internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp b05 - plr-120602-00 date date corporation date x date a date b date c date d date e date f this letter responds to your date request for rulings concerning the federal_income_tax consequences of a proposed transaction the information submitted for consideration is summarized below corporation was formed as a c_corporation in date x and operated as such through its taxable_year ending date a effective for its taxable_year beginning date b an election was made for corporation to be an s_corporation as defined in sec_1361 of the internal_revenue_code at that time there was net unrealized built in gain as defined in sec_1374 in corporation’s assets on date c all of corporation’s stock was purchased by shareholders who did not qualify as s_corporation shareholders as a result corporation’s s_corporation tax_year ended at the close of the day on date d corporation elected to be a reit under sec_856 for the taxable_year beginning on date e the day after date d and ending on date f corporation also elected pursuant to sec_1_337_d_-5t of the temporary income_tax regulations for the rules of sec_1374 to apply to the net unrealized built-in-gain plr-120602-00 based solely on the information submitted and provided that corporation enters into a closing_agreement with the service agreeing among other things that corporation will be subject_to the provisions of sec_1374 as a reit to the same extent it was subject_to sec_1374 as an s_corporation we rule as follows the 10-year recognition_period described in sec_1374 for corporation will continue to be treated as commencing on date b the effective date of corporation’s election to be an s_corporation the net unrealized built-in-gain of corporation under sec_1374 will continue to be calculated based on the fair_market_value and adjusted_basis of corporation’s assets as of date a no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code and its regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings this ruling is addressed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent it is important that a copy of this letter be attached to the federal_income_tax returns of the taxpayers involved for the taxable years in which the transaction covered by this letter is consummated pursuant to a power_of_attorney on file in this office a copy of this letter has been sent to the taxpayer by chief branch sincerely yours associate chief_counsel corporate


number release date internal_revenue_service index number ------------------------------ ------------------------- ------------ ----------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------------------------------- telephone number -------------------- refer reply to cc pa apjp b01 plr-164481-05 date date sec_3406 -- backup withholding sec_3406 -- backup withholding backup withholding sec_6041 -- information_at_source fixed or determinable gains profits or income payments specifically included sec_6045 -- returns of broker sec_6045 returns of brokers sec_6049 -- returns regarding payments of interest reportable interest legend dear ------------------ this letter responds to the letter dated date submitted on behalf of the fund requesting the following rulings plr-164481-05 settlement payments from the fund to mutual_fund investors are not subject_to information reporting under sec_6041 of the internal_revenue_code except in the case of payments made directly to participants in tax-qualified retirement plans settlement payments from the fund to mutual_fund investors are not subject_to information reporting under sec_6045 settlement payments from the fund to mutual_fund investors are not subject_to information reporting under sec_6049 for purposes of meeting any obligations it may have under sec_3406 as a payor of reportable payments the fund need not solicit taxpayer identification numbers tins from the individuals to whom it will make distributions the fund may obtain the tins from the mutual funds or tax-qualified plans in which such individuals held accounts or from transfer agents performing services for the funds or plans facts based upon the facts and the representations made the fund is a qualified_settlement_fund qsf as described in sec_468b and the regulations thereunder the fund was created in year to resolve an administrative_proceeding brought by the securities_and_exchange_commission commission against x relating to investment advice provided to certain mutual funds the proceeding related to the inadequate or nonexistent disclosure of x’s policy allowing market timing trading of mutual_fund units units and to the oversight monitoring or management of trades of such units trades from at least late year through late year in an order instituting proceedings oip directed at x and individuals y and z the commission alleged that x made various material omissions and misrepresentations regarding market timing of funds and that x y and z committed certain other wrongful acts relating to trades in the units including failure to detect late trading in the units improper market timing and late trading impair the value of mutual_fund shares by depressing their net asset value improper market timing also generates excess trading volume and thus increases the advisory fees mutual funds must pay to investment advisors such as x thus the conduct of x y and z resulted in damage to the investors and a loss of capital the commission based on the improper conduct described above and the resulting damage to mutual_fund investors sought profit disgorgement and civil penalties after investigation and negotiations x y and z agreed to pay dollar_figurea in disgorgement and civil penalties to settle the commission’s claims y also agreed to pay dollar_figureb in pre-judgment interest and z agreed to pay dollar_figurec in pre- judgment interest pursuant to section a of the sarbanes-oxley_act of u s c the oip authorized a fair fund for the disgorgement penalty and pre- plr-164481-05 judgment interest components of the settlement thus permitting all of those components to be paid to injured investors those investors holding units of the mutual funds during any portion of the time period specified in the oip will be eligible to receive distributions from the fund the distributions will be based on the commission’s orders the amount available for distribution is the net settlement pool which includes the sum of dollar_figurea dollar_figureb and dollar_figurec the amount transferred by x y and z into the fund plus the amount of net_income earned by the fund investors will be allocated portions of the net settlement pool the commission’s orders provide that investors will first receive their proportionate share of losses suffered by the mutual funds due to market timing and late trading and then a proportionate share of advisory fees paid_by the mutual funds that suffered such losses during the period of market timing and late trading law and analysis ruling sec_1_468b-2 of the treasury regulations provides that in general distributions by a qsf are subject_to certain information reporting and withholding requirements sec_1_468b-2 provides that a qsf must make a return for or must withhold tax on a distribution to a claimant if one or more transferors would have been required to make a return or withhold tax had that transferor made the distribution directly to the claimant the regulations further provide that for purposes of sec_6041 and sec_6041a if a qsf makes a distribution on behalf of a transferor or a claimant the fund is deemed to make the distribution to the recipient of that payment or distribution in the course of a trade_or_business in such a situation the qsf is also deemed to have made the distribution to the transferor or claimant see sec_1_468b-2 c - d sec_6041 requires all persons engaged in a trade_or_business and making payment in the course of such trade_or_business to another person of rent salaries wages premiums annuities compensations remunerations emoluments or other fixed or determinable gains profits and income of dollar_figure or more in any taxable_year to file an information_return with the service and to furnish an information statement to the payee sec_1_6041-1 provides that payments are fixed when they are paid in amounts definitely predetermined income is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained sec_1 a requires a payor to report sec_6041 amounts on form_1099 thus payments that are not fixed or determinable are not subject_to information reporting under sec_6041 amounts a taxpayer receives to restore a loss of capital are not income except to the extent that the payment exceeds the taxpayer’s basis in the injured property that is the subject of the payment 144_f2d_110 1st cir fund payments to investors for losses the mutual funds suffered from plr-164481-05 market timing and late trading appear to constitute compensation_for a loss of capital market timing and late trading permitted or undetected by x y and z depressed the net asset value of mutual_fund shares compensation from the fund will compensate at least partially for this damage because the fund has no access to the investors’ tax basis in their mutual_fund accounts and has no need or occasion to collect information on tax basis the fund is unable to calculate how much of this compensation_for mutual_fund losses constitutes fixed or determinable income accordingly the fund has no information reporting obligations under sec_6041 for such compensation as noted above a portion of the fund payments will compensate investors for improper advisory fees paid_by the mutual funds to x although such payments may constitute gross_income to investors the fund cannot due to limitations on its data collecting authority determine whether the payments will constitute gross_income to investors the payments therefore are not fixed or determinable income within the meaning of the regulations under sec_6041 accordingly subject_to the exceptions noted below regarding distributions to qualified_retirement_plan participants and distributions of pre- judgment interest the fund has no information reporting obligations under sec_6041 the fund states that it may make a certain number of distributions directly to participants in tax-qualified retirement plans sec_72 of the code controls the taxation of such distributions and the distributions must be reported on form 1099-r pursuant to sec_6041 subject_to the dollar_figure reporting threshold set forth in sec_6041 and sec_1_6041-1 as noted above y and z will pay pre-judgment interest in addition to other sums this component of the settlement constitutes fixed or determinable income for purposes of sec_6041 accordingly the fund must report on form 1099-int any fund distributions attributable to this pre-judgment interest component subject_to any applicable exceptions in the sec_6041 regulations and the dollar_figure reporting threshold set forth in sec_6041 and sec_1_6041-1 ruling sec_1_468b-2 provides that a qsf must make a return for a distribution to a claimant if one or more transferors would have been required to make a return had that transferor made the distribution directly to the claimant sec_6045 provides generally that every person doing business as a broker shall when required by the secretary make a return in accordance with such regulations as the secretary may prescribe sec_6045 defines the term broker to include a dealer a barter_exchange and any other person who for a consideration regularly acts as a middleman with respect to property or services the regulations further define the term broker to mean a person that in the ordinary course of a trade_or_business during the calendar_year stands ready to effect sales to be made by others see sec_1_6045-1 plr-164481-05 sec_1_6045-1 provides generally that a broker shall make an information_return for each sale effected by the broker in the ordinary course of the broker’s trade_or_business sec_1_6045-1 defines a sale as any disposition of securities commodities regulated_futures_contracts or forward contracts for cash and as including redemptions of stock retirements of indebtedness and entering into short_sales the fund’s payments to investors do not result from a sale as that term is defined above the fund therefore has no information reporting obligations under sec_6045 with respect to these payments ruling sec_6049 provides that every person who makes payments of interest aggregating dollar_figure or more to any other person during any calendar_year or receives payments of interest as a nominee and who makes payments aggregating dollar_figure or more during any calendar_year to any other person with respect to the interest so received shall make a return according to the forms or regulations prescribed by the secretary sec_6049 b provides that the term_interest includes interest on any obligation issued in_registered_form or of a type offered to the public other than any obligation with a maturity at issue of a year or less which is held by a corporation pursuant to sec_6049 interest also includes interest on deposits with brokers as defined in sec_6045 the fund distributions in the present case do not relate to deposits with brokers or obligations issued in_registered_form and do not otherwise qualify as interest within the meaning of sec_6049 this is so even though interest earnings may have accrued on the funds to be paid to investors from the time x y and z paid such funds to the fund the fund distributions to investors relate to violations of securities law and compensation_for financial harm not to obligations issued in_registered_form or other instruments that generate interest as sec_6049 defines that term accordingly the fund has no information reporting obligations under sec_6049 regarding its distributions to the investors ruling sec_3406 generally provides that in the case of any reportable_payment if a the payee fails to furnish his or her tin to the payor in the manner required b the secretary notifies the payor that the tin furnished by the payee is incorrect c there has been a notified_payee_underreporting of interest and dividends or d there has been a certification failure collectively referred to as payee failures then the payor shall deduct and withhold from such reportable_payment a backup withholding amount totaling of such payment plr-164481-05 sec_3406 provides that the term reportable_payment means any reportable_interest_or_dividend_payment and any other_reportable_payment sec_3406 provides that the term other_reportable_payment includes any payment of a kind and to a payee required to be shown on a return under sec_6041 or sec_6045 in light of rulings one through three above only direct payments by the fund to participants in tax-qualified plans and fund payments of pre-judgment interest will be reportable payments subject_to backup withholding under sec_3406 in order to meet its obligations under sec_3406 and to include tins on information returns it must provide for these reportable payments the fund plans to obtain those tins from one of the following sources the plan_administrator the mutual funds in which the investors held accounts or the transfer agents that provide services to the administrator or mutual funds obtaining the tins in this manner should prove more reliable and less burdensome and costly to the fund than soliciting the tins from the plan participants and pre-judgment interest recipients collectively payees in light of the authority it has been granted by the commission the fund will be able to obtain the payees’ tins from the plan administrators mutual funds or transfer agents the fund will not be required to solicit tins from the payees for purposes of applying the backup withholding rules of sec_3406 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 furthermore this letter expresses no opinion about information reporting requirements for fund distributions that are not made directly to the injured investors this letter also expresses no opinion about the income_tax consequences to investors of fund distributions this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party plr-164481-05 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 enclosure carol p nachman acting senior technician reviewer office of associate chief_counsel sincerely procedure and administration administrative provisions and judicial practice


office_of_chief_counsel internal_revenue_service memorandum number release date cc intl b03 tbhughes postu-100865-14 uilc date date to william r davis associate area_counsel denver large business international from barbara a felker branch chief branch associate chief_counsel international usparent state a x cfc1 y cfc4 y cfc5 uscorp2 x cfc2 x cfc3 country x country y tax authority percent percent percent percent percent percent amount amount amount amount amount ---------------------------------------- -------------- ------------------------------------------------------ --------------------------------- ----------------------------------------------------------------- ---------------------------------- ----------------------------------- ------------------------------------------ ------------- ------------ ------------------------------------ -------- -------- -------- -------- -------- -------- --------------------- --------------------- ------------------------ ------------------------ ------------------------ postu-100865-14 subject foreign tax redeterminations with respect to pre-1987 accumulated_profits this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent issue whether additional_amounts of creditable foreign_income_tax paid in with respect to pre-1987 accumulated_profits of x cfc3 and its country x subsidiaries for taxable years through should be accounted for by adjusting the foreign corporations’ relevant annual layers of pre-1987 accumulated_profits and pre-1987 foreign_income_taxes or their pools of post-1986_undistributed_earnings and post-1986_foreign_income_taxes which were established beginning in conclusion under the provisions of sec_902 sec_1 a and a and temp sec_1_905-5t a foreign_tax_redetermination with respect to a taxable_year prior to the first taxable_year taken into account in computing the post-1986_undistributed_earnings and post-1986_foreign_income_taxes of the country x controlled_foreign_corporations cfcs is not taken into account by adjusting the corporations’ pools of post-1986_foreign_income_taxes and post-1986_undistributed_earnings instead the additional foreign taxes paid must be accounted for by adjusting the cfcs’ annual layers of pre-1987 accumulated_profits and pre-1987 foreign_income_taxes because the cfcs’ pre-1987 accumulated_profits were eliminated in connection with the cfcs’ deemed liquidations as the result of check-the- box entity classification elections in no portion of those earnings has been or will ever be included in the taxable_income of usparent’s consolidated_group accordingly no portion of the cfcs’ pre-1987 foreign_income_taxes including the additional_amounts paid in with respect to taxable years are eligible to be deemed paid because all such taxes were paid with respect to taxable years when x cfc3 and its country x subsidiaries were not cfcs any such taxes paid_by any country x subsidiary below the third tier in the qualified_group are ineligible to be deemed paid for the additional reason that sec_902 limits credits for foreign_income_taxes paid_by fourth- fifth- and sixth-tier corporations to taxes paid with respect to post-1997 taxable years in which the corporation was a cfc facts usparent a domestic_corporation incorporated in state a files a consolidated_return on a calendar_year basis using the accrual_method of accounting usparent owns percent of x cfc1 which was incorporated in country x in postu-100865-14 immediately before the transactions at issue usparent owned percent of y cfc4 which owned percent of y cfc5 y cfc4 and y cfc5 are country y corporations usparent owned percent and y cfc5 owned percent in total comprising of uscorp2 a member of usparent’s consolidated_group since it was acquired together with the country y cfcs in in prior to being acquired by usparent uscorp2 had acquired percent more than and less than of the voting_stock of x cfc2 a country x corporation as a result x cfc2 and its wholly-owned country x subsidiaries became noncontrolled sec_902 corporations as defined in sec_904 in in usparent indirectly acquired the remaining voting_stock of x cfc2 accordingly x cfc2 and its wholly-owned country x subsidiaries became cfcs as defined in sec_957 in x cfc2 was subsequently renamed x cfc3 immediately before the transactions at issue uscorp2 directly owned percent more than of the voting_stock of x cfc3 x cfc3 was also a member of a qualified_group as defined in sec_902 through a chain of ownership usparent wholly owned x cfc1 which owned percent of the voting_stock of x cfc3 y cfc5 a second-tier cfc of usparent owned the remaining percent more than of x cfc3’s voting_stock at the time of its acquisition by usparent in x cfc2 had an ongoing dispute with tax authority with respect to the country x tax_liabilities of x cfc2 and its wholly- owned country x subsidiaries for their foreign calendar taxable years in x cfc3 as successor to x cfc2 and tax authority agreed to settle the outstanding audit issues relating to the tax_liability of the x cfc2 group for taxable years for a payment by x cfc3 of amount of which amount was payment of income_tax_liability these amounts were paid in mid-2007 agreed reductions in the amounts of loss_carryovers arising from the settlement agreement also increased the country x tax_liabilities of x cfc3’s country x group for taxable years and in november and date a number of country x cfcs that were wholly- owned by x cfc3 each filed form_8832 to elect to be treated as disregarded entities as provided in sec_301_7701-3 later in date x cfc3 filed form_8832 to elect to be treated as a partnership and then x cfc1 filed form_8832 to elect to be treated as a disregarded_entity as described below after the resulting deemed liquidations x cfc1 was treated as a disregarded_entity owned by usparent and x cfc3 was treated as a foreign_partnership owned by usparent y cfc5 and uscorp2 for u s tax purposes the other electing country x corporations that were directly or indirectly wholly-owned by x cfc3 