department of thetreasury internal_revenue_service washington d c tax_exempt_and_government_entities_division uil numbers date sep t1856 contact person identification_number telephone number employer_identification_number legends trust fund dear sir or madam this letter responds to trust’s request dated date for a ruling regarding the proposed transaction described below trust is a charitable_remainder_unitrust described in sec_664 of the internal_revenue_code code trust intends to form a wholly owned for profit corporation corporation subject_to income_tax under sec_11 of the code trust will contribute approximately x to the corporation trust will not incur any debt to create or fund the corporation once formed the corporation will follow all the corporate formalities required under the appropriate state law and will keep its corporate assets separate from the assets of trust trust anticipates that the corporation will use the funds contributed by trust to purchase a membership interest in the fund a limited_liability_company which is engaged primarily in the business of leasing equipment the fund anticipates using debt financing to partially fund its ‘acquisition of equipment trust represents that it has several business purposes for establishing a wholly owned corporation to make investments first use of a holding corporation will provide trust flexibility in disposing of investments the fund’s operating_agreement which was provided in the ruling_request includes a number of restrictions on the ability of any member to transfer or dispose_of membership interests in the fund specifically the operating_agreement provides that the fund’s manager may block any transfer of shares if a member assigns less than five shares or if the assignment would result in a member retaining jess than five shares or if the assignee is not a suitable investor under state or federal securities laws or if the assignee is not a united_states citizen and the transfer would cause an impermissible percentage of shares to be owned by noncitizens the operating_agreement also allows the manager to block a transfer if the fund’s tax counsel determines that such transfer would terminate the fund’s taxable_year or its status as a partnership for federal tax purposes even if an assignment is permitted under the operating_agreement there may be delay and uncertainty before such a transfer can take effect the operating_agreement does not specify how long the manager has to void an attempted transfer if it determines the transfer violates the operating_agreement trust represents that a member cannot necessarily determine whether a desired transfer will be possible since some of the restrictions depend on how many other shares have changed hands during the year and this information might not be available when a member is negotiating a sale lf trust owned shares in the fund trust represents that it may not be able to dispose_of its shares when it desires to do so trust represents there is uncertainty about whether an assignment will be possible thereby increasing the expense and difficulty of disposing of shares trust represents that by investing in the fund through a holding_company instead trust will have more flexibility to dispose_of its investment when it desires to do so because trust can sell all of its stock or a portion of its stock in the corporation at any time and it can negotiate such a sale without the need for approval by the fund_manager trust represents the corporation will provide it with additional limited_liability protection the fund intends to lease aircraft and marine vessels for use outside of the united_states creating potential exposure to international tort claims since it is not now known where the fund might lease equipment trust represents that it would be prohibitively expensive to research the legal regimes of all possible countries where the fund might face legal action because the corporation rather than trust will be a member in the fund trust’s other assets will be insulated from such potential exposure to international tort claims trust represents that the corporation will provide additional protection against united_states claims the applicable state law provides that a member is not liable for debts of a limited_liability_company unless the member agrees to be personally obligated on the debt however limited_liability members may be liable for debts of the limited_liability_company under a piercing-the-veil theory because the corporation rather than trust will be a member of the fund a judgement creditor of the fund would have to pierce the corporate veil not once but twice to reach the other assets of trust providing additional limited_liability protection the corporation may also make and manage additional investments funded either through retained earnings or additional capital contributions the corporation will manage these investments relieving trust of this duty and will shield trust from any possible involvement in an unrelated business that could expose trust assets to potential liability or generate unrelated_business_taxable_income trust will hold its shares of corporation stock as investment_property and will not be a trader or dealer of securities trust has requested the following rulings whether the corporation’s allocable share of income and gains under sec_704 of the code from the fund will constitute unrelated_business_taxable_income to trust within the meaning of sec_512 whether distributions of cash or property from the fund to the corporation will constitute unrelated_business_taxable_income to trust within the meaning of sec_512 of the code whether distributions from the corporation to trust will constitute unrelated_business_taxable_income to trust within the meaning of sec_512 of the code whether any gain realized by trust on the ultimate sale or disposition of shares of corporation stock will constitute unrelated_business_taxable_income to trust within the meaning of sec_512 of the code law sec_664 of the code provides that a qualifying charitable_remainder_trust is exempt from income taxes for any taxable_year unless the trust has unrelated_business_taxable_income for such year if the trust has unrelated_business_taxable_income for any taxable_year then the trust is not exempt from taxes and is subject_to taxation under the normal rules of subchapter sec_511 of the code imposes a tax on the unrelated_business_taxable_income of organizations exempt from federal_income_tax under sec_501 sec_512 of the code defines the term unrelated_business_taxable_income ubt as gross_income derived by an organization from an unrelated_trade_or_business regularly carried on by