internal_revenue_service number release date index number ------------------------------ --------------------------------------------- --------------------------------------- ------------------------------------------- ---------------------------------- re ------------ department of the treasury washington dc third party communication date of communication month dd yyyy person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc intl b02 plr-150429-10 date june legend domestic fund foreign fund x pfic date year year year type a entity type b entity stock exchange firm a firm b tax advisor ----------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- ------------------------ ------------------------ ------------------ ------------ -------------------------- ------- ------- ------- -------------------------------------- -------------------------------------------- ------------------------------- ------------------------------------- ------------------------- -------------------------- dear ------------------- this is in response to correspondence submitted on behalf of domestic fund by its authorized representative requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to make a mark to market election under sec_1296 of the internal_revenue_code with respect to its investment in pfic plr-150429-10 the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data submitted may be required as part of the audit process facts domestic fund was formed on date as a type a entity and commenced business activities during year domestic fund is treated as a partnership for u s federal_income_tax purposes domestic fund holds an x interest in foreign fund foreign fund is a type b entity that is treated as a partnership for u s federal_income_tax purposes foreign fund’s activity consisted of investment in a range of securities and asset classes including offshore marketable_securities of passive foreign investment companies within the meaning of sec_1297 during year foreign fund held marketable_securities of pfic a company listed on the stock exchange the accounting and tax filings of domestic fund and foreign fund collectively the funds were both handled by the same firm firm a a year form_1065 u s return of partnership income was timely filed for each of the funds employees at firm a prepared a form_8621 electing mark to market treatment for the stock of pfic however the form_8621 was prepared for and attached to the form_1065 of foreign fund rather than domestic fund for independent business reasons the funds thereafter changed tax advisors during year while preparing the year forms for the funds firm b the successor tax advisors found that the year form_8621 electing mark to market treatment for the stock of pfic was erroneously prepared for foreign fund instead of domestic fund domestic fund represents that its federal_income_tax returns have been filed as if it rather than foreign fund had made the mark to market election with respect to the pfic stock in a timely manner domestic fund has made the following additional representations with respect to the mark to market election as of the submission date of its request for relief domestic fund had not been notified a of any_action taken by the irs with respect to the election b that the irs had discovered its failure to properly make the regulatory election or c that the treatment of affected items on the returns filed by domestic fund was incorrect government interests will not be prejudiced by virtue of granting relief for domestic fund to file the election because the late election will not result in a lower or different tax_liability plr-150429-10 in addition tax advisor from firm a submitted an affidavit stating that a domestic fund intended to make a mark to market election under sec_1296 for the pfic stock that domestic fund indirectly held through foreign fund and b at all times the funds accounted for the investments in pfic as if a mark to market election had been timely and properly made law sec_1296 provides that in the case of marketable_stock in a passive_foreign_investment_company that is owned or treated as owned under sec_1296 by a united_states_person at the close of any taxable_year the united_states_person may elect to include in gross_income the excess of the fair_market_value of the stock over its adjusted_basis sec_1296 provides in part that stock owned directly or indirectly by a foreign_partnership will be considered as being owned proportionately by its partners sec_1_1296-1 provides that an election under sec_1296 for a taxable_year must be made on or before the due_date including extensions of the person’s u s income_tax return for that year sec_301_9100-1 provides that the commissioner has the discretion to grant a taxpayer a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that an election includes an application_for relief in respect of tax and defines a regulatory election as an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-3 provides that requests for relief will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government sec_301_9100-3 provides that except as provided in sec_301_9100-3 a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer i requests relief before the failure to make the regulatory election is discovered by the irs plr-150429-10 ii iii iv v failed to make the election because of intervening events beyond the taxpayer’s control failed to make the election because after exercising reasonable diligence taking into account the taxpayer’s experience and the complexity of the return or issue the taxpayer was unaware of the necessity for the election reasonably relied on the written advice of the irs or reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election sec_301_9100-3 provides that a taxpayer is deemed not to have acted reasonably or in good_faith if the taxpayer i ii iii seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief taking into account any qualified_amended_return filed within the meaning of sec_1_6664-2 and the new position requires or permits a regulatory election for which relief is requested was informed in all material respects of the required election and related tax consequences but chose not to file the election or uses hindsight in requesting relief sec_301_9100-3 provides in part that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money sec_301_9100-3 provides in part that the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made is closed or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer’s receipt of a ruling granting relief conclusion based on the information and representations submitted we conclude that domestic fund satisfies the requirements for a reasonable extension of time to make the mark to market election under sec_1296 of the code accordingly domestic fund is granted an extension of time of days from the date of this letter to make the election under sec_1296 with respect to the stock of pfic for year plr-150429-10 the granting of an extension of time is not a determination that domestic fund is otherwise eligible to make the election under sec_1296 sec_301 a 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 in accordance with the power_of_attorney on file with this office copies of this letter are being sent to domestic fund’s representative sincerely jeffery g mitchell chief branch office of the associate chief_counsel international


internal_revenue_service number release date index numbers ------------------------------- ------------------------------------------ -------------------------------- ---------------------------------- ---------------------------------- ----------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ----------------- telephone number --------------------- refer reply to cc psi b03 plr-124227-10 date date x --------------------------------------------------------------------------------------------------- ----------------------- legend legend country --------------------------- date -------------------------- dear ---------------- this letter responds to your letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect to be treated as a disregarded_entity under sec_301_7701-3 facts the information submitted states that x was formed under the laws of country x intended to be treated as a disregarded_entity effective date x represents that x is a foreign_entity eligible to elect to be treated as a disregarded_entity however x inadvertently failed to timely file a form_8832 entity classification election law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with at least two plr-124227-10 members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301 b unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides that for purposes of sec_301_7701-3 a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301 c i will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government plr-124227-10 conclusion based solely on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly x is granted an extension of time of one hundred and twenty days from the date of this letter to elect to be treated as a disregarded_entity for federal tax purposes effective date the election should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the election except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter 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 a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative sincerely associate chief_counsel passthroughs special industries s ____________________________ mary beth carchia senior technician reviewer branch office of associate chief_counsel passthroughs special industries by enclosures copy of this letter copy for sec_6110 purposes cc


id office uilc cca-181235-09 ----------------------- number release date from ------------------- sent thursday january pm to ------------------ cc -------------- subject re question re insurance agent ind contractor status ---------- i believe the substance of these notices actually made it into the provisions of the irm a couple of points the tax_court cases finding insurance salespersons to be independent contractors have not been overturned or negatively described second often once the seca_tax is calculated and employee_benefits are included in come the difference in tax is not so great which is something the taxpayer may not realize until the numbers are crunched if there is an actual case i suggest you discuss the facts with the agent to ensure the facts are the same as in the cases


t c summary opinion united_states tax_court evgeny kiselev petitioner v commissioner of internal revenue respondent docket no 30054-14s filed date evgeny kiselev pro_se rachel l rollins for respondent summary opinion colvin judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed 1section references are to the internal_revenue_code as amended and in effect for the year at issue rule references are to the tax_court rules_of_practice and procedure monetary amounts are rounded to the nearest dollar pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined a deficiency in petitioner’s federal_income_tax for of dollar_figure and an accuracy-related_penalty under sec_6662 of dollar_figure respondent has since conceded that petitioner is not liable for the penalty after concessions the issue for decision is whether and if so to what extent payments in from purdue university to petitioner to fund his work on his scientific research proposals are exempt from federal_income_tax under article of the convention for the avoidance of double_taxation and the prevention of fiscal evasion with respect to taxes on income and capital russia-u s date as amended by the protocol signed on date tax_treaties cch para treaty we hold that the payments are exempt from federal_income_tax to the extent discussed below 2on date the court filed its opinion in dovzhenok v commissioner t c summary opinion which as noted therein may not be treated as precedent that case also involves application of the convention for the avoidance of double_taxation and the prevention of fiscal evasion with respect to taxes on income and capital russia-u s date as amended by the protocol signed on date tax_treaties cch para however in dovzhenok we reached a different result on facts than are different from those in this case background some of the facts have been stipulated and are so found petitioner resided in maryland when he filed the petition a petitioner’s presence in the united_states and immigration status petitioner is a citizen of the russian federation he arrived in the united_states from the russian federation in date on a j-2 visa as the dependent spouse of his wife who received a j-1 visa sponsored by purdue university under the terms of his j-2 visa petitioner’s ability to enroll in an education program was subject_to further approval and was not assured when he entered the united_states petitioner applied for and was granted an employment authorization card which was valid from date through date on date petitioner’s visa was changed from a j-2 visa to an f-1 visa for students petitioner was present in the united_states for substantially_all of and he and his wife filed applications to become resident aliens during that year petitioner remained in f-1 status for more than three years until date when he and his wife became permanent residents of the united_states b petitioner’s employment and enrollment in a ph d program petitioner worked as a laboratory technician at purdue beginning in fall and continuing through fall petitioner was admitted to a ph d program at purdue on date petitioner was a full-time graduate student at purdue from fall through date as required by his ph d program during petitioner was employed by the university as a graduate research assistant and conducted supervised research which culminated in the preparation and defense of a ph d thesis petitioner conducted research and pursued his degree under the supervision of professor mark cushman graduate students who perform supervised research for the university receive financial remuneration including tuition remission a stipend and subsidized health insurance the university considers these individuals university employees c the grant programs during petitioner’s stipend included inter alia a purdue research foundation research prfr grant and a special incentive research sir grant those grants were made to fund specific research proposals prepared by petitioner purdue research foundation research grant prfr grants are nominally awarded to university faculty but are paid solely to fund a research proposal developed by a research assistant who assists the faculty_member research assistants receive the grants in the form of a salary and fringe_benefits a faculty_member who applies for a prfr grant must provide the name of a qualified student and a proposal containing a statement of the problem to be researched the significance of the problem and the plan of research professor cushman submitted an application_for a prfr grant for which identified petitioner as the student to be supported by the grant petitioner prepared the scientific proposal for the prfr grant application which reflected his own scientific vision in date professor cushman received a letter which stated that the grant had been awarded to him prfr grants equal one-half of the minimum annual salary paid to a qualified graduate research assistant the prfr grant totaled dollar_figure dollar_figure in salary and dollar_figure in fringe_benefits to be paid to petitioner from date through date special incentive research grant special incentive research grants sir grants benefit faculty members by supporting outstanding graduate students whom they supervise and who are undertaking cancer-related research in a call for proposals for sir grants for the purdue university center for cancer research solicited nominations for outstanding ph d degree candidates undertaking cancer-related research the call for proposals referred to the graduate student who applied for the grant as the awardee of the grant either the student a faculty_member or both may apply for an sir grant professor cushman submitted an application_for an sir grant petitioner prepared the scientific proposal in the application the application stated that professor cushman would be the recipient but the grant was paid to petitioner as salary in date petitioner received a letter stating that the sir grant application had been approved during petitioner conducted the research described in the prfr and sir grant applications and presented the results in the publicly available peer-reviewed scientific journal summary during petitioner received a stipend of approximately dollar_figure from the university approximately of petitioner’s stipend during was funded by the prfr and sir grants petitioner’s stipend for was in the same amount as it would have been without the grants d petitioner’ sec_2011 tax_return for purdue university withheld federal_income_tax of dollar_figure from petitioner’s stipend which was reported on form_w-2 wage and tax statement on a form 1040nr-ez u s income_tax return for certain nonresident_aliens with no dependents for petitioner reported that his stipend is exempt from u s federal_income_tax under article of the treaty petitioner requested a refund of the federal_income_tax withheld and respondent issued petitioner a refund on date in a notice_of_deficiency respondent determined that petitioner’s stipend for is taxable discussion a burden_of_proof the taxpayer generally bears the burden of proving that the commissioner’s deficiency determination is in error rule a the burden of proving a factual issue relating to tax_liability shifts to the commissioner under certain circumstances sec_7491 because we decide this case on a preponderance_of_the_evidence the burden_of_proof does not affect the result and we need not further consider it see sec_7491 138_tc_306 b the treaty article of the treaty titled students trainees researchers provides as follows an individual who is a resident of a contracting state at the beginning of his visit to the other contracting state and who is temporarily present in that other state for the primary purpose of c studying or doing research as a recipient of a grant allowance or other similar payments from a governmental religious charitable scientific literary or educational_organization shall be exempt from tax by that other state with respect to payments from abroad for the purpose of his maintenance education study research or training and with respect to the grant allowance or other similar payments the exemption in paragraph shall apply only for such period of time as is ordinarily necessary to complete the study training or research except that no exemption for training or research shall extend for a period exceeding five years this article shall not apply to income from research if such research is undertaken not in the public interest but primarily for the private benefit of a specific person or persons when interpreting a treaty we begin with the text of the treaty and the context in which the written words are used bhutta v commissioner 145_tc_351 citing e airlines inc v floyd 499_us_530 and 457_us_176 the plain meaning of the text of a treaty controls unless its effect is contrary to the intent or expectations of the signatories bhutta v commissioner t c pincite citing 548_us_331 sumitomo shoji am inc u s pincite and 90_tc_802 the two textual issues in dispute are whether petitioner was temporarily present in the united_states for the primary purpose of studying or doing research and whether he was a recipient of a grant allowance or other similar payments we discuss those textual issues infra parts e and f however first we consider an argument raised by respondent based on article of the treaty c whether to apply sec_117 qualified scholarships or related caselaw in construing article article of the treaty provides as regards the application of the convention by a contracting state any term not defined therein shall unless the context otherwise requires or the competent_authorities agree to a common meaning pursuant to the provisions of article mutual_agreement_procedure have the meaning which it has under the laws of that state concerning the taxes to which this convention applies emphasis added under article an undefined term in the treaty is given the meaning it has under u s tax law the phrase grant allowance or other similar payments is not defined by the treaty thus under article the phrase grant allowance or other similar payments is given the meaning it has under u s tax law however neither that phrase nor a remnant thereof grant allowance appears in title_26 or the regulations thereunder because the treaty phrase does not appear in u s tax law we are unable to discern or apply the meaning of that phrase under u s tax law in construing article respondent does not contend that the treaty draftspersons intended to mean scholarship when they used the broader phrase grant allowance or similar payment respondent contends however that we should consider the definition of scholarship in sec_117 qualified scholarships in construing grant allowance or other similar payments under sec_117 qualified scholarships are excluded from gross_income sec_117 defines qualified_scholarship as follows the term qualified_scholarship means any amount received by an individual as a scholarship or fellowship_grant to the extent the individual establishes that in accordance with the conditions of the grant such amount was used for qualified_tuition_and_related_expenses sec_117 uses the word grant in defining qualified_scholarship but sec_117 does not define grant or use the additional words in the phrase at issue here allowance or other similar payments that broaden the scope of article beyond a grant under caselaw established before the enactment of sec_117 in its present form the supreme court said that scholarships are paid on a no-strings basis 394_us_741 a grant however may as with the prfr and sir grants at issue here be provided specifically to undertake specific research proposed by the grantee if a grant is made to fund specific research then upon the award of the grant the recipient of that grant would reasonably be expected to conduct that research thus unlike scholarships some grants may come with strings and the term grant includes at least some arrangements unlike scholarships as described by the supreme court in bingler because u s tax law does not use or provide a meaning of the treaty phrase at issue grant allowance or other similar payments article does not direct us to apply u s law in construing that phrase d whether petitioner was temporarily present in the united_states for the primary purpose of studying or doing research as stated above the two textual issues in dispute are whether petitioner was temporarily present for the primary purpose of studying or doing 3like the current verison of sec_117 its predecessor did not include much less define the treaty phrase at issue here neither did the supreme court thus by its terms article does not cause us to consider 394_us_741 in deciding the meaning of grant allowance or other similar payments research and whether he was a recipient of a grant allowance or other similar payments we next consider whether petitioner was temporarily present in the united_states for the primary purpose of studying or doing research petitioner was admitted to a ph d program five months after he arrived in the united_states in and he remained in that program for more than five years until he was granted permanent resident status in this chronology shows that petitioner was engaged in study and research during almost all of the time he was in the united_states before becoming a permanent resident respondent contends that petitioner’s primary purpose is determined by his initial purpose when he came to the united_states in respondent points out that upon petitioner’s entry to the united_states in date petitioner’s visa status was j-2 as the dependent spouse of his wife and that even though he was admitted to a ph d program in date his visa status did not change to f-1 for students until date we disagree that the primary purpose of petitioner’s stay in the united_states from until can be learned solely by considering his intent when he arrived here or the range of activities allowed under his original j-2 visa instead to consider his primary purpose we will consider all of the facts and circumstances relating to his activities during the more than five years he was a temporary u s resident see bhutta v commissioner t c pincite stating that the court examines the entire record and considers all of the relevant facts and circumstances to discern a taxpayer’s primary purpose in coming to the united_states we conclude that petitioner’s primary purpose during his period of temporary residence in the united_states was to study and perform research the record shows that his primary purpose during those years for purposes of article was study and research e whether petitioner received a grant allowance or other similar payments the other textual issue in dispute is whether petitioner received a grant allowance or other similar payments in whether payments under the prfr and sir programs are grants allowances or similar payments respondent contends that neither prfr grants nor sir grants are grants allowances or similar payments in construing a treaty the court gives the language its ordinary meaning in the context of the treaty unless a more restricted sense is clearly intended see am air liquide inc subs v commissioner 116_tc_23 citing de 133_us_258 grant has been broadly defined as an amount of funds given for a specific purpose see american heritage dictionary 4th ed we see no reason based on article to narrow this definition particularly because the drafters of article included grant in the broader phrase allowance or other similar payments respondent has provided no persuasive reason for us to conclude that the payments petitioner received under the prfr and sir programs were not grants allowances or other similar payments whether petitioner received a grant allowance or similar payment respondent argues that professor cushman not petitioner was the recipient of the prfr and sir grants and that because he was a salaried employee petitioner did not receive grants respondent points out that purdue disburses funding for prfr and sir grants in part to assist purdue faculty that professor cushman signed the applications for the prfr and sir grants that petitioner could not have applied for them on his own that the award letter for the prfr grant was issued to professor cushman that professor cushman benefited from supervising a research assistant and that petitioner received a salary we disagree with respondent’s contention that petitioner did not receive the prfr and sir grants whatever role professor cushman had in obtaining the grants and whatever benefits he received from supervising a research assistant the grants were paid to petitioner to fund his work on his research proposals article provides no support for respondent’s contention that a grant may not be paid as a salary or that a grantee may not be an employee we conclude that petitioner was the recipient of the prfr and sir grants for purposes of article f whether petitioner fails to qualify under article because he was not a resident of the russian federation immediately before he was present in the united_states as a student respondent contends that petitioner is not eligible under article because he was not a resident of the russian federation immediately before he became a student in we disagree as discussed next it appears that respondent’s argument embellishes two separate phrases in article article provides in pertinent part that a n individual who is a resident of a contracting state at the beginning of his visit to the other contracting state and who is temporarily present in that other state for the primary purpose of c studying or doing research shall be exempt from tax by that other state article does not say that to qualify an individual must be a resident of the other contracting state immediately before becoming a u s student expressed in terms of the facts of this case article requires petitioner to have been a resident of the russian federation at the beginning of his visit to the united_states petitioner clearly was a resident of the russian federation when he came to united_states in date therefore petitioner does not fail to qualify because of this provision article also requires petitioner to have been temporarily present in the united_states for the primary purpose of studying or doing research petitioner was temporarily present in the united_states from date through the tax_year at issue and his primary purpose for being in the united_states from fall through was to study or do research petitioner did not become a permanent resident until he received a green card on date therefore petitioner does not fail to qualify under article because of this requirement respondent points out the definition of resident in sec_7701 and that days spent in the united_states as a student are generally disregarded in counting the length of time a noncitizen is a u s resident in deciding petitioner’s eligibility under article we need not consider petitioner’s status as a u s resident for two reasons first respondent points out that the result of this case is not affected by whether petitioner is a u s resident second while article requires petitioner to have been a resident of the russian federation before coming to the united_states it does not refer to petitioner’s status as a u s resident instead to qualify under article it requires petitioner to have been temporarily present in the united_states thus our application of article is not affected by the definition of u s resident in sec_7701 g conclusion approximately of petitioner’s stipend paid during was funded through the prfr and sir grants and is excludible from u s tax under article the parties agree that the remaining of his salary is taxable to petitioner to reflect the foregoing decision will be entered under rule


o f f i c e o f t h e c h i e f c o u n s e l 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 genin-115940-18 uil honorable cynthia bauerly commissioner minnesota department of revenue n robert st st paul mn dear commissioner bauerly thank you for your letter dated date about the deductibility of prepaid state or local real_property_taxes specifically you request clarification on whether cash-basis minnesota residents who paid local property taxes in are entitled to a deduction in for federal_income_tax purposes the tax cuts and jobs_act of tcja generally limits the deduction for state or local real_property_taxes and certain other taxes in to dollar_figure in response to numerous requests for immediate guidance following enactment of the tcja we issued an advisory ir-2017-20 on date and explained that a deduction is allowable if the tax was assessed in state or local law controls the imposition and assessment of real_property_taxes prior to passage of the tcja the irs has consistently taken the position during examinations that the deduction for state and local real_property_taxes is allowable as long as the tax is both paid and imposed or assessed in the tax_year taxpayers have generally accepted this position on the rare occasions this position has been challenged courts have upheld the irs’s interpretation for example in 8_fedappx_262 4th cir the u s court_of_appeals for the fourth circuit upheld a u s tax_court decision disallowing the deduction for a prepayment of property taxes because the tax had not yet been assessed the tcja did not change sec_164 of the internal_revenue_code relating to property_tax prepayment as such the irs’s longstanding position remains the same and is reflected in the advisory thus if a state or local taxing jurisdiction imposed tax on real genin-115940-18 property by the end of the amounts paid in are deductible on a taxpayer’s tax_return if the tax was not imposed by a state or local taxing jurisdiction by the end of the requirements for the deduction under sec_164 are not satisfied in that year and the deduction is therefore not allowable in the determination of when real_property_taxes are imposed or assessed on a cash_basis taxpayer under a particular state law such as minnesota requires a thorough examination of all provisions relevant to the assessment and levy process i hope this information is helpful please call ----------------------- at ---------------------- if you have questions sincerely scott k dinwiddie associate chief_counsel income_tax and accounting


department of the treasury int ernal revenue service washington d c o f f i c e o f c h i e f c o u n s e l date number release date tl-n-188-01 cc fip uilc internal_revenue_service national_office field_service_advice memorandum for from lon b smith acting associate chief_counsel fip cc fip subject equity stripping transaction this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent legend taxpayer parent third party a b c d e f g h tl-n-188-01 i j k year w year x year y date date date date custodian custodian money market fund money market fund custodial dividend receipts tl-n-188-01 custodial share receipts issues the issues taken from your request for field_service_advice fsa are as follows whether the taxpayer is entitled to a deduction of dollar_figureb for losses claimed on the sale of the custodial share receipts in year x whether the parent is required to report income in year x from holding the custodial share receipts conclusion sec_1 no the taxpayer is not entitled to claim a deduction of dollar_figureb for losses on the sale of the custodial share receipts in year x provided however that further factual development as specified below supports one or more of a number of potentially applicable legal theories addressed herein yes the parent is required to report income in year x from holding the custodial share receipts in year x subject_to the same caveat noted above concerning the outcome of further factual development facts issue the facts are summarized as follows on date the taxpayer purchased dollar_figurea shares of the money market fund2 for dollar_figurea from the date of purchase until date the money market fund a regulated_investment_company ric is designed for institutional investors the fund has all the characteristics of a typical money market mutual_fund the fund invests in short-term market obligations including securities issued or guaranteed by the united_states or its agencies or instrumentalities tl-n-188-01 the taxpayer received dividend income from these shares in the amount of dollar_figureh on or about date the taxpayer placed the shares in a formal custodial arrangement with custodian a third party trust company in exchange for the shares the taxpayer received four custodial receipts of the four two were custodial dividend receipts cdrs and two were custodial share receipts csrs described as follows one cdr represented the right to receive a stream of payments equal to the value of the dividends_paid on i shares of the money market fund for j years one cdr represented the right to receive a stream of payments equal to the value of the dividends_paid on i shares of the money market fund for k years one csr represented the right to receive i shares of the money market fund in j years one csr represented the right to receive i shares of the money market fund in k years the taxpayer sold both of the above-described cdrs to its parent parent for dollar_figurec the taxpayer reported no gain on the sale of the cdrs to the parent in year w because the taxpayer and the parent are members of the same consolidated_group the taxpayer treated the gain from the intercompany sale as deferred sec_1_1502-13 approximately three months later the taxpayer sold the above described csrs to the third party for dollar_figured for accounting purposes the taxpayer allocated the dollar_figurea basis in the shares between the cdrs and csrs based on their fair market values for tax purposes however the taxpayer allocated all of its basis dollar_figurea to the csrs and certificates of deposit time deposits bankers’ acceptance and other short-term obligations issued by domestic banks or london branches of domestic banks repurchase agreements and high grade commercial paper and other corporate obligations the money market fund seeks to maintain a net asset value of one dollar per share for purchase and redemption dividends declared each day are payable at the end of each month and are automatically reinvested in additional fund shares or at the investor’s option paid in cash if an investor redeems all shares in its account at any time during the month all dividends to which the investor is entitled will be paid along with the proceeds of the redemption according to the prospectus dividends derived from net_investment_income paid_by the fund are taxable as ordinary_income no portion of the dividends qualified for the dividends received deduction allowable to certain u s_corporations tl-n-188-01 claimed a loss in the amount of dollar_figureb in year x when it sold the csrs to the third party issue the second issue involves several transactions that are similar but unrelated to the csrs discussed in issue the parent purchased csrs from various unrelated third parties the custodial arrangements involved with these purchases were formed on various dates some prior to date and some after that date for example on date and date parent purchased of csrs issued by custodian the parent reported no income with respect to the period in year x during which it held the csrs however money market fund custodial receipts were grouped together with other assets and taxed as a partnership the partners were the parent and the taxpayer law and analysis among the potentially applicable legal theories we have considered in our analysis of this transaction are the following artificial loss theory applying economic_substance theories and sec_1_165-1 economic_substance and the sale of custodial receipts various arguments under the economic_substance_doctrine addressing whether the custodial receipts were sold for tax purposes and if so to whom entity classification applying sec_301_7701-4 sec_707 and basis allocation applying sec_1_61-6 and common_law artificial loss theory economic_substance sec_1_165-1 the transaction in issue is designed in part to produce an artificial loss for the taxpayer by attempting to separate from the money market fund shares part or all of the income produced by that asset however the separation of income from the underlying asset arguably does not result in any economic loss the purported loss resulting from the sale of the csrs does not represent a bona_fide loss reflecting actual economic consequences and therefore is not allowable as a deduction for federal_income_tax purposes see 157_f3d_231 3d cir cert_denied 526_us_1017 tax losses such a sec_3 this approach has been utilized by the service in a number of recent notices and one or more revenue rulings and revenue procedures see for example notice_2001_17 2001_09_irb_730 contingent_liability tax_shelter notice_2000_60 2000_2_cb_568 stock compensation corporate_tax_shelter notice_2000_44 2000_2_cb_255 tax_avoidance using artificially high basis rev_rul 2000-1c b sec_1275 --other definitions and special rules revproc_99_51 1999_2_cb_760 rulings and determination letters notice_99_59 1999_2_cb_761 tax_avoidance using distributions of encumbered property tl-n-188-01 these which do not correspond to any actual economic losses do not constitute the type of ‘bona fide’ losses that are deductible under the internal_revenue_code and regulations 840_f2d_478 7th cir to be deductible a loss must be a genuine economic loss 77_f2d_446 8th cir to be deductible a loss must be actual and real sec_1_165-1 only a bona_fide loss is allowable substance and not mere form shall govern in determining a deductible loss accordingly under this theory in issue the taxpayer would not be entitled to its claimed loss this theory does not however address the question presented in issue whether the parent is required to report income with respect to the period during which it held the csrs in year x economic_substance and the sale of the custodial receipt sec_4 the purported loss from a transaction such as the transaction in issue may be subject_to challenge by characterizing the transaction in accordance with its economic_substance depending upon the facts a taxpayer might be treated as having sold its entire_interest in the ric shares including the right to all future dividends in exchange for the cash received and additional payments equal to the dividends on the ric shares alternatively a taxpayer might be treated as not having sold the ric shares with the amount received from the purported sale of the ric shares instead treated as a loan to the taxpayer under the assignment_of_income_doctrine the holder of income-producing property is prevented for federal_income_tax purposes from separating the income from the underlying income-producing property see 281_us_111 and 311_us_112 therefore the dividend stream represented by the cdrs arguably cannot be stripped or separated from the underlying money market fund shares unless specifically permitted under the code or regulations see sec_305 and sec_1286 when a taxpayer gives away earnings from income-producing property the crucial question is whether the property or only the income from the property has been transferred 865_f2d_644 5th cir if the taxpayer transfers the entire property the assignment_of_income_doctrine does not apply see 300_us_5 the taxpayer did not anticipatorily assign income where the taxpayer transferred a beneficial_interest in income-producing property itself if however the taxpayer retains the income- the deemed financing approach one of the approaches discussed in this section also is utilized in i r c sec_636 concerning the income_tax treatment of mineral production payments prop sec_1 l -2 the proposed lease- stripping regulations and sec_1_7701_l_-3 the fast-pay preferred regulations tl-n-188-01 producing property and carves income or a partial interest out of the property the assignment_of_income_doctrine applies see 356_us_260 lump sum consideration received by the taxpayers in return for an assignment of oil_payment rights was essentially a substitute for what would otherwise be received at a future time as ordinary_income and is taxable as ordinary_income the issue in the instant case turns on whether the taxpayer transferred ownership of the money market fund shares upon the sale of the csrs to the third party if the taxpayer or its parent retained ownership of the shares then the parent on its consolidated_return is taxed on all dividend income earned on the shares if the taxpayer transferred ownership of the shares then the third party is taxed on all dividend income earned on the shares under both of these scenarios the payment of dollar_figured to the taxpayer by the third party must be characterized according to the substance of the transaction in general a sale is a transfer of property for money or for a promise to pay money 380_us_563 the test for determining whether a transaction is a sale as opposed to either a lease or a mere financing_arrangement is whether the benefits_and_burdens_of_ownership have passed to the purported purchaser 89_tc_1229 aff'd in relevant part rev'd in part sub nom 909_f2d_1360 9th cir thus whether a transaction is a sale lease or financing_arrangement is a question of fact that must be ascertained from the intent of the parties as evidenced by the written agreements read in light of the attending facts and circumstances 24_tc_1124 the tax_court generally considers the following factors when determining whether the benefits_and_burdens_of_ownership have passed to a purchaser whether legal_title passed to the purported purchaser whether the parties treated the transaction as a sale whether the purchaser acquired an equity_interest in the property whether the contract of sale created an obligation on the part of the seller to execute and deliver a deed and an obligation on the purchaser to make payments whether the purchaser is vested with the right of possession whether the purchaser pays income and property taxes after the transaction whether the purchaser bears the risk of economic loss or physical damage to the property and whether the purchaser receives the profit from the operation retention and sale of the property see 77_tc_1221 although no single factor under the grodt test determines whether a sale has occurred the relative importance of each factor is determined by the facts and circumstances of the particular transaction for example whether the buyer has acquired an equity_interest in the property is the most significant factor that distinguishes a bona_fide sale from a mere financing_arrangement thus the acquisition of an equity_interest may be considered substantive evidence of a sale tl-n-188-01 especially when the form of the transaction is a sale see 544_f2d_1045 9th cir however a taxpayer who does not acquire an equity_interest in a property will not have a depreciable_interest in that property either and thus will be viewed as having attempted to acquire mere tax benefits see 79_tc_570 another important factor in determining whether the property or only the income from the property has been transferred is who has control_over the income flow see thibodaux v 915_f2d_992 5th cir see also 212_f3d_86 2d cir it is a fundamental axiom even in the criminal context that tax consequences flow from the substance rather than the form of a transaction and that control_over property rather than documentary title marks the real owner for federal tax purposes 869_f2d_135 2d cir citing 281_us_376 taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed if under the facts and circumstances the third party is the owner of the shares then the transfer of the csrs constitutes a sale of the money market fund shares to the third party in consideration for dollar_figured in cash upfront and a series of payments over the following e years an indebtedness is defined for federal_income_tax purposes as an unconditional obligation to pay a sum certain at a fixed maturity_date 248_f2d_399 2nd cir cert_denied 359_us_1002 the cdrs retained by the consolidated_group including the taxpayer and the parent could represent a debt_instrument issued by the third party which would have original_issue_discount oid or a contract subject_to sec_483 if under the facts and circumstances the consolidated_group has retained ownership of the shares then the transfer of the csrs does not constitute a sale of the money market fund shares to the third party the transfer of dollar_figured in cash from the third party to the taxpayer is treated as a loan transaction for which the money market fund shares serve as collateral an indebtedness is defined for federal_income_tax purposes as an unconditional obligation to pay a sum certain at a fixed maturity_date 248_f2d_399 2nd cir cert_denied 359_us_1002 in the instant case the third party transferred dollar_figured to the taxpayer in return for the taxpayer’s unconditional promise to repay the amount in about e years by transferring to the third party the money market fund shares or an amount equal to the value of the money market fund shares in about e years because the value of the shares is always approximately dollar_figure per share the value of the money market fund shares in about e years is reasonably certain to be dollar_figurea therefore the csrs held by the third party represent a debt_instrument issued by the taxpayer which arguably would have oid under either scenario further factual development is necessary in order to determine whether the deemed lender must include in gross_income imputed tl-n-188-01 interest or oid we suggest that further assistance be requested on the operation of the oid and other interest imputation rules entity classification approach issue the classification of the custodial arrangement as a partnership may result in the denial of taxpayer’s claimed deduction of dollar_figureb for losses in year x further factual development however is necessary to determine whether the year x sale of the csrs to the third party should be treated as a sale of a partnership_interest the custodial arrangement involved in issue was entered into on or about date however the year involved is year x when the taxpayer sold the csrs to the third party for a loss effective date the classification of an entity is determined under the check-the-box_regulations the check-the-box_regulations generally provide that unless the entity elects otherwise an eligible_entity in existence prior to date will have the same classification that the entity previously claimed assuming the entity had a reasonable basis for its claimed classification sec_301_7701-3 and h however if no classification was previously claimed and an election was not made under sec_301_7701-3 a domestic eligible_entity is properly classified as a partnership by default if it has two or more members sec_301_7701-3 in the instant case it can be argued that the custodial arrangement claimed a classification that was neither that of a corporation a partnership or a_trust basically the custodial arrangement was not treated as an entity whether this was reasonable for this pre-date arrangement is determined under the tests and standards set out in sec_301_7701-2 sec_301_7701-3 and sec_301_7701-4 as in effect prior to date alternatively it can be argued that no classification was previously claimed and no election was made under sec_301_7701-3 so the entity is properly classified as a partnership by default under the check-the-box_regulations because it has at least two members sec_301_7701-3 sec_761 and sec_7701 provide that the term partnership includes a syndicate group pool joint_venture or other unincorporated organization through or by means of which any business financial operation or venture is carried on and which is not a_trust or estate or a corporation sec_301_7701-4 defines trusts in general the term trust refers to an arrangement created either by will or by an intervivos declaration whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries the fact that any organization is technically cast in the trust form by tl-n-188-01 conveying title to property to trustees for the benefit of persons designated as beneficiaries will not change the real character of the organization if applying the principles set forth in sec_301_7701-2 and sec_301_7701-3 the organization more nearly resembles an association or a partnership than a_trust the determination of whether a_trust is to be treated for tax purposes as a_trust or as an association depends on whether there are associates and an objective to carry on business and divide the gains therefrom sec_301_7701-2 former sec_301_7701-2 provided that an organization that has associates and an objective to carry on business and divide the gains therefrom may be classified as a partnership or an association_taxable_as_a_corporation that classification depends on whether the entity has the corporate characteristics of centralization of management continuity_of_life free_transferability_of_interests and limited_liability former sec_301_7701-2 provided that if an unincorporated organization possesses more corporate characteristics than noncorporate characteristics it constituted an association_taxable_as_a_corporation the tax_court in 66_tc_159 interpreted sec_301_7701-2 and concluded that equal weight must be given to each of the four corporate characteristics in determining whether these corporate characteristics exist all of the agreements and the totality of the circumstances must be considered an organization has the corporate characteristic of limited_liability if under local law there is no member who is personally liable for the debts of or claims against the organization personal liability means that a creditor of an organization may seek personal satisfaction from a member of the organization to the extent that the assets of the organization are insufficient to satisfy the creditor's claim former sec_301_7701-2 an organization has the corporate characteristic of continuity_of_life if the death insanity bankruptcy retirement resignation or expulsion of any member will not cause dissolution of the organization former sec_301_7701-2 if under local law a member has the power to dissolve the organization despite the terms of the agreement the organization lacks continuity_of_life former sec_301_7701-2 section of the custody agreement provides that the agreement shall terminate on the date on which no custodial receipts remain outstanding an organization has the corporate characteristic of free_transferability_of_interests if each of its members or those members owning substantially_all of the interests in the organization have the power without the consent of the other members to issue contains a discussion of the multiple classes of ownership interests involved with the custodial arrangement and why the arrangement appears to have associates and an objective to carry on business and divide the gains therefrom tl-n-188-01 substitute for themselves in the same organization a person who is not a member of the organization former sec_301_7701-2 the purchase agreement for the csrs between the third party and the taxpayer seems to indicate that the arrangement between the parties lacks the characteristic of free transferability paragraph of this agreement provides that neither the agreement nor its rights interests or obligations may be assigned by any party hereto provided however that buyer may assign the agreement to one or more of its subsidiaries or affiliates without seller’s consent accordingly the arrangement between the parties appears to lack the characteristic of free transferability an organization has the corporate characteristic of centralized_management if any person or any group of persons that does not include all the members has continuing exclusive authority to make the management decisions necessary to the conduct of the business for which the organization was formed former sec_301_7701-2 centralized_management means a concentration of continuing exclusive authority to make independent business decisions on behalf of the organization which do not require ratification by other members of the organization the persons who have such authority may or may not be members of the organization sec_2 of the custody agreement provides that the holder of the csrs has the right to vote the shares with some limitation under the agreements the custodial dividend receipt holder does not have the right to vote or other similar management power thus we believe that the corporate characteristic of centralized_management exists courts have looked at various factors in considering whether a partnership exists in determining whether a partnership exists for federal_income_tax purposes the supreme court stated the question is whether considering all the facts -- the agreement the conduct of the parties in execution of its provision their statements the testimony of disinterested persons the relationship of the parties their respective abilities and capital contributions the actual control of income and the purposes for which it is used and any other facts throwing light on their true intent -- the parties in good_faith and acting with a business_purpose intended to join together in the present conduct of the enterprise 337_us_733 the hallmarks of a partnership are the sharing of profits the contribution of capital and its risk of loss and the sharing of control_over the enterprise 90_tc_116 in 42_tc_1067 the tax_court articulated the following particular factors none of which is conclusive which tend to indicate whether a partnership or joint_venture has been formed t he agreement of the parties and their conduct in executing its terms the contributions if any which each party has made to the venture the parties' control_over income and capital and the right of each to tl-n-188-01 make withdrawals whether each party was a principal and coproprietor sharing a mutual proprietary interest in the net profits and having an obligation to share losses or whether one party was the agent or employee of the other receiving for his services contingent_compensation in the form of a percentage of income whether business was conducted in the joint names of the parties whether the parties filed federal partnership returns or otherwise represented to respondent or to persons with whom they dealt that they were joint venturers whether separate books of account were maintained for the venture and whether the parties exercised mutual control_over and assumed mutual responsibilities for the enterprise if after further development you determine that the custodial arrangement is properly classified as a partnership an argument can be made that under sec_707 the taxpayer would be treated as having contributed approximately e valued at about dollar_figured of the money market fund shares to the partnership in exchange for its partnership_interest and as having sold approximately f valued at about dollar_figureb of the money market market fund share to the parent in a disguised sale under sec_707 under sec_707 this transaction is treated as if the parent contributed about dollar_figureb to the partnership and the partnership used the approximately dollar_figureb to buy f of the money market fund shares from the taxpayer thus upon the formation of the partnership the taxpayer would have a capital_account balance and basis in the partnership of approximately dollar_figured and the parent would have a capital_account balance and basis in the partnership of approximately dollar_figureb on the disguised sale there would be no gain_or_loss because the taxpayer would be selling f of the money market fund shares with a basis of approximately dollar_figureb for approximately dollar_figureb when the taxpayer sells the csrs in year x to the third party the taxpayer would be treated as selling its partnership_interest with a basis of approximately dollar_figured to the third party in exchange for approximately dollar_figured so there should be no gain_or_loss furthermore the allocations of income during the operation of the partnership would have to comport with the rules in sec_704 issue below contains a discussion as to how sec_704 may operate in this situation issue the classification of the custodial arrangement as a partnership may require parent to report income in year x the purchase of csrs held by custodial arrangements entered into on or after date may be treated as the purchase of various partnership interests further factual development however is necessary to determine whether the purchase of various csrs held by custodial arrangements entered into prior to date should be treated as the purchase of various partnership interests the custodial arrangements involved in issue appear to have been entered into on various dates some prior to date the effective date of the check- tl-n-188-01 the-box regulations and some after that date the incoming memorandum requests advice on the parent’s date and date purchases of csrs issued by custodian the same analysis described in issue would apply to those custodial arrangements entered into prior to date however the classification of the custodial arrangements entered into on and after date is determined solely under the check-the-box_regulations under the check-the-box_regulations a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 under sec_301_7701-2 a business_entity is any entity recognized for federal tax purpose that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the code a business_entity with two or more members is classified for federal tax purposes as either a corporation or partnership a partnership is defined as a business_entity that is not a corporation under sec_301_7701-2 and that has at least two members sec_301_7701-2 for federal tax purposes the term corporation means a business_entity organized under a federal or state statute or under a statute of a federally recognized indian_tribe if the statute describes or refers to the entity as incorporated or as a corporation body corporate or body politic an association as determined under sec_301_7701-3 a business_entity organized under a state statute if the statute describes or refers to the entity as a joint-stock company or joint-stock association an insurance_company a state- chartered business_entity conducting banking activities if any of its deposits are insured under the federal deposit insurance act as amended u s c et seq or a similar federal statute a business_entity wholly owned by a state or any political_subdivision thereof a business_entity that is taxable as a corporation under a provision of the internal_revenue_code other than sec_7701 and certain specified foreign entities sec_301_7701-4 defines trusts this regulation provides that an investment_trust will not be classified as a_trust if there is a power under the trust agreement to vary the investment of the certificate holders see 122_f2d_545 2d cir cert_denied 314_us_701 an investment_trust with a single class of ownership interests representing undivided beneficial interests in the assets of the trust will be classified as a_trust if there is no power under the trust agreement to vary the investment of the certificate holders an investment_trust with multiple classes of ownership interests will be ordinarily classified as a business_entity under sec_301_7701-2 however an investment_trust with multiple classes of ownership interests in which there is no power under the trust agreement to vary the tl-n-188-01 investment of the certificate holders will be classified as a_trust if the trust is formed to facilitate direct investment in the assets of the trust and the existence of multiple classes of ownership interests is incidental to that purpose sec_301_7701-4 from the information you provided the cdr holder and the csr holder tend to have different rights and obligations with respect to the shares cdrs purport to evidence dividend rights which entitle the holder to receive distributions other than in respect of return_of_capital on the shares paid_by the issuer for a specified period of time csrs purport to evidence the right to the shares along with distributions in respect of a return_of_capital exclusive of the right to dividends_paid by the issuer on or prior to a specified date furthermore assuming without concluding that the csr represent equity rather than debt in some cases only one holder has the right to vote thus the share and dividend receipts represent two different classes of ownership interests the multiple classes of ownership_interest are designed to permit investors by transferring one of the certificates and retaining the other to fulfill their varying investment objectives of seeking primarily either dividend income or capital appreciation from the stock the arrangement creates investment interests that differ from the interests that would be obtained by direct investment in the assets thus the arrangement was not formed to facilitate direct investment in the assets and the existence of multiple classes of ownership interests is not merely incidental to that purpose therefore the custodial arrangement is classified as a business_entity under sec_301_7701-2 under sec_301_7701-2 the custodial arrangement is not a corporation as defined under sec_301_7701-2 and thus in the absence of an election otherwise it is a partnership by default sec_301_7701-2 as a partnership the custodial arrangement must make allocations of income that have substantial economic_effect under the rules in sec_1_704-1 unless the allocation of income to the holder of the dividend receipts during the term of the custodial arrangement has substantial economic_effect under the rules in sec_1_704-1 the income will be reallocated between the parties for federal_income_tax purposes for example assume the parent paid approximately dollar_figured for the right to receive the money market fund shares approximately e years later as the third party did in issue also assume that the party holding the right to a stream of income equal to the dividend income paid approximately dollar_figureb the parent would have a capital_account and basis of about dollar_figured in the partnership and the dividend holder would have a capital_account and basis of approximately dollar_figureb in the partnership under this arrangement at the end of e years the parent will receive the money market fund shares valued at dollar_figurea in return for its capital_account of approximately dollar_figured essentially the parent will receive its capital_account and that of the dividend holder as well the dividend holder will not receive anything at the end of e years tl-n-188-01 thus upon liquidation of the partnership the liquidating distributions are not being made in accordance with the positive capital_account balances of the partners the allocations of income for example the dividend income that the dividend holder is being allocated would have to be reallocated to comport with the rules in sec_704 the reallocation would be done in a manner that would essentially reduce the dividend holder’s capital_account balance to g by the end of the e-year period for a more detailed discussion of sec_704 we suggest that further assistance be requested on the operation of sec_704 basis allocation sec_1012 states that the basis in property shall be the cost of that property sec_1_61-6 of the income_tax regulations states that when a part of a larger property is sold the cost or other basis in the entire property shall be equitably apportioned among the several parts the gain_or_loss on the sale of the part is the difference between the selling_price and cost or other basis allocated to that part the sale of each part is to be treated as separate transactions and the gain_or_loss is to be computed separately on each part gain_or_loss is to be determined at the time of sale of each part and not deferred until the entire property has been disposed of this approach prevents the taxpayer from recognizing it’s claimed loss of dollar_figurec by allocating taxpayer’s original_basis in the money market fund shares dollar_figurea between the cdrs and the csrs according to their relative fair market values when the money market fund shares are exchanged with the custodian for the custodial receipts case development hazards and other considerations tl-n-188-01 tl-n-188-01 this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views please call if you have any further questions by alice bennett chief branch associate chief_counsel fip


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc intl br1-plr-102381-03 date date ty a date b country c date d dear this is in response to a letter dated date requesting a ruling that a’s loss of lawful permanent resident status expatriation did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code additional information was submitted in a letter dated date the information submitted for consideration is substantially as set forth below the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination a was born on date b in country c a came to the united_states for employment reasons and was a lawful permanent resident for eight and one-half years a is a citizen of country c where he now lives on date d a relinquished his green card a will be subject_to country c tax on his worldwide income on the date of a's expatriation his net_worth exceeded the applicable_amount set forth in sec_877 plr-102381-03 sec_877 generally provides that a citizen who loses u s citizenship or a u s long-term_resident who ceases to be taxed as a lawful permanent resident individuals who expatriate within the 10-year period immediately preceding the close of the taxable_year will be subject_to the special rules of sec_877 for such taxable_year unless such loss did not have for one of its principal purposes the avoidance of u s taxes sec_2107 and sec_2501 provide special estate and gift_tax regimes respectively for individuals who expatriate with a principal purpose to avoid u s taxes a former u s citizen or former u s long-term_resident will be treated as having expatriated with a principal purpose to avoid u s taxes for purposes of sec_877 sec_2107 and sec_2501 if the individual's average income_tax_liability or the individual's net_worth on the date of expatriation exceed certain thresholds see sec_877 sec_2107 and sec_2501 a former u s citizen whose net_worth or average tax_liability exceeds these thresholds however will not be presumed to have a principal purpose of tax_avoidance if that former citizen is described within certain statutory categories and submits a request for a ruling within one year of the date of loss of u s citizenship for the secretary's determination as to whether such loss had for one of its principal purposes the avoidance of u s taxes see sec_877 sec_2107 and sec_2501 under notice_98_34 1998_2_cb_29 modifying notice_97_19 1997_1_cb_394 a former long-term_resident whose net_worth or average tax_liability exceeds the applicable thresholds will not be presumed to have a principal purpose of tax_avoidance if that former resident is described within certain categories and submits a complete and good_faith request for a ruling as to whether such loss had for one of its principal purposes the avoidance of u s taxes notice_98_34 requires that certain information be submitted with a request for a ruling that an individual's expatriation did not have for one of its principal purposes the avoidance of u s taxes a is eligible to request a ruling pursuant to notice_98_34 because he is a citizen and resident fully subject_to tax in country c the country in which he was born a submitted all of the information required to be submitted by notice_97_19 as modified by notice_98_34 including additional information requested by the service after review of the submission accordingly based solely on the facts submitted and the representations made we conclude that a has made a complete and good_faith submission in accordance with sec_877 and notice_98_34 therefore a will not be presumed under sec_877 to have had as one of his principal purposes for expatriating the avoidance of u s taxes we further conclude that a will not be treated under sec_877 as plr-102381-03 having had as one of his principal purposes for expatriating the avoidance of u s taxes because the information submitted clearly establishes the lack of a principal purpose to avoid taxes under subtitle a or b of the code 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 in addition no opinion is expressed as to a's u s tax_liability for the taxable years prior to or after his expatriation under sections of the code other than sec_877 sec_2107 and sec_2501 a copy of this letter must be attached to a's u s income_tax return for the year in which a obtained the ruling whether or not a is otherwise required to file a return 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 a power_of_attorney on file in this office a copy of this letter will be sent to a sincerely m grace fleeman senior counsel cc intl br1


department of the treasury internal_revenue_service washington d c t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n contact person identification number-------- telephone number----------------- number release date se t eo ra t1 date date uil ein legend x y dear ------------------ this is in reply to your rulings request concerning x's transfer of all of its assets to y pursuant to sec_507 of the internal_revenue_code facts x and y are charitable trusts exempt from federal_income_tax under sec_501 of the code and are private_foundations under sec_509 x and y are controlled by substantially the same trustees x will transfer all of its assets to y after its transfer x will dissolve under state law x will have no expenditure_responsibility grants outstanding under sec_4945 at the time of the transfer rulings requested for purposes of chapter of the code sec_4940 et seq and part ii of subchapter_f of chapter sec_507 through of the code as a result of x's transfer of all of its assets to y y will be treated as x and all of the savings provisions applicable to private_foundations under the tax reform act of as amended will apply to y to the same extent and in the same manner as such provisions applied to x x's transfer of the assets to y will constitute a transfer of assets described in sec_507 of the code consequently the transfer will not result in the termination of the private_foundation_status of x under sec_507 and x and y will not be subject_to the termination_tax imposed by sec_507 voluntary termination of x under sec_507 of the code by notice to the internal_revenue_service given at least one day after x's transfer of assets will not result in termination_tax under sec_507 the preparation and or filing by x of any final accounting or other documents required by state law in winding up dissolving and terminating x will not result in the imposition of tax under sec_507 the tax basis computed under sec_4940 of the code and the holding_period of each asset received by y pursuant to x's transfer will be determined in the same manner as if such assets had continued to be held uninterruptedly by x y may report the investment_income of x for the year of the transfer and pay any excise_tax imposed on x under sec_4940 of the code x's transfer of assets to y a will not result in net_investment_income to x under sec_4940 of the code b will not be a direct or indirect act of self-dealing under sec_4941 of the code with regard to x y or any foundation managers substantial contributors or other disqualified persons of x or y c will not be an investment by x or y which jeopardizes the exempt purposes of x or y under sec_4944 of the code d will not be a taxable_expenditure under sec_4945 of the code by x if x has any grant s requiring expenditure_responsibility under sec_4945 at the time of x's transfer of all of its assets y will exercise expenditure_responsibility with respect to such grant s on behalf of x x's transfer will result in y being treated as x for purposes of sec_4942 of the code so that a x's distribution_requirements under sec_4942 of the code for the tax_year of x's transfer may be fulfilled by y b all of x's qualifying distributions during its tax_year in which x's transfer of assets occurs will be treated as if made by y as determined immediately prior to the transfer c y may reduce the amount of its required distributions under sec_4942 of the code including those for the tax_year of x's transfer by the amount if any of x's excess qualifying distributions carryover for prior years under sec_4942 as determined prior to x's transfer as if y had incurred such carryover d x will not be required to comply with the recordkeeping requirements of sec_4942 of the code with regard to the transfer of assets the transfer will not adversely affect the tax-exempt status of x or y and neither x nor y will be subject_to federal_income_tax under subtitle a of the code with regard to the transfer law sec_501 of the code provides for the exemption from federal_income_tax of nonprofit_organizations organized and operated exclusively for charitable and or other exempt purposes stated in that section sec_509 of the code describes organizations exempt from federal_income_tax under sec_501 that are private_foundations subject_to the private_foundation provisions of chapter of the code sec_507 of the code concerns the transfer of assets by one private_foundation to one or more other private_foundations and provides that each transferee private_foundation shall not be treated as a newly created organization sec_1_507-3 of the income_tax regulations indicates that a transfer under sec_507 of the code includes a transfer of assets from one private_foundation to another private_foundation pursuant to any reorganization including a significant disposition of or more of the transferor foundation's assets sec_1_507-3 of the regulations indicates that in a transfer of assets from one private_foundation to another private_foundation pursuant to a reorganization the transferee foundation shall not be treated as a newly created organization but shall succeed to the transferor's aggregate tax benefits under sec_507 of the code sec_507 of the code indicates in general that the aggregate tax benefits of an exempt_private_foundation refer to the value of its exemption from federal_income_tax and the deductions taken by its donors during its existence sec_1_507-1 of the regulations provides that a private_foundation which has transferred all of its net assets is not required to file annual information returns under sec_6033 of the code for tax years after the tax_year of such transfer when the transferor has no assets or activities sec_1_507-3 of the regulations indicates that a transferor private_foundation is required to meet its own charitable distribution_requirements under sec_4942 of the code even for its tax_year in which it makes a transfer of its assets to another private_foundation pursuant to sec_507 sec_1_507-3 of the regulations provides that a private_foundation that has transferred all of its assets to another private_foundation in a transfer pursuant to sec_507 of the code is not subject_to the expenditure_responsibility requirement of sec_4945 sec_1_507-3 of the regulations provides that certain tax provisions will carry over to a transferee private_foundation that is given a transfer of assets from a transferor private_foundation pursuant to sec_507 of the code sec_1_507-3 of the regulations indicates that if a transferor private_foundation transfers assets to one or more private_foundations which are effectively controlled directly or indirectly by the same person or persons who effectively control the transferor foundation then each transferee foundation will be treated as if it were the transferor foundation for purposes of sec_4940 through of the code and also sec_507 through each transferee is treated as the transferor in the proportion which the fair_market_value of the transferor's assets that were transferred bears to the fair_market_value of all of the assets of the transferor immediately before the transfer sec_1_507-3 of the regulations indicates that a transfer of assets under sec_507 of the code does not relieve the transferor private_foundation from filing its own final returns sec_1_507-1 and sec_1_507-3 of the regulations provide that a transferor foundation's transfer of assets under sec_507 of the code will not constitute a termination of the transferor foundation's status as a private_foundation sec_1_507-4 of the regulations provides that the tax under sec_507 of the code on termination of private_foundation_status does not apply to a transfer of assets pursuant to sec_507 revrul_2002_28 2002_1_cb_942 in its holding states that if a private_foundation chooses to provide notice under sec_507 of the code to the internal_revenue_service and therefore terminates its private_foundation_status under sec_509 it is subject_to the tax under sec_507 however if the private_foundation has no assets on the day it provides such notice for example the private_foundation provides such notice at least one day after it transfers all of its assets the tax under sec_507 will be zero holding indicates that no further tax returns are due if the transferor has no assets and activities holding sec_3 b c d e and f state that the transfer does not result in tax under sec_4940 sec_4941 sec_4942 sec_4943 sec_4944 or sec_4945 respectively holding a notes that the carryover to the transferee of the transferor’s excess tax paid under sec_4940 is allowed holding c notes that the carryover to the transferee of the transferor’s excess qualifying distributions under sec_4942 is allowed sec_4941 of the code imposes excise_tax on any act of self-dealing between a private_foundation and any of its disqualified persons under sec_4946 sec_53_4946-1 of the foundation and similar excise_taxes regulations provides that for purposes of self-dealing under sec_4941 of the code an exempt_organization under sec_501 is not a disqualified_person sec_4942 of the code requires that a private_foundation must expend qualifying distributions under sec_4942 for the conduct of exempt purposes revrul_78_387 1978_2_cb_270 describes the carryover of a transferor foundation's excess qualifying distributions under sec_4942 of the code to a transferee foundation that is effectively controlled by the same persons under sec_1_507-3 of the regulations under the regulation the transferee is treated as the transferor and thus the transferee can reduce its own distributable_amount under sec_4942 by the amount if any of its transferor's excess qualifying distributions under sec_4942 sec_4945 of the code imposes excise_tax on a private foundation's making of any taxable_expenditure under sec_4945 sec_4945 of the code requires that in order to avoid making a taxable_expenditure a transferor private_foundation must exercise expenditure_responsibility under sec_4945 on its grants to another private_foundation sec_4945 of the code defines expenditure_responsibility in terms of a grantor private_foundation requiring proper pre-grant inquiry and post-grant reports from a grantee private_foundation on the grantee's uses of the grant sec_4945 of the code provides that a taxable_expenditure also includes any amount expended by a private_foundation for purposes other than purposes under sec_170 sec_53_4945-6 of the regulations allows a private_foundation to make transfers of its assets pursuant to sec_507 of the code to organizations exempt under sec_501 without the transfers being taxable_expenditures under sec_4945 analysi sec_1 under sec_1_507-3 of the regulations transferee y will be treated as if its transferor x for purposes of chapter of the code and sec_507 through under sec_1_507-3 of the regulations transferee y will receive the carryover of any savings provisions applicable to x that are carried over to y under sec_1_507-3 through under sec_1_507-3 of the regulations a transfer under sec_507 of the code includes a transfer of assets from one private_foundation to another private_foundation pursuant to any reorganization including a significant disposition of or more of the transferor foundation's assets because x will transfer all of its assets to y x's transfer will be a significant disposition of its assets under sec_1_507-3 and thus will be a transfer under sec_507 under sec_1_507-3 of the regulations and as described in the analysis section of revrul_2002_28 supra x's transfer of all of its assets to y pursuant to sec_507 of the code will not be a termination of x's private_foundation_status under sec_509 this will result in zero termination_tax under sec_507 for either x or y under sec_507 of the code when x notifies the internal_revenue_service at least one day after x transfers all of its net assets to y of its intent to voluntarily terminate its private_foundation_status pursuant to sec_507 x will terminate its private_foundation_status pursuant to sec_507 under sec_507 of the code the value of x's assets after it transferred all of its assets to y will be zero thus as stated in holding of revrul_2002_28 supra x's voluntary notice of termination of its private_foundation_status pursuant to sec_507 will result in zero tax under sec_507 the preparation and filing of any final accounting or other documents required by state law in winding up dissolving and terminating x will not result in termination_tax under sec_507 of the code under sec_1_507-3 of the regulations the tax basis and holding periods of x's assets transferred to y will carry over to y for purposes of sec_4940 of the code under sec_1_507-3 of the regulations transferee y will be treated as its transferor x for purposes of chapter of the code thus y must report x's investment_income for the tax_year of the transfer and must pay x's excise_tax under sec_4940 of the code if x has not done so under sec_4940 of the code and holding a of revrul_2002_28 supra x's transfer of its assets to y will not result in tax to x or y under sec_4940 under sec_4941 of the code and holding b of revrul_2002_28 supra x's transfer of its assets to y will not be an act of self-dealing because x's transfer will be for exempt purposes to y which is exempt from federal_income_tax under sec_501 and which is not a disqualified_person for purposes of sec_4941 pursuant to sec_53_4946-1 of the regulations under sec_4944 of the code and holding e of revrul_2002_28 supra x's transfer of its assets for exempt purposes under sec_501 will not be a jeopardizing investment or result in tax under sec_4944 sec_53_4945-6 of the regulations indicates that a private_foundation can transfer its assets pursuant to sec_507 of the code to an organization exempt under sec_501 without the transfer being a taxable_expenditure under sec_4945 thus x's transfer of its assets to y pursuant to sec_507 will not be a taxable_expenditure under sec_4945 as in sec_1_507-3 example of the regulations y must continue x's expenditure_responsibility under sec_4945 of the code with respect to any expenditure_responsibility grant s made by x that remain outstanding at the time of x's transfer of its assets to y under sec_1_507-3 of the regulations x will not be required to exercise any expenditure_responsibility under sec_4945 of the code because x will transfer all of its assets to y under sec_1_507-3 of the regulations and holding c of revrul_2002_28 supra x's transfer will result in y being treated as x for purposes of sec_4942 of the code so that a x's distribution_requirements under sec_4942 for the tax_year of its transfer may be satisfied by y and b x's qualifying distributions during x's tax_year of its transfer may be treated as made by y as in revrul_78_387 supra and holding c of revrul_2002_28 supra y may reduce its required distributions under sec_4942 of the code including those for y's tax_year of the transfer by the amount if any of x's excess qualifying distributions carryover under sec_4942 of the code as of the time of x's transfer under sec_1_507-3 of the regulations x will not be required to comply with any recordkeeping requirements of sec_4942 of the code after x's transfer of all of its assets to y because x's transfer of its assets to y will be for exempt purposes to an organization exempt under sec_501 of the code x's transfer will not adversely affect the exemptions under sec_501 of x or y and x and y will not be subject_to federal_income_tax with regard to the transfer conclusions accordingly we rule as follows as a result of x's transfer of all of its assets to y y will be treated as x for purposes of chapter of the code and sec_507 through and all of the savings provisions of the tax reform act of as amended applicable to x will apply to y to the same extent as applied to x x's transfer of all of its assets to y will be a transfer under sec_507 of the code and will not cause termination of x's private_foundation_status or result in termination_tax under sec_507 on either x or y if x terminates its private_foundation_status at least one day after x transfers all of its assets to y and so notifies the internal_revenue_service pursuant to sec_507 of the code x will not be liable for tax under sec_507 because x will have no assets upon its termination the preparation and filing of any final accounting or other documents required by state law in winding up dissolving and terminating x will not result in tax under sec_507 the tax basis and the holding_period of each asset transferred by x to y will be carried over to y as if each asset had continued to be held by x y may report x's investment_income for the tax_year of the transfer and may pay x's excise_tax under sec_4940 of the code x's transfer of all of its assets to y a will not result in net_investment_income to x under sec_4940 of the code b will not be a direct or indirect act of self-dealing under sec_4941 of the code with regard to x y or any foundation managers substantial contributors or other disqualified persons of x or y c will not be an investment by x or y which jeopardizes the exempt purposes of x or y under sec_4944 of the code d will not be a taxable_expenditure under sec_4945 of the code by x if x has any grant s requiring expenditure_responsibility under sec_4945 at the time of x's transfer of all of its assets y must exercise expenditure_responsibility with respect to such grant s on behalf of x x's transfer will result in y being treated as x for purposes of sec_4942 of the code so that a x's distribution_requirements under sec_4942 of the code for the tax_year of x's transfer may be fulfilled by y b all of x's qualifying distributions during its tax_year in which x's transfer of assets occurs will be treated as if made by y as determined immediately prior to the transfer c y may reduce the amount of its required distributions under sec_4942 of the code including those for the tax_year of x's transfer by the amount if any of x's excess qualifying distributions carryover for prior years under sec_4942 as determined prior to x's transfer as if y had incurred such carryover d x will not be required to comply with the recordkeeping requirements of sec_4942 of the code with regard to its transfer of assets x's transfer of its assets will not adversely affect the exemptions under sec_501 of the code of x or y and will not subject x or y to federal_income_tax with regard to the transfer this ruling letter is directed only to the organization that requested it sec_6110 of the code provides it may not be used or cited as precedent because this ruling letter could help to resolve any future questions about tax consequences of x’s activities x should keep a copy of this ruling in its permanent records pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative you should keep a copy of this letter in your permanent records 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 enclosure notice debra kawecki manager exempt_organizations technical group sincerely