department of the treasury internal_revenue_service washington d c of f i c e of c h i e f c ou n s e l date number release date uilc cc psi br7 tl-n-6061-00 internal_revenue_service national_office field_service_advice memorandum for associate area_counsel -- from associate chief_counsel passthroughs and special industries cc psi subject research_credit this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent legend taxpayer a b c d u v w x y z issue ein dollar_figure dollar_figure dollar_figure dollar_figure whether expenses_incurred by taxpayer for wages paid to employees of taxpayer’s in-house patent department constitute qualified_research_expenses under sec_41 conclusion expenses_incurred by taxpayer for wages paid to employees of taxpayer's in-house patent department do not constitute qualified_research_expenses under sec_41 because such wages are not for services performed by taxpayer's employees that constitute qualified_services specifically the wages are not for tl-n-6061-00 either the actual conduct of qualified_research under sec_41 the direct supervision of the actual conduct of qualified_research or the direct support of either the actual conduct of qualified_research or the direct supervision of the actual conduct of qualified_research facts taxpayer is a provider of telecommunications products and services to protect taxpayer’s interests in its intangible_property taxpayer’s patent department manages the patent application process according to taxpayer the patent application process begins when an engineer performing research prepares a written disclosure of an idea which establishes the basis for the patent application to be drafted by the patent attorney and ends with the granting of a patent by the u s patent office during the a through d taxable years taxpayer employed between u to v persons in its patent department employees of the patent department include patent attorneys patent agents patent engineers patent illustrators and patent coordinators all personnel other than patent coordinators have technical degrees typically in electrical engineering physics or the equivalent the job titles and or job description sec_1 of the various patent department employees are summarized as follows patent attorneys the various job titles of the patent attorneys include from most to least senior group patent attorney division patent attorney senior patent attorney patent attorney i patent attorney ii patent attorney iii the duties of senior patent attorneys and patent attorneys i ii and iii generally include preparing and amending u s patent applications preparing and amending u s and secondary patent applications developing an understanding of client technology and eventually developing expertise according to client needs drafting of and assisting on agreements infringement or validity studies developing and maintaining communication with engineers inventors and managers and eventually developing counseling capability for all patent department employees the extent of involvement in and supervision over the duties described varies depending upon years of experience tl-n-6061-00 group patent attorneys and division patent attorneys have at least years experience and generally are responsible for the complete docket of patent disclosures amendments and intellectual_property projects for the assigned business area they also must be proficient in intellectual_property protection agreements and infringement studies counseling in intellectual_property matters supervision and training of intellectual_property practitioners patent agent the various job titles of the patent agents include from most to least senior patent agent i patent agent ii and patent agent iii the duties of all patent agents generally include preparing and amending u s patent applications with some supervision from patent attorneys preparing and amending secondary patent applications assisting with patent attorney guidance on infringement and validity studies developing communication with engineers inventors and managers maintaining awareness of relevant technical developments and continuing to develop an understanding of competitors’ as well as clients’ products and technology direction senior patent drafter or patent engineer the job of senior patent drafters is to prepare clear complete and accurate working plans and detail drawings for use in obtaining patent rights the duties of senior patent drafters generally include making final drawings from rough or detailed sketches or notes according to specifications checking dimensions of parts materials to be used relation of one part to another and relation of parts to entire project making adjustments or changes as necessary drawing statistical charts as required applying mechanical and electrical knowledge engineering practices mathematics and materials to complete drawings drafting multi-view assembly and subassembly drawings patent illustrator the various job titles of the patent illustrators include from most to least senior senior patent illustrator patent illustrator i patent illustrator ii and patent illustrator iii tl-n-6061-00 the duties of all patent illustrators generally include providing high-quality patent application drawings by further defining conceptual designs or rough sketches determining the layout 3-d perspective and appearance of inventions to prepare final artwork eg detailed schematics drawings illustrations flow diagrams etc planning and preparing layouts and drawings using computer-aided drafting systems and software interfacing with patent practitioners and inventors to produce and revise patent filing specifications specifically in relevant part talking with the practitioner and or inventor to determine the needs and requirements of the drawing assignment and providing expert advice to the practitioner on the best way to illustrate the invention patent coordinator patent coordinators perform clerical and administrative tasks and their job is to coordinate the patent docketing activities of the patent department the duties of patent coordinators generally include ensuring that docketing foreign filing and annuity_payment procedures are followed according to strict statutory requirements preparing procedural manuals for the office staff requiring investigation and analysis of changes in patent laws affecting office procedures handling minor problems with disclosure processing payment of patent awards department billings and taxes preparing monthly reports on patent office activities assigning and monitoring the work of lower level personnel for the d taxable_year taxpayer has claimed z as qualified_wages for purposes of sec_41 in addition taxpayer has filed an additional claim for qualified_wages for the a b and c taxable years in the amounts of w x and y respectively law sec_41 allows taxpayers a credit against tax for increasing research activities generally the credit is an incremental credit equal to the sum of percent of the excess if any of the taxpayer's qualified_research_expenses for the taxable_year over the base_amount and percent of the taxpayer's basic_research_payments sec_41 provides that the term qualified_research_expenses means the sum of the following amounts which are paid_or_incurred by the taxpayer during the taxable_year in carrying on any trade_or_business of the taxpayer a in-house_research_expenses and b contract_research_expenses tl-n-6061-00 sec_41 provides in relevant part that in-house_research_expenses include any wages paid_or_incurred to an employee for qualified_services performed by such employee and any amount_paid or incurred for supplies used in the conduct of qualified_research sec_41 provides that qualified_services means for purposes of both in-house and contract expenses i engaging in qualified_research or ii engaging in the direct supervision or direct support of research activities which constitute qualified_research sec_1_41-2 provides that engaging in qualified_research for purposes of performing qualified_services means the actual conduct of qualified_research as in the case of a scientist conducting laboratory experiments sec_1_41-2 provides that direct supervision for purposes of performing qualified_services means the immediate supervision first-line management of qualified_research as in the case of a research scientist who directly supervises laboratory experiments but who may not actually perform experiments direct supervision does not include supervision by a higher-level manager to whom first-line managers report even if that manager is a qualified_research scientist sec_1_41-2 provides that direct support for purposes of performing qualified_services means services in the direct support of either i persons engaging in actual conduct of qualified_research or ii persons who are directly supervising persons engaging in the actual conduct of qualified_research for example direct support of research includes the services of a secretary for typing reports describing laboratory results derived from qualified_research of a laboratory worker for cleaning equipment used in qualified_research of a clerk for compiling research data and of a machinist for machining a part of an experimental model used in qualified_research under sec_1_41-2 however direct support of research activities does not include general administrative services or other services only indirectly of benefit to research activities for example services of payroll personnel in preparing salary checks of laboratory scientists of an accountant for accounting for research expenses of a janitor for general cleaning of a research laboratory or of under sec_1_41-2 a contract research expense i sec_65 percent of any expense paid_or_incurred in carrying_on_a_trade_or_business to any person other than an employee of the taxpayer for the performance on behalf of the taxpayer of i qualified_research or ii services which if performed by employees of the taxpayer would constitute qualified_services although contract_research_expenses are not at issue in this case the rules relative to qualified_services as they apply to in-house_research_expenses likewise apply to contract_research_expenses tl-n-6061-00 company officers engaged in supervising financial or personnel matters do not qualify as direct support of research this is true whether general administrative personnel are part of the research department or in a separate department direct support does not include supervision indeed supervisory services constitute qualified_services only to the extent provided in sec_1_41-2 in general qualified_services do not consist of overhead general or administrative services or other services that only indirectly support the qualified_research thus accounting budgetary payroll and legal functions as well as business supervision and raising capital do not constitute qualified_services see joint_committee on taxation general explanation of the economic_recovery_tax_act_of_1981 pincite qualification under any of the grounds cited above is contingent upon a determination that the taxpayer is performing qualified_research within the meaning of sec_41 for purposes of the research_credit in taxable years through date the term qualified_research had the same meaning as the term research or experimental had under sec_174 except that the term did not include qualified_research conducted outside the united_states qualified_research in the social sciences or humanities and funded research under sec_1_174-2 the term research or experimental expenditures includes the costs of obtaining a patent such as attorneys' fees expended in making and perfecting a patent application however research or experimental expenditures do not include expenditures_for the acquisition of another's patent model production or process sec_1_174-2 for taxable years beginning after date congress substantially narrowed the definition of qualified_research for purposes of the credit computation with the objective of narrowing the scope of the credit to technological advances in products and processes see s rep no pincite h_r rep no pincite thus it was no longer sufficient merely to satisfy the sec_174 definition of research or experimental expenditure to qualify for the research_credit see 110_tc_454 982_fsupp_1279 n d ill aff'd 163_f3d_440 7th cir thus for taxable years beginning after date sec_41 defines the term qualified_research as research a with respect to which expenditures may be treated as expenses under sec_174 b which is undertaken for the purpose of discovering information-- i which is technological in nature and tl-n-6061-00 ii the application of which is intended to be useful in the development of a new or improved business_component of the taxpayer and c substantially_all of the activities of which constitute elements of a process_of_experimentation for a purpose related to a new or improved function performance or reliability or quality and not for a purpose related to style taste cosmetic or seasonal design factors qualified_research does not include any activity described in sec_41 sec_41 excludes several activities from the definition of qualified_research the exclusion for research after commercial production under sec_41 provides that the credit shall not be available for any research conducted after the beginning of commercial production of the business_component the business_component is defined as any product process computer_software technique formula or invention held_for_sale lease or license or used by the taxpayer in its trade_or_business sec_41 the legislative_history clarifies that no expenses for post-research activities relating to a business_component are eligible for the credit after the component has been developed to the point where it either meets the basic functional and economic requirements of the taxpayer for such component or is ready for commercial sale or use h_r conf_rep no at ii-74 the credit will be allowed for post-research activities only in the event a significant improvement is made to an existing business_component such that a new business_component is created see id at ii-74 n analysis the issue in this request for field_service_advice is whether wages paid to taxpayer's employees which are attributable to obtaining u s patents are qualified_research_expenses under sec_41 to qualify for the credit such wages must be for services performed by taxpayer's employees that constitute qualified_services within the meaning of sec_41 and sec_1_41-2 specifically taxpayer must show that the wages paid to its patent department employees are for either the actual conduct of qualified_research under sec_41 the direct supervision of the actual conduct of qualified_research or the direct support of either the actual conduct of qualified_research or the direct supervision of the actual conduct of qualified_research thus the determination of whether taxpayer's activities constitute qualified_services should be made by reference to the activities of taxpayer's employees and not by reference to the job title qualified_research tl-n-6061-00 the wages paid to employees of taxpayer's patent department relative to taxpayer's patent application process are not for the actual conduct of qualified_research under sec_41 while there is no dispute that taxpayer has satisfied the first requirement for qualified_research in that the costs of obtaining patents are research or experimental expenditures under sec_174 we cannot agree that taxpayer has satisfied the remaining requirements under sec_41 for taxable years after date to qualify for the credit the activities undertaken by taxpayer's patent department must be research undertaken for the purpose of discovering information that is technological in nature the application of which must be intended to be useful in the development of a new or improved business_component of the taxpayer further substantially_all of the research activities must constitute elements of a process_of_experimentation and must relate to a new or improved function performance reliability or quality and not to style taste cosmetic or seasonal design factors we have reviewed the job descriptions for the various patent department employees and do not believe that any of the activities delineated by the descriptions involve the discovery of technological information the application of which is intended to be useful in the development of a new or improved business_component the patent attorneys and patent agents generally prepare and amend patent applications to perform this task they must develop and maintain a communication link with inventors and engineers in a memorandum captioned response to eng-44 hereafter response taxpayer states that i nteraction with the engineer performing the research is often required which can result in the opportunity for the patent attorney to directly impact the research efforts for example the patent attorney may advise an engineer to re-direct his research efforts to prevent infringement on another inventor's previously granted patent we do not dispute this presumably a patent attorney and or patent agent must make a preliminary determination as to whether an idea for a proposed product is patentable to the extent there may be an existing patent moreover the patent attorneys and patent agents may provide advice to the researchers as to how distinct an invention or product must be such activities necessarily presuppose constant interaction between the researchers and the patent attorneys and patent agents such activities however do not presuppose the performance of qualified_research by either the patent attorneys or patent agent because there is no discovery of technological information the application of which is intended to be useful in the development of a new or improved business_component of taxpayer rather such activities are limited to determining whether a patent exists with respect to a similar product similarly the activities of the senior patent drafter patent illustrator and patent coordinator do not qualify under sec_41 senior patent drafters prepare final drawings of inventions for use in obtaining patent rights patent illustrators generally prepare patent application drawings and also serve as an tl-n-6061-00 intermediary between patent attorneys and inventors regarding the requirements of a patent drawing patent coordinators perform tasks relative to the patent docketing activities of the patent department none of these activities constitute qualified_research activities rather such activities are focused upon facilitating the acquisition of a patent for a completed product or invention in addition none of the activities of any patent department personnel constitute elements of a process_of_experimentation under sec_41 the conference_report describes the term process_of_experimentation as a process involving the evaluation of more than one alternative designed to achieve a result where the means of achieving that result is uncertain at the outset this may involve developing one or more hypotheses testing and analyzing those hypotheses through for example modeling or simulation and refining or discarding the hypotheses as part of a sequential design process to develop the overall component h_r conf_rep no at ii-71 none of the activities delineated in taxpayer's patent department job descriptions involve the weighing of alternatives or the development and analysis of hypotheses with respect to the development of the new or improved business_component in fact from taxpayer's perspective the process underlying the activities of the patent department should not be theoretical or speculative taxpayer relies upon its patent attorneys and patent agents to provide certain and irrefutable findings regarding the desired patent because taxpayer's products and resultant patents must be able to withstand legal scrutiny similarly the drawings generated by the senior patent drafter and patent illustrator must accurately reflect a completed final product or invention finally we note that some of the activities of taxpayer's patent department may be disallowed under the exclusion for research after commercial production if such products meet the basic functional and economic requirements of the taxpayer see sec_41 h_r conf_rep no at ii-74 it is also arguable that taxpayer's products are ready for commercial sale or use but for any impediments posed by the absence of the requisite patents direct supervision of qualified_research the wages paid to employees of taxpayer's patent department relative to taxpayer's patent application process are not for the direct supervision of the actual conduct of qualified_research under sec_41 direct supervision for tl-n-6061-00 purposes of performing qualified_services means the immediate day-to-day supervision or first-line management of qualified_research unlike the inventor or engineer or manager who directly supervises laboratory experiments performed by taxpayer's researchers taxpayer's patent department does not have a supervisory role vis-a-vis taxpayer's researchers even if during the course of daily discussions with the research department a patent attorney for example provided some guidance as to the direction of a certain product’s development because of concerns regarding an existing patent it is highly unlikely that the patent attorney would communicate directly with the researcher and not through that researcher’s own immediate supervisor notwithstanding the fact that most patent department personnel have technical degrees it is doubtful that any personnel possess either the technical ability or wherewithal to assume such a supervisory role taxpayer has provided no information to suggest that patent department employees possessed the requisite scientific capability to supervise directly the taxpayer's researchers while taxpayer has argued that the requisite interaction and interfacing between its inventors and the patent department directly impacts the research efforts this does not constitute the direct supervision of the actual conduct of qualified_research thus far we have concluded that taxpayer's patent department does not engage in the actual conduct of qualified_research or the direct supervision of qualified_research accordingly the wages of taxpayer's patent department can be taken into account for purposes of computing the research_credit only if the activities of the patent department are in the direct support of qualified_research direct support of qualified_research the wages paid to employees of taxpayer's patent department relative to taxpayer's patent application process are not for the direct support of either the actual conduct of qualified_research or the direct supervision of the actual conduct of qualified_research in its response taxpayer correctly notes that activities in direct support of research include typing reports cleaning equipment compiling data and machining parts so that without such activities the research could not be completed see sec_1_41-2 thus the failure of a secretary to type a report describing laboratory results derived from qualified_research may impede the research particularly to the extent such report would document the requisite process_of_experimentation similarly the failure of a clerk to compile research data may delay if not suspend the research conversely the failure of a patent coordinator to prepare a monthly report on patent department activities or to ensure that patent docketing procedures are followed may impede the operations of the patent department but not the progress of taxpayer's researchers similarly the failure of a patent attorney to determine if tl-n-6061-00 the product under development may potentially infringe upon an existing patent will only temporarily curtail product development in the same way the failure of a payroll employee to cut a salary check only may delay the research phase to the extent taxpayer's overall business activities are affected in short the activities of the patent department are intended to facilitate streamline and validate the research efforts and end products of taxpayer's inventors and engineers the patent department will perform all necessary tasks to achieve this end but such activities alone do not contribute to the efforts underlying the research or support the research under the facts provided we do not believe that taxpayer has demonstrated that patent department personnel contributed in any germane way to its research efforts although patent department personnel have technical degrees taxpayer does not portray such personnel as scientists or experts who may have been responsible for investigating what research avenues to pursue and that but for their recommendations the various alternatives and hypotheses could not have been weighed and evaluated the activities performed by taxpayer's patent department simply involve determining the extent to which completed research can be protected through the satisfaction of certain legal requirements case development hazards and other considerations we note that in response taxpayer's counsel states that the irs acquiesces on the issue of qualification under sec_174 the use of the word acquiesce is curious in view of the fact that the service will not argue against a regulation that clearly states that the costs of obtaining a patent will qualify under sec_174 we cannot however acquiesce on the issue of whether such costs constitute qualified_research costs under sec_41 congress in narrowing the scope of the credit to technological advances in products and processes sought to prevent taxpayers from claiming the credit for any expense relating to product development thus the credit is not available for an expenditure merely because the expenditure satisfies the requirements of sec_174 see 110_tc_454 costs attributable to obtaining a patent are precisely the sort of product development expenses that congress sought to exclude from the definition of qualified_research in response taxpayer's counsel notes that in the conference_report to the act congress specifically excludes the costs of acquiring another person's patent from the credit which implicitly allows the costs of obtaining one's own patent as expenditures that qualify for the credit h_r conf_rep no at ii-71 this argument is at best specious not surprisingly taxpayer presents this excerpt from the conference_report out of context the quoted portion is from a section of the conference_report where congress is delineating the threshold sec_174 requirements for qualified_research thus congress notes that the credit like the tl-n-6061-00 sec_174 deduction is not available for costs of acquiring another person's patent this is precisely the standard found under sec_1_174-2 which contemplates that a taxpayer should not get the deduction for obtaining another taxpayer's already perfected patent a sec_197 intangible subject_to 15-year amortization thus there is no inference in the conference_report that sec_41 allows the costs of obtaining that is making and perfecting one's own patent finally we note that in response taxpayer maintains that t here have been cases during the tax years in question where the involvement of the patent attorneys has been so significant that they were required to be listed as one of the inventors on the patent application this illustrates that some of the expenses in the patent department would even qualify under the stricter test of services directly engaged in research under sec_41 if this is indeed the case then taxpayer must come forward with evidence showing that the activities of such patent attorneys satisfied the substantive requirements for qualified_research under sec_41 and c until taxpayer makes such a showing however we cannot treat the wages incurred as qualified_research_expenses this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views please call if you have any further questions by christine e ellison chief branch passthroughs and special industries


internal_revenue_service number release date cc el ct-116699-99 uiln date memorandum for assistant regional_counsel criminal tax from subject barry j finkelstein assistant chief_counsel criminal tax u s department of justice legislative comparison of house and senate forfeiture bills this transmits a copy of the u s department of justice’s legislative comparison of the house and senate forfeiture bills dated date the comparison sets forth the following three categories the current law the house version outlined in h_r and the senate version outlined in s overall the house version has many anti- government proposed changes but does not address all existing provisions the senate version however is more neutral in expanding privileges for both the government and owners claimants we note some of the more significant changes below but as the proposed versions’ fate is still unknown current law still applies the most significant proposal shifts the burden_of_proof from the claimant to the government the senate version proposes requiring seizure warrants for all seizures of forfeitable property unless there is an applicable fourth_amendment exception under current law the government was authorized to seize property based on probable cause without a warrant also both the house and senate versions settle an existing circuit split making the government liable for pre-judgment interest the senate bill changes several provisions related to civil forfeiture proceedings first the court will stay all civil forfeiture proceedings if the government’s criminal case may be hampered eliminating the required showing of good cause further access to other records eg disclosure of tax returns or other information authorized in the investigative stage of criminal cases has been expanded to also allow disclosure in investigations leading to civil forfeiture actions lastly the use of grand jury information is also expanded to allow disclosure to federal prosecutors for use in any civil forfeiture action not just concerning banking law violations should you have any questions concerning this matter please feel free to contact attachment


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si 4-plr-115861-99 date date in re legend taxpayer - trust - x dollars - y dollars - date - child - child - child - state x - dear this is in response to your letter dated date in which you requested rulings concerning the income and gift_tax treatment of the establishment of a proposed charitable_lead_trust taxpayer a resident of state x has three adult children child child and child who are currently taxpayer’s only descendants you represent that taxpayer proposes to establish an irrevocable_trust trust for the benefit of charitable organizations and taxpayer’s three children the trustees of trust will be two unrelated individuals and an unrelated corporation taxpayer proposes to fund trust with cash and property valued at x dollars at the date of contribution the dispositive provisions of the trust will be as follows article second of the proposed trust instrument provides that beginning in the year that trust is established and continuing through date the trustees will distribute an annuity of y dollars each year to one or more qualified charities that the trustees will select each year the distribution may be made in cash or in_kind or partly in each at the trustees discretion and may be paid in installments but not less frequently than annually the annuity may not be commuted or prepaid prior to the termination_date plr-115861-99 for each taxable_year the annuity will be paid first from current income and to the extent that current income is not sufficient from accumulated income to the extent that accumulated income is not sufficient the annuity will be paid from principal including capital_gains any income not distributed may be added to principal in the trustees’ discretion in the event that days before the end of the taxable_year the trustees have not selected a qualified charity or charities to which to distribute the annuity the annuity will be paid to two specified charities if either organization is not a qualified charity the annuity is to be distributed in its entirety to the other organization the term qualified charities is defined as only such organizations described in both sec_170 and sec_2522 of the internal_revenue_code gifts to which qualify for a charitable deduction for federal income and gift_tax purposes article second paragraph b provides that trust will terminate on date in the year at which time the corpus will be distributed in equal shares one share for each of the taxpayer’s children a b and c his or her heirs executors or administrators article fifth provides that unless terminated sooner trust will terminate no later than years after the death of the last to die of taxpayer’s descendants living on the date trust is created article second paragraph a provides that the annuity interest provided in article second cannot be commuted or prepaid prior to the termination_date of the trust article first paragraph x of the proposed trust instrument provides that notwithstanding any other provision of the trust instrument to the contrary no trustee or other person acting on behalf of the trust shall engage in any act of self-dealing as defined in sec_4941 of the internal_revenue_code or corresponding provision of any subsequent federal tax laws cause any excess business holding as defined in sec_4943 or corresponding provision of any subsequent federal tax laws to be retained cause any investment to be acquired or retained in a manner that subjects the trust to tax under sec_4944 or corresponding provision of any subsequent federal tax laws or make any taxable_expenditures as defined in sec_4945 or corresponding provision of any subsequent federal tax laws you have requested the following rulings plr-115861-99 the annuity interest in the trust will be a guaranteed_annuity_interest within the meaning of sec_2522 and sec_25_2522_c_-3 of the gift_tax regulations and a gift_tax deduction will be allowed to taxpayer pursuant to sec_2522 equal to the present_value of the guaranteed annuity the trust will be allowed a deduction under sec_642 each taxable_year in an amount equal to the annuity amount_paid from the trust's gross_income except to the extent that the trust has unrelated_business_income under sec_681 and except to the extent that contributions are nondeductible under sec_508 or sec_4948 during the taxable_year in accordance with the terms of the trust no portion of the trust's income will be taxable to taxpayer under gift_tax ruling sec_2501 imposes for each calendar_year a tax on the transfer of property by gift during the calendar_year by any individual resident or nonresident sec_2522 provides that in computing taxable_gifts for the calendar_year there is allowed a deduction for all gifts to or for_the_use_of federal or other government entities for exclusively public purposes all gifts to or for_the_use_of a corporation or trust operated exclusively for religious charitable scientific literary or educational_purposes or certain transfers to fraternal or veterans organizations sec_2522 provides that where a donor transfers an interest in property other than an interest described in sec_170 to a person or for a use described in sec_2522 or b and an interest in the same property is retained by the donor or is transferred or has been transferred for less than an adequate_and_full_consideration in money_or_money's_worth from the donor to a person or for a use not described in sec_2522 or b no deduction is allowed for the interest that is or has been transferred to the person or for the use described in sec_2522 or b unless -- a in the case of a remainder_interest the interest is in a_trust that is a charitable_remainder_annuity_trust or a charitable_remainder_unitrust described in sec_664 or a pooled_income_fund described in sec_642 or b in the case of any other interest the interest is in the form of a guaranteed annuity or is a fixed percentage distributed yearly of the fair_market_value of the property to be determined yearly sec_25_2522_c_-3 provides that the term guaranteed_annuity_interest means an irrevocable right pursuant to the instrument of transfer to receive a guaranteed annuity a guaranteed annuity is an arrangement under which a plr-115861-99 determinable amount is paid periodically but not less often than annually for a specified term or for the life or lives of a named individual or individuals each of whom must be living at the date of the gift and can be ascertained at that date an amount is determinable if the exact amount that must be paid under the conditions specified in the instrument of transfer is ascertainable as of the date of the gift_for example the amount to be paid may be a stated sum for a term or for the life of an individual at the expiration of which it may be changed by a specified amount but it may not be redetermined by reference to a fluctuating index such as the cost of living index in further illustration the amount to be paid may be expressed as a fraction or percentage of the cost of living index on the date of the gift sec_25_2522_c_-3 provides that a charitable interest is a guaranteed_annuity_interest but only if it is a guaranteed_annuity_interest in every respect for example if the charitable interest is the right to receive from a_trust each year a payment equal to the lesser_of a sum certain or a fixed percentage of the net fair_market_value of the trust assets determined annually the interest is not a guaranteed_annuity_interest sec_25_2522_c_-3 provides that where a charitable interest in the form of guaranteed_annuity_interest is in trust and the present_value of all income interests for charitable purposes exceeds percent of the aggregate fair_market_value of all amounts in the trust after payment of liabilities the charitable interest will not be considered a guaranteed_annuity_interest unless the governing instrument of the trust prohibits both the acquisition and retention of the assets which would give rise to a tax under sec_4944 if the trust acquired such assets based on the information submitted and the representations made the annuity payable under the terms of the proposed trust satisfies the requirements of sec_25_2522_c_-3 and therefore will be a guaranteed annuity for purposes of sec_2522 accordingly we conclude that taxpayer will be entitled to a gift_tax deduction under sec_2522 based on the actuarial value of the guaranteed annuity payable to the charities from the trust determined under sec_25_2522_c_-3 income_tax rulings sec_642 provides the general_rule that in the case of an estate_or_trust other than a_trust meeting the specifications of subpart b there shall be allowed as a deduction in computing its taxable_income in lieu of the deduction allowed by sec_170 relating to deduction for charitable etc contributions and gifts any amount of the gross_income without limitation which pursuant to the terms of the governing instrument is during the taxable_year paid for a purpose specified in sec_170 determined without regard to sec_170 sec_642 provides that in the case of a_trust the deduction allowed by plr-115861-99 sec_642 shall be subject_to sec_681 relating to unrelated_business_income sec_681 provides that in computing the deduction allowable under sec_642 to a_trust no amount otherwise allowable under sec_642 shall be allowed as a deduction with respect to income of the taxable_year which is allocable to its unrelated_business_income for such year for purposes of the preceding sentence the term unrelated_business_income means an amount equal to the amount which if such trust were exempt from tax under sec_501 by reason of sec_501 would be computed as its unrelated_business_taxable_income under sec_512 relating to income derived from certain business activities and from certain property acquired with borrowed funds after applying the law to the facts submitted and the representations made we conclude that except to the extent that the trust has unrelated_business_income under sec_681 and except to the extent that contributions are nondeductible under sec_508 or sec_4948 the trust will be allowed deductions in accordance with sec_642 for amounts of gross_income paid to qualified charities during the taxable_year or by the close of the following taxable_year if the trustees make an election under sec_1 c - b because the deduction under sec_642 is limited to amounts of gross_income no deduction will be allowed for a distribution of principal except to the extent that the amount distributed has been included in the gross_income of the trust and provided no deduction was allowed for any previous taxable_year for the amount distributed as provided in sec_1_642_c_-1 sec_671 provides that where the grantor or another person is treated as the owner of any portion of a_trust there shall be included in computing the taxable_income and credits of the grantor or the other person those items of income deductions and credits against tax of the trust that are attributable to that portion of the trust to the extent that such items would be taken into account under chapter of the code in computing taxable_income or credits of an individual sec_673 through specify the circumstances under which the grantor or another person will be regarded as the owner of a portion of a_trust our examination of the trust agreement reveals none of the circumstances that would cause the taxpayer to be treated as the owner of any portion of the trust under sec_673 sec_674 sec_676 or sec_677 or would cause any other person to be treated as the owner under sec_678 under sec_675 and the applicable regulations the grantor of a_trust is treated as the owner of any portion of the trust if under the terms of the trust agreement or circumstances attendant on its operation administrative control is exercised primarily for the benefit of the grantor rather than the beneficiaries of the trust after applying the law to the facts submitted and representations made neither the taxpayer nor any other person will be treated as the owner of the trust or any portion thereof under sec_673 sec_674 sec_676 sec_677 or sec_678 our examination of the trust plr-115861-99 agreement reveals none of the circumstances that would cause administrative controls to be considered exercisable primarily for the benefit of the taxpayer under sec_675 however this is a question of fact the determination of which must be made by the appropriate district_director if the circumstances attendant to the operation of the trust do not require the taxpayer to be treated as the owner neither the taxpayer nor any other person will be treated as the owner of the trust a copy of this letter should be attached to any income or gift_tax returns that you may file relating to these matters 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 the 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 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under the cited provisions or any other provision of the code this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely assistant chief_counsel passthroughs and special industries by george masnik chief branch enclosure copy for purposes


internal_revenue_service significant index no department of the treasury waimagtha mkyomentacts partici pants person to contact talanhona numhar bele pay h ar date oct in re employer u l group this letter constitutes notice that with respect to the above-named money_purchase_pension_plan we have granted a conditional waiver of the minimum_funding_standard for the plan_year ending date your request for approval of a plan amendment that would have retroactively reduced benefits for the plan_year was previously lenied this conditional waiver for the plan_year ended date has been granted in accordance with sec_412 of the internal_revenue_code and sec_303 of the employee_retirement_income_security_act_of_1974 erisa required to reduce the balance in the funding_standard_account to zero as of the end of the plan_year for which this conditional waiver has been granted the waived amount is the contribution which would otherwise be the employer is part of a controlled_group controlled_group experienced net losses purchases of roup sales increased by percent however the group had a loss of million and working_capital went from positive dollar_figure million in to negative dollar_figure million in declined by percent the employer and two other companies in the controlled taking into account the remained positive but net wort in the in the group continued to have economic hardship by a net_loss of dollar_figure million on gross_sales of dollar_figure miltion group also had negative working_capital dollar_figure million remained positive but declined by percent from net_worth as evidenced the the employer has embarked on an ambitious cost cutting program including status of first three months of contributions other than those to amortize this waiver for however the recovery prospects are uncertain an reduction in the employer's staff the group has improved and the group had a net profit for the furthermore the plan was amended to cease the financial 3h oe because the recovery prospects are uncertain the waiver is granted subject_to the following conditions the contributions required to satisfy the minimum_funding_standard taking into account this waiver for the three plan years ended date-2002 are to be timely made as defined in code sec_412 the plan_sponsor adopts an amendment to reflect the waiver as described below if these conditions are not satisfied the waiver is retroactively you agreed to these conditions in a letter dated october nul and void _when a defined_contribution_plan receives a waiver of the minimum_funding requirements the plan in accordance with revrul_78_223 must be amended to reflect the waiver if the plan does not otherwise provide for such waiver section dollar_figure of revproc_83_41 provides that the applicant rul requesting a waiver need not submit an amendment designed to satisfy rev if no amendment is submitted the irs may issue a ruling letter granting a conditional funding waiver requiring the adoption of an amendment supplied by the irs accompanied your request we are granting the waiver subject_to your adoption of the enclosed adopted within a reasonable_time this waiver is null however if you disagree with our amendment or would like to modify it in any way we will consider any such request if such request is submitted in writing to us no later than days from the date of this such request would require a user_fee in accordance with rev letter proc i r b your letter should clearly state the exact changes you propose if that amendment is not because no amendment proposed amendment and void your attention is called to code sec_412 which describes the consequences which would result in the event the plan is amended to increase benefits change the rate in the accrual_of_benefits or to change the rate of vesting while any portion of the waived_funding_deficiency remains unamortized - this ruling is directed only to the taxpayer that requested it code sec_6110 provides that it may not be used or cited by others as precedent because we have granted a waiver of the minimum_funding_standard when filing form_5500 for the plan_year ending date schedule b actuarial information must be filed for line of form_5500 the schedule b actuarial information also be furnished to whoever will complete the schedule b a copy of this letter to the see the instructions a copy of this letter should be attached to a copy of this letter should we have sent for the sincerely t jpllinr p ames - holland jr manager employee_plans actuarial group tax_exempt_and_government_entities_division 3h attachment i v the employer if unable to satisfy the minimum_funding_standard for given plan_year may apply to the internal_revenue_service for a a waiver of the minimum_funding_standard following provisions apply if the waiver is granted the the valuation_date for a given plan_year is the last day of each plan_year an adjusted account balance shall be maintained for each plan participant whose actual account balance is less than or equal to his or her adjusted account balance a for the plan_year for which the first waiver is granted the adjusted account balance as of the valuation_date for each affected plan participant equals the participant's actual account balance ptus the amount that such participant would have received if the amount waived had been contributed b for each plan_year following the plan_year for which a waiver is granted the adjusted account balance of each participant affected by such waiver calculated as of the valuation_date for that year equals the adjusted account balance as of the valuation_date in the prior plan_year plus the amount equal to the actual investment return credited or charged to the participant's actual account balance plus the amount equal to over the participant's actual account balance calculated as of the same date plu sec_5 of the excess of the amount in the amount_equal to such participant's allocated share of the employer's required_contribution whether or not waived for the plan_year determined without regard to adjusted waiver payments and discretionary contributions minus - the amount of the participant's adjusted account balance forfeited during the plan_year under the plan's provisions for a given plan_year the employer is required to contribute a certain amount_in order to satisfy the minimum_funding which funding standard was granted the amount equals follows a plan_year for which a waiver of the minimum standard for such plan_year cal for each year plan e i pp r i the amount due in accordance with the plan's contribution formula without regard to this section plus the adjusted waiver amount the adjusted waiver amount for a given plan_year equals the sum of the amounts necessary to amortize each waived_funding_deficiency over a period of plan years plan years for waivers granted for plan years beginning prior to date measured from the valuation_date of the plan_year for which the corresponding waiver was granted at t interest compounded annually minus the sum of the amounts necessary to amortize the total of each year's forfeitures which have arisen since the first waiver was years plan years for forfeitures occurring in plan years beginning prior to date measured from the valuation_date of the plan_year in which the corresponding forfeitures arose at compounded annually granted over a period of plan interest an amount equal to the adjusted waiver amount must be contributed only until each actual account balance equals the adjusted account balance provides that employer contributions shal be reduced immediately by forfeitures is revoked until each participant's actual account balance equals that participant's adjusted account balance any plan provision which discretionary employer contributions which are in addition to the amounts contributed to satisfy the minimum_funding_standard can be made in any given plan_year however the total employer_contribution for the plan_year cannot exceed the then remaining underfunded amount the sum of the adjusted account balances minus the total plan assets the adjusted waiver payments discretionary contributions and forfeitures of actual account balances for the current plan_year shall be allocated as of that year's valuatdon date to the actual account balance of each affected plan participant each time a waiver is granted an original waiver amount cowa will be determined for each affected plan participant the amount which was waived the owa equals the participant's portion of on the valuation_date of a succeedin as of such valuation_date the owa equals the the commencing with the valuation_date of the plan_year for which a waiver is granted a remaining original waiver amount crowa must be calculated for each affected plan participant rowa lan rowa equals the prior plan year's rowa multiplied t minus the forfeiture of amounts in the prior year's rowa incurred in the current plan_year minus the allocation with respect to the owa for the current plan_year corresponding rowa will be established for each affected plan participant for each waiver that is granted one owa and a year by the sum of the adjusted waiver payments discretionary contributions and forfeitures of the actual account balances for a given plan_year are allocated to those participants who have rowa s by multiplying the sum of these three amounts by the fraction ci gi the numerator of which equals the sum of owa's for a particular participant and the denominator of which equals the sum of the owa's for all participants to determine the portion of this allocation which jis to assigned to a given rowa multiply the allocation by the corresponding owa then divide by the sum of the owa's for the particular participant be if the calculation of a rowa results in a value which is less than zero then the rowa is set equal to zero the corresponding owa is set equal to zero and the excess payments will be reallocated to the remaining rowa's a distribution is determined by multiplying a participant's vested percentage by his or her adjusted account balance however distributions from the plan may not exceed a participant's actual account balance if so limited plan participants shall receive subsequent distributions derived from future adjusted waiver payments b91 all_the amounts described in paragraph of this section shall first be applied to the actual account balance of the affected rank and file account balance for each participant is equal to his or her adjusted account balance as determined in paragraph participants until the actual t is the interest rate determined on the first day of the plan_year in accordance with sec_412 of the internal_revenue_code as in effect at the time the waiver was requested


department of the treasury yi internal_revenue_service p o box irs cincinnati oh release number release date date september employer id number contact person id number contact telephone number form you must file tax years uil dear this letter is our final_determination that you don’t qualify for tax-exempt status under sec_501 of the internal_revenue_code the code recently we sent you a proposed adverse determination in response to your application the proposed adverse determination explained the facts law and basis for our conclusion and it gave you days to file a protest because we didn’t receive a protest within the required days the proposed determination is now final you must file federal_income_tax returns for the tax years listed at the top of this letter using the required form also listed at the top of this letter within days of this letter unless you request an extension of time to file we’ll make this final adverse determination_letter and the proposed adverse determination_letter available for public inspection as required under sec_6110 of the code after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in the notice on how to notify us if you agree with our deletions you don’t need to take any further action if you have questions about this letter you can contact the person listed at the top of this letter if you have questions about your federal_income_tax status and responsibilities call our customer service number pincite-829-1040 tty for deaf or hard of hearing or customer service for businesses pincite-829-4933 letter rev catalog number 47635z sincerely stephen a martin director exempt_organizations rulings and agreements enclosures notice redacted letter proposed adverse determination under sec_501 other than c redacted letter final adverse determination under sec_501 other than c - no protest letter rev catalog number 47635z department of the treasury internal_revenue_service cincinnati oh legend t state u date of formation v brand w company dear date july employer id number contact person id number contact telephone number contact fax number uil we considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code the code based on the information provided we determined that you don’t qualify for exemption under sec_501 of the code this letter explains the basis for our conclusion please keep it for your records issues do you qualify for exemption under sec_501 of the code no for the reasons stated below facts you incorporated in the state of t on u your articles of incorporation state that your purpose is to advertise and promote the products and services of the dealers of a particular brand of vehicle v the v dealers are your members your articles also state that your general purposes are e e e e to foster and promote retail trade and commerce in connection with the products and services of your members and to protect the same from unjust and unlawful exactions and impositions to foster and promote the interest of those persons firms and corporations engaged in the retailing of v vehicles in the central t area to conduct and operate means and places of disseminating information relative to the use of motor vehicles and promote the sale of motor vehicles and for such purposes to establish conduct and manage advertising and promotional campaigns exhibitions displays tests trials and demonstrations and to promote the establishment and maintenance of a high standard of business ethics by your members and by all other automobile dealers and to discourage the use of false or misleading advertising or any other business practice which may be detrimental to the public and the retail automobile industry your bylaws state that you have one class of members your members are limited to those persons firms and corporations actively engaged in the retailing of new v brand vehicles who are duly authorized holders of sales and service agreements for w vehicles for the v brand in order to be eligible to become a member you must be doing business in or about central t your application additionally states that your members must be participating in w’s local marketing program and contributing funds to the program at a rate established by the board according to your application_for exemption your sole purpose is to advertise and promote the products and services of v dealers in central t who are your members your members all have a common business_interest of selling new and used v vehicles parts and service your board members consist of representatives from your member dealerships your application states that you are not operating for or conducting business intended to produce a profit of any kind but only to further the common business interests of your members your activities are intended to improve the business conditions of the v dealers in central t by promoting the common products and services offered which will in turn enhance the business viability of each of your members you provided a transcript of one of your advertisements the advertisement displays the awards v vehicles have won it also mentions the current offers available to consumers when purchasing a v vehicle at the end of the advertisement it instructs the audience to visit the v dealers located in central t your members contribute funds on a monthly basis to cover your cost of doing business upon dissolution your remaining assets will be distributed to the members on a prorated basis law sec_501 of the code provides exemption from federal_income_tax for business_leagues not organized for profit and no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_6_-1 defines a business league as an association having a common business_interest whose purpose is to promote the common business_interest and not to engage in a regular business of a kind ordinarily carried on for profit its activities are directed to the improvement of business conditions of one or more lines of business rather than the performance of particular services for individual members revrul_67_77 1967_1_cb_138 provides that an association of dealers which sold a particular make of automobile and that engaged in financing general advertising campaigns to promote the sale of that make was not exempt because it performed particular services for its members rather than promoting a line_of_business ie the automotive industry as a whole in national muffler dealers association inc organization that confines its membership to dealers franchised by a particular corporation and its activities to promoting the business interests of its members does not satisfy the line_of_business test of sec_1_501_c_6_-1 and is not a business league under sec_501 of the code v united_states 440_us_472 the court held that a trade in 667_fsupp_250 d c md the court held that an organization which served the needs of users of a specific brand of computers promoted only a segment of a line_of_business and was not exempt under sec_501 of the code the court concluded that the existence of an organization whose activities center on the needs of users of one particular product is indeed a useful sales tool in persuading potential customers to buy that particular computer brand and the manufacturer of that computer brand gains a competitive advantage over other computer manufacturers through such an organization letter rev catalog number 47628k in 948_f2d_360 7th cir the court concluded that an association of computer users did not qualify for exemption under sec_501 of the code because it benefited essentially users of ibm equipment the court stated that the organization also served as an influential marketing tool for ibm because the conferences it held allowed ibm to showcase its products and services application of law you are not a business league as described in sec_501 of the code and sec_1_501_c_6_-1 because your activities do not improve the business conditions of one or more lines of business rather you provide advertising services to your members you are nearly identical to the organization described in revrul_67_77 your advertising services further the business interests of your members your activities do not benefit the entire auto industry or improve the business conditions of the auto industry as a whole precluding you from exemption under sec_501 of the code like national muffler dealers association inc national prime users group inc and guide international corporation your membership consists of dealers of v a particular brand v dealers only represent a segment of the industry and not an entire line_of_business therefore you do not qualify from exemption under sec_501 of the code conclusion your activities are not directed to the improvement of business conditions of one or more lines of business you are performing services for your members who are dealers of a particular brand of vehicle by providing advertising on their behalf therefore you do not qualify for exemption under sec_501 of the code if you don’t agree you have a right to file a protest if you don’t agree with our proposed adverse determination to do so you must send a statement to us within days of the date of this letter the statement must include e e e e e e your name address employer_identification_number ein and a daytime phone number acopy of this letter highlighting the findings you disagree with anexplanation of why you disagree including any supporting documents the law or authority if any you are relying on the signature of an officer director trustee or other official who is authorized to sign for the organization or your authorized representative one of the following declarations for an officer director trustee or other official who is authorized to sign for the organization under penalties of perjury i declare that i examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete letter rev catalog number 47628k for authorized representatives under penalties of perjury i declare that i prepared this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete your representative attorney certified_public_accountant or other individual enrolled to practice_before_the_irs must file a form_2848 power_of_attorney and declaration of representative with us if he or she hasn’t already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney we’ll review your protest statement and decide if you provided a basis for us to reconsider our determination if so we’ll continue to process your case considering the information you provided if you haven’t provided a basis for reconsideration we'll forward your case to the office of appeals and notify you you can find more information about the role of the appeals_office in publication how to appeal an irs decision on tax- exempt status if you don’t file a protest within days you can’t seek a declaratory_judgment in court at a later date because the law requires that you use the irs administrative process first sec_7428 of the code where to send your protest please send your protest statement form_2848 if needed and any supporting documents to the applicable address u s mail street address for delivery service internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you can also fax your statement and supporting documents to the fax number listed at the top of this letter if you fax your statement please contact the person listed at the top of this letter to confirm that he or she received it if you agree if you agree with our proposed adverse determination you don’t need to do anything if we don’t hear from you within days we’ll issue a final adverse determination_letter that letter will provide information on your income_tax filing_requirements letter rev catalog number 47628k you can find all forms and publications mentioned in this letter on our website at www irs gov formspubs if you have questions you can contact the person listed at the top of this letter sincerely stephen a martin director exempt_organizations rulings and agreements enclosure publication letter rev catalog number 47628k


internal_revenue_service number release date index number ---------------------------------- ------------- ------------------------------- ----------------------------- ------------------------------------------- legend department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ----------------------- id no ------------------- --------------------------------------------------- telephone number ---------------------- refer reply to cc ita b04 plr-112628-15 date october taxpayer ---------------------------------------------------- ----------------------------------- corporation ----------------------------------------------------------- ---------------------------------------------------- ----------------------------------- date date buyer state --------------------------- ------------------------ ---------------------------------- -------------- dear ------------------------------ this responds to your request for a ruling under sec_1202 of the internal_revenue_code dated date the ruling contained in this letter is 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 taxpayer represents the facts to be as follows on date corporation was formed and issued common_stock to eight stockholders including the taxpayer the initial stockholders on date pursuant to an agreement buyer purchased a portion of the corporation stock owned by each initial stockholder also pursuant to that agreement corporation redeemed a portion of each initial stockholder’s corporation stock together the transaction thus immediately after plr-112628-15 the transaction buyer and initial stockholders owned all the stock of corporation immediately following the transaction corporation converted into an llc pursuant to state law corporation elected to continue to be taxed as a corporation for federal_income_tax purposes taxpayer makes the following additional representations as of the date corporation satisfied the requirements of sec_1202 upon the receipt of corporation stock on date taxpayer held qualified_small_business_stock under sec_1202 taxpayer’s corporation stock retained after the transaction continued to be the conversion of corporation into an llc pursuant to state law qualifies as sec_1202 stock and a sec_368 reorganization sec_1202 provides that gross_income does not include percent of any gain from the sale_or_exchange of qualified_small_business_stock held for more than years sec_1202 provides the definition of qualified_small_business_stock sec_1202 provides that certain transfers of qualified_small_business_stock will not be treated as a sale_or_exchange or affect the qualification of that stock as qualified_small_business_stock sec_1202 provides that r ules similar to the rules of sec_1244 shall apply for purposes of this section sec_1244 provides in part that a successor_corporation in a reorganization described in sec_368 shall be treated as the same corporation as its predecessor sec_368 provides that a corporate_reorganization includes a mere change in identity form or place of organization of one corporation however effected therefore based on the facts and representations submitted we rule that the status of the original issue common_stock of corporation as qualified_small_business_corporation_stock held by the initial stockholders if the stock is qualified_small_business_stock under sec_1202 is unaffected by the conversion 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 specifically no opinion is expressed or implied concerning i the qualification of corporation under sec_1202 ii the qualification of corporation’s stock as qualified_small_business_stock under sec_1202 or iii whether the conversion qualifies as a sec_368 reorganization plr-112628-15 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely j peter baumgarten assistant to the chief branch income_tax accounting


internal_revenue_service number release date index number ---------------------- ---------------------------- ---------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc psi b03 plr-151828-06 date date ------------------------------- ---------------------- x ------------------------------------------ taxpayer ----------------------------------------------------- country d1 d2 dear --------------- -------------------------- -------------------------- ----------------- we received a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representative requesting a ruling under sec_301_9100-3 of the procedure and administration regulations that x be granted an extension of time to file an election to be classified as a disregarded_entity under sec_301_7701-3 this letter responds to that request facts on d1 taxpayer formed x as a limited_liability_company under the laws of country taxpayer intended that x be treated as a disregarded_entity for federal tax purposes effective d2 however due to inadvertence x failed to file a timely form_8832 entity classification election law plr-151828-06 sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 sec_301_7701-3 provides that except as provided in sec_301_7701-3 unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides that except as provided in sec_301_7701-3 and v an eligible_entity may elect to be classified other than as provided in sec_301_7701-3 or to change its classification by filing form_8832 entity classification election with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301 c i will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed sec_301_9100-1 provides that the term regulatory election means an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 provides that the commissioner in exercising the commissioner’s discretion may 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 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_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 sets forth the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government plr-151828-06 conclusion based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file form_8832 with the appropriate service_center and to elect to be classified as a disregarded_entity for federal tax purposes effective d2 a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose except as expressly set forth above we express or imply no opinion concerning the federal tax consequences of the facts discussed above under any other provision of the code furthermore we express or imply no opinion concerning the application of any u s income_tax treaty 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 a power_of_attorney on file with this office we are sending a copy of this letter to x’s authorized representative s sincerely william p o'shea associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c no united_states tax_court scott c and sherry l russon petitioners v commissioner of internal revenue respondent docket no filed date p a funeral director is a full-time_employee of russon brothers mortuary a c_corporation all the stock of which was owned by his father and two uncles in p his brother and two cousins all funeral director employees of russon brothers agreed to purchase all the stock from their fathers so that the sons could conduct the mortuary business and earn a living continuing the business founded and developed by their fathers p incurred indebtedness in order to purchase his share of the stock at issue is whether interest_paid on that indebtedness is deductible as business_interest or whether deductibility is subject_to the investment_interest limitations of sec_163 i r c as modified by the revenue act of publaw_99_514 100_stat_2085 pursuant to sec_163 i r c the amount allowable as a deduction for investment_interest may not exceed the taxpayer's investment_income sometimes known as portfolio_income investment_interest is defined in sec_163 i r c as interest_paid on indebtedness properly allocable to property_held_for_investment a term that is defined in sec_163 i r c to include property which produces income of a type described in sec_469 ie portfolio_income such as dividends interest etc held since stock is the type of property that normally pays dividends it is covered by sec_163 i r c as property which produces income of a type described in sec_469 i r c notwithstanding that in this case no dividends have in fact been paid in the past on russon brothers stock accordingly interest_paid by p on indebtedness incurred to purchase the stock is subject_to the limitations of sec_163 i r c j michael gottfredson for petitioners james b ausenbaugh and mark h howard for respondent opinion raum judge the commissioner determined deficiencies in petitioners' federal income taxes of dollar_figure dollar_figure and dollar_figure for the taxable years and respectively petitioner husband petitioner or scott together with his brother and two cousins all employed full time as funeral directors in a mortuary operated by a c_corporation purchased all the stock of that corporation from its owners their fathers so that they could conduct the mortuary business full time and earn a living at issue is whether interest_paid on an indebtedness incurred by petitioner to purchase his share of the stock is deductible as business_interest or is subject_to the investment_interest limitations of sec_163 as modified by the revenue act of publaw_99_514 100_stat_2085 unless otherwise indicated all section references are to the internal_revenue_code in effect for the tax years involved petitioners resided in centerville utah when the petition in this case was filed petitioner is an employee of russon brothers mortuary russon brothers a utah corporation that was organized as a c_corporation in and continues as such to the present petitioner began full-time employment with russon brothers in date as a funeral director and has continued full time with russon brothers to the present on date scott his brother brent c russon and two cousins robert l russon and d gary russon agreed to buy all the stock in russon brothers from scott and brent's father milton w russon robert's father leo w russon and gary's father dale l russon milton leo and dale are brothers each of whom owned one-third of the stock of russon brothers scott brent robert and gary agreed to pay their fathers dollar_figure for the stock in russon brothers each son to pay one-fourth of the purchase_price payable ten percent down and the balance payable in equal monthly payments with interest at nine percent on the remaining balance the agreement gave the four buyers the right to exercise the ownership rights which shall include the right to all the dividends from the stock except as limited by the agreement one of the limitations provided that until the full purchase_price was paid the buyers could not declare or pay any dividends or make any distributions relating to the stock without written permission of the sellers the fathers scott brent robert and gary all were funeral directors at the time of the purchase they were trained and taught the mortuary business at russon brothers they qualified themselves to operate the mortuary business through schooling and while working at russon brothers on date russon brothers as the company scott brent robert and gary as buying shareholders and milton leo and dale as selling shareholders entered into a stock purchase agreement on date milton leo dale brent and gary were elected directors of russon brothers the new directors then elected robert as president brent as vice president and scott as secretary-treasurer of russon brothers at the time the stock was purchased milton and leo retired from russon brothers dale continued as a full-time_employee for a few months in order to receive his maximum social_security_benefits allowable to him for retirement at age scott brent robert and gary purchased the russon brothers stock from their fathers so that they could manage operate conduct and participate full time in the mortuary business and earn a living continuing a business started and developed by their fathers scott did not have a substantial investment motive when he purchased the stock milton dale and leo sold the russon brothers stock to scott brent robert and gary so the four sons of the three fathers could actively continue the mortuary business all the assets of russon brothers except for a mutual_fund acquired by the company in for dollar_figure with a value of dollar_figure are used actively in the mortuary business the checking account of russon brothers has an average balance of dollar_figure with cash available of dollar_figure and is all actively used in the mortuary business russon brothers has never paid interest dividends annuities or royalties to any of its shareholders during its existence of years beginning before date and continuing through all years involved in the tax matter before the court scott brent robert and gary actively and materially participated in russon brothers as an active mortuary business on a regular continuous and substantial basis in excess of hours per week scott brent robert and gary have never been engaged in the trading or dealing of stocks or securities sec_163 allows as a deduction all interest_paid or accrued within the taxable_year on indebtedness however sec_163 provides that in the case of a taxpayer other than a corporation the amount allowed as a deduction under this chapter for investment_interest for any taxable_year shall not exceed the net_investment_income of the taxpayer for the taxable_year sec_163 defines investment_interest as any interest allowable as a deduction under this chapter which is paid on indebtedness properly allocable to property_held_for_investment sec_163 defines property_held_for_investment as follows a in general the term property_held_for_investment shall include-- i any property which produces income of a type described in sec_469 and ii any interest held by a taxpayer in an activity involving the conduct of a trade or business-- i which is not a passive_activity and ii with respect to which the taxpayer does not materially participate c terms --for purposes of this paragraph the terms activity passive_activity and materially participate have the meanings given such terms by sec_469 the income described in sec_469 includes interest dividends annuities or royalties not derived in the ordinary course of a trade_or_business sometimes known as portfolio_income the dispute in this case revolves around whether the russon brothers stock is property_held_for_investment respondent has stipulated that petitioner materially participates in russon brothers and concedes that sec_163 does not apply to petitioner however since stock is generally productive of dividends the commissioner contends that the stock here is covered by sec_163 notwithstanding that the russon brothers stock has in fact never paid a dividend accordingly the argument continues the russon brothers stock is property_held_for_investment and as such petitioners' deduction for the interest is limited to their investment_income if this case were to be decided under the code as it existed prior to enactment of the tax_reform_act_of_1986 publaw_99_514 100_stat_2085 petitioners might be entitled to prevail under prior_law the term investment_interest was defined as interest_paid or accrued on indebtedness incurred or continued to purchase or carry property_held_for_investment sec_163 at that time the phrase property_held_for_investment had not been defined in the code or the regulations 91_tc_874 to determine whether interest should be subject_to the limitations of then sec_163 the tax_court looked to whether the taxpayer the version of sec_163 provides in general --in the case of a taxpayer other than a corporation the amount of investment_interest otherwise allowable as a deduction under this chapter shall be limited in the following order to-- a dollar_figure dollar_figure in the case of a separate_return by a married individual plus b the amount of the net_investment_income by which the deductions allowable under this had a substantial investment intent 70_tc_448 whether the taxpayer had the requisite intent was a question of fact id pincite the parties in this case stipulated that petitioner did not have a substantial investment motive when he purchased the stock prior to the tax_reform_act_of_1986 he would likely have prevailed the tax_reform_act_of_1986 broadened the definition of investment_interest sec_511 of the act defines property_held_for_investment to include any property which produces income of a type described in sec_469 100_stat_2245 the definition applies uniformly to every taxpayer his mindset is irrelevant as a result the reach of the definition under the act is more inclusive petitioners contend that the phrase property which produces income in sec_163 is limited to property which has actually produced one of the types of income described in sec_469 however the government's position here is supported by the legislative_history in the report of the senate_finance_committee accompanying sec_469 portfolio_income includes gain_or_loss attributable to disposition of section and sec_162 sec_164 or or attributable to property of the taxpayer subject_to a net_lease exceeds the rental income produced by such property for the taxable_year in the case of a_trust the dollar_figure amount specified in subparagraph a shall be zero property that is held for investment and that is not a passive_activity and property that normally produces interest dividend or royalty income s rept pincite c b vol emphasis added this committee report runs counter to petitioners' assertions as set forth in their brief that stock must produce a dividend before it is property_held_for_investment the report indicates that congress did not require the payment of interest dividends etc sec_163 refers to sec_469 for one definition of property_held_for_investment inasmuch as portfolio_income under sec_469 includes property that normally produces interest dividends etc it follows that the reference to sec_469 in sec_163 would also include property which normally produces dividends certainly stock is the kind of property that normally produces dividends would petitioners' position be different here if the corporation had paid only a very small dividend over the years moreover on the record in this case the possibility of dividends being paid was clearly contemplated by the buyers and sellers of the stock indeed the agreement of sale of the stock explicitly recognized that the purchasers would be entitled to all of the dividends from the stock subject only to the written consent of the sellers prior to the payment in full of the purchase_price that condition is not at all to be regarded as uncommon where there is a sale of all the stock of a corporation further it should be remembered that although the sale may be treated as having been made at arm's length nevertheless the sellers were the fathers of the purchasers and at least in some circumstances it would seem more likely that their consent would not be withheld than in the case of strangers petitioners contend that the purpose of the new provisions supports the allowance of the claimed deduction in their case to be sure the legislative_history of the act does disclose that congress was concerned with plugging a loophole that had permitted taxpayers to take deductions against their earned_income by reason of interest_expenses losses etc attributable to tax_shelters and other arrangements not related to the taxpayer's trade_or_business see h rept pincite c b vol and petitioners' rely upon a statement of the staff of the joint_committee on taxation explaining the reason for the new provisions as follows under prior_law leveraged investment_property was subject_to an interest limitation for the purpose of preventing taxpayers from sheltering or reducing tax on other non-investment income by means of the unrelated interest_deduction congress concluded that the interest limitation should be strengthened so as to reduce the mismeasurement of income which can result from the deduction of investment_interest expense in excess of current investment_income and from deduction of current investment_expenses with respect to investment_property on which appreciation has not been recognized staff of joint comm on taxation general explanation of the tax_reform_act_of_1986 pincite j comm print emphasis added petitioners call attention to the fact that in this case there would be no mismeasurement of income which can result from the deduction of investment_interest expense in excess of current investment_income however there are at least several answers to petitioners' point in the first place as has been stressed earlier in this opinion the statutory language was intended by congress as shown in the report of the senate_finance_committee to cover property that normally produces interest dividends or royalty income s rept supra c b vol pincite emphasis added and in this case the property involved stock is of a type that normally produces dividends in the second place as pointed out by judge friendly in 399_f2d_390 2d cir a legislature seeking to catch a particular abuse may find it necessary to cast a wider net further petitioners fail to consider the fact that russon brothers is a c_corporation if russon brothers were an s_corporation or a partnership it appears that scott as an active manager would be entitled to deduct the interest without limitation on the debt incurred to purchase the stock as a direct owner of the business however as a c_corporation russon brothers is a separate taxpaying entity distinguishable from its owners cf eg 319_us_436 russon brothers owns the mortuary business not scott and his fellow stockholders scott is an employee of the mortuary business as a result he is not entitled to deduct the interest on the debt incurred to purchase the russon brothers stock as trade_or_business interest the result that we reach is in accord with revrul_93_68 1993_2_cb_72 which considers a case virtually identical with this case the revenue_ruling explained its reasoning as follows because stock generally produces dividend income it is property_held_for_investment within the meaning of sec_163 and sec_469 of the code unless the dividends are derived in the ordinary course of a trade_or_business in this case any dividends_paid by x a c_corporation would not be derived by a an employee and purchaser of stock in x in the course of a trade_or_business because a is neither a dealer nor a trader in stock_or_securities thus the x stock purchased by a is property_held_for_investment pursuant to sec_163 regardless of a's motives for purchasing or holding that stock emphasis added revrul_93_68 c b pincite although we are by no means bound by the revenue_ruling we think its reasoning is correct and we have independently reached the same result here sec_163 contains two objective tests for property_held_for_investment we have concluded that petitioner's stock in russon brothers satisfies the first test under sec_163 it is therefore unnecessary to consider the second test in subparagraph a ii although it would seem and the government concedes that the second test does not apply here decision will be entered for respondent