internal_revenue_service department othe treasury index number washington dc person to contact telephone number refer reply cc dom fl p 5-plr-108991-98 date to apr legend state board city authority regents conference partnership team university university league bonds ks plr-108991-98 additional bonds a i r t n i a l o o e l a r i - p i date date date date date date dear i t l i t i t t w l i i t l this responds to your request for the following two rulings the transfer of proceeds of the bonds and the additional bonds to the city under the grant agreement for construction of state under sec_1_148-6 a new stadium the stadium is iii and a grant by the certain revenues received by university and university as a result of certain activities taking place in the stadium are not derived directly or indirectly from payments in respect of property used or to be used for a private_business_use under sec_141 plr-108991-98 facts the state and the city concluded that bringing the team to the state and constructing the stadium to serve as the team's home stadium would benefit the state and the city of the stadium began on date and will be substantially complete on date development agreement the grant agreement the university agreement and stadium lease the university lease and the partnership stadium lease control the financing construction use operation and management of the stadium described separately below various separate agreements including the each agreement is construction the development agreement the city the authority the team and the partnership entered into the development agreement on date ' development agreement was modified on date and date the development agreement the parties' obligations include but are not limited to the following the city must ensure that the stadium is constructed and upon substantial completion must convey the stadium to the authority the authority must lease the stadium to the partnership an affiliate of the team and in the stadium partnership the right to approve the design and construction plans for the stadium the team must relocate to the state and play its home games in addition the development agreement gives the under the the grant agreement construction financing for the stadium has been provided from various sources the state is contributing up to dollar_figurea to the cost of constructing the stadium using proceeds of the bonds and the additional bonds to the stadium's construction financing as a grant made by the state to the city pursuant to the terms of the grant agreement the state characterizes its contribution the state the city and the authority entered into the grant agreement on date years transfer to the city the proceeds of the bonds and the additional bonds together not to exceed dollar_figurea under the grant agreement the state is obligated to the term of the grant agreement is to reimburse the city for b ‘ the city formed the authority pursuant to the act to own and operate the stadium nonprofit corporation the authority is a state public plr-108991-98 ‘percent of the city's actual stadium construction costs grant agreement lists the following items as actual stadium construction costs the foundations and superstructure exterior skin interior building systems conveying systems furniture fixtures and equipment to be used in the stadium signage video and scoreboards and concessions and food service actual stadium construction costs do not include costs or expenses for stadium design site acquisition site development design or construction of stadium parking environmental services infrastructure construction or renovation or retainage unless and until due and payable the state fulfilled its obligation under the grant agreement in part by issuing the bonds on date and transferring dollar_figurec of the proceeds to the city fulfill the remainder of its obligation by issuing the additional bonds and transferring dollar_figured of the proceeds to the city the state will the grant agreement recites that the state entered into the grant agreement with the understanding that the partnership would manage and operate the stadium recites that the state entered into that agreement in exchange for among other consideration the state's use of e parking spaces at the stadium the grant agreement further the grant agreement provides that the state is entitled to exclusive use and possession of up to e designated parking spaces at the stadium on monday through friday between a m and p m during the term of that agreement it is expected that state employees will use the parking spaces during the work week the state is required to reimburse the authority for certain costs associated with its use of the parking spaces including the costs of operating the parking spaces maintaining the parking spaces determined by formula based upon the maximum number of spaces reserved by the state in a particular year and maintaining general liability insurance also determined by formula based upon the maximum number of spaces reserved by the state in a particular year be approximately dollar_figuref per year otherwise compensate the city the authority or the partnership for the value of its use of the parking spaces these costs have been estimated to the state is not required to plr-108991-98 the partnership stadium lease on date the city the authority and the partnership the term of the entered into the partnership stadium lease partnership stadium lease is lease was amended on date and date lease grants the partnership the exclusive right to possess and use the stadium for days during each calendar_year for team home games and other events determined and selected by the partnership the partnership stadium the partnership stadium years the partnership stadium lease provides that the partnership has the exclusive right and obligation to direct all aspects of the operation management and control of the stadium days per year during the 30-year term of the lease stadium lease generally provides that the partnership has such discretion to operate and manage the stadium as may be needed to perform its responsibilities thereunder lease sets forth specific and exclusive rights granted to the partnership including but not limited to the following the partnership the partnership stadium n a e e to operate and maintain the stadium in good condition to schedule events to be held at the stadium to employ and supervise all employees and to contract with independent contractors as it deems necessary to fulfill its obligations to contract with all vendors and concessionaires both inside and outside of the stadium and to operate all stadium restaurants and dining facilities to establish rules and policies with respect to employee matters and all aspects of advertising publicity and promotion to sell certain general admission club and luxury suite seating for all of the partnership's events to manage and operate the stadium parking facilities to contract for security personnel and systems and to control all access to the stadium to arrange and contract for all stadium utilities janitorial services parking and shuttle services equipment maintenance service laundry service and any and all services that the partnership deems advisable to obtain and maintain licenses and permits as required_by_law and to establish impose and enforce rules governing stadium use by all persons with no veto power reserved to the authority the partnership stadium lease states that the highest priority of the stadium with preference over all other uses to serve as the site for team games all other uses of the is plr-108991-98 stadium are to be scheduled by the partnership and are to be conducted in a manner that complies with this priority use by the team under the partnership stadium lease the partnership is obligated to pay the authority annual rent in the amount of sq in addition the partnership stadium lease entitles the partnership to retain all gross_income revenues and consideration that the partnership receives by connection with the partnership's events including team home games held at the stadiun from or in the the partnership stadium lease acknowledges that university is entitled to use the stadium to play its home games partnership stadium lease provides that university 1's use of the stadium is subject_to the partnership's rights under the partnership stadium lease including the partnership's right to operate and manage the stadium during any university home game the partnership stadium lease further provides that due to the partnership's substantial interest in the stadium the authority is required to submit the form of any agreement with university relating to the playing by university of its home games at the stadium to the partnership for review before the authority enters the partnership stadium lease prohibits into any such agreement the authority from entering into any agreement with university until the terms and conditions thereof have been mutually agreed upon by the authority university although agreement by the partnership may not be unreasonably withheld monitor and assist the authority in the authority's negotiations with university regarding any agreement for university 1's use of the stadium the partnership is permitted on request to attend and the partnership the university lease the city the authority the regents and the partnership entered into the university lease on date lease provides that university games at the stadium for the 30-year term of that lease university the amount of dollar_figureh throughout the term of the lease the rent is payable directly or indirectly to the state is obligated to pay to the authority annual rent in no amount of is entitled to play its home the university the university lease entitles university to all revenues that are directly or indirectly attributable to the university home games played in the stadium university gross revenues including revenues from the exercise of the university university is governed by the regents the state a public higher educational_institution the regents are an instrumentality of g2 plr-108991-98 revenues attributable to the advertising and broadcast rights gift shops ticket offices and concession areas provided that the university gross revenues do not include the following sale of novelties gifts and similar items that are licensed by the league or any of its affiliates revenues from restaurants and other facilities that operate on a regular basis and would therefore operate regardless of whether the university home games are played in the stadium revenues payable to the partnership in advertising rights broadcasting rights or other rights that are not based upon the number of people attending the university home games and university gross revenues net of the annual rent payment to the authority and the payment to the partnership as described below for management services the university adjusted revenues will be credited to university for the use and benefit of its athletic department revenues will not replace or reduce any state funding to university for its athletic activities any revenues relating to league games a lump sum for the partnership's the university adjusted the the university lease grants the partnership the exclusive right to operate and manage the stadium during university home games not limited to the following the partnership's rights and obligations include but are to operate and maintain the stadium during university home games and other periods set forth in the partnership stadium lease or the development agreement to regulate the stadium's use consistent with the partnership stadium lease and the development agreement to employ and supervise all employees and to contract with independent contractors as the partnership deems necessary to fulfill its obligations to contract with all vendors and concessionaires both inside and outside of the stadium and to operate all stadium restaurants and dining facilities to establish rules and policies with respect to employee matters and all aspects of advertising publicity and promotion to manage and operate the stadium parking facilities at least for the several years prior to the issuance of the bonds the state did not and does not reasonably expect to fund university 1's non-capital athletic activities and during the same period the state did not and does not reasonably expect to divert its university funding which is reserved for non- athletic activities to university 1's capital athletic activities plr-108991-98 to contract for security personnel and systems and to control all access to the stadium to arrange and contract for all stadium utilities janitorial services parking and shuttle services equipment maintenance service laundry service and any and all services that the partnership deems advisable to obtain and maintain licenses and permits as required_by_law and to establish impose and enforce rules governing stadium use the university lease emphasizes that the partnership has full power and authority to control operate manage and maintain the stadium subject only to the terms of the partnership stadium lease and the development agreement provision in the university lease for university to select or contract with any person other than the partnership to manage and no operate the stadium during university home games provision in the university lease permitting university to terminate university 1's relationship with the partnership there is no separate or independent contract or other arrangement between university and the partnership with respect to the partnership's services there is no there is in exchange for the above-listed services university is obligated to reimburse the partnership for university 1's allocable share of the actual and direct expenses that the partnership incurs to manage and operate the stadium but only if these costs and expenses are incremental costs and expenses that would not have been incurred except for the existence of the university lease partnership does not share in the university gross revenues other than this reimbursement the university use university is a public higher educational_institution and a member of the conference ‘ although university does not is expect to play its regular season games in the stadium it has been represented that the stadium may be used for one conference- sanctioned game the game per year whether the game may take place at the stadium takes place at the stadium the conference will receive revenues derived principally from ticket sales and certain corporate and media payments the conference gross revenues the conference determines when the game university is governed by the board an instrumentality of the state b4 plr when the game is played at the stadium the partnership will operate and manage the stadium under an arrangement that is substantially the same as the one under which the partnership operates and manages the stadium during university home games in that regard the partnership is reimbursed for its actual and direct expenses that it incurs to operate and manage the stadium during the game each member of the conference including university is the conference determines each conference member's expected to receive a share of the conference gross revenues net - of any payments to the partnership the conference adjusted revenues share of these revenues university participates in the game that member may receive an additional share of the conference adjusted revenues as determined by the conference stadium the university portion of the conference adjusted revenues is expected to be between dollar_figurei and dollar_figurej based upon a specified formula university revenues revenues are not intended to replace or reduce any state funding to university for its athletic activities when a conference member including if the game is played at the the university law and analysis grant issue the first ruling requested is that the transfer of proceeds of the bonds and the additional bonds to the city under the grant a grant by the state agreement for construction of the stadium is under sec_1 -6 d iii sec_1_148-6 iii defines the term grant as a transfer for a governmental purpose of money or property to a transferee that is not a related_party to or an agent of the the transfer must not impose any obligation or transferor condition to directly or indirectly repay any amount to the transferor be in any particular form eg that the amount of any repayment relate to the amount of the transfer this provision does not require that the repayment however obligations or conditions intended solely to in cash and does not require at least for the several years prior to the issuance of the bonds the state did not and does not reasonably expect to fund university 2's non-capital athletic activities and during the same period the state did not and does not reasonably expect to divert its university funding which is reserved for non- athletic activities to university 2's capital athletic activities plr -108991-98 lo assure expenditure of the transferred moneys in accordance with the governmental purpose of the transfer do not prevent a transfer from being a grant sec_1_150-1 defines the term related_party as here material as any member of the same controlled_group e provides that an entity is not a controlled_entity if the entity possesses substantial taxing eminent_domain and police powers amounts of each of these sovereign powers is not a controlled we assume for purposes of this ruling entity of the state request that the state and the city are not related parties for example a city possessing substantial section the grant agreement establishes various conditions on the state's transfer of the proceeds of the bonds and the additional bonds to the city including the condition that the city and the authority provide e parking spaces at the stadium to the state during the work week the e parking spaces have value to the state because it the state has chosen to permit state although it receives the right to use the spaces while only paying the costs of operating the spaces employees to use the spaces during the work week has been represented that the state is not obligated to provide parking for any of its employees that does not alter the conclusion that the state is receiving something of value moreover the e parking spaces represent a foregone value to the city and the authority because they could have earned additional revenues from renting the spaces to users including state employees during the period that the spaces are used by the state the provision of the e parking spaces to the state does not constitute a condition intended solely to assure that the city and the authority spend the proceeds of the bonds and the additional bonds for the governmental purpose of the transfer the grant agreement provides that the governmental purpose of the transfer is to construct the stadium and to relocate the team to the state the state's use of the e parking spaces has no correlation to ensuring that the proceeds of the bonds or the additional bonds are spent to construct the stadium or to relocate the team to the state on the basis of these facts we conclude that provision of the e parking spaces constitutes an obligation or condition to repay any amount to the state and therefore the transfer of proceeds of the bonds and the additional bonds to the city under the grant agreement for construction of the stadium is not a grant under sec_1_148-6 iii gb plr-108991-98 private payments issue the second ruling requested is that the university adjusted revenues and the university revenues are not derived directly or indirectly from payments in respect of property used or to be used for a private_business_use under sec_141 sec_103 generally provides that gross_income does not include interest on any state_or_local_bond provides that this exclusion does not apply to any private_activity_bond unless it defined under sec_141 private_activity_bond if the bond satisfies the private_business_use_test and the private_security_or_payment_test of sec_141 or the private_loan_financing_test of sec_141 is a qualified_bond as such terms are sec_141 provides that a bond is a sec_103 under sec_141 and the private_business_use_test is satisfied if more than percent of the proceeds of the bonds are used directly or indirectly in the trade_or_business of nongovernmental persons property is treated as the direct use of proceeds sec_1_141-3 both actual and beneficial use by a nongovernmental person may be treated as private_business_use in most cases the private_business_use_test is met only if a nongovernmental person has special legal entitlements to use the financed property according to an arrangement with the issuer under sec_1_141-3 the use of financed under sec_1_141-3 provides that with exceptions that sec_1_141-3 provides for this purpose ownership refers to ownership for are not material to this ruling ownership by a nongovernmental person of financed property is private_business_use of that property federal_income_tax purposes that with exceptions that are not material to this ruling the lease of financed property to a nongovernmental person is private for this purpose any arrangement business use of that property that is properly characterized as a lease for federal_income_tax purposes is treated as a lease management_contract is properly characterized as a lease it necessary to consider all of the facts and circumstances including the degree of control_over the property that is exercised by a nongovernmental person and whether a nongovernmental