internal_revenue_service department of the treasury number release date index number 468b washington dc person to contact telephone number refer reply to plr-124457-01 cc it a date date legend a b company m trust state year dear this letter is in response to the letter dated date submitted on behalf of company requesting the following rulings that the trust established in the reorganization plan qualifies as a qualified_settlement_fund within the meaning of sec_468b of the internal_revenue_code and the regulations thereunder the trust will be treated as a separate tax entity that the trust will be subject_to tax on its modified gross_income as defined in sec_1_468b-2 of the income_tax regulations at a rate equal to the maximum rate in effect for that taxable_year under sec_1 of the internal_revenue_code that the transfer of company’s stock into the trust and the transfer of cash and other assets into the trust on behalf of company to resolve the liability that the trust was created to assume will not constitute gross_income to the trust and that company will be entitled to deduct transfers made to the trust in the year of each payment to the extent that they do not represent settlements from insurance claims that are excludable from gross_income facts based upon the facts submitted and the representations made by the taxpayer the taxpayer was originally two separate entities a and b a and b were small manufacturers of certain specialty products before year a small portion of taxpayer’s business involved the manufacture of various items containing m the items were used by as a result of manufacturing items containing m a plr124457-01 and b were named as defendants in a large number personal injury lawsuits seeking damages for death or injury due to m-related diseases taxpayer uses an method_of_accounting a and b each filed a voluntary petition for relief under chapter of the united_states bankruptcy code the two cases were merged the bankruptcy court issued an order confirming a plan_of_reorganization hereinafter referred to as the plan the plan as approved by bankruptcy court was cancelled new stock was issued for company and all the stock of company was transferred to the trust company operates the existing business free of any further m related claims the plan expressly provides that the trust was established to assume and pay all of company’s m-related liabilities the plan required company to transfer assets to trust to be used to pay such liabilities the plan relieves company of all m-related liability in exchange for such transfer according to the court’s confirmation order the trust was established under the laws of state the trust will remain under the continuing jurisdiction of the bankruptcy court the trust was funded with the following of company’s stock company’s stock is not publicly traded the proceeds from company products liability insurance policies an assignment of all m related rights or causes of action that company may have against another entity excess cash not needed to operate company the trust is managed by an independent_trustee the trust agreement provides for termination following the payment of all known m-related liabilities any remaining trust assets will then be transferred to a sec_501 b organization not related to either company or the trustees requested ruling sec_468b of the internal_revenue_code provides in part that nothing in any provision of law shall be construed as providing that an escrow account settlement fund or similar fund is not subject_to current income_tax pursuant to the authority granted to the secretary under sec_468b of the code the secretary has published sec_1_468b-1 through 468b-5 of the income_tax regulations relating to qualified settlement funds sec_1_468b-1 of the income_tax regulations provides that a fund account or trust is a qualified_settlement_fund if it meets the following three requirements it is established pursuant to an order of or it is approved plr124457-01 by the united_states any state including the district of columbia territory possession or political_subdivision thereof or any agency_or_instrumentality including a court of law of any of the foregoing and is subject_to the continued jurisdiction of that governmental authority it is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event or related series of events that has occurred and that has given rise to at least one claim asserting liability i under the comprehensive environmental response compensation and liability act of as amended u s c et seq or ii arising out of a tort breach of contract or violation of law or iii designated by the commissioner in a revenue_ruling or revenue_procedure and the fund account or trust is a_trust under applicable state law or its assets are otherwise segregated from other assets of the transferor and related_persons in this case the trust satisfies the three requirements outlined in the regulations for qualified_settlement_fund treatment first the plan which contains provisions for the establishment of the trust was approved by the court and the trust will be subject_to the continuing jurisdiction of the court second the trust was established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from a related series of events that have occurred and have given rise to at least one claim arising out of a tort breach of contract or violation of law third the trust was formed and is administered in accordance with state law requested ruling sec_1_468b-2 provides that a qualified_settlement_fund is a united_states_person and is subject_to tax on its modified gross_income for any taxable_year