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 --------------------------- ------------------------- ----------------- telephone number ---------------------- refer reply to cc psi b04 plr-133235-17 date date legend decedent spouse date date date date date date date court trust state z year --------------------------------------------- ------------------------------------------- -------------------------- ------------------------- -------------------------- -------------------------- ------------------------ ----------------------- ---------------------------- ------------------------------------------------------- ---------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- ------------------- ------------------- ----------- ------- dear ----------------------------------- this letter responds to your authorized representative’s letter dated date and subsequent correspondence requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to make a qualified_terminable_interest_property qtip_election under sec_2056 of the internal_revenue_code the facts and representations submitted are as follows plr-133235-17 on date decedent a resident of state executed trust a revocable_trust on date decedent amended and restated trust on date decedent died testate survived by spouse trust became irrevocable upon decedent’s death under decedent’s will after the payment of certain residuary bequests decedent’s residuary_estate passed to trust the residuary_estate included various assets including a retirement account ira article iv of trust provides in relevant part that upon decedent’s death the principal and any undistributed_income then remaining shall be held by the trustee in trust for the benefit of spouse article iv paragraph a of trust provides that in each taxable_year of the trust during the lifetime of spouse the trustee s shall pay to spouse an amount equal to the greater of i z percent z percent of the net fair_market_value of the assets of the trust valued as of the first day of each taxable_year of the trust including but not limited to any retirement account payable to the trust or ii the required_minimum_distribution amount the first day of the payment period shall be the date of decedent’s death and the last day of the payment period shall be the date of spouse’s death if possibly sic the payment shall be made in equal quarterly installments at the end of each calendar_quarter article iv paragraph e provides that at spouse’s death the trustees are to distribute all of the principal and income of the trust to specified charities on date the executors of decedent’s estate timely filed a complete form_706 united_states estate and generation-skipping_transfer_tax return with extension based upon the value of the gross_estate and amount of taxable_gifts the executors of decedent’s estate had a filing requirement under sec_6018 and paid estate_tax on or about date on the form_706 the executors did not evidence any intent to divide trust into separate trusts or elect under sec_2056 to treat any assets of trust as qtip on date the executors filed a supplemental form_706 to claim a refund for federal_estate_taxes paid date is within the limitations_period prescribed by sec_6511 on date the trustees petitioned court to divide and modify trust into two trusts an ira trust consisting of the retirement accounts_payable to trust and a non-ira trust holding the other assets of trust the purpose of the division is to qualify the non-ira trust for qtip treatment plr-133235-17 on date court approved the division and modification of trust as modified article iv of trust provides in relevant part that upon decedent’s death the principal and any undistributed_income then remaining shall be held by decedent’s trustees in two separate trusts trust a ira trust and trust b non-ira trust trust a shall include the retirement account payable to the trust and trust b shall include the remaining principal and undistributed_income of the trust trust is further modified by the addition of article xv marital_deduction provisions the terms of which govern the two separate trusts trust a and trust b upon the division of trust at decedent’s death in relevant part article xv provides that if spouse survives decedent then notwithstanding any other provision of this agreement of trust the trustees shall not have any rights powers privileges or immunities which would cause the trusts not to qualify for the federal estate_tax_marital_deduction further article xv provides that a ll provisions of trust shall be construed in accordance with decedent’s primary intention that the trusts qualify for the federal estate_tax_marital_deduction you have requested the following rulings an extension of time under sec_301_9100-1 and -3 and sec_20_2056_b_-7 to sever trust into ira trust and non-ira trust effective as of the date of decedent’s death an extension of time under sec_301_9100-1 and -3 to make a qtip_election under sec_2056 with respect to the assets of the non-ira trust law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2056 provides that for purposes of the tax imposed by sec_2001 the value of the taxable_estate is except as limited by sec_2056 determined by deducting from the value of the gross_estate an amount equal to the value of any interest in property that passes or has passed_from_the_decedent to the surviving_spouse but only to the extent that such interest is included in determining the value of the gross_estate sec_2056 provides in relevant part that where on the lapse of time on the occurrence of an event or contingency or on the failure of an event or contingency to occur an interest passing to the surviving_spouse will terminate or fail no deduction plr-133235-17 shall be allowed under sec_2056 with respect to such interest if an interest in such property passes or has passed for less than adequate_and_full_consideration in money or money’s worth from the decedent to any person other than the surviving_spouse or the estate of the spouse and if by reason of such passing such person or his heirs or assigns may possess or enjoy any part of such property after such termination or failure of the interest so passing to the surviving_spouse sec_2056 provides an exception to the rule_of sec_2056 in the case of qtip sec_2056 provides that for purposes of sec_2056 qtip is treated as passing to the surviving_spouse and for purposes of sec_2056 no part of the property is treated as passing to any person other than the surviving_spouse sec_2056 defines qtip as property that passes from the decedent in which the surviving_spouse has a qualifying_income_interest_for_life and to which an election under sec_2056 applies under sec_2056 a surviving_spouse has a qualifying_income_interest_for_life if i the surviving_spouse is entitled to all the income from the property payable annually or at more frequent intervals or has a usufruct interest for life in the property and ii no person has a power to appoint any part of the property to any person other than the surviving_spouse sec_2056 provides that an election under sec_2056 with respect to any property shall be made by the executor on the return of tax imposed by sec_2001 such an election once made shall be irrevocable sec_20_2056_b_-7 of the estate_tax regulations provides that the election may relate to all or any part of property that meets the requirements of sec_2056 provided that any partial election must be made with respect to a fractional or percentage share of the property so that the elective portion reflects its proportionate share of the increase or decrease in value of the entire property for purposes of applying sec_2044 or sec_2519 the fraction or percentage may be defined by formula sec_20_2056_b_-7 provides that a_trust may be divided into separate trusts to reflect a partial election that has been made or is to be made if authorized under the governing instrument or otherwise permissible under local law any such division must be accomplished no later than the end of the period of estate administration if at the time of the filing of the estate_tax_return the trust has not yet been divided the intent to divide the trust must be unequivocally signified on the estate_tax_return sec_20_2056_b_-7 provides that in general the election referred to in sec_2056 and v is made on the return of tax imposed by sec_2001 or plr-133235-17 sec_2101 for purposes of this paragraph the term return of tax imposed by sec_2001 means the last estate_tax_return filed by the executor on or before the due_date of the return including extensions or if a timely return is not filed the first estate_tax_return filed by the executor after the due_date sec_20_2056_b_-7 provides that the principles of sec_20_2056_b_-5 apply in determining whether the surviving_spouse is entitled to all of the income_for_life from the entire_interest or a specific_portion of the entire_interest sec_20_2056_b_-5 provides in part that if an interest is transferred in trust the surviving_spouse is entitled_for_life to all of the income from the entire_interest or a specific_portion of the entire_interest if the effect of the trust is to give the spouse substantially that degree of beneficial_enjoyment of the trust property during the spouse’s life which the principles of the law of trusts accord to a person who is unqualifiedly designated as the life_beneficiary of a_trust in addition the surviving spouse’s interest shall meet the condition set forth in sec_20_2056_b_-5 if the spouse is entitled to all of the income as determined by applicable local law that provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust and that meets the requirements of sec_1_643_b_-1 of the income_tax regulations under sec_20_2056_b_-5 an interest passing in trust will not satisfy the condition in sec_20_2056_b_-5 that the surviving_spouse be entitled to all the income if the primary purpose of the trust is to safeguard property without providing the spouse with the required beneficial_enjoyment for example assume that the corpus of a_trust consists substantially of property which is not likely to be income producing during the life of the surviving_spouse and that the spouse cannot compel the trustee to convert or otherwise deal with the property as described in sec_20_2056_b_-5 an interest passing to such a_trust will not qualify unless the applicable rules for trust administration require or permit the spouse to require that the trustee provide the required beneficial_enjoyment such as by payments to the spouse out of other assets of the trust sec_20_2056_b_-5 provides that the terms entitled_for_life and payable annually or at more frequent intervals require that under the terms of the trust the income referred to must be currently at least annually