internal_revenue_service number release date index number ------------------------- ------------------------------------ --------------------------------------------- ----------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ---------------- telephone number -------------------- refer reply to cc tege eb qp2 plr-123182-15 date date taxpayer a company b parent company plaintiffs plan x plan y trustee c month amount amount amount amount dear --------------- ------------------------------------- ----------------------- ------------------------------------------------------ --------------------------------------------------------------------------------------- ------------------------------------------------------------------------- ---------------------------------- --------------------------------------------------------------------------------------- ------------------------------------------------ ------------- -------------- -------------- -------------- -------------- this letter responds to your request dated date as supplemented by correspondence dated date date date and date submitted on your behalf by your authorized representatives regarding the proper treatment of surplus assets in plan x following its termination under sec_4980 of the internal_revenue_code code and revrul_89_87 1989_2_cb_81 rev_rul the following facts and representations were submitted under penalty of perjury on your behalf taxpayer a is a limited_liability_company that is a disregarded_entity for tax purposes and that provides services to affiliated companies within the u s consolidated_group of corporations with parent company taxpayer a sponsors plan x a defined benefit plr-123182-15 pension_plan and plan y a defined contribution retirement_plan with sec_401 sec_401 and employee_stock_ownership_plan esop features both plan x and plan y have current favorable determination letters in month plaintiffs ---------------------------------------------------------------------------------------- ---filed lawsuits ------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------- in addition the defendants ------------------------------------------------------------------------------- -----------------------------------------------------------------------------have been named as defendants in an adversary proceeding ---------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------plan x remains a defendant in the litigation ------------------------------------------------------------------------- it should be noted that plan x is merely one of many defendants in the litigation as a defendant in the litigation plan x has a contingent_liability with respect to the litigation the contingent_liability taxpayer a represents that no further efforts to resolve the litigation are warranted pending resolution of the plaintiffs’ appeal ----------------------------- --------------------------and the motion to dismiss -------------------------------------------------------- ----------taxpayer a further represents that resolution of the contingent_liability is outside of its control taxpayer a terminated plan x effective as of date taxpayer a applied for a favorable determination_letter with respect to plan x’s termination and received a favorable determination_letter dated date taxpayer a intends to distribute assets either by payment of lump sums to plan participants or by the purchase of irrevocable commitments from an insurance_company to pay annuities to plan participants sufficient to satisfy all of plan x’s benefit liabilities as soon as administratively feasible plr-123182-15 after the satisfaction of all of plan x’s benefit liabilities plan x’s trust will have assets remaining surplus assets with respect to the surplus assets taxpayer a’s board_of managers has adopted a resolution under which any and all assets remaining in the plan x trust after plan x has terminated with respect to all participating employers and after all plan x liabilities have been satisfied shall be transferred to a qualified_replacement_plan within the meaning of sec_4980 as soon as administratively feasible the board further resolved that the assets shall be transferred to the qualified_replacement_plan as follows retain in plan x’s trust an amount deemed by taxpayer a sufficient to pay plan x’s maximum estimated potential contingent_liability transfer the balance of the surplus assets which will be at least percent of the surplus assets as soon as administratively feasible to a qualified_replacement_plan as defined in sec_4980 and as soon as administratively feasible following the satisfaction of the contingent_liability transfer any remaining assets to a qualified_replacement_plan as defined in sec_4980 thus no plan x assets will revert to taxpayer a taxpayer a anticipates that after satisfaction of all benefit liabilities approximately amount will remain in the plan x trust of which approximately amount will be withheld for the contingent_liability and approximately amount will be transferred as soon as administratively feasible to plan y as the qualified_replacement_plan plan y provides a discretionary contribution of from percent to percent of compensation dc1 as well as a discretionary contribution of from percent to percent of compensation dc2 no dc2 contributions are made unless dc1 contributions are made in an amount equal to percent of compensation at least percent of the employee participants in plan x will participate in plan y and be eligible to receive dc1 contributions somewhat less than percent of the employee participants in plan y will receive dc2 contributions because a certain group of highly compensated employees as defined in sec_414 are not eligible under the terms of plan y to receive dc2 contributions although this group is eligible to receive dc1 contributions based on the foregoing you request the following rulings the retention in plan x’s trust after all benefit liabilities have been satisfied of assets in an amount sufficient to satisfy the contingent_liability will not void plan x’s termination nor will it cause the plan x trust to be treated as a wasting trust benefit distributions made after receipt of the favorable determination_letter with respect to the plan x termination will be treated as made on account of the plan x termination and plan x will not be required to be updated for changes in applicable law or regulations occurring after date the plan x termination_date during the period the plan x trust retains assets to satisfy the contingent_liability the plan x trust will continue to be a tax-exempt_trust pursuant to plr-123182-15 sec_401 and sec_501 and the assets held therein will not be a reversion under sec_4980 no form_5500 will need to be filed under sec_6057 sec_6058 and sec_6059 for any year after the year in which all benefit liabilities are satisfied and no other annual returns otherwise required under the code will need to be filed for any such year the initial transfer of assets from plan x’s trust to plan y in an amount at least equal to percent of the surplus assets will constitute a transfer of amounts to a qualified_replacement_plan under sec_4980 notwithstanding that when such transfer occurs the contingent_liability will not have been satisfied and assets will remain in the plan x trust any transfer of assets from the plan x trust to the qualified_replacement_plan after the contingent_liability has been satisfied will not constitute a reversion under sec_4980 and will be subject_to a 7-plan-year allocation period under sec_4980 beginning with the plan_year in which such transfer occurs because at least percent of all employee participants in plan x are or will become participants in plan y entitled to dc1 contributions the participation requirement of sec_4980 will be satisfied even though somewhat less than percent of all employee participants in plan x will be eligible to receive dc2 contributions additionally if this participation requirement is met at the time of the initial transfer of surplus assets it will be deemed to be met when the second transfer is made following satisfaction of the contingent_liability with respect to ruling requests and under sec_401 a_trust created or organized in the united_states and forming a part of a qualified_stock bonus pension or profit-sharing_plan of an employer shall constitute a qualified_trust only if the various requirements set out in sec_401 are met under sec_501 an organization described in sec_401 that is a_trust which is part of a qualified_pension profit-sharing or stock_bonus_plan is generally exempt from taxation under sec_1_411_d_-2 of the income_tax regulations regulations for purposes of sec_411 a plan to which title iv of the employee_retirement_income_security_act_of_1974 erisa applies is considered terminated as of a particular date if as of that date it was terminated under sec_4041 or sec_4042 of erisa for such plans the date of termination is the date of termination determined under section of erisa under sec_1_411_d_-2 a plan that is not subject_to title iv is considered terminated on a particular date if as of that date it is voluntarily terminated by the employer or employers maintaining the plan sec_1_416-1 t-4 of the regulations defines a terminated plan as one which has been formally terminated under which crediting service has ceased for vesting and plr-123182-15 benefit accruals and under which plan assets have been or are being distributed as soon as is administratively feasible under sec_1_416-1 t-5 under a plan for which the assets are not distributed as soon as administratively feasible minimum contributions or benefit accruals are required under sec_416 under revrul_69_157 1969_1_cb_115 rev_rul a_trust that is part of a qualified_plan will not retain its qualified status after the plan has been terminated further a plan is not considered terminated in fact where the plan continues in effect until all the assets have been distributed to participants in accordance with the terms of the plan under revrul_79_237 1979_2_cb_190 rev_rul once applicable the minimum_funding standards described in sec_412 apply to a pension_plan through the date of its termination revrul_79_237 defines the date of termination for plans subject_to title iv as the date described in section of erisa revrul_89_87 clarifying revrul_69_157 and modifying revrul_79_237 states that in order to terminate a qualified_plan the date of termination must be established the benefits of plan participants and other liabilities under the plan must be determined with respect to the date of plan termination and all plan assets must be distributed to satisfy those liabilities in accordance with the terms of the plan as soon as administratively feasible after the date of termination a plan that is amended to terminate and to cease benefit accruals has not in fact been terminated under the code if the assets are not distributed as soon as administratively feasible after the stated date of plan termination regardless of whether the plan is treated as terminated under other federal_law including title iv of erisa whether a distribution is made as soon as administratively feasible is to be determined under all the facts and circumstances of the given case but generally a distribution which is not completed within one year following the date of plan termination specified by the employer will be presumed not to have been made as soon as administratively feasible revrul_89_87 further states that a plan under which all assets are not distributed as soon as administratively feasible is an ongoing plan and must meet the requirements of sec_401 in order to continue its qualified status such a plan remains subject_to the minimum_funding requirements of sec_412 where applicable also in any year in which the trust assets have not been distributed the plan is subject_to the information reporting requirements of sec_6057 and sec_6058 and in the case of a defined_benefit_plan the actuarial reporting requirements of sec_6059 form_5500 annual return report of employee_benefit_plan is filed in order to satisfy the reporting requirements of sec_6058 the instructions to form_5500 state that a final form_5500 may not be filed until all assets have been distributed plr-123182-15 schedule sb form single-employer defined_benefit_plan actuarial information is filed in order to satisfy the reporting requirements of sec_6059 the instructions to schedule sb form state that it must be filed for any year in which the plan is subject_to the minimum_funding standards pursuant to revrul_79_237 the minimum_funding standards do not apply to a terminating plan after the end of the plan_year containing the plan’s termination_date form 8955-ssa annual registration_statement identifying separated participants with deferred vested benefits is filed in order to satisfy the reporting requirements of sec_6057 the instructions to form 8955-ssa state that the form is filed to report information on separated participants who have deferred vested benefits the form only needs to be filed for a year if there is information to report with respect to ruling requests and in order for plan x to be a terminated plan the date of termination must be established the benefits of plan participants and other liabilities under the plan must be determined with respect to the date of plan termination and all plan assets must be distributed to satisfy those liabilities in accordance with the terms of the plan as soon as administratively feasible after the date of termination in the present case taxpayer a took action to terminate plan x effective as of date and to determine the benefits of plan participants and liabilities under plan x plan x received a favorable determination_letter on its termination on date all that remains to complete the termination is to distribute plan assets as soon as administratively feasible whether a distribution is completed as soon as administratively feasible has been interpreted in revrul_89_87 generally to require distribution within one year of the date of termination exceptions to the one-year_rule are limited and depend on the facts and circumstances of the plan termination in analogous guidance sec_1_430_a_-1 provides that in order to determine the termination_date for plans not subject_to title iv a plan is not treated as failing to meet the requirement to distribute plan assets as soon as administratively feasible to the extent that a delay in distributing plan assets is attributable to either circumstances beyond the control of the plan_administrator or the period of time necessary to obtain a determination_letter from the commissioner of internal revenue on the plan's qualified status upon its termination taxpayer a has represented that it is unknown when the contingent_liability will be resolved and the amount of the contingent_liability determined taxpayer a has further represented that the timing of the distribution of any amount remaining after the contingent_liability is resolved is outside of its control however taxpayer a is legally required pursuant to the resolution of the board_of managers to transfer any remaining assets in the plan x trust to plan y as soon as administratively feasible following the satisfaction of the contingent_liability plr-123182-15 based on the facts and circumstances as represented by taxpayer a we conclude that plan x will not be treated as failing to meet the requirement to distribute plan assets as soon as administratively feasible as a result of the fact that assets relating to the contingent_liability and any related earnings will remain in the plan x trust for a period of time after all other_benefits and liabilities have been distributed provided that any amounts remaining in the plan x trust after the contingent_liability is resolved are thereafter transferred to plan y as soon as administratively feasible in accordance with the resolution adopted by the board_of managers accordingly we rule that the retention in plan x’s trust after all benefit liabilities have been satisfied of assets in an amount sufficient to satisfy the contingent_liability will not void plan x’s termination nor will it cause the plan x trust to be treated as a wasting trust provided that any amounts remaining in the plan x trust after the contingent_liability is resolved are transferred to plan y as soon as administratively feasible in accordance with the resolution adopted by the board_of managers as a result benefit distributions made with respect to the plan x termination will be treated as made on account of the plan x termination plan x will not be required to be updated for changes in applicable law or regulations occurring after date the plan x termination_date the plan x trust will continue to be a tax-exempt_trust pursuant to sec_401 and sec_501 and schedule sb form single-employer defined_benefit_plan actuarial information will not need to be filed for years after the year containing the plan x termination_date however form_5500 annual return report of employee_benefit_plan will need to be filed for plan x with respect to each year that any assets remain in the plan x trust in addition form 8955-ssa annual registration_statement identifying separated participants with deferred vested benefits will need to be filed for each year that there are deferred vested participants to be reported with respect to ruling requests and sec_4980 imposes a percent excise_tax on the amount of any reversion from a qualified_plan under sec_4980 the excise_tax under sec_4980 is increased to percent with respect to an employer_reversion from a qualified_plan unless the employer either establishes or maintains a qualified_replacement_plan or the plan provides for certain benefit increases which take effect on the termination_date sec_4980 generally defines the term employer_reversion as the amount of cash and fair_market_value of other_property received directly or indirectly by the employer from the qualified_plan under sec_4980 a qualified_replacement_plan is a qualified_plan established or maintained by the employer in connection with a qualified_plan termination which satisfies the participation asset transfer and allocation requirements of sec_4980 b and c plr-123182-15 sec_4980 requires that at least percent of the active participants in the terminated plan who remain as employees of the employer after the termination be active participants in the replacement plan sec_4980 requires that a direct transfer from the terminated plan to the replacement plan be made before any employer_reversion and that the transfer be an amount equal to the excess if any of i percent of the maximum amount which the employer could receive as an employer_reversion without regard to sec_4980 over ii the amount equal to the present_value of the aggregate increases in the accrued_benefits under the terminated plan of any participants or beneficiaries pursuant to a plan amendment adopted during the 60-day period ending on the date of termination of the qualified_plan and which takes effect immediately on the termination_date under sec_4980 in the case of the transfer of any amount under sec_4980 from a terminated plan such amount is not includible in the gross_income of the employer no deduction is allowable with respect to such transfer and the transfer is not treated as an employer_reversion for purposes of sec_4980 under sec_4980 if the replacement plan is a defined_contribution_plan the amount transferred to the replacement plan must be i allocated under the plan to the accounts of participants in the plan_year in which the transfer occurs or ii credited to a suspense_account and allocated from such account to accounts of participants no less rapidly than ratably over the 7-plan-year period beginning with the year of the transfer under sec_4980 if by reason of any limitation under sec_415 any amount credited to a suspense_account under sec_4980 may not be allocated to a participant before the close of the 7-plan-year period such amount shall be allocated to the accounts of other participants and if any portion of such amount may not be allocated to other participants by reason of such limitation it shall be allocated to the participant as provided in sec_415 under sec_4980 any income on any amount credited to a suspense_account under sec_4980 shall be allocated to accounts of participants no less rapidly than ratably over the remainder of the period determined under sec_4980 after application of sec_4980 under sec_4980 if any amount credited to a suspense_account under sec_4980 is not allocated as of the termination_date of the replacement plan i such amount shall be allocated to the accounts of the participants as of such date except that any amount which may not be allocated by reason of any limitation under sec_415 shall be allocated to the accounts of other participants and ii if any plr-123182-15 portion of such amount may not be allocated to other participants under the preceding subclause by reason of such limitation such portion shall be treated as an employer_reversion to which sec_4980 applies under revrul_2003_85 2003_32_irb_291 the direct transfer from a terminating plan that did not increase benefits to a plan intending to be a qualified_replacement_plan satisfied the requirements of sec_4980 when the amount was at least percent of the maximum amount that the employer could receive as an employer_reversion in the present case plan y will be a qualified_replacement_plan if it is maintained by taxpayer a in connection with a qualified_plan termination that satisfies the participation asset transfer and allocation requirements of sec_4980 b and c as discussed above the proposed transfer of assets will occur in connection with a qualified_plan termination in addition taxpayer a has represented that at least percent of the active participants in plan x will remain as employees of taxpayer a after the termination of plan x and will be eligible for dc1 contributions under plan y thus satisfying the participation requirement of sec_4980 that at least percent of plan x participants be active participants in plan y taxpayer a has also represented that percent of the assets remaining in the plan x trust will be transferred to plan y although the transaction is expected to take place in two transfers the resolution adopted by the board_of managers binds taxpayer a to transfer the entire amount therefore the transfer of surplus assets and any related earnings to plan y will be treated as a single transaction involving at least percent of the surplus assets upon termination of plan x for purposes of satisfying the asset transfer requirement of sec_4980 finally each of the two transfers will be subject_to a 7-plan-year allocation period under sec_4980 beginning with the plan_year in which the transfer occurs accordingly we rule that the initial transfer of assets from plan x’s trust to plan y in an amount at least equal to percent of the surplus assets will constitute the transfer of an amount to a qualified_replacement_plan under sec_4980 notwithstanding that when such transfer occurs the contingent_liability will not have been satisfied and assets will remain in the plan x trust in addition any transfer of assets from the plan x trust to plan y after the contingent_liability has been satisfied will not constitute a reversion under sec_4980 and will be subject_to a 7-plan-year allocation period under sec_4980 beginning with the plan_year in which such transfer occurs finally because at least percent of all employee participants in plan x will remain as employees of taxpayer a after the termination of plan x and will be eligible for dc1 contributions under plan y the participation requirement of sec_4980 will be satisfied even though somewhat less than percent of all employee participants in plan x will be eligible to receive dc2 contributions additionally if this participation requirement is met at the time of the initial transfer of plr-123182-15 assets it will be deemed to be met when the second transfer is made following satisfaction or elimination of the contingent_liability except as specifically set forth above no opinion is expressed or implied concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office copies of this letter are being sent to your authorized representatives the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely laura b warshawsky senior tax law specialist qualified_plans branch office of associate chief_counsel tax exempt and government entities cc


internal_revenue_service number release date index number ------------------------ -------------------- --------------------- ---------------------------------------------- ----------------------------------- in re --------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc intl br6 plr-128832-10 date january ty ------- legend taxpayer accounting firm trust individual attorney date date year dear --------------- ----------------------------------------------- -------------------------------------------- ---------------------------- ------------------------ ---------------------- ----------------------- -------------- ------- this responds to a letter dated date submitted on behalf of taxpayer requesting that the internal_revenue_service service grant taxpayer an extension of time under sec_301_9100-1 and sec_301_9100-3 to file form 4876-a election to be treated as an interest_charge_disc for taxpayer’s first taxable_year the rulings given in this letter are based on facts and representations submitted by taxpayer and accounting firm and accompanied by penalty of perjury statements executed by appropriate parties this office has not verified any of the materials submitted in support of the request for a ruling verification of the factual information representations and other data may be required as part of the audit process facts taxpayer is a domestic_corporation wholly owned by trust accounting firm is an accounting tax planning and compliance and business advisory organization individual is president ceo of taxpayer and grantor of trust plr-128832-10 taxpayer was incorporated on date and was intended to be treated as an interest charge domestic_international_sales_corporation ic-disc from inception based on earlier discussions in year between individual and accounting firm unfamiliar with ic-disc tax matters individual consulted with attorney and accounting firm regarding the formation of an ic-disc believing all the requirements to conduct business and to be treated as an ic-disc for its first taxable_year were satisfied taxpayer began acting as an ic-disc as of date even though taxpayer had assumed that all the necessary requirements to conduct business as an ic-disc were satisfied it did not qualify as an ic-disc for federal_income_tax purposes because it did not timely file a form 4876-a with the service within days of date accounting firm had neither filed nor advised taxpayer to file form 4876-a within days of date because accounting firm had assumed that attorney would be responsible for timely filing this form accounting firm did not discover until approximately date that form 4876-a had not been filed by attorney upon discovery that the form had not been filed taxpayer instructed accounting firm to submit a ruling_request to the service for an extension of time to file form 4876-a for taxpayer’s first taxable_year law and analysis sec_992 of the internal_revenue_code code provides that an election by a corporation to be treated as a disc shall be made by such corporation for a taxable_year at any time during the 90-day period immediately preceding the beginning of the taxable_year except that the secretary may give his consent to the making of an election at such other times as he may designate sec_992 of the code provides that such election shall be made in such manner as the secretary shall prescribe and shall be valid only if all persons who are shareholders in such corporation on such first day of the first taxable_year for which such election is effective consent to such election temporary sec_1_921-1t provides in part that a corporation electing ic-disc status must file form 4876-a a corporation electing to be treated as an ic-disc for its first taxable_year shall make its election within days after the beginning of that year sec_301_9100-1 provides in part that the commissioner in exercising the commissioner’s discretion may grant a reasonable extension of time as explained below although taxpayer acted as an ic-disc it was not in fact an ic-disc plr-128832-10 under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that a regulatory election is an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin for this purpose an election includes an application_for relief in respect of tax sec_301_9100-3 provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interest of the government the election described in temp sec_1_921-1t is a regulatory election as defined in sec_301_9100-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer an extension of time provided that taxpayer satisfies the standards for relief set forth in sec_301_9100-3 based on the facts and representations submitted we conclude that taxpayer satisfies sec_301_9100-3 accordingly taxpayer is granted an extension of time of days from the date of this ruling letter to file form 4876-a such filing will be treated as a timely election to be treated as an ic-disc for taxpayer's first taxable_year beginning date the granting of an extension in this ruling letter is not a determination that taxpayer is otherwise eligible to make the election or to claim ic-disc status or benefits see sec_301_9100-1 a copy of this letter_ruling should be filed with the form 4876-a this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that written determinations may not be used or cited as precedent except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter plr-128832-10 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely jason osborn senior technical reviewer branch office of associate chief_counsel international enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number - -------------------------------------- ------------------------------------------------------- --------------------- ----------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc tege eoeg teb presp-148742-06 date date dear ------------- this letter is in response to your application_for an allocation of authority to issue dollar_figure------- ----------------in clean renewable energy bonds crebs under sec_54 of the internal_revenue_code the code sec_54 of the code imposes a limitation of dollar_figure on the amount of crebs which may be issued to finance qualified projects the limitation sec_54 provides that the limitation is to be allocated by the secretary of treasury in such manner as the secretary deems appropriate except that no more than dollar_figure of the limitation may be allocated to finance qualified projects of qualified borrowers which are governmental bodies section of notice_2005_98 2005_52_irb_1211 provides that the limitation will be allocated among qualified projects for which a share of such limitation has been requested beginning with the project s requesting the smallest share in dollar amount and continuing with the project s requesting the next-smallest share until the total limitation has been exhausted however in the event that dollar_figure has been allocated to qualified projects of qualified borrowers that are governmental bodies the remaining shares of the limitation will be allocated under the methodology described in the previous sentence only to qualified projects of qualified borrowers that are not governmental bodies for purposes of allocating the limitation among projects all qualified projects located at the same site and owned by the same qualified_borrower are treated as a single project and each project is treated as requesting a single allocation an allocation of shares of the limitation cannot be made with respect to the project owned by the borrower listed in appendix a because such borrower is a governmental body and dollar_figure has already been allocated to applications requesting a smaller presp-148742-06 share of the limitation to finance qualified projects owned by qualified borrowers that are governmental bodies we appreciate your submission of the application_for our consideration and encourage you to continue to pursue your plans for constructing a clean renewable energy project sincerely assistant chief_counsel exempt_organizations employment_tax government entities tax exempt government entities by timothy l jones senior counsel tax-exempt_bonds branch presp-148742-06 borrower name appendix a project type project location ----------------------------- wind facility --------- -------------------------------- ----------------------------- amount requested dollar_figure-------------- ---------------------------------- ------------------------------------------------ ------------------------------------------------- -------------------------- -------------------------------------------- ---------------------------


internal_revenue_service te_ge technical_advice_memorandum release number release date date uil area manager - taxpayer's name taxpayer's address taxpayer's identification_number years involved conference held legend t v o u issues whether funds derived by t a state-chartered credit_union described in sec_501 of the internal_revenue_code from the following activities should be treated as unrelated_business_taxable_income under sec_511 of the code a b c sale of insurance products interchange income derived in connection with t’s visa credit card and checkcard program nonmember automated teller machine atm fees facts established in t was originally incorporated in under the - federal credit_union statute and converted in t is a state-chartered credit_union which is recognized as exempt from federal_income_tax under sec_501 of the code as an organization described in sec_501 the purpose of t as set forth in the corporate by-laws is to promote thrift among its members by affording them an opportunity for accumulating payments on shares and to make loans therefrom to its members for provident and productive purposes t’s activities include accepting deposits from and maintaining the accounts and savings of its members these deposit accounts include savings or share accounts on which members earn periodic dividends credited to the accounts and share draft accounts which are transaction accounts similar to bank checking accounts t represents that its day-to-day business operations differ from conventional banking institutions in several ways t states that it conducts its business to reflect its non-profit mutual structure t makes loans to its members and states that many borrowers have low incomes and might not otherwise qualify for credit from conventional for-profit banks t also represents that it regularly issues loans for very small amounts such as loans for auto repairs which are typically not made by for-profit banks t indicates that it serves smaller communities than those served by for-profit banks t also indicates that because of its mutual non-profit operation all members not just those maintaining high minimum balances are able to earn competitive rates on their deposits and pay low banking fees t represents that in order to maintain its financial viability and continue to satisfy its stated purposes of promoting thrift and providing a source of low cost credit it has endeavored to become a full service financial_institution consequently t offers more than just demand deposits and loans currently t makes insurance products visa credit card and checkcard program and atm services available to members the different types of insurance are described in more detail below a group return was filed by the state banking department each credit_union included in the group return is represented as a separate corporate entity t was included in the form_990 group that is exempt from federal_income_tax return on the basis that it was in fact operating as a state-chartered credit_union as of the close of the tax_year at the service’s request form 990-ts unrelated_business_income_tax return were filed for the tax years at issue a sale of insurance products t contracted with an independent insurance_company to offer credit life and credit disability insurance to its members t and at least one employee are required to be licensed by the state department of insurance in order to offer and or sell this insurance to members t derives a fee based on a fixed percentage of gross premiums from the insurance_company to market these products and perform certain administrative services in connection with the insurance program t offers credit insurance to each member when a loan application request is made a member's participation in the insurance program is voluntary and is if a member elects to not a prerequisite for the approval of a loan application receive coverage he or she will sign the required forms provided by t on behalf of the insurance_company the insurance policies provide in pertinent part that the outstanding loan balance subject_to any cap on the insured amount will be repaid to the credit_union by the insurer upon the death of a member or by payment of or reimbursement of the contractual loan installments in the case of disability a member who elects to purchase credit insurance is required to pay the premiums to t for coverage t prepares a premium remittance report on a monthly basis that summarizes the insurance premiums payable to the insurance_company the report identifies the gross premium charges the administrative fee at the contract rate to be retained by t and the net_premiums to be remitted by t for administrative convenience and to ensure timely payment of premiums to the insurer t adds the premium charge to each member's loan balance and remits the premiums to the insurer net of the administrative fee ultimately recovers the premiums as the member makes payment s on his or her loan the insurance_company may issue a refund to t based on the claims experience rating than crediting members’ accounts t retains any refund attributable to experience rating rather t t also performs certain marketing and administrative services on behalf of one or more insurance_companies in connection with other insurance products offered to members such products include but are not necessarily limited to credit card life and disability and life_insurance policies that any member may subscribe to and elect to pay for through his or her credit_union account these kinds of insurance are offered independently of any loans the member may have with the credit_union t derives a fee on a periodic basis for services rendered to the insurance_companies t earned fees from its insurance program in excess of dollar_figure examination during each of the tax years under interchange income derived in connection with t's visa credit card and b checkcard program as a member of visa usa inc visa t is authorized to offer its members a visa credit card visa is an association of financial institutions that issue payment cards using visa's infrastructure and brand t became a member of t’s visa through a membership application and agreement executed with v membership in visa will hereinafter be referenced using the term member by reason of being a member t is subject_to the visa by-laws and operating regulations which prescribe the duties and responsibilities applicable to card issuers as a member that issues visa credit cards t is authorized to enter into direct contractual relationships with its cardholders and extend credit to and collect payments from cardholders ie members t markets its visa brand credit card approves or rejects applications for credit cards and performs a variety of administrative functions in accordance with the visa operating regulations furthermore t is at risk for credit it extends in connection with the use of the credit card and is responsible for the collection of any debt t’s members apply for a credit card by completing a standard application form t then approves or rejects the application based on the loan criteria that it has established if a member is approved for a credit card t will extend a line of credit subject_to limitations in connection with the use of such card credit cards offered by t benefits attendant to the card at times vary with respect to the credit line interest rate and t has two sources of revenue from its members’ use of visa credit cards summarized as follows line of credit - t earns interest_income on the unpaid balance of any line of credit extended in connection with the visa credit cards the terms and conditions pertaining to the credit cards including the interest rate charged are set forth in the cardholder agreement executed between t and each approved member t also receives income from certain fees and service charges as provided in the cardholder agreement including cash advance fees late penalty payment fees over limit fees and card or personal identification_number pin replacement fees although the name of the credit_union and visa logo are conspicuously present on the face of the plastic card only t bears any loss from a member's default on his or her obligation merchant assessments - by reason of its membership in visa and its active role in the marketing and issuance of visa brand credit cards t derives revenue from fees charged to retail businesses participating in the visa payment system visa processes the series of transactions that begin when a cardholder makes a purchase of goods or services using a visa brand credit card however a credit card transaction cannot be consummated if the retail business at which the transaction cycle begins is unwilling to accept them in order to foster card issuance and usage visa and its member institutions have developed and implemented visa net’ an advanced network that acts as an authorization service for visa card transactions as well as a clearing and settlement service to transfer payment information between parties technological developments marketing and other factors have encouraged retail businesses including supermarkets restaurants chain retailers and hundreds of thousands of other vendors and merchants collectively referred to as the merchants to accept visa cards as a payment option every transaction using a visa card incurs costs including but not limited to the point of sale pos terminal s provided to merchants that facilitate the transactions the visa network transmission lines and software that link the transaction authorization and related sales data between the merchants and visa and the expense associated with the credit union's agent which may also be a member of visa that processes the transaction and converts it to statement form for the multiple parties involved each merchant that accepts visa cards as a payment option must contractually agree ie the merchant agreement’ to pay a fee related to the transaction processing costs of visa card payments the fees assessed against merchants otherwise known in the industry as interchange income may vary by card product processing technology and merchant category but are generally based on a percentage of net sales plus a fixed transaction fee interchange income is generated from a payment system that operates every day of the year on a continuous basis the interchange income derived by visa is apportioned among the members that issue payment cards in accordance with a revenue sharing arrangement that credits a member's settlement account for that portion of interchange income attributable to its cardholders’ purchases accordingly t derives interchange income based on the consumer purchases made by its own members using the visa credit card the payment of interest charges and related service fees by a member of t pursuant to the cardholder agreement is not contingent on although it may be derived from credit card purchases this is evidenced by the fact that a member may incur credit card debt for instance by borrowing through cash advances without generating interchange income likewise a member may use his or her card to purchase goods or services which generate interchange income to t without incurring interest charges this is demonstrated by a member who pays the current month’s charges in full thereby maintaining a zero balance card both the interchange program and cardholder loan program incur a variety of expenses directly related to the type of income that each business produces due to the size and complexity of the credit card program t contracts directly and indirectly with an outside vendor that is able to capture and process data -related to the interchange program from access to the visa network that records credit card purchases and the cardholder program from information furnished by t the processing vendor vendor’ maintains a separate settlement account to record the interchange income and related expenses pertaining to t as well as the expenses attributable to the cardholder program t receives a statement from the vendor on a monthly basis that details the amount of interchange income credited to its account and the itemized charges related to both the interchange and cardholder programs expenses charged to t in connection with the interchange program include authorization fees transaction processing fees and marketing fees including scoreboard redemption fees expenses_incurred and charged by the vendor to administer certain functions of t's cardholder loan program include statement and notice fees security fees and pass-thru postage and delivery fees other expenses such as card issuance file residency maintenance and inquiry appear to be allocable to both the interchange and cardholder programs additional fees royalties and assessments may be charged to t directly by visa or indirectly through the vendor as they pertain to one or both programs t also offers its members a visa checkcard which can be utilized as either in order to use a checkcard a member must open a debit card or a pos card and maintain a sharedraft account a sharedraft account is analogous toa checking account at a bank the checkcard offers t’s members the convenience of withdrawing funds or purchasing goods or services without writing a manual sharedraft equivalent to a check a member may use the checkcard as a debit card to withdraw funds at an atm or to make purchases by keying in a personal identification_number or pin alternatively the member may use the checkcard as a signature required pos card the checkcard effectively taps into the visa network lines similar to a credit card except that it authorizes the transfer of funds from the member's sharedraft account there is generally no credit line extended in connection with the use of the checkcard since the member is expected to have sufficient funds in his or her account similar to its credit card program t derives interchange income from its visa checkcard program by virtue of its membership in visa and the services that it performs on behalf of visa in the marketing and issuance of its products the rate of checkcard interchange income is also determined by visa’s contractual arrangement with its participating merchants and may also vary based on the card product processing technology and category of merchant according to t the credit_union uses the vendor to process its check card transactions interchange income and expenses directly connected with interchange income are reported by the vendor on a monthly settlement account statement t maintains separate general ledger accounts to record the interest_income and interchange income derived from credit card and checkcard transactions during each tax_year under examination t derived gross interchange income in excess of dollar_figure c nonmember atm fees both the atm cards and checkcards enable t’s members to access cash from their sharedraft and or savings account s on a hour a day basis members may withdraw funds at any of the thousands of atm's that are linked to nyce or other financial networks t charges its members for atm transactions conducted at foreign machines the institution that owns the atm may also impose a surcharge alternatively t’s members may access their cash free of charge and perform other transactions at atm's owned by the credit_union t operates one or more proprietary atm’s as a service to its members however nonmembers can also withdraw funds at t’s atm's since they are accessible by the general_public on a 24-hour a day basis each atm can distinguish between a t issued atm or check card and a card issued by another credit_union or other financial_institution by the information coded on the magnetic strip embedded in the back of the card in accordance with state and or federal_law nonmembers are advised by an atm notice just prior to the execution of the transaction that they will be subject_to the fee imposed by t the notice effectively allows the nonmember the choice to continue and accept the surcharge or cancel the transaction without incurring a fee transaction details indicate that the atm’s are used by nonmembers on a regular and continuous basis t derived nonmember atm fees in excess of dollar_figure during the years at issue revenue derived from nonmember atm transactions is used in part to offset the expenses_incurred to operate the atm program and or to support other member programs law sec_501 of the internal_revenue_code code provides in part that organizations described in sec_501 are exempt from federal_income_tax sec_501 of the code specifically exempts from federal_income_tax credit unions without capital stock organized and operated for mutual purposes and without profit sec_1_501_c_14_-1 of the income_tax regulations regulations provides in part that credit unions other than federal credit unions described in sec_501 of the code without capital stock organized and operated for mutual purposes and without profit are exempt from tax under sec_501 a state-chartered credit unions were first acknowledged as exempt from federal_income_tax in a opinion of the attorney_general the attorney_general considered credit unions organized under the laws of the commonwealth of massachusetts the attorney general's opinion described the purposes of credit unions existing at that time it is apparent that the purpose of these financial associations is to help people save and to assist those in need of financial help whose credit may not be established at the larger banks in reality they are fundamentally similar and supplemental to the existing agencies for promoting thrift namely the savings banks and cooperative banks except on a much smaller scale the attorney general's opinion also described some of the operations of credit unions--making loans in appropriate amounts to members on which a low rate of interest is charged and that p rompt payment of obligations is a fundamental requirement the opinion described in detail the procedures by which members’ savings were held by the credit_union and how the members earned interest on their deposits the opinion also pointed to the democratic character of the governance of these early credit unions by their members at the annual meeting of the association each member shareholder and depositor has but one vote after review of the features and operations of these early massachusetts credit unions the attorney general’s opinion held that state-chartered credit unions would be exempt from federal_income_tax see u s op atty gen the legal analysis of the attorney general's opinion was adopted in treasury regulations issued in and this remained the official basis for the tax exempt status of state-chartered credit unions until the revenue act of granted express statutory tax-exempt status to state-chartered credit unions however the revenue act of removed tax exemption from savings and loan associations cooperative banks and mutual_savings_banks the legislative_history of the act suggests that the reason these entities lost their exemption was because of their increasing similarity to commercial banks and the resulting loss specifically referring to the early days of their original characteristic of mutuality of these institutions the legislative_history states the fact that the members were both the borrowers and the lenders was the essence of the mutuality of these organizations see generally s rep no date reprinted in u s code cong ad svc present-day sec_501 - as enacted in - incorporates the requirements of mutuality and non-profit operation which formed the basis for the attorney general's recognition of credit unions’ tax-exempt status in accordingly the basic purposes of the credit_union tax exemption remain essentially the same today as they were in based on the attorney general's opinion the basis for exemption is the provision of savings accounts and loans to members who may not be served by banks in a non-profit and - mutual manner sec_511 of the code imposes a tax on the unrelated_business_taxable_income of organizations otherwise exempt from federal_income_tax under sec_501 sec_512 of the code provides that the term unrelated_business_taxable_income means with certain modifications the gross_income derived by an organization from any unrelated_trade_or_business regularly carried on by it less allowable deductions sec_513 of the code defines the term unrelated_trade_or_business in the case of any organization subject_to tax imposed by sec_511 as any trade_or_business the conduct of which is not substantially related aside from the need of such organization for the income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its exempt_function sec_1_513-1 of the regulations provides that gross_income of an exempt_organization subject_to the tax imposed by sec_511 of the code is with certain exceptions includable in the computation of unrelated_business_taxable_income if it is income from trade_or_business such trade_or_business is regularly carried on by the organization and the conduct of such trade_or_business is not substantially related other than through the production of funds to the organization's performance of its exempt functions sec_1_513-1 of the regulations provides that the term trade_or_business has the same meaning it has in sec_162 of the code and generally includes any activity carried on for the production_of_income from the sale_of_goods or the performance of services sec_1_513-1 of the regulations states that in determining whether a trade_or_business is regularly carried on within the meaning of sec_512 of the code regard must be had to the frequency and continuity with which the activities are conducted and the manner in which they are pursued hence for example specific business activities will ordinarily be deemed regularly carried on if they manifest a frequency and continuity and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations sec_1_513-1 of the regulations provides that gross_income is derived from unrelated_trade_or_business within the meaning of sec_513 of the code if the conduct of the trade_or_business which produces the income is not substantially related other than through the production of funds to the purposes for which exemption is granted the presence of this requirement necessitates an examination of the relationship between the business activities that generate the particular income in question - the activities that is of producing or distributing the goods or performing the services involved - and the accomplishment of the organization's exempt purposes sec_1_513-1 of the regulations provides that a trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has a causal relationship to the achievement of exempt purposes other than through the production_of_income and it is substantially related for purposes of sec_513 only if the causal relationship is a strong one thus for the conduct_of_a_trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those exempt purposes whether activities contribute importantly to an organization’s exempt purposes depends in each case upon the facts and circumstances involved in 693_f2d_525 5th cir a business league described in sec_501 of the code engaged in several activities including the endorsement of insurance to its members the court analyzed whether these activities were substantially related to the business league's exempt_purpose under sec_501 of advancing the credit_union movement in order to determine whether income generated from those activities in its analysis the resulted in unrelated_business_income to the business league court stated that the substantial relationship’ determination is necessarily a fact- based inquiry id pincite the court also noted that the regulations under sec_513 require a case-by-case identification of the exempt_purpose an analysis of how the activity contributes to that purpose and an examination of the scale on which the activity is conducted the league promoted the purchase of insurance policies from a particular carrier providing the carrier with convenient services in the marketing and administration of its programs the court stated that the league's endorsement of group_insurance plans was principally motivated by a desire to raise revenue the court also discussed at length the distinction between group and individual benefit the court said the distinction between inherently group benefits and individual benefits is analogous to the aggregate entity concept familiar in partnership_taxation a member of his separate just as capacities as partner and non-partner so may a member of the league may enjoy benefits both as a league member and as an individual credit a partnership may enjoy benefits in only those activities that benefit the credit unions in their capacities union the be considered substantially as league members can this group benefit standard also accords with league’s exempt_function the requirement that a business league seek to improve the conditions of an entire line_of_business rather than perform discrete services for individuals see sec_1_501_c_6_-1 when the activities of a business the common business league are directed toward the achievement of its members are interest of inherently group benefits benefits that accrue to its members the related to id pincite the court continued its analysis by stating that insurance endorsement and administration is not the sort of unique activity that satisfies the substantial relationship_test nor is its benefits group-related id pincite rather than merely advising members of the availability and desirability of insurance coverage to credit unions generally the league promoted the purchase of polices from a particular carrier the court affirmed the district court's rationale that the league’s insurance activities did little more than generate revenue because the league’s endorsement was basically a fundraising activity it was by definition unrelated business activity under sec_513 id pincite therefore the court concluded that the league’s insurance activities were not substantially related to its tax-exempt purpose of advancing the credit_union movement rather the connection between the furtherance of the credit_union movement and the selling of insurance was at best tangential in 78_tc_246 aff'd 726_f2d_1097 6th cir the court held that promotional and administrative fees and an experience rating reserve refund received by a business league described in sec_501 of the code for promoting group_insurance programs for its members constituted unrelated_business_taxable_income under sec_512 in holding that the business league’s activities were not substantially related the court considered whether the league’s insurance activities contributed importantly to the league’s exempt_purpose of advancing the common business interests of independent insurance agents the court stated the burden is on the taxpayer to show that the challenged activities contribute directly and importantly to the improvement of conditions in a particular line_of_business the court noted that the petitioner's insurance activities did little more than generate revenue for the association and provided members with a convenient and economical service in the operation of their agencies as such they stood in sharp contrast to petitioner’s educational and legislative activities which served the broader purpose of improving the general business environment in which insurance agents operated thus the court found petitioner's activity of promoting insurance was not substantially related to its exempt_purpose in la caisse popu563_f2d_505 1st cir the government unsuccessfully challenged the exempt status under sec_501 of the code of an organization chartered as a credit_union by the state of new hampshire the government maintained that the organization was not exempt because it offered a wide variety of services typically offered by nonexempt full service banks and was therefore not organized or operated as a credit_union among these services were checking accounts mortgage loans banking by mail safe deposit boxes andanight depository this case focused solely on the taxpayer's exemption under sec_501 and did not address the provisions of sec_511 through in 646_fsupp_1199 n d ala a credit_union described in sec_501 of the code offered cancer and group_life_insurance to its individual members the issue was whether commissions the credit_union received from servicing these particular types of insurance policies constituted unrelated_business_income under sec_512 the court did not reach the issue for jurisdictional reasons however it stated in a footnote that the petitioner would have lost on the merits of this issue because the policies benefited the insured without any reference to the member's loans or accounts with the credit_union that court stated in dicta that cancer and group_life_insurance offered by a credit_union to its members would result in unrelated business table income for the following reasons petitioner earned commissions for servicing cancer and group_life_insurance policies these policies were for the express benefit of the insured without any reference to the member's loans or accounts with the credit_union petitioner derived no benefit from the policies other than commission on the sale of said policies earned from the insurance_companies which issued the policies the sale of the cancer and group_life_insurance policies referred to had no substantial causal relationship to petitioner's exempt purposes and the sale of the policies bore no relationship to petitioner's function as a credit_union id pincite n revrul_69_282 1969_1_cb_155 provides that an organization must be formed and operated under the state law governing the formation of credit unions to qualify for exemption under sec_501 of the code as a state- chartered credit_union revrul_72_37 1972_1_cb_152 provides that to qualify as a credit_union_exempt from income_tax under sec_501 a of the code an organization must in addition to being formed and operated under a state credit_union law operate without profit and for the mutual benefit of its members the revenue_ruling clarified revrul_69_282 stating that a state charter is a threshold requirement for exemption but not the sole requirement revrul_60_228 1960_1_cb_200 interprets the substantially related requirement of sec_513 an organization exempt from federal_income_tax as an agricultural_organization described in sec_501 of the code promoted wider insurance coverage among its members and other local farmers including life casualty and fire insurance the insurance programs are provided by several insurance_companies but the organization's administrative and secretarial staff is assigned to the work the organization receives an overall fee from the insurance_company for office and other services rendered them in connection with the insurance programs the revenue_ruling provides thata trade_or_business is substantially related to an organization’s exempt_activities if the principal purpose of the trade_or_business furthers these exempt purposes however in this case such activities are not usually associated with the functions of an agricultural_organization and normally would not be carried on by such an organization in furtherance of its exempt purposes therefore these activities are not substantially related to the organization’s exempt purposes thus the income resulting from these activities is subject_to tax under sec_511 analysis in determining whether an income-producing activity is an unrelated_trade_or_business it is necessary to show that there is a trade_or_business the trade_or_business is regularly carried on and the conduct of the trade_or_business is not substantially related to the organization's exempt_purpose or function see sec_1_513-1 a of the regulations t has agreed that the activities at issue are trade_or_business that is regularly carried on therefore the sole issue is whether each activity is substantially related to the organization’s achievement of its exempt purposes gross_income is derived from an unrelated_trade_or_business if the conduct of the trade_or_business is not substantially related other than through production of funds to the purposes for which exemption is granted sec_1_513-1 of the regulations determination of the substantial relationship issue requires an examination of the relationship between the business activities which generate the particular income in question and the accomplishment of the organization's exempt purposes id the regulations further state that for the conduct of trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes sec_1_513-1 of the regulations see also prof'l ins agents of michigan supra insurance activity was not substantially related because activity did little more than generate revenue and provide members with a service and did not further taxpayer's exempt_purpose of improving business conditions and louisiana credit_union league supra league's endorsement of group_insurance plans was principally motivated by a desire to raise revenue and at best was only tangentially related to the furtherance of the league’s exempt_purpose of improving business conditions of one or more lines of business the court found the requisite substantial relationship lacking for t’s activities to escape taxation as unrelated_business_income the activities must contribute directly and importantly to the accomplishment of one or more of t’s exempt purposes-promotion of thrift and providing low cost credit for its members through mutual and nonprofit operation sec_1_513-1 of the regulations see also prof ins agents of michigan supra we address each of the activities below insurance t argues that the sale of credit disability insurance is directly related to the credit union’s specific exempt purposes of fostering thrift among the members including both the extension of credit to members on reasonable terms and encouraging savings among the members and providing services to members on a mutual basis t further maintains that credit insurance which is an integral part of a member loan transaction is a mechanism for assuring the prompt repayment of debts in situations where the financial resources of the borrower and the borrower’s family become strained as a result of disability in fact credit disability the facts do not show how sales of credit disability insurance contribute directly and importantly to accomplishing t's exempt purposes credit disability insurance is not required for the approval of a loan insurance is not available to members on certain types of loans such as mortgage and other real_estate loans the member decides whether to purchase credit disability insurance based on his or her own assessment of whether the insurance will provide a benefit to that individual member the individual member benefits in that the member need not worry about paying a loan to t the event of disability while there is also a benefit to the credit_union as the beneficiary the facts do not show how the sale of credit disability insurance otherwise contributes importantly and directly to accomplishing t’s exempt purposes other than through the production_of_income availability of credit disability insurance does not encourage savings or assist t in offering low cost credit in t does not take into consideration the need for this insurance by members t performs no studies to determine which members may need credit disability insurance and there is no required corresponding counseling to members who may have more need than others although t’s staff may recommend insurance based on the level of personal and family resources these recommendations are not mandatory in specific cases and coverage is not required in these cases applying the factors of alabama central credit_union supra t earns commissions for providing credit disability insurance sells policies for the express benefit of the insured albeit with reference to a member's loan with the credit_union derives some benefit from the credit disability insurance but the primary benefit is production_of_income both through the commission on the sale of the insurance earned and the bonuses paid to t employees the insurance referred to has no substantial causal relationship to t’s exempt purposes and the insurance bears no relationship to t’s function as a credit_union looking at the facts with respect to credit disability insurance the sale of credit disability insurance is not substantially related to t's exempt purposes the available information indicates that the sale of insurance is primarily for the purpose of generating income to t and some of its employees and for the benefit of the insured rather than for the benefit of t’s membership based on all of the facts and circumstances t’s activities with respect to the sale of credit disability insurance do not contribute importantly to accomplishing t’s exempt purposes therefore the sale of credit disability insurance is not substantially related to t’s exempt purposes and amounts received therefrom are subject_to ubit t argues that making ad d and other types of insurance available to members is substantially related to the credit union’s exempt_purpose of promoting thrift by providing basic financial protection to members on a mutual basis t also argues that these insurances facilitate prompt repayment of loans on a mutual basis by protecting the individual member's financial security the facts do not show how t’s sales of these insurances contribute directly and importantly to t’s exempt purposes t has not demonstrated that sales of insurance encourage savings by members who purchase it provided information showing that the sale of insurance aids a member in _ obtaining credit or reduces the cost of providing credit to members the facts do not demonstrate that the sale of insurance to individual members advances t’s mutual operation insurance provides a financial protection to an individual the individual's purchase of insurance does not provide a benefit to the members as a whole the legislative_history of sec_501 c a of the code indicates that mutuality is tied to the same members being the borrowers and lenders in loan transactions rather than the general principles that t espouses s rep no date t has also not t has not stated how the sale of insurance to an individual provides a mutual benefit to t’s members the facts also do not show how sale of insurance benefits the members of the credit_union as a whole a member may if a member of t purchase insurance without obtaining credit or a loan from t receives accidental dismemberment insurance payments the member may use the insurance payments as he or she wishes rather than saving them or paying in the case of accidental death the member's beneficiary off an obligation to t may or may not be a member of t and also may use the payments as he or she desires in alabama central credit_union supra the court stated in dicta several in this case t factors cited above relevant to the substantially related inquiry earns commissions for servicing ad d insurance policies sells policies for the express benefit of the insured without any reference to the member's loans or accounts with the credit_union derives no benefit from the policies other than commission on the sale of the policies earned from the insurance_companies which issued the policies the sale of the insurance policies referred to has no substantial causal relationship to t's exempt purposes and the sale of the policies bears no relationship to t’s function as a credit_union based on all of the facts and circumstances t’s activities with respect to the sale of insurance do not contribute importantly to accomplishing t’s exempt purposes the insurance sold benefits an individual and t receives no benefit other than the production_of_income therefore the sale of insurance is not substantially related to t’s exempt purposes and amounts received therefrom are subject_to unrelated_business_income_tax ubit interchange income derived in connection with t's visa credit card and checkcard program making interest-bearing loans to members is a traditional activity of exempt credit unions_credit unions originally made unsecured personal loans to members because of changes in the financial marketplace and the expanded needs of financial_institution customers today all the types of loans made by t - including personal loans to members first mortgage loans and second-mortgage or home equity loans secured_by residential real_estate owned by the member member whose purchase is financed by the loan and credit card loans - are recognized as substantially related to the exempt purposes and functions of t - auto loans secured_by the automobile owned by the similarly activities attendant on these loan programs are also substantially related to t’s thrift-encouragement and mutual member service purposes credit card loans are extended to members as a component of the overall credit card program and ultimately the member lending program as a whole maintained by t accordingly the credit card program is substantially related to t’s exempt purposes therefore any net_income after deduction of related expenses arising from the card program specifically including but not limited to the interchange fees generated by merchant purchases is not subject_to unrelated_business_income_tax evolution and change in the financial marketplace over the decades govern the analysis of the other activities as well debit cards and atms are contemporary account access technologies which are provided in the context of a program with a number of features the debit card and atm programs as a whole are financial services that are substantially related to t’s exempt purposes as a financial_institution devoted to member service on a mutual and nonprofit basis any net_income from those overall programs interchange fees in the case of debit cards and fees from member use of t’s terminals in the case of atms is accordingly not subject_to unrelated_business_income_tax nonmember use of t’s atm’s t argues that atm fee revenue received from nonmembers is irrelevant so long as the trade_or_business activity itself is substantially related to the tax- exempt_purpose t argues that providing full service reciprocally accessible networked atms is substantially related to the credit union’s exempt purposes so all revenue derived from that activity including nonmember fees is exempt from ubit t also argues that many of its members are also customers of other ifa unrelated financial institutions and have such financial institution's atm card member of t uses t’s atm it would be recorded by t as a nonmember transaction from the other financial_institution the facts do not show how fees charged to nonmember atm users contribute directly and importantly to accomplishing t’s exempt purposes the nonmember benefits in that he or she can access an atm while there is also a benefit to the individual members by allowing them to use the atms of other financial institutions the facts do not show how the nonmember atm fees contributes importantly and directly to accomplishing t’s exempt purposes other than through the production_of_income availability of atms by nonmembers does not encourage savings or assist t in offering low cost credit t can easily avoid the result that transactions by members using cards from other institutions in t’s atms would be recorded as a nonmember transaction by asking its members to use only cards issued by t in t’s atms applying the factors of alabama central credit_union supra t earns revenue for providing nonmembers access to its atms derives little benefit from nonmember use at its atms charging fees for nonmember use at t’s atms has no substantial causal relationship to t’s exempt purposes the nonmember atm usage referred to has no substantial causal relationship to t’s exempt purposes and the nonmember atm usage bears no relationship to t’s function as a credit_union looking at the facts with respect to nonmember atm fees such fees are not substantially related to t’s exempt purposes the available information indicates that the fees generated from nonmember usage are primarily for the purpose of generating income to t and for the benefit of the nonmember user rather than for the benefit of t’s membership based on all of the facts and circumstances t’s activities with respect to the nonmember atm fees do not contribute importantly to accomplishing t's exempt purposes therefore the nonmember atm fees are not substantially related to t’s exempt purposes and amounts received therefrom are subject_to ubit conclusions for reasons set forth above we conclude that the income received by a sec_501 credit_union from the activities listed below are not substantially related to the furtherance of t’s exempt purposes and therefore are subject_to ubit a b sale of insurance products nonmember atm fees interchange income derived by t in connection with its visa credit card and checkcard program is substantially related to the performance of t’s exempt_function and therefore does not constitute unrelated_business_income subject_to the tax imposed by sec_511 of the code a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 of the code provides that it may not be used or cited as precedent - end -


internal_revenue_service number release date index number ---------------------------- -------------------- ------------------------------ - department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no -------------- telephone number --------------------- refer reply to cc psi plr-142737-05 date december legend legend ---- ------ this is in response to your authorized representative’s letter dated date ----------------------------- ------------------------------------------------ ----------------------- --------------------------- --------------------------- ------------------------------------------------------------------------------------------------ husband wife father date date trust -------------------------------------------------------------------------------------- q w dear ------------------ in which a ruling was requested regarding the federal estate_tax consequences of the proposed purchase by trustee of trust a of a life_insurance_policy on the life of wife date wife did not provide any of the funding for trust pay such amounts of income and principal to wife and to husband’s issue as the trustees in their absolute discretion shall determine on the death of husband article third a provides that the trustees are to set_aside w of the trust corpus as a separate trust trust a for the benefit of wife the trustees are to pay wife the entire net_income and so much of the principal of trust a as the trustees in their absolute discretion determine trust a is to terminate upon the death of wife and the balance of the trust a corpus is to be paid to husband’s then living issue per stirpes the balance of the trust corpus after providing for the funding of trust a is to be paid to husband’s then living issue per stirpes provided that any property payable to a child of husband who had not attained the age of is to be held in further trust for the benefit of the child according to the facts submitted husband created trust an irrevocable_trust on under the terms of trust during husband’s lifetime the trustees are directed to wife proposes to resign as co-trustee of trust a subsequent to wife’s article fifth i of the trust agreement provides that if any person currently a ruling is requested that wife will not possess any incidents_of_ownership over husband died on date in accordance with the terms of article third a_trust plr-142737-05 eligible to receive any principal or income from any trust created under the terms of trust is acting as a trustee then such trustee shall have no power whatsoever to make or participate in making decisions affecting in any way the disposition of the income or principal of such trust to himself or herself including determining how much income or principal should be distributed and whether the trust should be terminated a was established for the benefit of wife wife and father are currently serving as co- trustees of trust a resignation father as trustee of trust a will apply for and purchase a policy of insurance on wife’s life trust a will be the owner and beneficiary of the policy it is represented that the principal of trust a will be used to pay the premiums on the policy and that the annual premiums will be less than q of the principal of trust a wife will not pay any premiums with respect to the policy or otherwise contribute towards the maintenance of the policy all the income of trust a will continue to be paid to wife the life_insurance_policy on her life owned by trust a and that the proceeds of the policy will not be includible in wife’s gross_estate under sec_2042 of the internal_revenue_code you also request a ruling that the policy proceeds will not be includible under sec_2035 of the code if wife dies within three years of renouncing her rights as co-trustee of trust a sec_2035 provides that if the decedent made a transfer by trust or otherwise of an interest in any property or relinquished a power with respect to any property during the 3-year period ending on the date of the decedent’s death and the value of such property or an interest therein would have been included in the decedent’s gross_estate under sec_2036 sec_2037 sec_2038 or sec_2042 if such interest or relinquished power had been retained by the decedent on the date of his death the value of the gross_estate shall include the value of any property or interest therein which would have been so included proceeds of all life_insurance policies on the decedent’s life receivable by beneficiaries other than the executor of the decedent’s estate to the extent that the decedent possessed at death any incidents_of_ownership exercisable either alone or in conjunction with any other person ownership is not limited in its meaning to ownership of a policy in the technical legal sense generally speaking the term has reference to the right of the insured or his sec_20_2042-1 of the estate_tax regulations provides that incidents of sec_2042 provides that the value of the gross_estate shall include the under sec_20_2042-1 a decedent is considered to have an incident of in revrul_84_179 1984_2_cb_195 the decedent purchased an insurance plr-142737-05 estate to the economic benefits of the policy thus it includes the power to change the beneficiary to surrender or cancel the policy to assign the policy to revoke an assignment to pledge the policy for a loan or to obtain from the insurer a loan against the policy ownership in an insurance_policy on decedent’s life held in trust if under the terms of the policy the decedent either alone or in conjunction with another person or persons has the power as trustee or otherwise to change the beneficial_ownership of the policy or its proceeds or the time or manner of enjoyment thereof even though the decedent has no beneficial_interest in the trust policy on his life and transferred all incidents_of_ownership to his spouse his spouse designated their adult child as the policy beneficiary subsequently the spouse died and her will established a residuary_trust for the benefit of the child the decedent was designated the trustee of this trust the insurance_policy on the decedent’s life which was part of the residuary_estate passed to the testamentary_trust as trustee the decedent had broad discretionary powers in the management of the trust property and the power to distribute or accumulate income under the terms of the policy the owner could elect to have the proceeds made payable according to various plans use the loan value to pay the premiums borrow on the policy assign or pledge the policy and elect to receive annual dividends the will precluded the decedent from exercising these powers for the decedent’s own benefit the decedent paid the premiums on the policy out of other trust property and was still serving as trustee when he died that the section generally applies to include life_insurance in situations that parallel the inclusion of property under sections those sections generally involve the transfer of property where rights or powers are retained incident to the transfer under the facts in revrul_84_179 the decedent transferred the policy to his wife and subsequently in an unrelated transaction reacquired incidents_of_ownership over the policy in a fiduciary capacity the ruling holds that under these circumstances the decedent will not be considered to possess incidents_of_ownership in the policy for purposes of sec_2042 provided the decedent did not furnish consideration for maintaining the policy and could not exercise the powers for the decedent’s personal benefit the ruling further provides that the result would be the same if the decedent acting as trustee purchased a policy as a_trust asset the ruling states however that if the decedent’s powers over the policy could have been exercised for the decedent’s benefit they would constitute incidents_of_ownership in the policy without regard to how those powers were acquired and without consideration of whether or not the decedent was the source of the funds used to pay the premiums see 427_f2d_80 6th cir the ruling concludes based on the legislative_history underlying sec_2042 in the present case wife will resign as co-trustee of trust a prior to the plr-142737-05 acquisition by trust a of the life_insurance_policy on wife’s life trust a will be the owner and beneficiary of the policy accordingly because wife is resigning as co- trustee prior to the acquisition of the policy wife will never possess or have the power to exercise any incidents_of_ownership in the policy to be acquired by trust a nor will she relinquish or transfer any incidents_of_ownership in the policy by resigning as co- trustee prior to the acquisition of the policy further it is represented that only trust principal will be used to pay the premiums on the policy and the annual premiums will be less than q of the trust a principal all the income of trust a will continue to be paid to wife in addition wife has not transferred nor will she transfer any assets to trust a and she will not pay any premiums with respect to the policy to be held as an asset of trust a based on the foregoing we conclude that the proceeds of the life_insurance_policy to be acquired by trust a as described above will not be includible in wife’s gross_estate under sec_2042 further the policy proceeds will not be includible under sec_2035 if wife dies within three years of resigning as co-trustee of trust a the above conclusions assume that wife is not reinstated as co-trustee and is not serving as co-trustee at the time of her death or after being reinstated subsequently resigns within three years of death see revrul_84_179 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 or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely yours george masnik chief branch office of the associate chief_counsel passthroughs and special industries enclosure copy of letter for sec_6110 purposes