at a rate equal to the maximum rate in effect for that taxable_year under sec_1 because the trust in this case is a qualified_settlement_fund it will be subject_to tax on its modified gross_income for any taxable_year at a rate equal to the maximum rate in effect for that taxable_year under sec_1 requested ruling sec_1_468b-2 of the income_tax regulations defines the modified gross_income of a qualified_settlement_fund generally as its gross_income as defined in plr124457-01 sec_61 of the code it specifically provides however that in general amounts transferred to the qualified_settlement_fund by or on behalf of a transferor to resolve or satisfy a liability for which the fund is established are excluded from gross_income however dividends on stock of a transferor or related_person interest on debt of a transferor or a related_person and payments in compensation_for late or delayed transfers are not excluded from gross_income in this case the trust is a qualified_settlement_fund that was established pursuant to the court’s plan to assume and pay company’s m-related liabilities accordingly transfers made by or on behalf of company to resolve such liabilities will not constitute gross_income to the trust requested ruling sec_162 of the code provides in relevant part that there shall be allowed as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business furthermore even though a particular taxpayer may incur an expense only once in the lifetime of its business the expense may qualify as ordinary and necessary if it is appropriate and helpful in carrying on that business is commonly and frequently incurred in the type of business conducted by the taxpayer and is not a capital_expenditure 383_us_687 308_us_488 sec_461 of the code which addresses timing states that the amount of any deduction shall be taken in the taxable_year that is the proper taxable_year under the method_of_accounting used by the taxpayer in computing taxable_income additionally sec_1_461-1 of the income_tax regulations provides that an accrual_method taxpayer may deduct an expense in the taxable_year in which all events have occurred that establish the fact of liability the amount of the liability can be determined with reasonable accuracy and economic_performance has occurred with respect to the liability sec_461 of the code provides that in determining whether an amount has been incurred with respect to any item during any taxable_year the all_events_test shall not be treated as met any earlier than when economic_performance with respect to such item occurs the code goes on in part to further clarify in sec_461 that if the liability of the taxpayer requires a payment to another person and arises out of any tort economic_performance occurs as the payments to such person are made sec_1_468b-3 of the income_tax regulations provides that for purposes of sec_461 economic_performance occurs with respect to a liability described in plr124457-01 sec_1_468b-1 determined with regard to sec_1_468b-1 and g to the extent the transferor makes a transfer to a qualified_settlement_fund to resolve or satisfy the liability sec_1_468b-3 of the income_tax regulations provides however that n o deduction is allowed to a transferor for a transfer to a qualified_settlement_fund to the extent the transferred amounts represent amounts received from the settlement of an insurance claim and are excludable from gross_income sec_1_468b-3 of the income_tax regulations provides that a transferor must obtain a qualified_appraisal to support a loss or deduction it claims with respect to a transfer to a qualified_settlement_fund of nonpublicly traded securities issued by the transferor in this case company transferred to trust of its stock proceeds from its products liability insurance policies all of its m related rights or causes of action that it has or might have in the future against other entities and excess cash not needed to operate company so that trust may resolve company’s m-related liabilities conclusions based solely on the information provided and the representations made we conclude as follows the trust will constitute a qualified_settlement_fund under sec_1_468b-1 of the income_tax regulations the trust will be treated as a separate taxable entity the trust will be subject_to tax on its modified gross_income as defined in sec_1_468b-2 of the income_tax regulations at a rate equal to the maximum rate in effect for that taxable_year under sec_1 of the internal_revenue_code the transfer of the company stock into the trust and the transfer of cash and other assets into the trust on behalf of the company to resolve the liability that the trust was created to assume will not constitute gross_income to the trust company generally will be entitled to deduct transfers made to the trust in the year of each payment it will not be able to deduct any transfers to the trust to the extent that they represent settlements from insurance claims that are excludable from gross_income as described in sec_1_468b-3 of the income_tax regulations no opinion is expressed as to the value of the stock transferred to the fund additionally no opinion is expressed regarding the value of the assignment of rights to proceeds of asbestos related claims or causes of action company might have had against other entities assuming without deciding that company must recognize gross_income by reason of the transfer of funds from its liability insurance carriers to the trust company plr124457-01 would be allowed an offsetting deduction under sec_162 equal to the amount of the gross_income except as specifically ruled above no opinion is expressed as to the federal tax treatment of any issue addressed in this ruling under other provisions of the internal_revenue_code and regulations that may be applicable this ruling is directed only to the taxpayer sec_6110 of the code provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file in this office the original of this letter is being sent to you a copy will be sent to your authorized representative sincerely michael d finley chief branch office of assistant chief_counsel income_tax and accounting


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi br 1-plr-116709-01 date date x state d1 this responds to a letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts x was incorporated on d1 under the laws of state the shareholders of x desired that x elect s_corporation treatment effective on d1 but the election to be treated as an s_corporation was not timely filed accordingly x requests a ruling that it will be treated as an s_corporation effective d1 law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one-half months of a corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed sec_1362 provides that if no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply x did not file an election to be treated as an s_corporation under sec_1362 x has however established reasonable_cause for not making a timely s election and is entitled to relief under sec_1362 plr-116709-01 conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective d1 within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent s dianna k miosi sincerely chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number -------------------------- -------------------------- ------------------------------------- ------------------------------- ---------------------------- ------------------------- ---------------------------- 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 psi b01 plr-139088-04 date date legend x ----------------------- ----------------------- --------- ------------------------- country d dear ------------------ this letter responds to the letter dated date and related correspondence written on behalf of x requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to file an entity classification election facts the information submitted discloses that x was formed under the laws of country x intended to make an entity classification election to be treated for federal tax purposes as disregarded as an entity separate from its owner effective d however due to inadvertence form_8832 was not timely filed 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 elections are necessary only when an plr-139088-04 eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification sec_301_7701-3 provides that generally except as provided in sec_301_7701-3 unless an entity elects otherwise a foreign eligible_entity is treated as an association if all members have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing form_8832 entity classification election with the appropriate service_center under sec_301 c iii this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a regulation published in the federal_register commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-1 through provide the standards the conclusion based solely on the facts submitted and representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 and therefore it is granted an extension of time of sixty days from the date of this letter to file a form_8832 to elect to be treated as a disregarded_entity effective d a copy of this letter should be attached to the election a copy is enclosed for that purpose except as specifically set forth above we express no opinion concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_code this ruling is directed only to the taxpayer requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent plr-139088-04 in accordance with the power_of_attorney on file with this office a copy of this letter is being mailed to x enclosures copy of this letter copy for sec_6110 purposes sincerely heather c maloy associate chief_counsel passthroughs and special industries


internal_revenue_service number release date index number --------------------------- ------------------------------------------------------- -------------------------- ------------------------------------ ------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------ id no ------------- telephone number -------------------- refer reply to cc psi b02 plr-134224-09 date date legend x y --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ---------------------- country ------------------- date ------------------------- dear ---- --------- this responds to a letter dated date submitted on behalf of x by its authorized representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election to be classified as a disregarded_entity for federal tax purposes the information submitted states that x was formed under the laws of country as an entity eligible to make a classification election on date x was wholly owned by y x’s default status was as an association_taxable_as_a_corporation for federal tax purposes x was eligible to be classified as a disregarded_entity for federal tax purposes effective date however a form_8832 entity classification election for x to elect to be treated as a disregarded_entity effective date was not timely filed sec_301_7701-2 generally provides that a business_entity is any entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code plr-134224-09 sec_301_7701-3 provides that so long as a business_entity is not classified as a corporation under sec_301_7701-2 or an eligible_entity it may elect its classification for federal tax purposes sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if the foreign eligible_entity has only one owner it may elect to be treated as a disregarded_entity pursuant to the rules in sec_301_7701-3 sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing a form_8832 with the appropriate service_center under sec_301_7701-3 this election 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 date specified on form_8832 cannot be more than days prior to the date on which the election is filed and cannot 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 six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election with a deadline prescribed by a regulation 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 automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that request for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government 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 sixty days from the date of this letter to elect to be classified 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 plr-134224-09 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter will be sent to x’s authorized representative sincerely curt g wilson associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number --------------------------------------- --------------------------------- ---------------------------------- --------------------------------------- ------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------------- id no -------------- ----------------------------------------------------- telephone number --------------------- refer reply to cc psi b04 plr-139231-10 date date re ----------------------------------------------- -------------------------------------------------------------- ------------- legend grantor spouse trust ---------------------- ----------------------------------- -------------------------------------------------------------- ---------------------------- ---------------------------------------------------------------- ---------------------------------------------------------- trust ------------------------------------------------------------- trust ------------------------------------------------------------- agreement ----------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- son son’s spouse daughter spouse bank date date date year state state statute state statute state statute state statute ------------------------------------------------------- ------------------------------------------------ ------------------------------------------------- ------------------------------------------------ ------------------------------ ------------------------- --------------------- --------------------------- ------- ---------------- ----------------------------------------------------- ----------------------------------------------------- -------------------------------------------------------------- --------------------------------------------------- plr-139231-10 dear ---------------------------------- this letter responds to your authorized representative’s letter of date requesting rulings on the income estate gift and generation-skipping_transfer gst tax consequences of the proposed reformation of trust the facts submitted are as follows grantor and spouse each created an inter_vivos revocable_trust trust on date grantor contributed his separate assets to trust grantor died on date a date before date after the death of grantor_trust was to be continued for spouse son and daughter following the death of spouse trust was divided into two equal trusts trust for the benefit of son and trust for the benefit of daughter trust is governed by the laws of state son and bank are co-trustees trustees trust is the subject of this ruling_request article vii of trust provides that during son’s life all income from trust is to be distributed to son after the death of son if son’s spouse survives him trustees will distribute one-half of the income to son’s spouse during her lifetime and the remaining one-half to grantor’s then living grandchildren share and share alike principal may be distributed to son in case of illness or economic emergency up to the greater of dollar_figure or five percent of the trust assets for his support maintenance and health consistent with his standard of living if in the opinion of trustees the income is not sufficient principal may be distributed to son’s children prior to reaching the age of or when they complete their education for their support maintenance and education upon the death of son and son’s spouse if the his youngest living child has reached the age of all of the remaining trust estate is to be distributed to grantor’s grandchildren share and share alike and to the issue of a deceased grandchild per stirpes article iii b of trust grants son sole investment authority over trust assets provided that son is serving as one of the trustees of trust it further provides generally that bank will rely on son’s investment advice and follow son’s instructions bank is not liable for any losses that occur from following son’s instructions in the event of son’s resignation death or inability to serve as one of the trustees bank will serve as sole trustee article iii c of trust defines the term income as all of the income of the trust estate less costs of administration and all proper charges against the estate whether or not incoming funds or rights or ownerships constitute income shall be determined under the general powers of the trustees paragraph c of the general powers of the trustee attached as an addendum to trust provides that the trustee need not make any adjustments in bookkeeping as between income and principal accounts in connection with premiums_paid or discounts plr-139231-10 received on securities purchased it is authorized to credit or to charge premiums or discounts to investments to credit scrip stock_dividends extraordinary dividends or other receipts and to charge estate or inheritance or other taxes or charges either to or against principal or income as in its discretion shall seem proper under the circumstances state enacted state statute which provides in relevant part that a trustee may adjust between principal and income to the extent the trustee considers necessary if the trustee invests and manages the trust assets as a prudent investor and the terms of the trust describe the amount to be distributed to a beneficiary by referring to the trust's income in deciding whether and to what extent to exercise this power a trustee shall consider all factors relevant to the trust and its beneficiaries including certain listed factors state statute further provides in relevant part that a trustee may not make an adjustment i if possessing or exercising the power to make an adjustment causes an individual to be treated as the owner of all or part of the trust for income_tax purposes and the individual would not be treated as the owner if the trustee did not possess the power to make an adjustment ii if possessing or exercising the power to make an adjustment causes all or part of the trust assets to be included for estate_tax purposes in the estate of an individual who has the power to remove a trustee or appoint a trustee or both and the assets would not be included in the estate of the individual if the trustee did not possess the power to make an adjustment iii if the trustee is a beneficiary of the trust or iv if the trustee is not a beneficiary but the adjustment would benefit him directly or indirectly state statute provides that in exercising the power to adjust under statute a fiduciary shall administer a_trust or estate impartially based on what is fair and reasonable to all the beneficiaries except to the extent that the terms of the trust clearly manifest an intention that the fiduciary shall or may favor one or more of the beneficiaries state statute provides generally that its purpose is to provide statutory provisions for the resolution of disputes and other matters involving trusts_and_estates state statute further provides that the provisions are intended to provide nonjudicial methods for the resolution of matters including agreement state statute provides in relevant part that if all parties agree to a resolution of any dispute under state statute then the agreement must be a written_agreement signed by all parties the written_agreement is binding and conclusive on all persons interested in the trust on date trustees and the beneficiaries of trust including the current income_beneficiary and contingent beneficiaries by representation entered into a nonjudicial plr-139231-10 dispute resolution agreement agreement pursuant to state statute agreement is intended to comply with the requirements of state statute and becomes effective on the date trustees obtain a favorable private_letter_ruling from the internal_revenue_service pursuant to the terms of agreement the trustees and the beneficiaries have agreed to amend and modify trust as follows a to provide that son as trustee has sole management and investment authority over trust 1’s assets b to remove the requirement that bank review and approve son’s investment decisions including bank’s right to approve or disapprove a change in trust 1’s assets c to address the adjustment of receipts between principal and income d to provide that son invests trust 1’s assets prudently e trustee bank will serve as sole trustee and have sole investment authority over trust 1’s assets if bank determines due to incapacity that son is no longer capable of investing and managing trust 1’s assets bank may request son resign as trustee disregard his investment instructions and or take steps to remove son as trustee f to provide that granting sole investment authority to son involves risks g to provide that bank may exercise its discretion to adjust receipts between income and principal h to acknowledge the manner in which bank has previously adjusted receipts between income and principal and to determine the tax treatment of receipts for prior tax years i to determine treatment of future distributions j to provide that the adjustment between principal and income fulfills bank’s duty or impartiality between current and contingent beneficiaries and that if the internal_revenue_service does assess any federal income gift estate or generation-skipping_transfer_tax the tax will be assessed against the trust for such beneficiary and k to establish that the trustees will not be liable to the beneficiaries for their actions with respect to trust 1’s investments and that bank will not be liable with respect to the adjustment of receipts between principal and income and distribution of such receipts to son plr-139231-10 in recital u of agreement the parties define the term receipts to mean interest dividends return of principal capital_gain dividends and capital_gain distributions the term receipts does not include money received in partial_liquidation to the extent that the entity at or near the time of distribution indicates that it is a distribution in partial_liquidation money or property received if the total amount of money and property distributed in a distribution or series of related distributions is greater than twenty percent percent of the entity’s gross assets as shown by the entity’s year-end financial statements immediately preceding the initial distribution or capital_gain realized through the sale of investments in the ordinary course of business section of agreement provides that the parties acknowledge and agree that for taxable years prior to date bank has been adjusting receipts between principal and income treating all receipts as income and paying such receipts out of income to son in a manner that was fair and reasonable section of agreement provides that the parties acknowledge and agree that for year and for all taxable years following bank will have the power to adjust receipts between principal and income treat all receipts as income and distribute such income to son during his lifetime and to one or more of the beneficiaries following his death pursuant to the powers granted to bank in the state principal and income act trustees have requested the following rulings that the reformation of trust and bank’s power to adjust between principal and income will not constitute a sale exchange or other_disposition of trust 1’s assets and will not result in the recognition of any gain_or_loss by trust or the beneficiaries for federal_income_tax purposes that bank’s adjustment between principal and income and any resulting distributions of capital_gain to son will be treated as income for federal_income_tax purposes that bank’s possession and exercise of the power to adjust between principal and income will not cause any of the beneficiaries of trust or bank to be treated as the owner of any part of trust 1’s assets under sec_678 of the internal_revenue_code that the reformation of trust and bank’s power to adjust between principal and income will not cause trust to lose its status under of the tax_reform_act_of_1986 as exempt from the gst tax under chapter that bank’s possession and exercise of the power to adjust between principal and income will not constitute a taxable transfer by any beneficiary to trust for federal gift_tax purposes and plr-139231-10 that the reformation of trust and bank’s power to adjust between principal and income will not cause any part of trust 1’s assets to be included in a beneficiary’s estate under sec_2041 ruling sec_1 through sec_1_643_b_-1 of the income_tax regulations provides a comprehensive definition of income as that term applies to trusts_and_estates it provides in part that items such as dividends interest and rents are generally allocated to income and proceeds from the sale_or_exchange of trust assets are generally allocated to principal however an allocation of amounts between income and principal pursuant to applicable local law will be respected if local law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust for the year including ordinary and tax-exempt_income capital_gains and appreciation for example a state statute providing that income is a unitrust_amount of no less than percent and no more than percent of the fair_market_value of the trust assets whether determined annually or averaged on a multiple year basis is a reasonable apportionment of the total return of the trust similarly a state statute that permits the trustee to make adjustments between income and principal to fulfill the trustee's duty_of impartiality between the income and remainder beneficiaries is generally a reasonable apportionment of the total return of the trust sec_1_643_b_-1 further provides that a switch between methods of determining trust income authorized by state statute will not constitute a recognition event for purposes of sec_1001 a switch to a method not specifically authorized by state statute but valid under state law including a switch via judicial decision or a binding nonjudicial settlement may constitute a recognition event to the trust or its beneficiaries for purposes of sec_1001 in this case trustees and the beneficiaries executed agreement pursuant to state statute and state statute which permits bank to make adjustments between income and principal to fulfill bank's duty_of impartiality between the income and remainder beneficiaries the execution of agreement constitutes a switch between methods of determining trust income authorized by state statute bank’s ability to allocate amounts between income and principal including ordinary and tax-exempt_income capital_gains and appreciation pursuant to state statute will be respected because it is a reasonable apportionment between the income and remainder beneficiaries sec_671 provides that where it is specified in subpart e of part i of subchapter_j that the grantor or another person shall be treated as the owner of any portion of a_trust there shall then be included in computing the taxable_income and credits of the grantor or the other person those items of income deductions and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items plr-139231-10 would be taken into account under chapter in computing taxable_income or credits against the tax of an individual sec_678 provides in general that a person other than the grantor shall be treated as the owner of any portion of a_trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself or such person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would within the principals of sec_671 to inclusive subject a grantor of a_trust to treatment as the owner thereof in this case trustees and the beneficiaries executed agreement pursuant to state statute and state statute which permits bank to make adjustments between income and principal to fulfill bank's duty_of impartiality between the income and remainder beneficiaries the ability of bank to make adjustments between income and principal to fulfill the bank's duty_of impartiality does not cause bank to have a power exercisable solely by itself to vest the corpus or the income therefrom in itself under sec_678 with respect to the beneficiaries the execution of agreement constitutes a switch between methods of determining trust income authorized by state statute and does not cause any of the beneficiaries to hold a power exercisable solely by any beneficiary to vest the corpus or the income therefrom in himself under sec_678 the switch between methods of determining trust income authorized by state statute will not constitute a release or modification of a power described in sec_678 by either bank or the beneficiaries based on the facts submitted and representations made we conclude the following the reformation of trust and bank’s power to adjust between principal and income will not pursuant to sec_1_643_b_-1 constitute a sale exchange or other_disposition of trust 1’s assets and will not result in the recognition of any gain_or_loss by trust or the beneficiaries for federal_income_tax purposes bank’s adjustment between principal and income and any resulting distributions of capital_gain to son will be treated as income under sec_1_643_b_-1 bank’s possession and exercise of the power to adjust between principal and income will not cause any of the beneficiaries of trust or bank to be treated as the owner of any part of the trust 1’s assets under sec_678 ruling sec_2601 imposes a tax on every generation-skipping_transfer made after date plr-139231-10 under a of the tax_reform_act_of_1986 act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the gst tax is generally applicable to gsts made after date however under b a of the act and sec_26_2601-1 the gst tax does not apply to a transfer under a_trust that was irrevocable on date but only to the extent that the transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added under sec_26_2601-1 any trust in existence on date will be considered irrevocable unless the decedent had a power that would have caused inclusion of the trust in his or her gross_estate under sec_2038 or sec_2042 if the decedent had died on date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under sec_26_2601-1 or will not cause the trust to lose its exempt status under the regulation unless specifically provided otherwise these rules are applicable only for purposes of determining whether an exempt trust retains its exempt status for gst tax purposes thus unless specifically noted the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of gain for purposes of sec_1001 sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy sec_26_2601-1 b or c by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust sec_26_2601-1 provides that a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer to determine whether a modification of an irrevocable_trust will shift a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification if the effect of the modification cannot be immediately determined it is deemed to shift a beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification plr-139231-10 a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust in addition administration of a_trust in conformance with applicable local law that defines the term income as a unitrust_amount or permits a right to income to be satisfied by such an amount or that permits the trustee to adjust between principal and income to fulfill the trustee's duty_of impartiality between income and principal beneficiaries will not be considered to shift a beneficial_interest in the trust if applicable local law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust and meets the requirements of sec_1_643_b_-1 sec_26_2601-1 example considers a situation where in the grantor a resident of state x established an irrevocable_trust for the benefit of grantor’s child a and a’s issue the trust provides that trust income is payable to a for life and upon a's death the remainder passes to a's issue per stirpes in state x amends its income and principal statute to permit the trustee to make adjustments between income and principal when the trustee invests and manages the trust assets under the state's prudent investor standard the trust describes the amount that shall or must be distributed to a beneficiary by referring to the trust's income and the trustee after applying the state statutory rules regarding allocation of receipts between income and principal is unable to administer the trust impartially the provision permitting the trustees to make these adjustments is effective in for trusts created at any time the trustee invests and manages the trust assets under the state's prudent investor standard and pursuant to authorization in the state statute the trustee allocates receipts between the income and principal accounts in a manner to ensure the impartial administration of the trust the example concludes that the administration of the trust in accordance with the state statute will not be considered to shift any beneficial_interest in the trust therefore the trust will not be subject_to the provisions of chapter further no trust_beneficiary will be treated as having made a gift_for federal gift_tax purposes and neither the trust nor any trust_beneficiary will be treated as having made a taxable_exchange for federal_income_tax purposes in this case trust was irrevocable on date and it is represented that there have been no additions made after date the beneficiaries have entered into agreement with son and bank as trustees to reform trust to clarify and amend trustees’ investment responsibilities and to allow bank to make adjustments between principal and income pursuant to state statute and state statute statutes similar to that described in sec_26_2601-1 and sec_26 b i e example therefore the proposed administration of trust in accordance with state statute and state statute will not be considered to shift any beneficial_interest in trust for gst purposes accordingly based on the facts submitted and representations made we conclude that if bank makes adjustments between principal and income in accordance with agreement and in accordance with and pursuant to state statute and state statute the proposed modification to trust plr-139231-10 will not adversely affect trust sec_1’s status as exempt from gst tax further we conclude that the other modifications to trust contained in agreement are administrative in nature and therefore are not considered to shift any beneficial interests in trust thus we conclude that the reformation of trust pursuant to agreement will not adversely affect trust 1’s status as exempt from gst tax ruling sec_2501 imposes a tax on the transfer of property by gift during the calendar_year by any individual sec_2511 provides that the gift_tax applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2514 provides that the exercise or release of a general_power_of_appointment created after date shall be deemed a transfer of property by the individual possessing the power sec_2514 provides that the term general_power_of_appointment means a power that is exercisable in favor of the individual possessing the power his estate his creditors or the creditors of his estate sec_25_2514-1 of the gift_tax regulations provides in part that a power in a donee to remove or discharge a trustee and appoint himself may be a power_of_appointment for example if under the terms of a_trust instrument the trustee or his successor has the power to appoint the principal of the trust for the benefit of individuals including himself and a another person has the unrestricted power to remove or discharge the trustee at any time and appoint any other person including himself a is considered as having a power_of_appointment however the mere power of management investment custody of assets or the power to allocate receipts and disbursements as between income and principal exercisable in a fiduciary capacity whereby the holder has no power to enlarge or shift any of the beneficial interests therein except as an incidental consequence of the discharge of such fiduciary duties is not a power_of_appointment as set forth above under ruling sec_26_2601-1 example concludes that where a trustee administers a_trust in accordance with a state statute that permits the trustee to make adjustments between income and principal no trust_beneficiary will be treated as having made a gift_for federal gift_tax purposes in addition no beneficiary has a general_power_of_appointment as defined in sec_2514 consequently based on the facts submitted and representations made we conclude that the reformation of trust pursuant to the agreement and the power of plr-139231-10 bank to adjust between principal and income pursuant to state statute will not cause any beneficiary to have made a transfer of property for gift_tax purposes ruling sec_2041 provides that the value of the gross_estate includes the value of all property to the extent of any property with respect to which the decedent has at the time of death a general_power_of_appointment created after date sec_2041 defines the term general_power_of_appointment as a power which is exercisable in favor of the decedent his estate his creditors or the creditors of his estate subject_to certain exceptions sec_20_2041-1 of the estate_tax regulations provides in part that if a_trust instrument provides that the beneficiary may appropriate or consume the principal of the trust the power to consume or appropriate is a power_of_appointment a power in a donee to remove or discharge a trustee and appoint himself may be a power_of_appointment however the mere power of management investment custody of assets or the power to allocate receipts and disbursements as between income and principal exercisable in a fiduciary capacity whereby the holder has no power to enlarge or shift any of the beneficial interests therein except as an incidental consequence of the discharge of such fiduciary duties is not a power_of_appointment in this case bank is the only trustee with the power to make adjustments between income and principal under agreement and state statute no beneficiary of trust has any power over trust 1’s assets other than the power of management and investment of assets neither son nor any of the other beneficiaries has a power to replace bank as trustee or appoint successor trustees in the event of son’s resignation death or inability to serve as co-trustee bank becomes the sole trustee of trust therefore no beneficiary will be considered to have a general_power_of_appointment under sec_20_2041-1 accordingly based on the facts submitted and representations made we conclude that the reformation of trust and bank’s powers to adjust between principal and income pursuant to agreement and state statute will not cause any portion of trust 1’s assets to be included in a beneficiary's gross_estate under sec_2041 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination plr-139231-10 except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely by ______________________________ leslie h finlow senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes cc