distributable to the spouse or that the spouse must have such command over the income that it is virtually the spouse’s thus the surviving_spouse will be entitled_for_life to all of the income from the trust payable annually if under the terms of the trust instrument the spouse has the right exercisable annually or at more frequent intervals to require distribution to the spouse of the trust income and to the extent that right is not exercised the trust income is to be accumulated and added to principal sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 plr-133235-17 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 except subtitles e g h and i sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer failed to make the election because of intervening events beyond the taxpayer's control based on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 are satisfied therefore decedent's_estate is granted an extension of time of days from the date of this letter to sever trust into ira trust and non-ira trust effective as of the date of decedent’s death and make a qtip_election under sec_2056 with respect to the assets of non-ira trust the above elections should be made on a supplemental form_706 for year the form_706 should be filed with the cincinnati service_center at the following address internal_revenue_service center cincinnati oh a copy of this letter should be attached to the supplemental form_706 a copy is enclosed for this purpose in accordance with the power_of_attorney on file with this office we have sent a copy of this letter to your authorized representatives except as expressly provided herein we neither express nor imply any opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination plr-133235-17 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely associate chief_counsel passthroughs special industries leslie h finlow _____________________________ by leslie h finlow senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter


internal_revenue_service number release date index number ---------------------------- ------------------------ ---------------------------- re ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------ telephone number -------------------- refer reply to cc psi plr-123165-14 date december legend -------------------- ----------------------------------------------------------------------- testator trust ----------------------------------------------------------------------------------------------- ---------------------------------------------------------------------- ------------------------------------------------------------------------ corporate trustee a ----------------------------------------------------------- corporate trustee b ----------------------------- corporate trustee c ------------------------------------------- corporate trustee d ---------------------- child a ---------------------- child b --------------------------------- child c ------------------------------------------------------------------------ grandchild c -------------------------- grandchild a-1 --------------------- grandchild a-2 ----------------------- individual trust a ----------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------- ----------------------------------------------------------------------- trust b ------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- --------------------------------------------------- plr-123165-14 --------------------------------------------------------- ------------------------------------------------------------------------ share ---------------------------------------------------------------------------------- share --------------------------------------------------------------------------------------------------- date date date year year year year state court state act --------------------------------------------------- --------------------------------------------------------------------------------------------------------------- cite cite cite cite ------------------ ------------------- ------------------ ------ ------ ------ ------ -------- -------------------------------------------------------- ------------------------------------------------------------------- ---------------------------------------------------- ------------------------------------------------------------------------ ------------------------------------------------- ------------------------------------------------------------------------ dear -------------- this responds to your authorized representatives’ letter dated date and subsequent correspondence requesting rulings concerning the income gift estate and generation-skipping gst tax consequences of a settlement agreement facts testator died testate on date prior to date a resident of state he was survived by two children child a and child b a third child child c predeceased testator child c was survived by her child grandchild c testator’s last will and testament will established a_trust trust for the benefit of his lineal_descendants article first paragraph a of trust provides that the trustees are to pay the net_income quarterly in equal shares to child a child b and grandchild c if any of them is not living on an income payment_date the trustees are to pay over his or her share of the income by right of representation to his or her issue then living article first paragraph b provides that trust is to end upon the death of the survivor of child a child b and grandchild c at which time the trustees are to distribute the trust principal by right of representation to testator’s then living issue article second provides in relevant part that corporate trustee a child a child b and grandchild c are to be the trustees plr-123165-14 child a died in year survived by two children grandchild a-1 and grandchild a-2 child b is living grandchild c is living_trust will terminate when the survivor of child b and grandchild c has died corporate trustee a and its successor_corporation served as a co-trustee until year at present one-third of the trust income is paid to grandchild a-1 and grandchild a-2 as successors to child a’s income_interest another third of the income is paid to child b the last third of the income is paid to grandchild c the current presumptive remainder beneficiaries are i grandchild a-1 and grandchild a-2 ii child b’s three children and iii grandchild c’s four children the trust assets consist primarily of investment_assets it is represented that no actual or constructive additions have been made to trust since its inception in year child b and grandchild c as co-trustees petitioned the court to appoint an institutional co-trustee to restore the trustee structure as originally constituted under the will by court order of date corporate trustee b was appointed co-trustee of trust corporate trustee b was subsequently acquired by corporate trustee c accordingly the current co-trustees are child b and grandchild c and corporate trustee c following the year court proceedings the trustees modified the written investment policy of trust to invest and manage the trust assets in accordance with the state act under the modification in part an independent fiduciary as a trustee may equitably adjust between principal and income by allocating an amount of income to principal or an amount of principal to income to the extent the independent fiduciary considers appropriate if the terms of the trust describe the amount that may or must be distributed to a beneficiary by referring to the trust’s income in deciding whether and to what extent to exercise this power the independent fiduciary is to consider certain factors such as the assets held in the trust the extent to which they consist of financial_assets interests in closely held enterprises tangible and intangible personal_property or real_property the extent to which an asset is used by a beneficiary and whether an asset was purchased by the trustee or received from the settlor pursuant to the modification corporate trustee c exercised its authority to equitably adjust trust receipts between income and principal thereafter child b expressed concern and objected to corporate trustee c’s actions in exercising its adjustment powers the disagreements over these actions have resulted in a rift in the family and a desire by some family members to have different trustees and separate trusts for some of the beneficiaries in year child b filed a petition with the court to divide trust and administer the divided trusts as separate trusts child b’s stated reasons for the division were that it would facilitate investment management and administrative decisions regarding the plr-123165-14 share for child b and his family that would be consistent with their investment philosophy child b’s petition was met with opposition from the other beneficiaries and corporate trustee c they were concerned that among other things the division of trust violated the testamentary intent of testator and violated a material purpose of trust they were also concerned that the division of trust into new smaller trusts would result in the loss of economic efficiencies enjoyed by the existing trust child b’s petition was answered by the other beneficiaries who raised a counterclaim they requested that the court construe the words by right of representation in the context of testator’s will they asserted that construction of the term could affect future distributions from trust whether or not trust was divided that is depending on the order of deaths and whether or not there were future births in the family there were three possible constructions that could produce substantially different distributions of income and principal of trust see cite cite and cite see also cite after an adversarial process before the court and extensive settlement negotiations the trustees and beneficiaries of trust agreed to a settlement settlement agreement under which trust will terminate and its assets will be divided into two trusts trust a and trust b_trust a equal in value to one-third of the value of trust will be held as a separate trust for child b and his descendants trust b equal in value to two-thirds of the value of trust will be held as a separate trust for grandchild c and her descendants and child a’s descendants to the extent it is administratively feasible the division of assets will be pro_rata in addition the parties agreed that the term by right of representation will be construed to require a per stirpes distribution of trust assets among the descendants of testator with the first division to be made at the child level ie at the level of child a child b and child c even if that generation has no living descendants on date the court issued an order approving and adopting the terms of the settlement agreement the order provides in part that beginning on the date of division and continuing until termination trust a and trust b i shall be treated as completely separate and distinct trusts for all purposes and ii shall be governed by the existing provisions of trust except to the extent modified by certain provisions as described below trust a child b will receive the trust a income quarterly for his life after child b’s death his children will receive the income in equal shares if any child should die that child’s children will receive the child’s share of the income in equal shares if child b and all of his issue die before the termination of trust a the assets of trust a will be added to trust b on the death of the survivor of child b and grandchild c trust a will terminate plr-123165-14 and the trust a assets will be distributed to the then-living descendants of child b by right of representation child b and his three children will be the individual co-trustees of trust a corporate trustee d will be appointed as a co-trustee by a document signed prior to the effective date of the trust division and effective upon the creation of trust a a corporate trustee will remain in service until trust a terminates the corporate trustee will have all the powers under state law to exercise the trustee’s powers to adjust between income and principal pursuant to the provisions of the state act trust b grandchild a-1 grandchild a-2 grandchild c and individual will be the co-trustees of trust b corporate trustee c will serve as the corporate trustee trust b will consist of two shares share and share the income of share will be distributed quarterly to grandchild c the income of share will be distributed quarterly in equal shares to grandchild a-1 and grandchild a-2 if any of those persons should die during the term of the trust his or her income share will be paid to his or her descendants by right of representation on the death of the survivor of child b and grandchild c trust b will terminate share will be distributed to the then-living descendants of grandchild c by right of representation and share will be distributed to the then-living descendants of child a by right of representation you have asked for the following rulings the terms of the settlement agreement including the trust division and the construction of the phrase by right of representation will not cause a distribution from or the termination of any interest in trust trust a or trust b to be subject_to the generation-skipping_transfer_tax the terms of the settlement agreement including the trust division and the construction of the phrase by right of representation will not cause any person to make a gift to any beneficiary of trust trust a or trust b the terms of the settlement agreement including the trust division and the construction of the phrase by right of representation will not cause the assets held in trust trust a or trust b to be included in the gross_estate of a beneficiary who dies prior to the termination of such trust following the termination of trust and the resulting division of trust pursuant to the settlement agreement trust a and trust b will be treated as separate trusts plr-123165-14 the terms of the settlement agreement including the trust division and the construction of the phrase by right of representation will not cause any party to the settlement agreement to realize income from the sale_or_exchange of any trust assets or interests law and analysis ruling sec_2601 of the internal_revenue_code imposes a tax on every generation-skipping_transfer which is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip under of the tax_reform_act_of_1986 the act gst tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the tax does not apply to a transfer under a_trust that was irrevocable on date except to the extent the transfer is made out of corpus added to the trust by an actual or constructive_addition after 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 generation-skipping_transfer_tax under sec_26_2601-1 will not cause the trust to lose its exempt status these rules are applicable only for purposes of determining whether an exempt trust retains exempt status for generation-skipping_transfer_tax purposes 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 capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a court-approved settlement of a bona_fide issue regarding the administration of the trust or the construction of terms of the governing instrument will not cause an exempt trust to be subject_to the provisions of chapter if the settlement is the product of arm’s length negotiations and the settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement a settlement that results in a compromise between the positions of the litigating parties and reflects the parties’ assessments of the relative strengths of their positions is a settlement that is within the range of reasonable outcomes sec_26_2601-1 provides that a judicial construction of a governing instrument to resolve an ambiguity in the terms of the instrument or to correct a scrivener’s error will not cause an exempt trust to be subject_to the provisions of chapter if the plr-123165-14 judicial action involves a bona_fide issue and the construction is consistent with applicable state law that would be applied by the highest court of the state 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 example describes a situation where in grantor established an irrevocable_trust for the benefit of his two children a and b and their issue under the terms of the trust the trustee has the discretion to distribute income and principal to a b and their issue in such amounts as the trustee deems appropriate on the death of the last to die of a and b the trust principal is to be distributed to the living issue of a and b per stirpes in the appropriate local court approved the division of the trust into two equal trusts one for the benefit of a and a’s issue and one for the benefit of b and b’s issue the trust for a and a’s issue provides that the trustee has the discretion to distribute trust income and principal to a and a’s issue in such amounts as the trustee deems appropriate on a’s death the trust principal is to be distributed equally to a’s issue per stirpes if a dies with no living descendants the principal will be added to the trust for b and b’s issue the trust for b and b’s issue is identical except for the beneficiaries and terminates at b’s death at which time the trust principal is to be distributed equally to b’s issue per stirpes if b dies with no living descendants principal will be added to the trust for a and a’s issue the example concludes that the division of the trust into two trusts does not shift any 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 division in addition the division does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust therefore the two partitioned trusts resulting from the division will not be subject_to the provisions of chapter in this case trust was irrevocable on date it is represented that there have been no actual or constructive additions to the trust after date the settlement agreement and court order resolve bona_fide issues ie the construction of the words by right of representation as intended by testator and the administration of trust under the state act the settlement agreement is the product of arm’s length negotiations and is within the range of reasonable outcomes under trust and state law finally the settlement agreement and court order construing the term plr-123165-14 by right of representation and dividing trust will not shift a beneficial_interest in trust to a lower generation beneficiary and will not extend the time for vesting of any beneficial_interest in trust accordingly based on the facts submitted and representations made we conclude that the terms of the settlement agreement including the trust division and construction of the phrase by right of representation will not cause distributions from or the termination of any interest in trust trust a or trust b to be subject_to the gst tax imposed by sec_2601 ruling sec_2501 provides that a tax is imposed for each calendar_year on the transfer of property by gift during such calendar_year by any individual resident or nonresident sec_2511 provides that the tax imposed by sec_2501 will apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-1 of the gift_tax regulations provides that any transaction in which an interest in property is gratuitously passed or conferred upon another regardless of the means or device employed constitutes a gift subject_to tax whether an agreement settling a dispute is effective for gift_tax purposes depends on whether the settlement is based on a valid enforceable claim asserted by the parties and to the extent feasible produces an economically fair result see 674_f2d_761 9th cir citing 387_us_456 thus state law must be examined to ascertain the legitimacy of each party’s claim if it is determined that each party has a valid claim the service must determine that the settlement reflects the result that would apply under state law if there is a difference it is necessary to consider whether the difference may be justified because of the uncertainty of the result if the question were litigated as discussed above the issues resolved by the settlement agreement and court order concerning the construction of trust and its administration are bona_fide issues based upon valid enforceable claims by the interested parties the settlement agreement resolves conflicts concerning distributions of income and principal and is reflective of the rights of the parties under applicable state law that would be applied by the highest court of state accordingly based on the facts submitted and representations made we conclude that the terms of the settlement agreement will not cause any person to make a gift to any beneficiary of trust trust a or trust b ruling plr-123165-14 sec_2001 provides that a tax is imposed on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2033 provides that the value of the gross_estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for adequate_and_full_consideration in money or money’s worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom sec_2037 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time after date made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money or money’s worth by trust or otherwise if possession or enjoyment of the property can through ownership of such interest be obtained only by surviving the decedent and the decedent has retained a reversionary_interest in the property but in the case of a transfer made before date only if such reversionary_interest arose by the express terms of the instrument of transfer and the value of such reversionary_interest immediately before the death of the decedent exceeds five percent of the value of such property sec_2038 provides that the value of the decedent’s gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for adequate_and_full_consideration in money or money’s worth by trust or otherwise where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power in whatever capacity exercisable by the decedent alone or by the decedent in conjunction with any other person without regard to when or from what source the decedent acquired such power to alter amend revoke or terminate or where any such power is relinquished during the three-year period on the date of the decedent’s death sec_2041 provides that the value of the gross_estate shall include the value of all property to the extent of any property with respect to which the decedent has at the time of his death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released a power_of_appointment by a disposition that is of such nature that if it were a transfer of property owned by the decedent the property would be includible in the decedent’s gross_estate under sec_2035 to plr-123165-14 sec_2041 provides that a general_power_of_appointment is a power that is exercisable in favor of the decedent the decedent’s estate the decedent’s creditors or the creditors of the decedent’s estate however a power to consume invade or appropriate property for the benefit of the decedent that is limited by an ascertainable_standard relating to the health education support or maintenance of the decedent shall not be deemed a general_power_of_appointment in this case no person made a transfer to trust other than testator at his death on date the income and terminating distributions from the divided trusts will follow the same pattern as they would have had trust not been divided the income beneficiaries will be entitled to distributions quarterly and the remaindermen will be entitled to receive the trust property only upon surviving termination of the respective trust the terms of the settlement agreement do not cause any transfers or create any general powers of appointment that would cause any of the trust property to be included in the estate of a beneficiary under sec_2036 sec_2038 or sec_2041 consequently the terms of the settlement agreement will not cause any beneficiary of trust trust a or trust b who dies prior to the termination of such trust to include trust assets in his or her taxable_estate other than i trust assets that have been distributed to him or her prior to death or ii such quarterly distributions of income that were past due and not paid in accordance with the trust terms during a beneficiary’s life and to which he or she has a legally enforceable claim at death ruling sec_643 provides that for purposes of subchapter_j of chapter of subtitle a under regulations prescribed by the secretary two or more trusts shall be treated as one trust if such trusts have substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries and a principal purpose of such trusts is the avoidance of the tax_imposed_by_chapter_1 section b of the tax_reform_act_of_1986 provides that sec_643 shall apply to taxable years beginning after date except that in the case of a_trust that was irrevocable on date it shall apply only to that portion of the trust that is attributable to contributions of corpus after date the taxpayers represent that in this case trust a and trust b will have different beneficiaries the taxpayers also represent that no actual or constructive additions have been made to trust since its inception prior to date based on the facts submitted and the representations made we conclude that as long as trust a and trust b are separately managed and administered they will be treated as separate trusts for federal tax purposes ruling plr-123165-14 sec_61 and provides that gross_income includes gains derived from dealings in property and income from an interest in a_trust sec_1001 provides that the gain from the sale_or_other_disposition of property is the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss is the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized under sec_1001 the amount_realized from the sale_or_other_disposition of property is the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a of the code the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property must be recognized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained a partition of jointly owned property is not a sale_or_other_disposition of property if the co-owners of the joint property sever their joint_interests but do not acquire a new or additional interest as a result thereof thus neither gain nor loss is realized on a partition see revrul_56_437 1956_2_cb_507 conversion of a joint_tenancy in stock to a tenancy_in_common in order to eliminate the survivorship feature and the partition of a joint_tenancy in stock are not sales or exchanges similarly divisions of trusts are also not sales or exchanges of trust interests if each asset is divided pro_rata among the new trusts see revrul_69_486 1969_2_cb_159 pro_rata distribution of trust assets not a sale_or_exchange here the division of trust into trust a and trust b will not result in any shift in beneficial_interest in the assets of trust accordingly the division of trust as described will not result in the realization of gain_or_loss under sec_61 and sec_1001 in addition the agreement regarding construction of the term by right of representation will not result in the realization of gain_or_loss under sec_61 and sec_1001 except as expressly provided herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code these rulings are directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives plr-123165-14 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 sincerely leslie h finlow senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosure copy of letter for sec_6110 purposes


significant index number gepartiment of the treasury internal revomnuef sb vice ‘aashimgton dc mar np rr mot ames bey hl etiment entities j1ghun ov po sec_4 a og re taxpayer dear this letter constitutes notice that approval has been granted for your request for a 5-year automatic_extension for amortizing the unfunded liabilities as of date for the above-named plan which are described in sec_431 and sec_431 of the internal_revenue_code code and sec_304 and sec_304 of the employee_retirement_income_security_act_of_1974 erisa this extension is effective with the plan_year beginning date this extension applies to the eligible amortization charge bases established as of date which result in a net unfunded_liability of as of that date the extension of the amortization periods of the unfunded liabilities of the plan was granted in accordance with sec_431 of the code sec_431 of the code requires the secretary to extend the period of time required to amortize any unfunded_liability of a plan for a period of time not in excess of years if the plan submits an application meeting the criteria stated in sec_431 the plan has submitted the required information to meet the criteria in sec_431 including a certification from the plan's actuary that i absent the extension under subparagraph a the plan would have an accumulated_funding_deficiency in the current plan_year or any of the succeeding plan years ii the plan_sponsor has adopted a plan to improve the plan's funding status iii the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period as extended and iv the notice required under paragraph a has been provided we have sent a copy of this letter to the to the authorized representative pursuant to a power_of_attorney on file in this office to your this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited by others as precedent if you require further assistance in this matter please contact sincerely yours hg dl david m ziegler manager ep actuarial group


department of the treasury internal_revenue_service washington d c contact person identification_number telephone number employer_identification_number tax_exempt_and_government_entities_division number release date date date uil dear this is in response to your letter dated date in which you requested certain rulings with respect to sec_514 background you represent that you are a qualifying charitable_remainder_unitrust under sec_664 and sec_664 you propose to invest in a number of funds that will be treated as partnerships for tax purposes you have represented that none of the partners or brokers will be disqualified persons as to you the main activity of these funds will consist of investing in stocks these funds seek to maintain a neutral trading position as between short and long positions at all times in order to minimize risks to facilitate your short positions the funds will direct a broker to sell stock that the funds do not own at the current price to a buyer in the future at the time that the short_sale is settled the funds must borrow stocks from the broker the broker then provides those stocks to the buyer at the agreed price creating an obligation by the funds toward the broker for the amount of securities loaned by the broker the funds' creating income or loss is based on the difference between the price at the time of the short_sale and the price at the time the sale is settled the broker often also charges a lending fee for this transaction as well in addition to the short position of the funds the funds will also use the cash proceeds from the short_sales to purchase long positions in other stocks furthermore the funds are required to hold cash in reserve to leverage other positions these cash reserves may be required_by_law or by the broker depending on the positions taken by the funds when a fund takes a long position in a security it will acquire actual ownership of the security and it will not borrow money from any other party to purchase long positions in securities when a fund takes a short position in a security it will do so by entering into a short_sale with respect to the security such short_sales will be effected by borrowing the securities from a broker or other third party and collateralizing a fund's obligation to return such securities by depositing cash and securities of equal value of the securities borrowed funds securities trades will be executed through an unrelated third party which will act as custodian of the securities the cash and securities used as collateral for such obligations will be assets owned by the fund and in no case will such cash or securities be borrowed from outside sources thus in no case in which a fund takes a short position will there be any net borrowing by the fund