internal_revenue_service number release date index number department of the treasury washington dc person to contact telephone number refer reply to cc corp b02-plr-119822-99 date date legend mutual stock holding stock holding subsidiary subsidiary subsidiary subsidiary state x y z business a dollar_figureu year v year w plr-119822-99 dear this letter is in reply to a letter dated date regarding the federal_income_tax consequences of a proposed transaction additional information was submitted in letters dated february may may and date the information submitted for consideration is summarized below mutual is a mutual_insurance_company organized under the law of state x mutual is an accrual basis calendar-year taxpayer and is the common parent of an affiliated_group_of_corporations that file a consolidated federal_income_tax return the sole asset of mutual is the stock of stock holding as a mutual_insurance_company mutual has no authorized issued or outstanding capital stock rather it has members who are the policyholders the membership interests in mutual include voting rights and the right to participate in the distributions of mutual surplus in the event of mutual voluntary dissolution or liquidation stock holding is organized under the law of state x and is a wholly-owned subsidiary of mutual stock holding 1’s assets consist primarily of of the stock of subsidiary subsidiary and subsidiary and y of the stock of stock holding stock holding is a publicly traded insurance holding_company organized under state x law stock holding is an accrual basis calendar-year taxpayer and is the common parent of an affiliated_group_of_corporations the principal assets of stock holding consist of the stock of its wholly-owned subsidiaries which are all involved in business a stock holding and those subsidiaries that are not life_insurance_companies file a consolidated federal_income_tax return for what are represented as valid business reasons mutual has decided to convert from a mutual_insurance_company to a stock insurance_company accordingly mutual proposes the following i ii stock holding will liquidate into mutual mutual will convert under state x law into a stock insurance_company the conversion the rights of mutual members will be extinguished and the eligible members will receive in the aggregate voting common_stock that will ultimately represent y of mutual and approximately dollar_figureu of cash or policy credits funded by mutual and iii stock holding will merge into mutual by means of a statutory merger under state x law the public shareholders of stock holding will plr-119822-99 receive voting common_stock of mutual representing approximately z of the corporation in calculating the amount of consideration to be received by each eligible member in the conversion shares of mutual voting common_stock will be allocated among all the eligible members entitled to receive consideration in accordance with the terms of the plan of conversion and actuarial computations as described in the plan of conversion eligible members shall be entitled to receive either shares of mutual voting common_stock cash or policy credits in exchange for their membership interests in the case of membership interests associated with qualified contracts eligible members shall receive only policy credits eligible members with mailing addresses outside of the united_states or with an address to which mail is undeliverable and eligible members known to be in bankruptcy proceedings or whose policy is subject_to a creditor lien will receive solely cash in exchange for their membership interests all other eligible members will be entitled to receive cash mutual stock or a combination thereof based upon their election and funds availability with regard to the liquidation of stock holding into mutual the taxpayer has made the following representations a b c d e f mutual on the date of adoption of the plan_of_liquidation and at all times until the final liquidating_distribution is completed will be the owner of at least of the single outstanding class of stock holding stock no shares of stock holding stock will have been redeemed during the three years preceding the adoption of the plan_of_liquidation of stock holding all distributions from stock holding to mutual pursuant to the plan of complete_liquidation will be made within a single taxable_year of stock holding as soon as the first liquidating_distribution has been made stock holding will cease to be a going concern and its activities will be limited to winding up its affairs paying its debts and distributing its remaining assets to its shareholders stock holding will retain no assets following the final liquidating_distribution the liquidation of stock holding will not be preceded or followed by the reincorporation in or transfer or sale to a recipient corporation of any of the businesses or assets of stock holding plr-119822-99 g h i j k l prior to adoption of the plan_of_liquidation no assets of stock holding will have been distributed in_kind transferred or sold to mutual except for i transactions occurring in the normal course of business and ii transactions occurring more than years prior to adoption of the plan_of_liquidation stock holding will report all earned_income represented by assets that will be distributed to its shareholders such as receivables being reported on a cash_basis unfinished construction contracts commissions due etc the fair_market_value of the assets of stock holding will exceed its liabilities both at the date of the adoption of the plan of complete_liquidation and immediately prior to the time the first liquidating_distribution is made there is no intercorporate debt existing between mutual and stock holding and none has been canceled forgiven or discounted except for transactions occurring more than three years prior to the date of adoption of the plan_of_liquidation mutual is not an organization that is exempt from federal_income_tax under sec_501 or any other provision of the code all other transactions undertaken contemporaneously with in anticipation of in connection with or in any way related to the proposed liquidation of stock holding have been fully disclosed with regard to the conversion of mutual from a mutual_insurance_company to a stock insurance_company as described above the taxpayer has made the following representations m n o the fair_market_value of the mutual stock received by its members together with the cash and policy credits will approximately equal the fair_market_value of the proprietary interests in mutual surrendered in the exchange the conversion is not part of a plan to increase the proportionate interest of any owner in the assets or earnings_and_profits of mutual following the conversion mutual will continue as a stock insurance_company to be a company p mutual and its members will each pay their own expenses if any incurred in connection with the recapitalization q the conversion will occur under a plan agreed upon before the transaction is implemented plr-119822-99 r s t mutual is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 of the code following its conversion into a stock company mutual will be treated under state x law as the same corporation that previously existed as a mutual company following the recapitalization and the merger of mutual and stock holding mutual will continue to own all of the stock of the subsidiaries formerly owned by it and by stock holding with regard to the merger of mutual and stock holding as described above the taxpayer has made the following representations u to the best knowledge and belief of the taxpayer and the taxpayer’s representatives the merger of stock holding into mutual will qualify as a reorganization within the meaning of sec_368 based solely on the information submitted and the representations made we hold that provided that the requirements of sec_332 are met no gain_or_loss will be recognized by mutual upon the receipt of the assets and liabilities of stock holding distributed in complete_liquidation sec_332 no gain_or_loss will be recognized by stock holding on the distribution of its assets to or the assumption of its liabilities by mutual sec_336 sec_337 and sec_337 mutual basis in each asset to be received from stock holding as a result of the complete_liquidation will equal the basis of that asset in the hands of stock holding immediately before the complete_liquidation sec_334 mutual holding_period in each asset to be received from stock holding as a result of the complete_liquidation will include the period during which that asset was held by stock holding sec_1223 mutual will succeed to and take into account the items of stock holding described in sec_381 subject_to the conditions and limitations specified in sec_381 sec_382 sec_383 and sec_384 and the regulations thereunder sec_381 and sec_1_381_a_-1 except to the extent stock holding 1's earnings_and_profits are reflected in mutual earnings_and_profits mutual will succeed to and take into account the earnings_and_profits or deficit in earnings and plr-119822-99 profits of stock holding as of the date of the liquidation sec_381 sec_1_381_c_2_-1 and sec_1_1502-33 any deficit in the earnings_and_profits of stock holding or mutual will be used only to offset earnings_and_profits accumulated after the date of the liquidation sec_381 the conversion of mutual from a mutual_insurance_company to a stock company as described above will constitute a recapitalization and therefore qualify as a reorganization within the meaning of sec_368 of the code mutual will be a_party_to_a_reorganization within the meaning of sec_368 of the code no gain_or_loss will be recognized by mutual members on the exchange of their membership interests solely for mutual stock as described above sec_354 the basis of mutual membership interests is zero rev_rul 1971_1_cb_113 revrul_74_277 c b the basis of the mutual stock to be received in exchange for mutual membership interests will equal the basis of the mutual membership interests surrendered therefor ie zero sec_358 the holding_period of the mutual stock to be received by mutual members will include the period the mutual member held such mutual membership interest surrendered in exchange therefor sec_1223 gain will be recognized by those eligible members who receive cash in addition to mutual common_stock as described above in exchange for their mutual membership interest but not in excess of the amount of cash received sec_356 no loss will be recognized on the exchange sec_356 the redemption of the membership interests in mutual will be treated as a distribution in partial or full payment in exchange for stock under sec_302 for the purposes of determining gain in such redemption the basis of the equity interests deemed to have been redeemed will be zero no gain_or_loss will be recognized by mutual on the issuance of mutual stock in exchange for mutual membership interests sec_1032 the affiliated_group of which mutual was the common parent immediately before the proposed transaction will remain in existence and mutual will continue as the common parent sec_1 plr-119822-99 d the conversion will not have any effect on the date that any member’s life_insurance or annuity_contract was issued purchased or entered into for purposes of sec_72 sec_72 sec_72 sec_72 sec_72 sec_72 sec_72 sec_72 sec_101 sec_264 sec_264 sec_264 sec_264 sec_7702 sec_7702a and sec_7702b moreover the conversion will not require retesting or the start of new test periods for the contracts under sec_264 sec_7702 b - e or 7702a c sec_403 of the code provides generally that amounts contributed by certain tax-exempt employers to an annuity_contract purchased from an insurance_company by such an employer for an employee shall be excluded from the gross_income of the employee for the taxable_year of contribution and that the amount actually distributed to any distributee under such a contract shall be taxable to such distributee in the year distributed under sec_72 sec_403 imposes a limit on the maximum amount which may be contributed to a tax-sheltered annuity described in sec_403 on behalf of an employee in any taxable_year sec_403 provides that the provisions of sec_403 will not apply to an annuity unless under the annuity distributions are restricted to certain distribution events such as separation_from_service or attainment of age ½ sec_408 of the code defines an ira annuity as an annuity or endowment_contract which is issued by an insurance_company and which meets the requirements of sec_408 sec_408 establishes the annual_limit on contributions and premiums to an ira sec_408 provides that amounts paid or distributed from an ira shall be included in gross_income by the payee or distributee in the manner provided in sec_72 sec_72 of the code generally provides that gross_income includes any amount_received_as_an_annuity under an annuity endowment or life_insurance_contract sec_72 provides that any amount which is received under an annuity endowment or life_insurance_contract and is not received as an annuity i if received on or after the annuity_starting_date shall be included in gross_income and ii if received before the annuity_starting_date shall be included in gross_income to the extent allocable to income_on_the_contract and shall not be included in gross_income to the extent allocable to the investment_in_the_contract sec_72 defines the annuity_starting_date in part as the first day of the first period for which an amount is received as an annuity under the annuity_contract sec_72 provides that an amount shall be treated as allocable to income_on_the_contract to the extent that such amount does not exceed the excess of the cash_value of the contract immediately before the amount is received over the investment_in_the_contract at the time sec_72 provides in part that with certain exceptions an amount received from a_trust described in sec_401 which is exempt from tax under sec_501 or from a contract purchased by a_trust described in sec_401 purchased as part of a plan described in sec_403 or from a contract under sec_403 that the proceeds shall be included in gross_income but only to the extent it exceeds the investment plr-119822-99 in the contract sec_72 provides that the investment_in_the_contract as of any date is the aggregate amount of premiums or other consideration paid for the contract before such date minus the aggregate amount received under the contract before such date to the extent such amount was excludable from gross_income sec_72 of the code provides in part that if any taxpayer receives any amount from a qualified_retirement_plan defined in sec_4974 as including annuity_contracts under sec_401 sec_403 sec_403 and sec_408 prior to certain dates or the occurrence of certain events specified in sec_72 the taxpayer’s tax for the taxable_year shall be increased by an amount equal to percent of the portion of such amount which is includible in gross_income sec_4973 of the code imposes an excise_tax equal to percent of the amount of any excess_contribution to an ira or sec_403 annuity this percent tax applies for each taxable_year during which such excess_contributions remain in such ira or sec_403 annuity determined as of the end of the taxable_year sec_4979 of the code imposes an excise_tax equal to percent of the excess_aggregate_contributions under a qualified_plan or sec_403 tax-sheltered annuity plan for a taxable_year excess_aggregate_contributions under sec_4979 are defined in part as the sum of the employer matching_contributions and employee contributions actually made on behalf of highly compensated employees for a plan_year in excess of the maximum amount of such contributions permitted under the actual_contribution_percentage_test of sec_401 for such plan_year sec_3405 of the code requires the payor of a designated_distribution within the meaning of sec_3405 to withhold certain amounts from such distributions in general absent an election under sec_3405 made by a recipient sec_3405 requires the payor to withhold on distributions from employer deferred_compensation plans iras and commercial annuities as a general_rule all interest dividends capital growth stock distributions or any other change in the nature of assets through reorganization recapitalization or otherwise are held as part of the tax-deferred solution ie the tsa the ira and the qualified_plans until the assets are distributed only upon distribution are such increases in account value taxable to the recipient central to our analysis of your submitted ruling requests is the question of whether or not membership interests in a mutual_insurance_company are within the stated plans in this regard any membership interests in a mutual_insurance_company which arise from the purchase of an insurance_contract are inextricably tied to the contract from the time of purchase these membership interests are created by operation of state law solely as a result of the policyholder’s acquisition of the underlying contract from a mutual_insurance_company and cannot be transferred separately from that contract prior to conversion the membership interests have no determinable value apart from the insurance_contract itself further if the insurance_contract is surrendered by the policyholder or in the event an insurance_contract is terminated by plr-119822-99 payment of benefits to the contract beneficiary these membership interests cease to exist having no continuing value the membership rights associated with the tax qualified retirement contracts are acquired as a direct result of tax-favored payments to a mutual_insurance_company indeed these membership interests cannot be obtained by any purchase separate from an insurance_contract issued by mutual in view of the foregoing such interests are part of the tax qualified retirement contracts created pursuant to sec_401 sec_403 and sec_408 of the code respectively while it has been recognized that consideration received in a demutualization transaction is in exchange for a membership interest in a mutual_insurance_company and not from or under an insurance_contract such a distinction does not require the detachment of such consideration from the tax qualified retirement contracts which consists of both the contracts and all other interests which arise with the purchase of such a contract see revrul_71_233 1971_1_cb_113 rather contracts and the related membership interests must be viewed as part of a program of interrelated contributions and benefits which are retained within the plans cf income_tax regulation sec_1_72-2 the planned issuance of policy credits does not constitute a distribution of such credits to the annuitants the conversion of membership interests in mutual to policy credits is a mere change in form of one element within the arrangement to another since the conversion increases the accumulation value of the annuity_contracts the policy credits are treated for purposes of sec_403 and sec_408 of the code in the same manner as any other return of or return on an investment within the arrangements described above and are not regarded as having been received by the policyholder similarly under sec_402 sec_403 and sec_408 of the code only amounts paid or distributed under the applicable plans will be included in the gross_income of the distributee under the rules of sec_72 sec_72 dealing with the tax treatment of amounts_not_received_as_an_annuity provides for the inclusion of such amounts when received by the distributee as policy credits will be issued in exchange for membership interests such interests being held within the applicable plans no amount is treated as received by or includible in the gross_income of any policyholder under such plans of mutual for purposes of sec_72 the value of policy credits which will be added to the tax-qualified retirement contracts will not be regarded as part of the investment in the contracts an amount which under sec_72 consists of the aggregate amount of premiums or other consideration paid for the contract in addition as no amount is to be treated as having been distributed as a result of the issuance of policy credits nor received by the tax-qualified retirement policyholders outside the plans the additional percent tax imposed by sec_72 does not apply as indicated above sec_4979 of the code imposes excise_taxes on certain excess_contributions made to plans described in sec_401 and sec_403 sec_4973 imposes excise_taxes on certain excess_contributions made to iras and to certain tax-sheltered annuity_plans described in sec_403 because the addition of policy plr-119822-99 credits pursuant to the conversion occurs within the above arrangements causing neither a distribution from nor a contribution to such annuities no excess_contributions can be attributed to the addition of policy credits to the pension annuities sec_3405 of the code requires a payor to withhold income taxes on certain designated distributions including distributions from or under an employer_deferred_compensation_plan an individual_retirement_plan or a commercial_annuity the addition of policy credits within the tax-sheltered annuity arrangement described in sec_403 or ira arrangement pursuant to the conversion does not result in the distribution of any amounts to individual policyholders within the meaning of sec_3405 and will not be subject_to any requirement to withhold accordingly we conclude that under the terms of the proposed demutualization transaction whereby mutual plans to issue policy credits to qualified contracts that the issuance of policy credits to mutual members owning qualified contracts - will not be treated as a distribution that would affect the treatment of the qualified contracts under sec_402 sec_403 or sec_408 will not be treated as a distribution or contribution with respect to the qualified contracts that would result in an additional income or excise_tax under sec_72 sec_72 sec_4973 or sec_4979 will not result in current taxable_income to the members owning the qualified contracts will not be treated for purposes of sec_72 as part of the investment in the qualified contracts but will be treated for purposes of sec_403 and sec_408 as investment earnings attributable to the year in which the policy credits are issued and will not be subject_to_withholding pursuant to sec_3405 the rulings provided herein are based upon the assumption that the plans described are tax-sheltered annuity_plans that meet the requirements of sec_403 ira’s that meet the requirements of sec_408 or plans that meet the requirements of sec_401 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 ruling_request verification of the factual information and other data may be required as part of the audit process plr-119822-99 no opinion is expressed as to the tax treatment of the transactions under other provisions of the code or income_tax regulations or as to the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above rulings our ruling that the conversion constitutes a reorganization within the meaning of sec_368 of the code is conditioned on mutual being considered the same entity before and afer the conversion under state x law 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 a copy of this letter should be attached to the federal_income_tax return of mutual and stock holding for the taxable_year in which the transaction covered by this ruling letter is consummated sincerely associate chief_counsel corporate by lewis k brickates assistant to the branch chief branch


cca-581833-13 id -------------- office uilc number release date from ------------------ sent wednesday may pm to --------------- cc subject re quick question - effect of bkty petition assmt sol hi -------- - i agree that the filing of a bankruptcy petition doesn't suspend the assessment sol if a notice_of_deficiency hasn't been issued bc b d provides that the automatic_stay doesn't prohibit the making of a tax_assessment and sec_362 provides that the stay doesn't prohibit the issuance of a notice_of_deficiency once an sn is issued however the irs is indirectly prohibited by the stay from assessing a deficiency during the time the debtor is prohibited by sec_362 from filing a tax_court petition note prior to the bankruptcy act of the irs was directly prohibited by the automatic_stay from making assessments because the bc now allows assessments the sol on assessments is no longer suspended by reason of a bankruptcy case pursuant to sec_6503 sec_362 prevents an individual debtor from filing a petition in tax_court concerning a prepetition tax while the stay is in effect when this happens sec_6213 suspends the running of the 90-day period to petition_tax_court while the stay is in effect plus days when a statutory notice is issued while the stay is in effect the taxpayer ha sec_150 days to file a petition in tax_court after the stay ends because the irs is prohibited by sec_6213 from assessing a deficiency during the time the taxpayer has to petition_tax_court the filing of a bankruptcy petition has the effect of indirectly preventing the irs from making an assessment sec_6503 suspends the running of the sol on assessment during the time the irs is prohibited from making an assessment and for days thereafter this issue is discussed in the chief_counsel bankruptcy practice deskbook on pp to i hope this answers your question feel free to contact me however should you have any questions regarding the above ---------- --------------------- ------------ -----------------


department of the treasury internal_revenue_service washington d c date number release date office symbols cc dom fs it a case number tl-n-3653-97 uilc memorandum for district_counsel pacific northwest portland office cc wr pnw por from deborah a butler assistant chief_counsel field service cc dom fs subject internal_revenue_service national_office field_service_advice this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend x corp y corp z corp m n p q r s t u v w x y z date date date term a term b exercise period issue whether the taxpayer is entitled to an interest_deduction for the amount_paid to an unrelated party under a shadow warrant agreement executed in conjunction with a loan transaction between the parties conclusion we concur in your advice that the shadow warrant agreement is integrally related to the credit agreement which was part of a financing_transaction the available facts do not support recharacterizing the shadow warrants as equity however the additional factual development required may dictate a different conclusion facts on date x corp and y corp an unrelated financial lender entered into a credit agreement and a shadow warrant agreement the loans were fully secured not convertible into stock and y corp was given no participation in the management of the company under the credit agreement y corp received a closing fee of dollar_figures y corp agreed to provide financing to x corp as follows term_loan a in the amount of q payable in quarterly installments over term a interest at prime rate plus or libor plus as selected by x corp term_loan b in the amount of dollar_figurer payable in quarterly installments over term b interest rate of per annum and dollar_figurer revolving loan in the amount of dollar_figurer due and payable if term_loan a and term_loan b were paid in full interest at prime rate plus or libor plus as selected by x corp cid cid letter_of_credit guaranty of up to dollar_figurez of industrial_development_bonds already outstanding the credit agreement provided that as a condition of making the loan the shadow warrant agreement must be delivered to y corp on or before the closing date the shadow warrant agreement stated that the initial warrants were being issued to y corp in order to induce the initial_holder to enter into and advance funds pursuant to the credit agreement the shadow warrant agreement specifically states that nothing in its terms should be construed as granting the holder a right to purchase stock to receive notice of or to vote at shareholder meetings or to any rights as a shareholder the shadow warrants were transferable upon exercise of the warrants y corp was entitled to a contingent payment which was the greater of the fair_market_value per share or book_value per share of m shadow warrant shares minus the base price of dollar_figurez per share they could be exercised during the exercise period or upon the occurrence of an exercise event an exercise event was defined as a merger complete_liquidation sale of substantially_all assets or a sale of more than ten percent of outstanding capital stock in addition the shadow warrant agreement contained antidilution provisions which increased the number of shadow warrant shares and or decreased the base price in the event that x corp issued additional shares at less than the base price there was also a provision for the holder of the shadow warrants to share in corporate_distributions in essence these provisions were designed to protect y corp ’s right to receive the contingent payment which should equal n of the value of x corp a amendment to the shadow warrant agreement changed the applicable_percentage to p while at the same time increasing the number of shadow warrant shares to m on date x corp was purchased by z corp in accordance with the agreements y corp exercised the warrants the contingent payment was computed as dollar_figuret but on the date of the merger y corp received a payment of only dollar_figureu an additional dollar_figurev was payed to y corp during the taxable_year on the federal_income_tax return for the period ending x corp claimed an interest_expense_deduction in the amount of dollar_figuret during the audit x corp has agreed that the interest_expense_deduction is limited to the amount actually paid during the year but continues to assert that an interest_expense_deduction is allowable the revenue_agent has raised questions about the treatment of the warrants for tax purposes he is considering whether the shadow warrants are more properly characterized as equity in this regard he has also suggested that because the credit agreement and the shadow warrant agreement are two separate documents they should be considered independently cid law and analysis sec_163 allows a deduction for all interest_paid or accrued within the taxable_year interest is the amount which one has contracted to pay for the use forbearance or detention of money 308_us_488 284_us_552 revrul_76_413 1976_2_cb_213 a payment may not be denominated as interest but a taxpayer will nonetheless be entitled to a sec_163 deduction because it is in substance interest 286_f2d_285 6th cir 195_f2d_69 3rd cir a r jones syndicate v commissioner 23_f2d_833 7th cir 21_tc_846 the revenue_agent proposes that the credit agreement and the shadow warrant agreement should be considered separately rather than as integrally related and part of the same transaction while the loan and warrant agreements are separate documents they were executed at the same time and emanate from the same transaction we agree with the conclusion that an analysis of the shadow warrant agreement cannot be complete without taking into account the entire transaction which includes the credit agreement the execution and delivery of the shadow warrant agreement is a condition of the loan the two cannot be viewed as having independent significance unrelated to the other the determination of whether an instrument represents debt or equity is a question of fact 326_us_521 411_f2d_818 5th cir o h kruse grain milling v commissi279_f2d_123 9th cir litton business sys inc v commissioner 63_tc_367 the ultimate issue is whether there is a genuine intention to create a debt with a reasonable expectation of repayment and did that intention comport with the economic reality of creating a debtor-creditor relationship the intent of the parties is derived from the total effect of what occurred 641_f2d_83 2nd cir 376_f2d_791 2nd cir among the factors the courts consider the names given to the certificates evidencing the indebtedness the presence or absence of a fixed maturity_date the source of payment the right to enforce payments the extent of participation in management by the holder of the instrument status of the advances in relation to regular corporate creditors intent of the parties identity of interest between creditors and shareholders the ‘thinness’ of capital structure in relation to the debt the ability of the corporation to obtain funds from outside sources the use to which advances were put the failure of debtor to repay and the risk involved wilbur 800_f2d_625 6th cir 511_f2d_185 6th cir 432_f2d_741 6th cir 318_f2d_38 5th cir 74_tc_476 acq 1982_2_cb_1 no one of these factors is determinative 279_f2d_657 9th cir 319_f2d_475 9th cir they are only aids in answering the ultimate question of whether the investment analyzed in terms of its economic reality constitutes risk capital entirely subject_to the fortunes of the corporate venture or represents a strict debtor-creditor relationship 683_f2d_365 ct_cl applying these factors to the facts of this case we make the following observations names given the certificates exam argues that the term warrant connotes an equity_interest however warrants have sometimes been variously treated as debt and others as equity presence of a maturity_date term loans a and b have maturity dates but the revolving loan is due and payable only when and if the term loans are fully paid the shadow warrants are exercisable over a five year period if not exercised by that date or upon the occurrence of an exercise event the warrants would expire unpaid the source of the payment exam correctly points out that under the agreement all payments of the shadow warrants are tied to equity distributions or the appreciation of the value of x corp stock to the extent that x corp made a distribution to its shareholders it seems clear that the pro-rata payment which y corp received would be derived from the same source from which the stock_distribution was made-usually earnings_and_profits payment upon the occurrence of an exercise event would seem to derive from net_proceeds available to shareholders indicates equity right to enforce the payment of principal and interest upon either the occurrence of an exercise event or exercise by x corp the agreement specifies the warrantholder’s remedies at law in the event of either default or violation of the agreement including specific performance or injunction thus there are provisions to enforce payment of the contingent payment however if the value of the stock does not exceed dollar_figurex y corp is entitled to nothing indicates debt participation in management y corp has no rights to participate in management indicates debt status equal to or inferior to regular corporate creditors shadow warrants have no preference over other corporate debt subordination to debt tends to be indicative of equity intent of parties exam concedes that in form the shadow warrants are structured so as to look like debt the shadow warrant agreement specifically states that nothing in its terms should be construed as conveying the rights of a shareholder moreover it also states that the purpose for granting the shadow warrant agreement is as an inducement to y corp to lend funds to x corp indicates debt thin or adequate capitalization here the courts look at both the debt-equity_ratio and whether the amount of capital invested in a business venture is realistic and adequate for carrying on the business for which it is organized and engaged the 340_f2d_445 2nd cir where quick_assets cannot cover current liabilities the fifth circuit affirmed the tax court’s determination that a corporation was thinly capitalized and notes were in fact equity 462_f2d_712 5th cir unable to make a determination from the available facts identity of interest between creditor and stockholder the available facts indicate that y corp has no equity_interest in x corp there is no indication of the extent to which the two corporations have common shareholders or directors at this point it appears that y corp and x corp are totally unrelated even so the courts have held the fact that a transaction is between unrelated third party will not preclude examination of the substance of a purported loan 348_f2d_1006 6th cir the motel co v commissioner tcmemo_1964_34 available information indicates debt the ability to obtain capital from other sources the inability to secure financing from another source is considered evidence that the advances are risk capital rather than debt see merlo builders inc supra no facts provided with respect to this issue the use to which advances were put to the extent that the funds are used in acquiring the business or to acquire capital assets it tends to suggest that they are part of the venture capital see merlo builders inc supra 462_f2d_712 5th cir no facts were initially provided with respect to this issue in subsequent telephone conversation the revenue_agent indicated the date transactions were part of a leveraged_buyout needs additional factual development failure of debtor to repay while it appears that the contingent payment was in fact made x corp only paid part of what was calculated to be the amount due there is no explanation for the partial payment the risk involved no facts provided with respect to this issue in our view the factor which most strongly weighs in favor of treatment of the shadow warrants as equity is the source of payment to the extent that the contingent payment is based on the value of the stock and adjustments are required when there is a relative change in the capital structure of x corp the contingent payment looks like a dividend thus in amw investments inc v commissioner tcmemo_1996_235 where no principal or interest was paid until years after the transfer and repayment was contingent on corporate earnings a thinly capitalized corporation was denied an interest_expense_deduction on promissory notes moreover the courts have closely scrutinized instruments denominated as debt where a thinly capitalized corporation uses a large portion of cash and or property required to get the business established and under way 462_f2d_712 5th cir 377_f2d_403 10th cir isidor 15_tc_31 aff’d per curiam 192_f2d_392 2nd cir the scrutiny is not limited to corporation-shareholder transaction but also those transactions involving unrelated third parties see for example merlo builders inc v commissioner tcmemo_1964_34 nonetheless at this time we cannot say that the available facts support the recharacterization of the shadow warrants as equity rather than debt we point out that there is an argument that the payment structure for the warrants is merely designed to insure that the lender receives additional interest when and if the value of the corporation increases likewise it is arguable that the shadow warrant agreement provides for a distribution to the holder of the warrants when dividends are paid to ensure that shareholders do not receive preference over the noteholder see for example stephens brothers miller-hutchingson co v commissioner 24_tc_953 where the tax_court held that a taxpayer who agreed to repay principal plus one half of the profits in exchange for a loan may deduct the profits paid to lender as interest in 398_f2d_694 3rd cir held that a loan from shareholders to a corporation was equity rather than debt even though the notes presented all the formal indicia of debt the court noted that the loan proceeds had been used to acquire the assets of the corporation and could not have been repaid for a number of years the court concluded that the economic reality was that the advances were a long term commitment dependent on the future value of the asset acquired additionally the court pointed out that the shareholders’ willingness to defer repayment of the loan was vastly different from what an outside lender would expect similarly here in the absence of an exercise event y corp was deferring whatever payments it might receive on the warrants for five to ten years not only was the contingent payment deferred but in the ordinary course of business repayment of the interest on the revolving loan would not commence until years after the loans were made such deferral is not to be expected from most third party lenders you have asked about how 634_f2d_484 10th cir effects our analysis in that case the district_court found that stock warrants issued in connection with a loan transaction were an integral part of the loan and the value of the warrants constituted a part of the cost of obtaining the loan as such the warrants were an investment_unit under sec_1 a b ii a as applicable to obligations issued before date which entitled taxpayer to amortize and deduct the warrant purchase_price there was no debt-equity analysis in monarch cement co and the regulations under which that case was decided are inapplicable here despite the fact that the amount of the contingent payment is determined by reference to the value of the stock an attribute of stock to the extent that information has been provided to this office most of the other factors tend to support the taxpayer’s characterization of the contingent payment as interest essentially y corp an unrelated lender has the right to enforce its receipt of a payment by a date certain y corp cannot participate in the management of x corp and apart from the method of payment we can point to no other factor which tends to indicate the payment is not interest the expressed intent of the parties is that the shadow warrants were part of the recompense to y corp for extending financing the loans but as the cases point out it is the totality of the factors analyzed in light of the economic reality which dictate the results in view of the number of factors for which incomplete or no information has been provided additional facts could alter how the agreements are viewed like plantation patterns and the motel co v commissioner indicate loan transactions tied in with the initial acquisition of a business or its capital assets are subject_to careful scrutiny as cases case development hazards and other considerations despite our tentative conclusion that the record does not support recharacterization of the contingent payment at this time more factual development is in order no information was provided with respect to several of the factors which are considered in making the debt versus equity determination if you have any further questions please call deborah a butler assistant chief_counsel field service by thomas d moffitt senior technician reviewer income_tax accounting branch


internal_revenue_service number release date index number ------------------------- ------------------------------------------------- ----------------------------- --------------------------------------- ---------------------------------------- - department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ------------------ id no ------------- telephone number --------------------- refer reply to cc psi b04 plr-154675-04 date may legend first donor ------------------ second donor ------------------------ trust ------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- ---------------------------------------------------- trust ------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- --------------------------------------------------------------------- trust ------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- --------------------------------------------------------------------- trust ------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- --------------------------------------------------------------------- date -------------------------- date ------------------ date -------------------------- date -------------------------- date ------------------- a ------------------- b ----------------------------- c ------------------------------------- d ------------------------ e ------------------------ taxpayer ------------------ state ----------- plr-154675-04 dear ------------------ this is in response to your date letter in which you requested a ruling on the gift_tax consequences of proposed disclaimers to be executed by taxpayer the facts and representations are as follows trust trust an irrevocable_trust was executed by first donor on date under article second paragraph b of the trust instrument the trustees are to pay such sum or sums from time to time out of the income accumulated income or principal of trust to or for the benefit of a first donor's child or any of a's descendants in the trustees' sole and absolute discretion in the event of illness accident or other misfortune or in the event of any emergency or if in the trustees' judgment it is necessary trust will terminate twenty years after the death of the survivor of a b and c and all of first donor's descendants living on date on termination the remaining trust principal and undistributed_income will be distributed to the descendants of a who have no living ancestor who is a descendant of a per stirpes on the date trust was executed first donor had eleven living descendants consisting of three children a b and c and eight grandchildren all of whom are still living a's child d is taxpayer’s father as a's descendant the trustees may in their discretion make distributions of income and principal to taxpayer during the trust term further taxpayer as a descendant of a and a surviving child of d will be entitled to receive a share of the per stirpital portion of the trust remainder if d dies prior to the termination of trust and taxpayer survives taxpayer has received discretionary distributions from trust trust trust an irrevocable_trust was executed by first donor on date under article second paragraphs a and b of the trust instrument during a's lifetime i one-half of the trust income is to be accumulated and added to principal ii one quarter of the remaining income is to be paid to a and iii the balance of the income is to be paid to or for_the_use_of a's children and descendants of deceased children per stirpes under article second paragraph g a is granted a limited power to appoint by will the entire trust property to and among a's spouse e and any or all of a's children and descendants of deceased children to the extent a fails to exercise the power trust will be held in further trust and administered as provided in article second paragraphs c d and e under article second paragraph c on a's death subject_to a's exercise of his power_of_appointment one-half of the trust income is to be paid to e a's spouse during plr-154675-04 her lifetime provided that e survives a as his spouse the remaining trust income or all of the trust income if e should predecease a or die after a's death or not survive a as his surviving_spouse is to be paid to or for the benefit of a's children share and share alike with an equal portion to or for the descendants of any deceased child per stirpes under article second paragraph e during the time that e and a's children and their descendants are entitled to receive trust income in the event of illness accident or other misfortune or in the event of any emergency or if in the trustee's judgment and discretion it is necessary advisable or desirable for the comfortable maintenance and support of any of the beneficiaries the trustee may pay to a beneficiary or beneficiaries such principal as the trustee deems necessary or advisable under article second paragraph d subject_to a's exercise of his limited_power_of_appointment trust will terminate twenty-one years after the death of the last survivor of a e and a's children living at the creation of trust on termination all of the trust principal and accumulated income will be distributed per stirpes to a's children and the descendants of any deceased child on the date that first donor executed trust a had two children including d thus d's life is one of the lives measuring the duration of trust after d's death to the extent a has not exercised his testamentary limited power to appoint the entire trust corpus taxpayer as a descendant of a d's surviving child would be entitled to receive i trust income and principal during the trust term and ii a distribution of a per stirpital portion of the remainder accumulated trust income and principal when trust terminates taxpayer has not received any income or principal distributions from trust trust subsequent to date the provisions of trust are identical to those of trust described above trust trust an irrevocable_trust was executed by second donor on date trust an irrevocable_trust was executed by a on date under paragraph first of the trust instrument the trust is to be held in three equal shares under paragraph first subparagraphs a b and c the income derived from one share is to be accumulated and added to principal the income of the second one-third share is to be paid to a and on his death to e if she survives him as his spouse the income of the remaining one-third share is to be paid to e so long as she is a's spouse or has survived a as his spouse or to any of a's descendants in the event of need occasioned by illness accident or other misfortune or in any emergency or if in the trustee's plr-154675-04 discretion it is necessary for the comfortable maintenance support or education of any beneficiary or of his or her family under paragraph first subparagraph d trust is to terminate twenty years under paragraph first subparagraph d after a's death or on e's later death if she survives a as his spouse all of the one-third shares of trust are to be combined into a single trust less any portion of the second one-third share for which a has made a contrary testamentary_disposition of the income along with accumulated income trust is then to be divided into equal shares one such share for each of a's then living children and deceased children leaving surviving issue the surviving issue to take the deceased child's share by representation during the continuation of the trust term the trustee is to pay to the beneficiaries a's children or their surviving issue by representation of a respective share so much income of that share as the trustee in the trustee's discretion determines under paragraph first subparagraph e after a's death the trustee may as to any beneficiary who from time to time is receiving or entitled to receive trust income in the trustee's discretion in the event of illness accident or other misfortune or in the event of any emergency or if in the judgment of the trustee it is necessary for the comfortable maintenance support or education of any beneficiary or of the beneficiary's family pay to or for the benefit of the beneficiary such principal as the trustee deems necessary however the amount so paid is to be charged against the share from which the beneficiary is then receiving or entitled to receive income after the death of the last survivor of a e and those of a's children living on the date a executed trust on termination the trust principal and accumulated income will be distributed per stirpes to a's descendants then living who have no living ancestor who is a descendant of a lives measuring the duration of trust taxpayer as a's descendant and while a is living is entitled to distributions of income from a one-third share described above in the event certain needs arise after both a and d have died if taxpayer is living she will be entitled as d's surviving issue to i distributions of income and principal of the trust share set_aside with respect to d and ii on termination of trust distribution of all or a portion of the remainder of that share by representation each of trust trust trust and trust taxpayer proposes to disclaim her contingent right to receive the trust corpus on termination of the trust including any interest she would receive as a potential appointee of a's limited_power_of_appointment her majority date date date and date are all prior to taxpayer attained the age of majority under state law on date with respect to when a executed trust a had two children including d d's life is one of the the disclaimers will be executed by taxpayer within nine months after attaining taxpayer requests a ruling that the proposed disclaimers will not constitute a plr-154675-04 transfer subject_to federal gift_tax law and analysis each of the four trusts is governed by the laws of state under sec_469 of state revised statutes any individual to whom property or an interest therein is donatively transferred by any means including a transfer resulting from another disclaimer may disclaim all or any portion of the transfer unless the terms of the transfer otherwise provide the disclaimer shall cause the terms of the transfer to be applied to the disclaimed transfer and to any future interests taking effect thereafter as if the disclaimant had died immediately before the transfer sec_469 of state revised statutes provides that a disclaimer is made by a writing showing an unconditional refusal to accept a transfer or a portion thereof signed by the disclaimant or representative and delivered on or before nine months after the transfer or by any later time provided in the particular case or pursuant to other provisions of chapter of state revised statutes and before any acceptance of the disclaimed interest delivery of a disclaimer may be accomplished by delivery to the transferor the transferor's personal representative or other legal_representative or the holder of legal_title to the property to which the interest is related sec_469 of state revised statutes provides that each separate interest in property is subject_to disclaimer or acceptance and each separate interest including any specific amount part fraction or asset thereof or formula amount based on present or future facts independent of the disclaimant's volition is subject_to disclaimer or acceptance interest may be disclaimed in whole or in part at any time before or within nine months after beneficiaries of the interest have been fully ascertained and their interests vested sec_469 of state revised statutes provides that a contingent future sec_2501 of the internal_revenue_code imposes a tax on the transfer of property by gift sec_2511 provides that the gift_tax imposed under sec_2501 applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-1 of the gift_tax regulations provides that in the case of transfers creating an interest in the beneficiary disclaiming made before date where the law governing the administration of the decedent's_estate gives the beneficiary a right completely and unqualifiedly to refuse to accept ownership of property transferred from a decedent a refusal to accept ownership does not constitute the making of a gift if the refusal is made within a reasonable_time after knowledge of the existence of the transfer is unequivocal is effective under local law and is made before the disclaimant has accepted the property compare sec_2518 and plr-154675-04 sec_25_2518-1 through providing rules for determining whether a disclaimer is a qualified_disclaimer effective for estate and gift_tax purposes in the case of the disclaimer of an interest in property that is created in the beneficiary disclaiming by a transfer made after date as noted above under sec_25_2511-1 if the interest to be disclaimed was under sec_25_2511-1 the disclaimers must be unequivocal rev_rul in this case taxpayer proposes to disclaim her contingent right to receive trust created before date the disclaimant must disclaim the interest in the property within a reasonable_time after knowledge of the existence of the transfer creating the interest to be disclaimed in the case of a disclaimer of an interest in trust in general the transfer occurs when the trust is established rather than when the interest actually vests in the disclaimant if the transferor has not reserved any power over the trust see 455_us_305 however the time limitation for making the disclaimer does not begin to run until the disclaimant has attained the age of majority and is no longer under a legal disability to disclaim see jewett v commissioner supra pincite see also sec_2518 and sec_25 c ii corpus on the termination of trust trust trust and trust she will execute each disclaimer within nine months after reaching age under these circumstances the proposed disclaimers will be considered to be made within the time prescribed in sec_25_2511-1 1976_1_cb_292 which considers the application of sec_25_2511-1 concludes that a disclaimer is unequivocal if the disclaimant's act of refusal is unambiguous in its consequences that is the disclaimant must unqualifiedly refuse to accept ownership of the property for example a disclaimer is unequivocal if the disclaimed property must pass as otherwise provided in the instrument and not pursuant to the direction of the disclaimant similarly a disclaimer is unequivocal if the disclaimant does not accept the benefits from the property interest disclaimed in this case the disclaimed interests will not pass pursuant to any direction on the part of taxpayer further taxpayer will not accept the benefits of the disclaimed interests after the disclaimers compare sec_25_2518-3 and sec_25_2518-3 examples and regarding treatment of certain interests in the same property as separate interests eligible for qualified_disclaimer treatment under sec_2518 this case state law specifically provides that an individual may make a valid disclaimer of any separate interest in property while retaining other separate interests in the same property further the disclaimers will be timely under sec_469 of the state revised statutes consequently if taxpayer satisfies the procedural requirements prescribed under state law the disclaimers will be valid under local law under sec_25_2511-1 the disclaimers must be effective under local law in finally under sec_25_2511-1 the disclaimant must not have accepted the plr-154675-04 property before the disclaimer accordingly we conclude that based on the representations made if the disclaimers are executed as proposed and assuming that taxpayer has not accepted or received any of the benefits of the disclaimed interests the terminating distributions the disclaimers will not constitute transfers subject_to the federal gift_tax the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code sec_6110 provides that it may not be used or cited as precedent the ruling contained in this letter is directed only to the taxpayer s requesting it pursuant to the power_of_attorney on file a copy of this letter is being sent to the sincerely yours katherine a mellody senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries taxpayer enclosure copy for sec_6110 purposes cc


office_of_chief_counsel internal_revenue_service memorandum number release date cc ita preno-144820-04 uilc date date to associate area_counsel small_business self-employed cc sb mil from acting chief branch office of associate chief_counsel income_tax accounting cc ita subject wisconsin dairy investment_tax_credit this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent issue what is the federal_income_tax treatment of the recently enacted dairy investment_tax_credit under sec_71 3n and 3n of the wisconsin statutes conclusion the nonrefundable nontransferable state tax_credit is treated for federal_income_tax purposes as a reduction in state tax_liability to the extent a taxpayer deducts state taxes under sec_164 the credit effectively reduces the sec_164 deduction the credit is not treated as a recovery or reimbursement of the capital expenditures_for dairy farm modernization or expansion that qualify taxpayers for the credit facts preno-144820-04 the following description reflects our understanding of the dairy investment_credit based on our review of the relevant state statutes and the material on the website for the wisconsin department of revenue chapter of the wisconsin statutes provides for income and franchise_taxes for state and local revenues subchapter_i which contains dollar_figure through provides for the taxation of individuals and fiduciaries subchapter iv which contains dollar_figure through provides for the taxation of corporations sec_71 3n and 3n of the wisconsin statutes provide for a credit against the tax imposed under subchapters i and iv respectively the credit is an amount equal to of the amount the claimant paid in the tax_year for dairy farm modernization or expansion related to the operation of the claimant's dairy farm dairy farm modernization or expansion means the construction improvement or acquisition of equipment for dairy animal housing confinement animal feeding milk production or waste management the credit is not allowed for expenditures that are claimed as a deduction under sec_162 the credit is available for taxable years that begin after date and before date the maximum aggregate amount that may be claimed by a claimant during this six-year period is dollar_figure the credit is nonrefundable and may be carried forward for up to years see wis stat sec_71 3n f 3n f and f we understand that the credit is not transferable under state law the amount of the credit must be included in the claimant’s income except that credits computed by a partnership and passed through to partners are added to the partnership’s income and credits computed by a tax-option corporation and passed through to shareholders are added to the tax-option corporation’s income see wis stat sec_71 a a and g wisconsin tax bulletin p date law and analysis sec_61 of the internal_revenue_code provides that except as otherwise provided gross_income means all income from whatever source derived sec_1_61-1 of the income_tax regulations provides that gross_income includes income realized in any form whether in money property or services under the tax_benefit_rule partially codified in sec_111 of the code a refund of state tax is generally excludable from federal gross_income to the extent that the refund represents a recovery_of an amount of state tax that was deducted without tax_benefit in a prior year we were not asked to address the tax_credit that applies to insurance_companies in sec_71 3n of the wisconsin statutes preno-144820-04 sec_164 of the code generally allows as a deduction certain types of taxes listed in sec_164 - that are paid_or_accrued within the tax_year see also sec_1_164-1 of the income_tax regulations specifically sec_164 provides for the deduction of state_and_local_income_taxes paid_or_accrued within the tax_year additionally sec_164 provides for the deduction of state and local_taxes not described in sec_164 - that are paid_or_accrued within the tax_year in carrying_on_a_trade_or_business or an activity described in sec_212 relating to expenses for production_of_income see also revrul_70_561 1970_2_cb_40 pennsylvania excise_tax imposed on corporate net_income is deductible under sec_164 under sec_1012 of the code the basis_of_property is generally its cost sec_167 provides for a depreciation deduction for business property taxpayers may elect to expense the cost of certain depreciable business_assets under sec_179 generally a state tax_credit to the extent that it can only be applied against the recipient's current or future state tax_liability is treated for federal_income_tax purposes as a reduction or potential reduction in the taxpayer's state tax_liability the amount of the credit is not included in the taxpayer's federal gross_income or otherwise treated as a payment from the state and is not deductible as a payment of state tax under ' cf revrul_79_315 1979_2_cb_27 holding iowa income_tax rebate credited against tax due is neither includible in federal gross_income nor deductible under sec_164 similarly an accrual-basis taxpayer is not required to take the value of such future tax_credits into income the credits will simply reduce the taxpayer's otherwise-deductible tax_liabilities as and if they accrue see snyder v united_states 894_f2d_1337 u s app lexis 6th cir in certain situations in order to reflect the substance of a transaction and treat similarly- situated taxpayers fairly a reduction in state tax_liability may be recharacterized for federal tax purposes as a deemed payment by the state to the taxpayer this treatment may be appropriate for example when a credit abatement or similar item is provided in return for the provision of services the use of property or the transfer of property such a recharacterization may involve deeming the taxpayer to have made an equal offsetting payment to the state in satisfaction of the taxpayer's tax_liability unreduced by the credit and this offsetting deemed payment to the state may be deductible as a payment of tax if it otherwise qualifies the wisconsin dairy investment_credit illustrates the normal case in which a state tax_credit is treated for federal tax purposes as a reduction in tax not as an item_of_income and an offsetting payment of tax see holding of revrul_79_315 the dairy investment_credit is not treated for federal tax purposes as a recovery or reimbursement of the capital expenditures_for dairy farm modernization or expansion that qualify taxpayers for the credit the treatment of the credit for state tax purposes-the fact that the amount of the credit is included in the claimant's gross_income for state tax purposes-does not change its federal tax treatment preno-144820-04 more specifically to the extent a taxpayer deducts state taxes under sec_164 the wisconsin dairy investment_credit simply has the federal tax effect of reducing the sec_164 deduction in an amount that is partially offset by the increase in state tax caused by including the amount of the credit in state income similarly the fact that a state tax_refund is attributable in whole or in part to the reduction in state tax caused by the dairy investment_credit does not affect the federal tax treatment of the refund as a refund of state tax as such the refund is generally includible in gross_income unless pursuant to sec_111 the prior payment of state tax did not result in a tax_benefit because the dairy investment_credit is treated as a reduction in state tax_liability not a recovery or reimbursement of the expenditures that qualify a taxpayer for the credit the credit does not affect the basis for federal tax purposes of the assets with respect to which those expenditures are made and it is irrelevant whether the taxpayer took depreciation on those assets or expensed their cost under sec_179 please call if you have any further questions


significant index no department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division mar tep ra ad re substitute mortality_table ruling taxpayer ein plan for which substitute mortality tables are requested plan if ein plan no other plans in controlled_group ein ein ein ein dear’ plan t plan p plan lo plan tm plan no plan no plan no ‘ plan no this letter is to inform you that your request to use substitute mortality tables for making computations under sec_430 of the internal_revenue_code the code for plan if - has been granted with respect to the populations specified in this letter effective fora period of plan years beginning with the plan_year commencing january your request has been granted in accordance with sec_430 of the code and sec_303 of the employee_retirement_income_security_act_of_1974 this approval applies to the following specific populations e e plan if - male annuitants including disabled participants plan if - female annuitants including disabled participants based on the information provided by the taxpayer the following populations do not have credible mortality experience and therefore the standard mortality tables will be used for calculations under sec_430 of the code plan if - male nonannuitants plan if - female nonannuitants plan tm - male nonannuitants plan tm - female nonannuitants plan t - all participants plan p - all participants the taxpayer is also separately requesting approval for substitute mortality tables for all participants for plan 1o and the male annuitants and female annuitants for plan tm these requests will be addressed in separate ruling letters in granting this approval we have only considered whether the substitute mortality rates were developed in accordance with sec_1_430_h_3_-2 of the income_tax regulations regulations and revproc_2017_55 accordingly we are not expressing any opinion as to the accuracy or acceptability of any calculations or other material submitted with your request permission is hereby granted to use the substitute mortality rates shown in the tables below for plan if approved for use beginning with the plan_year commencing january substitute mortality tables base_year male female ge annuitant annuitant a - o m o g r o o o n i o c male annuitant female annuitant male annuitant female annuitant male annuitant annuitant female age through december the above rates were developed based on an experience study period from january - the rates were calculated by adjusting the applicable standard mortality tables in sec_1_430_h_3_-1 of the regulations indicated in the table below using the mortality ratio and credibility weighting factor determined by aggregating male and female experience for plan if as shown in the table below with a base_year of standard base mortality_table mortality ratio credibility factor population male annuitants male annuitant mortality female annuitant mortality female annuitants the internal_revenue_service has reviewed the substitute mortality rates and supporting information and has determined that based on the information submitted the rates were developed in accordance with sec_1_430_h_3_-2 of the regulations and revproc_2017_55 the above rates must be applied on a generational basis as provided in sec_1_430_h_3_-2 of the regulations your attention is called to sec_430 of the code and sec_1 h - d of the regulations which describe the circumstances in which the use of the substitute mortality_table will terminate before the end of the 10-year period described above in general the substitute mortality tables can no longer be used as of the earliest of for a plan using a substitute mortality_table for only one gender the first plan_year for which there is full or partial credible mortality information with respect to the other gender that had lacked credible mortality information unless an approved substitute mortality_table is used for that gender the first plan_year in which the plan fails to satisfy the requirements of sec_1_430_h_3_-2 of the regulations regarding the requirement that other plans and populations in the controlled_group must also use substitute mortality tables unless it can be demonstrated that they do not have credible mortality information taking into account the transition_period for newly affiliated - companies in sec_1_430_h_3_-2 of the regulations the second plan_year following the plan_year for which there is a significant change in individuals covered by the plan as described in sec_1_430_h_3_-2 of the regulations the plan_year following the plan_year in which a substitute mortality_table used for a plan population is no longer accurately predictive of future mortality of that population as determined by the commissioner or as certified by the plan's actuary to the satisfaction of the commissioner or the date specified in guidance published in the internal_revenue_bulletin pursuant to a replacement of mortality tables specified under sec_430 of the code and sec_1_430_h_3_-1 of the regulations other than annual updates to the static mortality tables issued pursuant to sec_1 h - a of the regulations or changes to the mortality improvement rates pursuant to sec_1_430_h_3_-1 of the regulations this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent when filing form_5500 for the plan years for which the substitute mortality tables are used please note the information that is required to be attached to schedule sb actuarial information in accordance with the instructions to that form we have sent a copy of this letter to your authorized representatives pursuant to a power_of_attorney form on file in this office and to the manager ep classification in columbus ohio and to the manager ep compliance unit in chicago illinois if you require further assistance in this matter please contact id yat - sincerely david m ziegler manager employee_plans actuarial group cc


office_of_chief_counsel internal_revenue_service memorandum number release date cc psi postn-139955-12 uilc date date to chief excise_tax program holly l mccann third party communication none date of communication not applicable from chief branch office of associate chief_counsel passthroughs and special industries cc psi frank boland subject federal excise_tax on wagers this responds to your request for non-taxpayer specific legal advice as to whether the excise_tax on wagering imposed by sec_4401 of the internal_revenue_code applies to wagers accepted as described below this document may not be used or cited as precedent facts dom a united_states citizen who resides in the united_states operates a sporting event bookmaking business in a manner similar to a sole_proprietor all of dom’s bettors are residents of the united_states related to this bookmaking business dom contracts with for a company outside the united_states to maintain the betting information that dom’s bettors send to for dom’s arrangement with for has the following features dom does not have an ownership or financial interest in for for cannot commit dom to a wager or reject or modify a wager for does not have an interest in the outcome of the wagers made by dom’s bettors for’s only income from this arrangement is fixed monthly fees paid_by dom for each bettor’s account information maintained by for dom’s bettor does not deposit money with for or a bank designated by for postn-139955-12 dom gives its bettors a toll free telephone number a website address an account number and a password a bettor using this information contacts for and describes the wager it wants to make the bettor can also use the same information to access its wagering history dom using a different toll free number or the same website a username and a password accesses a bettor’s wagers and account balance to monitor accept reject or modify a bettor’s wagers usually on a weekly basis dom personally pays out or collects cash to settle a bettor’s account dom settles only by paying or accepting cash in the united_states all of the bets involved in this case are wagers as that term is used in sec_4401 law sec_4401 imposes a tax on certain wagers under sec_4401 every person engaged in the business of accepting wagers is liable for the tax on each wager accepted by that person sec_4404 limits the wagering tax to wagers accepted in the united_states or placed by a person that is in the united_states a with a person that is a citizen of or resident_of_the_united_states or b in a wagering pool or lottery conducted by a person that is a citizen or resident_of_the_united_states sec_44_4401-2 of the wagering tax regulations identifies a person engaged in the business of accepting wagers as a person who makes it a practice to accept wagers with respect to which he assumes the risk of profit or loss depending upon the outcome of the event or the contest with respect to which the wager is accepted analysis for only receives and maintains information regarding a wager that a bettor sends to for pursuant to dom’s directions for stores this information for dom who can readily access the information to accept reject or modify a bettor’s wagering information for’s compensation is limited to the fixed account maintenance fees for charges dom these fees do not vary with the outcomes of sporting events with respect to which for receives bettors’ information therefore for’s participation in this arrangement is limited to data maintenance although dom directs its bettors to provide for with their wagering information dom alone retains the ability to accept reject or modify wagers by accessing bettors’ account information maintained by for dom not for assumes the risk of profit or loss depending upon the outcomes of sporting events with respect to which dom accepts wagers the acceptance of wagers for which dom assumes the risk of profit or postn-139955-12 loss depending upon the outcome of the event with respect to which the wagers are accepted identifies dom as being in the business of accepting wagers see sec_44 b the fact that dom arranges to have its bettors send their wagering information to for does not cause the wagers to be accepted by for because for only receives and maintains wagering information for dom therefore dom is accepting wagers in the united_states conclusion dom is liable for the sec_4401 tax because dom is in the business of accepting wagers and dom accepted the wagers in the united_states please call celia gabrysh at if you have any further questions


department of the treasury internal_revenue_service te_ge eo examinations commerce street mc dal dallas tx date taxpayer_identification_number person to contact identification_number contact telephone number tax_exempt_and_government_entities_division release number release date ape certified mail dear this is a final adverse determination regarding your exempt status under sec_501 of the internal_revenue_code the code our favorable determination_letter to you dated date is hereby revoked and you are no longer exempt under sec_501 of the code effective november 20xx the revocation of your exempt status was made for the following reason s you are not operating for any charitable religious educational or other exempt_purpose our examination for the tax years ended december 20xx and december 20xx reveals that you are not engaged primarily in activities which accomplish religious charitable educational or other exempt purposes as required by treas req sec_1_501_c_3_-1 moreover you failed the organizational_test for exemption because your corporate status has been suspended therefore you are nota corporation community chest fund or foundation as required by sec_501 contributions to your organization are no longer deductible under sec_170 after november 20xx you are required to file income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the tax_year ending december 20xx and for all tax years thereafter in accordance with the instructions of the return processing of income_tax returns and assessments of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination under the declaratory_judgment provisions of sec_7428 of the code a petition to the united_states tax_court the united_states claims_court or the district_court of the united_states for the district of columbia must be filed before the day after the date this determination was mailed to you please contact the clerk of the appropriate court for rules regarding filing petitions for declaratory judgments by referring to the enclosed publication you may write to these courts at the following addresses united_states tax_court second street nw washington d c united_states court of federal claims madison place nw washington d c united_states district_court for the district of columbia constitution avenue nw washington d c the taxpayer_advocate_service tas is an independent organization within the irs that can help protect your taxpayer rights tas can offer you help if your tax problem is causing a hardship or you’ve tried but haven't been able to resolve your problem with the irs tas will do everything possible to help you visit taxpayeradvocate irs gov or call if you qualify for our assistance which is always free if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely margaret von lienen director eo examinations enclosure publication letter catalog number 34198j internal_revenue_service tax_exempt_and_government_entities_division exempt_organizations examinations commerce street ms 4900-dal dallas tx department of the treasury date date taxpayer_identification_number form_990 990ez tax_year s ended december 20xx and 20xx person to contact id number contact numbers telephone fax manager’s name id number manager’s contact number response due_date certified mail - return receipt requested dear why you are receiving this letter we propose to revoke your status as an organization described in sec_501 of the internal_revenue_code code enclosed is our report of examination explaining the proposed action what you need to do if you agree if you agree with our proposal please sign the enclosed form_6018 consent to proposed action - sec_7428 and return it to the contact person at the address listed above unless you have already provided us a signed form we'll issue a final revocation letter determining that you aren’t an organization described in sec_501 after we issue the final revocation letter we'll announce that your organization is no longer eligible for contributions deductible under sec_170 of the code if we don't hear from you if you don’t respond to this proposal within calendar days from the date of this letter we'll issue a final revocation letter failing to respond to this proposal will adversely impact your legal standing to seek a declaratory_judgment because you failed to exhaust your administrative remedies letter rev catalog number 34809f effect of revocation status if you receive a final revocation letter you'll be required to file federal_income_tax returns for the tax_year s shown above as well as for subsequent tax years what you need to do if you disagree with the proposed revocation if you disagree with our proposed revocation you may request a meeting or telephone conference with the supervisor of the irs contact identified in the heading of this letter you also may file a protest with the irs appeals_office by submitting a written request to the contact person at the address listed above within calendar days from the date of this letter the appeals_office is independent of the exempt_organizations division and resolves most disputes informally for your protest to be valid it must contain certain specific information including a statement of the facts the applicable law and arguments in support of your position for specific information needed for a valid protest please refer to page one of the enclosed publication how to appeal an irs decision on tax-exempt status and page six of the enclosed publication the examination process publication also includes information on your rights as a taxpayer and the irs collection process please note that fast track mediation referred to in publication generally doesn’t apply after we issue this letter you also may request that we refer this matter for technical_advice as explained in publication please contact the individual identified on the first page of this letter if you are considering requesting technical_advice if we issue a determination_letter to you based on a technical_advice_memorandum issued by the exempt_organizations rulings and agreements office no further irs administrative appeal will be available to you contacting the taxpayer_advocate office is a taxpayer right you have the right to contact the office_of_the_taxpayer_advocate their assistance isn’t a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate can't reverse a legally correct_tax determination or extend the time you have fixed by law to file a petition in a united_states court they can however see that a tax matter that hasn't been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service office_of_the_taxpayer_advocate for additional information if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you letter rev catalog number 34809f thank you for your cooperation enclosures report of examination form_6018 publication publication sincerely margaret von lienen director eo examinations letter rev catalog number 34809f schedule number or exhibit form 886-a explanation of items rev date name of organization taxpayer tax identification_number year period ended december 20xx and 20xx issue whether the tax exempt status of should be revoked as of november 20xx for failing to comply with the operational_test within the meaning of sec_501 of the internal_revenue_code code and the regulations thereunder facts organizational information was incorporated in the state of on august 19xx no longer has any governing instruments articles of incorporation bylaws application form for recognition of exemption and the determination_letter we were unable to obtain the archived copies of these documents from the irs’s records unit nevertheless irs records indicate that exempt status under sec_501 and sec_170 of the code in october 19xx received its the name shown on all returns that the form_990 return of organization exempt from income_tax filed are slightly different from the name within irs records filed for the year ending december 20xx had the name the unabbreviated version of this name is d b a as however the state of website indicated full name within the irs records is name without __ or doing business as name without governing instruments and without any requested a name change we were not able to determine the cause of these records indicating differences to indicate all these variations of names represent the same entity we included them all in the header of this report operational information we audited the form_990 for the year ending december 20xx form 990-ez short_form return of organization exempt from income_tax for the year ending december 20xx and the activities of the mission was education of children from kindergarten through grade on both returns in 20xx reported dollar_figure program service expenses and stated its accomplishment as during the year the organization served approximately students in its academic extracurricular and other programs and activities in 20xx semester the organization served approximately students school closed in june 20xx program service fee and stated that during the spring reported dollar_figure agent interviewed the chief financial officer cfo on july 20xx the cfo started working for with in october 20xx as a bookkeeper but she did the books at home therefore she was not familiar was a regular pre-k through grade private activities and operations according to her form 886-a department of the treasury-internal revenue service page of schedule number or exhibit form 886-a rev date name of organization taxpayer explanation of items tax identification_number year period ended december 20xx and 20xx school that offered academic programs to students it might have operated after-school programs but she was not sure experienced financial difficulties since 20xx due to lack of enrolled students according to the financial statements summer school and fundraising events generated income from donations tuitions material fees filed its final return for the year ending december 20xx and checked the box terminated bank statements showed that closed all its bank accounts in october 20xx however the cfo stated that specific reasons had not officially terminated its status hadn't filed the articles of dissolution had some difficulties in filing the articles of dissolution without providing law organizational and operational requirements for exemption sec_501 of the code provides that an organization must be organized and operated exclusively for a charitable or other exempt_purpose for an entity to be organized for an exempt_purpose it must be a corporation community chest fund or foundation sec_1_501_c_3_-1 of federal tax regulations regulations provides that in order to be exempt as an organization described in sec_501 of the code an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in sec_501 of the code an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose the existence of a substantial nonexempt purpose regardless of the number or importance of exempt purposes will cause failure of the operational_test sec_1_501_c_3_-1 of the regulations provides that an organization may be exempt as an organization described in sec_501 of the code if one or more of the following purposes it is organized and operated exclusively for a religious b charitable c scientific d testing for public safety e literary f educational or form 886-a department of the treasury-internal revenue service page of schedule number or exhibit form 886-a name of organization taxpayer rev date explanation of items tax identification_number year period ended december 20xx and 20xx g prevention of cruelty to children or animals sec_1_501_c_3_-1 of the regulations provides in part that the organization must establish it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests government’s position for an organization to maintain its exempt status it must meet both organizational and operational tests under sec_501 of the code and sec_1_501_c_3_-1 of the regulations the operational_test generally requires that an organization operates consistently within the requirements of the code otherwise the organization is not operated exclusively for charitable purposes and will lose its tax exempt status stopped its operation in june 20xx completed winding down all matters in october 20xx when it closed all its bank accounts the documents we observed confirmed these statements has not carried on any exempt activity since october 20xx accordingly stopped conclusion taxpayer’s position proposed action- sec_7428 the cfo orally agreed with the revocation to therefore we propose to revoke its exempt on the revocation agreement form_6018 consent to to indicate that name variations represent the same entity we will be using meeting the operational_test since october 20xx within the meaning of the regulations sec_1_501_c_3_-1 nevertheless failed to complete its termination process because it did not officially dissolve its status with the state of status under sec_501 and sec_170 of the code effective november 20xx failed the operational_test because it stopped operating in october 20xx the exempt status is required to file forms u s_corporation income_tax return from november 20xx should be revoked effective november 20xx and all the subsequent years if applicable department of the treasury-internal revenue service exempt status form 886-a page of of