internal_revenue_service number release date index numbers -------------------------- ------------------------------------------------------------ ------------------ ---------------------------------- -------------------------------- ----------------------- ------------------------------------------------------------ ------------- ----------------------------------------- ---------------------------------- department of the treasury washington dc person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc fip plr-127104-07 date date ceding company ----------------------------------------------------- ---------------- ------------------ -------------------- assuming company ----------------------------------------------- --------------------------------------------------------------------------------------------- state a state b jurisdiction c date date date date -------------------------- ------------------------- ------------------------- ------------------------ ------------------------ date date date date date date date date date year aa amount w amount x amount y amount z number rr number tt number uu number vv number ww number xx number yy ------------------------ ------------------- ------------------- -------------------- ----------------------- ---------------------- ---------------------- ------------------------- --------------------------- ------- -------------- ------------- --------------- -------------- ---- -- -- ---- -- ---- ---- ---- number zz this is in response to your letter dated date jointly submitted by the dear ------------------------------------------ ceding company a state a mutual_life_insurance_company in rehabilitation and assuming company a state b domiciled stock_life_insurance_company requesting rulings on the federal_income_tax consequences of a proposed transaction the proposed transaction arises in the context of a plan for the rehabilitation of ceding company the plan and involves among other actions the transfer by assumption_reinsurance of ceding company’s life_insurance and other contracts to assuming company additional information was received in letters dated date date date date and date ceding company is a mutual life_insurance corporation organized to conduct a life_insurance business in state a ceding company issued life_insurance policies in number rr states and jurisdiction c ceding company is a mutual corporation and therefore has no shareholders instead owners of its contracts the contractholders have a dual relationship to ceding company as proprietary owners by reason of being members of the mutual corporation and as holders of contract rights under the contracts of ceding company the mutual membership interests include voting rights an undivided_interest in divisible surplus and a right to residual assets of ceding company upon liquidation mutual membership interests cannot be sold independently of the policy under which they arise and terminate when the insurance_contract terminates or matures typically a life_insurance_contract matures by reason of the death of an insured for purposes of the plan ceding company’s mutual members are those contractholders who had a contract or contracts in force on the record_date of date ceding company owns all of the stock of number tt corporations ceding company as the common parent of the affiliated_group_of_corporations files a life- nonlife consolidated federal_income_tax return pursuant to an election under sec_1504 of the internal_revenue_code period from date to date the state a insurance department and ceding company’s board_of directors petitioned the state a court for an order of rehabilitation on the grounds that ceding company failed to file certain reports with the state a insurance department and based on the fact that ceding company’s board_of directors consented to the rehabilitation in response to a rapid increase in policy surrenders and loan requests for the ceding company was placed in rehabilitation by an order of rehabilitation issued by the state a court on date a rehabilitator was appointed in that initial order the state a court made it clear that the court was not making a declaration of ceding company’s insolvency however the order provided for a moratorium on cash distributions policy surrenders withdrawals and policy_loans except in the case of certain hardship situations the moratorium on policyholders’ cash withdrawals began on date and continued until date for number ww years well in excess of years when on date it was lifted by the state a court on date the rehabilitator filed an initial plan of rehabilitation with the state a court however this plan was later abandoned on date the rehabilitator filed an amended rehabilitation plan with the state a court amended plan this amended plan of rehabilitation was the subject of a private_letter_ruling plr issued on date objections of interested parties and changes in the financial condition of ceding company resulted in abandoning this amended plan of rehabilitation on date the rehabilitator filed a subsequent amended plan of rehabilitation with the state a court amended plan and this plan was abandoned as well on date a further amended plan was filed with the state a court amended plan this plan was the subject of private_letter_ruling plr-199941023 issued on date as was the case with the earlier plans this plan was abandoned and not implemented when ceding company was placed in rehabilitation it had assets with a book_value of amount w dollars a significant portion of which was comprised of real_estate and mortgages that were nonperforming illiquid and overvalued as indicated above the initial order imposed a moratorium on policyholder access to cash distributions policy surrenders withdrawals and policy_loans under the contracts except for certain hardship circumstances since that time ceding company has improved the investment quality of its assets and its financial strength it has stabilized its revenue and has achieved levels of surplus in excess of minimum state regulatory requirements its current investment_assets consist principally of fixed income assets policy_loans cash and cash equivalents as indicated above the moratorium on policyholder cash withdrawals from contracts was lifted by the state a court in an order of date policyholder dividends under participating contracts and excess_interest credits under certain other contracts eg universal life and deferred_annuity contracts as ceding company’s financial condition improved and in recognition of the fact that ceding company policyholder dividends and declared interest credits together the policyholder dividends generally were lower during the early years of its rehabilitation than policyholder dividends for comparable policies of other insurers ceding company by order of the state a court of date increased the policyholder_dividend crediting rates of certain contracts subsequent orders of the state a court approved the payment by ceding company continued during its rehabilitation to pay at its discretion ceding company will modify the contracts by endorsement immediately before ceding company of policyholder dividends for each subsequent year in amounts consistent with its financial capacity to pay starting in year aa ceding company paid enhanced amounts of policyholder dividends which have been reduced each year thereafter in connection with policyholder dividends ceding company has not been obligated under state or federal_law to declare or pay any amount of policyholder dividends no amount_paid therefor has been fixed by the terms of the contracts and the declaration allocation and payment of the policyholder dividends is not inconsistent with the terms of the contracts finally no change has been nor will have been made to the contracts by reason of the declaration allocation and payment of policyholder dividends other than the exercise of a dividend payment option if such exercise is permitted under the terms of the contract and is not subject_to evidence of insurability or other consent of ceding company further the contracts will be modified by an endorsement immediately before the assumption_reinsurance transaction and this endorsement will include modifications of the policyholder_dividend provisions prospectively the closing on the closing date which is the closing date of the assumption_reinsurance transaction immediately following the endorsement of the contracts assuming company will assume and reinsure ceding company contracts and thereafter ceding company will liquidate the contractholders creditors and mutual members will be provided benefits in accordance with priorities for distribution under the plan contracts universal_life_insurance contracts deferred and immediate_annuity contracts conversion fund and deposit_administration_fund contracts health insurance contracts disability_income contracts issued or administered by ceding company and contracts or agreements issued in substitution for or supplementary to any such contract plan does not authorize an election to opt_out of participation contractholders however may surrender their contracts in accordance with the terms of the contracts at any time before or after the closing without extra contractual charges or penalties and without loss of the right to such compensation_for extinguishment of mutual membership rights as they may be entitled to under the plan any contractholder who rejected the assumption_reinsurance transaction prior to the date final hearing of the state a court on the plan will have his policy cancelled at closing and will receive at closing the then-current surrender_value as discussed below reinsurance transaction will be modified by ceding company through one or more endorsements effective as of the closing date but immediately prior to the closing of the reinsurance of the endorsed contracts this endorsement will not change reduce or as indicted in the plan each contract which is in force on the closing date of the all contracts in force on the closing date will participate under the plan as the the contracts subject_to the plan include traditional ordinary_life_insurance each cash_value contract will be modified to provide that any policyholder in lieu of policyholder_dividend provisions each cash_value contract eg a the contract including any riders will no longer have voting rights or rights to restructure the death_benefits cash values or account or policy values dividend accumulations minimum interest rate guarantees maximum mortality charges policy loan accounts or contractual loan interest rate guarantees of the endorsed contract pursuant to the plan the endorsements will include the following provisions participate in divisible surplus through dividends traditional ordinary or universal_life_insurance contract or deferred_annuity_contract which does not already have a provision for the payment or application of non- guaranteed elements will be modified to provide that such contract may be eligible annually for non-guaranteed elements in accordance with the plan to be applied as the contractholder may select in accordance with the same options as were available for the application of dividends before such contract modification dividend or interest credit that has been declared but not paid or applied with respect to such contract by ceding company prior to closing will be converted into a credit to policy values of such contract that will be payable or applicable at or after closing in the same manner and as of the same date that such dividend or interest credit would have been payable or applicable absent this modification provisions and the extinguishment of mutual membership interests in the form of credits to the policy values the plan credits described below excess of minimum contractual payments b discretionary contractual charges or premium amounts that are below the maximum contractual charges or c discretionary interest credits that are in excess of minimum guaranteed rates these payments credits and charges with respect to non-guaranteed elements being discretionary can vary from year to year a statement of principles an attachment to the plan will govern the setting of the non-guaranteed elements the endorsed contracts along with the practices dictated by the statement of principles are intended to provide approximately the same non-guaranteed values after closing as the unmodified contracts provided before closing provisions will be added to provide for continued compliance with various tax certain tax-qualified contracts will be authorized to receive compensation_for non-guaranteed elements are a discretionary contractual payments that are in the endorsements are subject_to change before the closing as may be in the assumption_reinsurance transaction assuming company will assume the as indicated in the plan ceding company will transfer its insurance_business by necessary to conform the endorsements to the state a court’s orders or to court- approved changes in the plan or to comply with the requirements of the various state regulators in addition the value benefits and provisions of the contracts are subject_to modification as of the closing date to reflect the application of plan credits non- guaranteed elements or other modifications provided for under the plan or state a court order with respect to such contracts transferring the endorsed contracts ie after their endorsement and other assets to support the contracts transferred to assuming company pursuant to an assumption_reinsurance agreement and ancillary agreements assuming company will assume obligations under the contracts and pay to ceding company a ceding commission consisting of a fixed amount of amount x dollars and a contingent payment of up to amount y dollars after the assumption_reinsurance transaction and pursuant to an order of the state a court ceding company will eventually be dissolved obligations of ceding company to the same extent and with the same effect as if assuming company had issued the endorsed contracts directly subject_to regulatory approval ceding company will be discharged of liability on those endorsed contracts that are assumed and assuming company will have the direct and sole liability for the endorsed contracts assumed contractholders who did not reject the transfer of the endorsed contracts prior to the date of the date state a court’s hearing on the final adoption of the plan or who pay premiums thereunder to the assuming company will be deemed to consent to the transfer distribution to its mutual members as described below with respect to the distribution of distributable equity certain liabilities to be retained by ceding company as set forth in the plan retained liabilities and assets in an amount initially approved by the state a court for the satisfaction of retained liabilities less amounts previously paid in satisfaction of such liabilities will be set_aside in a distributing trust the distributing trust will be established in the form of an irrevocable grantor_trust under state a law the rehabilitator will serve as the trustee of the distributing trust generally certain assumption_reinsurance in writing prior to the date hearing of the state a court will have their contracts surrendered at the closing for the then-current surrender_value to the extent approvals from state regulators are not received for such an assumption_reinsurance of the endorsed contracts assuming company will percent coinsure liabilities under the endorsed contracts with ceding company provided that enough state approvals shall have been received for the assumption_reinsurance transaction to permit the assumption on the closing date of policies representing at least number vv percent of insurance in force measured by face value within number xx days after the closing date ceding company will make a as mentioned previously the contracts of the contractholders who affirmatively rejected such with the possible exception noted above for the stock of its number tt mutual members will be the beneficiaries of the distributing trust except for holders of certain tax qualified contracts defined below foreign mutual members and mutual members who disclaim their membership interests any amount of distributable equity allocable to foreign mutual members and those that hold tax qualified contracts will be satisfied by ceding company before it transfers certain assets and liabilities to the distributing trust and this obligation will not become a liability of the distributing trust instead ceding company will pay the foreign mutual members directly and will transfer amounts to the assuming company for application as plan credits to the tax-qualified contracts upon its dissolution ceding company will transfer certain assets including the stock of its number tt subsidiaries unless such stock is previously disposed of to the distributing trust along with retained liabilities using these assets the distributing trust will satisfy the retained liabilities the distributing trust will be responsible for distributing generally to the remaining and non-disclaiming mutual members any remaining cash in the distributing trust subsidiaries the assets held by the distributing trust will be reinvested if at all only in cash obligations issued or guaranteed by the united_states or any agency thereof or demand deposits with or certificates of deposit issued by federally insured banks or savings and loan institutions the distributing trust will incorporate the characteristics of a traditional liquidating_trust and will not engage in the conduct of any trade_or_business the activities of the trustee will be limited to those reasonably necessary for and consistent with the accomplishment of such limited purposes number tt years after the closing of the assumption_reinsurance transaction when all retained liabilities are expected to be paid or provided for and when if any assets remain a second distribution of the remaining assets of the distributing trust will be made to or for the benefit of mutual members as beneficiaries of the distributing trust upon application by the rehabilitator or any mutual member and approval by the state a court the distributing trust agreement provides that the distributing trust will terminate no later than number uu years after the closing date unless otherwise ordered by the state a court the beneficial interests of mutual members in the distributing trust may not be transferred or hypothecated and will not be evidenced by the issuance of any certificates consistent with its role of the distributing trust in the plan the distributing trust agreement provides generally that the members who are the trust’s beneficiaries will be treated as the owners of the assets in the trust estate for all income_tax purposes and b the transfer by ceding company of net assets to the trust will be treated for all income_tax purposes as a distribution of such assets to such beneficiaries the distributing trust is expected to be liquidated and dissolved approximately the plan specifies a classification of claims and interest and a priority of class claims will be satisfied by the allocation of distributable equity in followed by the transfer of such assets by such beneficiaries to the distributing trust in exchange for the beneficial interests in such trust distributions under the plan the rights provided the contractholders will have a cla sec_3 following certain secured and administrative claims which are classified as cla sec_1 and cla sec_2 claims classe sec_4 through claims provide for claims of governments general creditors employees debt holders etc class the last and residual category provides for the claims in respect of mutual membership interest of the mutual members allowed claims claims approved by the state a court in classe sec_1 through will be paid in full in cash including contractholders who have a claim for cash provided that from and after the closing date allowed claims in classes other than cla sec_3 will become retained liabilities to the extent remaining as of the closing date or determined to be such after the closing date assuming company will not bear any of such liabilities exchange for the extinguishment of the mutual membership interests as provided in the plan the distributable equity is the amount of net assets available for distribution to mutual members after providing for retained liabilities mutual members generally will receive a distribution as compensation_for the extinguishment of mutual membership interests the first distribution of distributable equity will be made by the ceding company within number xx days after the closing date and any subsequent distribution thereof generally will be made by the distributing trust the distributable equity will be allocated to mutual members consisting of a fixed portion based on voting rights of the contracts and a variable portion based on contributions to surplus number yy percent of the distributable equity will be allocated in respect of voting rights and number zz percent of the distributable equity will be allocated based on contributions to surplus as determined by an actuarial methodology set forth in the plan and allocation report described therein the amount of distributable equity allocable to each mutual member will be determined pursuant to a formula described in the allocation report which has been found to be fair and equitable and was approved by the state a court by order of date eg individual_retirement_account contracts or sec_403 contracts will not receive or be entitled to receive distributable equity in the form of cash or other consideration with respect to such tax-qualified contracts instead they will receive credits to the policy value plan credits in the form of additional paid-up insurance or account value credits the value of the plan credits will be equal to the value of the cash otherwise allocable to the qualified contractholders with respect to their tax-qualified contracts mutual members who hold non-trusted tax qualified retirement funding contracts the assumption_reinsurance agreement provides that ceding company and the plan has been reviewed by the state a court which issued a final approval assuming company will receive assets from ceding company for purposes of paying the plan credit amounts order on date previously state a court issued a preliminary approval order on date which among other matters approved the plan without modification and authorized the rehabilitator to proceed with implementing the plan subject_to final approval of the state a court the rehabilitator has selected assuming company as the successful bidder and a final approval order was issued by the state a court on date the state a court’s review has included among other matters a final_determination after hearings available to the contract holders creditors and other interested parties of the procedural and substantive fairness of the terms and conditions of the allocation of distributable equity in exchange for mutual membership interests and b final approval of the modifications by the endorsements of the terms and conditions of the contracts the state a court will retain exclusive jurisdiction to enforce the provisions of the plan and to ensure that its intent and purposes are carried out and given effect assuming company will make a joint election to apply provisions of sec_1_848-2 concerning an excess negative_capitalization_amount to any reinsurance agreement entered into between the parties specifically including the assumption_reinsurance agreement sometimes referred to as the insolvent insurer election the receipt of a favorable ruling concerning the eligibility of ceding company to make the insolvent insurer election will result in assuming company being obligated to pay up to an additional_amount y dollars as a ceding commission to ceding company under the terms of the assumption_reinsurance agreement that term is defined in sec_1_848-2 of the income_tax regulations under the assumption_reinsurance agreement because ceding company will transfer a substantial amount of assets expected to exceed amount z dollars to assuming company as consideration for the assumption of ceding company’s liabilities under the transferred contracts because ceding company has not written any new business since it was placed in rehabilitation on date and therefore has not received substantial premiums subject_to sec_848 it also will have an excess negative capitalization carryover allocable to the assumption_reinsurance agreement under sec_1_848-2 applicable law and analysis it is represented that ceding company will have net negative consideration as deferred acquisition costs sec_848 authorizes the treasury_department to prescribe sec_848 provides that with respect to each category of specified sec_848 of the code provides that insurance_companies must capitalize specified_policy_acquisition_expenses and amortize these amounts on a straight-line basis generally over ten taxable years instead of identifying the categories of acquisition expenses that must be capitalized and amortized sec_848 requires an insurance_company to capitalize an amount of otherwise deductible expenses for the taxable_year equal to specified percentages of net_premiums with respect to certain types of insurance contracts the maximum amount of expenses required to be capitalized for any taxable_year is generally limited to the insurance company’s general_deductions for that year insurance contracts net_premiums equal the excess if any of a the gross_amount_of_premiums_and_other_consideration for the contracts over b the sum of return_premiums and other consideration incurred for the reinsurance of the contracts regulations to ensure that premiums and other consideration for reinsurance are treated consistently by the parties of a reinsurance agreement in applying the provisions of sec_848 pursuant to this authority sec_1_848-2 provides special rules for determining the amount of premiums and other consideration for reinsurance for purposes or computing an insurance company’s net_premiums under sec_848 under sec_1_848-2 of the income_tax regulations all items of consideration transferred between a ceding company and a reinsurer pursuant to a reinsurance agreement are netted for purposes of determining each party’s net_premiums under sec_848 the net negative consideration determined by one party to the reinsurance agreement reduces its net_premiums under sec_848 the net positive consideration determined by the other party increases its net_premiums under sec_848 the net consideration rules in sec_1_848-2 ensure that premiums and other consideration with respect to reinsurance are treated consistently by the parties in applying the capitalization requirements of sec_848 capitalization amount with respect to a category of specified insurance contracts the negative_capitalization_amount reduces the amount of specified_policy_acquisition_expenses that would otherwise be capitalized with respect to other categories of insurance contracts for that year but not below zero any remaining negative_capitalization_amount is then applied as a reduction of the company’s previously capitalized expenses under sec_848 with a corresponding ordinary deduction for this purpose the negative_capitalization_amount is determined by multiplying the negative net_premiums for a category of specified contracts by the applicable_percentage for that category as a practical matter a negative_capitalization_amount for a category of sec_848 provides that if for any taxable_year there is a negative sec_1_848-2 provides that an insolvent insurance_company with an sec_1_848-2 of the regulations provides that if an insurance company’s specified insurance contracts will generally only arise as a result of reinsurance agreements negative_capitalization_amount for a category of specified insurance contracts for a taxable_year cannot be utilized for that year because it exceeds the company’s specified policy expenses for other categories of specified contracts for the year plus the unamortized balance of specified_policy_acquisition_expenses from prior taxable years the excess is carried over to future taxable years as an excess negative_capitalization_amount excess negative_capitalization_amount and net negative consideration under a reinsurance agreement and the other party to the reinsurance agreement may make a joint election if the election is made the insolvent company may not claim a carryover with respect to the portion of the excess negative_capitalization_amount attributable to the reinsurance agreement correspondingly the party with net positive consideration may reduce its specified_policy_acquisition_expenses for the taxable_year by an amount equal to the reduction in the insolvent company’s excess negative capitalization carryover amount insurance_company undergoing a court supervised rehabilitation or similar state proceeding for purposes of determining the availability of the joint election under sec_1_848-2 to reduce the insolvent company’s excess negative capitalization carryover amount attributable to the reinsurance agreement and the other party’s specified_policy_acquisition_expenses under sec_1_848-2 an insurance_company undergoing a rehabilitation conservatorship or similar state proceeding will be presumed to be insolvent if the state proceeding results in - a an order by the court finding that the fair_market_value of the company’s assets is less than its liabilities b the use of funds guarantees or reinsurance from a guaranty association c a reduction of the policyholders’ account balances or d a substantial limitation on access to funds for example a partial or total moratorium on policyholder withdrawals or surrenders that applies for a period of years subject_to restrictions on its activities and the contractholders were subject_to as described above during its rehabilitation period ceding company was made sec_1_848-2 provides presumptions relating to the insolvency of an substantial limitations on certain cash surrenders and withdrawals of funds under the contracts for almost number ww years which was well in excess of years pursuant to the order of rehabilitation issued by the state a court on date a moratorium was imposed immediately on all cash distributions policy surrenders withdrawals and policy_loans under the contracts except in the case of certain hardship situations such moratorium remained in effect until the issuance of an order of the state a court lifting the moratorium on date after the order restricting contractholders’ access to their funds went into effect therefore such moratorium satisfies the requirement for the presumption under the regulation that the ceding company is an insolvent employer for purposes of making their insolvent insurer election see sec_1_848-2 of the regulations grandfather provisions revproc_92_57 1992_2_cb_410 address the effect on policyholders of the modification or restructuring of an annuity life_insurance or endowment_contract issued or assumed through reinsurance by a financially troubled insurance_company if the modification or restructuring is an integral part of the rehabilitation plan and is approved by the state insurance commissioner state court or other responsible state official then the internal_revenue_service will treat the modification or restructuring as not having an effect on the date that the contract was issued entered into or purchased for purposes of sec_72 sec_101 sec_264 sec_7702 and sec_7702a and will not require retesting or the start of a new test period under sec_7702 b - e and 7702a c sec_72 of the code sets out various rules for the tax treatment of amounts received under an annuity endowment or life_insurance_contract sec_72 provides in part that gross_income includes any amount received under an annuity endowment or life_insurance_contract the exclusion_ratio for amounts received as an annuity determined under sec_72 is calculated with respect to the taxpayer’s investment_in_the_contract as defined by sec_72 sec_72 applies to amounts that are not received as an annuity and provides in general that amounts_not_received_as_an_annuity are include in gross_income to the extent of the income_on_the_contract a taxpayer’s investment_in_the_contract as defined by sec_72 is taken into account in determining that income an exception to the general_rule exists for life_insurance contracts the exception reverses the general income-out-first rule and allows amounts_not_received_as_an_annuity to be treated first as a return of the investment_in_the_contract and then as taxable_income to the extent there are untaxed earnings in the contract for amounts_not_received_as_an_annuity sec_72 defines the term investment_in_the_contract as of any date as a the aggregate amount of premiums or other consideration paid for the contract before such date minus b the aggregate amount received under the contract before such date to the extent that such amount was excludable from gross_income for amounts received as annuity sec_72 defines the term investment_in_the_contract as of the annuity_starting_date as a the aggregate amount of premiums or other consideration paid for the contract before such date minus b the aggregate amount received under the contract before such date to the extent that such amount was excludable from gross_income conclusions based upon the information submitted and the representations made it is held as follows ceding company qualifies an insolvent insurance_company within the meaning of sec_1_848-2 of the regulations therefore assuming that ceding company has net negative consideration which results in an excess negative_capitalization_amount under sec_1_848-2 as a result of the assumption_reinsurance agreement ceding company and assuming company are eligible to make the joint election set forth in sec_1_848-2 with respect to the assumption_reinsurance agreement that election allows ceding company to forgo the carryover of the portion of the excess negative_capitalization_amount attributable to the assumption_reinsurance agreement and allows assuming company to reduce its specified_policy_acquisition_expenses for that taxable_year by an amount equal to ceding company’s excess negative_capitalization_amount that is not carried over provided that the contracts to be assumed by assuming company that are issued as life_insurance contracts constitute life_insurance contracts for federal_income_tax purposes and the contracts that are issued as annuity_contracts to be assumed by assuming company are annuity_contracts for federal_income_tax purposes it is held as follows neither a the modification of a contract by endorsement upon closing nor b any amount_paid or credited with respect to a contract pursuant to the state a court’s approval of the rehabilitator’s petitions to approve policyholder dividends with respect thereto nor c the assumption_reinsurance of an endorsed contract pursuant to the plan if such assumption_reinsurance transaction does not change the terms and conditions of such contract other than the insurer after such modification by endorsement i will have any effect on the date that such contract was issued entered into or purchased for purposes of sec_72 sec_101 sec_101 sec_264 sec_7702 or sec_7702a or ii will require retesting or the start of a new test period for such contract under sec_264 sec_7702 b - e or 7702a c for purposes of i and ii above as each endorsed contract will be treated under revproc_92_57 as a continuation of an unendorsed contract with respect to the contractholder for purposes of sec_72 the investment_in_the_contract under sec_72 for each endorsed contract immediately after the assumption_reinsurance transaction will remain the same as for the predecessor unendorsed contract immediately prior to its endorsement this ruling is directed only to the taxpayers who requested it sec_6110 there are a number of requested holdings submitted in the ruling_request dated date to which this ruling letter does not respond these rulings are not within the ruling jurisdiction of the office of the associate chief_counsel financial institutions products it is expected that you will receive a second letter or other correspondence with respect to the matters not ruled upon in this ruling letter this includes requested rulings iii and as submitted in your ruling_request of date provides that it may not be used or cited as precedent pursuant to the powers of attorney on file with this office copies of this letter are being sent to your authorized representatives a copy of this letter must be attached to any income_tax return to which it is relevant alternatively for a return s filed electronically this requirement is satisfied by attaching a statement to the return s that provides the date and control number of the letter_ruling representations submitted by the taxpayers and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sheryl b flum chief branch office of associate chief_counsel financial institutions products the rulings contained in this letter are based upon information and sincerely yours s


internal_revenue_service number release date index number ------------------- --------------------------------- ------------------------------ in re ruling_request department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------------ id no ------------ ----------------- telephone number -------------------- refer reply to cc psi b04 plr-113996-16 date date legend taxpayer trust year year dear -------------- ------------------- ------------------------------------------- ------- ------- this letter responds to your personal representative's letter of date requesting an extension of time under sec_2642 of the internal_revenue_code and sec_301_9100-3 of the procedure and administration regulations to make the election out of the automatic allocation of generation-skipping_transfer gst_exemption under sec_2632 the facts submitted and the representations made are as follows in year on a date after date taxpayer established and made a transfer to an irrevocable_trust trust trust has gst tax potential taxpayer retained a tax professional to prepare her year form_709 united_states gift and generation-skipping_transfer_tax return to report the transfer to trust in preparing this form the tax professional elected out of the automatic allocation of gst_exemption to the transfer to trust under sec_2632 in year taxpayer made two transfers to trust taxpayer retained the same tax professional to prepare her year form_709 to report the transfers to trust in preparing this form the tax professional inadvertently failed to elect out of the automatic allocation of gst_exemption to the transfers to trust under sec_2632 taxpayer requests an extension of time under sec_2642 and sec_301_9100-3 to elect out of the automatic allocation of gst_exemption to the year transfers to trust under sec_2632 plr-113996-16 law and analysis sec_2601 imposes a tax on every gst a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2632 is effective for transfers subject_to chapter or made after date and to estate_tax inclusion periods etips ending after date see pub_l_no sec_561 sec_2632 provides that if any individual makes an indirect_skip during such individual's lifetime any unused portion of such individual's gst_exemption shall be allocated to the property transferred to the extent necessary to make the inclusion_ratio for such property zero if the amount of the indirect_skip exceeds such unused portion the entire unused portion shall be allocated to the property transferred sec_2632 provides that for purposes of sec_2632 the term indirect_skip means any transfer of property other than a direct_skip subject_to the tax imposed by chapter made to a gst_trust sec_2632 provides that an individual may elect to have sec_2632 not apply to any or all transfers made by such individual to a particular trust such an election may be made on a timely filed gift_tax_return for the calendar_year for which the election is to become effective sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides in relevant part that a transferor may prevent the automatic allocation of gst_exemption elect out with respect to one or more prior-year transfers subject_to sec_2642 regarding etips made by the transferor to a specified trust or trusts one or more or all current-year transfers made by the transferor to a specified trust or trusts one or more or all future transfers made by the transferor to a specified trust or trusts all future transfers made by the transferor to all trusts whether or not in existence at the time of the election out or any combination of through sec_26_2632-1 provides that to elect out the transferor must attach an election out statement to a form_709 filed within the time period provided in sec_26_2632-1 in general the election out statement must identify the trust and specifically must provide that the transferor is electing out of the automatic allocation of gst_exemption with respect to the described transfer or transfers sec_26_2632-1 provides that to elect out the form_709 with the attached election out statement must be filed on or before the due_date for timely filing the form_709 for the calendar_year in which for a transfer subject_to sec_2642 the etip closes or for all other elections out the first transfer to be covered by the election out was made plr-113996-16 sec_2642 provides generally that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c sec_2642 provides that in determining whether to grant relief the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief the time for making the allocation shall be treated as if not expressly prescribed by statute see notice_2001_50 2001_2_cb_189 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose date is prescribed by a regulation and not expressly provided by statute in accordance with sec_2642 and notice_2001_50 a taxpayer may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore taxpayer is granted an extension of time of days from the date of this letter to elect out of the automatic allocation rules with respect to the transfers taxpayer made to trust in year taxpayer’s election should be made on a supplemental form_709 for year the supplemental form_709 should be filed with the internal_revenue_service center at the following address internal_revenue_service cincinnati service_center - stop plr-113996-16 cincinnati oh a copy of this letter should be attached to the supplemental form_709 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely karlene m lesho karlene m lesho senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosure copy of this letter for sec_6110 purposes