on its own behalf or on behalf of you the amount of the collateral deposited by a fund will equal at least percent of the amount of its obligations under existing short_sale contracts the value of any securities placed on deposit as well as the amount of the fund's obligations under its short_sale contracts will be redetermined on a daily basis and the fund will maintain sufficient reserves of cash or cash equivalents to meet requirements for any additional deposits which may be required under applicable margin regulations a fund's deposit of cash or securities will ensure the broker and the parties with whom the broker deals in connection with the short_sale transaction that the fund will be capable of performing its obligations under its short_sale contracts while cash or securities are on deposit with the broker the fund will be entitled to receive any earnings which accrue thereon similarly the fund will be required to deliver upon completion of a short_sale any earnings which accrue during the term of the contract rulings requested the borrowing of stocks by a fund in entering into short positions will not result in acquisition_indebtedness as defined in sec_514 so that none of the distributive_share of a fund's income or gain which is derived from the fund's trading activities to the extent attributable to the foregoing transactions will be treated as debt-financed_property as defined in sec_514 the purchase of long positions in stocks in accounts at one or more affiliates of a broker using in whole or in part cash proceeds from short_sales made through a fund's accounts at one or more affiliates of that same broker will not result in acquisition_indebtedness as defined in sec_514 so that none of the distributive_share of a fund's income or gain which is derived from the fund's trading activities to the extent attributable to the foregoing transactions will be treated as debt-financed_property as defined in sec_514 the use of long positions in stocks including some or all of those purchased with short_sale proceeds as collateral to secure the performance by a fund of its obligations to deliver stock to the broker to cover its open short positions will not result in acquisition_indebtedness as defined in sec_514 so that none of the distributive_share of a fund's income or gain which is derived from the fund's trading activities to the extent attributable to the foregoing transactions will be treated as debt-financed_property as defined in sec_514 law sec_512 provides that the term unrelated_business_taxable_income means the gross_income derived by an organization from an unrelated_trade_or_business as defined in sec_513 regularly carried on by it less the deductions allowed for expenses directly connected with the carrying on of such trade_or_business - - - - - - - ------------ sec_512 excludes all dividends interest payments_with_respect_to_securities_loans as defined in subsection a amounts received or accrued as consideration for entering into agreements to make loans and annuities and all deductions directly connected with such income from the computation of unrelated_business_income sec_512 provides that notwithstanding paragraph or in the case of debt-financed_property as defined in sec_514 there shall be included as an item_of_gross_income derived from an unrelated_trade_or_business the amount ascertained under sec_514 and there shall be allowed as a deduction the amount ascertained under sec_514 sec_512 excludes the gains or losses from the sale of property not held as inventory sec_512 provides that if a trade_or_business regularly carried on by a partnership of which an organization is a member is an unrelated_trade_or_business with respect to such organization such organization in computing its unrelated_business_taxable_income shall subject_to the exceptions additions and limitations contained in subsection b include its share whether or not distributed of the gross_income of the partnership from such unrelated_trade_or_business and its share of the partnership deductions directly connected with such gross_income sec_514 provides that a portion of the income produced from debt-financed_property shall be included in unrelated_business_income in relation to the proportion of the overall value of the property constituting acquisition_indebtedness sec_514 defines debt-financed_property as any property which is held to produce income and with respect to which there is an acquisition_indebtedness as defined in subsection c at any time during the taxable_year sec_514 defines acquisition_indebtedness as the unpaid amount of-- a the indebtedness incurred by the organization in acquiring or improving such property b the indebtedness incurred before the acquisition or improvement of such property if such indebtedness would not have been incurred but for such acquisition or improvement and c the indebtedness incurred after the acquisition or improvement of such property if such indebtedness would not have been incurred but for such acquisition or improvement and the incurrence of such indebtedness was reasonably foreseeable at the time of such acquisition or improvement sec_664 provides that a charitable_remainder_unitrust for any taxable_year is not subject_to any_tax imposed by this subtitle unless the trust for the year has ubti within the meaning of sec_512 sec_664 defines the term charitable_remainder_unitrust to include a trust-- a from which a fixed percentage which is not less than percent of the net fair_market_value of its assets valued annually is to be paid not less often than annually to one or more persons at least one of which is not an organization described in sec_170 c and in the case of individuals only to an individual who is living at the time of the creation of the trust for a term of years not in excess of years or for the life or lives of such individual or individuals b from which no amount other than the payments described in subparagraph a may be paid to or for_the_use_of any person other than an organization described in sec_170 and c following the termination of the payments described in subparagraph a the remainder_interest in the trust is to be transferred to or for_the_use_of an organization described in sec_170 c or is to be retained by the trust for such a use revrul_95_8 1995_4_irb_29 provides that income attributable to a short_sale can be income derived from debt-financed_property only if the short seller incurs acquisition_indebtedness within the meaning of sec_514 with respect to the property on which the short seller realizes that income in 308_us_488 the supreme court held that although a short_sale created an obligation it did not create indebtedness for purposes of the predecessor of sec_163 therefore neither the dollar_figure oox gain realized by on the short_sale attributable to the decline in value of a stock from dollar_figurex to dollar_figurex nor income derived from the proceeds of the short_sale such as the rebate fee earned by is income from debt-financed_property within the meaning of sec_514 analysis since you represent that you are a charitable_remainder_unitrust you are governed by sec_664 this section subjects you to taxation on income that qualifies as ubti as defined by sec_512 sec_512 provides that notwithstanding paragraphs b or of sec_512 in the case of debt-financed_property certain items gross_income and deductions shall be included in the computation of unrelated_business_taxable_income sec_514 defines debt-financed_property as any property which is held to produce income and with respect to which there is an acquisition_indebtedness at any time during the taxable_year or during the months preceding disposition in the case of property disposed of during the taxable_year sec_514 defines acquisition_indebtedness as the unpaid amount of the indebtedness incurred by the organization in acquiring the property and in certain cases indebtedness incurred before or after the acquisition in accordance with sec_512 a charitable_remainder_unitrust which is a partner in a partnership is required to count as ubti its share of the partnership's gross_income from unrelated_trade_or_business in making this calculation the modifications under sec_512 are applicable as well as the rules set forth in sec_514 pertaining to unrelated_debt-financed_income thus in this case your share of interest dividends or gains from the sale of property attributable to your participation as a partner in the funds would generally be excluded from the computation of unrelated_business_taxable_income unless such amounts are derived from debt financed property accordingly dividends on your stock holdings earned while the stock is pledged as collateral would be excluded from the computation of unrelated_business_taxable_income under sec_512 and income received by you from the sale_or_exchange of your securities would also be excluded from the computation of unrelated_business_taxable_income under sec_512 however the modifications contained in sec_512 are not available where such amounts are derived from debt-financed_property sec_512 in revrul_95_8 supra we ruled that a short_sale does not create an indebtedness for purposes of sec_514 because it constitutes the borrowing of property rather than money revrul_95_8 supra relies on 308_us_488 in which the supreme court held that a borrowing of property does not give rise to indebtedness the taxpayer borrowed stock and argued that payments made to the lender constituted interest the court held that although the taxpayer had an obligation to the lender such obligation was not an indebtedness because an indebtedness arises only with respect to the borrowing of money not the borrowing of property based on the information presented we believe that none of the obligations that will be incurred through the funds pursuant to the transactions described above will result in acquisition_indebtedness under sec_514 like the income received by the organization described in revrul_95_8 supra your income which is attributable to a sale of publicly traded stock through a broker will not be income derived from debt-financed_property under sec_514 since the borrowing of the securities used in the short_sale does not constitute acquisition_indebtedness see also deputy v du pont u s pincite since the income from the short_sale will not constitute debt-financed_property the long positions purchased using the cash proceeds from those sales will also not be considered debt-financed_property therefore given that no long position stocks cash reserves or short-sale stocks will be purchased using borrowed funds the income received by you from your participation in the funds will not constitute income from unrelated debt-financed_property under sec_514 rulings the borrowing of stocks by a fund in entering into short positions will not result in acquisition_indebtedness as defined in sec_5l4 c so that none of the distributive_share of a fund's income or gain which is derived from the fund's trading activities to the extent attributable to the foregoing transactions will be treated as debt-financed_property as defined in sec_514 the purchase of long positions in stocks in accounts at one or more affiliates of a broker using in whole or in part cash proceeds from short_sales made through a fund's accounts at one or more affiliates of that same broker will not result in acquisition_indebtedness as defined in sec_514 so that none of the distributive_share of a fund's income or gain which is derived from the fund's trading activities to the extent attributable to the foregoing transactions will be treated as debt-financed_property as defined in sec_514 the use of long positions in stocks including some or all of those purchased with short_sale proceeds as collateral to secure the performance by a fund of its obligations to deliver stock to the broker to cover its open short positions will not result in acquisition_indebtedness as defined in sec_514 so that none of the distributive_share of a fund's income or gain which is derived from the fund's trading activities to the extent attributable to the foregoing transactions will be treated as debt-financed_property as defined in sec_514 this ruling will be made available for public inspection under sec_611 after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice this ruling is directed only to the organization that requested it sec_6110 provides that it may not be used or cited by others as precedent this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described specifically this ruling does not reach any conclusion as to the qualifying_distribution status of your proposed transfer under sec_4942 because it could help resolve questions concerning your federal_income_tax status this ruling should be kept 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 in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative sincerely michael seto manager eo technical enclosure notice


internal_revenue_service number release date index number ------------------------ ---------------------------- ------------------------ in re ------------------ --------------------- ------------------- ---------- department of the treasury washington dc person to contact ---------------------- id no ------------- telephone number ----------------- refer reply to cc intl br1 - plr-170448-03 date date ---------- ty----------- ----------------- -------------------- ------------------------- a ------------------------------------------------------------------------------ date b country c date d dear ------------------ this is in response to a letter received date requesting a ruling that a’s surrender of her green card 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 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 lives a expatriated on date d on the date of a's expatriation her net_worth exceeded the applicable_amount set forth in sec_877 long-term_resident who ceases to be taxed as a lawful permanent resident individuals sec_877 generally provides that a citizen who loses u s citizenship or a u s a was born on date b in country c a is a citizen of country c where she now a former u s citizen whose net_worth or average tax_liability exceeds these under notice_98_34 1998_2_cb_29 modifying notice_97_19 1997_1_cb_394 a plr-170448-03 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 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 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 and resident fully subject_to tax in country c the country in which she was born 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 her principal purposes for expatriating the avoidance of u s taxes however because the information submitted does not clearly establish the existence or lack of a principal purpose to avoid taxes under subtitle a or b of the a is eligible to request a ruling pursuant to notice_98_34 because she is a citizen a submitted all of the information required to be submitted by notice_97_19 as except as expressly provided herein no opinion is expressed or implied plr-170448-03 code no opinion is expressed as to whether a's expatriation had for one of its principal purposes the avoidance of such taxes 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 her expatriation under sections of the code other than sec_877 sec_2107 and sec_2501 which a obtained the ruling whether or not a is otherwise required to file a return the code provides that it may not be used or cited as precedent will be sent to a in accordance with a power_of_attorney on file in this office a copy of this letter this ruling is directed only to the taxpayer requesting it sec_6110 of a copy of this letter must be attached to a's u s income_tax return for the year in sincerely ________________ s karen a rennie senior technical reviewer cc intl br1


internal_revenue_service department of the treasury washington dc index no number release date person to contact telephone number refer reply to cc dom p si -- plr-111457-99 date date legend taxpayer state state project general_partner limited_partner a b c d e f g h i k plr-111457-99 dear this letter responds to your authorized representative’s letter dated a on behalf of taxpayer requesting a ruling that the use of no more than i residential rental units as after-school care rooms as described in the below facts will qualify as a common area that is functionally related and subordinate to project within the meaning of sec_1_103-8 and sec_1_103-8 of the income_tax regulations the internal_revenue_service district_office that has examination jurisdiction over the taxpayer is the b district the relevant facts as represented in your submission are set forth below facts taxpayer a state limited_partnership was formed on c to develop own and manage project the general_partner of taxpayer is general_partner a state limited_partnership the limited_partner of taxpayer is limited_partner a state limited_partnership project which has been in operation since d is a qualified_low-income_housing_project as defined in sec_42 of the internal_revenue_code consisting of e residential units in f residential buildings taxpayer has elected to satisfy the minimum set-aside requirement for project as described in sec_42 and g of the residential units in project are set_aside for low-income tenants whose income is at or below of the median income for the area as adjusted for family size project includes a high proportion of single working parent and dual working parent households which results in a relatively high number of unsupervised school- aged children based on taxpayer's experience this can result in higher rates of property damage and criminal activity in project than if there was a lower proportion of such households in order to reduce this result taxpayer has chosen to provide after- school child care the program for the school-aged residents of project the provision of after-school care through the program is a valuable social service that benefits a large segment of project residents who have school-aged children in addition to providing supervision of school-aged residents the program provides recreational and educational activities computer training and socialization opportunities additionally the program directly benefits other residents and taxpayer by providing a safer more peaceful and better-maintained property taxpayer believes that the program has contributed positively to the achievement of safe and secure housing for all project residents the program is currently housed in a community building and provides after- school care for approximately h children on a daily basis the program is available only to residents of project at no charge due to higher than anticipated demand for the program from residents the program has become larger than was originally anticipated and the community building in which the program is housed is no longer plr-111457-99 adequate to accommodate the number of children who participate additionally the operation of the program in the community building is interfering with other uses of that building which include project’s leasing activities resident social functions first aid training drug awareness education anti-crime programs credit counseling programs health education and crises intervention services rather than reduce the availability of the program to the detriment of residents and project as a whole taxpayer proposes to convert no more than i residential rental units into after-school care rooms for the exclusive use of the program taxpayer anticipates that the conversion of i residential rental units for use by the program will enable approximately k additional school-aged residents to participate in the program the size of the residential units to be converted will not exceed the size necessary to provide on-site after-school child care services to residents based upon the historical and anticipated demand for the program the converted after-school care rooms will be used exclusively by project residents and persons providing services to them no other aspects of the program will change ruling requested taxpayer requests that the service rule that the use of no more than i residential rental units as after-school care rooms as described in the facts will qualify as a common area which is functionally related and subordinate to project withing the meaning of sec_1_103-8 and sec_1_103-8 law and analysis sec_42 provides a tax_credit for investment in low-income_housing buildings placed_in_service after date for any taxable_year in a ten-year credit_period the amount of credit is equal to the applicable_percentage of the qualified_basis of each qualified_low-income_building sec_42 defines the qualified_basis of any qualified low-income_housing building for any taxable_year as an amount equal to the applicable_fraction determined as of the close of the taxable_year of the eligible_basis of the building determined under sec_42 under sec_42 the applicable_fraction means the smaller of the unit_fraction or the floor_space_fraction sec_42 provides that the eligible_basis of a new_building is its adjusted_basis as of the close of the first taxable_year of the credit_period sec_42 provides that except as provided in sec_42 the adjusted_basis of any building is determined without regard to the adjusted_basis of any property that is not residential_rental_property under sec_42 the adjusted_basis of any building is determined by taking into account the adjusted_basis of property of a character subject_to the allowance for depreciation used in common areas or provided as comparable amenities to all residential rental units in the building plr-111457-99 the legislative_history of sec_42 states that residential_rental_property for purposes of the low-income_housing_credit has the same meaning as residential_rental_property within the meaning of sec_103 thus residential_rental_property includes residential rental units facilities for use by the tenants and other facilities reasonably required by the project further the legislative_history states that the allocable cost of tenant facilities such as swimming pools other recreational facilities and parking areas may be included in eligible_basis provided there is no separate fee for_the_use_of these facilities and they are made available on a comparable basis to all tenants in the project h_r conf_rep 99th cong 2d sess ii-89-90 vol c b sec_1_103-8 provides that an exempt facility includes land building or other_property functionally related and subordinate to the facility property is not functionally related and subordinate to a facility if it is not of a character and size commensurate with the character and size of the facility sec_1_103-8 provides that under sec_1_103-8 facilities that are functionally related and subordinate to residential rental projects include facilities for use by the tenants for example swimming pools other recreational facilities parking areas and other facilities that are reasonably required for the project such as heating and cooling equipment trash disposal equipment or units for resident managers or maintenance personnel taxpayer represents that the residential units to be converted to house the program will be of a character and size commensurate with the character and size of project based upon the historical demand for the program by project residents and its anticipated use by project residents taxpayer also represents that the resident population of project includes households who require some form of child care after school and during breaks from school taxpayer further represents that the room s that will be utilized for the program will be for the exclusive use of project residents and service providers and residents will not be charged for enrollment in or use of the program accordingly based solely on the representations and relevant law as set forth above we conclude that the use of no more than i residential rental units as after- school care rooms as described in the facts will qualify as common area which is functionally related and subordinate to project withing the meaning of sec_1_103-8 and sec_1_103-8 no opinion is expressed or implied regarding the application of any other provisions of the code or regulations specifically we express no opinion on whether the project qualifies for the low-income_housing tax_credit under sec_42 nor the effect that the conversion of up to i residential rental units to a common area will have on the applicable_fraction and qualified_basis of the building s in which the converted units are located plr-111457-99 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours harold e burghart harold e burghart assistant to the branch chief branch office of assistant chief_counsel passthroughs and special industries enclosure copy


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 ita b07 plr-151436-09 date date re request for private_letter_ruling regarding sec_1245 re request for private_letter_ruling regarding sec_1245 taxpayer state date date date date date date company a company b company c company d shareholder appraiser year year year a b c d e f g h ----------------------------------------------------------------- ------------- -------------------------- --------------------- ------------------- --------------------- --------------------- -------------- ----------------------------------------------------------------- ------------------------- -------------------------------- ----------------- --------------------- ----------------- ------------------ ------- ------- ------- ---- ----- ---- ---- -- ---- ---- ----------- plr-151436-09 j dollar_figurek ------------- ------------- dear -------------- this letter is in response to your letter dated date and subsequent correspondence submitted on behalf of taxpayer requesting a letter_ruling on whether any gain upon the sale of certain self-created customer based intangibles will be subject_to recapture under sec_1245 of the internal_revenue_code as a result of amortization deductions claimed for certain acquired customer based intangibles taxpayer represents that the facts are as follows facts taxpayer a holding_company operates ------------------------------------------------------ --------------------------------------------------------------------------------------------businesses in the united_states offering services to -------------------------------------------customers taxpayer offers ----------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------services taxpayer was organized in state during year and completed an initial_public_offering of its class a common_stock in date taxpayer’s principal assets as of date consist of a a percent controlling common equity_interest and a b percent voting interest in company a taxpayer's only business is to act as the sole manager and control the affairs of company a and company a's subsidiaries shareholder is taxpayer's controlling shareholder shareholder also owns the remaining c percent of company a through company b shareholder’s wholly-owned s_corporation as well as a note convertible into company a's membership units through affiliated entities company a owns a d percent partnership_interest in company c shareholder owns the remaining e percent partnership_interest in company c through company b company c owns interests in various subsidiaries company a also owns a f percent partnership_interest in company d and company a's subsidiaries own the remaining g percent partnership_interest in company d company a company a's subsidiaries company c company c's subsidiaries and company d each own the customer based intangibles that are the subject of this letter_ruling ------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- plr-151436-09 ----------------------------------------------------- --------------------------------------------- taxpayer will acquire shareholder's e percent partnership_interest in company c that is owned through company b ------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------- taxpayer's customer relationships in year through year taxpayer acquired approximately h customers through a series of ------------ acquisitions hereinafter these customers are referred to as acquired customer relationships the acquired customer relationships represent mostly written terminable-at-will contracts between taxpayer and its then existing customers these relationships provided taxpayer with the right to service the existing customers --------------------- ------- -------------- with the services offered by taxpayer at the time of its last significant ------- ------------ acquisition in date taxpayer primarily offered --------------------------------------- services the acquired customer relationships gave taxpayer the right to service those customers -------------------------------------------------- at the time of each respective asset acquisition taxpayer took a cost_basis in the acquired customer relationships and began amortizing this tax basis together with other amortizable sec_197 intangibles over the 15-year period prescribed under sec_197 since its last significant ------------ acquisition in date taxpayer expanded its service offerings from primarily ----------------------------------services to also include ------- - ----------------------------------------services further taxpayer grew its ---------------------------- -----------------------------------------------------------------------------------------------------------------to be able to provide services to customers it had previously been unable to -------- taxpayer expended significant amounts of capital to solicit and service new customers hereinafter these new customers are referred to as self-created customer relationships ------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------- ------------- -------------- currently taxpayer offers its services to customers under two types of contracts -------------------------------------------------------------- the majority of taxpayer’s contracts are terminable-at-will ---------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- plr-151436-09 --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------- because the -------------- industry is highly competitive taxpayer's continual capital investments are necessary to maintain an edge in the market taxpayer spent approximately dollar_figurek on capital expenditures from year to year in order to maintain and attract customers taxpayer claims that absent efforts made by taxpayer -- --------------- -------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------- it is reasonable to conclude that potential customers would have enlisted the services of competitors -------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------- due to the significant affirmative efforts that taxpayer made to ---------------- ------- -----------------------and create new customer relationships taxpayer’s current customer relationships consist of acquired customer relationships and self-created customer relationships as of date taxpayer has approximately j customers which are not identical to the h acquired customer relationships taxpayer makes the following specific representations taxpayer has sufficient records and information to identify which of its current customers represent components of either self-created customer relationships or acquired customer relationships further taxpayer represents it can individually identify each customer determine when they became a customer and ------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------- taxpayer maintains a customer data base which provides various information regarding its customers for purposes of providing services and billing for those services included in this information are --------------------------------------------------------------------------------------- ------------------------------------------------------------------------ taxpayer ----------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------- identify each customer as either an acquired customer relationship or a self-created customer relationship each of the identified types of customer relationships that are acquired customer relationships and that are self-created customer relationships has a reasonably ascertainable value plr-151436-09 each of the identified types of customer relationships that are acquired customer relationships and that are self-created customer relationships has a reasonably determinable life with respect to the last two representations taxpayer represents that as part of its annual financial reporting process ------------------------------------------------------------------- ------------------------------------------------------------------------ taxpayer engaged appraiser to value its identifiable intangible assets appraiser identified several categories of intangible assets that are apart from goodwill including customer relationships and ------ ---------------------------------- the rights to future economic benefits of these two assets are associated with the ------------------------------and were segregated into two categories the portion of these rights with a limited useful_life or customer relationships and the portion of these rights with an indefinite useful_life or ---------------------------------- appraiser identified three types of customer relationships -------------------------------------- ---------------------------------------------------------------------------------- based upon --------------- --------------------------------------------------------------------------------------------------------------------- ---------------------- appraiser was able to assign a value to each type of customer relationship appraiser is then able to allocate the value of each type of customer relationship to taxpayer's business units ----------------------------- taxpayer's taxable_exchange ---------------------------------------------------------------------------pursuant to an exchange_agreement entered into by taxpayer company b and shareholder company b has the right and option to exchange all or any portion of its partnership_interest in company a with taxpayer for taxpayer's stock in a taxable_exchange this transaction will result in the application of sec_1245 because company a holds intangible assets that consist primarily of customer relationships ie the acquired customer relationships and the self-created customer relationships -------------------- and trademarks and all of company a’s acquired intangible assets including the acquired customer relationships have been subject_to amortization under sec_197 shareholder and company b also have the right under certain circumstances to enter into a subsequent tax-free or taxable_exchange for any remaining company a interests held after the initial exchange ruling requested taxpayer requests that the service issue the following ruling the self-created customer relationships are a severable and distinct asset from the acquired customer relationships such that any gain with respect to a sale of the self-created customer relationships will not be subject_to sec_1245 recapture as a result of amortization deductions claimed with respect to the acquired customer relationships plr-151436-09 law and analysis sec_167 provides that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion wear_and_tear and obsolescence of property used in the taxpayer's trade_or_business sec_1_167_a_-3 of the income_tax regulations provides in pertinent part that if an intangible is known from experience or other factors to be of use in the business or in the production_of_income for only a limited period the length of which can be estimated with reasonable accuracy such an intangible asset may be the subject of a depreciation allowance sec_1_167_a_-3 further provides that no allowance will be permitted merely because in the unsupported opinion of the taxpayer the intangible asset has a limited useful_life sec_197 provides that a taxpayer shall be entitled to an amortization deduction with respect to any amortizable sec_197 intangible the amount of the deduction is determined by amortizing the adjusted_basis of such intangible ratably over the 15-year period beginning with the month in which the intangible was acquired sec_197 provides that except as provided in sec_197 no depreciation or amortization deduction shall be allowable with respect to any amortizable sec_197 intangible sec_197 provides that in general the term amortizable sec_197 intangible means any sec_197 intangible that is acquired after date and that is held in connection with the conduct_of_a_trade_or_business or an activity described in sec_212 sec_197 provides that the term amortizable sec_197 intangible does not include any sec_197 intangible that is not described in sec_197 e or f and that is created by the taxpayer the term sec_197 intangible is defined in sec_197 and the regulations thereunder sec_197 provides that a sec_197 intangible includes any customer-based_intangible sec_197 defines the term customer-based_intangible as meaning in general composition of market market share and any other value resulting from the future provision of goods or services pursuant to relationships contractual or otherwise in the ordinary course of business with customers see also sec_1_197-2 thus the term amortizable sec_197 intangible includes customer-based intangibles generally amortization under sec_197 is not allowed for self-created intangibles unless certain exceptions apply in this case we find the acquired customer-based intangibles at issue are an amortizable sec_197 intangible and the self- created customer-based intangibles at issue are not an amortizable sec_197 intangible plr-151436-09 sec_197 provides that for purposes of sec_197 any amortizable sec_197 intangible shall be treated as property which is of a character subject_to the allowance for depreciation provided in sec_167 see also sec_1_197-2 in general sec_1245 provides that if sec_1245 property is disposed of the amount by which the lower_of i the recomputed_basis of the property or ii the amount_realized on a sale exchange or involuntary_conversion or the fair_market_value of the property on any other_disposition exceeds the adjusted_basis of such property shall be treated as ordinary_income such gain shall be recognized notwithstanding any other provision of the code sec_1245 defines the term sec_1245 property as meaning any property that is or has been property of a character subject_to the allowance for depreciation provided in sec_167 and is among other things personal_property pursuant to sec_1_1245-3 and b the term personal_property includes intangible personal_property prior to the enactment of sec_197 numerous court cases discuss the test a taxpayer must meet to prove a particular intangible asset is separate and distinct from goodwill the u s supreme court in 507_us_546 held that an intangible asset that would otherwise fall within the concept of goodwill is depreciable provided a taxpayer is able to prove the intangible asset has an ascertainable value and a limited useful_life that can be determined with reasonable accuracy the court further stated that the taxpayer’s burden_of_proof often will prove too great to bear id moreover the mass-asset rule does not prevent taking an amortization deduction if the taxpayer properly carries the taxpayer’s dual burden of proving that the intangible asset involved has an ascertainable value separate and distinct from goodwill and has a limited useful_life the duration of which can be ascertained with reasonable accuracy id pincite citing to 481_f2d_1240 5th cir cert_denied u s see also 91_tc_463 aff'd 919_f2d_1492 11th cir when a taxpayer has been able to satisfy this perhaps extremely difficult burden depreciation expense deductions have been allowed citizens and southern corporation pincite in this case taxpayer represents that it has sufficient records and information to identify which of its current customers represent the acquired customer relationships and which represent the self-created customer relationships taxpayer also represents that each of the identified types of customer relationships ------------------------ --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- that are plr-151436-09 acquired customer relationships and that are self-created customer relationships has a reasonably ascertainable value and a reasonably determinable life further taxpayer represents that it has expended significant amounts of capital to solicit and service new customers ------------------------------------------------------------------------------------- ------------------------- thus by analogy these representations that taxpayer can separately identify value and life the acquired customer relationships and the self- created customer relationships support treating the self-created customer relationships as being a separate and distinct asset from the acquired customer relationships see newark morning ledger and citizens and southern corporation conclusion based solely on the facts and representations submitted and the relevant law and analysis as set forth above we conclude that the self-created customer relationships are a severable and distinct asset from the acquired customer relationships such that any gain with respect to a sale of the self-created customer relationships will not be subject_to sec_1245 recapture as a result of amortization deductions claimed with respect to the acquired customer relationships we note that amortization deductions claimed for the acquired customer relationships are subject_to sec_1245 upon disposition of such intangibles similarly depreciation or amortization deductions claimed if any for the self-created customer relationships are subject_to sec_1245 upon disposition of such intangibles except as set forth above we express no opinion concerning the federal_income_tax consequences of the facts described above under any other provisions of the code specifically no opinion is expressed or implied on i the application of sec_1245 ii whether the acquired customer relationships and the self-created customer relationships can be separately identified or ii whether each of the identified types of customer relationships ------------------------------------------------------------------------------------- -------------------------------------- that are acquired customer relationships and that are self-created customer relationships has a reasonably ascertainable value and a limited useful_life in accordance with the power_of_attorney we are sending copies of this letter to taxpayer’s authorized representative we are also sending a copy of this letter to the appropriate operating division director plr-151436-09 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent enclosures copy of this letter copy for sec_6110 purposes sincerely kathleen reed kathleen reed chief branch office of associate chief_counsel income_tax and accounting