tax exempt and govern ment entities division date feb uil department of the treasury internal_revenue_service washington d c contact person identification_number telephone number t- 0b employer_identification_number m o g i g i e i k f i n i l w k i i i l w dear sir or madam dear sir or madam this is in response to a ruling_request dated date submitted on your behalf by your authorized representatives you are seeking rulings on whether the excise_tax provisions of chapter of the internal_revenue_code are violated by a proposed investment as more fully set forth below facts x is a_trust created and funded by a who currently serves as the sole trustee a funded x on the date of its creation with a and since its creation x has not received any other contributions to date x's funds have been invested solely in money market accounts x has been recognized as exempt from federal_income_tax under sec_501 of the code and as a private_foundation under sec_509 y is a limited_partnership that acts as the general_partner of and an investor in z an investment_partnership whose limited partners are unrelated to x the management control and operation of y is vested exclusively in its general_partner w the current limited partners of y are a u a corporation wholly owned by a his wife and children b c d and relatives of and private_foundations created by each of b c and d w the general_partner of y is a wholly-owned subsidiary of v a business_trust that has elected to be treated as an association_taxable_as_a_corporation for federal_income_tax purposes v has also made elections under sec_1362 and sec_1362 of the code to be an s_corporation and to treat w as a qualified_subchapter_s_subsidiary the beneficial interests in v and thus indirectly in w are owned b by a c by d d by b and e by c these individuals hereinafter the investment advisors are sophisticated fund managers who provide services only on behalf of z each of the four manages a portion of z's assets for the most part independently of the others z is a limited_partnership organized to act as an investment_partnership the management control and operation of z is vested exclusively in y its sole general_partner as of date y holds g of the capital interest in z the remaining capital interests in z are held in various percentages by h all of whom are limited partners who are not related to x y or any other partner of y z has over in assets under management invests solely in publicly-traded securities including publicly-traded derivatives and does not acquire more than j of the securities issued by any one issuer at any given time z's investment portfolio may consist of portions of to different companies representing four to six different sectors of the market z's investing strategy makes use of a variety of sophisticated investment techniques including puts calls straddles margin purchases and short as well as long positions from its inception z has had an annualized return of k as a result of its risk hedging practices z has at the same time been able to achieve those returns while performing with less volatility that the s p y receives two forms of compensation from z a quarterly management fee the management fee and a special_allocation of profits the special_allocation the quarterly management fee paid_by z to y is equal to of the value of the assets under management on behalf of the limited partners as of the beginning of each calendar_quarter the entire amount of the management fee is remitted by y to its own general_partner w in turn w the wholly owned subsidiary of v is responsible for all net costs and expenses of y attributable to y's activities as general_partner of z any net profits or losses from the provision of services to z for which the management fee is intended compensation thus -accrues solely to the owners of w the investment advisors by virtue of their ownership of v the special_allocation is part of the overall allocation provisions in z's partnership_agreement under those provisions z's partners general as well as limited first receive an allocation of gain whether realized or unrealized until the total gain allocation to them represents a cumulative m return on their investment in z for each semi-annual period beginning on january or july of each year the gains allocated to y are in turn allocated by y to the partnership interests of the investment advisors who together decide how such gains should be allocated among themselves the remaining income of y represents the gains whether realized or unrealized allocated to y by z in proportion to y’s ownership_interest in z those gains are in turn allocated among partners of y in proportion to their respective ownership interests neither the z partnership_agreement nor the y partnership_agreement requires y to invest in z nevertheless in fact y invests all of its assets with z and plans to do so for the foreseeable future for the limited_partner the economic_effect of investing funds in y therefore is the same as direct investment in z except that investments in z made through y do not bear the burden of the management fee or the special_allocation the limited partners of y in effect receive the benefit of the investment advisors' expertise free of charge on the other hand except for the investment advisors the limited partners of y do not share in either the management fee or the special_allocation that y receives from z for the investment and management services that the investment advisors provide through w all expenses and liabilities of y related to the management of z are the responsibility of w the net effect is that the limited partners of y other than the investment advisors have an investment in z but they have no interest in the investment advisory and management business that the investment advisors operate through y and w x wishes to avail itself of the services of the investment advisors because the investment advisors provide services only to z x can only obtain these services through an investment in z however z will not permit a direct investment by x because of security law concerns a direct investment in z would also cause x to incur the burden of the management fee and the special_allocation for those reasons x proposes to invest most if not all of its current_assets in z by acquiring a limited_partnership_interest in y which will in turn invest the funds received from x in z by investing in z through y x will obtain the benefit of the services of the investment advisors without incurring the burden of the management fee or the special_allocation x's proposed investment in z will not create any economies of scale or any other benefit for y z or any other investor in either y or z in particular x's proposed investment will not benefit the investment advisors personally in any way section 1-il of the fourth_amendment to y's partnership_agreement states notwithstanding any other provision of the partnership_agreement the partners agree that the partnership shall refrain from the following actions and that any such action purported to be taken on behalf of the partnership shall be void and of no effect i any transaction involving a limited_partner that is a private_foundation under sec_509 of the code that would constitute a direct or indirect act of self- dealing under sec_4941 by such private_foundation and ii any other action with respect to partnership assets attributable to the capital contributions of a limited_partner that is such a private_foundation that would constitute a direct or indirect act of self-dealing under sec_4941 of the code by such private_foundation you represent that the following types of transactions will not occur with respect to x's proposed investment in y once the investment has been made by way of example and not limitation no portion of x's proposed investment will be sold exchanged or leased to y or a disqualified_person who is a partner in y no portion of x's proposed investment will be loaned to or extended as credit to y or to a disqualified_person who is a partner in y no portion of x's proposed investment will be used to furnish goods services or facilities to y or a disqualified_person who is a partner in y no portion of x's proposed investment will be used to pay compensation to or reimburse the expenses of y or a disqualified_person who is a partner in y and no portion of x's proposed investment will be transferred to or used by or for the benefit of y or a disqualified pérson who is a partner in y the subsequent operation of y pursuant to the above representations with respect to x's proposed investment in y once made will therefore not constitute either a direct or indirect act of self-dealing under y's partnership_agreement x will be entitled to receive and withdraw the profits earned on its investment at least annually in addition x will have the opportunity twice a year to withdraw its investment these rights are identical to those granted to limited partners in z so that x will have the same rights in that respect that it would have if it invested directly in z law sec_4941 of the code imposes an excise_tax on acts of self-dealing between a disqualified_person and a private_foundation sec_4947 defines self-dealing to include any direct or indirect a sale_or_exchange or leasing of property between a private_foundation and a disqualified_person b lending of money or other extending of credit between a private_foundation and a disqualified_person c furnishing of goods services or facilities between a private_foundation and a disqualified_person d payment of compensation or payment or reimbursement of expenses by a private_foundation to a disqualified_person e transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation sec_4941 of the code provides generally that the payment of compensation and the payment or reimbursement of expenses by a private_foundation to a disqualified_person for personal services which are reasonable and necessary to carrying out the exempt_purpose of the private_foundation shall not be an act of self-dealing if the compensation or payment or reimbursement is not excessive sec_53 d -1 a of the foundation and similar excise_taxes regulations provides that it is immaterial whether a self-dealing transaction results in a benefit or detriment to the private_foundation self-dealing does not however include a transaction between a private_foundation and a disqualified_person where the disqualified_person status arises only as a result of such transaction sec_53 d -2 f of the regulations provides that the fact that a disqualified_person receives an incidental or tenuous benefit from the use by a foundation of its income or assets will not by itseif make such use an act of self-dealing sec_53_4941_d_-3 of the regulations provides that ‘personal services’ include the services of a broker serving as agent for the private_foundation but not the services of a dealer who buys from the private_foundation as principal and resells to third parties this paragraph n n applies without regard to whether the person who receives the compensation or payment or reimbursement is an individual the portion of any payment which represents payment for property shall not be treated as payment of compensation or payment or reimbursement of expenses for the performance of personal services for purposes of this paragraph in sec_53 d -3 c example of the regulations c a manager of private_foundation x owns an investment counseling business acting in his capacity as an investment counselor c manages x's investment portfolio for which he receives an amount which is determined to be not excessive the payment of such compensation to c shall not constitute an act of self-dealing sec_4943 of the code imposes an excise_tax on any excess_business_holdings of a private_foundation sec_4943 of the code defines an excess business holding as any interest in a business_enterprise held in excess of of the business's voting_stock or profits interest reduced by any such stock or interest held by disqualified persons sec_4943 of the code provides that the term business_enterprise does not include a trade_or_business at least of the gross_income of which is derived from passive sources in s rep no 91st cong 1st sess the senate_finance_committee stated the following regarding the meaning of business holding under sec_4943 of the code s tock in a passive holding_company is not to be considered a business holding even if the holding_company is controlled by the foundation instead the foundation is to be treated as owning its proportionate share of the underlying assets of the holding_company the committee also made it clear that passive investments generally are not to be considered business holdings for example the holding of a bond issue is not a business holding nor is the holding of stock of a company which itself derives income in the nature of a royalty to be treated as a business holding sec_4944 of the code imposes an excise_tax on the investment of any amount by a private_foundation in such a manner as to jeopardize the carrying out of any of its exempt purposes sec_53_4944-1 of the regulations provides that an investment shall be considered to jeopardize the carrying out of the exempt purposes of a private_foundation if it is determined that the foundation managers in making such investment have failed to exercise ordinary business care and prudence under the facts and circumstances prevailing at the time of making the investment in providing for the long- and short-term financial needs of the foundation to carry out its exempt purposes sec_4946 of the code provides that a disqualified_person with respect to a private_foundation includes a a substantial_contributor including a creator of a_trust b a foundation_manager c an owner of more than of a corporate partnership or trust substantial_contributor d a family_member including a child or grandchild of an individual described above e a corporation of which persons described above own more than of the total combined voting power f a partnership in which persons described in a - d own more than of the profits interest g a_trust or estate in which persons described in a - d hold more than of the beneficial_interest sec_4946 of the code requires that for purposes of determining the ownership of a corporation there shall be taken into account indirect stockholdings which would be taken into account under sec_267 of the code as modified by the definition of members_of_family under sec_4946 sec_4946 of the code requires that for purposes of determining the profits or beneficial interests in a partnership or trust the rules of constructive_ownership under sec_267 of the code as modified by the definition of members_of_family under sec_4946 be taken into account sec_4946 of the code defines the term foundation manager’ as an officer director or trustee of a foundation or an individual having powers or responsibilities similar to those of officers directors or trustees of the foundation and any employee of the foundation having the authority or responsibility to act on behalf of the foundation sec_4946 of the code provides that for purposes of sec_4946 the family of an individual shall include only his spouse ancestors children grandchildren great- grandchildren and the spouses of children grandchildren and great-grandchildren analysis you have represented that b c and d have not made any financial contribution to x and that none of them serves as a trustee of x they do not own more than twenty percent of the stock profit interests or beneficial_interest of any substantial_contributor to x finally they are not a family_member of a substantial_contributor a trustee or owner of more than twenty percent of a substantial_contributor b c and d are shareholders in y but none own more than a sixteen percent interest as investment advisors b c and d each make investment decisions with respect to a portion of z's investment portfolio and as such they would control some portion of x's investments so long as x retained any investment in z through y they would not however have any control_over x's decision to withdraw from or continue to invest with y x's relationship with b c and d is that of an investor with an investment_advisor conversely b c and d do not exercise any contro or authority over x other than that of an investment_advisor accordingly b c and d are not disqualified persons with respect to x within the meaning of sec_4946 of the code since y is a disqualified_person with respect to x because a and his family together will own directly or indirectly more that of the profits interests in y prior to x's proposed investment with y a sale_or_exchange between x and y wouid constitute an act of self-dealing under sec_4941 a of the code however x's proposed acquisition of a limited_partnership_interest in y is in substance a co-investment arrangement by x in y along with other partners of y not a sale_or_exchange between x and y or between x and the other partners of y this arrangement is more properly characterized as involving services in the nature of brokerage and portfolio services performed for x by y the purpose of x's acquisition of a partnership_interest in y is to permit x to make an investment in z that it could not otherwise make and to allow it to make such an investment on a more favorable basis than it could if it could invest in z directly this arrangement will also give x essentially the same rights as a direct investment in z no disqualified_person will benefit from x's investment by reducing their administrative expenses or in any other way accordingly neither the initial acquisition of a limited_partnership_interest in y by x nor any subsequent additional investments in z or withdrawals from z made by x through y will constitute acts of self-dealing under sec_4941 of the code you have represented that z is not a business_enterprise because all of its income is passive_income therefore x's proposed investment in y is viewed as an investment in z for purposes of sec_4943 of the code and that investment will not be characterized as a holding in a business_enterprise the investment by x of substantially_all of its assets in one company might ordinarily be viewed as a jeopardizing investment due to a lack of diversification however under the facts and circumstances presented x's proposed investment in y may be viewed as an investment in z and through z in the underlying securities held by z the securities held by z are sufficiently diversified so that the indirect investment by x would meet the requisite standard of care and prudence which would not jeopardize the carrying out of x's exempt purposes based on the information submitted and the representations made therein we rule as rulings follows b c and d are not disqualified persons with respect to x a x's acquisition of a limited_partnership_interest in y thereby effecting an indirect interest in z will not be an act of self-dealing within the meaning of sec_4941 of the code b additional investments by x in y to permit additional indirect investments in z or withdrawals from y to enable withdrawals from z will not be acts of self- dealing within the meaning of sec_4941 of the code the subsequent operation of y as set forth in this request will not give rise to any act of self-dealing within the meaning of sec_4941 of the code on the part of x x's limited_partnership_interest in y will not be an interest in a business_enterprise within the meaning of sec_4943 of the code x's acquisition of a limited_partnership_interest in y will not constitute a jeopardizing investment under sec_4944 of the code solely because such limited_partnership_interest may constitute a significant portion of x's assets these rulings are directed only to the organization that requested them sec_6110 of the code provides that they may not be used or cited as precedent if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely signed robert c harper iy’ wo robert c harper jr manager exempt_organizations technical group


internal_revenue_service number info release date index number dear this letter responds to your inquiry dated date to the commissioner of internal revenue which forwards correspondence from your constituent is concerned with a notification he received from his telephone service provider informing him that he would be subject_to federal excise_tax on frequent flyer mileage he earned as a result of his usage of the provider’s long distance services the congress passed a law concerning this tax in but its effects are somewhat different from that described by the service provider as part of the taxpayer_relief_act_of_1997 sec_4261 was added to the internal_revenue_code under that section any amount_paid for the right to award frequent flyer miles is subject_to an excise_tax thus when a telephone service provider purchases the right to award frequent flyer miles to a customer it pays the tax to the air carrier selling the miles the air carrier then pays the tax over to the united_states because the customer is not paying any amount for the right to award frequent flyer miles this tax does not apply to the transaction between the customer and its telephone service provider the telephone company may be showing on its invoice to the customer an amount representing the tax that was paid on its purchase of the frequent flyer miles from the air carrier but the tax as enacted by the congress does not apply to the customer’s receipt of the miles as a consequence of its purchase of telephone services this tax as well as several other federal excise_taxes relating to air transportation is paid into the airport_and_airway_trust_fund the trust fund amounts in the trust fund are used to plan construct develop operate and maintain air traffic control air navigation and communications for the airway system in addition certain portions of the budget of the department of transportation concerned with air transportation and air safety including over half of the expenditures of the federal aviation administration come from the trust fund i hope this information is helpful to you in responding to your constituent if you have any questions please contact sincerely assistant chief_counsel passthroughs and special industries by richard a kocak chief branch


department of the treasury internal_revenue_service washington d c date number release date uilc cc it a internal_revenue_service national_office field_service_advice memorandum for from associate chief_counsel income_tax accounting cc it a subject sec_263 - takeover defense expenses this field_service_advice responds to your request dated date it is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent disclosure statement field_service_advice is chief_counsel_advice and is open to public inspection pursuant to the provisions of sec_6110 the provisions of sec_6110 require the service to remove taxpayer identifying information and provide the taxpayer with notice of intention to disclose before it is made available for public inspection sec_6110 and i sec_6110 also authorizes the service to delete information from field_service_advice that is protected from disclosure under u s c sec_552 b and c before the document is provided to the taxpayer with notice of intention to disclose only the national_office function issuing the field_service_advice is authorized to make such deletions and to make the redacted document available for public inspection accordingly the examination appeals or counsel recipient of this document may not provide a copy of this unredacted document to the taxpayer or their representative the recipient of this document may share this unredacted document only with those persons whose official tax_administration duties with respect to the case and the issues discussed in the document require inspection or disclosure of the field_service_advice legend taxpayer corporation a partnership b year year year year year dollar_figureamount dollar_figuredollar_figureamount issue whether taxpayer must capitalize under sec_263 certain legal and investment banking fees it incurred as the target during a corporate takeover conclusion taxpayer must capitalize the fees it incurred during the takeover campaign facts prior to year taxpayer formerly named corporation a was a publicly traded company engaged in the food-service business its business primarily involved the development and operation of operations under various trade names taxpayer became the target of a takeover attempt in year when partnership b began purchasing a significant number of taxpayer shares of common_stock on the open market and approached taxpayer’s management to attempt to achieve their cooperation in a takeover taxpayer rejected partnership b’s acquisition proposal partnership b then commenced an unsolicited tender offer for taxpayer’s common_stock taxpayer took a number of steps attempting to thwart the takeover including the issuance of preferred_stock purchase rights to its common_stock holders the filing of a lawsuit against partnership b the vigorous defense of several lawsuits filed against it by partnership b the postponement of the year annual meeting of stockholders during a proxy fight instigated by partnership b and the active evaluation of potential financial alternatives to the partnership b tender offer in fighting the takeover taxpayer paid fees of dollar_figureamount to certain investment advisors banks and lawyers moreover there is evidence that the bulk of the fees paid were to evaluate the fairness of offers received or to be received-regardless of whether these offers were solicited unwelcome or otherwise the attempts to thwart taxpayer’s acquisition proved futile and in early year its board_of directors announced that the company was for sale to the highest bidder on the advice of their investment advisors taxpayer’s board recommended that the shareholders accept an increased offer from a corporation owned by partnership b over the following several months partnership b’s acquiring_corporation lined up the permanent financing necessary to complete the transaction in late year the acquisition was approved by the shareholders a subsidiary of a corporation owned by partnership b was the acquisition vehicle it acquired of taxpayer stock and then merged into taxpayer on its federal corporate_income_tax returns for year sec_1 and taxpayer deducted as ordinary and necessary business_expenses the various amounts paid to investment bankers and law firms with regard to the above transactions law and analysis as related above taxpayer engaged others to render certain legal financial and investment advice concerning the proposed acquisition of its stock as such the facts of this case are similar to the situation in 503_us_79 with the purported distinction that the acquisition in the latter was a friendly one from the beginning both targets hired investment banking firms to determine if the buyout price being offered was a fair price as well as to advise how to proceed strategically both companies incurred significant expense in that process both companies were ultimately acquired the court upheld our position in indopco that all the expenses involved must be capitalized while noting that long-term benefits were also inherent in the corporate restructuring as a consequence of the buyout taxpayer was ostensibly saddled with dollar_figuredollar_figureamount in both public and private debt transferred to it by the acquiring_corporation subsequently as a result of the cost of servicing the debt assumed by taxpayer and the limitations on its resources for funding its business needs taxpayer ultimately found that it could not survive under its resulting debt structure in year it tried a recapitalization in year taxpayer was forced to file for bankruptcy protection under chapter although it has since emerged from bankruptcy in year it remains highly leveraged taxpayer for its part argues that all of the countermeasures it took and the litigation that ensued manifests the hostile nature of the takeover and the fact that it was merely defending itself against interests that had no experience in its particular business and which could prove deleterious to that business additionally it maintains that there was absolutely no future benefit to it as a result of the merger in light of the amount of debt it would be forced to take on and which in fact was ultimately reflected in the bankruptcy filing these factual assertions may be true nevertheless it is our view that these do not constitute supporting grounds for allowing current deduction treatment while apparently conceding that so-called friendly merger costs of a target_corporation may require capitalization treatment taxpayer argues that hostile defenses nonetheless may be deducted citing federated department stores inc v united_states u s t c big_number s d ohio the court upheld the decision of the bankruptcy court that the costs incurred in the target’s failed defense of a takeover were deductible and relying chiefly upon a e staley manuf119_f3d_482 7th cir rev’g 105_tc_166 in staley the seventh circuit held that the target’s investment banker fees in a takeover battle were deductible as taxpayer notes the appellate court stated that indopco did not change the law with respect to costs incurred to defend a business f 3d pincite the court found that the bulk of the fees were paid to frustrate the occurrence of the merger id pincite the seventh circuit focused on the law applicable to defending a business it stated that proxy expenses for example to defend corporate policy are conceded deductible see 237_fsupp_80 d conn revrul_67_1 1967_1_cb_28 after analyzing the various expenses_incurred it held that the majority were incurred to defend against takeover and were thus deductible only those expenses directly facilitating the eventual merger were to be capitalized the aforementioned arguments ignore the tenet that expenses_incurred in connection with the creation and adoption of a shareholder rights plan or other corporate capital structure should be capitalized see 503_us_79 at fn and the changes in corporate that is presumably with the qualification that long-term benefits are actually reaped the circuit_court also rejected the notion suggested by the tax_court that the costs were not incurred in the corporation’s trade_or_business and were instead a nondeductible dividend for the benefit of the shareholders of the target structure cases cited there in brief it is of no consequence that the measures were adopted for the immediate purpose of defending against hostile merger overtures with respect to the argument that the heavy debt-saddling negated any putative long-term benefits of the acquisition--while having some initial practical appeal-the contention should also be rejected as the tax_court has noted w e find petitioner’s debt equity argument less persuasive because in the context of leveraged buyouts these transactions typically rely on large amounts of debt and increase debt equity ratios in the acquired or newly formed companies well beyond conventional norms accepting petitioner’s argument conceptually would require us to conclude that whenever an acquisition results in an increase in the target’s debt to equity ratio a finding that no long-term benefit was obtained must follow we cannot accept such a sweeping generalization as a universal truth 99_tc_648 on the basis of the foregoing analysis it is our position that capitalization treatment should be required for the fees in issue case development hazards and other considerations heather c maloy by thomas d moffitt acting chief branch income_tax accounting division


internal_revenue_service number release date index number ------------------ --------------------------------------------------- --------------------------------- ---------------------------------------- -------------- --------------------- legend x -------------------- ----------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-132894-05 date date ----------------------- --------------------------- country d dear ------------------ correspondence submitted on behalf of x requesting an extension of time under ' and ' of the procedure and administration regulations to file an entity classification election this letter responds to a letter dated date and subsequent facts the information submitted states that x is an eligible_entity formed under the laws of country x failed to timely file a form_8832 entity classification election to be treated as a disregarded_entity for federal tax purposes as of d law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under ' b or an eligible_entity can elect its classification for federal tax purposes elections are necessary only when an plr-132894-05 eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification sec_301_7701-3 provides that except for certain existing entities described in sec_301_7701-3 unless a foreign eligible_entity elects otherwise the entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single member that does not have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under ' b by filing form_8832 with the appropriate service_center under ' c iii this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a regulation published in the federal_register commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-1 through provide the standards the conclusion based solely on the facts submitted and representations made we conclude that x has satisfied the requirements of and and therefore it is granted an extension of time of sixty days from the date of this letter to file a form_8832 to elect to be treated as a disregarded_entity for federal tax purposes effective d a copy of this letter should be attached to the election a copy is enclosed for that purpose plr-132894-05 except as specifically set forth above we express no opinion concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_code this ruling is directed only to the taxpayer requesting it sec_6110 of the 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 mailed to your authorized representatives sincerely heather c maloy heather c maloy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for ' purposes cc


internal_revenue_service number release date index number 7702b ------------------ ---------------------------------------------------- -------------------------------------------------- ------------- ------------------------------------- ---------------------------- 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 fip b04 plr-135748-10 date november legend legend taxpayer ------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ rider ------------------------------------------ dear ---------- this is in response to your request for rulings concerning a rider to be offered in connection with certain qualified long-term care insurance contracts under sec_7702b of the internal_revenue_code taxpayer represents as follows facts taxpayer is a stock_life_insurance_company taxable under sec_801 and is the issuer of certain qualified long-term care contracts contracts that comply with the requirements of sec_7702b taxpayer proposes to issue rider by either including it on contracts to be issued or adding it to certain in-force contracts in its base form there are two attributes to the rider first through the rider taxpayer will provide the policyholder1 with access to information pertaining to health the policyholder is generally the person insured under a contract hence the term policyholder will be used herein plr-135748-10 wellness and long-term care that promotes and encourages a healthy lifestyle this information will be disseminated through written or media-based educational materials telephonic or internet-based access to a registered nurse or other professional to answer questions on general wellness long-term care and other health-related topics will also be available additionally information about long-term care and other health care services that the policyholder may separately purchase from third-party sources will be provided the purpose of providing such information is to either facilitate the provision of long-term care services or reduce the incidence or severity of any future need for long-term care this information will be provided regardless of the policyholder’s health ie no insurable event need have occurred second the rider sets forth a voluntary incentive program for policyholders to maintain wellness if the policyholder participates in certain periodic health assessments to be offered by a third-party and satisfies certain medical criteria eg a prescribed body mass index score that evidences healthy living the policyholder will be entitled to any incentive benefit taxpayer may declare such as a premium discount or increase in benefits as part of the assessment information customized to the policyholder’s particular circumstance may be provided the extent and scope including termination of this program is at taxpayer’s discretion in some instances the rider will be offered in an alternative form without the voluntary incentive program there will be no additional_charge for the rider requested rulings taxpayer requests rulings that the inclusion of a rider in a contract will not cause the contract to be treated as providing insurance coverage other than of qualified_long-term_care_services within the meaning of sec_7702b and all premiums_paid for a contract that includes a rider are premiums for a qualified_long-term_care_insurance_contract requested ruling law and analysi sec_2 there is no stated charge for the rider nor is it taken into account in pricing the contract except as part of taxpayer’s overall administrative expenses plr-135748-10 under sec_7702b a qualified_long-term_care_insurance_contract is an insurance_contract under which the only insurance protection provided is coverage of qualified_long-term_care_services neither the code nor the regulations define the terms insurance or insurance_contract the supreme court of the united_states has explained that in order for an arrangement to constitute insurance for federal_income_tax purposes both risk shifting and risk_distribution must be present 312_us_531 the risk transferred must be risk of economic loss 572_f2d_1190 7th cir the risk must contemplate the fortuitous occurrence of a stated contingency 183_f2d_288 2d cir and must not be merely an investment or business risk le gierse u s pincite revrul_2007_47 2007_2_cb_127 in addition the arrangement must constitute insurance in the commonly accepted sense see eg 988_f2d_1135 fed cir 979_f2d_162 9th cir aff’g 96_tc_18 it is common for insurance contracts to be priced with reference to the risk profile of the insured life_insurance contracts are implemented and priced differently depending on underwriting risk factors some life_insurance contracts provide wellness incentives in determining the current mortality charge sec_7702b was enacted to provide an incentive for individuals to take financial responsibility for their long-term care needs sec_7702b therefore generally provides favorable tax treatment with respect to long-term care insurance contracts and services meeting sec_7702b’s requirements h_rep_no pincite the rider will not provide any diagnostic except as is implied from the periodic health assessments or therapeutic treatment in essence the rider allows the contract to be implemented based on the risk profile of the policyholder it would be inconsistent with the stated goal of sec_7702b to deny qualification to a long-term care insurance_contract because it provided ancillary mechanisms aimed at minimizing long-term care needs accordingly the inclusion of a rider in either form in a contract will not cause the contract to be treated as providing insurance coverage other than of qualified long- term care services within the meaning of sec_7702b requested ruling under sec_7702b the general_rule is that amounts paid for a qualified long- term care insurance_contract providing the benefits described in sec_7702b shall see eg society of actuaries product tax seminar session life_insurance product tax update and 7702a www soa org files pdf 2010-washington-prod-tax-se sec_1 pdf pincite plr-135748-10 be treated as payments made for insurance for purposes of sec_213 sec_7702b provides that per_diem payments without regard to the expenses_incurred will not disqualify a contract under sec_7702b or b under sec_7702b a qualified_long-term_care_insurance_contract provides only coverage of qualified_long-term_care_services qualified_long-term_care_services are defined by sec_7702b as being those required by a chronically_ill_individual pursuant to a plan of care prescribed by a licensed_health_care_practitioner the information and incentives provided by the rider are not insurance benefits but are a loss prevention program consistent with the purpose of sec_7702b as explain in connection with requested ruling the amount of consideration paid for the contract that could be allocated to this program should not be recharacterized as something other than an amount_paid for a long-term care insurance_contract based on the foregoing ruling sec_1 the inclusion of a rider in a contract will not cause the contract to be treated as providing insurance coverage other than of qualified_long-term_care_services within the meaning of sec_7702b and all premiums_paid for a contract that includes a rider are premiums for a qualified_long-term_care_insurance_contract caveats except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter no ruling has been requested and no opinion is expressed concerning whether the contract constitutes a qualified_long-term_care_insurance_contract or the treatment of any incentive declared by taxpayer this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative plr-135748-10 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 s sheryl b flum chief branch office of associate chief_counsel financial institutions products


tax_exempt_and_government_entities_division department of the treasury internal_revenue_service washington d c date number release date contact person identification_number telephone number uil employer_identification_number dear this is in response to your letter dated date in which you requested certain rulings with respect to sec_501 sec_507 sec_4940 and background you are a_trust that has been recognized as exempt as a_trust described in sec_501 c and you have been classified as a private_foundation under sec_509 your purposes are encouraging and rewarding excellence in scientific health and public safety literary fine arts and educational_purposes your assets consist entirely of liquid or nearly liquid_assets that were granted to you at your founding and upon your founder's death you will also receive additional assets in the future upon the death of your founder's wife you are seeking to transfer without consideration all of your assets to a new private_foundation at the death of your founder's wife upon the receipt of further assets you will transfer all of those assets to this same new private_foundation the new foundation was formed by your trustees and is currently seeking recognition of exemption as an organization described in sec_501 c the new foundation's purposes are the same as your purposes you have provided that the new foundation will be effectively controlled by the same people who effectively control you after transferring all of your assets to the new foundation but prior to the death of your founder's wife you will continue to exist with no assets you will continue to file a form_990-pf return of private_foundation or sec_4947 trust treated as private_foundation for all years in which you exist upon the death of your founder's wife you will again transfer all of your assets to the new foundation after the second transfer you will seek to terminate your private_foundation_status and your existence as a_trust you will notify the service of your termination no earlier than one day after your second transfer of all of your assets you have stated that you have not and will not notify the secretary of your intent to terminate your status as a private_foundation and that you have not ever either committed willful repeated acts or failures to act or committed a willful and flagrant act or failure to act which gives rise to tax under chapter rulings requested the transfer of all of your assets will not adversely affect your status as a sec_501 c organization and you may continue in existence as a dormant shell and still maintain your sec_501 c status the transfer will qualify as a transfer under sec_507 and will not result in a termination of your foundation status or cause the imposition of the termination_tax under sec_507 the new foundation will not be treated as a newly created organization as a result of the transfers following the transfers you will be eligible to terminate your private_foundation_status through the voluntary termination procedures pursuant to sec_507 pursuant to sec_1 -7 b the date for determining the value of your assets for purposes of calculating the termination_tax pursuant to sec_507 c shall be the date proper notification is given and provided that such notice is given at least one day after the second transfer of all of your assets then the amount of termination_tax due shall be zero dollars after each transfer the new foundation will be treated as if it were you for purposes of sec_4940 through and sec_507 through and the new foundation will be responsible for any of your excise_tax liabilities under chapter to the extent that you do not satisfy such liabilities the transfers will not give rise to any gross_investment_income or capital_gain_net_income within the meaning of sec_4940 and any excess sec_4940 tax paid_by you may be used by the new foundation to offset its sec_4940 tax_liability the transfers will not constitute self-dealing under sec_4941 you will not be required to meet the qualifying_distribution requirements of sec_4942 for either taxable_year of transfers provided that the new foundation's distributable_amount for the year of each transfer is increased by your distributable_amount in addition the new foundation's own distributable_amount under sec_4942 shall be reduced by your excess qualifying distributions under sec_4942 if any the transfers will not constitute taxable_expenditures within the meaning of sec_4945 and you will not be required to exercise expenditure_responsibility with respect to the assets transferred to the new foundation the new foundation as successor to you will be required to exercise expenditure_responsibility with respect to any of your expenditure_responsibility grants if reasonable in amount the legal accounting and other expenses_incurred by you and new foundation in connection with this ruling_request and with effectuating the transfers will be considered qualifying distributions under sec_4942 and will not constitute taxable_expenditures pursuant to sec_4945 law sec_501 c provides that organizations may be exempted from tax if they are organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes and no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_507 provides that the status of any organization as a private_foundation shall be terminated only if such organization notifies the secretary of its intent to accomplish such termination or there have been willful and repeated acts or a willful and flagrant act giving rise to liability for tax under chapter and the secretary notifies such organization that it is liable for such tax sec_507 provides that for purposes of sec_507 sec_508 and sec_509 in the case of a transfer of assets of any private_foundation to another private_foundation pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization the transferee foundation shall not be treated as a newly created organization sec_4940 imposes a tax on each private_foundation which is exempt from taxation under sec_501 a for the taxable_year with respect to the carrying on of its activities a tax equal to percent of the net_investment_income of such foundation for the taxable_year sec_4940 defines net_investment_income as the amount by which a the sum of the gross_investment_income and the capital_gain_net_income exceeds b the deductions allowed by paragraph sec_4940 allows as a deduction all the ordinary and necessary expenses paid_or_incurred for the production or collection of gross_investment_income or for the management conservation or maintenance of property held for the production of such income determined with the modifications set forth in subparagraph b sec_4941 imposes a tax on each act of self-dealing between a disqualified_person and a private_foundation i r c sec_4941 d defines self-dealing as the furnishing of goods services or facilities between a disqualified_person and a private_foundation as well as the payment of compensation by a private_foundation to a disqualified_person sec_4942 imposes a tax on undistributed_income_of_a_private_foundation for any taxable_year which has not been distributed by the first day of the second taxable_year following such taxable_year sec_4942 defines undistributed_income as the amount by which the distributable_amount for such taxable_year exceeds the qualifying distributions made before such time out of such distributable income sec_4942 and e define distributable_amount as an amount equal to five percent of the excess of the fair_market_value of all assets of the foundation over its acquisition_indebtedness for such assets minus the sum of the taxes imposed on such foundation for the taxable_year under sec_4940 sec_4942 defines qualifying_distribution as any amount including that portion or reasonable and necessary administrative expenses paid to accomplish one or more purposes described in sec_170 other than any contribution to an organization controlled by the foundation or one or more disqualified_person with respect to the foundation except as provided in sec_4942 sec_4942 provides that if for the taxable years in the adjustment period for which an organization is a private foundation-- a the aggregate qualifying distributions treated under subsection h as made out of the undistributed_income for such taxable_year or as made out of corpus except to the extent subsection g with respect to the recipient private_foundation or sec_170 f ii applies during such taxable years exceed b the distributable amounts for such taxable years determined without regard to this subsection then for purposes of this section other than subsection h the distributable_amount for the taxable_year shall be reduced by an amount equal to such excess sec_4945 imposes a twenty percent tax on each taxable_expenditure of a private_foundation sec_4945 defines taxable_expenditure as any amount_paid or incurred by a private_foundation as a grant to an organization unless the private_foundation exercises expenditure_responsibility with respect to such grant in accordance with subsection h or an amount_paid for any purpose other than one specified in sec_170 c b sec_4945 defines expenditure_responsibility as the private_foundation will assert all reasonable efforts and establish adequate procedures to see that the grant is spent solely for the purpose for which it was made to obtain full and complete reports from the grantee on how the funds are spent and to make full and detailed reports with respect to such expenditures to the secretary sec_4946 provides that a disqualified_person with respect to a private_foundation includes a substantial_contributor as defined under sec_507 a foundation director or officer and any spouse ancestor child grandchild great grandchild of that contributor director or officer sec_1_501_c_3_-1 states an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_507-1 b provides that in order to terminate its private_foundation_status under paragraph a of this section an organization must submit a statement to the district_director of its intent to terminate its private_foundation_status under sec_507 sec_1 -3 a provides that a transferee organization to which sec_507 applies shall succeed to the aggregate tax_benefit of the transferor organization in an amount equal to the amount of such aggregate tax_benefit multiplied by a faction the numerator of which is the fair_market_value of the assets transferred to such transferee and the denominator of which is the fair_market_value of the assets of the transferor immediately before the transfer sec_1 -3 a provides that if a private_foundation incurs liability for one or more of the taxes imposed under chapter prior to or as a result of making a sec_507 transfer to one or more private_foundations each transferee foundation shall be treated as receiving the transferred assets subject_to such liability to the extent that the transferor does not satisfy such liability sec_1 -3 a provides that a private_foundation is required to meet the distribution_requirements of sec_4942 for any taxable_year in which it makes a sec_507 transfer of all or part of its net assets to another private_foundation such transfer shall itself be counted toward satisfaction of such requirements to the extent the amount transferred meets the requirements of sec_4942 sec_1 -3 a i provides that if a private_foundation transfers all of its net assets to one or more private_foundations which are effectively controlled by the same person or persons which effectively controlled the transferor private_foundation such a transferee foundation shall be treated as if it were the transferor sec_1_507-3 provides that for the purposes of sec_507 the terms other adjustment organization or reorganization shall include any partial_liquidation or any other significant disposition of assets to one or more private_foundations other than transfers for full and adequate_consideration or distributions out of current income the term significant disposition of assets shall include any disposition for a taxable_year where the aggregate of the dispositions to one or more private_foundations is twenty-five percent or more of the fair_market_value of the net assets of the foundation at the beginning of the taxably year sec_1 -3 d states that unless a private_foundation voluntarily gives notice pursuant to sec_507 a transfer of assets described in sec_507 will not constitute a termination of the transferor's private_foundation_status under sec_507 sec_1_507-4 provides that if a private_foundation makes a transfer makes a transfer described in sec_507 or then it is not subject_to the tax imposed under sec_507 with respect to such transfer unless the provisions of sec_507 become applicable sec_1_507-7 provides that in the case of a termination under sec_507 the date referred to in paragraph a of this section shall be the date on which the terminating foundation gives the notification described in sec_507 sec_53 d -2 f provides that the fact that a disqualified_person receives an incidental or tenuous benefit from the use by a foundation of its income or assets will not by itself make such use an act of self-dealing thus the public recognition a person may receive arising from the charitable activities of a private_foundation to which such person is a substantial_contributor does not in itself result in an act of self-dealing since generally the benefit is incidental and tenuous for example a grant by a private_foundation to a sec_509 or organization will not be an act of self-dealing merely because one of the sec_509 or organization's officers directors or trustees is also a manager of or a substantial_contributor to the foundation treas reg a -3 a provides that any amount including program-related investments as defined in sec_4944 and reasonable and necessary administrative expenses paid to accomplish one or more purposes described in sec_170 or sec_53_4945-5 provides that if a private_foundation makes a grant to a private_foundation for endowment for the purchase of capital equipment or for other capital purposes the grantor foundation shall require reports from the grantee on the use of the principal and the income from the grant funds the grantee shall make such reports annually for its taxable_year in which the grant was made and the immediately succeeding two taxable years sec_53_4945-6 provides that any payment which constitutes a qualifying_distribution under sec_4942 or an allowable deduction under sec_4940 will not ordinarily be treated as taxable_expenditures under sec_4945 sec_53_4945-6 provides that any expenditures_for unreasonable administrative expenses including compensation consultant fees and other fees for services rendered will ordinarily be taxable_expenditures under sec_4945 unless the foundation can demonstrate that such expenses were paid_or_incurred in the good_faith belief that they were reasonable and that the payment or incurrence of such expenses in such amounts was consistent with ordinary business care and prudence the determination whether an expenditure is unreasonable shall depend upon the facts and circumstances of the particular case sec_53_4945-6 provides that if a private_foundation transfers assets as described in sec_507 the transferred assets will not be considered used exclusively for purposes described in sec_170 c unless the assets are transferred to a fund or organization described in sec_501 sec_53_4946-1 a provides that for purposes of sec_4941 only the term disqualified persons shall not include any organization which is described in sec_501 c other than organizations described in sec_509 revrul_64_182 c b provides that corporation organized exclusively for charitable purposes derives its income principally from the rental of space in a large commercial office building which it owns maintains and operates the charitable purposes of the corporation are carried out by aiding other charitable organizations selected in the discretion of its governing body through contributions and grants to such organizations for charitable purposes the ruling holds that the corporation is deemed to meet the primary purpose test of sec_1_501_c_3_-1 of the regulations and to be entitled to exemption under sec_501 where it is shown to be carrying on through such contributions and grants a charitable program commensurate in scope with its financial resources revrul_78_387 1978_2_cb_270 provides that a private_foundation that had a carryover of excess qualifying distributions as described in sec_4942 transferred all its assets to another private_foundation that was controlled by the same persons who controlled the first foundation the transferee foundation may reduce its distributable_amount under sec_4942 by such carryover revrul_2002_28 c b provides a transfer of assets described in sec_507 does not constitute a termination of the transferor's private_foundation_status under sec_507 unless the transferor voluntarily gives notice pursuant to sec_507 see sec_1 b and d the transferor foundation is not required to provide such notice in situation ps dissolution under state law has no effect on whether p has terminated its private_foundation_status for federal tax purposes the ruling also goes on to state that the distributions are made to sec_501 c organizations which cannot be disqualified persons for sec_4941 purposes therefore there is no self-dealing the ruling also commented on sec_4945 stating that because each transferor foundation transfers all of its assets to one or more private_foundations effectively controlled by the same persons that effectively control the transferor the transferee foundations are treated as though they were the transferor for purposes of sec_4945 see sec_1 -3 a i because the transferee foundations are treated as the transferor foundation rather than as recipients of expenditure_responsibility grants there are no expenditure_responsibility requirements that must be exercised under sec_4945 or h with respect to the transfers to the transferee foundations see sec_1_507-3 and iii example analysis ruling the transfer of all of your assets will not adversely affect your status as a sec_501 organization and you may continue in existence as a dormant shell and still maintain your sec_501 status in order to be exempt under sec_501 c an organization must be operated exclusively for an exempt_purpose sec_1_501_c_3_-1 revrul_64_182 supra providesthatthe provision of grants to exempt_organizations is a charitable purpose under sec_501 c here you are providing a grant to an organization that is expected to be recognized as exempt under sec_501 c the provision of grants to such an organization is in furtherance of your exempt_purpose therefore it does not create a substantial non-exempt purpose the transfer of assets described by you does not affect your exempt status under sec_501 c additionally you will continue to operate for an exempt_purpose following your distribution since you will continue to operate charitable activities commensurate in scope with your financial resources see revrul_64_182 and you have a specific plan to continue such charitable distributions upon the receipt of funds for which you have an identifiable legal right in the future your proposed transactions do not jeopardize your tax exemption you will also continue to file form 990-pfs in the intervening years avoiding the effects of ruling sec_2 and the transfer will qualify as a transfer under sec_507 and will not result in a termination of your foundation status or cause the imposition of the termination_tax under sec_507 the new foundation will not be treated as a newly created organization as a result of the transfers and after each transfer the new foundation will be treated as if it were you for purposes of sec_4940 through and sec_507 through and the new foundation will be responsible for any of your excise_tax liabilities under chapter to the extent that you do not satisfy such liabilities sec_507 describes a transfer from one private_foundation to another private_foundation according to any liquidation merger redemption recapitalization or other adjustment organization or reorganization sec_1_507-3 describes the terms other adjustment organization or reorganization as including any partial_liquidation or any other significant distribution of assets to one or more private_foundations other than transfers for full and adequate_consideration or distributions out of current income the term significant disposition of assets to one or more private_foundations is defined by sec_1 -3 c as any disposition or series of dispositions where the aggregate value transferred i sec_25 percent or more of the fair_market_value of the net assets of the foundation at the beginning of the taxable_year since you are transferring more than percent of the fair_market_value of your net assets to the new foundation a private_foundation for no consideration your proposed transfer is a significant disposition of assets that qualifies as a transfer under sec_507 therefore the new foundation will not be considered a new organization and it will assume your aggregate tax_benefit and liabilities in proportion to the fair_market_value of the real and personal_property it receives over your total net asset value prior to the transfer see sec_1_507-3 pursuant to sec_1_507-4 a private_foundation that makes a transfer described in sec_507 is not subject_to the tax imposed under sec_507 with respect to such transfer unless the provisions of sec_507 become applicable your transfer will constitute a significant distribution of assets described in sec_507 you have stated that you have not and will not notify the secretary of your intent to terminate your status as a private_foundation and that you have not ever either committed willful repeated acts or failures to act or committed a willful and flagrant act or failure to act which gives rise to tax under chapter therefore your proposed transfer of assets to the new foundation under sec_507 will not terminate your private_foundation_status under sec_507 and does not result in a termination_tax imposed by sec_507 sec_1_507-3 provides that in the case of a significant disposition of assets to one or more private_foundations within the meaning of paragraph c supra the transferee organization shall not be treated as a newly created organization under sec_1 -3 a i if a private_foundation transfers all of its net assets to another private_foundation which is effectively controlled by the same person or persons which effectively controlled the transferor private_foundation the transferee private_foundation is treated as if it were the transferor here you are transferring all of your net assets so assuming that the new foundation is effectively controlled by the same persons that control you as you have stipulated the new foundation is not treated as a newly created organization instead it will be treated as you for all private_foundation purposes including sec_4940 through and sec_507 through ruling sec_4 and following the transfers you w111 be eligible to terminate your private_foundation_status through the voluntary termination procedures pursuant to sec_507 and pursuant to sec_1 b the date for determining the value of your assets for purposes of calculating the termination_tax pursuant to sec_507 shall be the date proper notification is given and provided that such notice is given at least one day after the second transfer of all of your assets then the amount of termination_tax due shall be zero dollars sec_1_507-1 b provides that in order for a private_foundation to terminate its private_foundation_status under sec_507 it must submit a statement to the service of its intent to terminate its private_foundation_status under sec_507 where there have been no willful repeated acts or failures to act and no flagrant act or failure to act which would give rise to taxes and penalties under chapter a taxpayer may elect to terminate its private_foundation_status by notifying the manager exempt_organizations determinations of its intent to accomplish such termination and paying any termination_tax deemed to be due under sec_507 since you have committed no willful repeated acts or failures to act and no flagrant act or failure to act which would give rise to taxes and penalties under chapter you are eligible to terminate your private_foundation_status through a voluntary termination sec_507 imposes a tax on a terminating private_foundation equal to the lesser_of the aggregate tax_benefit resulting from its sec_501 c status and the value of its net assets sec_1_507-7 provides that in the case of a voluntary termination the date for determining the value of the foundation's assets for purposes of the termination_tax shall be the date on which the foundation gives the notification described in sec_507 you state that you will provide notification no earlier than one day after the full transfer of all of your assets following the death of your founder's wife at this point you will have no assets your situation is substantially_similar to that found in revrul_2002_28 supra where the organizations in all three situations provide notice at least one day after transferring all of their assets the ruling determined that in this case the organizations would owe zero dollars under sec_507 similar to the organizations in revrul_2002_28 you will owe zero dollars in termination taxes under sec_507 if you provide notice of termination no earlier than one day after the transfer of all of your assets ruling the transfers will not give rise to any gross_investment_income or capital_gain_net_income within the meaning of sec_4940 and any excess sec_4940 tax paid_by you may be used by the new foundation to offset its sec_4940 tax_liability sec_4940 generally imposes an excise_tax on a private foundation's net_investment_income for the taxable_year sec_4940 defines net_investment_income as the amount by which the sum of the gross_investment_income and the capital_gain_net_income exceeds the deductions allowed under sec_4940 revrul_2002_28 supra holds that transfers from a private_foundation to one or more private_foundations which are transfers described in sec_507 b do not constitute investments of the transferor for purposes of sec_4940 thus the transfers do not give rise to net_investment_income subject_to tax under sec_4940 in addition because the transferor foundation transfers all of its assets to one or more private_foundations effectively controlled by the same persons that effectively control the transferor any excess sec_4940 tax paid_by the transferor may be used by the transferee to offset the transferees' sec_4940 tax_liability your transfer to the new foundation is similar to those found in revrul_2002_28 in that it is a transfer described in sec_507 supra that is made to another private_foundation that is effectively controlled by the same persons that effectively control you since your transfer is the same as that found in revrul_2002_28 your transfer is not an investment thus does not give rise to tax under sec_4940 additionally any excess sec_4940 taxes paid_by you may be used by the new foundation to offset its own sec_4940 tax_liability ruling the transfers will not constitute self-dealing under sec_4941 sec_4941 a imposes an excise_tax on each act of self-dealing between a disqualified_person and a private_foundation sec_4941 and sec_1 -3 a determine whether the proposed transfer of your assets to the new foundation will constitute an act of self-dealing between a private_foundation and its disqualified persons as defined in sec_4946 under sec_53_4946-1 a a disqualified_person does not include organizations that are exempt under sec_501 rev_rul supra also discusses the distribution from a private_foundation to another sec_501 c organization stating that such a distribution is not subject_to sec_4941 due to the exception for sec_501 c organizations any benefit to your foundation managers is incidental and tenuous under the circumstances therefore your transfer of assets to the new foundation is not an act of self dealing assuming that the new foundation is recognized by the service as an organization exempt from tax under sec_501 ruling you will not be required to meet the qualifying_distribution requirements of sec_4942 for either taxable_year of transfers provided that the new foundation's distributable_amount for the year of each transfer is increased by your distributable_amount in addition the new foundation's own distributable_amount under sec_4942 shall be reduced by your excess qualifying distributions under sec_4942 if any sec_1_507-3 provides that if the same persons control the both the transferee and transferring organization then they will be treated as the same organization for purposes of sec_4940 through revrul_2002_28 supra states that the transfers to the transferee foundations are not treated as qualifying distributions because in the situations described in the revenue_ruling the transferee foundations are treated as though they were the transferor foundations for purposes of sec_4942 furthermore revrul_2002_28 provides that the transferee foundation assumes all obligations with respect to the transferor's undistributed_income within the meaning of sec_4942 if any and reduces its own distributable_amount under sec_4942 by the transferor foundation's excess qualifying distributions under sec_4942 additionally revrul_78_387 supra provides that when a private_foundation transfers all of its assets to another private_foundation that is controlled by the same persons as the transferring organization then the transferee foundation may reduce its distributable_amount under sec_4942 by the amount of the transferor's excess qualifying distributions as described in sec_4942 thus your transfer to the new foundation will not be a qualifying_distribution and the new foundation will assume your obligations for qualifying distributions if any or reduce its own qualifying_distribution requirements by any excess distributions you may have as described in sec_4942 ruling the transfers will not constitute taxable_expenditures within the meaning of sec_4945 and you will not be required to exercise expenditure_responsibility with respect to the assets transferred to the new foundation the new foundation as successor to you will be required to exercise expenditure_responsibility with respect to any of your expenditure_responsibility grants with a sec_507 transfer if all of the assets of a private_foundation are transferred to another private_foundation effectively controlled by the same person s the transferee foundation will be treated as if it were the transferor organization and would be subject_to any liabilities not paid_by the transferor sec_1_507-3 and i since the transferee organization in such a transaction is treated as the transferor there are no expenditure_responsibility requirements with respect to such transactions sec_1_507-3 example revrul_2002_28 supra you have represented that the same persons effectively control both you and the new foundation given your representations of effective_control the new foundation will be treated as you for sec_4945 purposes since the new foundation is treated as you there are no expenditure_responsibility requirements that must be exercised under sec_4945 and h with respect to your transfer of assets to the new foundation any expenditure responsibilities remaining after the transfer of all of your assets to the new foundation will be assumed by the new foundation ruling if reasonable in amount the legal accounting and other expenses_incurred by you and new foundation in connection with this ruling_request and with effectuating the transfers will be considered qualifying distributions under sec_4942 and will not constitute taxable_expenditures pursuant to sec_4945 sec_53_4942_a_-3 defines the term qualifying_distribution as any amount including reasonable and necessary administrative expenses paid to accomplish one or more purposes described in sec_170 since your legal accounting and other expenses_incurred in connection with this ruling_request and with effectuating the transfers will be reasonable and consistent with ordinary business care and prudence and paid to accomplish one or more purposes described in sec_170 c b the granting of assets to an organization described in sec_501 c such expenses are considered qualifying distributions under sec_4942 under sec_53_4945-6 of the regulations legal administrative and other expenses_incurred by a private_foundation are not taxable_expenditures if the foundation can demonstrate that such expenses were paid_or_incurred in the good_faith belief that they were reasonable and that the payment or incurrence of such expenses in such amounts was consistent with ordinary business care and prudence the determination whether an expenditure is reasonable depends upon the facts and circumstances of a particsular case thus your payment of such reasonable expenses assuming that you can demonstrate ordinary care and prudence will not constitute a taxable_expenditure under sec_4945 rulings the transfer of all of your assets will not adversely affect your status as a sec_501 c organization and you may continue in existence and still maintain your sec_501 c status the transfer will qualify as a transfer under sec_507 and will not result in a termination of your foundation status or cause the imposition of the termination_tax under sec_507 the new foundation will not be treated as a newly created organization as a result of the transfers following the transfers you will be eligible to terminate your private_foundation_status through the voluntary termination procedures pursuant to sec_507 pursuant to sec_1_507-7 the date for determining the value of your assets for purposes of calculating the termination_tax pursuant to sec_507 shall be the date proper notification is given and provided that such notice is given at least one day after the second transfer of all of your assets then the amount of termination_tax due shall be zero dollars after each transfer the new foundation will be treated as if it were you for purposes of sec_4940 through and sec_507 through and the new foundation will be responsible for any of your excise_tax liabilities under chapter to the extent that you do not satisfy such liabilities the transfers will not give rise to any gross_investment_income or capital_gain_net_income within the meaning of sec_4940 and any excess sec_4940 tax paid_by you may be used by the new foundation to offset its sec_4940 tax_liability the transfers will not constitute self-dealing under sec_4941 your transfer to the new foundation will not be a qualifying_distribution and the new foundation will assume your obligations for qualifying distributions if any or reduce its own qualifying_distribution requirements by any excess distributions you may have as described in sec_4942 the transfers will not constitute taxable_expenditures within the meaning of sec_4945 and you will not be required to exercise expenditure_responsibility under sec_4945 with respect to the assets transferred to the new foundation the new foundation as successor to you will be required to exercise expenditure_responsibility with respect to any of your expenditure_responsibility grants if reasonable in amount the legal accounting and other expenses_incurred by you and new foundation in connection with this ruling_request and with effectuating the transfers will be considered qualifying distributions under sec_4942 and will not constitute taxable_expenditures pursuant to sec_4945 this ruling is contingent upon the new foundation receiving a favorable determination_letter from the internal_revenue_service stating that the new foundation has been recognized as an organization described in sec_501 c this ruling will be made available for public inspection under sec_6110 of the code 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_611 o k of the code 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 exempt_organizations enclosure notice


internal_revenue_service number release date index number 6050p -------------------------- ------------------------------ ------------------------------ ----------------------------- ------------- ------------------------------------ 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 pa plr-100404-12 date july legend entity entity asset state x state y date date date date collection remedy ----------------------------------- ------------------------------ ----------------------------- --------------- -------- ----------- ------------------ ------------------- ----------------------- --------------------- dear ---------------- this letter responds to the letter dated date submitted on behalf of entity requesting a ruling that entity is not required to file forms 1099-c with respect to the write-off of balances and charges pursuant to its settlement agreement because the discharge was not the result of an identifiable_event listed in sec_1_6050p-1 but rather was required by operation of state law for the reasons set forth below we conclude that entity is required to comply with the reporting requirements of sec_6050p because the discharge_of_indebtedness was the result of an identifiable_event listed in sec_1_6050p-1 facts entity is a financial_institution chartered in state x that provides its members with thrift services such as checking and savings accounts and other financial_services_entity was a service company that offered retail_sale installment contracts from asset dealers plr-100404-12 to financial institutions for the financing of the assets and serviced those contracts including when necessary initiating default proceedings on behalf of the financial_institution that held a security_interest in the asset entity acquired various asset loan installment contracts and retained entity for servicing collection and enforcement of those contracts on date consumers in state y filed a class action lawsuit against entity in the circuit_court of state y alleging violations of state y law including that the notices related to the collection remedy did not meet the statutory notice requirements on date the case was removed to u s district_court western district of state y on date entity and the class plaintiffs signed a settlement and release agreement agreement settling the entire class action lawsuit the agreement provides among other things that entity shall close all accounts and write off any balances owed or claimed remaining as any deficiency on the loans including judgment balances that were the subject of the litigation the agreement further provides for payments from entity to the class members out of a net distributable settlement fund provided by entity the agreement states that all class members shall be responsible for paying any and all federal taxes due on payments made to them pursuant to the settlement the agreement provides that entity will request a private_letter_ruling from the irs supporting the parties’ position that entity is not required to file information returns relating to the terms of the agreement the notice of proposed class action settlement that entity sent to the class members states that the request for private_letter_ruling would be made by entity in support of the parties’ position that the class members are not obligated to report the amount of the deficiency write-off or judgment write-off received as part of the settlement law analysis sec_6050p of the internal_revenue_code requires that an applicable_entity report any discharges in whole or in part of indebtedness of any person in excess of dollar_figure the report is to include the name address and taxpayer_identification_number of each person whose indebtedness is discharged the date of the discharge and the amount of indebtedness discharged in addition sec_1_6050p-1 of the treasury regulations provides that a discharge_of_indebtedness occurs if one of the following identifiable events takes place a a discharge_of_indebtedness under title of the united_states_code bankruptcy b a cancellation or extinguishment of an indebtedness that renders a debt unenforceable in a receivership foreclosure or similar proceeding in a federal or state court as described in sec_368 other than a discharge described in paragraph b i a of this section plr-100404-12 c a cancellation or extinguishment of an indebtedness upon the expiration of the statute_of_limitations for collection of an indebtedness subject_to the limitations described in paragraph b ii of this section or upon the expiration of a statutory period for filing a claim or commencing a deficiency judgment proceeding d a cancellation or extinguishment of an indebtedness pursuant to an election of foreclosure remedies by a creditor that statutorily extinguishes or bars the creditor’s right to pursue collection of the indebtedness e a cancellation or extinguishment of an indebtedness that renders a debt unenforceable pursuant to a probate or similar proceeding f a discharge_of_indebtedness pursuant to an agreement between an applicable_financial_entity and a debtor to discharge indebtedness at less than full consideration g a discharge_of_indebtedness pursuant a decision by the creditor or the application of a defined policy of the creditor to discontinue collection activity and discharge debt or h the expiration of the non-payment testing_period as described in paragraph b iv of this section out of the above events only two have a potential bearing on the requested ruling the first possible event sec_1_6050p-1 provides that an identifiable_event exists when the applicable_financial_entity and debtor agree to discharge the indebtedness for less than full consideration to establish consideration there must be a performance or a return promised which has been bargained for by the parties restatement second contracts sec_71 in this case entity and the debtor-class members agreed to the entry of a judgment approved and supervised by the court that incorporates the parties’ agreement by which entity will write off all remaining debt balances as part of the overall settlement of the pending litigation this appears on its face to be the identifiable_event described in subsection f of the regulations the request for the plr submitted on behalf of entity argues that the agreement does not reflect a mere agreement of the parties entity argues instead that the agreement reflects the operation of the law of state y the law of state y provides that in a case where the collection remedy did not strictly comply with notice requirements there is an absolute bar on collecting any remaining deficiency balances the class members alleged that entity violated various aspects of the notice requirements in the presale notices sent to the class members as part of its collection remedy the agreement acknowledges that plaintiffs’ claims are premised on state law which provides that collection of the deficiency balances may be barred without proper notice having been given to the debtors the representations and stipulations section of the agreement refers to a potential court’s finding that there was a failure to send a pre-sale notice to each of the class members and or that the pre-sale notices failed to comply with state law that language also is contained draft preliminary approval order attached to the plr-100404-12 agreement as exhibit b the agreement otherwise contains no admission or concession by entity with respect to the claims or defenses alleged in the litigation including any alleged violation of federal state or local law the agreement contains a specific denial of liability no admissions paragraph which states that the settlement is being entered into for the purpose of avoiding the burdens expense and risk of further litigation entity contends that the application of state law and specifically the bar on collection of the deficiency balances was triggered by the judicial rulings which certified the matter as a class action and thereby made the deficiency bar available to all class members entity however continued to pursue the litigation and assert its defenses to the complaint well after the certification of the class including filing a motion for partial summary_judgment it was only by reaching a settlement agreement with the plaintiffs that entity gave up its disputed claims to the deficiency amounts the court order issued on date contains a finding that there was a failure to send a pre-sale notice to each of the class members and or that the pre-sale notices failed to comply with state law such that entity cannot collect any deficiency balances from the class members this language is identical to the language referenced above that was contained in the draft preliminary approval order attached to the agreement as exhibit b thus the court finding of the bar on collection of remaining deficiency balances was at the behest of the parties and was a component of the overall settlement of the litigation as reflected in the agreement the fact that the terms of the settlement were reflected in the order does not serve to convert the forgiveness of the debt from being entered into voluntarily to one forced by operation of state law the agreement should be taken on its face as an agreement between entity and the debtors to discharge the indebtedness at less than full consideration therefore sec_1_6050p-1 applies the second possible event sec_1_6050p-1 provides that a discharge_of_indebtedness exists where a creditor discontinues collection activity pursuant to a decision by the creditor or a defined policy of the creditor according to sec_1_6050p-1 a creditor’s defined policy includes both a written policy and the creditor’s established business practice in this case the cancellation of indebtedness does not appear to have been as a result of any defined policy or business practice of entity but rather by its decision to discontinue collection action as part of settling the litigation this decision appears to fall within subsection g in any event regardless of whether subsection g of the regulation applies the event set forth in regulation subsection f as set forth above does apply and the sec_6050p reporting requirements must be met conclusion plr-100404-12 based solely on the information provided and the representations made we conclude that entity is required to file forms 1099-c with respect to the write-off of balances and charges pursuant to its settlement agreement because the discharge was the result of an identifiable_event listed in sec_1_6050p-1 and not by operation of state law this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative 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 ashton p trice chief branch procedure administration enclosures copy of letter copy for sec_6110 purposes cc the letter requesting the plr by entity refers to the year as the relevant tax period however because the agreement did not become final until the reporting requirement is for the year


third party communication date of communication month dd yyyy cca_2014041415232801 id uilc number release date from sent monday date pm to cc bcc subject re follow up tefra question the claim would be non-tefra so that they can file the claim within years of payment under sec_6511 even though the payment was for a different item i e the money is fungible for this purpose any refund claim would be limited to the amount_paid in the two year period id under lewis v reynolds s c t we can raise any non-tefra offsets to the refund claim