person bears risk of loss of the financed property in determining whether a is sec_1_141-3 i provides that subject_to exceptions that are not material to this ruling a management_contract with respect to financed property may result in private_business_use of that property based on all of the facts and circumstances property generally results in private_business_use of that a management_contract with respect to financed o7 plr-108991-98 iv a management_contract with respect to property if the contract provides for compensation_for services rendered with compensation based in whole or in part on a share of net profits from the operation of the facility sec_1_141-3 financed property results in private_business_use of that property if the service provider is treated as the lessee or owner of financed property for federal_income_tax purposes under sec_1_141-3 is not treated as a management_contract that gives rise to private_business_use if the only compensation is the reimbursement of the service provider for actual and direct expenses paid_by the service provider to unrelated parties iii d a contract to provide for services under under sec_1_141-3 iii for a facility in which government_use and private_business_use occur simultaneously the entire facility is treated as having private_business_use under sec_141 the private_security_or_payment_test is satisfied if payment of the principal of more than percent of the proceeds of the issue is directly or indirectly secured_by any interest in property used or to be or payments in respect of such used for a private_business_use to be derived from payments whether or not to property or the issuer be used for a private_business_use in respect of property or borrowed money used or to or the interest on i a both direct and indirect payments made by sec_1_141-4 provides that private payments are payments of the debt service on an issue that are directly or indirectly to be derived from payments whether or not to the issuer or any related_party in respect of property or borrowed money used or to be used for a private_business_use sec_1_141-4 any nongovernmental person that is treated as using proceeds of the issue are taken into account as private payments but only to the extent allocable to the proceeds used by that person payments are taken into account as private payments only to the extent that they are made for the period of time that proceeds are used for a private_business_use proceeds include payments whether or not to the issuer respect of property financed directly or indirectly with those proceeds even if the payments are not made by a private business user those payments are directly allocable to other_property being directly used by the person making the payment and those payments represent fair_market_value compensation_for that other use payments are not made in respect of financed property if payments for a use of in under in sec_1_141-4 example a city owns a hospital and issues general obligation bonds to finance renovations to the hospital the city under a management_contract that results in private_business_use under sec_1_141-3 a nongovernmental person d operates the hospital for the city will use hospital o plr-108991-98 a3 revenues after payments to d and payment of operation and maintenance_expenses to pay debt service on the bonds example concludes that the bonds meet the private_security_or_payment_test because the revenues from the hospital are payments in respect of property used for a private_business_use the in order to determine whether the university adjusted revenues and the university revenues are payments in respect of property used or to be used for a private_business_use necessary to first determine whether the partnership's use of the stadium constitutes private_business_use it is the development agreement establishes the relationship among the city the authority the partnership and the team the development agreement the partnership is granted the right to approve the stadium design and construction plans under the partnership stadium lease grants the partnership virtually absolute control_over the management and operation of the extent of the partnership's the stadium days per year control_over the management and operation of the stadium is evidenced by the enumerated rights and obligations set forth in the partnership stadium lease including the following to operate and maintain the stadium in good condition to schedule events to be held at the stadium to employ and supervise all employees and to contract with independent contractors as the partnership deems necessary to fulfill its obligations to contract with all vendors and concessionaires both inside and outside of the stadium and to operate all stadium restaurants and dining facilities to establish rules and policies with respect to employee matters and all aspects of advertising publicity and promotion to sell certain general admission club and luxury suite seating for all of the partnership's events to manage and operate stadium parking facilities to contract for security personnel and systems and to control all access to the stadium to arrange and contract for all stadium utilities janitorial services parking and shuttle services equipment maintenance service laundry service and any and all services that the partnership deems advisable to obtain and maintain licenses and permits as required_by_law and to establish impose and enforce rules governing stadium use by all persons with no veto power reserved to the authority plr-108991-98 the partnership's control is further evidenced by additional in the authority is required to keep the partnership rights it has relating to university 1's use of the stadium particular the partnership stadium lease entitles the partnership to approve any agreement between the authority and university regularly advised in reasonable detail of all negotiations pertaining to the university lease permitted on request to attend monitor and assist the authority in the authority's negotiations with university finally the authority is prohibited from entering into any agreement with university unless and until the partnership approves the terms thereof the partnership is further in addition to its control_over management and operation of the stadium the partnership is entitled to retain all gross_income revenues and consideration that the partnership receives in connection with partnership events at the stadium as discussed earlier the partnership is entitled to certain revenues generated during non-partnership events at the stadium for example the partnership is entitled to receive any revenues attributable to the sale of novelties gifts and similar items that are licensed by the league or any of its affiliates subject_to any payments that must be made to the league moreover based on all facts and circumstances we conclude that the partnership has special legal entitlements to use the stadium days per year as a result of its status as lessee under the partnership stadium lease stadium constitutes private_business_use of the proceeds of the bonds and the additional bonds thus the partnership's use of the the fact that the partnership does not receive all of the is at other times revenues generated when it manages and operates the stadium during university and university events does not make the partnership any less of a private business user during such this is because the activities events than it performed by the partnership during university and university events are part of a single indivisible arrangement created by the partnership stadium lease lease the partnership's control_over the management and operation of the stadium during university and university games is the same as the partnership's control during other stadium events management services during the university and university games is equal to the partnership's actual and direct expenses_incurred as a result of the partnership's managing the stadium for games this level of compensation in the absence of the partnership's status as lessee of the stadium under the partnership stadium lease university negotiated any of the terms with respect to the there are no facts to indicate that university is unlikely that the partnership would agree to while the partnership's compensation_for under the partnership stadium or it 7e plr-108991-98 partnership's management services rights and obligations terminate when the partnership stadium lease is terminated permitted to either select any person or entity other than the partnership to operate or manage the stadium during university or university games or to terminate its arrangement with the partnership university and university are not the partnership's management as a result we conclude that the partnership's management and operation of the stadium during university and university events may not be analyzed independently of the other arrangements under the partnership stadium lease we turn then to the issue of whether the university adjusted revenues and the university revenues received by the respective university and generated from games played in the stadium during the partnership's use of the stadium are derived directly or indirectly from payments in respect of property used or to be used for a private_business_use because we have concluded that the stadium is used by the partnership days per year the university adjusted revenues and the university revenues being analyzed will be generated during the period of time that proceeds of the bonds and the although additional bonds are used for a private_business_use the revenues do not originate from the partnership this is not relevant because the university adjusted revenues and the university revenues are revenues in respect of the stadiun and are not directly which is used for a private_business_use allocable to other_property being directly used by the persons making the payments that generate such revenues the university adjusted revenues and the university there is however no arrangement obligating revenues are retained by university and university respectively university or university to directly pay over any amount of moreover it has been represented those revenues to the state that no amount of the university adjusted revenues or the university revenues will be used to directly pay debt service on the bonds or the additional bonds and it has further been represented that the university adjusted revenues and the university revenues will not replace or reduce state funding to each university for non-capital athletic activities nonetheless because the state is related to university and any payments received by university and university university shall be treated as received by the state c state or originate from the partnership in order for those payments to be private payments i a does not require that payments be made to the moreover neither sec_1 section 7i plr-108991-98 a nor sec_1_141-4 directly traced to payment of debt service in order for those payments to be private payments i a require that payments be for the reasons noted above we conclude that the university adjusted revenues and university revenues received by each a result of the games taking place in respective university as the stadium are derived directly or indirectly from payments in respect of property used or to be used for a private_business_use under sec_141 -except as expressly provided herein no opinion is expressed as to the tax treatment of the transaction involved herein under the provisions of any other section of the code and regulations that may be applicable thereto or the tax treatment of any or effect resulting from condition existing at the time of transaction that is not specifically covered by the above the this letter is directed only to the taxpayer s requesting sec_6110 of the code provides that it may not be it used or cited as precedent sincerely assistant chief_counsel financial institutions products blip bryce m serchuk senior technician reviewer branch enclosure copy for sec_6110 purposes


significant index number tax exempt and division government entities department of the treasury internal_revenue_service washington d c mar tep ra aq re taxpayer dear this letter constitutes notice that approval has been granted for your request for a 5-year automatic_extension for amortizing the unfunded liabilities as of date for the above-named plan which are described in sec_431 and sec_431 of the internal_revenue_code code and sec_304 and sec_304 of the employee_retirement_income_security_act_of_1974 erisa this extension is effective with the plan_year beginning date this extension applies to the eligible amortization charge bases as identified in your application submission established as of date the extension of the amortization periods of the unfunded liabilities of the plan was granted in accordance with sec_431 of the code sec_431 of the code requires the secretary to extend the period of time required to amortize any unfunded_liability of a plan for a period of time not in excess of years if the plan submits an application meeting the criteria stated in sec_431 the plan has submitted the required information to meet the criteria in sec_431 including a certification from the plan’s actuary that i absent the extension under subparagraph a the plan would have an accumulated_funding_deficiency in the current plan_year or any of the succeeding plan years ii the plan_sponsor has adopted a plan to improve the plan's funding status iti the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period as extended and iv the notice required under paragraph a has been provided we have sent a copy of this letter to the ' to the - and to your authorized representative pursuant to a power_of_attorney on file in this office this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited by others as precedent if you require further assistance in this matter please contact sincerely yours david m ziegler manager ep actuarial group


internal_revenue_service number release date index number washington dc department of the treasury in re person to contact telephone number refer reply to cc psi 9-plr-133137-02 date date legend taxpayer spouse trust settlors date date date year a b accounting firm personal advisor bookkeeper dear this is in response to your letter received date requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations and sec_2642 of the internal_revenue_code to allocate taxpayer’s generation-skipping_transfer gst tax exemption to a transfer to an irrevocable_trust a summary of the facts and representations submitted is as follows on date taxpayer and spouse settlors formed the trust for the benefit of their family members and their descendants article iii of trust provides that the trustee will initially hold the trust estate in a single common trust article iii a provides that during the common trust’s term trustee has the discretion to distribute trust net_income to settlors’ children and grandchildren and taxpayer’s mother father and brother to provide for their health support maintenance and education if the trustee deems that the common trust’s plr-133137-02 income is insufficient the trustee has the discretion to pay trust principal to settlors’ children or grandchildren for their health support maintenance and education distributions need not be equal among the beneficiaries undistributed_income is to be added to principal article iii c provides that the common trust will terminate on the third anniversary of the death of the last of the settlors to die upon termination the trustee is to divide the remaining trust estate into equal shares and allocate one share to each then living child and one collective share to each deceased child’s then living descendants trustee is to hold each living child’s share in further trust under article iii trustee is to divide the collective share allocated to each deceased child’s then living descendants into equal shares and allocate one share to each deceased child’s the then living children settlors’ grandchildren and one collective share to each deceased grandchild’s then living descendants settlors’ great-grandchildren trustee is to hold each living grandchild’s share in further trust under article iii each then living great- grandchildren’s collective share is to be further divided and allocated one share to each great-grandchild and held in further trust under article iii in the event that settlors are not survived by then living descendants when the common trust terminates the trustee is to distribute the trust estate to taxpayer’s father brother and mother if living if not then to charities designated in the trust pursuant to articles iii a and b the trustee of a_trust established under article iii c for a child is to pay the child and his or her descendants so much of trust’s net_income and principal deemed necessary to provide for the child’s and his or her descendants health support maintenance and education income not distributed is to be added to principal pursuant to article iii c article iii e provides the child with a testamentary limited power to appoint the trust’s remaining trust estate in his or her will or codicil among settlors’ descendants article iii f provides that when a child dies his or her trust terminates if the child is survived by then living descendants the trustee is to divide the remaining unappointed trust estate into equal shares and allocate one share to the child’s then living children settlors’ grandchildren and one collective share to each deceased grandchild’s then living descendants settlors’ great-grandchildren trustee is to hold each living grandchild’s share in further trust under article iii the collective share for a deceased grandchild’s living descendants is to be divided and one share is to be allocated to each great-grandchild and held in further trust in accordance with article iii taxpayer has represented that he relied upon accounting firm to prepare all of his individual tax returns taxpayer also relied on personal advisor and his personal bookkeeper bookkeeper to provide accounting firm with the necessary information in order for accounting firm to prepare taxpayer’s individual tax returns personal advisor is a certified_public_accountant with over years of experience of which are in the area of taxation plr-133137-02 on date taxpayer made a gift of dollar_figurea to the trust in the same year year taxpayer made a gift of dollar_figureb to the trust on date settlors retained accounting firm to prepare their form sec_709 united_states gift and generation-skipping_transfer_tax returns for year on their form sec_709 settlors consented to treat the gifts made in year as being made one-half by each pursuant to sec_2513 through an oversight settlors’ tax professionals failed to include the date gift of dollar_figurea to the trust on settlors’ form sec_709 and as a result failed to allocate settlors’ gst exemptions thereto taxpayer is requesting an extension of time under sec_2642 and sec_301_9100-3 to make a gst_exemption allocation to the date transfer to the trust and that such allocation will be based on the value of the property transferred to the trust on date law and analysis sec_2601 imposes a tax on every generation-skipping_transfer gst a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under sec_2631 which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides that an allocation of gst_exemption to property transferred during the transferor’s lifetime other than in a direct_skip is made on form_709 as applicable during the year at issue sec_2642 provided that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer or is deemed to be made under sec_2632 or c - a the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period its value at the time of the close of the estate_tax_inclusion_period and b such allocation shall be effective on and after the date of such transfer or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period on and after the close of such estate_tax_inclusion_period plr-133137-02 sec_2642 provides generally that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of sec_2642 sec_2642 provides that in determining whether to grant relief under this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant sec_2642 further provides that for purposes of determining whether to grant relief the time for making the allocation shall be treated as if not expressly prescribed by statute sec_2652 provides that if under sec_2513 one-half of a gift is treated as made by an individual and one-half of the gift is treated as made by the spouse of such individual such gift shall be so treated for purposes of this chapter notice_2001_50 2001_34_irb_189 provides that under sec_2624 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a generation-skipping_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a notice published in the internal_revenue_bulletin in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 under the provisions of sec_301_9100-3 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government plr-133137-02 sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore taxpayer is granted an extension of time of sixty days from the date of this letter to make an allocation of taxpayer’s available gst_exemption to the transfer to the trust on date the allocation should be made on a supplemental form_709 for year that includes taxpayer’s date gift of dollar_figurea to the trust the allocation will be effective as of date and the gift_tax value of the transfer to the trust will be used in determining the amount of gst_exemption to be allocated to the trust the supplemental form_709 should be filed with the internal_revenue_service center cincinnati ohio a copy of this letter should be attached to the supplemental form_709 one copy is enclosed for this purpose the rulings contained in this letter are based upon information and representations submitted by settlors and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied regarding the value of the property transferred to the trust for federal transfer_tax purposes this ruling is directed only to the taxpayers requesting it sec_6110 provides that it may not be used or cited as precedent sincerely heather c maloy associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes one copy of this letter cc


office_of_chief_counsel internal_revenue_service memorandum number release date cc intl erbarret postf-145472-05 uilc date date to ---------------------- ---------------------------------------- ------------------------------------ from elizabeth u karzon chief branch office of associate chief_counsel international ------------------- subject this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend business country a country a parent country a exchange country a co country a sub country a sub ------------------------------------------------------------------------ ------------------------------------------------------------------------ --------------------------- --------------------- --------------------------- --------------------------------- ------------------------------ ------------------------------- ------------------------------- postf-145472-05 us sub us parent us hold co a b number c amount d e number f amount g amount h amount i amount j amount k state l m year year year year date date date date date month issues ------------------------------------------------------------------------ ------------------------------------------------------------------------ ---------------------------------------------------------------------- ----------------------- ------------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------------------------------------------------------ --------------------------- ----------------------- -------------------------------------- ------ ------ ---- dollar_figure-------------- ---- -- dollar_figure----------- dollar_figure------------------- dollar_figure------------------- dollar_figure----------------- dollar_figure----------------- ------------- --------- ------- ------- ------- ------- --------------- ---------------- ------------------- ----------- ------------- ------------ whether sec_1_894-1 may be applied to recharacterize deemed interest payments treated as made on or after date by us parent to country a co as sec_301 dividend distributions and accordingly disallow us parent’s interest_expense deductions associated with the deemed interest payments postf-145472-05 conclusions sec_1_894-1 of the treasury regulations may be applied to recharacterize the deemed interest payments by us parent to country a co as sec_301 dividend distributions and disallow us parent’s interest_expense deductions associated with the deemed interest payments under the terms of the united states- country a income_tax treaty the us parent-to-country a co deemed_dividend payments would be subject_to u s withholding_tax at the rate of five percent facts the parties i country a parent is a country a public company traded on the country a exchange and the parent of a multinational group of entities engaged in business country a co is a country a corporation wholly owned by country a parent country a co wholly owns two country a companies country a sub and country a sub us parent is a state l general_partnership that is wholly owned by country a sub a interest and country a sub b interest us parent elected under the check- the-box regulations to be taxed as a corporation for u s federal_income_tax purposes for country a tax purposes however us parent is treated as a partnership us sub is a domestic_corporation that is wholly owned by us parent us sub was included on us parent’s consolidated federal_income_tax return for the taxable periods at issue us parent’s taxable years ending date year and date year ii in connection with certain restructuring and acquisition activities country a co us parent and us sub entered into the following agreements the procurement agreement on or about date year us parent and us sub entered into an agreement under which us parent agreed to procure a purchaser willing to pay amount d for one share of us sub series a preferred_stock the procurement agreement provided that if us parent failed to secure the payment of the subscription price within number c days then us parent would pay the subscription price to us sub and would be deemed to be the subscriber the agreements the subscription agreement on date year us sub and country a co entered into an agreement under which us sub agreed to issue one share of series a preferred_stock the preferred share to country a co in exchange for amount d country a co agreed not to sell transfer pledge or otherwise dispose_of the postf-145472-05 preferred share other than pursuant to the pledge and security_agreement see below without first giving notice to us sub any transferee of the preferred share would have to assume all of country a co’s obligations under the subscription agreement the call option agreement see below the put option agreement see below and the pledge and security_agreement see below these agreements are collectively referred to hereinafter as the transaction agreements the preferred share the preferred share carries no voting rights and is mandatorily redeemable upon the tenth anniversary of its issuance date year for its original issue_price of amount d it has a fixed annual coupon rate of e on its amount d stated_value payable quarterly the preferred share has a liquidation preference of amount d plus any accrued and unpaid dividends the call option agreement on date year in consideration of us parent entering into the transaction agreements country a co granted us parent a call option with respect to the preferred share upon the occurrence of certain option events us parent has the option to purchase the preferred share from country a co if an option event has not occurred by date year us parent may exercise the option at any time during the one-month period from date year through date year if as of date year us parent has not exercised its call option and country a co has not exercised its put option see below us parent will be deemed to exercise its call option the put option agreement on date year in consideration of country a co entering into the transaction agreements us parent granted country a co a put option with respect to the preferred share upon the occurrence of certain option events country a co can require us parent to purchase the preferred share if an option event has not occurred by date year country a co may exercise the option at any time during the one-month period from date year through date year provisions common to the call option agreement and put option agreement under both the call option agreement and the put option agreement the option agreements country a co appointed irrevocably and by way of security us parent or its nominee as country a co’s attorney-in-fact to do anything country a co was obligated to do under the option agreements the exercise price under both option agreements is the original purchase_price of the preferred share amount d plus a supplemental amount equal to the present_value of any payable but unpaid dividends the exercise price can be paid at us parent’s discretion in cash or with a number f-year note the rights and obligations under the option option events under the call option agreement include country a co’s bankruptcy dissolution or failure to perform pursuant to the transaction agreements or the declaration of a dividend by us sub option events under the put option agreement include the bankruptcy of us parent or us sub failure to perform pursuant to the transaction agreements any obligation of us parent or its subsidiaries in excess of amount g becoming prematurely payable or the declaration of a dividend by us sub postf-145472-05 agreements are assignable only with the counter-party’s prior written consent until such time as it may sell the preferred share country a co retained all rights to dividends when declared and all other rights pertaining to the preferred share the pledge and security_agreement on date year country a co granted us parent as security for country a co’s obligation to deliver the preferred share under the option agreements a security_interest in country a co’s interest in certain property including the preferred share country a co retained all rights pertaining to the preferred share which included dividends the u s tax letter the option agreements refer to a one-page u s tax letter entered into by us parent and country a co and dated month year as one of the transaction agreements the u s tax letter states that for u s federal_income_tax purposes the parties intend o that the transactions entered into under the transaction agreements be treated as a secured loan by country a co and a secured borrowing by us parent o that us parent be treated as the beneficial_owner of the preferred share and o that u s income_tax returns be filed on a basis consistent with this intent notwithstanding the agreement with respect to the intended u s tax treatment the parties agreed that it was not intended that country a co or us parent would be required to treat the preferred share as owned by us parent for purposes of country a tax law the intended u s tax treatment of the transactions iii as noted in the preceding discussion of the u s tax letter country a co us parent and us sub undertook these transactions with the intent that they be treated for u s federal_income_tax purposes as a secured financing the parties intended that us parent be treated as owning the preferred share and consistent with the treatment of the transactions as a secured financing that payments made by us sub to country a co with respect to the preferred share be treated as non-deductible dividend payments from us sub to us parent followed by deductible_interest payments from us parent to country a co in the taxable years at issue us sub made monthly payments directly to country a co with respect to the preferred share the payments made by us sub to country a co this property includes the preferred share which upon issuance will be delivered to us parent by country a co to be held as security any other_securities certificates of deposit or other instruments or documents representing the preferred share that shall be lodged with or delivered to us parent or its nominees as security for the obligations the products and proceeds of the foregoing and any substitutions or replacements therefore other than dividends payable on the preferred share and all books documents and records related to the foregoing postf-145472-05 with respect to the preferred share totaled amount h in the taxable_year ending date year and amount i in the taxable_year ending date year us parent filed consolidated u s federal_income_tax returns for the taxable periods at issue consistent with its intent to treat the transactions as a secured financing - that is for u s tax purposes us parent treated the direct payments by us sub to country a co as deemed dividends from us sub to us parent followed by deemed interest payments from us parent to country a co these amounts were booked as interest_expense and were reflected on the us parent consolidated income_tax returns for the relevant taxable years as interest_expense deductions the adjustments at issue in the present memorandum are limited to amounts paid after date and before date year with respect to the preferred share - that is amount j in the taxable_year ending date year and amount k in the taxable_year ending date year for purposes of the present memorandum we assume that these transactions in the aggregate were appropriately treated as a secured financing for u s federal_income_tax purposes but we express no opinion as to whether such treatment was correct iv in year us parent decided to reorganize its holdings in certain of its u s subsidiaries as part of this reorganization on date year us parent organized us hold co as a state l corporation and a m -owned subsidiary of us parent us hold co was included on us parent’s consolidated federal_income_tax return beginning with the taxable_year ending date year us hold co was treated as a corporation for purposes of both u s and country a tax law on date year us hold co us parent us sub and certain other u s subsidiaries of us parent entered into a reorganization subscription and share cancellation agreement the reorganization agreement pursuant to the reorganization agreement us hold co became a direct wholly owned subsidiary of us parent and us sub became a wholly owned subsidiary of us hold co the reorganization agreement also provided inter alia that us hold co would assume from us parent all of us parent’s rights and obligations under the put option call option and pledge and security agreements the reorganization paragraphs d i and d ii of sec_1_894-1 apply to items of income paid_by a domestic_reverse_hybrid_entity after date given our assumption that the taxpayer’s option transaction structure no longer involved payments to or from a domestic_reverse_hybrid_entity after the reorganization agreement see below sec_1_894-1 would not be applicable to the structure after date year the remaining us hold co shares were owned by a domestic subsidiary of us parent postf-145472-05 it is our understanding that the parties to the reorganization agreement intended that the contractual arrangements with respect to the preferred share would continue to be treated as a secured financing for u s federal_income_tax purposes following the reorganization agreement however the parties intended that us hold co rather than us parent would be treated as owning the preferred share accordingly for u s tax purposes the parties intended that the direct payments by us sub to country a co with respect to the preferred share would be treated as deemed_dividend payments from us sub to us hold co followed by deemed interest payments from us hold co to country a co the reorganization agreement did not affect us parent’s treatment of the transactions with respect to the preferred share as a secured financing for purposes of filing its consolidated u s federal_income_tax return for the second of the taxable years at issue taxable_year ending date year for purposes of the present memorandum we assume that the option transaction structure no longer involved deemed payments to or from a domestic_reverse_hybrid_entity following the reorganization agreement that is after date year we express no opinion as to whether this assumption is correct in addition we express no opinion as to whether it was correct to continue to treat these transactions in the aggregate as a secured financing for u s federal_income_tax purposes following the reorganization agreement v treatment of the transactions for purposes of the united states-country a income_tax treaty consistent with the treatment of the transactions at issue as a secured financing for u s tax purposes country a co us parent and us sub also intended that the transactions be treated in the same manner for purposes of the united states-country a income_tax treaty6 the treaty and that the deemed us parent-to-country a co interest payments be exempt from u s withholding_tax pursuant to article --- interest of the treaty for purposes of the present memorandum we assume that country a ------------------------------------------------------------------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------- please note that the united_states and country a signed a new income_tax treaty on ------------------ which entered into force on ---------------------- for purposes of this memorandum we assume that post-reorganization agreement the parties intended that the transactions at issue would continue to be treated as a secured financing for purposes of the treaty - that is that the deemed us hold co-to-country a co interest payments would be exempt from u s withholding_tax pursuant to article --- of the treaty a discussion of the application of the treaty to the deemed us hold co-to-country a co interest payments is beyond the scope of the present memorandum treatment of the transactions for purposes of country a tax law postf-145472-05 co was a resident of country a entitled to the benefits of the treaty in the taxable years at issue but we express no opinion as to whether that assumption is correct vi it is our understanding that for country a tax purposes the transactions at issue were treated in accordance with their form the direct payments made by us sub to country a co with respect to the preferred share were taxable dividends for country a tax purposes the us parent-to-country a co interest payments were deemed to exist for u s tax purposes only the deemed interest payments did not exist for country a tax purposes and accordingly no country a entity claimed an interest_deduction associated with these payments for country a tax purposes it is our understanding that country a co paid country a tax on the preferred share dividends in accordance with country a tax law country a co would have been allowed to claim a foreign_tax_credit for a pro_rata share of the u s taxes on the us sub income out of which the dividends were paid law and analysis the sec_894 domestic reverse hybrid regulations i sec_1_894-1 of the treasury regulations provides special rules that apply with respect to payments made and received by a domestic_reverse_hybrid_entity drh the term domestic_reverse_hybrid_entity is defined by sec_1_894-1 as a domestic entity that is treated as not fiscally transparent for u s tax purposes and as fiscally transparent under the laws of the interest holder’s jurisdiction with respect to the item_of_income received by the domestic entity in general an item_of_income paid_by a drh to an interest holder in the drh shall have the character of such item_of_income under u s law sec_1_894-1 sec_1_894-1 of the treasury regulations contains a general_rule that applies when a domestic entity makes a payment to a related drh that is treated as a dividend under either u s law or the laws of the jurisdiction of a related foreign interest holder in the drh and the drh makes a payment of a type that is deductible for u s tax purposes to the related foreign interest holder or to certain other related_persons and for which a reduction in u s withholding_tax would be allowed under an applicable income_tax treaty in such cases in general to the extent that the payment by the drh does not exceed the sum of the portion of the payment made to the drh by the related domestic entity treated as derived by the related foreign interest holder the payment by the drh will be treated for all purposes of the internal_revenue_code the code and any applicable income_tax treaty as a dividend similarly following the reorganization agreement the us hold co-to-country a co interest payments were deemed to exist for u s tax purposes only we have not been provided information on the country a foreign tax_credits claimed in the taxable years at issue in respect of dividends on the preferred share postf-145472-05 distribution within the meaning of code sec_301 sec_1 d ii b iii accordingly the u s tax to be withheld from the payment by the drh is determined based on the appropriate rate of withholding applicable to dividends_paid from the drh to the related foreign interest holder sec_1_894-1 of the treasury regulations provides a special rule for determining the amount to be recharacterized as a dividend under sec_1_894-1 paragraphs d ii and d iii of sec_1_894-1 apply to items of income paid_by a domestic_reverse_hybrid_entity on or after date with respect to amounts received by the domestic_reverse_hybrid_entity on or after date sec_1_894-1 ii withholding_tax under the code and the treatment of interest and dividends under the treaty sec_881 of the code generally imposes a 30-percent tax on the amount received by a foreign_corporation as interest or dividends from sources within the united_states to the extent that the interest or dividends are not effectively connected with the conduct_of_a_trade_or_business within the united_states sec_894 of the code provides that the provisions of the code shall be applied to any taxpayer with due regard to any treaty obligation of the united_states that applies to such taxpayer sec_1_871-12 of the treasury regulations provides that with respect to items of income the tax on which is limited by a tax_convention the tax is determined upon the gross amount of each separate item_of_income at the reduced_rate applicable to that item under the convention paragraph -- of article --- dividends of the treaty provides in relevant part that dividends_paid by a u s_corporation to a country a resident corporation that controls directly or indirectly at least percent of the voting_stock of the u s_corporation paying the dividends may be taxed by the united_states at a rate not to exceed five percent paragraph -- of article --- interest of the treaty provides generally that interest derived and beneficially owned by a resident of country a shall be exempt from tax by the united_states iii discussion a application of sec_1_894-1 to deemed payments us parent is domestic entity that is treated as a corporation for u s tax purposes for country a tax purposes us parent is treated as a fiscally_transparent_entity within the meaning of sec_1_894-1 us parent is thus a drh as that term is defined in sec_1_894-1 because us parent is a drh treas reg postf-145472-05 sec_1_894-1 may apply to recharacterize certain deductible payments made by us parent on or after date as nondeductible dividends for u s tax purposes in discussing whether sec_1_894-1 will apply in the present factual context it is first necessary to address the threshold issue whether the payments described in sec_1_894-1 include payments that are deemed to occur for u s tax purposes in the present case us parent has taken the position that substance-over-form principles should apply to treat a series of contractual arrangements in the same manner as a secured financing for certain code purposes and for purposes of the treaty under the present facts we believe that the same substance-over-form principles should prevail for purposes of applying the sec_894 rules on payments by domestic reverse hybrid entities - that is that sec_1_894-1 should apply with respect to payments that occur or are deemed to occur for purposes of the code as part of a secured financing_transaction sec_1_894-1 of the treasury regulations provides expressly that an item_of_income paid_by a domestic_reverse_hybrid_entity shall have the character of such item_of_income under u s law this reference to u s law cannot be limited to situations where there is an actual payment but rather incorporates all u s tax principles in determining whether there has been a deductible payment and to whom that payment was made we additionally believe that to the extent a taxpayer may characterize a transaction in a manner inconsistent with its form equitable considerations would require that the taxpayer be held to such substance-over-form re-characterization for purposes of the sec_894 domestic reverse hybrid regulations cf 756_f2d_569 7th cir taxpayer may assert the priority of substance over form where his tax reporting and actions show an honest and consistent respect for the substance of a transaction quoting weinert’s 294_f2d_750 5th cir 108_tc_590 taxpayer permitted to assert substance over form where tax reporting and actions show honest and consistent respect for substance citing fnma v commissioner 90_tc_405 87_tc_1417 aff’d 896_f2d_580 d c cir taxpayer asserting priority of substance of a transaction must show honest and consistent respect for substance in tax reporting and actions citing comdisco this is especially true where as here the taxpayer’s transactions create in substance precisely the type of drh structure targeted by the sec_894 regulations a drh structure established by related parties to manipulate differences in u s and foreign_entity classification rules to reduce through inappropriate use of an income_tax treaty the amount of tax imposed on items of income paid_by domestic corporations to related foreign companies 2002_2_cb_78 preamble to the final sec_894 regulations relating to domestic reverse hybrids as explained in the preamble to the regulations see sec_1_894-1 postf-145472-05 the overall effect of these transactions if respected would be a deduction under u s law for the outbound payment of an item_of_income the reduction or elimination of u s withholding_tax on that item_of_income under an applicable treaty and the imposition of little or no tax by the treaty partner on the item_of_income this result is inconsistent with the expectation of the united_states and its treaty partners that treaties should be used to reduce or eliminate double_taxation of income id the overall effect of the transactions at issue in the present case if respected follows this framework a deduction under u s law for us parent’s outbound interest payment to country a co the elimination of u s withholding_tax on the interest payment under the treaty and the imposition of little or no tax by country a on the item_of_income characterized for country a tax purposes as a dividend as a result of the country a foreign_tax_credit this result is inconsistent with the intent of the treaty to reduce or eliminate double_taxation of income but not to result in double non-taxation of income the deemed payments at issue in the present case are thus clearly within the intended scope of the sec_894 regulations and the payments described in sec_1_894-1 include deemed payments b application of sec_1_894-1 to the present facts the discussion below addresses the application of sec_1_894-1 to the present facts as noted above given our assumption that the option transaction structure no longer involved actual or deemed payments to or from a drh following the reorganization agreement this discussion is not relevant with respect to payments made by us sub or us hold co occurring after date year given the complexity of the sec_894 drh regulations the relevant portion of the regulations is reproduced in italics immediately preceding the corresponding discussion sec_1_894-1 b payment made to related foreign interest holder general_rule if- i a domestic entity makes a payment to a related domestic_reverse_hybrid_entity that is treated as a dividend under either the laws of the united_states or the laws of the jurisdiction of a related foreign interest holder in the domestic_reverse_hybrid_entity in the taxable years at issue us sub was deemed for u s law purposes to pay dividends to us parent a related11 domestic_reverse_hybrid_entity the condition described in the first clause of sec_1_894-1 is thus satisfied under the present facts see sec_1_894-1 postf-145472-05 and under the laws of the jurisdiction of the related foreign interest holder in the domestic_reverse_hybrid_entity the related foreign interest holder is treated as deriving its proportionate share of the payment under the principles of paragraph d of this section under the laws of country a the related12 foreign interest holders in us parent country a sub and country a sub were not treated as deriving their proportionate share of the deemed_dividend payments however under sec_1 d ii b the portion of the dividend payments treated as derived by the related foreign interest holders is increased by the portion of the dividend payments derived by any other person described in sec_1_894-1 - that is a person wherever organized the income and losses of which are available under the laws of country a to offset the income and losses of the related foreign interest holder for country a tax purposes country a co derived the dividend payment on the preferred sharedollar_figure country a’s group relief provisions allow a company to claim tax relief for the losses and certain other tax reliefs of another company if both companies are members of the same groupdollar_figure in response to an idr us sub has indicated that the country a group relief provisions would apply to make available country a co’s income and losses to offset the income and losses of country a sub and country a sub the related foreign interest holders country a co is accordingly a person described in sec_1_894-1 and the portion of the dividend payments treated as derived by country a sub and country a sub is increased by the amount of the dividends with respect to the preferred share derived for country a tax purposes by country a co in the present factual context we do not consider it significant that country a does not view any payment as being made between us sub and us parent that is that country a does not recharacterize the transaction as a secured financing because us parent is fiscally transparent for purposes of country a law there is no economic or tax difference between a dividend payment from us sub to us parent and a dividend payment from us sub directly to its related foreign interest holders or to any other person described in sec_1_894-1 in the present case the condition described in the second clause of sec_1_894-1 is thus satisfied id under the principles of sec_1_894-1 an entity is considered to derive an item_of_income if the entity is not fiscally transparent under the laws of the entity’s jurisdiction with respect to the item_of_income country a co was not fiscally transparent under country a law with respect to the dividends on the preferred share see generally ---------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------- postf-145472-05 sec_1_894-1 and ii the domestic_reverse_hybrid_entity makes a payment of a type that is deductible for u s tax purposes to the related foreign interest holder or to a person wherever organized the income and losses of which are available under the laws of the related foreign interest holder to offset the income and losses of the related foreign interest holder and for which a reduction in u s withholding_tax would be allowed under an applicable income_tax treaty in the taxable years at issue us parent was deemed for u s law purposes to make deductible_interest payments to country a co a person the income and losses of which are available under country a law to offset the income and losses of the related foreign interest holders in us parentdollar_figure under the treaty a reduction in u s withholding_tax to zero would be allowed if the interest were beneficially owned by a resident of country a entitled to the benefits of the treaty in the present case the condition described in sec_1_894-1 is thus satisfied the taxpayer in the present case has argued in part that sec_1 d ii b ii is intended to cover situations where there is an interest_expense_deduction in the united_states and under the law of the foreign interest holder the language of the regulation however requires solely that the payment be deductible for u s tax purposes - there is no requirement that the interest_expense be deductible under the laws of the related foreign interest holder as noted in the preamble to the domestic reverse hybrid regulations the deduction targeted by the regulations is the deduction under u s law for the outbound payment of the item_of_income ie the u s deduction for the outbound interest payment by the drh see 2002_2_cb_78 taxpayer’s argument in this regard appears to ignore the circumstance that a drh is by definition fiscally transparent under the laws of the interest holder’s jurisdiction interest payments by a drh to its interest holder will generally not have any net tax effect in the foreign jurisdiction that considers the drh to be fiscally transparentdollar_figure as discussed above under the present facts the conditions described in sec_1_894-1 and ii are satisfied we thus turn to sec_1 d ii b iii to determine the consequences with respect to post-date interest payments from us parent to country a co sec_1_894-1 then see the discussion of the country a group relief provisions in section iii b above under the law of the foreign jurisdiction a payment from a fiscally_transparent_entity to its interest holder will likely either be disregarded or offset by a corresponding income inclusion postf-145472-05 iii to the extent the amount of the payment described in paragraph d ii b ii of this section does not exceed the sum of the portion of the payment described in paragraph d ii b i of this section treated as derived by the related foreign interest holder and the portion of any other prior payments described in paragraph d ii b i of this section treated as derived by the related foreign interest holder the amount of the payment described in d ii b ii of this section will be treated for all purposes of the internal_revenue_code and any applicable income_tax treaty as a distribution within the meaning of sec_301 of the internal_revenue_code and the tax to be withheld from the payment described in paragraph d ii b ii of this section assuming the payment is a dividend under sec_301 of the internal_revenue_code shall be determined based on the appropriate rate of withholding that would be applicable to dividends_paid from the domestic_reverse_hybrid_entity to the related foreign interest holder in accordance with paragraph d ii a of this section in the present case it is our understanding that the amounts of the payments described in paragraph d ii b ii are equal to the amounts of the payments described in paragraph d ii b i treated as derived by the related foreign interest holders and by other persons described in paragraph d ii b ii see sec_1 d ii b determining the amount to be recharacterized under paragraph d ii b iii the amounts of the payments described in paragraph d ii b ii ie the deemed us parent-to-country a co interest payments are accordingly treated for all purposes of the code and the treaty as dividend distributions within the meaning of sec_301 no interest_expense_deduction is permitted in respect of payments treated as sec_301 dividends under the terms of the treaty - and assuming that country a co was a resident of country a entitled to the benefits of the treaty in the taxable years at issue - the us parent-to-country a co deemed_dividend payments would be subject_to u s withholding_tax at a rate not to exceed five percentdollar_figure case development hazards and other considerations -------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- it is our understanding that country a co indirectly controlled percent of the voting_stock of us parent at all relevant times during the taxable years at issue and would thus satisfy the conditions set out in article ------- of the treaty to qualify for the five-percent dividend rate we express no opinion as to country a co’s residence for treaty purposes postf-145472-05 --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions _____________________________ elizabeth u karzon chief branch office of associate chief_counsel international


internal_revenue_service number release date index number ----------------------------------------------- --------------------------- ---------------------------------- --------------------------- --------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-115234-05 date date ----------------------------------------------------- y x ------- state year date ------------- -------------------------------------------- legend ------------------------------------------------------------ -------------------------------------------------------------------------------------- dear ---------------- --------------------------------------- ------------------------------ ---------------------- busine sec_2 busine sec_1 investments ------ a -------------------------------------------------------------------------------- plr-115234-05 seeking a ruling regarding passive_investment_income under sec_1362 and sec_1375 of the internal_revenue_code this letter is in response to your request dated date on behalf of x facts based on the materials submitted and representations within we understand the relevant facts to be as follows x was incorporated in year in accordance with the laws of state and is engaged in the active trade of busine sec_1 x also earns income from investments which are considered to be sec_1362 passive_investment_income x made an election to be treated as an s_corporation effective date thus x has accumulated_earnings_and_profits ae p from prior years which is engaged in the active trade of busine sec_2 it is anticipated that the income from x’s interests in y will provide approximately a of x’s annual gross_receipts x represents that y meets the qualifying_income exception of sec_7704 and thus is taxed as a partnership for federal_income_tax purposes x also represents that y is not an electing_large_partnership as defined by sec_775 and thus the normal flowthrough provisions of subchapter_k apply to their partners in order to diversify x purchased interests in y a publicly_traded_partnership law and analysis sec_1362 provides that an election under sec_1362 shall be sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect for the taxable_year terminated whenever the corporation has accumulated_earnings_and_profits at the close of each of three consecutive taxable years and has gross_receipts for each of the taxable years more than percent of which are passive_investment_income the termination is effective on and after the first date of the first taxable_year beginning after the third consecutive taxable_year referred to in sec_1362 sec_1362 the term passive_investment_income means gross_receipts derived from royalties rents dividends interest annuities and sales or exchanges of stock_or_securities accumulated_earnings_and_profits at the close of a taxable_year and that has gross_receipts more than percent of which are passive_investment_income within the meaning of sec_1362 except as otherwise provided in sec_1362 sec_1362 provides that sec_1375 imposes a tax on the income of an s_corporation that has sec_1_702-1 provides that each partner must take into account sec_702 provides that the character of any item_of_income gain loss sec_7704 provides that except as provided in subsection c a publicly sec_7704 provides that the term ptp means any partnership if interests in plr-115234-05 sec_702 provides that in determining income_tax_liability each partner shall take into account separately his distributive_share of the partnership’s items of income gain loss deduction and credit to the extent provided by regulations separately his distributive_share of any partnership_item that would result in an income_tax_liability for that partner different from that which would result if that partner did not take the item into account separately deduction or credit included in a partner’s distributive_share under sec_702 through shall be determined as if the item were realized directly from the source from which realized by the partnership or incurred in the same manner as incurred by the partnership traded partnership shall be treated as a corporation that partnership are traded on an established_securities_market or are readily_tradable on a secondary market or the substantial equivalent thereof sec_7704 provides that subsection a shall not apply to any publicly_traded_partnership for any taxable_year of such partnership meets the gross_income requirements of paragraph c for such taxable_year and each preceding_taxable_year beginning after date during which the partnership or any predecessor was in existence sec_7704 states that a partnership meets the gross_income requirements of this paragraph for any taxable_year if percent or more of the gross_income of such partnership for such taxable_year consists of qualifying_income means income and gains derived from the exploration development mining or production processing refining transportation including pipelines transporting gas oil or products thereof or the marketing of any mineral_or_natural_resource including fertilizer geothermal_energy and timber for purposes of this section mineral_or_natural_resource means any product of a character with respect to which a deduction for depletion is allowable under sec_611 but is not a product described in sec_613 or b revrul_71_455 1971_2_cb_318 deals with an s_corporation that operates a business in a joint_venture with another corporation in the tax_year at issue the total business_expenses exceeded gross_receipts the revenue_ruling holds that in applying the passive_investment_income limitations the s_corporation should include its sec_7704 provides in relevant part the term qualifying_income plr-115234-05 distributive_share of the joint venture’s gross_receipts and not its share of the venture’s loss in accordance with sec_702 the character of these gross_receipts were not converted into passive_investment_income upon their allocation to the s_corporation x’s distributive shares of gross_receipts from y if separately taken into account might affect its federal_income_tax liability under sec_1362 the status of x as an s_corporation could depend upon the character of its distributive shares of gross_receipts from y thus pursuant to sec_1_702-1 x must take into account separately its distributive shares of the gross_receipts from y the character of these partnership receipts for x will be the same as the character of the partnership receipts for y in accordance with sec_702 conclusion except as specifically ruled upon above no opinion is expressed as to the based solely upon the representations made and the information submitted we conclude the following x’s distributive shares of the gross_receipts of y will be included in its gross_receipts for purposes of sec_1362 and sec_1375 and x’s distributive shares of y’s gross_receipts attributable to the exploration development mining or production processing refining transportation including pipelines transporting gas oil or products thereof or the marketing of any mineral_or_natural_resource will not constitute passive_investment_income as defined by sec_1362 federal_income_tax consequences of the facts described above under any other provision of the code in particular no opinion is expressed or implied as to whether x otherwise qualifies as a subchapter_s_corporation under sec_1361 furthermore the passive_investment_income rules of sec_1362 are completely independent of the passive_activity rules of sec_469 of the code provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer who requested it sec_6110 plr-115234-05 letter_ruling will be sent to your authorized representative in accordance with the power_of_attorney on file with this office a copy of this sincerely david r haglund senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes