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 b2 plr-146089-13 date date x state a d1 d2 d3 d4 -------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------- ---------------------------- dear ------------------ this responds to a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representative requesting relief under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated under the laws of state on d1 and made an s election effective d2 x’s issuance of a convertible debenture to a pursuant to a convertible debenture purchase agreement on d3 may have inadvertently created a second class of stock in violation of the one class of stock requirement under sec_1361 therefore x’s s_corporation_election may have terminated on d3 on d4 x retired the convertible debenture x represents that the circumstances resulting in x’s possible invalid s_corporation_election were inadvertent and not motivated by tax_avoidance or retroactive plr-146089-13 tax planning further the convertible debenture was returned and the purchase agreement was terminated on or before d4 x further represents that x has filed returns consistent with x’s status as an s_corporation since d2 x and its shareholders have agreed to make such adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which it was made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the event resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the required shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination the corporation shall be treated as an s_corporation during the period specified by the secretary based solely on the facts submitted and the representations made we conclude that x may have terminated its s election on d3 because of the creation of a second class of stock we also conclude that any ineffective election on d3 or termination of x’s s election on d3 was inadvertent within the meaning of sec_1362 therefore we conclude that x will be treated as an s_corporation from d3 and thereafter provided that x’s s_corporation_election was otherwise valid and was not otherwise terminated under sec_1362 this ruling is conditioned upon the shareholders of x including in income their pro_rata share of the separately_stated and nonseparately computed items of x as provided in sec_1366 making any adjustments to basis as provided in sec_1367 and taking into account any distributions made by x as provided by sec_1368 except as specifically set forth above no opinion is expressed or implied concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed regarding x’s eligibility to be an s_corporation this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent plr-146089-13 pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representatives sincerely melissa liquerman branch chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date number release date cc ita b04 genin-117301-16 ------------- --------------- uil -------------------------- ------------------------ ------------------------------ dear i am responding to your letter dated date you ask for clarification of revrul_70_604 1970_2_cb_9 and whether a condominium_management_association must recognize excess member income attributable to excess assessments collected during the taxable_year that is accumulated in a working_capital reserve i hope that the following general information is helpful except as provided under sec_528 of the internal_revenue_code a condominium_management_association that is classified as a corporation for federal_income_tax purposes must include in income funds it collects for its normal operating_expenses any funds accumulated as contingency reserves are also includible in the association’s gross_income because the internal_revenue_code does not provide for such accumulations without tax consequences see revrul_75_371 1975_2_cb_52 revrul_70_604 1970_2_cb_9 addresses a different situation in which a condominium management_corporation directly or indirectly returns excess assessments to its shareholder-owners the corporation’s sole authorized activity is limited to assessing its stockholder-owners for the purposes of managing operating maintaining and replacing the common elements of the condominium property the stockholder-owners of the corporation meet each year to decide whether to return excess assessments to themselves or to have the excess applied against the following year's assessments in this situation the corporation is not taxable on the excess assessments because the excess has been returned in effect to the stockholder-owners whether in the form of cash or in the form of a credit against next year’s assessment revrul_70_604 does not provide that a condominium_management_association may exclude from income amounts it accumulates in a working_capital reserve see revrul_75_371 which states that a condominium_management_association generally must genin-117301-16 include in income amounts accumulated in a contingency reserve this letter calls your attention to certain general principles of the law it is intended for informational purposes only and does not constitute a ruling see section dollar_figure of revproc_2016_1 2016_1_irb_1 if you have any additional questions you may contact ----------------------- -------------------- at by _________________________ j peter baumgarten assistant to the branch chief branch associate chief_counsel income_tax accounting


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si 1-plr-111775-99 date august legend x a b d1 d2 d3 d4 d5 a state this responds to your representative’s letter dated date submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts x is a corporation that was incorporated in state on d1 from d2 to d3 a was the sole shareholder in x on d3 x issued a shares of x preferred_stock to b an owner of the business prior to d2 for no consideration as a purely ceremonial gesture plr-111775-99 no dividends have been paid with respect to the preferred_stock issued to b on d5 x filed an election to be treated as an s_corporation effective d4 also on d5 x’s professional advisors realized that b held a shares of preferred_stock and that x’s s_corporation_election was not valid on d5 x converted the a shares of x preferred_stock into x common_stock x a and b represent that the failure to qualify as a small_business_corporation was not motivated by tax_avoidance or hindsight and agree to make any adjustments consistent with the treatment of x as an s_corporation that the secretary may require for the period that the s election was ineffective law and analysis sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect sec_1361 defines a small_business_corporation as a domestic_corporation that is not an ineligible_corporation and that does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock under sec_1362 an election under sec_1362 is terminated whenever the corporation ceases to be a small_business_corporation sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under paragraph or of sec_1362 the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the required shareholder consents and the corporation and each person who was a shareholder in the corporation at any time during the period specified pursuant to this subsection agrees to make any adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination the corporation shall be treated as an s_corporation during the period specified by the secretary plr-111775-99 conclusions based solely on the facts submitted and representations set forth above we conclude that x’s election to be an s_corporation beginning on d4 was ineffective because at the time of the election x had more than one class of stock we also conclude that the ineffectiveness of x’s s_corporation_election was inadvertent within the meaning of sec_1362 pursuant to sec_1362 x will continue to be treated as an s_corporation during the period from d4 to d5 and thereafter unless x’s s election is otherwise terminated under sec_1362 in addition during the period d4 to d5 a and not b will be treated as the owner of the preferred_stock held by b therefore a must include a’s pro_rata share of the separately_stated and nonseparately computed items of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided in sec_1368 if x or a fails to comply with the requirements of this paragraph this ruling is null and void except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely yours signed daniel j coburn daniel j coburn assistant to the branch chief branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes plr-111775-99


department of the treasury internal_revenue_service washington d c contact person danny smith identification_number telephone number ted bf employer_identification_number dear sir or madam this is in response to your letter dated date in which you requested certain rulings with respect to a proposed transfer of assets from b to c both b and c are exempt under sec_501 of the internal_revenue_code and are classified as a private_foundations under sec_509 both b and c were established by members of the d family as the d family has grown the charitable and philanthropic interests of the various family members have diverged and many of these family members have established private_foundations to carry out their respective charitable and philanthropic interests to facilitate the charitable objectives of one branch of the family b proposes to transfer approximately one-third of its net assets to c b has not notified the service that it intends to terminate its private_foundation_status nor has b ever received notification that its status as a private_foundation has been terminated furthermore b has stated that it has not committed willful repeated acts or failures to act ora willful and flagrant act or failure to act giving rise to liability for tax under chapter sec_507 of the code provides for the voluntary and involuntary termination of private it states in part that except for transfers described in sec_507 an foundation status organization’s private_foundation_status will be terminated only if the organization notifies the service of its intent to terminate or there have been either willful repeated acts or failures to act or a willful and flagrant act or failure to act giving rise to liability for tax under chapter sec_507 of the code provides that when a private_foundation transfers assets to another private_foundation pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization the transferee foundation shall not be treated as a new organization sec_1_507-1 of the income_tax regulations provides that neither a transfer of all of the assets of a private_foundation nor a significant disposition of assets as defined in sec_1_507-3 by a private_foundation whether or not any portion of such disposition of assets is made to another private_foundation shall be deemed to result in a termination of the transferor private_foundation under sec_507 of the code unless the transferor private_foundation elects to terminate pursuant to sec_507 or sec_507 is applicable sec_1_507-3 of the regulations provides that in a sec_507 transfer the transferee organization shall succeed to the aggregate tax_benefit of the transferor organization in an amount equal to the amount of such aggregate tax_benefit of the transferor organization multiplied by a fraction the numerator of which is the fair_market_value of the assets less encumbrances transferred to such transferee and the denominator of which is the fair_market_value of the assets of the transferor less encumbrances immediately before the transfer fair_market_value is determined at the time of transfer sec_4940 of the code imposes a tax on the net_investment_income of private_foundations sec_4941 of the code imposes a tax on each act of self-dealing between a disqualified_person and a private_foundation sec_4941 of the code includes in the definition of self-dealing any direct or indirect transfer to or use for the benefit of a disqualified_person of the income or assets of a private_foundation sec_4943 of the code provides that there is hereby imposed on the excess_business_holdings of any private_foundation in a business_enterprise during any taxable_year which ends during the taxable_period a tax equal to percent of the value of such holdings sec_4944 of the cade imposes a tax upon a private_foundation which invests any amount in such a manner as to jeopardize the carrying out of any of its exempt purposes sec_4945 of the code states that the term taxable_expenditure includes any amount_paid or incurred by a private_foundation as a grant to an organization unless a the organization is described in subparagraphs or of sec_509 of the code or is an exempt_operating_foundation as defined in sec_4940 of the code or b the private_foundation exercises expenditure_responsibility with respect to such grant in accordance with sec_4945 of the code sec_4945 of the code provides that expenditure_responsibility referred to in subsection d means that the private_foundation is responsible to exert all reasonable efforts sd and to establish adequate procedures to see that the grant is spent solely for the purpose for which made to obtain full and detailed reports with respect to such expenditures and to make full and detailed reports to the secretary sec_53_4945-5 of the foundation and similar excise_taxes regulations refers to the rules relating to the extent to which the expenditure_responsibility_rules contained in sec_4945 and h and this section apply to transfers of assets described in sec_507 sec_53_4945-5 of the regulations provides that if a private_foundation makes a grant described in sec_4945 to a private_foundation which is exempt from taxation under sec_501 far endowment for the purchase of capital equipment or for other capital purposes the grantor foundation shall require reports from the grantee on the use of the principal and income if any from the grant funds the grantee shall make such reports annually for its taxable_year in which the grant was made and the immediately succeeding two taxable years because a transfer of assets as described in sec_507 will not cause a termination of an organization’s private_foundation_status the transfer of b's assets to c will not terminate b’s status as a private_foundation b will not terminate its status as a result of this transaction therefore the transfer of b’s assets to c will not result in the imposition of tax under sec_507 of the code under sec_507 of the code in the case of a transfer of assets of any private_foundation to another private_foundation pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization the transferee foundation shall not be treated as a newly created organization the transfer from b to c will constitute an adjustment organization or reorganization within the meaning of sec_507 accordingly the transfer by b to c will not be treated as a transfer to a newly created organization because the proposed transfer of one-third of b’s assets to c qualifies as a transfer within the meaning of sec_507 of the code b can treat its aggregate tax_benefit as having been transferred to c in proportion to the assets transferred the proposed transfer of one-third of the assets of b to c will be a transfer for no consideration consequently b generate gain_or_loss from the sale_or_other_disposition of property for the purposes of sec_4940 of the code therefore the transfer will not result in imposition of tax on b under sec_4940 because the transferred assets will not constitute gross_investment_income to c the transfer will not result in imposition of tax on c under sec_4940 will not recognize gain on the transfer and the transfer will not because c has certain foundation managers in common with b these managers will be disqualified persons with respect to the proposed transfer however the transfer will not constitute an act of self-dealing because no funds will be disbursed either to the managers or for their use therefore the proposed transfer of one-third of the assets of b to c will not result in the imposition of tax under sec_4941 because the proposed transfer of assets from b to c does not involve or result in excess_business_holdings within the meaning of sec_4943 of the code the asset transfer will not give rise to tax under sec_4943 because the proposed transfer of assets to c will be made to accomplish the exempt purposes of b and c the transfer will not constitute investments for purposes of sec_4944 of the code thus the excise_taxes imposed on jeopardizing investments under sec_4944 of the code will not apply to the transfer of assets from b to c the transfer of one-third of the assets of b to c will be a grant for the endowment of c accordingly the transfer will not be a taxable_expenditure within the meaning of sec_4945 of the code as long as b exercises expenditure_responsibility over the grant as described in sec_4945 of the code and sec_53_4945-5 of the regulations accordingly based on the information furnished we rule as follows tne proposed transfer of one-third of b’s net assets to c will qualify as a transfer described in sec_507 of the code and will not constitute a termination of b’s status as a private_foundation under sec_507 the proposed transfer of one-third of b’s net assets to c will not result in any_tax under sec_507 of the code the transfer of one-third of the net assets of b to c will not be treated as a transfer toa newly created organization c will succeed to one-third of the aggregate tax_benefit of b determined as the amount of such aggregate tax_benefit multiptied by the portion of b’s assets based upon the fair_market_value of such assets which will be transferred to c the proposed transfer of one-third of b’s net assets to c will not give rise to net_investment_income to b or c and therefore will not result in the imposition of tax under sec_4940 of the code the proposed transfer of one-third of b’s net assets to c will not constitute an act of self- dealing and will not subject b or c or foundation managers and disqualified persons with respect to b and c to any_tax under sec_4941 or of the code the proposed transfer of one-third of b’s net assets to c will not involve or result in any excess_business_holdings and will not result in the imposition of any_tax under sec_4943 of the code the proposed transfer of one-third of b’s net assets to c will not constitute a jeopardizing investment and will not result in the imposition of any_tax under sec_4944 of the code the proposed transfer of one-third of b's net assets to c will not constitute a taxable_expenditure under sec_4945 of the code as long as b exercises the capital endowment expenditure_responsibility required by sec_4945 of the code and sec_53 c of the regulations with respect to the transferred amount we are informing the ohio te_ge office of this action please keep a copy of this ruling in your organization’s permanent records this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as precedent if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely preratel v soot gerald v sack manager exempt_organizations technical group


internal_revenue_service number release date index number ------------------------------- ------------------------------ ------------------------------- --------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ----------------- telephone number --------------------- refer reply to cc psi b01 plr-128388-10 date date x ------------------------------ --------------------------------- state --------- grantor --------------------------- wife -------------------- trust1 ------------------------------------------- trust2 -------------------------------------------- ------------------------------------- trust3 -------------------------------------------- ------------------------------------- date1 --------------------- date2 -------------------------- date3 --------------------- date4 ------------------------- date5 ----------------------- date6 ---------------------- date7 ----------------------- plr-128388-10 date8 ----------------------- dear --------------- this responds to a letter dated date submitted on behalf of x by x’s authorized representative requesting relief under sec_1362 of the internal_revenue_code facts the information submitted states that x was incorporated under the laws of state on date1 and elected to be treated as an s_corporation effective date2 grantor was the sole shareholder of x at the time of the election grantor formed trust1 on date3 and transferred all of the shares of x to trust1 on date4 the governing document of trust1 provides that during grantor’s life grantor had the absolute right to amend restate or revoke any term or provision of the trust agreement in addition grantor had the absolute right to control the distribution of income and principal from the trust this included the right to direct distributions of income and principal to himself grantor died on date5 upon grantor’s death the governing document of trust1 provides that the trust property was to be held by trust1 during a reasonable period of administration after which the trust property including the x stock was to be distributed to trust and trust in accordance with the trust document x stock was transferred to trust2 and to trust3 on date trust2 and trust3 were intended to be qualified subchapter_s trusts qssts during wife’s life wife was the sole beneficiary of trust2 and trust3 it has been represented that trust2 and trust3 distributed all of their income to wife x represents that trust2 was eligible to be treated as a qsst however wife inadvertently failed to make a timely qsst election under sec_1361 x represents that trust3 was eligible to be treated as a qsst except that the trust document granted wife a lifetime limited_power_of_appointment over the principal of trust3 on date7 wife disclaimed her lifetime power_of_appointment over the principal of trust3 effective date6 in addition wife failed to make a timely qsst election for trust3 under sec_1361 wife died on date8 and the shares of x stock were treated as distributed to an individual who is an eligible s shareholder as of that date plr-128388-10 as a result of the transfer of the x stock to trust2 and trust3 x’s s election terminated on date6 x represents that the presence of the ineligible shareholders and the termination of its s_corporation_election was inadvertent and not motivated by tax_avoidance x and its shareholders agree to make such adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder sec_1361 provides that for purposes of sec_1361 a_trust which was described in sec_1361 immediately before the death of the deemed owner and which continues in existence after such death may be a shareholder for the 2-year period beginning on the day of the deemed owner’s death sec_1361 provides that a qsst whose beneficiary makes an election under sec_1361 will be treated as a_trust described in sec_1361 and the beneficiary of such trust shall be treated as the owner for purposes of sec_678 of that portion of the trust which consists of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1361 provides that a beneficiary of a qsst or his legal_representative may elect to have sec_1361 apply sec_1361 provides that an election under sec_1361 shall be effective up to days and months before the date of the election sec_1361 defines a qsst as a_trust a the terms of which require that i during the life of the current income_beneficiary there shall be only one income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of the beneficiary’s plr-128388-10 death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to that beneficiary and b all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to one individual who is a citizen or resident_of_the_united_states sec_1362 provides that an election under sec_1362 will be terminated whenever at any time on or after the 1st day of the 1st taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides in part that if an election under sec_1362 by any corporation was terminated under sec_1362 or the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such termination steps were taken so that the corporation for which the termination occurred is a small_business_corporation and the corporation for which the termination occurred and each person who was a shareholder in the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such termination such corporation shall be treated as an s_corporation during the period specified by the secretary based solely on the information submitted and the representations made we conclude that trust1 was a permitted shareholder in x under sec_1361 from date4 to date and a permitted shareholder under sec_1361 from date5 to date6 we further conclude that x’s s_corporation_election terminated on date6 as a result of the transfer of x stock to trust2 and trust3 we also conclude that the termination of x’s status as an s_corporation was inadvertent within the meaning of sec_1362 accordingly pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from date6 and thereafter provided that x’s s_corporation_election was otherwise valid and not otherwise terminated under sec_1362 trust2 will be treated as qsst from date6 and thereafter trust3 will be treated as a qsst from date7 and thereafter this relief is contingent upon a qsst election being filed for trust2 with an effective date of date6 with the appropriate service_center within days following the date of this letter a copy of this letter should be attached to the qsst election a qsst election must be filed for trust3 with an effective date of date7 with the appropriate service_center within days following the date of this letter a copy of this letter should be attached to the qsst election wife must be treated as the shareholder of the x stock for the purpose of sec_1366 sec_1367 and sec_1368 during the period that trust2 plr-128388-10 and trust3 held the stock x and its shareholders must also file any necessary original or amended returns consistent with the relief granted within days following the date of this letter except as expressly provided herein no opinion is express or implied 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 concerning whether x is otherwise eligible to be an s_corporation for federal tax purposes 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 a copy of this letter is being sent to your authorized representative sincerely faith p colson faith p colson senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes cc


internal_revenue_service number release date index number -------------------------------------- -------------------------------------- ----------------------- re ---------------------------------------------- ------------------------------------------------------------ - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------------------------------------- ----------------------------------- telephone number ------------------- refer reply to cc psi b04 plr-144461-12 date date legend husband wife trust trust foundation charity date date date date date county court a b c d e f state ----------------------------------------------- ------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------- ----- ------------------------------------------------------------------------------------------------------------------- --------------------------- ----------------------------------------------------------------------- ----------------------------------------------- ----------------- ----------------- ---------------------- -------------------------- ---------------------- ---------------------------------------------------------------------- ------------ --- ------------ ------------ ------ dear ---------------------------- this letter responds to your authorized representative’s letter dated date requesting income and gift_tax rulings with respect to the proposed transfer of your interests in trusts to charity a charitable_organization that meets the requirements of sec_170 and sec_2522 of the internal_revenue_code plr-144461-12 the facts and representations submitted are summarized as follows on date husband and wife collectively trustors created trust and funded trust with assets having a value of approximately dollar_figurea husband and wife represent that trust is a charitable_remainder_unitrust crut pursuant to sec_664 paragraph second of trust provides that in each taxable_year of trust the trustee shall pay to husband and wife during their lifetimes and after the death of the first of them to die to the survivor for such time as he or she survives a unitrust_amount equal to b percent of the net fair_market_value of the assets of trust valued as of the first day of each taxable_year paragraph sixth a of trust provides that upon the death of the survivor of husband and wife subject_to paragraph sixth b the trustee shall distribute all of the then principal and income of trust other than any amount due to the surviving recipient to charity paragraph sixth b of trust provides that if either the will of the surviving trustor or a writing by the surviving trustor delivered to the trustee make specific reference to this paragraph sixth b and provides for a distribution which is different than the distribution provided in paragraph sixth a the entire remaining trust principal shall be paid over and distributed as provided in such will or writing in such amounts as the surviving trustor may direct provided however that such payment and distribution shall be made only to an organization or organizations each of which is described in sec_170 sec_170 sec_2055 sec_2522 or sec_2522 provided further however that no payment or distribution shall be made to an organization which is a private_foundation described in sec_509 other than a private_foundation described in sec_170 paragraph sixth e of trust provides that notwithstanding any provision to the contrary the trustee may distribute currently a portion of the trust assets to the qualified organizations selected by the trustors pursuant to a separate written instrument which expressly references this paragraph sixth and is provided to the trustee in accordance with this paragraph sixth paragraph fourteenth of trust provides that trust is executed under the laws of state and governed by the laws of state on date husband and wife waived their rights to change the designation of charity as the charitable_beneficiary with respect to c percent of the remainder_interest of trust plr-144461-12 on date husband and wife created trust and funded trust with assets having a value of approximately dollar_figured husband and wife represent that trust is a crut pursuant to sec_664 paragraph second of trust provides that in each taxable_year of trust the trustee shall pay to husband and wife during their lifetimes and after the death of the first of them to die to the survivor for such time as he or she survives a unitrust_amount equal to e percent of the net fair_market_value of the assets of trust valued as of the first day of each taxable_year paragraph sixth a of trust provides in pertinent part that upon the death of the survivor of husband and wife subject_to paragraph sixth b the trustee shall distribute all of the then principal and income of trust other than any amount due to the surviving recipient to charity paragraph sixth b of trust provides that if either the will of the surviving trustor or a writing by the surviving trustor delivered to the trustee makes specific reference to this paragraph sixth b and provides for a distribution which is different than the distribution provided in paragraph sixth a the entire remaining trust principal shall be paid over and distributed as provided in such will or writing in such amounts as the surviving trustor may direct provided however that such payment and distribution shall be made only to an organization or organizations each of which is described in sec_170 sec_170 sec_2055 sec_2522 or sec_2522 provided further however that no payment or distribution shall be made to an organization which is a private_foundation described in sec_509 other than a private_foundation described in sec_170 paragraph thirteenth of trust provides that trust is executed under the laws of state and governed by the laws of state the trustors represent that at the time trust and trust collectively trusts were created they had no intention to divide the unitrust and remainder interests as a method to avoid the partial_interests rules in sec_170 on date husband and wife entered an agreement agreement with charity agreement requires that husband and wife irrevocably relinquish any right to change the charitable beneficiaries of the trusts acknowledge that charity is the sole remainder beneficiary of trusts and convey to charity all of trustors’ respective rights to all remaining unitrust amounts payable to trustors from trusts husband as trustee of trusts agrees to assign to charity all assets of trusts within thirty days of the approval date of agreement trustors have also agreed to transfer to charity additional assets equal to the difference between dollar_figuref and the sum of the value of the assets of trusts on or before the date which is fifteen days after the approval date of agreement the approval date of agreement is the later of a the date on which county court plr-144461-12 approves the agreement and its effect on trusts or b the date on which trustors receive a private_letter_ruling from the service approving the transaction on date county court approved agreement you have requested the following rulings husband and wife will be entitled to a gift_tax deduction under sec_2522 for the value of the remainder interests in trusts transferred as a result of their irrevocable renunciation of their right to change the charitable_remainder beneficiary of trusts and their irrevocable designation of charity as the sole charitable_remainder beneficiary of trusts husband and wife will be entitled to a gift_tax deduction under sec_2522 for the value of their unitrust interests in trusts transferred as a result of their assignment of those unitrust interests to charity husband and wife will be entitled to an income_tax deduction under sec_170 for the value of their unitrust interests in trusts transferred as a result of their assignment of those unitrust interests to charity based on the representation that trusts qualify as cruts under sec_664 and based on the representation that husband and wife did not divide their interest in the properties originally transferred to trusts to avoid the partial interest rules sec_170 and sec_1_170a-6 of the income_tax regulations will not disallow a charitable_contribution_deduction for husband and wife under sec_170 based on the present fair_market_value of the remainder_interest originally contributed to the trusts law and analysis ruling sec_1 - sec_170 provides that there shall be allowed as a deduction any charitable_contribution as defined in sec_170 payment of which is made within the taxable_year sec_170 provides that in the case of property transferred in trust no deduction is allowed for the value of a contribution of a remainder_interest unless the trust is a charitable_remainder_annuity_trust or a charitable_remainder_unitrust described in sec_664 or a pooled_income_fund described in sec_642 sec_170 provides that no charitable_contribution_deduction is allowed for the value of any interest in property other than a remainder_interest transferred in trust unless the interest is in the form of a guaranteed annuity or a fixed percentage distributed annually of the fair_market_value of the trust property determined annually plr-144461-12 and the grantor is treated as the owner of the interest for purposes of applying sec_671 relating to grantor trusts sec_170 provides that a contribution not made by a transfer in trust of less than the taxpayer's entire_interest in property is not allowed as a charitable_contribution_deduction except to the extent such contribution would have been allowed as a deduction had it been transferred in trust sec_170 provides that sec_170 does not apply to a contribution of an undivided portion of the taxpayer's entire_interest in property sec_1_170a-6 and sec_1_170a-7 provide that a deduction is allowed for a contribution of a partial interest in property if such interest is the taxpayer's entire_interest in the property such as an income_interest or a remainder_interest if however the property in which such partial interest exists was divided in order to create such interest and thus to avoid sec_170 the deduction will not be allowed sec_1_170a-6 provides that no deduction is allowed under sec_170 for the fair_market_value of a charitable_contribution of a remainder_interest in property which is less than the donor's entire_interest in the property and which the donor transfers in trust unless the trust is a charitable_remainder_unitrust described in sec_664 and sec_1_664-3 sec_1_170a-7 provides that an undivided portion of a taxpayer's entire_interest in property must consist of a fraction or percentage of each and every substantial interest or right owned by the taxpayer in the property and must extend over the entire term of the taxpayer's interest in the property sec_1_170a-1 provides that if a charitable_contribution is made in property other than money the amount of the contribution is generally the fair_market_value of the property at the time of the contribution sec_1_170a-1 provides that if as of the date of the gift a transfer for charitable purposes is dependent upon the performance of some act or the happening of a precedent event in order that it might become effective no deduction is allowable unless the possibility that the charitable transfer will not become effective is so remote as to be negligible sec_664 provides that for purposes of sec_664 a charitable_remainder_unitrust is a_trust a from which a fixed percentage which is not less than percent nor more than percent of the initial net fair_market_value of all property placed in trust is to be paid not less frequently than annually to one or more persons at least one of which is not an organization described in sec_170 and in the case of individuals only to an individual who is living at the time of creation of the trust for a term of years plr-144461-12 not in excess of years or for the life or lives of such individual or individuals b from which no amount other than the payments described in sec_664 and other than qualified gratuitous transfers described in sec_664 may be paid to or for the uses of any person other than an organization described in sec_170 c following termination of the payments described in sec_664 the remainder_interest in the trust is to be transferred to or for_the_use_of an organization described in sec_170 or is to be retained by the trust for such a use or to the extent the remainder_interest is in qualified_employer_securities as defined in sec_664 all or a part of such securities are to be transferred to an employee_stock_ownership_plan as defined in sec_4975 in a qualified_gratuitous_transfer as defined in sec_664 and d with respect to each contribution of property to the trust the value determined under sec_7520 of the remainder_interest passing to charity is at least percent of the initial net fair_market_value of all property placed in the trust sec_2501 imposes a tax for each calendar_year on the transfer of property by gift during such calendar_year by any individual sec_2511 provides that the tax imposed by sec_2501 shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-2 of the gift_tax regulations provides in part that a gift is incomplete if and to the extent a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed_or_ascertainable_standard thus a gift would be incomplete to the extent the donor retains the power to designate the beneficiaries of the gift even if the power retained is limited to designating charitable beneficiaries see revrul_77_275 1977_2_cb_346 sec_25_2511-2 provides in part that the relinquishment or termination of a power to change the beneficiaries of transferred property occurring otherwise than by the death of the donor the statute being confined to transfers by living donors is regarded as the event which completes the gift and causes the tax to apply sec_2522 provides that in computing taxable_gifts for the calendar_year there shall be allowed as a deduction the amount of all gifts made during such year to or for_the_use_of a corporation or trust or community chest fund or foundation organized and operated exclusively for religious charitable scientific literary or educational_purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_2522 provides that where a donor transfers an interest in property other than an interest described in sec_170 to a person or for a use described in sec_2522 or b and an interest in the same property is retained by the plr-144461-12 donor or is transferred or has been transferred for less than an adequate_and_full_consideration in money_or_money's_worth from the donor to a person or for a use not described in sec_2522 or b no deduction shall be allowed under this section for the interest which is or has been transferred unless -- a in the case of a remainder_interest such interest is in a_trust which is a charitable_remainder_annuity_trust or a charitable_remainder_unitrust described in sec_664 or a pooled_income_fund described in sec_642 or b in the case of any other interest such interest is in the form of a guaranteed annuity or is a fixed percentage distributed yearly of the fair_market_value of the property to be determined yearly in situation of revrul_86_60 1986_1_cb_302 in a created a charitable_remainder_annuity_trust described in sec_664 the trust instrument provided that the trustee shall pay the annuity amount annually to a for life and upon a's death to b the successive life interest beneficiary for such time as b survives upon the death of the survivor of a and b the corpus is to be distributed to x a charitable_organization that meets the requirements of sec_170 and sec_2522 in a and b assigned their interests in the trust to the charitable_remainder beneficiary a made a completed_gift under sec_2511 to b of the secondary life_annuity interest in the trust in because a made a completed_gift in the trust to a noncharitable beneficiary the charitable gift_tax deduction is allowed for a's transfer only if the interest is described in sec_25 c -3 c because a's transfer to x is of a right to receive a fixed amount annually for the life of a and qualifies as a guaranteed annuity the interest qualifies under sec_25 c -3 c v and the gift qualifies for a gift_tax_charitable_deduction under sec_2522 in addition a’s transfer of a’s entire life_annuity interest in qualifies for an income_tax deduction under sec_170 the life_annuity interest was the only interest in the charitable_remainder_annuity_trust that a owned at the time of the transfer although a had previously divided the interest a held in the property the division was not done to avoid sec_170 thus under sec_1_170a-7 a’s transfer of a’s entire life_annuity interest qualifies for an income_tax deduction under sec_170 furthermore following the transfer b did not retain any interest in the trust and at no time had b made a transfer of an interest in the trust for a private purpose consequently there is no requirement that the transfer to charity be in a form described in sec_25_2522_c_-3 and b's transfer of b's annuity interest to charity qualifies for a deduction under sec_2522 finally b’s transfer qualifies for an income_tax charitable deduction under sec_170 the secondary life_annuity interest was the only interest in the trust that b owned at the time of the transfer therefore under sec_1_170a-7 b's transfer of b's entire secondary life_annuity interest qualifies for an income_tax deduction under sec_170 in this case the taxpayers represent that trust and trust satisfy the requirements of sec_664 based on the information submitted and representations made we conclude that the terms of agreement will not preclude trust and trust from qualifying as cruts plr-144461-12 under the proposed transaction trustors will irrevocably relinquish any right to change the charitable beneficiaries of the trusts and acknowledge that charity is the sole remainder beneficiary of trusts the gift of the remainder interests in trusts to charity would be complete accordingly based on the facts presented and the representations made we conclude that husband and wife will be entitled to a gift_tax deduction under sec_2522 for the value of the remainder interests in trusts transferred in addition based on the representation that trusts qualify as cruts under sec_664 sec_170 will not disallow a charitable_contribution_deduction for the remainder_interest under sec_170 for husband and wife furthermore under the proposed transaction trustors will convey to charity all of trustors’ respective rights to all remaining unitrust amounts payable to trustors from trusts husband and wife will convey their entire_interest in trusts to charity and following the transfer husband and wife will not retain any interest in trusts accordingly based on the facts presented and the representations made we conclude that husband and wife will be entitled to a gift_tax deduction under sec_2522 and income_tax deduction under sec_170 for the value of their unitrust interests in trusts in accordance with the power_of_attorney on file with this office we have sent a copy of this letter to your authorized representatives except as expressly provided herein we neither express nor imply any opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination plr-144461-12 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely _____________________________ james f hogan chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter


department of the treasury internal_revenue_service washington d c date number release date cc psi postf-110966-02 uilc internal_revenue_service national_office chief_counsel_advice memorandum for associate area_counsel lmsb area from subject lm fsh har mark pitzer senior counsel branch office of passthroughs and special industries cc psi proper asset_guideline_class for tools dies and molds used by the taxpayer in manufacturing its products and whether a change in the asset_guideline_class of revproc_87_56 for these assets is a method change under sec_446 this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 of the internal_revenue_code this chief_counsel_advice should not be cited as precedent legend taxpayer taxable years amount issues whether the tools dies and molds used by taxpayer in manufacturing its products are includible in asset cla sec_30 manufacture of finished plastic products-special tools or asset cla sec_39 manufacture of athletic jewelry and other goods of revproc_87_56 1987_2_cb_674 postf-110966-02 whether a change in recovery_period resulting from a change in macrs classification of taxpayer’s tools dies and molds is a change in method_of_accounting to which the provisions of sec_446 of the internal_revenue_code and the regulations thereunder apply conclusion sec_1 the tools dies and molds used by taxpayer in manufacturing its products are includible in asset cla sec_39 of revproc_87_56 because taxpayer is engaged in the business activity of manufacturing but is not engaged in the business activity of manufacturing finished plastic products a change in recovery_period resulting from a change in macrs classification of taxpayer’s tools dies and molds from asset class dollar_figure to asset cla sec_39 is a change in method_of_accounting to which the provisions of sec_446 and the regulations thereunder apply because the change in classification affects the proper time that taxpayer can take depreciation_deductions facts taxpayer is in the business of designing manufacturing and marketing a diverse line of products generally taxpayer uses various materials to construct its including plastic metal wood cardboard and cloth taxpayer also utilizes numerous tools dies and molds the disputed assets in its manufacturing process taxpayer’s manufacturing process includes injection molding blow molding metal stamping printing box making assembly and wood processing during taxable years taxpayer spent amount on the disputed assets taxpayer utilizes the disputed assets to produce plastic and parts taxpayer makes its own tools but purchases the dies and molds from third parties for tax purposes taxpayer has historically classified the disputed assets in asset cla sec_30 manufacture of finished plastic products - special tools of revproc_87_56 taxpayer depreciates the remainder of its tangible_personal_property under asset cla sec_39 manufacture of athletic jewelry and other goods the internal_revenue_service is currently examining the consolidated income_tax returns of taxpayer for taxable years during this examination the service advised taxpayer that because taxpayer is a manufacturer the disputed assets are includible in asset cla sec_39 rather than asset cla sec_30 taxpayer contends that the disputed assets belong in asset class dollar_figure because taxpayer uses them to produce finished plastic products postf-110966-02 law and analysis issue the depreciation deduction provided by sec_167 for tangible_property placed_in_service after generally is determined under sec_168 this section prescribes two methods_of_accounting for determining depreciation allowances the general depreciation system in sec_168 and the alternative_depreciation_system in sec_168 under either depreciation system the depreciation deduction is computed by using a prescribed depreciation method recovery_period and convention for purposes of either sec_168 or sec_168 the applicable_recovery_period is determined by reference to class_life or by statute sec_168 provides that the term class_life means the class_life if any that would be applicable with respect to any property as of date under former sec_167 as if it were in effect and the taxpayer were an elector prior to its revocation sec_167 provided that in the case of a taxpayer who elected the asset_depreciation_range_system of depreciation adr the depreciation deduction would be computed based on the class_life prescribed by the secretary which reasonably reflects the anticipated useful_life of that class of property to the industry or other group sec_1_167_a_-11 of the income_tax regulations sets out the method for asset classification under former sec_167 property is included in the asset_guideline_class for the activity in which the property is primarily used_property is classified according to primary use even though the use is insubstantial in relation to all of the taxpayer's activities revproc_87_56 sets forth the class lives of property that are necessary to compute the depreciation allowances under sec_168 the revenue_procedure establishes two broad categories of depreciable assets asset classes dollar_figure through that consist of specific assets used in all business activities and asset classes through that consist of assets used in specific business activities the same item of depreciable_property can be described in both an asset category that is asset classes dollar_figure through and an activity category that is asset classes through in which case the item is classified in the asset category unless specifically described in the activity category see 111_tc_105 item described in both an asset and an activity category furniture and fixtures should be placed in postf-110966-02 the asset category the asset classes described below are set forth in revproc_87_56 asset cla sec_30 manufacture of finished plastic products includes assets used in the manufacture of plastics products and the molding of primary plastics for the trade the asset class does not include assets used in the manufacture of basic plastics materials nor the manufacture of phonograph records assets in this class have a recovery_period of years for purposes of sec_168 and sec_11 years for purposes of sec_168 asset cla sec_30 manufacture of finished plastic products -- special tools includes assets defined as special tools such as jigs dies fixtures molds patterns gauges and specialty transfer and shipping devices used in activities as defined in cla sec_30 special tools are specifically designed for the production or processing of particular parts and have no significant utilitarian value and cannot be adapted to further or different use after changes or improvements are made in the model design of the particular part produced by the special tools this asset class does not include general purpose small tools such as wrenches and drills both hand and power-driven and other general purpose equipment such as conveyors transfer equipment and materials handling devices assets in this class have a recovery_period of years for purposes of sec_168 and sec_3_5 years for purposes of sec_168 asset cla sec_39 manufacture of athletic jewelry and other goods includes assets used in the production of jewelry musical instruments toys and sporting goods motion picture and television films and tapes and pens pencils office and art supplies brooms brushes caskets etc assets in this class have a recovery_period of years for purposes of sec_168 and sec_12 years for purposes of sec_168 the depreciation regime established by sec_168 commonly referred to as macrs is a class_life depreciation regime under a class_life depreciation regime the economic or useful_life of a particular asset is not determinative of its recovery_period rather an asset’s recovery_period generally is determined by reference to the appropriate asset class the asset classes set forth in revproc_87_56 are composite classes of assets each asset class includes assets that have longer or shorter anticipated useful lives than the recovery_period provided for the asset class with the exception of the assets that are includible in the asset classes provided for certain specific assets used in all business activities assets generally are classified for depreciation purposes in accordance with the taxpayer’s business activity thus postf-110966-02 with respect to this latter category of assets the focus of a classification inquiry is on the taxpayer’s business activity rather than the particular asset the business activity asset classes were established in light of the recognition that the anticipated useful lives of assets including the same types of assets will vary in accordance with the business activity in which they are used this is because each business activity has its own set of risks business practices and obsolescence realities taxpayers in a particular industry will tend to move toward similar production processes use similar equipment and retire equipment on similar schedules see generally the adoption of the asset_depreciation_range adr system department of the treasury june by providing that the class_life of property reflects the anticipated useful_life of that class of property to the industry or other group former sec_167 took cognizance of the different business circumstances of different businesses accordingly under macrs it is not uncommon for the same types of assets to have different recovery periods resulting from their inclusion in different business activity asset classes for example a fork-lift truck used in manufacturing rubber products asset cla sec_30 will have a 7-year recovery_period under sec_168 while the same fork-lift truck used in manufacturing chemicals asset cla sec_28 will have a 5-year recovery_period under sec_168 because of the reference to former sec_167 in sec_168 macrs classification determinations are guided by the adr classification regulations in addition published guidance interpreting the adr classification regulations is useful when considering classification questions under macrs sec_1_167_a_-11 clearly indicates that a taxpayer can be engaged in multiple business activities in such a case assets are included in the asset class for the business activity in which the assets are primarily used the regulation provides that assets are classified according to primary use even though the use is insubstantial in relation to all of the taxpayer’s business activities the issue presented by the present case is whether taxpayer in addition to being a manufacturer a business activity described in asset cla sec_39 is also engaged in the business of manufacturing finished plastic products the business activity described in asset cla sec_30 only if taxpayer is also engaged in the business of manufacturing finished plastic products can the disputed assets be included in asset cla sec_30 this subsidiary asset class provides that it is limited to assets used in activities as defined in asset cla sec_30 in addition revproc_74_30 1974_2_cb_483 which was published to prescribe the subsidiary asset classes for adr provides that unless a subsidiary asset class has been established for an activity as set forth in revproc_74_30 or other supplementary guidance special postf-110966-02 tools placed_in_service after date must be included with other machinery and equipment in the general activity asset class revrul_77_63 1977_1_cb_60 considered whether the chemical process assets of the taxpayer a bauxite refiner and aluminum producer should be classified separately from the assets used in the taxpayer’s business activity of nonferrous metal manufacturing the business activity described in asset cla sec_33 the revenue_ruling holds that because the taxpayer’s chemical process is an integral part of the refining of the nonferrous metal all of the assets used by the taxpayer in the processing of the bauxite ore into primary aluminum are classified in asset cla sec_33 the revenue_ruling also holds that assets used in activities other than aluminum production should be classified in other asset classes revrul_77_476 1977_2_cb_5 holds that a 50-mile oil pipeline owned by an electric utility company used to transport oil between the company’s dock and its inland generating facility is included in asset cla sec_49 electric utility steam production plant rather than in asset cla sec_46 pipeline transportation because the company operated the pipeline in conjunction with its business activity of producing electrical energy the revenue_ruling concludes that the company does not have a separate trade_or_business activity of transporting oil or other goods by pipeline because the oil pipeline property is merely a part of the company’s fuel handling operation for its electric generating plant another source of insight into the content of the asset classes described in revproc_87_56 is the standard industrial classification manual sic published by the office of management and budget sic is the statistical classification standard underlying all establishment-based federal economic statistics classified by industry however in making use of sic in a depreciation classification inquiry care must be exercised because sic does not use the same classification techniques and depreciation concepts of revproc_87_56 while sic has precise categorization by primary business activity using language and a numbering scheme very similar to that found in revproc_87_56 the revenue_procedure departs dramatically from the categorization scheme of sic by establishing as previously discussed two broad categories of depreciable assets asset classes dollar_figure through that consist of specific assets used in all business activities and asset classes through that consist of assets used in specific business activities the introduction to the sic provides that an establishment is an economic unit generally at a single physical location where business is conducted or where services or industrial operations are performed where distinct and separate economic activities are performed at a single physical location each activity should be treated as a separate establishment where no one industry description in the postf-110966-02 classification includes such combined activities the employment in each such economic activity is significant and separate reports can be prepared on the number of employees their wages and salaries sales or receipts and other types of establishment data sic major group miscellaneous manufacturing industries includes establishments primarily engaged in manufacturing products not classified in any other manufacturing major group industry no includes establishments primarily engaged in manufacturing industry no includes establishments primarily engaged in manufacturing and products of this industry include among many other things the revenue rulings discussed above indicate that the macrs asset classification system looks at business activities broadly and is not intended to divide a taxpayer’s business into a myriad of activities this view comports with the introductory language in sic indicating that a business will be subdivided for sic classification purposes only where separate and distinct economic activities are performed no one industry description in the classification includes such combined activities and employment in each activity is significant in this regard it is clear that under sic manufacturers of are encompassed within major group accordingly for an activity to be classified as a separate business activity for macrs purposes it must be substantial although it may be insubstantial in relation to all the activities of the taxpayer significant and separate and not merely part of another business activity of the taxpayer the present case is similar to the situations described in the revenue rulings discussed above taxpayer is a manufacturer of taxpayer’s are manufactured from among other materials metal wood plastic cardboard and combinations thereof all of the plastic products produced by taxpayer are used in conjunction with and are integral to taxpayer’s manufacturing business activity like the chemical process assets at issue in revrul_77_63 and the oil pipeline assets at issue in revrul_77_476 the disputed assets in the present case are merely part of another business activity in this case manufacturing the disputed assets are not used in conjunction with any other activity rather the activities performed by the disputed assets are encompassed within the description of asset cla sec_39 taxpayer does not have a separate business activity of manufacturing finished plastic products accordingly the disputed assets are not includible in asset class dollar_figure and must be classified in asset cla sec_39 postf-110966-02 issue sec_446 provides that taxable_income shall be computed under the method_of_accounting on the basis of which the taxpayer regularly computes his income in keeping his books sec_446 provides that if no method_of_accounting has been regularly used by the taxpayer or if the method used does not clearly reflect income the computation of taxable_income shall be made under such method as in the opinion of the secretary does clearly reflect income sec_446 provides that except as otherwise expressly provided in this chapter a taxpayer who changes the method_of_accounting on the basis of which he regularly computes his income in keeping his books shall before computing his taxable_income under the new method secure the consent of the secretary sec_1_446-1 defines the term method_of_accounting as including not only the over-all method_of_accounting of the taxpayer but also the accounting treatment of any item examples of such over-all methods are the cash_receipts_and_disbursements_method an accrual_method combinations of such methods and combinations of the foregoing with various methods provided for the accounting treatment of special items these methods_of_accounting for special items include the accounting treatment prescribed for among other things depreciation sec_1_446-1 provides that a change in method_of_accounting includes a change in the overall plan of accounting for gross_income or deductions or a change in the treatment of any material_item used in such overall plan a material_item is any item which involves the proper time for the inclusion of the item in income or the taking of a deduction sec_1_446-1 provides that a change in method_of_accounting does not include an adjustment with respect to the addition to a reserve for bad_debts or an adjustment to the useful_life of a depreciable asset the regulation further provides that while these adjustments may involve the question of the proper time for the taking of a deduction these items are traditionally corrected by adjustments in the current and future years in the present case the service is reclassifying the disputed assets from asset class dollar_figure to asset cla sec_39 of revproc_87_56 assets includible in asset class dollar_figure have a recovery_period of years for purposes of sec_168 and sec_3_5 years for purposes of sec_168 assets includible in asset cla sec_39 have a recovery_period of years for purposes of sec_168 and sec_12 years for postf-110966-02 purposes of sec_168 this change in classification changes the recovery_period of the disputed assets but not the depreciation method and convention under macrs the recovery_period determines the period of time over which the basis of depreciable_property is recovered a change in recovery_period affects when not whether the cost of depreciable_property will be deducted thus the change in classification of the disputed assets from asset class dollar_figure to asset cla sec_39 changes the applicable_recovery_period and consequently the proper time that taxpayer can take depreciation_deductions while sec_1_446-1 indicates that a change in the treatment of any item which involves the proper time for the taking of a deduction is a change in method_of_accounting sec_1 e ii b provides that a change in method_of_accounting does not include an adjustment to the useful_life of a depreciable asset the question presented by the present case is whether a change in recovery_period falls within the scope of the useful_life exception of sec_1_446-1 or whether such change is a change in method_of_accounting useful_life and recovery_period are not equivalent terms and significant differences exist between these depreciation concepts under the useful_life depreciation regime that existed before the actual_useful_life of a particular asset the period over which an asset could reasonably be expected to be useful to a taxpayer in its business played the key role in the calculation of depreciation under macrs the recovery_period of an asset generally is determined by placing it in a set of broad asset classes these classes of assets are often depreciated over a shorter recovery_period than actual economic useful_life in addition under macrs each recovery_period is inextricably linked with a certain prescribed method of calculating depreciation straight_line 150-percent declining balance 200-percent declining balance taking cognizance of these differences the commissioner through his administrative pronouncements has determined that the distinctions between the useful_life and recovery_period concepts are more significant than their similarities and that a change in recovery_period is not equivalent to a change in useful_life in revproc_96_31 1996_1_cb_714 the commissioner stated that a change from not claiming the depreciation allowable to claiming the deprecation allowable is a change in method_of_accounting requiring consent in irs pub the commissioner expressly stated that a change in recovery_period is a change in accounting_method requiring his consent see also sec_2 b vii of the appendix of revproc_97_37 1997_2_cb_455 in contrast section dollar_figure of this appendix generally applies to a change in recovery_period of property for which depreciation is determined under sec_168 or former sec_168 sec_2 b vii of the appendix of revproc_98_60 1998_2_cb_759 same sec_2 c vii of the appendix of revproc_99_49 1999_2_cb_725 in contrast section dollar_figure of this appendix generally postf-110966-02 applies to a change in recovery_period of property for which depreciation is determined under sec_56 sec_56 sec_168 or former sec_168 and sec_2 c vii of the appendix of revproc_2002_9 2002_3_irb_327 same the scope of the useful_life exception in sec_1_446-1 was considered by the united_states court_of_appeals for the tenth circuit in 222_f3d_830 10th cir noting that the commissioner had promulgated administrative interpretations of the useful_life exception rev_proc and pub that excluded a change in macrs recovery_period from that exception the court stated that this interpretation is entitled to deference unless it is plainly erroneous or inconsistent with the regulation the court concluded that the administrative pronouncements were entitled to deference noting that the plain language of the regulation only excludes an adjustment of a change in the calculation of useful_life the united_states district_court for the western district of texas in 108_fsupp2d_709 w d tex and the united_states district_court for the district of minnesota in o’shaughnessy v commissioner ustc cch big_number d minn also decided not to expand the useful_life exception to property reclassifications under macrs however see brookshire brothers holding inc and subsidiaries v commissioner tcmemo_2001_150 appeal docketed no 5th cir date where the united_states tax_court expanded the useful_life exception of sec_1_446-1 to include macrs_property reclassifications based upon the preceding discussion we conclude that a change in recovery_period does not fall within the scope of the limited exception provided by sec_1_446-1 in the present case the change in classification of the disputed assets changes the applicable_recovery_period and consequently the proper time that taxpayer can take depreciation_deductions sec_1 e ii a provides that a change in the treatment of any item which involves the proper time for the taking of a deduction is a change in method_of_accounting accordingly a change in recovery_period resulting from a change in macrs classification of the disputed assets is a change in method_of_accounting to which the provisions of sec_446 and the regulations thereunder apply case development hazards and other considerations taxpayer makes reference to revproc_62_21 1962_2_cb_418 a predecessor of revproc_87_56 this revenue_procedure provides that where multiple guideline classes are specified for a particular industry each guideline_class covers that portion of the total depreciable_property appropriate to the class revproc_62_21 q a 1962_2_cb_477 sets forth an asset classification example involving a taxpayer that mines iron ore postf-110966-02 and coal manufactures steel and steel products and provides a bowling alley for its employees the q a provides that the assets used in the mining operation should be classified in a different class mining than the assets used in steel manufacturing ferrous metals further the q a indicates that the bowling alley assets would have been classified in still another class recreation had they not been deemed insubstantial under then-existing law we find this q a to be troubling because it can be interpreted to support the contention that a taxpayer’s assets can be classified in multiple activity classes even when the taxpayer is not engaged in separate business activities however the facts in the q a do not make clear whether all of the coal and iron ore mined by the taxpayer is consumed by the taxpayer in its steel manufacturing operations or whether the bowling alley is limited to taxpayer’s employees if the taxpayer sells coal and iron ore to third parties and the bowling alley is not limited to its employees we would agree that the taxpayer is engaged in multiple activities for asset classification purposes we note that the premise to the q a states that the taxpayer is engaged in more than one industrial or commercial activity if this phrase is interpreted to mean separate business activities as discussed in our fsa then the q a presents no problem revproc_62_21 q a 1962_2_cb_478 also concerns a taxpayer engaged in multiple activities the facts of this example clearly indicate that the taxpayer manufactures and markets products for different industries and its assets are classified accordingly we also note that revproc_62_21 was revoked by revproc_72_10 1972_1_cb_721 the revenue rulings discussed in our fsa show that assets merely used in conjunction with another activity are not separately classified revrul_77_63 states that its same holding would have been reached under revproc_62_21 the decision in 172_f3d_1255 10th cir duke owned and operated various systems of interconnected subterranean natural_gas gathering pipelines and related compression facilities gathering systems duke argued that its gathering systems were includible in class because gathering systems are specifically mentioned in asset class the gathering systems are used by petroleum and natural_gas producers to produce natural_gas and the gathering systems are essential to the production and sale of gas in the market the service argued that to be includible in a particular asset class the taxpayer with the depreciable_interest in the property must itself be engaged in the described business activity while the lower court held in the service’s favor finding that duke transports rather than produces gas this decision was reversed by the 10th circuit which held that the gathering systems were assets used by producers in the exploration for and production of petroleum and natural_gas deposits the present case is similar to duke in that taxpayer can argue that the disputed assets are specifically mentioned in asset class dollar_figure and are used by postf-110966-02 taxpayer to manufacture plastic products however as previously discussed we believe all aspects of manufacturing are encompassed within asset class taxpayer argues that the service is precluded from reclassifying the disputed assets to asset cla sec_39 because the service previously allowed taxpayer to use asset class dollar_figure for exam years and and taxpayer has been depreciating its plastic injection blow molds over a three-year period since however it is well-established that the commissioner does not have the duty to assert a particular position at the earliest moment and that he may correct an error in the interpretation of the tax laws even if he has failed to challenge that error in previous years 465_us_330 353_us_180 713_f2d_347 8th cir the commissioner may challenge a particular tax treatment even when he has audited the taxpayer’s returns in a prior year and failed to disallow that treatment in the audit 590_f2d_1360 5th cir equitable_estoppel does not apply to the government when it seeks to correct an error of law automobile club of michigan this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views if you have any questions regarding this chief_counsel_advice please call mark pitzer


internal_revenue_service number release date index number --------------------------- ---------------------------------------------------------- ------------------- ---------------------------------- -------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc corp b04 plr-147688-09 date november legend corporation business ---------------------------------------------------- ---------------------------------------------------- ----------------------- ---------------------------------------------------- ---------------------------------------------------- ---------------- shareholder ---------------------------------------------------- ---------------------------------------------------- ----------------------- shareholder ---------------------------------------------------- ---------------------------------------------------- ----------------------- minority shareholders ---------------------------------------------------- ---------------------------------------------------- ---------------------------------------------------- ------------------------------ state a ------------ plr-147688-09 a b c d e f g h i ------------- ----------- --------------- --------------- -------- --- ------ ----------- --- dear ------------------- this letter responds to your date request for rulings as to the federal_income_tax consequences of a proposed transaction the information submitted for consideration is summarized below corporation is a state a corporation engaged in business corporation currently has issued and outstanding a shares of class a common_stock b shares of class b common_stock and c shares of several series of preferred_stock the class a common_stock and each series of preferred_stock have voting rights while the class b common_stock is nonvoting corporation also has outstanding restricted_stock and options to purchase stock of corporation all of which are held by the minority shareholders together the common and preferred_stock the restricted_stock and the unexercised options represent all of the outstanding shares of corporation a total of d shares shareholder and shareholder own e percent and f percent respectively of the total shares of corporation the minority shareholders own the remaining g percent of the total shares of corporation stock in the form of class a common shares and class b common shares plr-147688-09 in order to increase the operational flexibility of corporation and to reduce costs and eliminate administrative burdens associated with minority shareholders shareholder shareholder and corporation propose the following transaction i ii iii shareholder and shareholder will form a new corporation under the laws of state a newco solely for the purpose of effecting this transaction shareholder and shareholder will contribute all of their common and preferred shares of corporation to newco in exchange for an equal number of shares of common and preferred_stock of newco the contribution in addition shareholder will contribute cash to newco in exchange for h additional shares of newco class a common_stock the stock acquisition newco will merge into corporation with corporation surviving in connection with the merger the minority shareholders will receive a specified cash amount per share in exchange for their corporation stock and such stock will be cancelled minority shareholders who dissent to the proposed transaction and perfect their appraisal rights will receive an amount per share as determined through the appraisal process and the shares will be cancelled also in connection with the merger the newco shares owned by shareholder and shareholder will be cancelled and each will receive the same number class and series of shares of corporation stock as it held in newco in exchange for its previously held newco stock the share exchange in addition under the terms of the corporation stock_option plan all unvested options will become vested and exercisable days prior to the merger and to the extent unexercised will expire as of the merger holders of expiring options who do not exercise their options will be entitled to receive payments equal to the difference between the exercise price and the per share consideration amount the outstanding corporation restricted_stock will be converted into cash upon the merger and none will remain outstanding after the completion of the proposed transaction shareholder will hold a number of shares equal to what shareholder held immediately before the proposed transaction and with the same rights preferences and privileges plus the h shares of class a common_stock of corporation that shareholder acquired in the stock purchase thereby increasing shareholder 1’s ownership in corporation to i percent after the completion of the proposed transaction shareholder will hold the same number of shares of corporation stock and with the same rights preferences and privileges that shareholder held in corporation immediately before the proposed transaction based solely on the information submitted we rule as follows plr-147688-09 the creation of newco followed by the merger of newco into corporation will be disregarded for federal_income_tax purposes rev_rul c b the stock acquisition will be treated as if shareholder contributed cash to corporation in exchange for additional shares of class a common_stock of corporation the proposed transaction will be treated as if shareholder and shareholder never transferred their corporation stock for federal_income_tax purposes and thus shareholder and shareholder will not recognize any gain_or_loss in the contribution and the share exchange rev_rul c b no gain_or_loss will be recognized by corporation in the stock acquisition sec_1032 the cash received by the minority shareholders for such holders’ class a common_stock and class b common_stock will be treated as having been received by each such shareholder as a distribution in redemption of such holder’s stock subject_to the provisions and limitations of sec_302 of the code rev_rul c b no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above rulings this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to the taxpayer’s federal_income_tax return for the taxable_year in which the transaction is consummated alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of this letter sincerely __________________ lewis k brickates chief branch office of associate chief_counsel corporate


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 b04 plr-143333-07 date date legend grantor -------------------- child trust -------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------- trust dear -------------- this is in response to your letter of date submitted on your behalf by your authorized representative requesting a ruling concerning the application of sec_2041 of the internal_revenue_code grantor created trust sec_1 and for the benefit of her daughter-in-law and the children of her son and daughter-in-law each trust is an irrevocable_trust and each was created prior to date each trust creates a separate share for each child child is one of the children of grantor’s son and daughter-in-law the separate share for the benefit of child is the subject of this ruling each trust provides that when child reaches the age of majority income is payable to child for life article second section of each trust provides that upon child’s death that share shall be disposed of as child shall appoint by will provided however that such appointees are ‘members of the family’ as hereinafter defined article ninth of each trust provides plr-143333-07 whenever the phrase members of the family is used in this indenture in relation to any person it shall be interpreted to mean and include the husband or wife as the case may be and the children or other descendents of said person and the children of grantor and their descendents but no other persons child has requested a ruling that the powers of appointment contained in trust sec_1 and are not general powers of appointment within the meaning of sec_2041 and that the exercise of the powers will not cause the property subject_to the powers to be includible in child’s gross_estate sec_2041 provides that the value of the gross_estate shall include the value of all property to the extent of any property with respect to which a general_power_of_appointment created on or before date is exercised by the decedent by will or by a disposition which is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent's gross_estate under sec_2035 to inclusive sec_2041 provides with exceptions not relevant here that the term general_power_of_appointment means a power which is exercisable in favor of the decedent his estate his creditors or the creditors of his estate sec_20_2041-1 of the estate_tax regulations provides that the term general_power_of_appointment as defined in sec_2041 means any power_of_appointment exercisable in favor of the decedent his estate his creditors or the creditors of his estate sec_20_2041-1 provides that a power_of_appointment is not a general power if by its terms it is exercisable only in favor of one or more designated persons or classes other than the decedent or his creditors or the decedent's_estate or the creditors of his estate here child may appoint to the class consisting of child’s spouse child’s descendents and grantor’s descendents because child's power is a testamentary power child may not appoint any part of trust or trust to child or to child's creditors during child's life further because child’s power_of_appointment is expressly limited to a permissible class of appointees child may not appoint the property in trust or trust to child's estate or the creditors of child’s estate accordingly based on the information submitted and the representations made we conclude the testamentary powers of appointment granted child in trust and trust do not constitute general powers of appointment within the meaning of sec_2041 and child’s exercise of the powers will not cause the property subject_to the powers to be includible in child’s gross_estate plr-143333-07 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 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 a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely ___________________________ james f hogan senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosure