and that has permanently ceased to produce electricity sec_1_468a-6t b provides that sec_1_468a-6t applies if-- immediately before the disposition the transferor maintained a qualified nuclear decommissioning fund with respect to the interest disposed of and immediately after the disposition-- i the transferee maintains a qualified nuclear decommissioning fund with respect to the interest acquired ii the interest acquired is a qualifying interest of the transferee in the nuclear power plant in connection with the disposition either- i the transferee acquires part or all of the transferor’s qualifying interest in the plant and a proportionate amount of the assets of the transferor’s fund is transferred to a fund of the transferee or ii the transferee acquires the transferor’s entire qualifying interest in the plant and the transferor’s entire fund is transferred to the transferee and the transferee continues to satisfy the requirements of sec_1_468a-5t a iii which permits an electing taxpayer to maintain only one qualified nuclear decommissioning fund for each plant sec_1_468a-6t c provides that a disposition that satisfies the requirements of sec_1_468a-6t b will have the following tax consequences at the time it occurs neither the transferor nor the transferor’s qualified nuclear decommissioning fund will recognize gain_or_loss or otherwise take any income into account by reason of the transfer of a proportionate amount of the assets of the transferor’s qualified nuclear decommissioning fund to the transferee’s qualified nuclear decommissioning fund or by reason of the transfer of the transferor’s entire qualified nuclear decommissioning fund to the transferee for purposes of the regulations under sec_468a this transfer or the transfer of the transferor’s qualified nuclear decommissioning fund will not be plr-101913-09 considered a distribution of assets by the transferor’s qualified nuclear decommissioning fund neither the transferee nor the transferee’s qualified nuclear decommissioning fund will recognize gain_or_loss or otherwise take any income into account by reason of the transfer of a proportionate amount of the assets of the transferor’s qualified nuclear decommissioning fund to the transferee’s qualified nuclear decommissioning fund or by reason of the transfer of the transferor’s entire qualified nuclear decommissioning fund to the transferee for purposes of the regulations under sec_468a this transfer or the transfer of the transferor’s qualified nuclear decommissioning fund will not constitute a payment or a contribution of assets by the transferee to its qualified nuclear decommissioning fund transfers of assets of a qualified nuclear decommissioning fund to which this section applies do not affect basis thus the transferee’s qualified nuclear decommissioning fund will have a basis in the assets received from the transferor’s qualified nuclear decommissioning fund that is the same as the basis of those assets in the transferor’s qualified nuclear decommissioning fund immediately before the distribution under sec_1_468a-6t f the service may treat any disposition of an interest in a nuclear power plant as satisfying the requirements of the regulations if the service determines that such treatment is necessary or appropriate to carry out the purposes of sec_468a conclusions based on the information submitted by parent we reach the following conclusions ruling the qdts were not disqualified by reason of the restructuring described above ruling the qdts will continue to be treated as qdts that satisfy the requirements of sec_468a and sec_1_468a-6t after the restructuring described above ruling pursuant to sec_1_468a-6t c and the qdts will not recognize any gain_or_loss or otherwise take any income_or_deduction into account by reason of the restructuring ruling pursuant to sec_1_468a-6t c and neither parent company a company b nor company c will be required to recognize any gain_or_loss or take any income_or_deduction into account as a result of the transfers of the qdts as a result of the restructuring plr-101913-09 ruling pursuant to sec_1_468a-6t c after the restructuring the qdts will have a tax basis in each of their assets that is the same as the tax basis in those assets immediately prior to the restructuring ruling the qdts were not disqualified by reason of the spinoff to taxpayer described above ruling the qdts will continue to be treated as qdts that satisfy the requirements of sec_468a and sec_1_468a-6t after the spinoff to taxpayer described above ruling pursuant to sec_1_468a-6t c and the qdts will not recognize any gain_or_loss or otherwise take any income_or_deduction into account by reason of the spinoff to taxpayer described above ruling pursuant to sec_1_468a-6t c and neither parent nor taxpayer will be required to recognize any gain_or_loss or take any income_or_deduction into account as a result of the transfers of the qdts as a result of the spinoff to taxpayer described above ruling pursuant to sec_1_468a-6t c after the restructuring the qdts will have a tax basis in each of their assets that is the same as the tax basis in those assets immediately prior to the spinoff to taxpayer described above while it owns interests in the plants taxpayer is eligible to maintain the qualified nuclear decommissioning funds except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described above in particular we express no opinion on the tax results of either the restructuring or spinoff described above under any section of the code other than sec_468a in addition we express no opinion on the tax results of the transfers of the nonqualified decommissioning trust funds as part of either the restructuring or spinoff described above this letter_ruling is directed only to the taxpayer that requested it sec_6110 provides that this ruling may not be used or cited as precedent in accordance with the power_of_attorney on file with this office the original of this letter is being sent to taxpayer’s authorized representative we are also sending a plr-101913-09 copy of this letter_ruling to taxpayer and to the industry director natural_resources lm nr sincerely peter c friedman senior technician reviewer branch office of associate chief_counsel passthroughs and special industries cc


internal_revenue_service release number release date index number ---------------------------------- ------------------------------ ------------------------ ---------------------------- ----- - department of the treasury washington dc person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 - plr-135714-03 date dec legend company ------------------------------ state year year year date date dollar_figurea dollar_figureb dollar_figurec dollar_figured ------------- w x ------------- ------- ------- ------- --------------------------- ------------------------- --------------- --------------- --------------- --------------------------------------- y z dear ---------------- ------------------------------------------------------- ------------------------------------------------------------------------- ----------------------------------------------------------------- --------------------------------------------------------------------------- this responds to a letter dated date together with subsequent correspondence submitted on behalf of company requesting a ruling that the income it received with respect to its copyrights trademarks and related intellectual_property derived from its literary and film rights does not constitute passive_investment_income within the meaning of sec_1362 of the internal_revenue_code because such income constitutes royalties derived in the ordinary course of a trade_or_business of licensing or franchising property within the meaning of sec_1_1362-2 plr-135714-03 facts company was incorporated in state in year and was a c_corporation until it filed an election to be treated as an s_corporation effective date company’s principal business is the production of feature-length motion pictures and the licensing of related television home video and sound reproductions and other allied rights including the rights to produce related merchandise in addition in year company acquired the film and allied rights to x over the next several years company spent approximately dollar_figured producing y a film based on x in year company licensed some of its rights to x for the purpose of producing z company was involved in the production and development of z consulting on the scripts suggesting musicians discussing casting and viewing some of the film footage during the editing process on the marketing side company organized promotional showings for writers critics and others in the film industry in year company licensed some of its rights to x for the purpose of producing w company is involved in the production and development of w consulting on scripts and music and has rights to approve authors scripts music directors sets and costume designers principal cast members and promotional activities company has also entered into numerous merchandising agreements with others companies to allow them to produce products relating to x company spends considerable amount of time negotiating monitoring and enforcing compliance with such agreements all merchandise is submitted to company for its approval of trademarks and company employees spend significant time inventorying photographing and inspecting such merchandise for its taxable_year ending date company received approximately dollar_figurea in revenues with respect to its licensing of rights relating to films it produced dollar_figureb in revenues with respect to its licensing of rights relating to its interest in x and dollar_figurec in investment_income company has accumulated_earnings_and_profits law and analysis except as provided in sec_1362 sec_1362 provides that a small_business_corporation may elect in accordance with the provisions of sec_1362 to be a subchapter_s_corporation sec_1362 provides that an election under sec_1362 plr-135714-03 terminates whenever the corporation i has accumulated_earnings_and_profits at the close of each of three consecutive years and ii has gross_receipts for each of such tax years more than percent of which are passive_investment_income except as otherwise provided in sec_1362 sec_1362 provides that the term apassive investment_income means gross_receipts derived from royalties rents dividends interest annuities and sales or exchanges of stock_or_securities sec_1_1362-2 of the income_tax regulations provides that royalties means all royalties including mineral oil_and_gas royalties and amounts received for the privilege of using patents copyrights secret processes and formulas good will trademarks tradebrands franchises and other like property sec_1_1362-2 provides that royalties does not include royalties derived in the ordinary course of a trade_or_business of franchising or licensing property royalties received by a corporation are derived in the ordinary course of a trade_or_business of franchising or licensing property only if based on all the facts and circumstances the corporation created the property or performed significant services or incurred substantial costs with respect to the development or marketing of the property conclusion after applying the law to the facts submitted and representations made we conclude that the income company receives with respect to licensing of literary film and allied rights relating to films it produced and its interest in x is not passive_investment_income under sec_1362 except as expressly provided herein no opinion is expressed or implied concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed regarding whether company otherwise satisfies the s_corporation eligibility requirements under sec_1361 in addition no opinion is expressed as to whether the royalties also qualify as produced_film_rents within the meaning of sec_1362 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-135714-03 letter is being sent to the first and second attorneys listed in accordance with the power_of_attorney on file with this office a copy of this s david r haglund sincerely david haglund senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for ' purposes cc


department of the treasury internal_revenue_service washington d c govermment entities division contact person number release date uw x i e i uil e t u w dear legend telephone number dentification number date date employer_identification_number this letter is in reference to the letter dated date as augmented by the letter dated date from the authorized representative of m the use of its golf course and clubhouse facilities by unaccompanied guests and full privilege guests constitutes member use for purpases of determining m’s exempt status under sec_501 of the internal_revenue_code and that m's income from members for_the_use_of its facilities by guests including unaccompanied guests constitutes exempt_function_income for purposes of sec_512 of the code m's articles of incorporation state that m was organized for athletic recreation and social purposes m's membership application requires that each member acknowledge that m exists solely for going and related social purposes and that business activities are inappropriate m states that its only activity is the maintenance and operation of its golf course and clubhouse and the conduct of social activities directly connected therewith golf course m's clubhouse offers dining facilities and four guest rooms for out-of-town members in general m states these rooms are available only to members visiting the area but may in limited circumstances be used by guests of members income_tax as a club organized for pleasure recreation and other nonprofitable purposes under sec_501 of the code mis an organization recognized by the internal_revenue_service as exempt from federal w's by-laws provide that there shall be only one class of membership and that the total m is requesting a ruling that in addition to the number of members shall not exceed m the by-laws also provide that each member shall have the right to use and enjoy the golf course the facilities of the clubhouse and the services provided by m's staff subject_to certain restrictions set out in the by-laws m's rules and any other regulations that may be adopted by the board_of directors no membership shall be transferable m states that its writtan customs and privileges which are provided to members with the articles of incorporation and by-laws sefve as its operational guidelines according to these guidelines a member is allowed to invite a quest personally known to a host member provided the guest remains in the company of a member and a member and his spouse may invite up to six guests to accompany them in play however member guests are not allowed to play m's golf course more than twelve times per year regardless of the potential number of sponsoring members members’ spouses unwed children of members and unwed children of members spouses are granted full membership privileges and are not considered guests the golf course is not available to outside groups and organizations or to the general_public however an exception may be made for charitable and non-profit events of major significance to the community and development of public support for golf a ull privitege guest is a person eighteen years or older who has had a guest card issued by the board_of m at the request of a member in accordance with the by-laws he or she is ‘extended the privileges of the use of the clubhouse as well as the golf course for a maximum period of two weeks he or she may not extend privileges to others or entertain non-members on m's premises issuance of a full privilege guest card is limited to no more than two persons per member at any one time no guest may have more than two non-consecutive full privilege guest cards during a calendar_year an unaccompanied guest is a person eighteen years of age or older who is personally known to a host member and who is invited to play the course with no clubhouse privileges by a member at a date and time appravad by the board_of directors and arranged and scheduled in the golf shop in any given year each member may not sponsor more than unaccompanied guests or full privileged guests in the aggregate m's by-laws state that each member shall be individually liable for all charges of any member of his family to whom the privileges of m may at his request be extended and for alll charges of any guest to whom at his request a guest card may be issued m has provided the following information concerning the use of its golf course by full privileged guests and unaccompanied guests quests number of unaccompanied total number of rounds played u v w x z m states that its procedures for unaccompanied guest use of its golf course and club facilities are very formal and restrictive for example the procedures for requesting board approval of guest use requires a written signed request by a current member to the board_of directors and then issuance by the board_of either a guest card or a letter of acceptance number of full privilege quests year l t indicating date and time for use of the course and liability on the part of the member for any charges incurred by the guest are restricted from using clubhouse facilities other than locker rooms further unaccompanied guests other than full privilege quests m emphasizes that itis strictly a private organization that exists solely for golfing no recreational facilities other than the golf course are provided eg there are no tennis courts or a swimming pool and while the clubhouse does serve food use of the clubhouse by unaccompanied guests is restricted to a very limited number of full privilege guests annually even then any charges attributable to guest use remain the sole responsiblity of the member who requested board permission for the guest's use of the clubhouse while guests may purchase merchandise for cash in the pro shop the pro shop is owned and operated by an independent third party who is unrelated to m and who cannot accept payment for a guest for greens fees sec_501 of the code provides for the exemption from federal_income_tax of clubs organized and operated for pleasure recreation and other nonprofitable purposes substantially_all the activities of which are for such purposes and no part of the net eamings of which inures to the benefit of any private shareholder sec_12 a of the code provides in general that the term unretated business taxable_income means the gross_income derived by any organization from any unrelated_trade_or_business as defined in sec_513 regularly carried on by it less the deductions allowed by this chapter which are directly connected with the carrying on of such trade_or_business both computed with the modifications provided in b sec_512 of the code provides special rules applicable to organizations described in sec_501 c sec_512 of the code provides in general that in the case of an organization described in sec_501 the term unrelated_business_taxable_income means the gross_income excluding any exempt_function_income less the deductions allowed by this chapter which are directly connected with the production of the gross_income excluding exempt_function_income both computed with the modifications provided in sec_512 sec_512 a b of the code provides in part that for purposes of sec_512 the term exempt_function_income means the gross_income from dues fees charges or similar amounts paid_by members of the organization as consideration for providing such members or their dapandents or guests goods facilities or services in furtherance of the purposes constituting the basis for the exemption of the organization to which such income is paid sec_1 c -1 a of the income_tax regulations provides in part that in general this exemption extends to social and recreation clubs which are supported solely by membership fees dues and assessments however a club otherwise entitled to exemption will not be disqualified because it raises revenue from members through the use of club facilities or in connection with club activities sec_1_501_c_7_-1 of the regulations provides that a club which engages in business such as making its social and recreational facilities available to the general_public or by selling real_estate timber or other products is not organized and operated exclusively for pleasure recreation and other nonprofitable purposes and is not exempt under sec_501 of the code solicitation by advertisement or otherwise for public patronage of its facilities is prima facie avidence that the club is engaging in business and is not being operated exclusively for pleasure recreation or social purposes rey rul 1958_2_cb_266 discusses the various criteria for recognition of exemption under sec_501 c of the code in order to establish that a club is organized and operated for pleasure recreation and other nonprofitable purposes there must be an established membership of individuals personal contacts and fellowship a commingling of the members must play a material part in the life of the organization the revenue_ruling states that itis clear that a club which engages in business such as making its social and recreational facilties available to the general_public may not be considered as being organized and operated exclusively for pleasure recreation or social purposes a club will not be denied exemption merely because it receives income from the general_public that is persons other than members and the bona_fide quests or because the general_public on occasion is permitted to participate in its affairs provided such participation is incidental to and in furtherance of its general club purposes and it may not be said that income therefrom is inuring to members this is generally true where the receipts from nonmembers are no more than enough to pay their share of the expanse revproc_71_17 1971_1_cb_683 sets forth guidelines for determining the effect gross_receipts derived from use of a social olub’s facilities by the general_public have on the club's exemption from federal_income_tax under sec_501 of the cade the procedure defines the term general_public as used in the procedure as persons other than members of a olub or their dependents or guests the procedure states that where a club makes its facilities available to the general_public to a substantial degree the club is not operated exclusively for pleasure recreation or other nonprofitable purposes public law amended sec_50'1 c of the code te allow social clubs to receive some outside income including investment_income without jeopardizing their exempt status specifically the senate_finance_committee report c b states it is also intended that within thi sec_35 percent it is intended that these organizations be permitted to receive up to percent of their gross racaipts including investment_income from sources outside of their membership without losing their tax-exempt status amount not more than percent of the gross_receipts shauld be derived from the use of a social club’s facilities or services by the general_public modification increases from percent current audit_standard rev_proc to percent the proportion of grass receipts a club may receive from making its club facilities available to the general_public without losing its exempt status this also means that a club exempt from taxation described in sec_501 c is to be permitted to receive up to percent of its gross_receipts from a combination of investment_income and receipts from non-members so long as the latter do not represent more than percent of total in effect this latter receipts gross_receipts are defined for this purpose as those receipts from normal and usual activities of the club that is those activities they have traditionally conducted the report also states that the decision in each case as to whether substantially_all of the organization's activities are related to its exempt purposes is to continue to be based on all the facts and circumstances however the facts and circumstances approach is to apply only if the club earns more than is permitted under the new guidelines ifthe outside income is less than the guidelines permit then the club's exempt status will not be lost on account of nonmember income congress anticipated that the service would continue to address the problem of unrelated activities as it had in the past thus a passage from the house report states your committee does not intend that these organizations should be permitted to receive within the or percent allowances income from the active_conduct of business not traditionally carried on by these organizations in order for an organization to be exempt under sec_501 of the code two tests must be met an activities test and a member income test the activities test means that substantially_all of the activities of an organization exempt under sec_501 of the code must be normal and usual activities for a social_club that is activities they have traditionally conducted conversely no more than an insubstantial amount of a social club's income can be derived from nontraditional activities even if conducts those activities exclusively with its members examples of nontraditional activities include an athletic club's liquor store selling package liquor for off-premises consumption a flower shop long-term rental and a gas station these kinds of activities preclude exemption under sec_501 even if the sales are limited to members if substantial it the congressional intent in amending sec_501 of the code with public law is clear the percentage of outside income a social_club is to receive is to be liberalized according to a fixed percentage now percent in all other aspects social clubs will continue to be treated as they were in the past that is traditional business activities should continue to be distinguished from nontraditional business activities a nontraditional business is any business other than investments which if conducted on a membership basis would net further the club's exempt purposes nontraditional business activities continue to be prohibited subject_to an insubstantial trivial and non-recurrent test for business conducted with both members and nonmembers to distinguish a nontraditional business and any other unrelated business for purposes of income subject_to the percent and percent limitation the committee report defined such gross_receipts in virtually the same manner as in revproc_71_17 supra for purposes of also discussed in revproc_71_17 normal and usual activities the earlier percent limitation of a social_club encompasses those social and recreational activities upon which the club’s extension of such traditional social_club activities to the general_public exemption is based gives rise to unrelated_business_income nontraditional business or social_club activities with the general_public in this case it is clear that m does not engage in m has also shown that it has an established membership of individuals and that it does not take its social and recreational facilities available to the general_public available only to its members and their invited guests with the possible exception for charitable and non-profit events of major significance to the community and development of public support for golf each member is individually liable for all charges incurred by his or her guests in this case m does not have gross_receipts from nonmember use of its facilities m's facilities are from the information that has been presented itis clear that m's primary activity is the maintenance and operation of its golf course and clubhouse and the conduct of social activities directly connected therewith accordingly based on the facts and circumstances discussed above we rule as follows the use of m's golf courses and clubhouse facilities by unaccompanied guests and full privilege guests constitutes member use for purposes of determining m's exempt status under sec_501 c of the code m's income from members for_the_use_of its facilities by guests including unaccompanied guests constitutes exempt_function_income for purposes of sec_512 of the code these rulings are based on the facts as they were presented and on the understanding that there will be no material changes in these facts any changes that may have a bearing upon m's tax status should be reported to the service because it could help resolve questions ‘concerning your federal_income_tax status this ruling should be kept in m's permanent records pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to m's authorized representative except as we have specifically ruled herein we express no opinion as to the ‘consequences of this transaction under the cited pravisions ar under any other provision of the code this ruling will be made available for public inspection under sec_6110 of the code after certain detetions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice this ruling is directed only to the organization that requested it sec_6110 k of the code provides that it may not be used or cited as precedent if there are any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter enclosure notice sincerely yours ronald j shoemaker manager exempt_organizations technical group


department of thetreasury internal_revenue_service washington d c 4' ‘a tax_exempt_and_government_entities_division uniform issue list sep seit efp'ra tz kek xk legend taxpayer a jra xx financial_institution a financial_institution b amount amount account m account n date date dear kkk he kkk rhe kek eke kek ake ae kek this letter is in response to your request on date supplemented with correspondence dated date date february date date and date in which you request a page pa waiver of the 60-day rollover period contained in sec_408 of the internal_revenue_code the code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a years old asserts that she received a distribution from ira x totaling amount on date taxpayer a asserts that her failure to accomplish a rollover within the 60-day period prescribed by sec_408 of the code of amount from ira x was due to several debilitating medical issues taxpayer a represents that amount has not been used for any purpose taxpayer a asserts that she decided to close ira x because she lost confidence in financial_institution a after it misplaced amount a substantial sum that was invested in ira x once amount was restored to ira x taxpayer a closed ira x on date and received a distribution of amount which financial_institution a direct deposited into account m at financial_institution b taxpayer a asserts that she intended to rollover amount into another ira after she researched other options taxpayer a asserts that during the 60-day rollover period was under a doctor's care and she was incapacitated by several debilitating medical issues and a severe reaction to a drug prescribed to treat one of those medical issues which prevented her from completing the rollover within the 60-day period taxpayer a submitted documentation from treating physicians of her medical issues and her severe reaction to a drug prescribed to treat one of her medical issues based on the facts and representations taxpayer a requests a ruling that the internal_revenue_service waive the 60-day rollover requirement contained in sec_408 of the code with respect to the distribution of amount 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 60th day after the day on which the individual receives the payment or distribution or ty page 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 60th 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 secretary may waive the 60-day requirement under 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 only distributions that occurred after date are eligible for the waiver under sec_408 of the code 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 of the code 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 submitted by the taxpayer including but not limited to a documented physician's opinion and supporting documentation from treating physicians is consistent with the assertion that her inability to complete a timely rollover was due to her medical incapacity therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount from is granted a period of days from the issuance of this letter_ruling ira x taxpayer a to contribute amount 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 contributions amount will be considered a rollover_contribution within the meaning of sec_408 of the code page 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_61 k of the code provides that it may not be used or cited as precedent if you wish to inquire about this ruling contact at ’ please address all correspondence to se t ep ra t2 sincerely yours dine hf tb sv donzell littlejohn manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose