internal_revenue_service department of the treasury number release date index no 7520-dollar_figure p o box ben franklin station washington dc person to contact telephone number refer reply to cc psi - plr-112401-02 date december re legend date taxpayer trust agreement bank company corporation w date court date exercise of special_power_of_appointment foundation x y z state dear this is in response to a letter dated date and prior correspondence submitted on behalf of the taxpayer requesting rulings regarding the proposed termination of a charitable_remainder_unitrust plr-112401-02 facts the facts submitted and representations made are as follows on date taxpayer executed trust agreement establishing a charitable_remainder_unitrust trust with taxpayer as trustee and bank as independent special trustee the independent special trustee acts alone in performing such specified tasks as determining the value of a difficult to value asset in administering trust and making investment decisions regarding that asset trust was funded with the stock of company which was an entity that the taxpayer owned and sold shortly after transferring w shares into the trust on date court issued order reforming trust under the terms of trust agreement as reformed during his life taxpayer receives a unitrust_amount equal to percent of the net fair_market_value of the assets of trust valued as of the first day of each taxable_year and payable quarterly on the last day of each quarter trust income in excess of the unitrust_amount is added to principal at taxpayer’s death subject_to a retained power in taxpayer the trustee is to distribute the remaining trust assets in specified amounts to three designated charities if any of these charities is not then an organization described in sec_170 sec_2055 and sec_2522 of the internal_revenue_code the trustee must distribute the trust assets to one or more organizations that are so described as the trustee selects taxpayer retained the right to change the charitable_remainder beneficiaries as follows donor retains the right by acknowledged written instrument to change the charitable remaindermen by adding new charitable organizations and or omitting certain charitable organizations or by altering the share one or more charitable organizations is to receive the retained right to change charitable remaindermen shall be exercised by donor if at all while donor is living provided that the charitable_organization s designated by the donor satisfy sec_170 sec_2055 and sec_2522 of the code at the time when any principal or income of the unitrust is to be distributed to such charitable_organization s on date taxpayer executed exercise of special_power_of_appointment designating foundation as the sole remainder beneficiary of trust the exercise provides that if foundation is not an organization described in sec_170 sec_2055 and sec_2522 at the time when any principal or income is to be distributed to foundation then trustee in its sole discretion shall select one or more other charitable organizations foundation is classified as an organization described in sec_501 and plr-112401-02 is a private_foundation within the meaning of sec_509 taxpayer and taxpayer’s wife are trustees of foundation trust currently holds assets valued at dollar_figurex which are comprised of dollar_figurey of marketable_securities and dollar_figurez of value remaining in a patent on items developed by the company the patent was transferred as part of the sale of the company to corporation taxpayer and foundation have determined that it is in each of their respective best interests to have trust terminated and the assets distributed trust will petition court to request an order terminating trust and stating the date of termination value of the assets to be distributed to taxpayer and foundation it is represented that applicable state law allows the early termination of trust and that the consent of the attorney_general of state is not required however it is represented that when the petition is filed with court the attorney_general of state and the secretary of state will be given notice of the hearing upon its termination trust proposes to distribute to taxpayer as the income_beneficiary and to foundation as the remainder beneficiary lump sums equal to the present_value of their respective interests on the date of termination trust represents that the values will be determined using the discount rate in effect under sec_7520 on the date of termination and using the methodology under sec_1_664-4 of the income_tax regulations for valuing interests in charitable_remainder trusts it is represented that taxpayer’s last physical was in date and that there was no indication he would have any condition that would cause his life expectancy to be less than the average person of his age law and analysis sec_664 provides that the amounts distributed by a charitable_remainder_trust to the beneficiary of the annuity or unitrust payment are characterized in the hands of the recipient first as ordinary_income second as capital_gain third as other income and fourth as trust corpus both current and prior undistributed amounts from a tier must be exhausted before distributions are deemed to be made from the next tier sec_664 provides rules to determine the character of the annual unitrust amounts distributed by a charitable_remainder_unitrust to the unitrust beneficiary any regular unitrust_amount distributed to a beneficiary prior to the termination of the trust will have the characteristics in the hands of the beneficiary determined under sec_664 however money and property received by a beneficiary upon the termination of a_trust do not represent a distribution of an annual unitrust_amount therefore sec_664 is plr-112401-02 inapplicable to this amount rather the beneficiary is disposing of his interest in the trust in exchange for money and property in a transaction that is governed by sec_1001 sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain sec_1001 provides that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of any property received sec_1001 provides that the entire amount of the gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1001 provides that in determining gain_or_loss from the sale_or_other_disposition of a term_interest_in_property that portion of the adjusted_basis of such interest which is determined pursuant to sec_1015 to the extent that such adjusted_basis is a portion of the entire adjusted_basis of the property shall be disregarded under sec_1001 a term_interest_in_property includes an income_interest in a_trust sec_1001 provides that the general_rule of sec_1001 does not apply to a sale_or_other_disposition which is a part of a transaction in which the entire_interest in property is transferred to any person or persons sec_1015 provides that if property was acquired after date by a transfer in trust other than by a transfer in trust by a gift bequest or devise the basis shall be the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on such transfer sec_1_1001-1 of the income_tax regulations provides that for purposes of determining the gain_or_loss from the sale_or_other_disposition of a term_interest_in_property a taxpayer shall not take into account that portion of the adjusted_basis of such interest which is determined pursuant to sec_1015 relating to the basis_of_property acquired by gift or by a transfer in trust to the extent that such adjusted_basis is a portion of the adjusted uniform basis of the entire property as defined in sec_1_1014-5 sec_1_1014-5 defines the term adjusted uniform basis as the uniform basis of the entire property adjusted as required by sec_1016 and sec_1017 to the date of sale_or_other_disposition of any interest in the property sec_1_1015-1 provides that property acquired by gift has a single or uniform basis although more than one person may acquire an interest in such property the uniform basis of the property remains fixed subject_to proper adjustment for items under sec_1016 and sec_1017 however the value of the proportionate parts of the uniform basis represented for instance by the respective interests of the life_tenant and plr-112401-02 remainderman are adjustable to reflect the change in the relative values of such interest on account of the lapse of time the portion of the basis attributable to an interest at the time of its sale_or_other_disposition shall be determined under the rule provided in sec_1_1014-5 in determining gain_or_loss from the sale_or_other_disposition after date of a term_interest_in_property as defined in sec_1_1001-1 the adjusted_basis of which is determined pursuant or by reference to sec_1015 that part of the adjusted uniform basis assignable under the rules of sec_1_1014-5 to the interest sold or otherwise_disposed_of shall be disregarded to the extent and in the same manner provided by sec_1001 and sec_1_1001-1 see also sec_1_1015-2 regarding transfers in trust revrul_72_243 1972_1_cb_233 provides that the sale of an income_interest in a_trust is a sale of a capital_asset within the meaning of sec_1221 see 157_f2d_235 2d cir sec_4941 imposes an excise_tax on each act of self-dealing between a disqualified_person and a private_foundation sec_4941 provides that the term self-dealing means any direct or indirect transfer to or the use by or for the benefit of a disqualified_person of the income or assets of a private_foundation sec_4946 provides the term disqualified_person with respect to a private_foundation includes a substantial_contributor to the foundation including the creator of a_trust a family_member of a substantial_contributor including children and a foundation_manager including a trustee sec_4946 together with sec_4946 define the term disqualified_person to include a spouse of a substantial_contributor among others sec_4947 provides generally that split-interest_trusts are subject_to the provisions of sec_507 sec_4941 and sec_4945 in the same manner as if such trusts were private_foundations but under sec_4947 not with respect to any amounts payable under the terms of such trust to income beneficiaries unless a deduction was allowed under sec_170 sec_2055 or sec_2522 sec_53_4947-1 of the foundation and similar excise_taxes regulations provides that under sec_4947 sec_4941 does not apply to any amounts payable under the terms of a split-interest trust to income beneficiaries unless a deduction was allowed under sec_170 sec_2055 or sec_2522 with respect to the income_interest of any such beneficiary as a charitable_remainder_unitrust under sec_664 trust is a split-interest trust described in sec_4947 and is therefore subject_to sec_4941 which imposes an excise_tax on acts of self-dealing taxpayer is a disqualified_person with respect to trust plr-112401-02 under sec_4946 because he is a substantial_contributor to trust and is a trustee because trust is a split-interest trust it is treated as a private_foundation under sec_4947 the critical question is whether early termination may be expected to result in a greater allocation of trust’s assets to the income_beneficiary to the detriment of the charitable_beneficiary foundation than would a termination at taxpayer’s death as provided under trust agreement taxpayer’s proposed allocation method is reasonable if the income_beneficiary has no knowledge of a medical_condition or other circumstance likely to result in a shorter life expectancy than that predicted by the actuarial_tables otherwise an early termination would tend to deprive foundation of its benefit and would be inconsistent with the charitable deduction allowed to taxpayer accordingly we conclude as follows taxpayer is selling his interest in trust to the remainderman provided that the money and other_property received by taxpayer are distributed to taxpayer in accordance with his interest in trust the amount taxpayer will realize from the sale of his interest in trust is the amount of money and the fair_market_value of the property received by taxpayer pursuant to sec_1001 the portion of the adjusted uniform basis assigned to taxpayer's interest in trust is disregarded the exception contained in sec_1001 is not applicable because the entire_interest in trust’s assets is not being sold or otherwise_disposed_of to a third party accordingly taxpayer will be treated as though he has no basis in his interest in trust and therefore taxpayer will realize gain under sec_1001 in the amount received from the disposition of his interest in trust the amounts taxpayer receives are subject_to taxation as long-term_capital_gain we further conclude that no direct or indirect act of self-dealing within the meaning of sec_4941 will result from the termination of trust and the distribution of the assets of trust to taxpayer and foundation the above conclusions are based on the assumptions that state law allows the early termination all beneficiaries favor the early termination the amounts distributed to taxpayer and foundation are determined and distributed pursuant to the rules set forth in sec_1_664-4 and sec_7520 and taxpayer has signed an affidavit under penalties of perjury that he is aware of no medical_condition expected to result in a shorter-than- average longevity except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code plr-112401-02 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours senior counsel branch lorraine e gardner office of associate chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes


internal_revenue_service number info 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 b01 genin-165670-04 date march dear ------------ this is in response to your letter dated date in which you requested advice regarding sec_301_7701-3 of the procedure and administration regulations sec_301_7701-2 defines a business_entity as any entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the code 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 this section sec_301_7701-3 provides that except as otherwise provided in paragraph b of that section unless the entity elects otherwise a domestic eligible_entity is i a partnership if it has two or more members or ii disregarded as an entity separate from its owners if it has a single owner sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided in sec_301 b by filing form_8832 entity classification election with the service_center designated on form_8832 a sole_proprietor cannot elect to be treated as an association a sole_proprietor is not an entity recognized for federal tax purposes and therefore is not a business_entity as defined in sec_301_7701-2 because a sole_proprietor is not a business_entity it cannot be an eligible_entity as defined in sec_301_7701-3 pursua nt to sec_301_7701-3 only eligible entities can make an entity classification election because a sole_proprietor is not an eligible_entity it cannot make an entity classification election we hope that this information is helpful to you if you have additional questions please contact -------------- at --------------------- not a toll-free call genin-165670-04 s dianna k miosi sincerely dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries


t c summary opinion united_states tax_court cynthia susan ruhl and jonathan b klinck petitioners v commissioner of internal revenue respondent docket no 14569-09s filed date cynthia susan ruhl and jonathan b klinck pro sese kevin w coy for respondent gerber judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the year under consideration this opinion shall not be treated as precedent for any other case respondent determined a dollar_figure income_tax deficiency for petitioners’ tax_year the parties now agree that the statutory deficiency is dollar_figure petitioners disagree with respondent’s computation of the amount of their deficiency in payment we must decide whether we have jurisdiction in this case to consider the amount if any of tax due background petitioners resided in california when their petition was filed pursuant to an extension they timely filed their joint federal_income_tax return return on date by a correspondence_audit respondent examined petitioners’ return and on date mailed petitioners a notice of proposed changes the proposed changes resulted in a dollar_figure increase in tax for which was to be reduced by an amount previously paid of dollar_figure resulting in dollar_figure of tax due without considering interest in a notice_of_deficiency deficiency_notice respondent determined that there was a dollar_figure deficiency in petitioners’ federal_income_tax the deficiency_notice did not reference or give petitioners credit for the dollar_figure amount previously paid that was explained in the date notice of proposed changes on their return petitioners reported an income_tax_liability of dollar_figure which included dollar_figure of alternative_minimum_tax amt petitioners also reported that they were liable for a dollar_figure addition_to_tax under sec_6654 for failure to pay estimated_tax petitioners reported dollar_figure in payments attributable to as follows tax withholding application of overpayment estimated_tax payments paid with extension to file return total payments dollar_figure big_number big_number big_number big_number the net result of their reporting dollar_figure in payments and dollar_figure in tax and the addition_to_tax dollar_figure dollar_figure was a claimed overpayment of dollar_figure which petitioners requested be applied toward their estimated_tax liability respondent’s accounts agree with petitioners’ reported payments with the exception of the dollar_figure application of the overpayment instead of the dollar_figure from the year respondent’s accounts reflected an overpayment of dollar_figure or dollar_figure less resulting in dollar_figure in total payments and ultimately resulting in a dollar_figure overpayment to be credited by respondent to petitioners’ estimated payments when petitioners’ return was processed at the internal_revenue_service fresno service_center respondent reduced the dollar_figure of amt reported by petitioners to dollar_figure a difference of dollar_figure the dollar_figure decrease in amt resulted in respondent’s reducing petitioners’ claimed dollar_figure overpayment by approximately dollar_figure to dollar_figure instead of reducing it by the dollar_figure difference in payments between petitioners and respondent the parties now agree that respondent’s reduction of petitioners’ amt was in error and that respondent should have assessed the dollar_figure of tax petitioners originally reported the parties’ disagreement focuses solely upon the dollar_figure difference in payments the dollar_figure difference derives from a somewhat complex computation of the amount of overpayment that should have been applied from petitioners’ tax_year which in turn concerns applications of other overpayment credits petitioners directed the application of a dollar_figure overpayment for as an estimated payment on their income_tax year subsequently in a date notice respondent notified petitioners that dollar_figure2 of their overpayment was being applied to an outstanding tax liability3 for their tax_year petitioners disagreed with respondent’s application of the dollar_figure as being in contravention of their direction and claimed the entire dollar_figure overpayment from as a prepayment on their 2the small difference between the dollar_figure and the dollar_figure that is in dispute is attributable to an unrelated adjustment about which there is no disagreement 3petitioners do not agree that they had an outstanding income_tax_liability respondent countered that the period for seeking a refund of the offset has expired income_tax return conversely respondent applied a credit of only dollar_figure dollar_figure - dollar_figure from for use as a payment in after petitioners’ return was audited respondent on date sent petitioners an initial notice of adjustments the notice contained the following two noncomputational proposed increases to income nonemployee compensation of dollar_figure and interest_income of dollar_figure the adjustments according to respondent’s computation resulted in a dollar_figure income_tax deficiency along with dollar_figure of interest for a total amount due of dollar_figure in response to the date notice petitioners on date sent a letter to respondent along with a form 1040x amended u s individual_income_tax_return petitioners included the dollar_figure of nonemployee compensation in income and deducted dollar_figure in expenses connected with the income for a net increase in income of dollar_figure petitioners also explained that they had included the dollar_figure of interest on their original return and they did not include it again on their form 1040x for petitioners also submitted a dollar_figure payment with their form 1040x to pay the self-reported deficiency of dollar_figure plus interest respondent did not process or formally accept petitioners’ form 1040x and instead on date mailed petitioners a notice of proposed changes that would result in a dollar_figure income_tax deficiency and proposed to allow petitioners a dollar_figure credit for their payment so that the amount due including dollar_figure in interest was dollar_figure on date respondent issued a notice_of_deficiency in which he determined a deficiency of dollar_figure after issuing the deficiency_notice respondent admitted that the dollar_figure deficiency was incorrect and reduced the deficiency by dollar_figure to dollar_figure the reduction is attributable to the allowance of expenses against the dollar_figure of nonemployee compensation discussion the question we consider is a simple one although the underlying factual predicate is complex ultimately the question posed by petitioners is whether respondent was entitled to disregard their explicit instructions to credit their entire overpayment as a prepayment for and in turn a prepayment for if petitioners’ request had been honored they would have no tax due for if on the other hand respondent was entitled to ignore petitioners’ request then petitioners are liable for the dollar_figure unpaid portion of the dollar_figure deficiency we begin by considering the definition of a deficiency under sec_6211 a deficiency is the amount by which the tax imposed exceeds the excess of the sum of the amount shown as tax by the taxpayer upon the return plus the amounts previously assessed or collected without assessment as a deficiency over the amount of rebates made this definition has been described as the statutory deficiency the parties do not disagree about the amount of the statutory deficiency see supra p respondent argues that this court’s jurisdiction is limited to redetermining the amount of the income_tax deficiency and that the court has no authority to consider any payment credits in connection with the determination of the statutory deficiency petitioners believe that the court has jurisdiction to consider any aspect of the tax_year including the composition or amount of credits that may affect the amount of the statutory deficiency that remains unpaid petitioners’ and respondent’s arguments are in some respects generally correct before this court’s authorization to hear collection matters the credits payments and collection-related matters were without this court’s statutory jurisdiction with the enactment of sec_6320 and sec_6330 this court acquired jurisdiction to hear collection matters where the commissioner issues certain notices and taxpayers file petitions seeking review of the commissioner’s proposed collection action unfortunately for petitioners the predicate for collection consideration is an administrative collection proceeding a notice_of_determination and a petition to this court with respect to the notice_of_determination we also agree with petitioners that it may be inefficient to require two separate proceedings to resolve the deficiency determination and collection aspects for the same taxable_year in many collection proceedings it is first necessary to decide the amount of any deficiency before collection issues can arise in this case however the subject of the collection-related dispute arose before the deficiency determination irrespective of that distinction congress has not empowered this court to consider petitioners’ collection matters in this deficiency proceeding to reflect the foregoing decision will be entered for respondent in the amount of the agreed deficiency 4we note however that sec_301_6402-3 proced admin regs in accord with sec_6402 authorizes the commissioner to override a taxpayer’s instructions to apply overpayments or credits and to apply them against any outstanding liability for any_tax accordingly it is questionable whether petitioners would be successful in pursuing respondent’s decision to override their overpayment directions on their federal_income_tax return


significant index no ow department of the treasury u a internal_revenue_service washington dc tax exempt and see on tes sep t ep rat al re dear this letter constitutes notice that your request for a waiver of the minimum_funding_standard for the plan for the plan_year ending december subject_to the following conditions has been granted beginning with the required quarterly contribution due on date for the plan_year ending date the company makes the required quarterly contributions due on date date date date date and date ina timely manner and the company makes sufficient contributions to meet the minimum_funding_standard for the plan for the plan years ending date and date by date and date respectively without applying for a waiver of the minimum_funding_standard your authorized representative agreed to these conditions in a letter dated date if any one of the conditions is not met the waiver for the plan_year ending december is retroactively null and void this conditional waiver has been granted in accordance with sec_412 of the internal_revenue_code code and sec_303 of the employee_retirement_income_security_act_of_1974 erisa the amount for which this conditional waiver has been granted is equal to the contribution that would otherwise be required to reduce the balance in the funding_standard_account to zero as of date 20u the company is a manufacturer of replacement propellers for recreational boats in the united_states the company manufactures a wide-range of custom-crafted marine propellers from small inboard and fixed-pitch propellers to a complete line of aluminum and steel propellers for outboard and stern-drive applications the current business hardship was brought on starting in by competition in the replacement propeller market from asia these inexpensive imported propellers were being sold at prices below the company’s cost for manufacturing its propellers as a result the company lost a significant market share in the replacement propeller industry furthermore the plan’s minimum_funding_standard increased from to the foreign competition coupled with a general downturn in the marine industry itself and increased pension costs led to a decline in the company’s sales which in turn had a negative impact on the company’s cash_flow the company is confident that its long-term prospects are good it has taken steps to reduce costs by streamlining its manufacturing and operations and the company has also taken steps to restructure its workforce the company has introduced its product to new foreign markets expanded its product lines and negotiated a new contract with a division of a major corporation furthermore the company’s shareholder-owners contributed dollar_figure million of additional equity in to finance operations and effect a business turnaround these steps have already had an impact on the company’s financial position from to the company increased sales by and reduced losses by nearly dollar_figure million furthermore its cash_flow nearly doubled market analysts also predict a significant upturn for the marine industry starting in it is obvious from the financial information provided by the company that it has experienced a substantial business hardship the company suffered significant financial losses from through furthermore the significant increase in pension costs for the plan since has strained the company’s financial resources the company’s financial situation seems to have turned around somewhat during furthermore the company has resumed funding the plan for the plan_year ending december date and date these facts indicate that the company’s hardship is temporary however because the plan is only on a current_liability basis and the prospects for the company's recovery are uncertain the request for a waiver of the minimum_funding_standard for the plan for the plan_year ending december has been granted subject_to the conditions described above by making the required quarterly contributions that were due on your attention is called to sec_412 of the code and sec_304 of erisa which describe the consequences that 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 20vu751034 please note that any amendment to a profit sharing plan or any other retirement plans covering employees covered by the plan maintained by the company to increase the liabilities of those plans would be considered an amendment for purposes of sec_412 of the code and sec_304 of erisa similarly the establishment of a new profit sharing plan or any other retirement_plan by the company covering employees covered by the plan would be considered an amendment for purposes of sec_412 of the code and sec_304 of erisa this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent when filing form_5500 for the plan_year ending december the date of this letter should be entered on schedule b actuarial information for this reason we suggest that you furnish a copy of this letter to the enrolled_actuary who is responsible for the completion of the schedule b we have sent a copy of this letter to the and to your authorized representative pursuant to a power_of_attorney on file in this office if you require further assistance in this matter please contact ' at sincerely yours x donna m prestia manager actuarial group


internal_revenue_service number release date index number -------------------------- ---------------- ---------------------------------------------------- ----------------------------- --------------- ----------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ----------------- ----------------------------------------------------- telephone number ---------------------- refer reply to cc corp b03 plr-135052-12 date february legend distributing ------------------------------------------------------------ -------------------------------------------------------------------- --------------------------------- controlled ------------------------------------------------------------ -------------------------------------------------------------------- ----------------------------------------------- sub ------------------------------------------------------------ -------------------------------------------------------------------- -------------------------------------- sub ------------------------------------------------------------ -------------------------------------------------------------------- ------------------------------------ llc --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- ---------------------------------- llc ------------------------------------------------------------ ------------------------------------------------------------------------------------- ---------------------------------- business a business b ------------------------------------ ------------------------- plr-135052-12 business c ----------------------------------- b properties ---------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------- shareholder a shareholder b state a investment bank date date date date date date date date date a b c d e f ------------------------------------------------------------ ------------------------------------ -------------- ----------------------- ---------------------- -------------------- ------------------- ---------------------- ------------------------ ------------------------ ------------------------ ------------------------ -------------------------- ---- ---- ---- ------ ----- ------------------- plr-135052-12 g h i j k l ----------------- ----------------- ----- -------------- ---- ------- dear -------------- this letter responds to your date request for rulings on certain federal_income_tax consequences of a series of proposed transactions the proposed transactions the information provided in that request and in later correspondence is summarized below the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination in particular this office has not reviewed any information pertaining to and has made no determination regarding whether the distribution described below i satisfies the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii is used principally as a device for the distribution of the earnings_and_profits of a distributing_corporation or a controlled_corporation or both see sec_355 of the internal_revenue_code and sec_1_355-2 or iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in any distributing_corporation or any controlled_corporation see sec_355 and sec_1_355-7 summary of facts distributing is the common parent of a group of corporations the includible affiliates of which join in filing a consolidated_return for federal_income_tax purposes distributing is engaged through its direct and indirect domestic and foreign subsidiaries partnerships and limited_liability companies llcs the distributing group in business a plr-135052-12 business b and business c the outstanding capital stock of distributing consists of a single class of common_stock based on publicly available securities information only shareholder a and shareholder b held five percent or more of the common_stock on date the remaining shares of distributing are widely held and publicly traded distributing issues restricted_stock distributing restricted shares to its non-employee directors until the time of the controlled ipo distributing a state a corporation owned all the stock of sub a state a corporation and controlled a state a corporation newly formed to facilitate the proposed transactions and all of the outstanding interests in llc a state a limited_liability_company disregarded as separate from distributing for federal tax purposes under sec_301_7701-3 of the procedure and administration regulations distributing owns directly and indirectly the stock of and interests in numerous other entities that conduct the businesses of distributing distributing llc1 and certain other entities in the distributing group are engaged in business a following the distribution described below these entities will all belong to the distributing separate_affiliated_group sag as defined in sec_355 the distributing sag sub wholly owns sub a state a corporation and also owns directly and indirectly all the stock of and interests in several other corporations partnerships and llcs collectively the sub subgroup the sub subgroup is engaged in business b following the distribution these entities will all belong to the controlled sag financial information has been submitted indicating that business a conducted by the distributing sag and business b to be conducted by the controlled sag following the contribution each has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years llc owns all of the interests in llc a state a llc treated as a corporation for federal tax purposes llc owns directly and indirectly all the stock of and interests in several corporations partnerships and llcs the llc subgroup the llc subgroup is engaged in business c distributing announced on date that it has entered into a definitive agreement to sell llc and business c the sale of llc and business c should not have any effect on the proposed transactions’ qualification under sec_355 the distribution will separate business b from business a to a resolve capital allocation issues between business a and business b b enhance the value of the stock of distributing and controlled and thereby i facilitate future strategic acquisitions by controlled using its stock as acquisition currency and ii increase the long-term effectiveness of equity-linked incentive compensation programs for the employees of each business and c resolve management operational and other business issues plr-135052-12 caused by the operation of these businesses within the same affiliated_group a b and c together the corporate business purposes proposed transactions to achieve the corporate business purposes distributing has proposed and partially undertaken the following series of transactions i ii iii on date distributing organized controlled under state a law on date sub issued several intercompany notes in the aggregate principal_amount of f dollars to distributing the sub notes and the note distribution the sub notes had terms ranging from a months to b months and bore a market rate of interest on date controlled filed an amended and restated certificate of incorporation with the state of state a controlled authorized two classes of common_stock the controlled high-vote common_stock and the controlled low-vote common_stock each share of controlled high-vote common_stock is identical to each share of controlled low-vote common_stock except for voting rights and conversion regarding voting rights each share of controlled high-vote common_stock entitles its holder to e votes on all matters submitted to a vote of the stockholders while each share of controlled low-vote common_stock entitles its holder to d votes per share regarding conversion the controlled high-vote common_stock may be electively or automatically converted under certain circumstances to controlled low-vote common_stock in particular any member of the distributing group has the right to convert all or a portion of any controlled high-vote common_stock held by it into controlled low-vote common_stock at any time before the distribution in step xi any conversion of all of distributing’s controlled high-vote common_stock a complete pre- distribution high-vote conversion distributing may not transfer controlled high-vote common_stock outside the distributing group except to distributing’s shareholders in the distribution at which time the conversion features of the controlled high-vote common_stock will cease to apply the controlled low-vote common_stock is not convertible into controlled high-vote common_stock or any other security in addition at any time before the distribution controlled subject_to distributing’s consent and the satisfaction of certain other requirements may elect to reduce the number of votes per share of the controlled high-vote common_stock for either or both of a the election of directors or b all matters other than the election of directors to the minimum number of whole votes per share but not less than one required to preserve distributing’s plr-135052-12 control of controlled as defined in sec_368 sec_368 control and a vote reduction election the dual-vote capitalization ensured that distributing would have sec_368 control of controlled after the controlled ipo in step viii and that distributing would have sec_368 control before the distribution in step x iv v vi on date distributing transferred to sub in non-taxable transactions the b properties related to business b on date sub transferred to llc in taxable transactions certain intellectual_property related to business c the ip and the ip distribution on date distributing contributed all of the sub stock to controlled in exchange for controlled high-vote common_stock the contribution the resulting group of entities is referred to as the controlled_group vii on date controlled borrowed g dollars from unrelated third parties under new senior secured credit facilities such amount less fees and expenses the cash proceeds these credit facilities consist of a i year revolving credit facility and two term loans of varying maturities provided by a syndicate of financial institutions viii as a result of an initial_public_offering on date and related funding on date controlled issued j shares for h dollars to public investors in exchange for cash the controlled ipo and such amount less fees and expenses the ipo proceeds following the controlled ipo public investors owned all of the outstanding controlled low-vote common_stock the public investor stock if prevailing capital market conditions and other factors are favorable controlled may undertake additional public offerings of its controlled low-vote common_stock together the aggregate controlled offerings in addition distributing may convert a portion of its controlled high-vote common_stock into controlled low-vote common_stock to effect a follow-on offering any such offering may take the form of an equity for debt exchange s similar to the equity for debt exchange s described in steps xiii and xiv in no event will a the public investor stock resulting from the aggregate controlled offerings b any controlled common_stock not distributed by distributing in the distribution the retained shares and c the shares in the restricted_stock distribution defined below together represent more than ---- percent of the outstanding controlled common_stock by voting power ix immediately after the closing of the controlled ipo on date controlled contributed f dollars of the cash proceeds and ipo proceeds together the combined proceeds to sub and sub transferred the combined plr-135052-12 x xi proceeds plus the then-accrued interest on the sub notes to distributing in full satisfaction of the sub notes at the time of its payment the sub notes had been outstanding for k days payment had previously been authorized by the boards of directors of both controlled and sub immediately after receipt distributing used the combined proceeds to pay down existing third-party debt distributing historical debt before the distribution in step xi controlled intends through a vote reduction election to reduce to d votes per share the number of votes per share of the controlled high-vote common_stock for all matters other than the election of directors in addition controlled intends to reduce the number of votes to which each share of controlled high-vote common_stock is entitled in the election of directors of controlled to the lowest whole number that is less than e but not less than d that is necessary to preserve sec_368 control in the distribution distributing intends to distribute sufficient controlled common_stock whether controlled high-vote common_stock controlled low-vote common_stock or a combination of the two to ensure the distribution of at least ---- percent of the voting power of controlled common_stock to its shareholders pro_rata the distribution holders of distributing restricted shares who are directors of controlled at the time of the distribution will exchange such shares for controlled restricted shares having similar terms the restricted_stock distribution if at the time of the distribution the controlled high-vote common_stock that distributing intends to distribute in the distribution represents more than ---- percent of the total number of outstanding shares of controlled common_stock distributing may effect a complete pre-distribution high-vote conversion alternatively if the controlled high-vote common_stock that distributing intends to distribute in the distribution does not represent more than ---- percent of the total number of outstanding shares of controlled common_stock distributing may elect to convert some of its shares of controlled high-vote common_stock to controlled low-vote common_stock such that the controlled high-vote common_stock and the controlled low-vote common_stock that distributing intends to distribute in the distribution satisfies sec_368 control no fractional shares of controlled common_stock will be distributed in the distribution instead all fractional shares of controlled common_stock that distributing shareholders otherwise would be entitled to receive will be aggregated by a transfer agent and as soon as practicable following the effective time of the distribution will be sold at the prevailing price on the new york stock exchange any distributing shareholder entitled to receive a fractional share of the controlled common_stock will be entitled to receive a cash payment in an amount equal to the shareholder’s proportionate interest in the net_proceeds from the open market sales any retained shares which upon the distribution shall plr-135052-12 xii automatically convert into controlled low-vote common_stock may be used to effect the equity for debt exchange s described in step xiii if any complete pre-distribution high-vote conversion or other conversion has not eliminated the controlled high-vote common_stock it is expected that following consummation of the distribution and in connection with the consideration of resolutions to be submitted to the controlled shareholders at the next regularly scheduled annual shareholders’ meeting of controlled or at a special shareholders’ meeting of controlled the controlled board_of directors the controlled board may consider a proposal to convert the controlled high-vote common_stock to controlled low-vote common_stock on a share-for-share basis subject_to the approval of the controlled shareholders by a majority of the aggregate number of outstanding shares of controlled high-vote common_stock and controlled low-vote common_stock voting together as a single class with one vote per share the post- distribution high-vote conversion there will be no binding commitment by the controlled board to and there can be no assurance that the controlled board will consider the issue or resolve to present the proposal to the controlled shareholders at that meeting or any subsequent meeting moreover there can be no assurance that if presented the controlled shareholders will approve the post-distribution high-vote conversion xiii not later than c months following the distribution distributing may issue short-term debt the distributing short-term debt to one or more investment banks investment bank in exchange for cash this step xiii may occur earlier in the sequence of proposed transactions steps including before the distribution not earlier than five days following the issuance of the distributing short-term debt distributing and investment bank acting as principal for its own account will enter into an exchange_agreement the exchange_agreement pursuant to which distributing will transfer an amount of the retained shares up to and including all of the retained shares in one or more transactions to investment bank in repayment of the distributing short-term debt the equity for debt exchange s it is expected that immediately after the receipt of retained shares investment bank will sell the retained shares to unrelated third parties in a public or private offering in this regard investment bank may solicit orders but not binding agreements from third parties before entering into the exchange_agreement and engaging in the equity for debt exchange s investment bank may enter into other arrangements respecting the distributing short-term debt including hedging arrangements provided neither distributing nor any member of its affiliated_group is a party to the arrangements to the extent requested by investment bank the exchange_agreement will also grant to investment bank the option to acquire additional controlled plr-135052-12 common_stock from distributing in exchange for the distributing short-term debt to cover any over-allotment of controlled common_stock the over- allotment option in the event the over-allotment option is exercised by investment bank the exchange of controlled common_stock for distributing short-term debt pursuant to the over-allotment option will close approximately l business days after the date of exercise any distributing short-term debt exchanged by investment bank for controlled common_stock pursuant to the over-allotment option will have been held by investment bank for at least days subject_to applicable waiver provisions xiv not earlier than days following issuance of the distributing short-term debt distributing and investment bank will complete the equity for debt exchange s this step xiv may occur earlier in the sequence of proposed transactions steps if the issuance of distributing short-term debt in step xiii occurs earlier in the sequence any portion of the distributing short-term debt that remains outstanding after completion of the equity for debt exchange s will be repaid by distributing in cash at its maturity xv as soon as practicable following the equity for debt exchange s unless it they occur s before the distribution distributing will dispose_of any remaining retained shares by distribution sale or other exchange the retained shares disposition once the distribution and any retained shares disposition are concluded the separation of business b from business a will be complete except for the continuing agreements described below in connection with the proposed transactions the distributing group and the controlled_group have entered into a variety of agreements collectively the continuing agreements including a separation agreement a tax_matters_agreement an employee matters agreement transitional agreements including a transition services agreement and certain commercial agreements including manufacturing supply sales distribution transition sales and intellectual_property agreements indemnification provisions in the separation and tax matters agreements are together referred to as the contingent_liability arrangements representations the contribution and distribution distributing has made the following representations for the proposed transactions a any indebtedness owed by controlled or any entity controlled directly or indirectly by controlled to distributing or any entity controlled directly or plr-135052-12 indirectly by distributing after the distribution will not constitute stock_or_securities b except for the restricted_stock distribution no part of the consideration distributed by distributing in the distribution will be received by any shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing in no event will the restricted_stock distribution combined with the retained shares and stock issued in the aggregate controlled offerings represent more than ---- percent of the voting power for directors of the controlled common_stock restricted or unrestricted immediately before the distribution c no shareholder of distributing will surrender distributing stock in the distribution except for the restricted_stock distribution d distributing and controlled each will treat all members of its sag as defined in sec_355 as one corporation in determining whether the requirements of sec_355 regarding the active_conduct_of_a_trade_or_business are satisfied e the five years of financial information submitted for business a conducted by the distributing sag and for business b to be conducted by the controlled sag following the contribution is representative of the present operations of each business and there have been no substantial operational changes in either business since the date of the last financial statements submitted f neither business a conducted by the distributing sag nor control of an entity conducting this business will have been acquired during the five-year period ending on the date of the distribution in a transaction in which gain_or_loss was recognized or treated as recognized in whole or in part except in connection with expansions of business a see sec_1_355-3 g neither business b to be conducted by the controlled sag following the contribution nor control of an entity conducting this business will have been acquired during the five-year period ending on the date of the distribution in a transaction in which gain_or_loss was recognized or treated as recognized in whole or in part except in connection with expansions of business b see sec_1_355-3 h apart from transitional and administrative support services that are being provided under the continuing agreements the distributing sag will continue the active_conduct of business a independently and with its separate employees following the distribution plr-135052-12 i apart from transitional and administrative support services that are being provided under the continuing agreements the controlled sag will continue the active_conduct of business b independently and with its separate employees following the distribution j the distribution will be carried out to accomplish the corporate business purposes the distribution is motivated in whole or substantial part by the corporate business purposes k the distribution will not be used principally as a device for the distribution of the earnings_and_profits of controlled or distributing or both l there is no plan or intention to liquidate any member of the distributing sag engaged in business a or any member of the controlled sag engaged in business b to merge any member of either sag with any other entity or to sell or otherwise dispose_of the assets or shares of any member after the distribution except for transactions in the ordinary course of business and the anticipated sale of llc and business c m the total adjusted_basis of the assets transferred to controlled in the contribution exceeded the sum of i the total liabilities assumed as determined under sec_357 by controlled and ii the total amount of any money and the fair_market_value of any other_property within the meaning of sec_361 received by distributing from controlled and transferred to distributing’s creditors in connection with the reorganization n any liabilities assumed as determined under sec_357 by controlled in the contribution were incurred in the ordinary course of business and are associated with the assets transferred o the total fair_market_value of the assets transferred to controlled in the contribution exceeded the sum of i the amount of any liabilities assumed as determined under sec_357 by controlled in connection with the contribution ii the amount of any liabilities owed to controlled by distributing that were discharged or extinguished in connection with the contribution and iii the amount of any cash and the fair_market_value of any other_property other than stock and securities permitted to be received under sec_361 without the recognition of gain received by distributing in connection with the contribution the fair_market_value of the assets of controlled exceeded the amount of its liabilities immediately after the contribution p the aggregate fair_market_value of the assets distributing transferred to controlled in the contribution exceeded the aggregate adjusted_basis of those assets plr-135052-12 q no investment_tax_credit determined under sec_46 has been or will be claimed for any property that was transferred by distributing to controlled in the contribution r no two parties to the distribution are investment companies as defined in sec_368 and iv s immediately before the distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and -14 as in effect before the publication of t d 1995_2_cb_147 and as currently in effect sec_1 as published in t d further any excess_loss_account that distributing has in the controlled common_stock or the stock of any direct or indirect subsidiary of controlled will be included in income immediately before the distribution to the extent required by regulations see sec_1_1502-19 at the time of the distribution distributing will not have an excess_loss_account in the stock of controlled or the stock of any direct or indirect subsidiary of controlled t apart from debt arising in connection with the proposed transactions and intercompany loans or other obligations that have arisen or will arise in the ordinary course of business no intercorporate debt will exist between controlled or any entity controlled directly or indirectly by controlled and distributing or any entity controlled directly or indirectly by distributing at the time of or after the distribution u apart from certain payments made under the tax_matters_agreement the employee matters agreement and or the transitional agreements payments made in connection with all continuing transactions between controlled or any entity controlled directly or indirectly by controlled and distributing or any entity controlled directly or indirectly by distributing will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length v for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing ---- percent or more of the total combined voting power for directors of all classes of distributing stock entitled to vote or ---- percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution w for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing ---- percent or plr-135052-12 more of the total combined voting power for directors of all classes of controlled common_stock entitled to vote or ---- percent or more of the total value of shares of all classes of controlled common_stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution or ii attributable to distributions on distributing stock_or_securities that were acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution x the distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a -----percent or greater interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of either corporation y immediately after the transaction as defined in sec_355 i no person will hold a -----percent or greater interest within the meaning of sec_355 in distributing or controlled ii if any person holds a -----percent or greater interest within the meaning of sec_355 in any disqualified_investment_corporation within the meaning of sec_355 such person will have held such interest in such corporation either directly or through attribution immediately before the distribution or iii neither distributing nor controlled will be a disqualified_investment_corporation within the meaning of sec_355 z distributing will hold the retained shares if any following the distribution to provide flexibility in further reducing indebtedness of distributing including in the equity for debt exchanges s aa distributing will transfer the retained shares if any to investment bank in the equity for debt exchange s no later than c months following the distribution any retained shares not transferred to investment bank in the equity for debt exchange s will be distributed in the retained shares disposition as soon as commercially practicable but in no event later than five years after the distribution bb after the distribution distributing will vote the retained shares if any in proportion to votes cast by the other controlled shareholders and will grant controlled a proxy for the retained shares requiring this manner of voting cc in the event a retained shares disposition is necessary from the date of the distribution until the date distributing has disposed of all retained shares no director or officer of distributing or any of its subsidiaries will be a director or officer of controlled or any of its subsidiaries plr-135052-12 dd controlled has no legally binding obligation to any person to consider or present to the controlled shareholders a proposal to convert the controlled high-vote common_stock to controlled low-vote common_stock following the distribution ee if a proposal to convert the controlled high-vote common_stock to controlled low-vote common_stock is approved by the controlled board and presented to the controlled shareholders its adoption will require the approval of a majority of the aggregate number of outstanding controlled high-vote shares and controlled low-vote shares voting together as a single class with d votes per share ff the aggregate amount of distributing historical debt and distributing short- term debt repaid with the retained shares will not exceed the weighted quarterly average of distributing third-party debt for the 12-month_period ending on the close of business on date gg the receipt by distributing shareholders of cash in lieu of fractional shares of controlled common_stock resulting from the open market sale of these shares will be solely for the purpose of avoiding the expense and inconvenience to controlled of issuing fractional shares and does not represent separately bargained-for consideration it is intended that the total cash consideration received by the shareholders of distributing from the open market sale of their fractional shares will not exceed ------ percent of the total consideration that will be distributed in the distribution it is also intended that no distributing shareholder will receive cash in an amount equal to or greater than the value of one full share of controlled common_stock neither controlled nor distributing is aware of any overall plan within the meaning of sec_355 to acquire an ownership_interest in controlled through the purchase of bundled controlled shares sold in connection with the issuance of cash in lieu of fractional shares rulings the contribution and internal distribution the ip distribution and the note distribution each will be a distribution within the meaning of sec_301 sub will recognize gain if any as if it had sold the ip to distributing at its fair_market_value sec_311 the contribution followed by the distribution will qualify as a reorganization under sec_368 distributing and controlled each will be a_party_to_a_reorganization within the meaning of sec_368 plr-135052-12 no gain_or_loss will be recognized by distributing on the contribution sec_361 and sec_357 no gain_or_loss will be recognized by controlled on the contribution sec_1032 the basis of each asset received by controlled in the contribution will equal the basis of that asset in the hands of distributing immediately before the contribution sec_362 the holding_period of each asset received by controlled in the contribution will include the period during which distributing held that asset sec_1223 no gain_or_loss will be recognized by distributing on the distribution sec_361 no gain_or_loss will be recognized by distributing on the equity for debt exchange s sec_361 no gain_or_loss will be recognized by distributing on the retained shares disposition to the extent it takes the form of a distribution should it occur sec_361 no gain_or_loss will be recognized by and no amount will be included in the income of the distributing shareholders on the distribution sec_355 no gain_or_loss will be recognized by the distributing shareholders on the retained shares disposition to the extent it takes the form of a distribution should it occur sec_355 the basis of the distributing stock and controlled common_stock in the hands of each distributing shareholder immediately after the distribution including any fractional share interest in controlled common_stock to which the shareholder may be entitled will equal the basis of the distributing stock held by such distributing shareholder immediately before the distribution allocated between the stock of distributing and controlled in proportion to the fair_market_value of each in accordance with sec_1_358-2 sec_358 and c if a distributing shareholder that purchased or acquired shares of distributing stock on different dates or at different prices is not able to identify which particular share of controlled common_stock or portion thereof is received with respect to a particular share of distributing stock or portion thereof the shareholder may designate which share of controlled common_stock is received with respect to a particular share of distributing stock provided the terms of the designation are consistent with the terms of the distribution sec_1 a vii plr-135052-12 should the retained shares disposition occur and take the form of a distribution immediately after such distribution a distributing shareholder who receives retained shares will have an adjusted_basis in its distributing stock controlled common_stock excluding the retained shares but including any fractional share interest in controlled common_stock to which the shareholder may be entitled in the distribution and retained shares equal to the adjusted_basis of the distributing stock held by such distributing shareholder immediately before the distribution allocated among the distributing stock controlled common_stock excluding the retained shares but including any fractional share interest in controlled common_stock to which the shareholder may be entitled in the distribution and retained shares in proportion to the fair_market_value of each immediately following the distribution in accordance with sec_1 a iv sec_358 and c if a distributing shareholder that purchased or acquired shares of distributing stock on different dates or at different prices is not able to identify which particular share of controlled common_stock or portion thereof is received with respect to a particular share of distributing stock or portion thereof the shareholder may designate which share of controlled common_stock is received with respect to a particular share of distributing stock provided the terms of the designation are consistent with the terms of the distribution sec_1_358-2 the holding_period of the controlled common_stock received by each distributing shareholder in the distribution including any fractional share interest in controlled common_stock to which the shareholder may be entitled will include the holding_period of the distributing stock on which the distribution is made provided the distributing stock is held by the distributing shareholder as a capital_asset on the date of the distribution sec_1223 should the retained shares disposition occur and take the form of a distribution the holding_period of the controlled common_stock received by a distributing shareholder in the retained shares disposition including any fractional share interest in the retained shares to which the shareholder may be entitled will include the holding_period of the distributing stock as it existed on the date of the distribution on which the retained shares disposition is made provided the distributing stock was held by the distributing shareholder as a capital_asset on the date of the distribution sec_1223 earnings_and_profits if any will be allocated between distributing and controlled in accordance with sec_312 and sec_1_312-10 and sec_1_1502-33 any payments between distributing and controlled that are made following the distribution pursuant to the contingent_liability arrangements regarding obligations that i have arisen or will arise for a taxable_period ending on or plr-135052-12 before the distribution or for a taxable_period beginning before but ending after the distribution and ii will not have become fixed or ascertainable until after the distribution will be treated as occurring immediately before the distribution cf 344_us_6 73_sct_71 97_led_6 1952_2_cb_136 revrul_83_73 c b following the distribution controlled will not be a successor of distributing for purposes of sec_1504 therefore controlled and its direct and indirect subsidiaries that are includible corporations under sec_1504 and satisfy the ownership requirements of sec_1504 will be members of an affiliated_group_of_corporations entitled to file a consolidated federal_income_tax return with controlled as the common parent the retention of the retained shares is not in pursuance of a plan having as one of its principal purposes the avoidance of federal_income_tax within the meaning of sec_355 effecting the post-distribution high-vote conversion will not prevent the distribution from qualifying under sec_355 whether the conversion occurs before or after distributing disposes of the retained shares the receipt by a distributing shareholder of cash in lieu of fractional shares of controlled common_stock will be treated for federal_income_tax purposes as if the fractional shares had been distributed to the distributing shareholder as part of the distribution and then had been disposed of by the shareholder for the cash in a sale_or_exchange the gain_or_loss if any determined using the basis allocated to the fractional shares in ruling or and the holding_period attributed to the fractional shares in ruling or will be treated as a capital_gain or loss provided the stock was held as a capital_asset by the selling shareholder sec_1001 caveats no opinion is expressed about the tax treatment of the proposed transactions under other provisions of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transactions that are not specifically covered by the above rulings in particular no opinion is expressed regarding i whether the distribution satisfies the business_purpose requirement of sec_1_355-2 plr-135052-12 ii whether the distribution is used principally as a device for the distribution of earnings_and_profits of distributing or controlled or both see sec_355 and sec_1_355-2 iii whether the distribution and an acquisition or acquisitions are part of a plan or series of related transactions under sec_355 and iv the tax treatment of any payment made under the continuing agreements that is not for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length procedural matters 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 temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling will be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in the letter_ruling see section dollar_figure of revproc_2013_1 2013_1_irb_1 however when the criteria in section dollar_figure of revproc_2013_1 2013_1_irb_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely gerald b fleming senior technician reviewer branch office of associate chief_counsel corporate cc


internal_revenue_service number release date index number ---------------------------- ----------------- ------------------------- in re -------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi b04 plr-117362-06 date january legend legend settlor trust ---------------------------------------------------------------------------------------- ----------------- ----------------------------------------------------------------------------- child a child b child c a b c corporate trustee child a_trust --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------ --------------------------------------------------- ----------------------- ----------------------- -------------------------------------- ------------------- ------------------- --------------- ------------------------------------------------------ ------------------------------------------------------------------------------ child b_trust --------------------------------------------------------------------------------------------------------------------- ---------------------------- ----------------------------------------------------------------------------- child c trust ----------------------------------------------------------------------------------------------------------------- ---------------------------- ----------------------------------------------------------------------------- date date date date state court ----------------------------------------------- ----------------------- -------------------- ---------------------- ------------------------- ------------- ---------------------------------------------------------------- plr-117362-06 dear --------------- this is in response to the date letter and other correspondence requesting rulings on the income gift and generation-skipping_transfer_tax consequences of the proposed modification and partition of the trust on date prior to date settlor irrevocably created the trust for the benefit of his three children child a child b and child c and their descendants on date also prior to date trust was amended with the consent of settlor the then current trustees and the trust beneficiaries child a child b and child c child a and a an individual were originally designated as the trustees settlor died on date child a child b and child c are currently living each has children and grandchildren article provides that during the trust term the trustees may in their sole and the pertinent provisions of the trust are as follows article provides that during the trust term the trustees may in their sole and absolute discretion make distributions of trust income and or principal to or for the benefit of settlor’s children as the trustees deem necessary and or advisable for their care support maintenance welfare medical and emergency needs discretionary distributions shall be made from time to time and at any time in such amounts and manner as the trustees in the exercise of their sole discretion determine best absolute discretion make distributions of trust income and or principal to or for the benefit of settlor’s grandchildren as the trustees deem necessary or advisable discretionary distributions shall be made from time to time and at any time in such amounts and manner as the trustees in the exercise of their sole discretion shall determine best article provides that on the death of the last survivor of settlor’s children the trust will be divided into separate and equal trust shares the number of shares being determined by the number of deceased children of settlor who are survived by lineal_descendants each such trust share will be held and administered for the benefit of the respective child’s ie child a’s child b’s or child c’s lineal_descendants when a beneficiary attains distribution age a pro_rata portion of the trust share will be distributed to him or her outright and the trust will terminate as to him or her under article a b and c distribution age means age with respect to settlor’s grandchildren living at the creation of the trust and age with respect to all other beneficiaries if a beneficiary has attained distribution age at the death of the last survivor of settlor’s children distribution to that beneficiary is to be made as soon as practical thereafter if a beneficiary dies before attaining distribution age and before receiving complete distribution of his or her pro_rata portion of the trust share the pro_rata portion is to vest in the beneficiary as of his or her death and be distributed as soon as practical after the death of the beneficiary to his or her then living lineal_descendants beneficiary the powers of that person as trustee shall abate with respect to the exercise of article provides that if any person serving as a trustee is simultaneously a plr-117362-06 discretion granted to trustees in making distributions of trust income and or principal to that person or that person’s lineal_descendants under article as executed on date in the event child a ceases to serve as co- trustee the following will automatically succeed as co-trustee in the following order child b corporate trustee under article in the event that a ceases to serve as co-trustee the following will automatically succeed as co-trustee in the following order b c and corporate trustee on date as noted above article was amended to provide that if child b ceases to serve as co-trustee the following will automatically succeed as co-trustee in the following order child c corporate trustee child a_trust the child b_trust and the child c trust child a will be the trustee of the child a_trust child b will be the trustee of the child b_trust child c will be the trustee of the child c trust the trust provisions executed by settlor will govern the child a_trust child b_trust and child c trust except for the following modifications the trustees propose to partition the trust into three separate and equal trusts the article will provide that each child is to be the sole trustee of the separate trust named for him or her article will provide that a child may appoint a co-trustee of his or her separate trust the co-trustee must be an independent_trustee once a child has appointed an independent_trustee an independent_trustee will be required at all times for that child’s trust the named child may remove the independent_trustee upon the appointment and acceptance of a successor independent_trustee article will provide that if a child has resigned and is not serving as a trustee of the trust named for him or her the child may resume the co-trustee position at any time by serving notice upon the then serving independent_trustee article will provide that if the named child ceases to serve as trustee the independent_trustee then serving will be sole trustee if there is no independent_trustee corporate trustee is to be the independent_trustee article will provide that after the death or total incapacity of the named child ie child a child b or child c the ability to remove and appoint a successor independent_trustee may be exercised by a majority of the adult beneficiaries of the named child’s separate trust article will provide that the term independent_trustee means a corporate or individual trustee who is neither related nor subordinate within the meaning of sec_672 of the internal_revenue_code_of_1986 as amended to the person appointing such trustee if a separate trust has more than one adult beneficiary any trustee appointed by the adult beneficiaries must be neither related nor subordinate within the meaning of sec_672 to any of the adult beneficiaries of that separate trust plr-117362-06 the trustees petitioned the court for approval of the partition the court approved the partition in an order dated date the order is not to be effective unless and until the trustees file with the court a copy of a favorable letter_ruling from the internal_revenue_service the partition will not cause the trust or any beneficiary to recognize gain_or_loss you have asked for the following rulings from a sale_or_other_disposition of property under sec_61 or sec_1001 assuming the trust is otherwise exempt from generation-skipping_transfer_tax the partition will not result in the trust losing exempt status under b a of the tax_reform_act_of_1986 and will not cause any distribution from or termination of any interests in the trust to be subject_to the generation-skipping_transfer_tax the partition will not cause any beneficiary to be considered as having made a taxable gift and will not constitute a taxable gift to any beneficiary under sec_2501 law and analysis issue sec_61 of the internal_revenue_code provides that gross_income includes gains derived from dealings in property and under sec_61 from an interest in a_trust sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized sec_1001 states that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides that gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained the co-owners of the joint property sever their joint_interests but do not acquire a new or additional interest as a result of the transaction thus neither gain nor loss is realized on a a partition of jointly owned property is not a sale_or_other_disposition of property where 499_us_554 concerns the issue of the court concluded that sec_1_1001-1 reasonably interprets sec_1001 and stated that plr-117362-06 partition see revrul_56_437 1956_2_cb_7 when a sale_or_exchange has taken place that results in realization of gain_or_loss under sec_1001 in cottage savings a financial_institution exchanged its interests in one group of residential mortgage loans for another lender’s interests in a different group of residential mortgage loans the two groups of mortgages were considered substantially identical by the agency that regulated the financial_institution an exchange of property gives rise to a realization event under sec_1001 if the properties exchanged are materially different cottage savings u s pincite in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent cottage savings u s pincite the court held that mortgage loans made to different obligors and secured_by different homes did embody distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans cottage savings u s pincite estate shall be equally divided into three fractional shares of equal value this is not necessarily the same as a pro_rata partition of each of the trust’s assets and the pro_rata distribution of such assets into the three resulting separate trusts however the submission does indicate that the division will be pro_rata further paragraph of the date order issued by the court approving the partition specifically states that e ffective the partition date each of the assets of the trust should be equally divided among the three resulting trusts in fractional shares if any asset cannot be equally divided in ownership then it shall be sold and the resulting cash shall be distributed equally among the three resulting trusts emphasis added this language equates to an order by the court that the assets in the trust corpus be divided and distributed among the child a_trust the child b_trust and the child c trust on a pro_rata basis it is consistent with the supreme court’s opinion in cottage savings to find that the legal entitlements and interests of the beneficiaries of each of the resulting separate trusts will not differ materially in_kind or extent from their interests in the trust except for the modifications described above all relevant provisions of the trust will remain unchanged accordingly no gain_or_loss is recognized on the partition of the trust for purposes of sec_1001 by the trust or any of the three resulting separate trusts or any beneficiary of those trusts issue we note that the submission’s facts and the petition to the court state that the trust sec_2601 imposes a tax on each generation-skipping_transfer made by a transferor to a skip_person plr-117362-06 under a of the tax_reform_act_of_1986 the generation-skipping_transfer_tax is generally applicable to generation-skipping transfers made after date however under b a of the tax reform act and sec_26_2601-1 of the generation- skipping transfer_tax regulations the tax does not apply to a transfer from a_trust if the trust was irrevocable on date and no addition actual or constructive was made to the trust after that date under sec_26_2601-1 any trust in existence on date will be considered irrevocable unless the settlor had a power that would have caused inclusion of the trust in his or her gross_estate under sec_2038 or sec_2042 if the settlor had died on date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax will not cause the trust to lose its exempt status the regulation provides that the rules contained in the paragraph are generally applicable only for purposes of determining whether an exempt trust retains its exempt status for generation-skipping_transfer_tax purposes unless noted otherwise the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a modification will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust example contained in sec_26_2601-1 considers a situation where in grantor established an irrevocable_trust for the benefit of his two children a and b and their issue under the terms of the trust the trustee has the discretion to distribute income and principal to a b and their issue in such amounts as the trustee deems appropriate on the death of the last to die of a and b the trust principal is to be distributed to the living issue of a and b per stirpes in the appropriate court approved the division of the trust into two equal trusts one for the benefit of a and a's issue and one for the benefit of b and b's issue the trust for a and a's issue provides that the trustee has the discretion to distribute trust income and principal to a and a's issue in such amounts as the trustee deems appropriate on a's death the trust principal is to be distributed equally to a's issue per stirpes if a dies with no living descendants the principal will be added to the trust for b and b's issue the plr-117362-06 trust for b and b 's issue is identical except for the beneficiaries and terminates at b 's death at which time the trust principal is to be distributed equally to b 's issue per stirpes if b dies with no living descendants the principal will be added to the trust for a and a's issue the division of the trust into two trusts does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the division in addition the division does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust therefore the two partitioned trusts resulting from the division will not be subject_to the provisions of chapter revrul_95_58 1995_2_cb_191 concludes that a settlor's retained power to remove a trustee and appoint an individual or corporate trustee as successor that is not related or subordinate to the settlor within the meaning of sec_672 will not be considered a retention of the trustee's discretionary powers for purposes of sec_2036 and sec_2038 represented that no trust additions have been made after date in the present case the trust was irrevocable on date it is the proposed partition of the trust into the child a_trust the child b_trust and the further although each of child a child b and child c will be appointed the trustee of child c trust is substantially_similar to the situation described in example of sec_26 b i e under the proposed modification and partition these trusts will except as described above be administered under the original terms of the trust his or her respective trust under article each will be foreclosed from making any distributions of trust income or corpus to any trust_beneficiary the respective child and his or her descendants in order for a_trust distribution to be made child a child b or child c as the case may be must first appoint an independent_trustee defined as an individual or corporation that is neither related or subordinate within the meaning of sec_672 to any adult beneficiary of the trust under the modified trustee successor provisions child a child b and child c each have the power to remove and replace the independent_trustee if removed that trustee must be replaced with another independent_trustee in the event of the death or total incapacity of the named child the adult beneficiaries of the child’s trust will also have the power by a majority vote to remove and replace the independent_trustee if removed that trustee must be replaced with another independent_trustee the removal and replacement power satisfies the standards of revrul_95_58 consequently we conclude that the partition of the trust into the child a_trust the child b_trust and the child c trust and the trust modification relating to the appointment of an independent_trustee will not result in a shift of any beneficial_interest in the trust assets to any beneficiary who occupies a generation lower than the persons holding the beneficial interests prior to the partition and modification in addition the partition and modification will not extend the time for vesting of any beneficial_interest in the trust or the successor trusts beyond the period provided in the original terms of the trust plr-117362-06 accordingly based on the facts submitted and the representations made and provided the court order is effective under state law and includes the modifications as described above we conclude that the proposed modification and partition of the trust will not cause the successor trusts to lose exempt status for generation-skipping_transfer_tax purposes or otherwise be subject_to chapter issue sec_2501 imposes a tax on the transfer of property by gift sec_2511 provides that the tax imposed by sec_2501 applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2512 provides that if a gift is made in property the value thereof at the date of the gift shall be considered the amount_of_the_gift sec_2512 provides that where property is transferred for less than an adequate_and_full_consideration in money_or_money's_worth then the amount by which the value of the property exceeded the value of the consideration is deemed a gift under the modification and partition of the trust as discussed above each beneficiary of the child a_trust the child b_trust and the child c trust will have an interest in the income and principal of that respective trust that is identical to the beneficiary's interest in the income and principal of the trust created by the settlor accordingly based on the facts submitted and the representations made and provided the court order includes the modifications as described above and the proposed partition is carried out and is effective under state law we conclude that the proposed partition of the trust into the child a_trust the child b_trust and the child c trust will not result in a transfer by any of the beneficiaries that is subject_to federal gift_tax under sec_2501 except as specifically ruled herein we express no opinion on the federal tax consequences of the proposed modifications and division under the cited provisions or under any other provisions of the code plr-117362-06 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent enclosure copy for sec_6110 purposes sincerely yours george masnik chief branch office of associate chief_counsel passthroughs and special industries