it less the allowable deductions which are directly connected with such trade_or_business both computed with the modifications provided in subsection b sec_512 of the code excludes all dividends from the computation of ubti sec_512 of the code provides that rents attributable primarily to leases of personal_property are not excluded from the definition of ubti sec_512 of the code provides that notwithstanding the general exclusion of dividends from ubti dividends and other passive_investment_income derived from debt- financed property are treated as gross_income from an unrelated_trade_or_business in an amount determined under sec_514 deductions from such debt-financed_property are allowed in an amount ascertained under sec_514 sec_512 of the code provides that gains from the sale or disposition of property other than inventory or property_held_primarily_for_sale to customers are excluded from the computation of ubti sec_512 of the code provides special rules for certain amounts of income an exempt_organization receives from a controlled_entity sec_512 of the code provides that notwithstanding sec_512 and of the code an organization controlling_organization receiving a specified_payment from another entity which it controls controlled_entity shall include such payment as an item_of_gross_income derived from an unrelated_trade_or_business to the extent such payment reduces the net_unrelated_income of the controlled_entity or increases any net_unrelated_loss of the controlled_entity there shall be allowed all deductions of the controlling_organization directly connected with amounts treated as derived from an unrelated_trade_or_business under the preceding sentence sec_512 of the code provides that the term specified_payment means any interest annuity royalty or rent sec_512 of the code provides that if a trade_or_business is regularly carried on by a partnership of which an organization is a member and if the partnership business is unrelated to the exempt_purpose of the organization the organization shall include its allocable share whether or not distributed of partnership gross_income sec_514 of the code provides that in calculating ubti there shall be included a percentage of gross_income from debt-financed_property and a percentage of deductions directly connected with debt-financed_property or the income thereof the percentage of income and deductions included in the calculation of ubti is proportional to the average amount of acquisition_indebtedness with respect to the property sec_514 of the code defines debt-financed_property to mean any property held to produce income and with respect to which there is acquisition_indebtedness at any time during the taxable_year sec_514 of the code defines acquisition_indebtedness with respect to property as unpaid indebtedness that is incurred to acquire or-improve such property unpaid indebtedness incurred before the acquisition or improvement of the property if the debt would not have been incurred but for such acquisition or improvement of the property or unpaid indebtedness incurred after the acquisition or improvement of the property if such debt would not have been incurred but for such acquisition or improvement and the incurrence of such indebtedness was reasonably foreseeable at the time of such acquisition or improvement sec_704 of the code sets forth rules regarding determination of tax_liability for partners and partnerships specifically the determination of a partner's_distributive_share of income gain loss deduction or credit for federal_income_tax purposes a parent_corporation and its subsidiary are separate taxable entities so long as the purposes for which the subsidiary is formed are the equivalent of business activities or the subsidiary subsequently carries on business activities 319_us_436 431_f2d_227 cir where an organization is organized with the bona_fide intention that it will have some real and substantive business function its existence may not generally be disregarded for tax purposes subsidiary corporations are separate entities from a taxable parent if the organizational purpose is a business_purpose so that subsidiaries cannot avoid being separately taxed this rationale also applies to the parent under sec_512 sec_512 and sec_514 of the code income from the fund would be ubti to trust if received directly by trust because it is debt-financed_income however here the income will arrive to trust indirectly through the corporation which will pay dividends to trust dividend income is not taxable under sec_512 or subject_to the controlled organization rules of sec_512 further trust has not itself incurred debt in financing its interest in the corporation and thus such dividend income is not debt-financed_income described in sec_514 since the corporation stock owned by trust will not be debt-financed_property dividends_paid on the stock will be exempt from ubti under sec_512 the shares of corporation stock owned by trust will not be debt financed property and the shares will be investment_property rather than property held as inventory or for the sale to customers therefore any gain on the sale or disposition of the shares will be excluded from ubti under sec_512 of the code accordingly based on your representations that corporation will have real and substantive business purposes we rule as follows the corporation's allocable share of income and gains under sec_704 of the code from the fund will not constitute unrelated_business_taxable_income to trust within the meaning of sec_512 the distributions of cash or property from the fund to the corporation will not constitute unrelated_business_taxable_income to trust within the meaning of sec_512 of the code the distributions from the corporation to trust will not constitute unrelated_business_taxable_income to trust within the meaning of sec_512 of the code the gain realized by trust on the ultimate sale or disposition of shares of corporation stock will not constitute unrelated_business_taxable_income to trust within the meaning of sec_512 of the code this ruling is directed only to the organization that requested it sec_6110 of the code provides that this ruling may not be used or cited by others as precedent this ruling is limited to the applicability of sec_512 of the code to the issues presented this ruling does not purport to address any issues under sec_664 of the code and chapter including sec_4941 and sec_4945 this ruling is based on the understanding that there will be no material changes in the facts upon which it is based if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely io lite thapr robert c harper jr manager exempt_organizations technical group