were treated as disregarded entities owned by x cfc3 usparent and exam agree that as a result of the entity classification elections each lower-tier entity wholly owned by x cfc3 was deemed to have liquidated into x cfc3 in a nontaxable sec_332 liquidation requiring under sec_381 x cfc3 to succeed to and take into account all of the lower-tier entities’ earnings_and_profits postu-100865-14 e_p and foreign_income_taxes sec_301_7701-3 and sec_301 g i and ii sec_381 sec_381 and sec_367 sec_1_367_b_-7 pursuant to sec_1_367_b_-7 the post-1986_undistributed_earnings and the associated post-1986_foreign_income_taxes of those liquidating country x subsidiaries that were members of x cfc3’s qualified_group were combined with the post-1986_undistributed_earnings and post-1986_foreign_income_taxes of x cfc3 pursuant to sec_1_367_b_-7 x cfc3 also succeeded to the pre-1987 accumulated_profits and pre-1987 foreign_income_taxes of the liquidating country x subsidiaries but these amounts continued to be maintained in pre-pooling annual layers and were not combined with each other or with the pre-pooling annual layers of x cfc3 sec_1_367_b_-7 usparent and exam further agree that x cfc3 was next deemed to have liquidated into uscorp2 x cfc1 and y cfc5 in a taxable sec_331 liquidation resulting in an amount of sale gain which is calculated under sec_1248 being recharacterized as a dividend to each of uscorp2 x cfc1 and y cfc5 the portion of the gain treated as a dividend is the e_p attributable to the x cfc3 stock that were accumulated during the post-2001 taxable years when x cfc3 and its country x subsidiaries were cfcs which did not include any portion of the pre-1987 accumulated_profits of x cfc3 or its country x subsidiaries see sec_964 and sec_1248 and sec_301 g and a pursuant to sec_3 of notice_2007_9 2007_1_cb_401 the portion of the gain on the x cfc3 stock that was recharacterized as a dividend under sec_964 and sec_1248 but not the remainder of the capital_gain realized by x cfc1 and y cfc5 was eligible for the sec_954 exemption from foreign_personal_holding_company_income for purposes of subpart_f each of uscorp2 x cfc1 and y cfc5 was eligible to compute an amount of foreign taxes deemed paid with respect to the sec_1248 deemed_dividend resulting from the deemed sale of x cfc3 see sec_902 sec_902 sec_1248 and sec_964 finally usparent and exam agree that x cfc1 was next deemed to have liquidated into usparent in a sec_332 liquidation resulting in usparent including in income as a deemed_dividend the all e_p amount with respect to the stock of x cfc1 see sec_1_367_b_-3 the deemed_dividend was considered paid out of the e_p with respect to which the deemed_dividend was determined sec_1 b - d and -2 e usparent and exam agree that usparent properly excluded the pre-1987 accumulated_profits of x cfc3 and x cfc3’s country x subsidiaries including those accumulated in in computing the amounts of recharacterized sale gain arising from the sec_331 deemed liquidation of x cfc3 that were treated as dividends in the hands of uscorp2 x cfc1 and y cfc5 under sec_964 and sec_1248 accordingly none of those earnings were included in the taxable_income or e_p of uscorp2 x cfc1 and y cfc5 in connection with the deemed sec_331 liquidation of x cfc3 or in the computation of the all e_p amount usparent included in income on the deemed sec_332 liquidation of x cfc1 because the deemed sec_331 postu-100865-14 liquidation of x cfc3 was not subject_to sec_381 none of those pre-acquisition earnings carried over to or were otherwise taken into account by uscorp2 x cfc1 or y cfc5 in computing its deemed_paid_foreign_tax_credit under sec_902 for taxable_year with respect to the liquidating distributions from x cfc3 and x cfc1 usparent included in x cfc3’s general category post-1986_foreign_income_taxes amount of taxes that x cfc3 paid in taxable_year to tax authority that were related to the settlement by x cfc3 of the country x tax_liabilities of x cfc3 and its wholly-owned country x subsidiaries relating to taxable years on its u s tax_return for usparent claimed a total deemed paid credit of amount of which amount is derived from taxes paid in to tax authority with respect to x cfc3’s country x group’s taxable years you requested advice as to whether usparent properly included in the country x cfcs’ post-1986_foreign_income_taxes pools and claimed deemed-paid foreign tax_credits in connection with deemed dividends and inclusions from post-1986_undistributed_earnings for the additional_amounts of creditable income_tax paid to country x in with respect to the country x cfcs’ pre-1987 accumulated_profits for their through taxable years although not discussed in this advice adjustments to e_p included in the computation of the country x cfcs’ post-1986_undistributed_earnings may also affect the computation of foreign taxes deemed paid_by usparent and uscorp2 in connection with deemed dividends or inclusions out of those post-1986_undistributed_earnings law and analysis a foreign taxes deemed paid under sec_902 sec_901 provides that if the taxpayer chooses to have the benefits of subpart a - foreign_tax_credit the tax_imposed_by_chapter_1 shall subject_to the limitation of sec_904 be credited with the amounts provided in the applicable paragraph of subsection b plus in the case of a corporation the taxes deemed to have been paid under sec_902 and sec_960 sec_901 states that subject_to the limitation of sec_904 a domestic_corporation is allowed to claim a credit under sec_901 for the amount of any income_war_profits_and_excess_profits_taxes paid_or_accrued during the taxable_year to any foreign_country or to any possession_of_the_united_states under sec_902 a domestic_corporation which owns percent or more of the voting_stock of a foreign_corporation from which it receives dividends in any taxable_year shall be deemed to have paid the same proportion of such foreign corporation’s post- foreign_income_taxes as the amount of such dividends determined without regard to sec_78 bears to such foreign corporation’s post-1986_undistributed_earnings postu-100865-14 sec_1_1248-1 provides that if a 10-percent domestic corporate shareholder includes an amount in its gross_income as a dividend under sec_1248 upon a sale_or_exchange of stock in a first-tier foreign_corporation the foreign_tax_credit provisions shall apply in the same manner and subject_to the same conditions and limitations as if the first-tier corporation on such date distributed to the_domestic_corporation as a dividend that portion of the amount included in gross_income which does not exceed the e_p of the first-tier corporation attributable to the stock under sec_1_1248-2 or sec_1_1248-3 as the case may be in addition sec_1_367_b_-2 provides that the all e_p amount income inclusion is treated as a dividend for purposes of the internal_revenue_code accordingly usparent and uscorp2 were entitled to compute an amount of foreign taxes deemed paid under sec_902 with respect to the income inclusions on the deemed liquidations of x cfc1 and x cfc3 respectively b inclusion of taxes paid_by lower-tier entities in foreign taxes deemed paid sec_902 provides that a foreign_corporation that owns percent or more of the voting_stock of another foreign_corporation that is a member of the same qualified_group as defined in sec_902 shall be deemed to have paid the same proportion of the lower-tier corporation’s post-1986_foreign_income_taxes as would be determined under sec_902 if the recipient were a domestic_corporation sec_902 defines a qualified_group as a foreign_corporation with a percent domestic corporate shareholder and any other foreign_corporation of which the_domestic_corporation owns at least percent of the voting_stock indirectly through a chain of foreign_corporations connected through stock ownership of at least percent of their voting_stock and such other foreign_corporation is not below the sixth tier in such chain however the term qualified_group does not include any foreign_corporation below the third tier in the chain unless such foreign_corporation is a cfc in which the_domestic_corporation is a united_states_shareholder as defined in sec_951 id in addition sec_902 provides that foreign_income_taxes paid_by a member of the qualified_group below the third tier are eligible to be deemed paid only if such taxes were paid with respect to periods during which the member was a cfc section a of the taxpayer_relief_act_of_1997 p l amended sec_902 to extend the tier limit for deemed paid taxes from three tiers to six effective for taxes of foreign_corporations for taxable years of such corporations beginning after date accordingly sec_1_902-1 provides that no foreign_income_taxes of cfcs below the third tier that were paid_or_accrued with respect to taxable years beginning on or before date or during which the foreign_corporations were not cfcs are eligible to be deemed paid accordingly in connection with the deemed sec_332 liquidations of its country x subsidiaries under sec_381 and sec_1_367_b_-7 x cfc3 succeeded to the earnings and taxes of the liquidating country x subsidiaries as provided therein but postu-100865-14 foreign_income_taxes paid_or_accrued by any fourth- fifth- or sixth-tier country x subsidiary are eligible to be deemed paid only to the extent those taxes were paid_or_accrued with respect to the post-2001 taxable years during which those subsidiaries were cfcs c classification of foreign_income_taxes as post-1986_foreign_income_taxes or pre- foreign_income_taxes under sec_902 the term post-1986_undistributed_earnings means the amount of the e_p of the foreign_corporation computed in accordance with sec_964 and sec_986 accumulated in taxable years beginning after date as of the close of the taxable_year of the foreign_corporation in which the dividend is distributed and without diminution by reason of dividends distributed during such taxable_year sec_902 provides that the term post-1986_foreign_income_taxes means the sum of the foreign_income_taxes with respect to the taxable_year of the foreign_corporation in which the dividend is distributed and the foreign_income_taxes with respect to prior taxable years beginning after date to the extent such foreign taxes were not attributable to dividends distributed by the foreign_corporation in prior taxable years however under sec_902 if the first day on which the requirements of sec_902 are met with respect to any foreign_corporation is in a taxable_year of such corporation beginning after date the post-1986_undistributed_earnings and the post-1986_foreign_income_taxes of such foreign_corporation shall be determined by taking into account only periods beginning on and after the first day of the first taxable_year in which such requirements are met sec_902 provides that the requirements of sec_902 are met with respect to any foreign_corporation if percent or more of the voting_stock of such foreign_corporation is owned by a domestic_corporation or the requirements of sec_902 relating to the inclusion of the foreign_corporation in a chain of foreign_corporations constituting a qualified_group are met with respect to such foreign_corporation see also sec_1_902-1 sec_1_902-1 sec_1_902-1 and sec_1_902-1 defining post-1986_foreign_income_taxes and post-1986_undistributed_earnings with reference to the special effective date provisions of sec_902 sec_902 provides rules with respect to the treatment of distributions out of earnings accumulated in taxable years beginning before and in post-1986 taxable years before the requirements of sec_902 are met with respect to the foreign_corporation sec_902 provides that in the case of any dividend paid_by a foreign_corporation out of accumulated_profits as defined in sec_902 prior to amendment by the tax_reform_act_of_1986 tra for taxable years beginning before the first taxable_year taken into account in determining the post-1986_undistributed_earnings of such corporation the pre-1986 tra version of sec_902 applies prior to amendment by the tra sec_902 provided for the calculation postu-100865-14 of deemed-paid taxes on the basis of annual layers of earnings and taxes rather than on the basis of multi-year pools of earnings and taxes sec_902 and sec_1_902-1 provide that dividends_paid in post-1986 taxable years shall be treated as made first out of post-1986_undistributed_earnings to the extent thereof under sec_1_902-1 consistent with the law in effect prior to the tra and sec_1_902-3 any dividend in excess of post-1986_undistributed_earnings is attributable to pre-1987 accumulated_profits for a taxable_year to the extent thereof on a last-in_first-out basis under sec_902 and sec_1 b foreign taxes deemed paid with respect to dividends_paid out of pre-1987 accumulated_profits are computed under sec_902 and the regulations thereunder as in effect prior to the effective date of the tra sec_1_902-1 provides that the term pre-1987 accumulated_profits means the amount of the e_p of a foreign_corporation computed in accordance with sec_902 and attributable to its taxable years beginning before date however consistent with sec_902 if the special effective date of sec_902 and sec_1_902-1 applies pre-1987 accumulated_profits also includes any e_p computed in accordance with sec_964 and sec_986 attributable to the foreign corporation's taxable years beginning after date but before the first day of the first taxable_year of the foreign_corporation in which the ownership requirements of sec_902 and sec_1_902-1 through are met with respect to that corporation id under sec_902 and sec_1_902-1 the amount of a distribution out of pre-1987 accumulated_profits and the amount of foreign_income_taxes deemed paid under sec_902 with respect thereto shall be determined and translated into united_states dollars by applying the law as in effect prior to the effective date of the tra sec_1_902-1 provides that the term pre-1987 foreign_income_taxes means any foreign_income_taxes paid accrued or deemed paid_by a foreign_corporation on or with respect to its pre-1987 accumulated_profits pre-1987 accumulated_profits and pre-1987 foreign_income_taxes are computed and maintained in annual layers in accordance with sec_1_902-3 see sec_1_902-3 e and f x cfc3 and its wholly-owned country x subsidiaries first became noncontrolled sec_902 corporations in when uscorp2 met the requirements of a domestic shareholder with respect to x cfc3 under sec_902 and sec_1 a therefore the post-1986_undistributed_earnings and post-1986_foreign_income_taxes of the country x cfcs that were members of x cfc3’s qualified_group included only earnings and taxes for taxable years beginning on and after date the first day of the foreign corporations’ first taxable_year in which uscorp2 met such ownership requirements sec_902 sec_1_902-1 e_p accumulated by the qualified_group members prior to date are pre-1987 accumulated_profits attributable to taxable years beginning before the first day of the first taxable_year in which the ownership requirements were met by uscorp2 with postu-100865-14 respect to x cfc3 and the lower-tier corporations became members of a qualified_group sec_1_902-1 and foreign_income_taxes paid accrued or deemed paid_by x cfc3 and its country x subsidiaries on or with respect to their pre-1987 accumulated_profits are pre-1987 foreign_income_taxes sec_1_902-1 accordingly additional_amounts of creditable_foreign_taxes paid_by x cfc3 in with respect to the pre-1987 accumulated_profits of the country x group for its taxable years are pre- foreign_income_taxes these amounts are definitionally excluded from and therefore may not be included in the post-1986_foreign_income_taxes of x cfc3 or its country x subsidiaries sec_1_902-1 sec_1_902-1 and sec_1 a i d additional rules with respect to foreign tax redeterminations sec_905 provides that in general if a accrued taxes when paid differ from the amounts claimed as credits by the taxpayer b accrued taxes are not paid before the date years after the close of the taxable_year to which such taxes relate or c any_tax paid is refunded in whole or in part the taxpayer shall notify the secretary who shall redetermine the amount of the tax for the year or years affected sec_905 also provides that the secretary may prescribe adjustments to the pools of post-1986_foreign_income_taxes and the pools of post-1986_undistributed_earnings under sec_902 and sec_960 in lieu of the redetermination of u s tax required under the preceding sentence sec_989 also authorizes regulations providing for alternative adjustments to the application of sec_905 that are necessary or appropriate to carry out the purposes of subpart j relating to foreign_currency_transactions sec_905 provides additional rules for taxes not paid within two years in general except as provided in sec_905 in making the redetermination under sec_905 no credit is allowed for accrued taxes not paid before the date two years after the close of the taxable_year to which such taxes relate under sec_905 and ii any such taxes if subsequently paid are taken into account in the case of taxes deemed paid under sec_902 or sec_960 for the taxable_year in which paid and no redetermination shall be made under sec_905 by reason of such payment and in any other case for the taxable_year to which such taxes relate sec_905 was amended and sec_905 and sec_905 were added by the taxpayer_relief_act_of_1997 p l sec_1102 effective for taxes which relate to taxable years beginning after date however under sec_902 and sec_1_902-1 sec_1_902-1 sec_1_902-1 and sec_1_902-1 the amount of a distribution out of pre-1987 accumulated_profits and the amount of foreign_income_taxes deemed paid under sec_902 with respect to such a distribution is determined by applying the law in effect prior to the effective date of the tra which did not include the provisions of sec_905 and sec_905 postu-100865-14 temporary and proposed_regulations published under sec_905 in and amended in part in generally provide that foreign tax redeterminations with respect to post-1986_undistributed_earnings are taken into account through prospective adjustments to the pools of post-1986_undistributed_earnings and post-1986_foreign_income_taxes rather than by redetermining the foreign taxes deemed paid and the u s tax_liability of the foreign corporation’s domestic corporate shareholders see temp sec_1_905-3t and sec_1_905-3t sec_905 codified this rule with respect to additional payments of creditable_foreign_taxes that relate to taxable years beginning after date temp sec_1_905-5t provides rules governing the application of sec_905 to foreign tax redeterminations occurring in taxable years beginning prior to date and to foreign tax redeterminations occurring after date with respect to foreign tax deemed paid under sec_902 or sec_960 with respect to pre- accumulated_profits as defined in sec_1_902-1 to include earnings accumulated in both taxable years beginning before and post-1986 taxable years beginning before the foreign_corporation first had a domestic corporate shareholder eligible to compute foreign taxes deemed paid under temp sec_1_905-5t the term foreign_tax_redetermination is defined in temp sec_1_905-3t as a change in foreign tax_liability that may affect a taxpayer’s foreign_tax_credit including additional payments of creditable_foreign_tax temp sec_1_905-5t states that a redetermination of united_states tax_liability is required with respect to any foreign_tax_redetermination subject_to temp sec_1_905-5t usparent properly excluded the pre-1987 accumulated_profits of x cfc3 and its country x subsidiaries that were accumulated in taxable years beginning before in calculating the sec_1248 amounts of recharacterized sale gain arising from the deemed liquidation of x cfc3 that were treated as dividends in the hands of uscorp2 x cfc1 and y cfc5 because those e_p were accumulated in taxable years before usparent acquired the stock of the country x corporations and they became cfcs sec_1_1248-2 accordingly it also excluded these amounts from the computation of the all e_p amount recognized on the deemed liquidation of x cfc1 sec_1_367_b_-7 however in computing its deemed paid credit under sec_902 and sec_960 for taxable_year with respect to the liquidating distributions from x cfc3 and x cfc1 usparent included in x cfc3’s general category post-1986_foreign_income_taxes amount of taxes that x cfc3 paid in taxable_year to tax authority that were related to the settlement by x cfc3 for the country x tax_liabilities of x cfc3 and its wholly-owned country x subsidiaries relating to their pre-1987 accumulated_profits for taxable years usparent then took those taxes into account in computing its deemed-paid credit with respect to the deemed dividends that were calculated solely with respect to the cfcs’ post-1986_undistributed_earnings accumulated in post-2001 taxable years postu-100865-14 x cfc3 and its country x group were assessed additional foreign_income_taxes and therefore had foreign tax redeterminations with respect to their pre-1987 accumulated_profits for their through taxable years the position that additional payments of tax with respect to pre-1987 accumulated_profits may adjust post-1986_foreign_income_taxes finds no support in the code the regulations or sound tax policy only additional assessments of tax paid with respect to the x cfcs’ and later taxable years are properly accounted for under sec_905 and temp sec_1 3t by adjusting the relevant pools of post-1986_undistributed_earnings and post-1986_foreign_income_taxes in the year those taxes were paid sec_905 and temp sec_1_905-3t do not apply to sec_902 computations including the effect of foreign tax redeterminations on the amount of foreign taxes deemed paid with respect to pre-1987 accumulated_profits instead those computations are governed by the law in effect prior to the tra sec_902 and temp sec_1_905-5t e_p accumulated by x cfc3 and its country x subsidiaries in taxable years beginning before date are pre-1987 accumulated_profits under sec_1 a iii and e and f any foreign_income_taxes of x cfc3 and its country x subsidiaries that are attributable to pre-1987 accumulated_profits including but not limited to the additional foreign tax assessments paid in with respect to taxable years through are pre-1987 foreign_income_taxes under sec_902 and sec_902 such pre-1987 foreign_income_taxes must be taken into account under the annual layering rules of sec_1_902-3 and are definitionally excluded from post-1986_foreign_income_taxes under sec_902 and sec_1 a ii the amount of a distribution out of any pre-1987 accumulated_profits and the amount of foreign_income_taxes deemed paid under sec_902 with respect to such a distribution are determined by applying the law as in effect prior to the effective date of the tra the regulations under sec_905 similarly confirm that foreign tax redeterminations with respect to pre-1987 accumulated_profits regardless of when made are accounted for by adjusting the foreign corporation’s pre-1987 accumulated_profits and pre-1987 foreign_income_taxes for the year or years affected and not by adjusting the corporation’s post-1986_undistributed_earnings and post-1986_foreign_income_taxes pools temp sec_1_905-3t specifically limits the application of the prospective pooling adjustment rules of temp sec_1_905-3t to foreign tax redeterminations with respect to post-1986_undistributed_earnings by their terms temp sec_1_905-3t sec_1_905-4t and sec_1_905-5t were published on date and amended in part by temporary regulations made effective for taxes paid_or_accrued in taxable years of united_states taxpayers beginning on or after date and taxes paid_or_accrued by a foreign_corporation in its taxable years ending with or within such taxable years of its domestic corporate shareholder the additional country x taxes were paid in prior to the effective date of the amendments to the sec_905 temporary regulations accordingly the temporary regulations rather than the temporary regulations govern the effect of the foreign tax redeterminations at issue here however the amendments made no substantive change to the relevant provisions of the regulations postu-100865-14 these regulations plainly preclude the inclusion in post-1986_foreign_income_taxes of any additional tax paid with respect to pre-1987 accumulated_profits of x cfc3 and its country x subsidiaries for their taxable years through but in any event as described in detail above the plain language of sec_902 and sec_902 and the final regulations under those sections mandate the same result sec_905 provides only that additional payments of tax paid_by a foreign_corporation shall be taken into account in the taxable_year in which paid and no redetermination of u s tax shall be made under sec_905 by reason of such payment it does not mandate inclusion of pre-1987 foreign_income_taxes in the post- foreign_income_taxes pool instead it simply provides that such taxes can only be deemed paid in the year paid or subsequent years and are not taken into account by redetermining foreign taxes deemed paid and the u s shareholder’s u s tax for prior years including and subsequent to the year or years to which the taxes relate here the required adjustment to the appropriate annual layer of the country x cfcs’ pre- accumulated_profits and pre-1987 foreign_income_taxes did not require a redetermination of u s tax under sec_905 because no portion of those pre-1987 accumulated_profits had yet been distributed or otherwise included in usparent’s income and no portion of the pre-1987 foreign_income_taxes had ever been deemed paid the required adjustments to the country x subsidiaries’ pre-1987 foreign_income_taxes paid with respect to their pre-1987 accumulated_profits for taxable years would have been taken into account in computing usparent’s foreign taxes deemed paid only in connection with distributions or inclusions of those pre-1987 accumulated_profits in years subsequent to the year in which the additional taxes were paid and in fact no portion of the pre-1987 accumulated_profits were ever taxable to usparent because the sec_1248 amounts of deemed dividends taken into account in connection with the deemed sec_331 liquidation of x cfc3 included only e_p accumulated in the post-2001 years during which the country x corporations were cfcs any pre-1987 accumulated_profits of x cfc3 and its lower-tier country x subsidiaries were eliminated in connection with that liquidation accordingly even if sec_905 applied to the additional assessments which under sec_902 and sec_902 and the regulations under those sections it clearly does not usparent would still be precluded from including any pre-1987 foreign_income_taxes of the country x cfcs in their post-1986_foreign_income_taxes pools finally the conclusion that foreign tax redeterminations with respect to pre-1987 accumulated_profits must be taken into account by adjusting the appropriate annual layers of pre-1987 accumulated_profits and pre-1987 foreign_income_taxes is entirely consistent with the purpose of the foreign_tax_credit to alleviate double_taxation of we note that sec_905 is effective for taxes that relate to taxable years beginning after date therefore in addition to the dispositive reasons laid out above usparent cannot rely on that section as support for including taxes paid_by x cfc3 and its country x subsidiaries with respect to their pre-1987 accumulated_profits for the taxable years in their post-1986_foreign_income_taxes pools postu-100865-14 foreign_source_income usparent seeks to claim a deemed-paid foreign_tax_credit for taxes paid with respect to earnings_of x cfc3 and its lower-tier country x subsidiaries that have not been and will never be distributed or deemed distributed and subject_to tax in the united_states the result usparent seeks in addition to being squarely contradicted by the statutory and regulatory regime is flatly inconsistent with the congressional policy underlying the matching regime established by sec_902 see h 59_tc_53 in computing the deemed_paid_foreign_tax_credit accumulated_profits of each year must be matched with foreign taxes paid for that year accordingly the additional_amounts of creditable_foreign_tax paid_by x cfc3 in with respect to its and its country x subsidiaries’ taxable years through must be taken into account in the respective cfcs’ annual layers of pre-1987 foreign_income_taxes for the appropriate year none of these taxes may be added to the cfcs’ post- foreign_income_taxes pools in the year paid only taxes paid with respect to and later taxable years were properly included in the cfcs’ post-1986_foreign_income_taxes pools and deemed paid_by uscorp2 and usparent in connection with the deemed liquidations of x cfc3 and x cfc1 in please call cc intl br3 at if you have any further questions


department of the treasury internal_revenue_service washington d c contact person id number contact number date may op ec t ot uniform issue list legend x y dear sir or madam this is in reply to your rulings request of date on x’s proposed transfer of all of its assets to y pursuant to sec_507 of the internal_revenue_code x and y are nonprofit_corporations exempt from federal_income_tax under sec_501 of the code and are private_foundations under sec_509 x and y are controlled by the same persons x will transfer all of its assets to y x has no expenditure_responsibility grants outstanding under sec_4945 of the code sec_501 of the code provides for the exemption from federal_income_tax of nonprofit_organizations organized and operated exclusively for charitable and or other exempt purposes stated in that section sec_509 of the code provides that certain organizations exempt from federal_income_tax under sec_501 of the code are private_foundations subject_to the provisions of chapter of the code sec_507 of the code and sec_1_507-1 of the income_tax regulations provide that a private_foundation may voluntarily terminate its private_foundation_status by submitting to the internal_revenue_service a statement of its intention to voluntarily terminate its private_foundation_status pursuant to sec_507 a and by paying any termination_tax under sec_507 of the code sec_507 of the code impose excise_tax on a private_foundation which voluntarily terminates its private_foundation_status under sec_507 this sec_507 tax is equal to the lower_of a the aggregate tax benefits that have resulted from the private foundation's exempt status under sec_501 or b the value of the net assets of the private_foundation sec_507 of the code concerns the transfer of assets by one private_foundation to one or more other private_foundations and provides that each transferee private_foundation shall not be treated as a newly created organization sec_1_507-3 of the regulations indicates that a transfer under sec_507 of the code includes a transfer of assets from one private_foundation to one or more other private_foundations pursuant to any reorganization including a significant disposition of or more of the transferor foundation's assets sec_1_507-3 of the regulations indicates that in a transfer of assets from one private_foundation to one or more private_foundations pursuant to a reorganization each transferee private_foundation shall not be treated as a newly created organization but shall succeed to the transferor’s aggregate tax benefits under sec_507 of the code sec_507 of the code indicates that the aggregate tax benefits of a private_foundation refer to the value of its exemption from federal_income_tax and of the deductions taken by its donors during its existence sec_1_507-1 of the regulations provides that a private_foundation which transfers all of its het assets is not required to file annual information returns required by sec_6033 of the code for subsequent tax years after its tax_year of such transfer when it has no assets or activities sec_1_507-3 a of the regulations indicates that a transferor private_foundation is required to meet its charitable distribution_requirements under sec_4942 of the code even for any_tax year in which it makes a transfer of its assets to another private_foundation pursuant to sec_507 of the code sec_1 a of the regulations provides that where a private_foundation has transferred all of its assets to another private_foundation in a transfer under sec_507 of the code it is not required to exercise expenditure_responsibility under sec_4945 of the code with respect to such transfer sec_1_507-3 a of the regulations provides that certain tax provisions will carry over to a transferee private_foundation that receives a transfer of assets from another private_foundation pursuant to sec_507 b of the code sec_1_507-3 i of the regulations indicates that if a transferor private_foundation transfers assets to one or more private_foundations which are effectively controlled within the meaning of sec_1_482-1 i of the regulations directly or indirectly by the same person or persons who effectively control the transferor private_foundation each transferee foundation will be treated as if it were the transferor foundation for purposes of sec_4940 through and sec_507 through of the code each transferee is treated as its transferor in the proportion which the fair_market_value of the transferor’s assets transferred to it bears to the fair_market_value of all of the assets of the transferor immediately before the transfer sec_1_507-3 ii of the regulations provides that a transfer of assets under sec_507 b of the code does not relieve the transferor private_foundation from filing its own final tax_year return as required by sec_6043 of the code sec_1_507-4 of the regulations provides that the tax on termination of private_foundation_status under sec_507 of the code does not apply to a transfer of assets under sec_507 of the code sec_1_507-1 b and d of the regulations provide that a transferor foundation's transfer of assets under sec_507 b of the code will not constitute any termination of the transferor foundation‘s private_foundation_status under sec_509 _- sec_4940 of the code imposes excise_tax on certain investment_income of a private_foundation sec_4941 of the code imposes excise_tax on any act of self-dealing between a private_foundation and any of its disqualified persons under sec_4946 of the code sec_53_4946-1 a of the foundation and similar excise_taxes regulations provides that for purposes of self-dealing under sec_4941 of the code an exempt_organization under sec_501 of the code is not a disqualified_person sec_4942 of the code requires that a private_foundation must expend annual qualifying distributions under sec_4942 of the code for the conduct of exempt purposes sec_4942 g a of the code provides that a private_foundation does not make a qualifying_distribution under sec_4942 where the distribution is a contribution to either i an organization controlled by the transferor or by one or more of the transferor’s disqualified persons or ii any private_foundation which is not an operating_foundation under sec_4942 j sec_4942 of the code requires that a transferor private_foundation in order to have a qualifying_distribution for its grant to another private_foundation must have adequate_records as required by sec_4942 g b to show that its transferee foundation in fact subsequently made qualifying distributions that were equal to the amount of the transfer received and that were paid out of the transferee’s own corpus within the meaning of sec_4942 such transferee foundation's qualifying distributions must be expended before the close of the transferee’s first tax_year after the transferee’s tax_year in which it receives the transfer revrul_78_387 1978_2_cb_270 describes the carry-over of a transferor private foundation’s excess qualifying distributions under sec_4942 of the code where the transferor and the transferee foundations are controlled by the same persons under sec_1_507-3 of the regulations under that regulation the transferee is treated as the transferor so that the transferee can reduce its own distributable_amount under sec_4942 by the amount if any of the transferor’s excess qualifying distributions under sec_4942 sec_4945 of the code imposes excise_tax on any private foundation’s making of a taxable_expenditure under sec_4945 sec_4945 of the code requires that in order to avoid making a taxable_expenditure a transferor private_foundation must exercise expenditure_responsibility under sec_4945 on its grants to another private_foundation sec_4945 of the code defines expenditure_responsibility in terms of the grantor private_foundation requiring pre-grant and post-grant reports from the grantee private_foundation on its uses of the grant sec_4945 of the code provides that a taxable_expenditure includes any amount expended by a private_foundation for purposes other than exempt purposes sec_63 c of the regulations allows a private_foundation to transfer its assets to exempt_organizations under sec_501 c of the code including private_foundations pursuant to sec_507 b of the code without the transfers being taxable_expenditures under sec_4945 of the code x will transfer all of its assets to y your requested rulings are discussed below analysi sec_1 under sec_507 of the code and sec_1_507-3 of the regulations a transfer under sec_507 includes a transfer of assets from one private_foundation to one or more other private_foundations pursuant to any reorganization including any significant disposition of or more of the transferor’s assets because x will be in such a reorganization by its transfer of all of its assets to y x’s transfer will be a transfer under sec_507 b of the code under sec_1_507-4 of the regulations x‘s transfer of assets pursuant to section s07 b of the code does not cause termination of x‘s private_foundation_status under sec_509 of the code and thus does not result in any termination_tax under sec_507 c of the code sec_507 of the code imposes excise_tax on a private_foundation which voluntarily terminates its status as a private_foundation pursuant to sec_507 a of the code this sec_507 tax is equal to the lower_of a the aggregate tax benefits that have resulted from the foundation's exempt status under sec_501 of the code or b the value of the net assets of the foundation the value of x’s net assets after x has transferred all of its assets to y will be zero thus at that time x’s voluntary notice to the service of its termination of its private_foundation_status pursuant to sec_507 a of the code will not result in any termination_tax under sec_507 of the code x’s transfer of assets to y will be made for y’s exempt purposes under sec_501 of the code so the transfer will not adversely affect the exemption under sec_501 c of the code or the private_foundation_status under sec_509 of the code of x or y sec_1_507-3 a i of the regulations indicates that if a transferor private_foundation transfers assets to one or more private_foundations which are effectively controlled directly or indirectly by the same person or persons who effectively control the transferor private_foundation then each transferee private_foundation will be treated as if it were the transferor private_foundation for purposes of sec_4940 through and sec_507 through of the code each transferee is treated as the transferor in the proportion which the fair_market_value of the transferor foundation’s assets that were transferred bears to the fair_market_value of all of the assets of the transferor foundation immediately before the transfer in this case where transferee y‘s directors are substantially the same as those of x x‘s transfer will be treated as a transfer to a transferee organization that is effectively controlled by the same persons who control the transferor so that the transfer is within sec_1_507-3 of the regulations of g2 under sec_1_507-3 a of the regulations in a transfer of assets from one private_foundation to one or more other private_foundations pursuant to a reorganization each transferee private_foundation will not be treated as its proportionate share of its transferor’s aggregate tax benefits under sec_507 of the code thus x's aggregate tax benefits will be transferred to y in full proportion to all of the assets transferred by x to y and y will be subject_to the amount of any liability that x may have incurred under chapter of the code to the extent not already satisfied by x a newly created organization but will succeed to under sec_1_507-3 of the regulations x's transferee y will receive the benefits if any of the transitional rules and savings provisions of that regulation that were applicable to x x‘s transfer y will not constitute investment_income or any taxable sale or disposition of property and thus the transfer will not result in tax on investment_income under sec_4940 of the code under sec_4941 of the code x's transfer will not be an act of self-dealing because it will be made for exempt purposes to an organization y exempt from federal_income_tax under sec_501 c of the code which is not a disqualified_person for purposes of sec_4941 of the code pursuant to sec_53_4946-1 of the requiations as in revrul_78_387 cited above after x transfers all of its assets to y x's excess qualifying distributions if any under sec_4942 i of the code may be used by y to reduce y’s distributable_amount under sec_4942 of the code by the amount if any of x's excess qualifying distributions carryover under sec_4942 of the code transferee y in its tax_year in which the transfer occurs may increase its distributable_amount under sec_4942 of the code by x’s distributable_amount for x‘s tax_year in which its transfer occurs transferee y can treat x’s qualifying distributions for its tax_year of its transfer as if made by transferee y in addition to any qualifying distributions made by y alone x's distribution requirement under sec_4942 of the code for its tax_year of its transfer may be fulfilled by transferee y to the extent that sec_4942 g of the code is met by y under sec_1_507-3 a of the regulations any record-keeping requirement under sec_4942 of the code as to transferor x will not apply after x has transferred all of its assets to y because x’s transfer of assets to y will be made for y's exempt purposes under sec_501 c of the code x’s transfer will not be a jeopardizing investment or result in tax under sec_4944 of the code op f3 under sec_53_4945-6 of the regulations a private_foundation can make a transfer of its assets pursuant to sec_507 of the code to exempt_organizations under sec_501 c of the code including private_foundations without the transfer being a taxable_expenditure under sec_4945 of the code thus x’s transfer to y will not be a taxable_expenditure under sec_4945 of the code and will not subject x to tax under that section sec_1_507-3 of the regulations provides that where a private_foundation transfers all of its assets to an exempt_organization under sec_501 c of the cade pursuant to sec_507 b of the code it has no expenditure_responsibility requirement under sec_4945 of the code thus x and y will not have to exercise expenditure_responsibility under sec_4945 of the code with respect to x’s transfer of all of its assets to y under sec_1_507-1 of the regulations x will not be required to file its annual return under sec_6033 of the code for any_tax years subsequent to the tax_year in which it transfers all of its assets to y accordingly we rule that x’s transfer of all of its assets to y will be a transfer under sec_507 b of the code and will not cause termination of x‘s private_foundation_status or result in termination_tax under sec_507 of the code if x terminates its private_foundation_status at least one day after it transfers all of its assets and so notifies the internal_revenue_service pursuant to sec_507 of the code x will not be liable for tax under sec_507 because it will have no assets upon its termination the preparation and filing of any final accounting or other documents required by state law in winding up dissolving and terminating x will not result in tax under sec_507 of the code x’s transfer will not adversely affect the exemption under sec_501 c of the code or the private_foundation_status under sec_509 of the code of x or y xand y are effectively controlled by the same persons within the meaning of sec_1 i of the regulations so x's transfer will be a transfer described in that regulation and pursuant to sec_1_507-3 i of the regulations after x‘s transfer y will be treated as if it were x for purposes of chapter and sec_509 of the code y as transferee of x’s assets will succeed to x's aggregate tax benefits under sec_507 d of the code y as transferee of x's assets will receive the benefits of any transitional rules and savings provisions under sec_1_507-3 a of the regulations that were applicable to x x‘s transfer of assets to y will not result in tax on investment_income under sec_4940 of the code x's transfer of assets to y will not be an act of self-dealing under sec_4941 of the code as to x or y or any persons or foundation managers under sec_4946 and will not result in any_tax under sec_4941 afyed after x‘s transfer y may reduce its required qualifying distributions under sec_4942 of the code by the amount if any of x's excess qualifying distributions carryover under sec_4942 i of the code y’s distributable_amount under sec_4942 of the code for its tax_year of x’s transfer may be increased by x’s distributable_amount for x’s tax_year of the transfer as if y had held x‘s assets for the entire tax_year all qualifying distributions made by y during its entire tax_year and all qualifying distributions made by x during its tax_year of its transfer may be treated as if made by y so that x’s distribution requirement under sec_4942 of the code for x's tax_year of its transfer may be fulfilled by y after its transfer of all of its assets to y x will not be required to comply with the record- keeping requirements of sec_4942 of the code because x will have no assets x‘s transfer of assets to y will not be a jeopardizing investment or result in tax under sec_4944 of the code x’s transfer of all of its assets to y will not be a taxable_expenditure under sec_4945 of the code and because x will transfer all of its assets x and y will not be required to exercise expenditure_responsibility under sec_4945 of the code with respect to the transfer of all assets x will not be required to file its annual information_return required under sec_6033 of the code for any_tax years subsequent to its tax_year of its transfer of all of its assets if during such subsequent tax years x has no assets this ruling_request will not be construed by the service as any notice by x or y to voluntarily terminate its private_foundation_status pursuant to sec_507 of the code because this ruling letter could help to resolve any questions please keep it records in your permanent this ruling letter is directed only to the organizations that requested it code provides that it may not be used or cited as precedent sec_6110 j of the sincerely signed garland_é carter garland a carter chief exempt_organizations technical branch dis


internal_revenue_service department of the treasury index number number release date washington dc person to contact telephone number refer reply to cc dom fi p 2-plr-115838-99 date date legend master_trust master fund feeder funds state x state y dear this responds to your request for a ruling dated date submitted by your authorized representative on behalf of the feeder funds the ruling requested is as follows each of the feeder funds which invests in the master fund as a partner in the master fund will be deemed to own a proportionate share of each of the assets of the master fund and will be deemed to be entitled to the proportionate income of the master fund attributable to such share for purposes of determining whether such feeder fund satisfies the requirements of sec_851 sec_851 sec_852 sec_853 and sec_854 of the internal_revenue_code_of_1986 for purposes of these sections the interest of a feeder fund in the master fund shall be determined in accordance with each feeder fund’s capital interest in that master fund plr-115838-99 facts master_trust is a business_trust established under the laws of state y under a declaration of trust master_trust will be registered as an open-end management investment_company under the investment_company act of u s c 80a-1 et seq the act master_trust has established a series the master fund into which the feeder funds may invest the taxpayers represent that the master fund will be treated as a partnership under sec_301_7701-3 b and will not be treated as a publicly_traded_partnership under sec_1_7704-1 the feeder funds are corporations incorporated under the laws of state x that are or will be registered under the act as open-end management investment companies each feeder fund will qualify for and elect status as a regulated_investment_company ric under subchapter_m of the code it is proposed that each of the feeder funds will invest substantially_all of its assets in the master fund in exchange for an interest therein pursuant to a private_placement of interests in the respective master fund such investment will in each case constitute more than of the gross assets of the feeder fund a feeder fund's interest in the master fund will be determined by reference to its capital_account in the master fund the number of holders of interests in the master fund will be limited to fewer than interests in the master fund will be offered and sold only to institutional investors no individual s_corporation partnership or grantor_trust a grantor of which includes an individual s_corporation or partnership will be issued interests in the master fund each holder of an interest in the master fund will be allocated its pro_rata share of each item_of_income of the master fund and will bear its pro_rata share of the expenses of the master fund the master fund will allocate taxable_income gain loss deduction and credit under sec_704 and c and the applicable regulations the taxpayers represent that except as required by sec_704 and sec_1_704-1 of the regulations allocations of specific items of income gain loss deduction and credit will be proportionate to the interests of the holders in the master fund the taxpayers represent that the organization of the master fund in a manner to enable its classification as a partnership was not made to enable a partner that is a ric to make distributions that would be prohibited under revrul_89_81 1989_1_cb_226 had the ric invested directly in the assets of the master fund the taxpayers represent that for purposes of determining the required plr-115838-99 distribution under sec_4982 of the code the feeder funds will account for their shares of partnership items of income gain loss and deduction as they are taken into account by the partnership as required by revrul_94_40 1994_1_cb_274 law and analysis sec_851 of the code provides that certain requirements must be satisfied in order for a domestic_corporation to be taxed as a ric and thereby to be exempt from the corporate level tax on most income sec_851 of the code provides that to qualify as a ric at least percent of a corporation’s gross_income must be derived from dividends interest payments_with_respect_to_securities_loans as defined in sec_512 gains from the sale_or_other_disposition of stocks securities foreign_currencies or other income derived with respect to its business of investing in such stocks securities or currencies sec_851 of the code requires that in order to qualify as a ric at the close of each quarter of the taxable_year at least percent of the value of a corporation’s total assets must be represented by cash and cash items including receivables government securities securities of other rics and other_securities generally limited in respect of any one issuer to an amount not greater in value than percent of the value of the total assets of the corporation and to not more than percent of the outstanding_voting_securities_of_such_issuer sec_851 of the code provides that in order to qualify as a ric not more than percent of the corporation’s total assets may be invested in the securities other than government securities and the securities of other rics of any one issuer or of two or more issuers that the corporation controls and which are determined under regulations to be engaged in the same or similar trades_or_businesses or related trades_or_businesses sec_853 of the code provides that a ric more than percent of the value as defined in sec_851 of whose total assets at the close of the taxable_year consists of stock_or_securities in foreign_corporations and which meets the requirements of sec_852 for the taxable_year may elect to treat its shareholders as if they had paid certain foreign taxes incurred by the ric for purposes of determining a shareholder’s foreign_tax_credit under sec_901 sec_854 of the code provides that a dividend other than a capital_gain dividend received from a ric qualifies for the dividends received deduction under sec_243 to the extent so designated by the ric provided that the ric meets the requirements of sec_852 for the taxable_year during which it paid the dividend sec_854 of the code provides that the aggregate amount that may plr-115838-99 be designated as dividends under sec_854 shall not exceed the aggregate_dividends_received by the ric for the taxable_year sec_854 of the code provides that the term aggregate_dividends_received includes only dividends received from domestic corporations sec_854 of the code provides in part that for purposes of determining an amount to be treated as a dividend eligible for the dividends received deduction under sec_243 of the code a payment to a ric shall not be treated as a dividend unless had it not been a ric it would have been allowed a dividends received deduction under sec_243 with respect to the payment sec_702 of the code provides with respect to a partnership that the character of items stated in sec_702 that are included in a partner’s distributive_share shall be determined as if such items were realized directly from the source from which they were realized by the partnership or incurred in the same manner as incurred by the partnership sec_702 provides that where it is necessary to determine the amount or character of the gross_income of a partner such amount shall include that partner’s distributive_share of the gross_income of the partnership section n l of the technical_and_miscellaneous_revenue_act_of_1988 added a sentence to the flush language of sec_851 of the code which states that income derived from a partnership or trust shall be treated as satisfying the percent requirement of sec_851 only to the extent that such income is attributable to items of income of the partnership or trust which would be described in sec_851 if earned directly by the ric the legislative_history of that sentence indicates that it was intended to clarify the general_rule used to characterize items of income gain loss deduction or credit includible in a partner’s distributive_share as applied to rics that are partners it therefore explains the relationship of sec_702 to the percent test under sec_851 see s rep no 100th cong 2d sess under subchapter_k of the code a partnership is considered to be either an aggregate of its members or a separate_entity under the aggregate approach each partner is treated as an owner of an undivided_interest in partnership assets and operations under the entity approach the partnership is treated as a separate_entity in which partners have no direct interest in partnership assets and operations see s rep no 83d cong 2d sess h_r rep no 83d cong 2d sess in order for each holder ie feeder fund to qualify as a ric under the diversification tests of sec_851 of the code the aggregate approach will have to be applied to each feeder fund's partnership_interest in the master fund as an aggregate each holder will be entitled to take into account its share of the individual items of income and assets of the master fund plr-115838-99 revrul_75_62 1975_1_cb_188 concerns a life_insurance_company that contributed cash to a partnership in exchange for a percent interest in the partnership the partnership held real_estate as its principal asset for the taxable_year in question sec_805 of the code required life_insurance_companies to value their assets each taxable_year for this purpose sec_805 required that shares of stock and real_estate be valued at their fair market values and that other assets be valued at their adjusted bases the issue presented in the ruling is whether for purposes of sec_805 the life_insurance company’s interest in the partnership is considered to be an investment in the real_estate held by the partnership an aggregate approach or an investment in other_property an entity approach revrul_75_62 holds that the partnership_interest held by the life_insurance_company must be accounted for as other_property for purposes of sec_805 of the code the ruling cites sec_705 and sec_741 both of which generally treat an interest in a partnership as an interest in an entity as evidence of an intent in subchapter_k to take the entity approach in questions concerning the nature of an interest in a partnership the ruling states that the legislative_history of sec_805 does not indicate that application of the entity approach to the facts of the ruling is inappropriate and that there is no compelling reason to take the aggregate approach the flush language of sec_851 and its legislative_history indicate that here unlike the situation described in revrul_75_62 congress intended that an aggregate approach be taken in determining the nature of the partnership_interest held by the holders the flush language of sec_851 mandates an aggregate approach in applying the gross_income_test of sec_851 to rics that hold partnership interests it would be anomalous to suggest that congress intended that a ric’s interest in a partnership be viewed as a direct investment in the underlying partnership assets for purposes of sec_851 but not for purposes of sec_851 sec_852 and sec_853 the tax treatment accorded real_estate_investment_trusts reits lends further support to applying the aggregate approach to the present case reits were created to provide an investment vehicle similar to the ric for small investors to invest in real_estate and real_estate mortgages see h_r rep no 86th cong 2d sess like rics reits are subject_to restrictions on the type of assets they can hold if they want to retain the benefits accorded them under subchapter_m and are subject_to certain gross_income source tests reits and rics also have similar distribution and holding_period requirements sec_1_856-3 of the regulations provides that in the case of a real_estate_investment_trust which is a partner in a partnership as defined in sec_7701 and the regulations thereunder the trust will be deemed to own its proportionate share of plr-115838-99 each of the assets of the partnership and will be deemed to be entitled to the income of the partnership attributable to such share for purposes of sec_856 the interest of a partner in the partnership’s assets shall be determined in accordance with his capital interest in the partnership the character of the various assets in the hands of the partnership and items of gross_income of the partnership shall retain the same character in the hands of the partners for all purposes of sec_856 thus for example if the trust owns a 30-percent capital interest in a partnership which owns a piece of rental property the trust will be treated as owning percent of such property and as being entitled to percent of the rent derived from the property by the partnership similarly if the partnership holds any property primarily_for_sale_to_customers in the ordinary course of its trade_or_business the trust will be treated as holding its proportionate share of such property primarily for such purpose also for example where a partnership sells real_property or a_trust sells its interest in a partnership which owns real_property any gross_income realized from such sale to the extent that it is attributable to the real_property shall be deemed gross_income from the sale or disposition of real_property held for either the period that the partnership has held the real_property or the period that the trust was a member of the partnership whichever is the shorter thus the regulation adopts the aggregate look-through approach in determining how a reit should account for its partnership interests for purposes of all of the income and asset qualification tests under sec_856 of the code the legislative purpose underlying the creation of both rics and reits was to provide small investors a means of pooling their resources to invest in a particular type of assets without the imposition of corporate_income_tax the qualification tests are similar for each therefore although the ric regulations do not specifically address the issue herein it is appropriate to adopt an approach for rics that parallels that set forth for reits based on the information and representations submitted we rule that each feeder fund assuming it qualifies as a ric and is a partner in the master fund will be deemed to own a proportionate share of the assets of the master fund and will be deemed to be entitled to the income of the master fund attributable to that share for purposes of determining whether each feeder fund satisfies the requirements of sec_851 sec_851 sec_853 and sec_854 of the code for purposes of these sections the interest of each feeder fund in the master fund shall be determined in accordance with the feeder fund’s capital interest in the master fund this ruling is directed only to the taxpayers who requested it sec_6110 of the code provides that it may not be used or cited as precedent further except as specifically ruled upon above no opinion is expressed or implied regarding the federal_income_tax consequences of the transactions described above to any other taxpayer plr-115838-99 that is no or may become a holder of an interest in either master fund a copy of this letter should be attached to the federal_income_tax return of each feeder fund for every taxable_year in which the feeder fund participates in the master-feeder_arrangement described in this letter sincerely yours assistant chief_counsel financial institutions products by ________________________ william e coppersmith chief branch


internal_revenue_service number release date index number ---------------------------- -------------------------------- ------------------ ---------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ----------------- telephone number ------------------- refer reply to cc psi b03 plr-149275-09 date march legend ----------------------------------------------------------------------------------------------------- ------------------------ ------------------- ---------------------- ------- x date date year state ------------- a b c d -- -- ------------- ------------- dear -------------------- this letter responds to a letter dated date as well as subsequent correspondence submitted on behalf of x by x’s authorized representative requesting a ruling that rental income received by x is not passive_investment_income within the meaning of sec_1362 of the internal_revenue_code facts plr-149275-09 x was incorporated under the laws of state on date and elected under sec_1362 to be an s_corporation effective date x owns leases and manages a single-family residential properties x leases its properties to unrelated individual tenants under rental arrangements involving a term of one year or less that are not net leases x is actively involved in performing all of the leasing and administrative functions necessary for managing its properties including repair and maintenance services specifically x supervises and ensures that all vacancies are properly prepared for re- rental advertizes for new tenants and processes prospective tenant applications including performing credit checks on prospective tenants and negotiating the lease and rental agreements once the property is rented x collects the rent communicates with tenants during their tenancy and monitors tenant compliance with lease terms if a tenant experiences a repair or maintenance problem with the rental property x customarily arranges supervises and pays for the required repair and maintenance work as to major building elements such as the heating and cooling systems plumbing exterior walls and roof in addition x pays all property taxes and maintains the casualty and liability insurance on these properties x has b employees and multiple independent contractors involved in the day-to-day activities associated with its single- family residential rental operations in year x had c in gross rental receipts and incurred d in operating_expenses other than depreciation x also represents it has accumulated_earnings_and_profits x does not engage in any business other than its residential rental operations law and analysis sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 shall be 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 such taxable years more than percent of which are passive_investment_income sec_1362 provides that except as otherwise provided in sec_1362 the term passive_investment_income means gross_receipts derived from royalties rents dividends interest and annuities sec_1_1362-2 of the income_tax regulations provides that rents means amounts received for_the_use_of or the right to use property whether real or personal of the corporation plr-149275-09 sec_1_1362-2 provides that rents does not include rents derived in the active trade_or_business of renting property rents received by a corporation are derived in the active trade_or_business of renting property only if based on all the facts and circumstances the corporation provides significant services or incurs substantial costs in the rental business generally significant services are not rendered and substantial costs are not incurred in connection with net leases whether significant services are performed or substantial costs are incurred in the rental business is determined based upon all the facts and circumstances including but not limited to the number of persons employed to provide the services and the types and amounts of costs and expenses_incurred other than depreciation conclusion based solely on the facts submitted and representations made we conclude that the rental income x receives from its operations described above is not passive_investment_income under sec_1362 except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion regarding x's eligibility to be an s_corporation further the passive_investment_income rules of sec_1362 are independent of the passive_activity rules of sec_469 unless an exception under sec_469 applies the rental_activity remains passive for purposes of sec_469 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representatives the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination plr-149275-09 enclosures copy of this letter copy for sec_6110 purposes sincerely s leslie h finlow senior technician reviewer branch office of the associate chief_counsel passthroughs special industries