cca-042874-14 id ----------------- office uilc number release date from --------------- sent monday date am to ---------------------- cc ------------------ subject re domestication of foreign_trust - ---------------------- ---------- in answer to your questions posed below sec_301_7701-7 provides that a_trust is a united_states_person if i a court within the united_states is able to exercise primary supervision over the administration of the trust court test and ii one or more united_states persons have the authority to control all substantial decisions of the trust control test in order to be a domestic_trust the trust must meet the court test and the control test based on the terms of the trust itself and the applicable law see sec_301_7701-7 when applying the court test the term is able to exercise means that a court has or would have the authority under applicable law to render orders or judgments resolving issues concerning administration of the trust sec_301_7701-7 primary supervision means a court has the authority to determine substantially_all issues regarding the administration of the entire trust sec_301_7701-7 administration of the trust means carrying out the duties imposed by the terms of the trust instrument and applicable law including maintaining the books_and_records of the trust filing tax returns managing and investing the assets of the trust defending the trust from suits by creditors and determining the amount and timing of distributions sec_301_7701-7 the regulation also provides a safe_harbor a_trust will satisfy the court test if i the trust instrument does not direct that the trust be administered outside of the united_states ii the trust is administrated exclusively in the united_states and iii the trust is not subject_to an automatic migration provision sec_301_7701-7 with respect to the -------------- which will be the only trust document described in this email the ------------------------includes these same provisions a court within the united_states is able to exercise primary supervision over the administration of the trust thus the court test is met ----------------------- ------------------------ trust agreement explains that the intent of the settlors is that the trust not constitute a foreign_trust as defined in sec_7701 to that end ---------------- provides that the place of administration shall be the state of resident of the first trustee who is a united_states_person living in ------------ pursuant to this provision the first trustee administered the trust in ------- ----------- the paragraph continues that if that person is no longer a trustee the place of administration shall be the state of residence or domicile of the longest-serving trustee who is a resident in the same country as a majority of the beneficiaries in addition there is no automatic migration provision in the trust document as defined by sec_301_7701-7 because a united_states court is able to exercise primary supervision of the administration of the trust the court test is met in order to meet the control test one or more united_states persons within the meaning of sec_7701 must have the authority to control all substantial decisions of the trust the term substantial decisions means those decisions that persons are authorized or required to make under the terms of the trust instrument and applicable law and that are not ministerial sec_301 d ii substantial decisions include but are not limited to decisions such as whether and when to distribute income or corpus the amount of any distribution and whether to remove add or replace a trustee id control means having the power by vote or otherwise to make all of the substantial decisions of the trust with no other person having the power to veto any of the substantial decisions to determine whether u s persons have control it is necessary to consider all persons who have authority to make a substantial decision of the trust not only the trust fiduciaries sec_301_7701-7 when created the trust had two trustees a united_states_person trustee and a foreign trustee you informed us that the foreign trustee was effectively fired in ------ when the trustee fees that were being paid to the foreign trustees were no longer paid no other foreign trustee was named as a replacement the only trustee at that point forward was the united_states_person trustee as such united_states persons are the only persons who have the power to make the substantial decisions of the trust from ------ forward furthermore even prior to ------ united_states persons controlled all the substantial decisions of the trust there were only two trustees named the united_states_person and the foreign trustee --------- -----------------------------trust document provided that a majority of the trustees must agree to decisions but if there are only two acting the joinder of both is required unless at such time one of the trustees is a resident of or domiciled in the same country as settlor and the other of the trustees is not a resident of or domiciled in the same country as settlor in which case the determination of the trustee who is a resident of or domiciled in the same country as settlor shall govern effectively the united_states_person trustee could make decisions without the input of the foreign trustee in addition --------------------------------------- trust document provides the protector who is the settlor and a united_states_person with a veto power over any decisions to be made by the trustees as such a united_states_person the united_states trustee has the power to make all of the substantial decisions of the trust and another united_states_person the settlor has the power to veto any of those substantial decisions all powers of control_over substantial decisions rest in united_states persons under sec_301_7701-7 see also sec_301_7701-7 example disclaimer this discussion only applies to the trust documents we reviewed and cannot be applied to trust documents governing different trusts the analysis under sec_301_7701-7 depends on the terms of the trust and the applicable law -----------------------


internal_revenue_service number release date index number --------------------------- ------------------------------------------------------------ -------------- ---------------------------------------- ------------------------------ ------------------------------------------------------------- ---------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------------------------------------- ----------------- telephone number ---------------------- refer reply to cc psi b04 plr-141552-15 date date legend husband wife grandchild grandchild grandchild grandchild daughter trust trust trust trust trust year state state court settlement agreement state statute a individual individual individual individual individual ------------------ ------------------- --------------------------------------------------- ------------------------------------------------------------ --------------------------------------------------------------- ------------------------------------- ------------------------------------------------------------------ --------------------------------------------------------- ----------------------------------------------------- ------------------------------------------------------------ ----------------------------------------------------------------------- ---------------------------------------------------- -------- ---------- ----------------------------------------------------------------------------- --------------------------------------------------- ------------------------------------------------- ----------------------------------------------------------------------- ------------------ ---------------------- --------------------------- ----------------------------- ------------------------------- ------------------------- plr-141552-15 individual bank date date date date -------------------------- ------------------ --------------------------- -------------------------- --------------------------- ------------------ dear---------------- this letter responds to your authorized representative’s letter dated date requesting income gift estate and generation-skipping_transfer gst tax rulings with respect to the proposed modifications of trust the facts and representations submitted are summarized as follows on date a date prior to date husband and wife created five irrevocable trusts with substantively similar terms for different beneficiaries trust was created for the primary benefit of grandchild trust was created for the primary benefit of grandchild trust was created for the primary benefit of grandchild trust was created for the primary benefit of daughter and trust was created for the primary benefit of grandchild this ruling pertains only to trust article i of trust provides that the trustees are to pay to or for the benefit of daughter so much of the net_income from trust as the trustees in their sole discretion shall determine to be necessary and desirable to provide for the health education maintenance and support hems of said beneficiary in the event that net_income is not sufficient to provide for the health education maintenance and support of said beneficiary then the trustees may use such part of the principal as from time to time in their sole discretion they may determine to be necessary for such purposes article ii of trust provides that upon the death of daughter the trustees are to pay to or for the benefit of the issue of daughter such part of the net_income from trust as the trustees in their sole discretion shall determine to be necessary and desirable to provide for the health education maintenance and support of such issue in the event that the trustees determine that the net_income is not sufficient to provide for the health education maintenance and support of any one or more of such issue then the trustees may use such part of the principal as from time to time in their sole discretion they may determine to be necessary for such purposes article iii of trust provides that in the event that daughter and all issue of daughter shall die prior to the final distribution of trust properties the remaining trust properties principal and any accumulated income shall be paid over and plr-141552-15 delivered in equal shares among the other trusts trust trust trust and trust then in existence article xii of trust provides that trust will terminate years after the last to die of grandchild grandchild grandchild daughter or grandchild upon termination all of the properties remaining in trust shall be distributed to the then-living beneficiaries of trust share and share alike trust appoints seven initial individual trustees and article viii of trust identifies seven successor individual trustees of trust article viii of trust additionally provides that when fewer than four trustees are currently serving the remaining trustees shall have the power and authority to appoint one or more individuals as trustees so that at least four and not more than seven individuals may serve as trustees further article viii of trust grants the trustees then serving the power to appoint a bank as successor trustee to serve thereafter as the sole trustee grandchild died in year without issue pursuant to the terms of trust the assets remaining after the death of grandchild were distributed equally among trust trust trust and trust on date daughter petitioned state court pursuant to state statute to modify trust specifically requesting the appointment of a corporate trustee to replace the six individual trustees then serving the six individual trustees then serving individual individual individual individual individual and individual also served as co-trustees of trust trust trust and trust grandchild grandchild and grandchild also filed petitions to modify the respective trust of which each is a beneficiary and similarly requested the appointment of a corporate trustee the petitions allege that the six individual trustees then serving failed to sufficiently communicate with the beneficiaries of the trusts concerning the investment strategies for each of the respective trusts and the respective beneficiary’s needs in relation to his or her health education support and maintenance in addition the petitions filed by grandchild grandchild and grandchild allege that the six individual trustees then serving failed to sufficiently diversify trust assets and made questionable investments despite the potential for conflicts of interests the six individual trustees then serving denied the allegations in the petitions and opposed the request to appoint a corporate trustee for each trust after an extended period of negotiations including mediation grandchild grandchild grandchild daughter and the six individual trustees entered into settlement agreement which state court approved by order dated date settlement agreement is contingent on the receipt of favorable rulings from the internal_revenue_service plr-141552-15 settlement agreement provides that bank will be appointed to serve as the sole corporate trustee of trust in addition settlement agreement provides that trust trust and trust will each be divided into two resulting trusts with bank serving as the sole corporate trustee of one successor trust and individual individual and individual serving as trustees of the other successor trust settlement agreement provides that the trustee provision of trust will be modified to provide the distributees of trust upon application to and order of state court at state court’s discretion the power to remove at any time and without cause any then-serving corporate trustee of trust by written notice delivered to such trustee and the power to replace such trustee with another corporate trustee that- has the power to act as a trustee under the laws of the state governing the administration of the trust has at least dollar_figurea in assets under management and is not related or subordinate within the meaning of sec_672 to the distributees of trust further the trustee provisions of trust will be modified to provide the distributees of trust in the event the then-serving corporate trustee resigns or can no longer serve as trustee the power to appoint a successor corporate trustee without application to and approval by state court that- has the power to act as a trustee under the laws of the state governing the administration of the trust has at least dollar_figurea in assets under management and is not related or subordinate within the meaning of sec_672 to the distributees of trust the term distributees refers to a majority of the competent adult beneficiaries who are at the time authorized to receive distributions of principal or income from the trust settlement agreement modifies trust by adding provisions that address the trustees’ administration of the trust including a provision regarding the trustee’s communications with beneficiaries under settlement agreement attorneys’ fees and expenses_incurred by the trustees and beneficiaries relating to the litigation and the settlement agreement will be paid or reimbursed by trust trust trust and trust the direct payments and reimbursements shall be made from each of trust trust trust and trust pro_rata in relation to the total value of each trust daughter died on date a date after state court’s order approving settlement agreement you represent that no other additions have been made to trust since date you have requested the following rulings the modification of trust pursuant to settlement agreement will not cause trust to be subject_to the provisions of chapter plr-141552-15 none of the powers granted to any of the beneficiaries of trust will cause the assets of trust to be included in any beneficiary’s gross_estate under sec_2041 a payment by trust to a beneficiary of trust trust trust trust or one of the resulting divided trusts as reimbursement for the beneficiary’s prior payment of attorney’s fees and expenses will not result in a deduction under sec_661 for the reimbursing trust or gross_income to the recipient beneficiary under sec_662 but such payment will result in a deduction for the reimbursing trust under sec_212 ruling sec_2601 imposes a tax on every gst made after date a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2612 provides that the term taxable_termination means a termination by death lapse of time release of a power or otherwise of an interest in property held in a_trust unless a immediately after such termination a non-skip_person has an interest in such property or b at no time after such termination may a distribution including distributions on termination be made from such trust to a skip_person sec_2612 provides that the term taxable_distribution means any distribution from a_trust to a skip_person other than a taxable_termination or a direct_skip under sec_2612 a direct_skip is a transfer subject_to federal estate or gift_tax of an interest in property to a skip_person under a of the tax_reform_act_of_1986 act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the gst tax is generally applicable to gsts made after date however under b a of the act and sec_26_2601-1 the gst tax does not apply to a transfer under a_trust that was irrevocable on date but only to the extent that such transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added under sec_26_2601-1 any trust in existence on date will be considered irrevocable unless the settlor had a power that would have caused inclusion of the trust in his or her gross_estate under sec_2038 or sec_2042 if the settlor had died on date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that plr-141552-15 is exempt from the gst tax under sec_26_2601-1 or hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status in general unless specifically provided otherwise the rules contained in sec_26_2601-1 are applicable only for purposes of determining whether an exempt trust retains its exempt status for gst tax purposes thus unless specifically noted the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of gain for purposes of sec_1001 sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy sec_26_2601-1 b or c by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust sec_26_2601-1 provides that for purposes of sec_26_2601-1 a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer to determine whether a modification of an irrevocable_trust will shift a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification if the effect of the modification cannot be immediately determined it is deemed to shift a beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust sec_26_2601-1 example considers the following situation in grantor established an irrevocable_trust for the benefit of grantor's issue naming a bank and five other individuals as trustees in the appropriate local court approves a modification of the trust that decreases the number of trustees which results in lower administrative costs the modification pertains to the administration of the trust and does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification in addition the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for plr-141552-15 in the original trust therefore the trust will not be subject_to the provisions of chapter in the present case trust became irrevocable prior to date the trustee represents that there have been no additions actual or constructive to trust after date with regard to the proposed modifications of trust we conclude a the modification of trust pursuant to the terms of settlement agreement to provide for a change in trustee and to modify the trustee succession procedures is viewed as pertaining to the administration of the trust comparable to the administrative modification in example of sec_26_2601-1 b in addition all other terms and trust modifications set forth in settlement agreement including the trustee procedures regarding hems distributions the payment of attorneys’ fees and trustee communications with beneficiary are viewed as administrative in nature and under sec_26_2601-1 will not be considered to shift a beneficial_interest to a lower generation in the trust or extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in trust accordingly based upon the facts submitted and the representations made we further conclude that after the modification of trust pursuant to settlement agreement trust will not be subject_to the provisions of chapter ruling sec_2041 provides that the value of the gross_estate shall include the value of all property to the extent of any property with respect to which the decedent has at the time of his death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released a power_of_appointment by a disposition that is of such nature that if it were a transfer of property owned by the decedent the property would be includible in the decedent's gross_estate under sec_2035 to inclusive sec_2041 provides that a general_power_of_appointment is a power that is exercisable in favor of the decedent the decedent's_estate the decedent's creditors or the creditors of the decedent's_estate however a power to consume invade or appropriate property for the benefit of the decedent that is limited by an ascertainable_standard relating to the health education support or maintenance of the decedent shall not be deemed a general_power_of_appointment plr-141552-15 sec_20_2041-1 of the estate_tax regulations provides in part that a donee may have a power_of_appointment if he has the power to remove or discharge a trustee and appoint himself for example if under the terms of the instrument the trustee or his successor has the power to appoint the principal of the trust for the benefit of individuals including himself and the decedent has the unrestricted power to remove or discharge the trustee at any time and appoint any other person including himself the decedent is considered as having a power_of_appointment however the mere power of management investment custody of assets or the power to allocate receipts and disbursements as between income and principal exercisable in a fiduciary capacity whereby the holder has no power to enlarge or shift any of the beneficial interests therein except as an incidental consequence of the discharge of the fiduciary duties is not a power_of_appointment revrul_95_58 1995_2_cb_191 holds that a decedent grantor's reservation of an unqualified power to remove a trustee and to appoint an individual or corporate successor trustee that is not related or subordinate to the decedent within the meaning of sec_672 is not considered a reservation of the trustee's discretionary powers of distribution over the property transferred by the decedent grantor to the trust accordingly the trust corpus is not included in the decedent's gross_estate under sec_2036 or sec_2038 the ruling notes that the eighth circuit in 973_f2d_1409 8th cir concluded that the decedent had not retained dominion and control_over assets transferred to a_trust by reason of his power to remove and replace the trustee with a party that was not related or subordinate to the decedent accordingly the court held that under sec_25_2511-2 the decedent made a completed_gift when he created the trust and transferred assets to it sec_672 defines the term related_or_subordinate_party to mean any nonadverse_party who is the grantor's spouse if living with the grantor or any one of the following the grantor's father mother issue brother or sister an employee of the grantor a corporation or any employee of a corporation in which the stock holdings of the grantor and the trust are significant from the viewpoint of voting control a subordinate employee of a corporation in which the grantor is an executive in this case the beneficiaries will have an increased ability to remove and replace the trustee after the modification of trust the distributees of trust can replace the corporate trustee with another corporate trustee the trustee’s power to invade income and corpus of the trust to distribute funds to the beneficiaries is limited by an ascertainable_standard relating to the health education support or maintenance of the beneficiaries therefore the power that the trustee has cannot be classified as a general_power_of_appointment accordingly based on the facts submitted and the representations made we conclude that none of the powers granted to any of the beneficiaries of trust will cause the assets of any such trust to be included in any beneficiary’s gross_estate under sec_2041 plr-141552-15 ruling sec_212 states that in the case of an individual there shall be allowed as a deduction all the ordinary and necessary expenses paid_or_incurred during the year for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income sec_1_212-1 of the income_tax regulations provides in part that reasonable amounts paid_or_incurred by the fiduciary of a_trust on account of administration_expenses including expenses of litigation which are ordinary and necessary in connection with the performance of duties of administration are deductible under sec_212 notwithstanding that the trust is not engaged in a trade_or_business except to the extent that the expenses are allocated to the production or collection of tax-exempt_income sec_265 provides that expenses that are directly allocable to any class or classes of tax-exempt_income shall be allocated to the tax-exempt_income the regulations further provide that if an expense otherwise allocable is indirectly allocable to both nonexempt and exempt_income then a reasonable proportion is allocated to each considering the particular facts and circumstances whether legal fees are deductible expenses under sec_212 or are capital expenses under sec_263 requires an examination of the origin of the claim giving rise to the legal fees that analysis requires that prior transactions be examined in order to determine if a cause of action originates from an ordinary or capital event the origin of the claim doctrine was established by u s v gilmore 372_us_39 sec_263 provides generally that no deduction is allowed for any amount_paid out for new buildings or for permanent improvements or betterments see sec_1_263_a_-1 sec_1_263_a_-2 sec_1_263_a_-2 and sec_1_263_a_-4 of the income_tax regulations the supreme court has stated that determining whether an expenditure is a current_expense or a capital_expenditure entails a facts and circumstances analysis with material distinctions being of degree and not of kind in 403_us_345 the court stated that a payment that serves to create or enhance a separate and distinct additional asset is a capital_expenditure accordingly the capitalization_rules were initially understood to require that expenditures be capitalized only if they resulted in separate and distinct assets however in 503_us_79 the court clarified lincoln savings by stating that creation of a separate and distinct asset is a sufficient but not a necessary condition to classification as a capital_expenditure in indopco the court established the future benefit test and stated that a taxpayer's realization of benefits beyond the year in which the expenditure is incurred is undeniably plr-141552-15 important in determining whether the appropriate tax treatment is immediate deduction or capitalization sec_1_263_a_-4 provides rules for applying sec_263 to amounts paid to acquire or create intangibles sec_1_263_a_-4 provides that except as otherwise provided in sec_1_263_a_-4 a taxpayer must capitalize an amount_paid to i acquire an intangible see sec_1_263_a_-4 ii create an intangible described in sec_1_263_a_-4 iii create or enhance a separate and distinct intangible asset within the meaning of sec_1_263_a_-4 iv create or enhance a future benefit identified in the federal_register or the internal_revenue_bulletin as an intangible for which capitalization is required and v facilitate as defined in sec_1_263_a_-4 the acquisition or creation of an intangible sec_1_263_a_-4 provides in relevant part that a taxpayer must capitalize amounts paid to another party to create originate enter into renew or renegotiate with that party any ownership_interest in a corporation partnership trust estate limited_liability_company or other entity legal fees relating to the proper investment of trust assets are a function of the management of the trust property and are deductible if they are ordinary and necessary 325_us_365 in herman a 49_tc_430 acq 1968_2_cb_21 the service challenged the trustee’s deduction of certain attorneys’ fees in computing the trust’s income these fees arose from an action brought by the testator’s children to accelerate their beneficial interests in the trust pursuant to state law the court ordered that the attorneys’ fees for the trust the beneficiaries and the guardian ad litem be paid from trust income the court decided that the state court decision aided the trustee in its management of the trust property and ii the trust benefitted by the involvement of the beneficiaries and the guardian ad litem in the litigation thus the court held that all of the litigants’ attorneys’ fees paid from trust income were deductible under sec_212 in the present case the legal fees paid_by beneficiaries seeking to change the trustee of the trust are not payments to acquire create or facilitate the acquisition or creation of an intangible the litigation involved only the proper administration of the trust and not the beneficiaries’ ownership interests in the trust the beneficiaries already had an ownership_interest in the trust and were not seeking a redetermination of that ownership_interest but rather merely a change in the administration of the trust therefore the legal fees are not subject_to capitalization under sec_1_263_a_-4 based on the facts submitted and the representations made we conclude that the purpose of the action brought by the beneficiaries was to change the trustee and to improve the investment of the assets of the trust further the trust benefited by the involvement of the beneficiaries in the proceedings thus subject_to allocations under plr-141552-15 sec_1_265-1 we conclude that the attorneys’ fees paid_by trust to a beneficiary of trust trust trust trust or one of the resulting divided trusts pursuant to settlement agreement as reimbursement for the beneficiary’s prior payment of attorney’s fees and expenses will result in a deduction for the reimbursing trust under sec_212 since the attorney’s fees and expenses are deductible under sec_212 it is implicit that those expenses are not deductible under sec_661 or includible by the beneficiaries under sec_662 in accordance with the power_of_attorney on file with this office we have sent a copy of this letter to your authorized representatives except as expressly provided herein we neither express nor imply any opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely karlene m lesho karlene m lesho senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter cc


department of the treasury internal rev enue se rvice washington d c ta x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n se t eo ra t contact person telephone number identification_number employer_identification_number number release date date date uniform issue list legend date date date year year year year dear sir or madam we have considered your ruling_request dated date requesting a ruling under sec_514 of the internal_revenue_code the neighborhood_land_rule the information submitted shows that you are a church that is recognized as exempt from federal_income_tax under sec_501 of the code you purchased two parcels of land parcel one was purchased on date with debt financing which was paid off on date parcel one has no structures on the property parcel two was purchased on date without debt-financing has two structures on the property the land was purchased for the purpose of church expansion you have submitted your proposed plans for constructing a building that will be used for your church activities the proposed building will be built on the purchased property which is one mile from your present facility you state that architectural plans were approved in year with a formal fundraising campaign initiated in year your original plans were to have construction begin in year however because your fundraising has fallen short construction may be delayed until year you request a ruling that it is reasonably certain that the land will be used for an exempt_purpose within years of its acquisition and that the property will be exempt from the debt-financed_property provisions of sec_512 and sec_514 of the code as a result of the neighborhood_land_rule under sec_514 sec_501 of the code provides for the exemption from federal_income_tax of organizations that are organized and operated exclusively for charitable and educational_purposes no part of the net_earnings of which inures to the benefit of any individual sec_511 to of the code generally impose a tax on the unrelated_business_taxable_income of exempt_organizations derived from the conduct of unrelated_trade_or_business sec_512 of the code generally exempts from unrelated_business_taxable_income rents_from_real_property sec_512 and sec_514 of the code generally impose income_tax notwithstanding the exception for rents under sec_512 on unrelated_business_taxable_income from debt- financed property sec_514 of the code provides a special rule for neighborhood land if an organization acquires real_property for the principal purpose of using the land commencing within years of the time of acquisition for an exempt_purpose and at the time of acquisition the property is in the neighborhood of other_property owned by the organization which is used in such manner the real_property acquired for such future use shall not be treated as debt-financed_property so long as the organization does not abandon its intent to so use the land within the 10-year period the preceding sentence shall not apply for any period after the expiration of the 10-year period and shall apply after the first years of the 10-year period only if the organization establishes to the satisfaction of the secretary that it is reasonably certain that the land will be used in the described manner before the expiration of the 10-year period sec_514 of the code provides that subparagraph a i shall apply with respect to any structure on the land when acquired by the organization or to the land occupied by the structure only if and so long as the intended future use of the land for an exempt_purpose requires that the structure be demolished or removed in order to use the land in such manner shall not apply to structures erected on the land after the acquisition of the land and ii iii shall not apply to property subject_to a lease which is a business_lease as defined in this section immediately before the enactment of the tax reform act of sec_514 of the code has a special rule for debt-financed_property which extends the neighborhood_land_rule for churches to a 15-year period in addition churches are exempt from unrelated_debt-financed_income even if the acquired land does not meet the neighborhood test sec_1_514_b_-1 of the income_tax regulations defines the basic neighborhood_land_rule excepting certain real_property from debt-financed_property if it is acquired for the principal purpose of using it in an exempt_function within years years for churches of the time of acquisition sec_1_514_b_-1 of the regulations provides that in order to satisfy the commissioner that future use of the acquired land in furtherance of the organization's exempt_purpose before the expiration of the relevant period is reasonably certain the organization does not necessarily have to show binding contracts however it must at least have a definite plan detailing a specific improvement and a completion date and some affirmative action toward the fulfillment of such a plan this information shall be forwarded to the commissioner of internal revenue washington d c for a ruling at least days before the end of the fifth year after acquisition of the land sec_1_514_b_-1 of the regulations provides that if a church or association or convention of churches acquires real_property for the principal purpose of using the land in the exercise or performance of its exempt_purpose commencing within years of the time of acquisition such property shall not be treated as debt-financed_property so long as the organization does not abandon its intent to use the land in such a manner within the 15-year period sec_1_514_b_-1 of the regulations provides that this paragraph shall not apply to any property after the expiration of the 15-year period further this paragraph shall apply after the first years of the year period only if the church or association or convention of churches establishes to the satisfaction of the commissioner that use of the acquired land in furtherance of the organization's exempt_purpose before the expiration of the 15-year period is reasonably certain for purposes of the preceding sentence the rules contained in paragraph d iii of this section with respect to satisfying the commissioner that the exempt_organization intends to use the land within the prescribed time in furtherance of its exempt_purpose shall apply you have requested a ruling that the neighborhood_land_rule applies to exempt the land from the definition of debt-financed_property for years from acquisition you submitted your ruling_request in a timely manner and the information submitted indicates that it is reasonably certain that you will use the land in an exempt_purpose or function within years of acquisition accordingly we rule that it is reasonably certain that the land will be used for an exempt_purpose within years of its acquisition and that the properties are exempt from the debt- financed property provisions of sec_512 and sec_514 of the code as a result of the neighborhood_land_rule under sec_514 for years beginning with the dates that you acquired them this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because it could help resolved questions concerning your federal_income_tax status this ruling should be kept in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative enclosure notice robert c harper jr manager exempt_organizations technical group sincerely


dec internal_revenue_service national_office technical_advice_memorandum uniform issue list taxpayer’s name taxpayer’s address taxpayer’s identification_number years involved conference held legend r u o o x i w u o h issues whether m should retain its status as an organization described in sec_501 of the internal_revenue_code is not an organization described in sec_501 of the code whether its exempt status should be modified to sec_501 if m if m’s exemption as an organization described in sec_501 of the code is revoked what should be the effective date of the reclassification whether income from m’s sale of a particular document should constitute unrelated_business_taxable_income under sec_511 of the code facts m is a membership_organization recognized as exempt from federal_income_tax under sec_501 of the code purposes as stated in its amended articles of incorporation are its to conduct to promote effective to advise the legislative bodies federal x to do all things necessary for the purpose of maintaining and raising the standards and ethics of the governmental x departments agencies and organizations professional education activities to exchange information on products centralized public x manufacturers policies procedure and general information useful to x agents agencies and the x agencies of states counties villages towns boroughs provinces publicly-owned utilities public schools and colleges prisons governmental hospitals and other institutions and other tax-supported x agencies public authorities and similar ad hoc agencies on legislation and all problems affecting public x and the general welfare of the members and the agencies which they represent and their agents and employees specifications for_the_use_of members promote the acceptance and passage of uniform laws and procedures for all governmental x to develop and perfect standards practices and and to develop and m's articles of incorporation also state that m’s membership shall consist of both public x agencies and public x personnel as agency members governmental x organizations including federal x agencies and the x agencies of states counties cities villages towns boroughs provinces publicly-owned utilities public schools and colleges prisons governmental hospitals and other institutions other tax-supported x agencies public authorities and similar ad hoc agencies are eligible the articles state that each member agency shall be represented by its head or designated representative in the organization and administration of m are eligible for membership members are governmental agencies as individual members public x personnel m states that all of its voting m's bylaws provide that m will cooperate on a professional membership or representation basis with all legislative and other public bodies departments private groups academic institutions and organizations in working toward its fundamental objectives of promoting professional development and improving the education organization administration and operation of governmental x during the year under examination m conducted its annual professional development forum and products exposition educational programs and certification programs the annual meeting provides lectures seminars workshops and other educational’ opportunities for governmental x personnel to improve their skills and to keep up-to-date with the best industry practices and programs as well as learn the latest information on new and revised rules and regulations affecting m states that m states that the concurrent products exposition governmental x provided an opportunity for suppliers of products and services to government agencies to provide information and product demonstrations to x personnel m states that it sponsors a substantial set of educational programs for public x personnel usually presented in association with local chapters attendance at programs lasting two or three days course syllabus independently of its certification program in that individuals may enroll in all of the educational programs without regard to whether they are working toward certification these courses involve substantial reading and include a m states that these programs are operated m states that it conducts two certification programs a q p or as a m states that the leading to designation as principal purpose of the certification programs is to achieve more effective and efficient x by public agencies through improvement of the skills of governmental x personnel and improvement of the ability of public agencies to identify skilled m states that the means to and experienced x personnel certification is through educational courses self-study the experience and successfully passing an examination certificate is similar to a diploma recognizing satisfactory mastery of a recognized body of knowledge certification individuals must be recertified at five-year intervals based primarily on continued education study and contributions to the x function as or workshop leader a writer seminar instructor to retain m states that the certification programs are carried out the national association of state x through a particular council which is composed of representatives of m officials all of whose members are governmental employees the united statestgeneral services administration its canadian counterpart supply and services canada six members of the board_of examiners who review completed examinations and one academic member exception of the executive director of m and the academic member all members of the council are or were two members are retired if employees of governmental agencies not most payments of certification fees are paid_by governmental agencies certification m states that with the m also states that many uv an employment advertisement by the united_states general services administration in the wall street journal dated includes the following requirements for december candidates for a particular executive position an accredited college or university with a bachelor’s degree graduation from eight years of progressively responsible professional administration experience to include four years in x activities is required a certified x manager or be current certification as able to obtain certification by the second year of employment a master’s degree is preferred must possess a p or as a m states that it also publishes a bi-monthly journal a compendium of news feature articles and other information of interest to public x personnel personnel to expand their knowledge in the field m states that it stocks a number of books that are available for purchase by members and nonmembers in order to encourage purchasing m states that at the request of its agency members and in x products by assigning standard code numbers to particular order to enable them to improve their efficiently in and services m developed and publishes a particular code document products governmental x agencies can perform certain necessary functions more efficiently using less overhead reduce costs through cooperative x agreements among agencies and analyze performance over time members and nonmembers than m’s members publishing the code is code is neither a computer_program nor a data base but simply a standard document published in electronic form that can be used as a data base m’s code is available for sale to both m states that the principal means of nonmembers are charged more for the code in an electronic format however the applicable law sec_501 of the code for the exemption from federal_income_tax of organizations organized and operated exclusively for religious charitable or educational_purposes so long as no part of the organization’s net_earnings inures to the benefit of any private_shareholder_or_individual sec_1 c -1 d of the income_tax regulations provides that the term charitable is used in sec_501 of the code in its generally accepted legal sense and is therefore not to be construed as limited by the separate enumeration in sec_501 of other tax-exempt purposes which may fall within the broad outlines of charity as developed by judicial decisions the term charity includes lessening of the burdens of government the regulations continue that sec_1 c -1 d of the regulations provides that educational as used in sec_501 of the code relates to the instruction or training of the individual for the purpose of improving or developing his capabilities or the instruction ef the public on subjects useful to the individual and beneficial to the community sec_511 of the code imposes a tax on the unrelated_business_income of certain exempt_organizations including those exempt under sec_501 sec_512 of the code provides that as a general_rule except as otherwise provided the term unrelated_business_taxable_income means the gross_income derived by any organization from any unrelated_trade_or_business as defined in sec_513 regularly carried on by it deductions and modifications less certain allowable sec_513 of the code defines the term unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of the functions constituting the basis for its exemption sec_513 of the code provides that the term trade_or_business includes any activity which is carried on for the production_of_income from the sale_of_goods or the performance of services sec_1 513-l a of the regulations provides that gross_income of an exempt_organization subject_to tax imposed by sec_511 of the code is includible in the computation of unrelated_business_taxable_income if trade_or_business carried on by the organization_trade_or_business is not substantially related other than through the production of funds to the organization’s performance of its exempt functions such trade_or_business is regularly the conduct of such and it is income from a sec_1_513-1 of the regulations provides that activities of producing or distributing goods or performing services from which a particular amount of gross_income is derived do not lose identity as trade_or_business merely because they are carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which may organization for example activities of soliciting selling and publishing commercial advertising do not lose identity as a trade_or_business even though the advertising is published in an exempt_organization periodical which contains be related to the exempt purposes of the or may not thus editorial matter related to the exempt purposes of the organization sec_1_513-1 of the regulations provides that in determining whether trade_or_business from which a particular amount of gross_income derives 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 productive of the income are conducted and the manner in which they are pursued organization will ordinarily be deemed to be regularly carried on if they manifest a frequency and continuity and are pursued in a manner generally similar to comparable commercial activities of non-exempt organizations for example specific business activities of an exempt sec_1_513-1 of the regulations provides that in general gross_income derives from unrelated_trade_or_business within the meaning of sec_513 of the code 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 which generate the particular income in question--the activities that is producing or distributing the goods or performing the services involved--and the accomplishment of the organization’s exempt purposes if the conduct of sec_1_513-1 of the regulations provides that a substantial one trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has causal relationship to the achievement of exempt purposes and is substantially related for purposes of sec_513 of the code only if the causal relationship is thus 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 the services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes where the production or distribution of the goods or the performance of the services does not contribute importantly to the accomplishment of the exempt purposes of of the goods or the performance of the services does not derive from the conduct of related trade_or_business activities productive of gross_income contribute importantly to the accomplishment of any purpose for which an organization is granted exemption depends in each case upon the facts and circumstances involved an organization the income from the sale whether revrul_73_567 1973_2_cb_178 holds that a medical specialty board formed by members of the medical profession to devise and administer written examinations and issue certificates a business league under to the successful candidates is exempt as sec_501 of the code but is not exempt under section the revenue_ruling makes no mention of whether the c candidates for certification are members of the organization employees of the members or members of the general_public revenue_ruling concludes that since the activities of the board consist of certifying physicians who are thereafter authorized to hold themselves out to the public as specialists its purpose is to promote the common business interests of the physicians within the meaning of sec_501 rather than to be operated exclusively for charitable purposes within the meaning of sec_501 the a state by assisting revrul_74_117 1974_1_cb_128 holds that an organization formed to implement an orderly change_of administration of the office of governor of the governor-elect during the period between his election and inauguration through screening and selecting applicants for state appointive offices and preparing a legislative message and program reflecting the party’s platform and budget is an action_organization under sec_1_501_c_3_-1 of the regulations and does not qualify for exemption the facts of this case the state will officially provide similar services to the executive after the inauguration but has never provided these services prior to any inauguration the revenue_ruling concludes that the government is the party best qualified to decide whether a particular activity is sufficiently in the public interest to warrant its recognition as function of government and unlike some other jurisdictions this particular jurisdiction has not seen fit to provide services of the type described above for the governor-elect and thus has not recognized such activities as functions of government prior to his inauguration organization are not relieving any burden of the government thus the activities of the subject as stated in a legitimate revrul_85_2 1985_1_cb_178 holds that an organization providing legal assistance to guardians ad litem who represent abused and neglected children before a juvenile court that requires their appointment lessens the burdens of government and therefore qualifies for exemption under sec_501 of the code the revenue_ruling states that a determination of whether an organization is lessening the burdens of government requires consideration of whether the organization’s activities are activities that a governmental_unit considers to be its burdens and whether such activities actually lessen such governmental burden the revenue_ruling continues that in order a burden of government the the fact that an organization is to determine whether an activity is question to be answered is whether there is an objective manifestation by the government that it considers such activity to be part of its burden engaged in an activity that is sometimes undertaken by the governnent is insufficient to establish a burden of government similarly the fact that the government or an official of the government expresses approval of activities is also not sufficient to establish that the organization is lessening the burdens of government interrelationship between the organization and the government may provide evidence that the government considers the organization's a favorable working relationship activities to be its burden between the government and the organization is strong evidence that the organization is actually lessening the burdens of the the revenue_ruling states that to determine whether government the organization is actually lessening the burdens of government all of the relevant facts and circumstances must be considered an organization and its the a v the tax the state in indiana crop improvement association inc acq c b the organization’s primary activity was the the function of seed certification was in turn commissioner t c court found that the organization was described in sec_501 of the code because it was lessening the burdens of government certification of crop seed within the state of indiana substantial amount of time was also spent conducting scientific research in seed technology and providing instructions in modern seed technology in conjunction with purdue university of indiana did not have a department of agriculture to regulate agricultural products within the state and delegated by law agricultural regulatory functions to purdue university and the director of the purdue university agricultural experiment station delegated to indiana crop improvement association inc court found that indiana the organization was directly assisting the u s department of agriculture rather than promoting the economic interests of commercial seed producers and commercial farmers pursuant to the organization’s delegated authority or conjunction with purdue university rather than being carried on as an incident to commercial operations organization’s educational programs on good farm management through the use of modern seed technology available to anyone interested did not benefit only the business interests of commercial seed producers and commercial farmers but rather was of educational within the meaning of sec_1 c -1 da the regulations the seed certification research and testing was either as the official seed certifying agency for the tax the and in _9- rationale m states that its principal purpose is to lessen the burdens of government and that the operation of a certification program is not necessarily inconsistent with exemption under section m states that its only voting members are c of the code governmental agencies and that the vast majority of its revenues are paid_by governmental agencies who pay membership dues provide funding for their employees to attend m’s educational programs and pay for the certification of their employees states that the purpose of its certification program is to provide education and training to public x personnel to enable them to make x decisions that make more effective and efficient use of taxpayer dollars professionalism necessarily follow m’s program but these results are only incidental consequences and are not the purpose of the programs its members and if they paid for the education and certification then the purpose of the programs might be to promote common business interests however pay for the education of their employees and often thus m states the programs primarily their certification serve the governmental agencies’ interests and only incidentally benefit the participating employees m also argues that if the individual employees were the governmental agencies who are members enhanced credibility and for m m contends that further evidence of the participation of governmental agencies in the certification program is found in the fact that m’s certification programs are administered by a separate council that is comprised primarily of employees of governmental agencies a determination of whether an organization is lessening the burdens of government requires consideration of whether the organization’s activities are activities that a governmental_unit considers to be its burdens and whether such activities actually merely providing a service to lessen such governmental burden governmental agencies for a fee is usually not considered to be lessening the burdens of government provides funds to a county’s law enforcement agencies to police illegal narcotics traffic lessens the burdens of government and therefore is described in sec_501 of the code rul provides legal assistance to guardians ad litem who represent abused and neglected children before a juvenile court that requires their appointment lessens the burdens of government and is also described in sec_501 as stated in rev best qualified to decide whether a particular activity is rul supra the government is the party similarly an organization that an organization that c b supra rev_rul rev - sufficiently in the public interest to warrant its recognition as a legitimate function of government in this case several governments have made it fairly by apparent that they consider the training education and certification of their public x personnel as a’ legitimate not only by supporting m through function of government membership dues educational fees and certification fees virtue of making up the entire voting membership of m and having the primary representation on the council carrying out m’s certification programs the governments are indicating that the education is necessary for their employees in the x function also the governments are keeping control of all of m’s activities even though m governments administrative file there is no evidence that the various governments have any other internal training facilities for the purpose of x training personnel advertisement the government is using designations is distinguishable from the originated and certified by m rul supra due to the organization discussed in rev fact that the primary recipient of the benefits of the training are the employees of governments who use their training directly for the benefit of their respective governments reasons m government also as noted in the wall street journal is considered to be lessening the burdens of although not reflected directly in the an organization independent of the for these is m before income from an activity may be taxed as unrelated_business_income the following three conditions must be satisfied the organization’s exempt_purpose must be regularly carried on the trade_or_business must not be substantially related to the activity must constitute a trade_or_business the trade_or_business and and is available for sale m’s code document was requested by its governmental agency members and is being used regularly by the various governments it was developed by m published by m by m to its members and nonmembers rul improvement association inc and revrul_85_2 all supra the government is the party best qualified to decide whether a particular activity is sufficiently in the public interest to warrant its recognition as a legitimate function of government document is related to m’s exempt_purpose of lessening the burdens of government exempt_purpose the questions of whether the activity constitutes is regularly carried on need not trade_or_business and whether it be discussed for these reasons m’s use of the code since the activity is related to m’s as indicated in indiana crop v commissioner rev - li - conclusions m should retain its status as an organization described in sec_501 of the code the question of whether m meets the requirements for exemption under sec_501 of the code is moot the question regarding the effective date of revocation of exempt status under sec_501 of the code is moot m’s income from its sale of its commodity code is related to its exempt_purpose and is not unrelated_business_taxable_income under sec_511 of the code a copy of this memorandum is to be given to m section of the code provides that it may not be used or cited j as precedent - end -


internal_revenue_service number release date index number ------------------------------ --------------------------------- ------------------------------------ ------------------------------------- ---------------------------------------------- legend legend department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ----------------- telephone number --------------------- refer reply to cc ita b03 plr-108025-10 date date investors --------------------------------- corporation x ---------------------------------------- z ---------------------- date ---------------- date ----------------------- date ----------------- date ----------------------- country --------------------------------------- government ----------------------------------------------------------------- act -------------------------------------------------------- act ----------------------------- act ----------------------------------------- fund ----------------------------------------------- agency -------------------------------------------------- n ------ p --- plr-108025-10 q --- r ----------------------------------------------------------------------------------------------------------- dear ---------------- this is in response to your request for a ruling under sec_165 and sec_1231 of the internal_revenue_code dated date facts the investors are a series of trusts which are treated as partnerships for federal_income_tax purposes on date the investors purchased an aggregate investment of approximately n of the stock of corporation x on date government passed act which had the purpose of stabilizing the financial markets as part of that legislation government established the fund and the agency the fund and the agency are subject_to legal and substantive supervision by government financial department on date government passed act authorizing the nationalization of corporation x under act the fund first was required to buy the shares of corporation x with nationalization to take place only after fund had attempted to purchase the stock act authorized fund to squeeze out minority shareholders of a corporation if fund acquired a minimum ownership of p stock of such corporation in all other cases a majority shareholder is required to acquire a higher minimum ownership of q in addition act authorized fund to inject capital into targeted corporations in exchange for stock in order to dilute non-fund ownership in the corporation government and fund took the following steps in order to acquire of the stock of corporation x fund provided liquidity guarantees to corporation x in addition to support provided by the government central bank and a consortium of country financial institutions fund subscribed to new shares of corporation x out of authorized capital of the company by excluding the subscription rights of all other shareholders fund acquired additional shares of corporation x stock through a public_tender_offer public documents stated that shareholders who did not accept the public_tender_offer would become subject_to an expropriation of their shares at a lower price under the governing documents in place for the investors only a small percentage of the investors’ shares were sold in the public_tender_offer such shares are not the subject of this letter_ruling plr-108025-10 a second capital increase was approved that resulted in fund increasing its ownership in corporation x to at least p following which and pursuant to government legislation granting fund the legal right to do so with regard to corporation x it was resolved that all remaining corporation x shares not already owned by fund should be transferred to fund in exchange for cash compensation determined according to the corporate statutes of country and government in an amount equal to r the legislation granting fund this right to compel transfer of corporation x shares also provided for severe penalty provisions in the event of objection by minority shareholders on date pursuant to government court action the transfer of the shares to fund took effect under the transfer resolution for the squeeze out of minority shareholders including investors minority shareholders became entitled to a cash settlement payment from fund the amount of the cash settlement payment was determined in accordance with the provisions of act which provides that the minimum level of cash compensation is equal to r following the transfer of their shares to fund investors and certain other minority shareholders filed suits against corporation x in the courts of country requesting that their shares of stock in corporation x be returned to them the suits note that the provisions relating to the recapitalization and the related modifications to the squeeze-out rules were newly introduced into the law of country in the context of the measures aimed at stabilization of the financial markets and allege violations of the constitution of country and several articles of the z contract investors also filed suits against fund requesting additional compensation_for transferring their shares to fund investors request a ruling that they recognized a loss under sec_165 of the internal_revenue_code equal to the amount received in the transaction less their basis in the shares of corporation x and that under sec_1231 the loss is treated as a sec_1231 loss applicable law sec_165 of the code provides that any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise may be deducted sec_165 states that the basis for determining the amount of the deduction for any loss shall be the adjusted_basis provided in sec_1011 for determining the loss from the sale_or_other_disposition of property sec_1_165-1 of the income_tax regulations states that sec_165 provides that in computing taxable_income under sec_63 any loss actually sustained during the taxable_year and not made good by insurance or some other form of compensation shall be allowed as a deduction subject_to any provision of the internal revenue laws which prohibits or limits the amount of the deduction this deduction for plr-108025-10 losses sustained shall be taken in accordance with sec_165 and the regulations thereunder sec_1_165-1 of the regulations states that to be allowable as a deduction under sec_165 a loss must be evidenced by closed and completed transactions fixed by identifiable events and except as otherwise provided in sec_165 and sec_1_165-11 relating to disaster losses actually sustained during the taxable_year only a bona_fide loss is allowable substance and not mere form shall govern in determining a deductible loss sec_1_165-1 of the regulations provides that as to the year of deduction a loss shall be allowed as a deduction under sec_165 only for that taxable_year in which the loss is sustained for this purpose a loss shall be treated as sustained during the taxable_year in which the loss occurs as evidenced by closed and completed transactions and as fixed by indentifiable events occurring in such taxable_year sec_1_165-1 of the regulations provides that if a casualty or other event occurs which may result in a loss and in the year of such casualty or event there exists a claim for reimbursement with respect to which there is a reasonable_prospect_of_recovery no portion of the loss with respect to which reimbursement may be received is sustained for purposes of sec_165 until it can be ascertained with reasonable certainty whether or not such reimbursement will be received whether a reasonable_prospect_of_recovery exists with respect to a claim for reimbursement of a loss is a question of fact to be determined upon an examination of all facts and circumstances whether or not such reimbursement will be received may be ascertained with reasonable certainty for example by a settlement of the claim by an adjudication of the claim or by an abandonment of the claim issue does investors’ filing of a suit against x in courts of country prevent the loss from being sustained in year sec_165 provides for the deduction of losses sustained during the taxable_year for which no compensation is received in the case of individuals sec_165 limits the deduction to losses_incurred in a trade_or_business or in any transaction entered into for profit in order to be deductible a loss must be evidenced by a closed and completed transaction fixed by identifiable events and actually sustained during the taxable_year 326_us_287 sec_1_165-1 a loss is only deductible for the taxable_year in which such loss is sustained sec_1_165-1 the determination of whether a loss occurred during a particular taxable_year is purely one of fact 524_f2d_888 9th cir affg t c memo a critical inquiry is to focus on the year that the taxpayer loses control_over and possession of the property at issue 274_us_398 plr-108025-10 whether a reasonable prospect for recovery exists with respect to a claim for reimbursement of the loss is a question of fact to be determined upon examination of all of the facts and circumstances whether or not such reimbursement will be received may be ascertained with reasonable certainty for example by a settlement of the claim by an adjudication of the claim or by an abandonment of the claim the determination of whether reasonable certainty exists as to reimbursement is an objective inquiry into the facts and circumstances surrounding the loss as of the close of the taxable_year in which the deduction is claimed see 326_us_287 ramsey scarlett co v commissioner 61_tc_795 aff'd 521_f2d_786 4th cir brown v commissioner tcmemo_1996_284 various cases and rulings discuss the timing of a loss caused by a seizure of stock by a foreign government such cases and rulings generally permit the loss in the year of the seizure finding that there was not a reasonable prospect for recovery_of the loss in spite of the purported existence of claims for reimbursement for example in united_states v s s white dental mfg co the supreme court held that a taxpayer creditor and stockholder of a corporation seized by the german government in could take a deduction for the loss of the taxpayer’s investment in the year of seizure even though in a later year the german government bound itself to make a payment to the taxpayer in respect of the seized property in fuchs v commissioner 413_f2d_503 2d cir a loss caused by the seizure of rental properties by the czechoslovakia government in was held to be deductible in notwithstanding that the taxpayer recovered a portion of her loss from a fund set up by the united_states government in see also 48_tc_711 revrul_62_197 1962_2_cb_66 discusses when a loss is permitted to u s taxpayers whose property was seized by the government of cuba it states it is the position of the service that acts of confiscation whether by way of seizure intervention in expropriation or similar taking of property by the cuban government constitute identifiable events which in light of all of the circumstances have resulted in closed and completed transactions notwithstanding promise of indemnification emphasis added an act of confiscation has occurred when the taxpayer has been deprived of ownership of property or the normal attributes of ownership such as receipt of income and control_over the operation or use of the property with little or no chance of being compensated therefore in revrul_75_121 1975_1_cb_70 the taxpayer’s domestic subsidiary s formed to own and operate property in a foreign_country was occupied by the government of that country contingent upon the investment of 100x dollars in capital improvements in s by the taxpayer secured_by the stock of s the ruling holds that there is a loss when the taxpayer after originally agreeing to make the investment later determined such investment to be unfeasible upon which the foreign government declared the stock of s to be forfeited revrul_76_41 1976_1_cb_52 which in part clarified revrul_75_121 stated that implicit in revrul_75_121 is the requirement that plr-108025-10 a seizure of stock in a domestic_corporation results in a loss for purposes of sec_165 sec_172 and sec_1231 only if the u s shareholder cannot expect to regain legal ownership of the stock through a u s court_proceeding in boehm v commissioner the court held that there was no prospect of recovery as to stock in a failing corporation in spite of a shareholders derivative suit that was filed against the corporation and its board_of directors the shareholders purchased stock for dollar_figure in by the corporation had sustained large losses and a receiver was appointed the shareholders instituted a stockholder’s derivative suit against the corporation and nine members of its board_of directors the suit was settled in and the shareholders took a loss for the stock at that time the court denied the loss holding that the stock had become worthless in a previous year even though the shareholders were pursuing a claim against the corporation the court determined that the shareholders had not shown that there was any value to the suit as there was no evidence in the stipulation of the merits of the suit the probability of recovery or any assurance of collection of an amount sufficient to pay the creditor’s claim and to provide a sufficient surplus for stockholders so as to give any real value to their stock u s pincite unlike the situation in rev ruls and the stock in this case is not stock in a u s subsidiary and investors cannot expect to regain legal ownership through a u s court_proceeding under the reasoning of boehm v commissioner the mere fact of having filed a suit to recover their shares does not automatically establish that there is a valid claim for reimbursement or recovery under boehm it is necessary to consider the merits of the suit including the probability of recovery in this case although investors have instituted a suit in the courts of country to regain their stock in view of the circumstances under which corporation x stock was transferred the investors have represented that they have no reasonable prospect of recovering their corporation x shares as a result of these legal actions instead the legal actions were intended as an incentive to fund to offer additional compensation_for the stock based upon this it is appropriate to consider the loss as sustained as of date when the stock was transferred to fund pursuant to the forced sale issue does the loss result from the involuntary_conversion of the stock into other_property or money under sec_1231 sec_1231 provides that the term sec_1231 loss means any recognized loss from a sale_or_exchange or conversion described in sec_1231 sec_1231 provides that sec_1231 gain means any recognized gain from the compulsory or involuntary_conversion as a result of destruction in whole or in part theft or seizure or an exercise of the power of requisition or condemnation or the threat or imminence thereof into other_property or money of property used in a trade_or_business or any capital_asset held for more than one year that is held in connection with a trade_or_business or a transaction entered into for profit plr-108025-10 sec_1_1231-1 of the regulations provides that for purposes of sec_1231 the terms ‘compulsory or involuntary conversion’ and ‘involuntary conversion’ of property mean the conversion of property into money or other_property as a result of complete or partial destruction theft or seizure or an exercise of the power of requisition or condemnation or the threat or imminence thereof revrul_72_1 1972_1_cb_52 situation holds that a taxpayer y owning stock in a foreign_corporation t may deduct the loss caused by the nationalization of the stock of t whose assets were located in the foreign_country when there was no reasonable prospect for payment of such compensation nor of recovery_of y’s interest in the corporation or indemnification by insurance or otherwise in addition the ruling notes that if the prospect for compensation is favorable but y is required as a condition to receiving compensation to enter into a formal contract of sale with country b in respect of y’s stock in t such a ‘sale’ will be viewed by the service as merely an agreement as to the amount of compensation to be paid for the involuntary_conversion of y’s stock revrul_75_121 holds that the taxpayer’s loss qualifies under sec_1231 when s a domestic subsidiary formed to own and operate property in a foreign_country was occupied by the government of that foreign_country contingent upon the investment of 100x dollars in capital improvements in s by the taxpayer the taxpayer agreed to make the investment but later determined such investment to be unfeasible and so notified the foreign government upon which the foreign government declared the stock of s to be forfeited with compensation under the pledged agreement generally a seizure for federal tax purposes occurs when a governmental authority enters into physical possession of property without authority of a court order with compensation to be determined later and is limited to the taking of property for public use revrul_79_269 1979_2_cb_297 an act of confiscation whether by way of seizure intervention in expropriation or similar taking of property occurs when a foreign government deprives a taxpayer of ownership of property or the normal attributes of ownership such as receipt of income and control_over the operation or use of the property with little or no chance of being compensated therefore revrul_62_197 1962_2_cb_66 clarified by revrul_64_149 1964_1_cb_233 modified by revrul_69_498 1969_2_cb_31 compensation may be received in some instances of seizure by a foreign government revrul_72_1 situation the expropriation or confiscation of property by a foreign government is considered a loss under and an involuntary_conversion for purposes of sec_1231 see revrul_72_1 1972_1_cb_52 see also revrul_62_197 situation at times forced sales of stock have been held to be involuntary_conversions however other cases and rulings have held that forced sales of stock do not qualify as involuntary_conversions in revrul_79_269 1979_2_cb_297 a sale of stock by a plr-108025-10 trustee in bankruptcy of a customer’s securities held in a margin_account of a bankrupt brokerage firm was not considered an involuntary_conversion sale of stock by one of two shareholders under a state deadlock statute was held not to be an involuntary_conversion 274_f2d_656 affg 31_tc_1168 american natural_gas co v u s ct_cl held that a sale of public_utility stock by sec order was not an involuntary_conversion the acquisition of stock in this case by fund was pursuant to the squeeze-out provisions of government law the circumstances of this sale differ from the cases cited above in which a forced sale was not considered an involuntary_conversion while the cases cited above resulted in the forced sale of stock pursuant to a government order those sales did not result in the acquisition by the government or a government controlled_entity of the stock and the stock was not acquired for a public purpose rather they resulted in another private party acquiring the stock in this case the forced sale resulted in acquisition of stock by fund an instrumentality of government for a public purpose the stabilization of the economy of country pursuant to the provisions of act described above fund first was required to buy the shares of corporation x with nationalization to take place only after fund had attempted to purchase the stock act authorized fund to squeeze out minority shareholders of a corporation if fund acquired a minimum ownership of p stock of such corporation in addition act authorized fund to inject capital into targeted corporations in exchange for stock in order to dilute non-fund ownership in the corporation as described above fund acquired p of the shares of corporation x on date all remaining corporation x shares not already owned by fund were transferred to fund in exchange for cash compensation this was pursuant to the express provisions of act described above which directed that fund should acquire the shares of corporation x either by purchase or by nationalization if necessary under revrul_72_1 this should be treated as an involuntary_conversion of the stock of corporation x through seizure or confiscation even though the stock was purchased under the laws of government and the shareholders of corporation x received compensation equal to r the terms of act make it clear that it was the intention of government to acquire the stock of corporation x for public purposes the provisions of act first instructed fund to acquire the shares through purchase and if that was not possible authorized the nationalization of corporation x therefore it is held that investors recognized a loss under sec_165 of the internal_revenue_code as of date equal to the amount received in the transaction less their basis in the shares of corporation x and that under sec_1231 the loss is treated as a sec_1231 loss 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-108025-10 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling 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 christopher f kane chief branch income_tax accounting


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 2-plr-137534-02 date date legend x y state date dear this responds to your letter dated date submitted on behalf of x requesting time extensions under sec_301_9100-3 of the procedure and administration regulations for x to elect to be classified as an association_taxable_as_a_corporation for federal tax purposes facts the information submitted states that x is a series of y a state business_trust x intended to elect to be classified as an association_taxable_as_a_corporation effective on date however due to inadvertence a form_8832 entity classification election was not timely filed for x law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with a single owner can elect to be classified either as an entity disregarded as separate from its owner or as an association sec_301_7701-3 provides that a domestic eligible_entity with a single owner will be disregarded as an entity separate from its owner unless it elects otherwise plr-137534-02 sec_301_7701-3 allows an eligible_entity to elect to change its classification by filing form_8832 entity classification election sec_301_7701-3 provides that all such elections become effective on the date specified by the entity on form_8832 or on the date filed if no effective date is specified the specified effective date must not be earlier than days prior to the filing_date of form_8832 nor later than twelve months after the filing_date sec_301_9100-1 gives the commissioner discretion to grant reasonable extensions of time to make regulatory elections under the rules of sec_301_9100-2 and sec_301_9100-3 under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-3 sets forth the standards that the commissioner uses to determine whether to grant a discretionary extension of time these standards indicate that the commissioner will grant relief when the taxpayer provides evidence proving to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the information submitted and the representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 as a result x is granted an extension of time for sixty days from the date of this letter to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date x should make the election by filing a form_8832 with the appropriate service_center a copy of this letter should be attached to that form 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 this ruling is directed only to the taxpayer requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x and x’s second authorized representative sincerely heather c maloy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number 9100-dollar_figure -------------------------------------------------------- --------------------------------- -------------------------- -------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ ------------------- telephone number --------------------- refer reply to cc psi b02 plr-148664-09 date date legend x y ------------------------------------------------------------------------------------------------------ ------------------------ ------------------------------------------------------------------------------------------------------ ------------------------ state ------------------- d1 ---------------------- dear ---------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representative requesting relief under sec_1362 of the internal_revenue_code for x to elect to be an s_corporation and requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to treat y as a qualified_subchapter_s_subsidiary qsub the information submitted states that x was formed in state on d1 it was intended for x to be an s_corporation effective d1 in addition x intended to make a qsub election for y effective d1 however due to inadvertence form_2553 election by a small_business_corporation and form_8869 qualified_subchapter_s_subsidiary election were not timely filed sec_1362 provides that a small_business_corporation may elect to be an s_corporation plr-148664-09 sec_1362 provides the rule on when an s election will be effective generally if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one-half months of a corporation's taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year and sec_1362 shall not apply sec_1361 provides that a qsub shall not be treated as a separate corporation and all assets liabilities and items of income deduction and credit of a qsub shall be treated as assets liabilities and such items as the case may be of the s_corporation sec_1361 defines a qsub as a domestic_corporation which is not an ineligible_corporation if percent of the stock of the corporation is held by an s_corporation and the s_corporation elects to treat the corporation as a qsub sec_1_1361-3 of the income_tax regulations provides the time and manner of making a qsub election a taxpayer makes a qsub election with respect to a subsidiary by filing a form_8869 with the appropriate service_center sec_1 a provides that a qsub election cannot be effective more than two months and days prior to the date of filing sec_301_9100-1 gives the commissioner discretion to grant reasonable extensions of time to make regulatory elections under the rules of sec_301_9100-2 and sec_301_9100-3 under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a regulation published with the federal_register sec_301_9100-3 sets forth the standards that the commissioner uses to determine whether to grant a discretionary extension of time these standards indicate that the commissioner should grant relief when the taxpayer provides evidence proving to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation effective d1 accordingly x is granted an extension of time of days from plr-148664-09 the date of this letter to file a properly executed form_2553 with the appropriate service_center effective d1 a copy of this letter should be attached to the form_2553 additionally based solely on the facts submitted and the representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 as a result x is granted an extension of time of days from the date of this letter to elect to treat y as a qsub effective d1 accordingly provided that x makes the above-mentioned s election and makes a qsub election for y by filing a completed form_8869 effective d1 with the appropriate service_center within days from the date of this letter then such election will be treated as timely made for d1 a copy of this letter should be attached to the form_8869 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 or whether y is an eligible qsub this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely curt g wilson associate chief_counsel office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes