t c no united_states tax_court unionbancal corporation f k a union bank successor_in_interest to standard chartered holdings inc and includable subsidiaries petitioner v commissioner of internal revenue respondent docket no filed date in p was part of a controlled_group_of_corporations on its federal_income_tax return p reported an dollar_figure million loss resulting from p’s sale of a loan portfolio to its united kingdom parent_corporation sc-uk united_states and united kingdom competent_authorities subsequently determined that the actual loss was dollar_figure million pursuant to a settlement agreement for the taxable_year r allowed p to deduct dollar_figure million of the loss on its return the remaining loss was deferred pursuant to sec_267 i r c r determined that under sec_1 -1t c temporary income_tax regs fed reg date p was not entitled to deduct the deferred loss in when it left the controlled_group before the loan portfolio had been disposed of outside the controlled_group instead r determined that under sec_1_267_f_-1t c temporary income_tax regs supra sc-uk’s basis in the loan portfolio was increased by the amount of the deferred loss the united kingdom has declined to allow sc-uk a stepped-up_basis in the loan portfolio in r replaced the temporary regulations under sec_267 i r c with final regulations effective prospectively the final regulations operate to restore a deferred loss under sec_267 i r c to the seller when it leaves the controlled_group even if the loss property has not been disposed of outside the controlled_group r denied p’s request for elective retroactive application of the final regulations held sec_1 -1t c temporary income_tax regs supra is valid p is not entitled to deduct the dollar_figure million loss deferred under sec_267 i r c held sec_1 -1t c temporary income_tax regs supra does not violate article paragraph of the united states--united kingdom income_tax treaty date u s t held r's refusal to allow p to elect retroactive application of the final regulations under sec_267 i r c is permissible under sec_7805 i r c frederick r chilton jr and paolo m dau for petitioner cynthia k hustad for respondent thornton judge respondent determined a deficiency in petitioner's corporate federal_income_tax for the taxable_year ending date in the amount of dollar_figure the only issue before the court is whether respondent erred in refusing to allow petitioner a deduction in the amount of dollar_figure representing losses previously deferred pursuant to sec_267 and arising from petitioner’s sale of certain loans to a member of the same controlled_group when petitioner left its controlled_group in ‘ this question turns on the validity of sec_1 f -1t c temporary income_tax regs fed reg date and the application of sec_7805 the parties submitted this case fully stipulated in accordance with rule the stipulation of facts is incorporated herein by this reference findings_of_fact petitioner is a california corporation with its principal office in san francisco california as described in more detail below in petitioner belonged to a controlled_group_of_corporations that included its indirect united kingdom parent_corporation in petitioner sold a loan portfolio to its indirect united kingdom parent_corporation realizing a loss of dollar_figure million respondent determined that petitioner was permitted to deduct dollar_figure million of the losses in taxable_year but pursuant to sec_267 was required to defer additional losses associated with the sale in petitioner left the controlled_group which still held the loan portfolio all section references are to the internal_revenue_code in effect for the taxable_year in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise specified references to petitioner include references to petitioner’s predecessor in interest union bank respondent denied petitioner’s claim for a deduction in taxable_year for the remaining amount of the loss associated with the sale of the loan portfolio ie dollar_figure million organizational structure and history on date and at all prior times relevant hereto standard chartered holdings inc standard chartered was the sole shareholder of union bancorp which in turn was the sole shareholder of union bank a u s_corporation standard chartered overseas holdings ltd scoh a united kingdom corporation owned all of the stock in standard chartered standard chartered bank standard chartered-u k a united kingdom corporation owned all of the stock in scoh therefore standard chartered-u k was the indirect parent of union bank on date scoh sold all its stock in standard chartered to california first bank an unrelated party on date standard chartered and its subsidiaries union bancorp and union bank were liquidated into california first bank california first bank then changed its name to union bank on date bancal tri-state corp a delaware corporation and parent of the bank of california merged into union bank with union bank surviving union bank transferred all the assets of its banking business to the bank of california and union bank then changed its name to petitioner's present name unionbancal corp the sale of the loan portfolio on date union bank sold to standard chartered-- u k loans that it had made to various foreign countries the loan portfolio the sales_price was dollar_figure the face value of the loan portfolio was dollar_figure on date when scoh sold all its stock in standard chartered to california first bank the loan portfolio had not been disposed of outside of the controlled_group standard chartered-u k transferred the loan portfolio outside of the controlled_group in tax treatment of the loan portfolio sale for taxable_year on its corporate federal_income_tax return petitioner claimed a loss of dollar_figure in connection with the sale of the loan portfolio corresponding to the difference between petitioner’s basis in the loan portfolio dollar_figure and the sales_price dollar_figure in in the course of respondent’s appeals_office review of the audit determinations for the taxable_year petitioner filed an amended federal_income_tax return for its taxable_year claiming a revised loss of dollar_figure on the sale of the loan portfolio to standard chartered-u k respondent denied this affirmative adjustment petitioner and respondent reached a partial appeals settlement for taxable_year under which respondent allowed petitioner a loss deduction in in the amount of dollar_figure which represented percent of the loss claimed on petitioner’s original return remaining losses associated with the sale of the loan portfolio were deferred pursuant to sec_267 tax treatment of the loan portfolio deferred loss for taxable_year on its federal_income_tax return for taxable_year petitioner originally claimed no deduction for any loss resulting from the sale of the loan portfolio in instead as previously discussed petitioner initially sought to deduct such losses with respect to its taxable_year the settlement of its taxable_year having resulted in an allowance for that year of only dollar_figure of the losses petitioner sought an affirmative adjustment for its taxable_year claiming that losses deferred from the loan portfolio sale should be restored to petitioner on date when it left the standard chartered controlled_group respondent disallowed petitioner’s claim the competent_authority process for united kingdom income_tax purposes standard chartered- u k claimed losses with respect to the loan portfolio predicated the appeals settlement left unresolved the value of the loan portfolio at the time of its sale to standard chartered-u kk accordingly the amount of any loss deferred under sec_267 was not determined as part of the settlement agreement on the loan portfolio’s having a united kingdom tax basis of dollar_figure in examining standard chartered-u k 's tax returns for and certain subsequent years the united kingdom inland revenue determined that standard chartered-u k ’s tax basis in the loan portfolio was overstated and consequently that its allowable losses therefrom should be reduced for united kingdom income_tax purposes in petitioner requested competent_authority assistance to resolve the value of the loan portfolio on date the amount of the loss realized on that date upon the sale of the loan portfolio and the proper treatment of the loss realized the united_states competent_authority and the united kingdom competent_authority agreed that the value of the loan portfolio on date was dollar_figure and that petitioner’s loss on the sale was dollar_figure the competent_authorities were unable however to resolve the tax treatment of this loss the united_states would not withdraw its adjustment disallowing the loss to petitioner in addition the united kingdom would not allow standard chartered-u k to increase its basis in the loan portfolio to reflect the loss disallowed petitioner for u s income_tax purposes petitioner has not returned to standard chartered-u k the excess of the amount received from it for the loan portfolio over the value of the loan portfolio as determined under the competent_authority process opinion sec_267 generally disallows losses from the sale_or_exchange of property between related parties as defined in sec_267 if a loss is disallowed under sec_267 a subsection d generally provides a corresponding reduction in the amount of any gain the related purchaser must recognize on a subsequent resale of the property in its letter to petitioner the united_states competent_authority stated the determination made by the competent_authorities results in improperly lodged funds in the u s to the extent of the reduction in the transfer price ie dollar_figure since petitioner and standard chartered-u k elect not to repatriate the funds the dollar_figure amount will be treated as a contribution to the capital of petitioner by standard chartered-u k during the taxable_year sec_267 and d provides in pertinent part a in general -- deduction for losses disallowed --no deduction shall be allowed in respect of any loss from the sale_or_exchange of property directly or indirectly between persons specified in any of the paragraphs of subsection b d amount of gain where loss previously disallowed -----if-- in the case of a sale_or_exchange of property to continued sec_267 f prescribes special rules for losses_incurred on the sale_or_exchange of property between related_taxpayers that are members of the same controlled_group sec_267 provides deferral rather than denial of loss from sale_or_exchange between members --in the case of any loss from the sale_or_exchange of property which is between members of the same controlled_group and to which subsection a applies determined without regard to this paragraph but with regard to paragraph -- a subsections a and d shall not apply to such loss but b such loss shall be deferred until the property is transferred outside such controlled_group and there would be recognition of loss under consolidated_return principles or until such other time as may be prescribed in regulations continued the taxpayer a loss sustained by the transferor is not allowable to the transferor as a deduction by reason of subsection a and the taxpayer sells or otherwise disposes of such property at a gain then such gain shall be recognized only to the extent that it exceeds so much of such 10ss as is properly allocable to the property sold or otherwise_disposed_of by the taxpayer xk k for this purpose a controlled_group is determined under the rules provided in sec_1563 except that stock ownership of more than percent is substituted for the requirement in sec_1563 for stock ownership of at least percent see sec_267 it undisputed that standard chartered-u k and union bank were part of the same controlled_group at the time of the sale of the loan portfolio and immediately thereafter cf 111_tc_315 in date respondent promulgated f -1t temporary income_tax regs fed reg date the temporary_regulation the temporary_regulation provides generally that consolidated_return principles apply under sec_267 to the deferral and restoration of loss on the sale_or_exchange of property between member corporations of a controlled_group see sec_1 -1t c temporary income_tax regs fed reg date as in effect for the years in issue the consolidated_return rules for deferred intercompany_transactions generally defer a loss on a sale to another controlled_group member and allow for the deferred intercompany loss to be taken into account by the selling member upon the earliest of various specified dates see sec_1 c i f income_tax regs ’ one such specified date is the date immediately preceding the time when either the selling member or the member which owns the property ceases to be a member of the controlled_group see sec_1_1502-13 f income_tax regs see also 111_tc_315 ’ sec_1_1502-13 income_tax regs as in effect in the taxable_year at issue was repromulgated in in t d 1995_2_cb_147 which also included the final regulations under sec_267 the temporary_regulation contains a number of exceptions to this general_rule one exception the loss restoration exception states as follows exception to restoration rule for selling member that ceases to be a member if a selling member of property for which loss has been deferred ceases to be a member when the property is still owned by another member then for purposes of this section sec_1_1502-13 shall not apply to restore that deferred loss and that loss shall never be restored to the selling member sec_1 f - t c temporary income_tax regs fed reg date if the loss restoration exception applies then the temporary_regulation provides a basis_adjustment the basis shift exception to the purchasing member as follows basis_adjustment and holding_period if paragraph c of this section precludes a restoration for property then the following rules apply on the date the selling member ceases to be a member the owning member's basis in the property shall be increased by the amount of the selling member's unrestored deferred loss at the time it ceased to be a member sec_1 f -1 t c temporary income_tax regs fed reg date the temporary_regulation remained in force until superseded by the final_regulation sec_1 f -1 income_tax regs the final_regulation the final_regulation is prospective only and applies with respect to transactions occurring in years beginning on or after date see t d 1995_2_cb_147 under the final_regulation consolidated_return principles apply to restore the deferred loss to the seller when it leaves the controlled_group even if the loss property has not been disposed of outside the controlled_group see sec_1 -1 a income_tax regs petitioner challenges the validity of the loss restoration exception petitioner asserts that the temporary_regulation violates the plain meaning and intent of sec_267 by effectively denying it the deferred loss on its loan portfolio sale in addition petitioner argues that the temporary_regulation violates the u s income_tax treaty with the united kingdom see the convention between the government of the united_states of america and the government of the united kingdom of great britain and northern ireland for the avoidance of double_taxation and the prevention of fiscal evasion with respect to taxes on income and capital_gains date u s -u k u s t hereinafter u s -u k treaty finally petitioner argues that respondent's refusal to allow it to elect retroactive application of the final_regulation is not authorized by sec_7805 b it validity of the temporary_regulation a standard of review a legislative_regulation is entitled to greater deference than an interpretive regulation which is promulgated under the general rulemaking power vested in the secretary by sec_7805 111_tc_273 see 15_f3d_917 9th cir affg 97_tc_534 111_tc_198 peterson marital trust v commission102_tc_790 affd 78_f3d_795 2d cir as stated in 467_us_837 if congress has explicitly left a gap for the agency to fill there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation such legislative regulations are given controlling weight unless they are arbitrary capricious or manifestly contrary to the statute see also 513_us_251 the temporary_regulation is a legislative_regulation because it was promulgated under the specific delegation of authority contained in sec_267 b see 106_tc_1 a legislative_regulation is made pursuant to a specific grant of authority often without precise congressional guidance to define a statutory term or prescribe a method of executing a statutory provision see also 111_tc_273 schwalbach v commissioner c contrary to petitioner’s assertion the mere fact that the temporary_regulation may embody interpretations of the operative statutory language does not alter its characterization as a legislative_regulation cf 432_us_416 723_f2d_175 lst cir as a general proposition temporary regulations are entitled to the same deference we accord final regulations see 105_tc_227 peterson marital trust v commissioner supra pincite 98_tc_141 the temporary_regulation was promulgated without notice and public comment procedures petitioner argues that the temporary_regulation therefore is not entitled to chevron_deference citing bankers life cas co v the treasury_decision in which the temporary_regulation was promulgated explained the absence of notice and public comment procedures as follows there is a need for immediate guidance with respect to the provisions contained in this treasury_decision for this reason it is found impracticable to issue this treasury_decision with notice and public procedure under subsection b of sec_553 of title of the united_states_code t d 1985_1_cb_71 under the administrative_procedure_act u s c sec_553 b b notice and public comment procedures are not required when the agency for good cause finds and incorporates the finding and a brief statement of reasons therefor in the rules issued that notice and public procedure thereon are impracticable unnecessary or contrary to the public interest petitioner does not contend that the temporary_regulation is invalid for failure to comply with notice and public comment procedures or to meet the requirements of the good cause exception cited above accordingly we do not reach these issues -- - united_states 142_f3d_973 7th cir we need not resolve this question however for we conclude that the temporary_regulation is valid even under the traditional standard of review for interpretive regulations as articulated in 440_us_472 cf union carbide corp v commissioner 1t c 98_tc_187 under that standard we must defer to respondent’s regulations if they implement the congressional mandate in some reasonable manner national muffler dealers association inc v united_states supra pincite the critical inguiry is whether the regulation harmonizes with the plain language of the statute in 142_f3d_973 7th cir the court_of_appeals for the seventh circuit followed 467_us_837 and accorded deference to interpretive regulations issued under sec_7805 with notice and comment procedures the court cited 44_f3d_437 7th cir for the proposition that the notice and comment procedure was the sine qua non for chevron_deference the court in bankers life cas co did not address the appropriate standard of review for legislative regulations issued without notice and comment procedures in kikalos v commissioner f 3d ss 7th cir revg in part tcmemo_1998_92 the court_of_appeals for the seventh circuit sua sponte raised the issue of the degree of deference owed to temporary interpretive regulations issued by respondent under sec_163 without notice and comment procedures because both parties assumed that chevron_deference applied in this circumstance the court reserved judgment on whether a lesser degree of deference was appropriate -- - its origin its purpose id see also ann jackson family found v commissioner f 3d pincite b the parties’ positions the parties have stipulated that petitioner realized a loss of dollar_figure on the sale of the loan portfolio to standard chartered the parties also agree that sec_267 provides for deferral rather than denial of losses arising from sales between corporations that are members of the same controlled_group the crux of their disagreement is whether the deferred loss must be restored to petitioner or whether the temporary_regulation permissibly denies the loss to petitioner allowing instead a basis_adjustment to the purchasing member of the controlled_group does the temporary_regulation violate the mandate of the statute petitioner argues that the temporary_regulation imposes a result expressly prohibited by the statute specifically petitioner notes that sec_267 if applicable would disallow the seller's loss with a corresponding reduction under subsection d of any subsequent gain by the purchaser upon resale of the loss property outside the controlled_group sec_267 a however states that subsections a and d shall not apply to loss sales between controlled_group members therefore petitioner concludes in the case of loss sales between controlled_group members if the seller’s loss may not be disallowed to the seller then of necessity it must eventually be allowed to the seller ie restored to it petitioner argues that as applied to petitioner the temporary_regulation impermissibly imposes the loss_disallowance_rule of sec_267 and reinstates the gain-reduction rule_of sec_267 we disagree by rendering inapplicable the general rules contained in subsections a and d sec_267 a simply makes operable the special rules of subsection f those special rules indicate that when the selling member leaves the controlled_group before the loss property is disposed of outside the group the loss is deferred until such time as may be prescribed in regulations the temporary_regulation does not replicate the loss disallowance and gain adjustment mechanisms of subsections a and d generally speaking under subsection a the loss is denied absolutely not only to the seller but to any party the gain-reduction adjustment under subsection d mitigates the subsection a loss disallowance only where the transferee subsequently resells the loss property at a gain by contrast the temporary_regulation generally preserves the deferred loss in the controlled_group for u s income_tax purposes by means of a -- - basis_adjustment that applies without regard to whether the loss property is subsequently resold at a gain_or_loss does the temporary_regulation permissibly accrue the benefit of the deferred loss to the purchasing member rather than to the selling member petitioner argues that recognition of the deferred loss by the purchasing party is inconsistent with a general principle that allowable losses should be confined to the taxpayer sustaining them citing various cases including 292_us_435 sec_267 however constitutes a statutory exception to any such general principle losses otherwise allowable under sec_165 are disallowed under sec_267 to prevent abuses resulting from the generation of loss deductions by persons with common economic interests see 88_tc_122 affd 866_f2d_852 6th cir 63_tc_175 affd 599_f2d_305 9th cir in 331_us_694 the supreme court thoroughly considered and explained the purposes of sec_24 of the internal_revenue_code_of_1939 which was the predecessor to sec_267 sec_24 states an absolute prohibition--not a presumption----against the allowance of losses on any sales between the members of certain designated groups the one common characteristic of these groups is that their members although distinct legal entities generally have a near- identity of economic interests it is a fair inference that even legally genuine intra-group transfers were not thought to result usually in economically genuine realizations of loss and accordingly that congress did not deem them to be appropriate occasions for the allowance of deductions xk kek we conclude that the purpose of sec_24 was to put an end to the right of taxpayers to choose by intra-family transfers and other designated devices their own time for realizing tax losses on investments which for most practical purposes are continued uninterrupted id pincite fn ref omitted in sum under sec_267 to the extent that a property sale between related_taxpayers gives rise to an otherwise deductible loss to the seller it is a loss that is neither recognized nor allowed for purposes of this rule it is irrelevant whether the sale was bona_fide congress obviously did not want the courts to face the difficult task of looking behind the sales instead congress made its prohibition absolute in reach believing that this would be fair to the great majority of taxpayers 75_tc_182 in 111_tc_315 we concluded that the special rules of sec_267 reflect an extension of the related_party provisions of sec_267 the legislative_history regarding sec_267 indicates that it was intended to extend the related_party provisions of sec_267 even though subsection f a makes subsections a and d inapplicable nevertheless there is a general theme that runs through the gain recognition limitation in sec_267 and the loss_deferral provisions of subsection f in that they both - - prevent an immediate loss deduction to the seller and accrue the loss either in terms of a limited gain recognition to the purchaser pursuant to sec_267 or as a deferral of the tax_benefit of the loss pursuant to sec_267 we think what congress intended to ‘extend’ was the class of transaction in which there would be a delay of some kind in the recognition of a loss until there was an economically genuine realization of the loss fn ref omitted emphasis added consistent with this rationale the temporary_regulation reasonably interprets sec_267 as requiring deferral until the loss property is disposed of outside the controlled_group at which time there is an economically genuine realization of the loss nothing in the statutory language expressly mandates that the benefit of the deferred loss accrue to the seller petitioner cites various cases including hassen v commissioner supra and grady whitlock leasing corp v commissioner tcmemo_1997_405 for the proposition that the loss that is disallowed under sec_267 is the seller’s loss therefore petitioner concludes the loss that is deferred under sec_267 must be the seller’s loss rather than the controlled group’s loss and must be restored to the seller the cited cases however add nothing to the analysis other than to show that sec_267 does not permit recognition of the loss putatively sustained by the seller the statute does not otherwise identify the disallowed loss with the seller to the contrary the gain-reduction adjustment under subsection d --- - explicitly identifies the loss with the property transferred and not with the seller specifically subsection d provides that where the loss sustained by the transferor is disallowed under subsection a the loss properly allocable to the property sold or otherwise_disposed_of reduces any gain recognized by the transferee similarly the temporary_regulation effectively identifies the deferred loss with the loss property by means of a basis_adjustment petitioner argues that the use of the verb defer in sec_267 necessarily denotes postponement and restoration of the seller’s loss to the seller under the literal language of the statute however what is deferred under sec_267 f b is not the seller's recognition of the seller's loss but rather the loss itself under the temporary_regulation this loss is not recognized by the seller or any other party while the controlled_group continues to hold the loss property rather the loss is recognized only when the loss property leaves the controlled_group this result is within the statutory delegation of authority to the treasury_department the temporary regqulation is consistent with the pertinent legislative_history this result also harmonizes with the purpose of the statute to prevent premature recognition of losses among related_taxpayers before the enactment of subsection f in -- - sec_267 had long included certain controlled corporations within the definition of related parties under sec_267 b that were subject_to the general loss disallowance and gain adjustment provisions of subsections a and d when congress created the special rules of sec_267 it also enlarged the class of controlled corporations defined as related parties to curb further the sorts of abuses that sec_267 was meant to address congress believed that certain related parties such as controlled corporations should be made subject_to the related_party rules in order to prevent tax_avoidance on transactions between those parties staff of joint comm on taxation general explanation of the revenue provisions of the deficit_reduction_act_of_1984 pincite j comm print the house bill would have simply applied the general loss_disallowance_rules of sec_267 to the expanded class of controlled corporations ’ the senate bill followed the house prior to amendment in sec_267 defined as related_taxpayers two corporations more than percent in value of the outstanding_stock of each of which is owned directly or indirectly by or for the same individual if either one of such corporations with respect to the taxable_year of the corporation preceding the date of the sale_or_exchange was under the law applicable to such taxable_year a personal_holding_company or a foreign_personal_holding_company ‘t the house report stated the bill extends the loss disallowance and accrual continued - - bill in its expanded definition of related_taxpayers but provided special rules for sales or exchanges between controlled_group party group members the senate bill generally would have allowed the transferring property to a member of the same controlled to recognize the loss in the year that the loss property was disposed of outside the controlled_group ’ h continued provisions of sec_267 to transactions between certain controlled corporations for purposes of these part loss disallowance and accrual provisions corporations will be treated as related_persons under the controlled_corporation rules of sec_1563 except that a percent control test will be substituted for the percent test these rules are not intended to overrule the consolidated_return regulation rules where the controlled corporations file a consolidated_return h rept vol pincite fn ref omitted sec_180 of the senate bill provided in pertinent c deferral rather than denial of loss from sale_or_exchange between members of a controlled_group --- sec_267 is amended by adding at the end thereof the following new subsection g deferral of losses from sales or exchanges between members of controlled groups --in the case of any loss from a sale_or_exchange of property between members of the same controlled_group to which subsection a applies determined without regard to this subsection -- subsections a and d shall not apply to such loss but no deduction shall be allowed with respect to such loss to the transferor of such property until the first taxable_year of such transferor in which the transferee--- a sells exchanges or otherwise disposes of such property or exchanged_basis_property with respect to such property to a person other than a continued -- - the senate report stated in pertinent part the bill extends the loss disallowance and accrual provisions of sec_267 to transactions between certain controlled corporations for purposes of these loss disallowance and accrual provisions corporations will be treated as related_persons under the controlled_corporation rules of sec_1563 except that a 50-percent control test will be substituted for the 80-percent test these rules are not intended to overrule the consolidated_return regulation rules where the controlled corporations file a consolidated_return in the case of controlled corporations losses will be deferred until the property is disposed of by the affiliate to an unrelated third party in a transaction which results in a recognition of gain_or_loss to the transferee or the parties are no longer related in a transaction where no gain_or_loss is recognized by the transferee the loss is deferred until the substitute basis property is disposed of s print vol pincite fn ref omitted emphasis added in support of its position petitioner relies upon the underscored senate report language supra this report language was dropped however in the conference committee report which stated as follows the provision generally follows the senate amendment with the following modifications the operation of the loss_deferral_rule is clarified to provide that any loss sustained shall be deferred until the property is transferred outside the group or until such other time as is provided by regulations these rules will apply to taxpayers who have elected not to apply the continued member of such controlled_group determined as of the time of the disposition and b recognizes gain_or_loss on such disposition s print vol pincite- - - deferral intercompany_transactions rules except to the extent regulations provide otherwise h conf rept pincite 1984_3_cb_1 petitioner argues that the indication in the conference committee report that it generally follows the senate bill reflects a legislative intent to adopt the sense of the senate report language in question without expressly repeating it we are unpersuaded that this is so it is clear that the conference committee report generally follows the senate bill by including special rules for transfers between controlled_group members unlike the house bill which contained no such special rules it is also clear that the special rules actually adopted by the conference committee and enacted into law differ significantly from the senate bill among these differences is the omission of the senate provision requiring that the deferred loss be restored to the transferor it seems clear that congress having considered the issue ultimately rejected any mandate that the deferred loss be recognized by the transferor when it leaves the controlled_group instead congress specified that the deferral lasts until the property is transferred outside the controlled_group or until such other time as regulations may prescribe relevance of purchasing member’s tax treatment under united kingdom tax law in the final analysis petitioner's argument that the temporary_regulation is invalid rests on the united kingdom’s - - refusal to allow standard chartered-u k to recognize the loss petitioner contends that in this specific fact situation because the united kingdom denied the loss for united kingdom tax purposes to the member of the controlled_group who bought the property the temporary_regulation has the effect of denying and not deferring the loss contrary to sec_267 we disagree under the temporary_regulation standard chartered-u k was entitled under u s tax law to have its basis in the loan portfolio increased for u s income_tax purposes the inability of standard chartered-u k to avail itself of the deferred loss under united kingdom tax law is irrelevant had petitioner transferred the loan portfolio to a u s affiliate or had its foreign affiliates been located outside the united kingdom the results might have been different we agree with respondent that the validity of the temporary_regulation cannot depend upon the treatment of the deferred loss under foreign tax law cf 493_us_132 302_us_573 effect of the final_regulation on the validity of the temporary_regulation petitioner contends that the loss restoration exception in the temporary_regulation is diametrically fundamentally and precisely opposed to the treatment of deferred losses under the -- p7 - final_regulation and that both cannot be reasonable interpretations of the statute petitioner contends that the final_regulation is evidence that the temporary_regulation was in error we are unpersuaded by petitioner's arguments after receiving public comments on the temporary_regulation the treasury_department adopted the changes incorporated in the final_regulation explaining that it was simplifying the rules to correspond more closely to the consolidated_return rules ’ it is well established that the agency administering the statute has flexibility to change a regulation in the light of administrative experience central pa sav association subs v the notice of proposed rulemaking for the proposed regulations states the proposed_regulations retain the basic approach of the current regulations but simplify their operation by more generally incorporating the consolidated_return rules the proposed_regulations eliminate the rule that transforms s's selling member's loss into additional basis in the transferred property when s ceases to be a member of the controlled_group instead the proposed_regulations generally allow s's loss immediately before it ceases to be a member this conforms to the consolidated_return rules and eliminates the need for special rules an anti-avoidance rule is adopted however to prevent the purposes of sec_267 from being circumvented for example by using the proposed rule to accelerate s's loss notice of proposed rulemaking consolidated groups and controlled groups--- intercompany_transactions and related rules reprinted in 1994_1_cb_724 - - commissioner 104_tc_384 moreover a treasury regulation is not invalid simply because the statutory language will support a contrary interpretation 455_us_16 the question is not whether the treasury regulation represents the best interpretation of the statute but whether it represents a reasonable one 523_us_382 as discussed above the temporary_regulation is a reasonable interpretation of sec_267 il the temporary requlation does not violate the united states-united kingdom income_tax treaty petitioner argues that the temporary_regulation is inconsistent with article paragraph of the u s -u k treaty which provides as follows enterprises of a contracting state the capital of which is wholly or partly owned or controlled directly or indirectly by one or more residents of the other contracting state shall not be subjected in the first-- mentioned contracting state to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first--mentioned state are or may be subjected neither sec_267 nor the temporary_regulation discriminates between united kingdom taxpayers and u s taxpayers or between u s taxpayers owned by united kingdom interests and u s taxpayers not owned by united kingdom - - interests for u s income_tax purposes petitioner was treated no differently than any other u s taxpayer petitioner argues that the temporary_regulation discriminates against u s subsidiaries owned by foreign purchasing members without effectively_connected_income because losses sustained by such subsidiaries are uniformly denied under the temporary_regulation in the absence of competent_authority intervention petitioner argues that this requirement of competent_authority intervention entirely avoided by a u s_corporation with a u s parent is more burdensome than requirements imposed on u s -owned corporations in contravention of article of the u s -u k treaty petitioner’s argument is without merit the operation of neither sec_267 nor the temporary_regulation is conditioned on the country of incorporation of the taxpayer’s parent but rather on the taxpayer’s selling property at a loss to members of the same controlled_group without reference to where those related parties may be incorporated a u s_corporation with a u s parent would face the same burdens and requirements as petitioner all other things being equal if it sold property at a loss to a united kingdom corporation that was a member of the same controlled_group conversely a u s_corporation with a united kingdom parent might sell property to a u s affiliate without implicating the competent_authority -- - process we agree with respondent that petitioner’s problem to the extent it has one does not arise under u s income_tax law but under united kingdom tax law which has not given effect to the increase in standard chartered-u k ’s basis as provided under the temporary_regulation the failure of the competent_authority process to resolve this inconsistent treatment under u s and u k tax laws is unfortunate but it does not reflect upon the validity of either sec_267 or the temporary_regulation til respondent’s authority to limit the retroactive effect of the final_regulation during the administrative proceedings of this case petitioner requested elective retroactive application of the final_regulation in a date technical_advice_memorandum respondent denied petitioner’s request petitioner argues that respondent’s denial was not authorized by sec_7805 b sec_7805 provides b retroactivity of regulations or rulings --- the secretary may prescribe the extent if any to which any ruling or regulation relating to the internal revenue laws shall be applied without retroactive effect sec_7805 was amended in effective for regulations that relate to statutory provisions enacted on or after date see taxpayer bill of right sec_2 publaw_104_168 110_stat_1452 accordingly the amendments are inapplicable to the instant case --- - sec_7805 sets out a blanket rule which specifically permits the commissioner to prescribe prospective effect to regulations which would otherwise have retroactive application 79_tc_355 affd 739_f2d_580 1llith cir also affd sub nom 728_f2d_1249 9th cir under sec_7805 there is a presumption that every regulation will operate retroactively unless the secretary specifies otherwise see 710_f2d_1400 9th cir affg 78_tc_989 91_tc_110 affd 886_f2d_442 d c cir in the instant case the secretary did specify otherwise and in doing so clearly acted within his authority see butka v commissioner supra pincite sec_7805 certainly gives the secretary authority to provide if he so chooses that the new regulation will operate only prospectively petitioner argues that respondent’s exercise of his authority to issue prospective regulations being discretionary is reviewable for abuse_of_discretion petitioner states on brief petitioner submits that when retroactive application of a regulation would not have inequitable results respondent does not have the authority to limit retroactivity congress only gave respondent the discretion to prevent retroactivity to the extent reguired in order to avoid undue_hardship or discrimination - - neither the express language of sec_7805 nor its legislative_history however contains any suggestion of such conditions on the secretary’s authority to issue prospective regulations to the contrary the pertinent legislative_history indicates that sec_7805 was intended to prevent problems that might otherwise arise from retroactive application of regulations rather than to restrict the secretary’s ability to promulgate prospective regulations the predecessor to sec_7805 was enacted in the revenue act of ch sec_1314 42_stat_227 the legislative_history states that the purpose of the provision was to-- permit the treasury_department to apply without retroactive effect a new regulation or treasury_decision reversing a prior regulation of treasury_decision this would facilitate the administration of the internal revenue laws in that it would make it unnecessary to reopen thousands of settled cases h rept 67th cong lst sess c b part emphasis added in the provision was reenacted with various substantive amendments that are not central to the present discussion the pertinent legislative_history to the legislation states the amendment extends the right granted by existing law to the treasury_department to give regulations and treasury decisions amending prior regulations or treasury decisions prospective effect only by allowing the secretary to prescribe the exact extent to which any regulation or treasury_decision whether or not it amends a prior regulation or treasury decisions will be applied without - - retroactive effect regulations treasury decisions and rulings which are merely interpretive of the statute will normally have a universal application but in some cases the application of regulations treasury decisions and rulings to past transactions which have been closed by taxpayers in reliance upon existing practice will work such inequitable results that it is believed desirable to lodge in the treasury_department the power to avoid these results by applying certain regulations treasury decisions and rulings with prospective effect only h rept 73d cong 2d sess c b part emphasis added this is not a case where petitioner alleges detrimental reliance upon an existing practice that would be undone by retroactive application of new regulations moreover petitioner's suggestion that sec_7805 requires respondent to apply regulations retroactively if they would be beneficial to the taxpayer raises significant administrability problems of the sort which sec_7805 was intended to prevent petitioner has cited and we have discovered no case constraining the secretary’s authority to issue prospective regulations in support of its position petitioner cites various cases including 353_us_180 for the proposition that in enacting the predecessor to sec_7805 congress gave respondent the authority to limit retroactive application to the extent necessary to avoid inequitable results the automobile club of mich case however like all the other cases cited by petitioner deals with respondent's obligation to limit - -- retroactivity to avoid inequitable results when taxpayers have entered into transactions in reliance on past regulations that concern is simply not relevant when the taxpayer is requesting retroactive application of a new regulation remaining contentions not addressed herein we deem irrelevant without merit or unnecessary to reach to reflect the foregoing and concessions by the parties decision will be entered under rule


internal_revenue_service number release date index number -------------------------------------- ------------------------------- ------------------------------- ------------------------------------------------------------ --- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------------- -------------------------------------------------- telephone number -------------------- refer reply to cc psi b03 plr-101970-19 date date legend x ------------------------------------------------- -------------------------------------- y z ------------------------------------ -------------------------------------- a -------------------------------------------------- -------------------------- b ------------------------ -------------------------------------------------- c -------------------------------------------------- -------------------------- trust1 ----------------------------------------------------------------------------------------------- ---------------------------------------------------------------------- trust2 ----------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- state -------------- date1 date2 date3 -------------------------- ---------------- -------------------------- plr-101970-19 date4 date5 n1 n2 n3 --------------------- --------------------------- ----- ------ --- dear --------------- this responds to a letter dated date submitted on behalf of x and z by the authorized representative of x and z requesting a ruling under sec_1362 of the internal_revenue_code code facts the information submitted states that x was incorporated under the laws of state on date1 and elected to be an s_corporation effective on date2 at the time of x’s incorporation a owned n1 shares of x which comprised all of the outstanding shares of x on date3 a established trust1 for the benefit of b and trust2 for the benefit of c at that time a transferred n2 shares of stock of x to each of trust1 and trust2 after those transfers a retained n3 shares of x x represents that trust1 and trust2 have always met the requirements as a qualified_subchapter_s_trust qsst except that no qsst election had been timely filed on behalf of either trust1 or trust2 effective on date3 on date4 y purchased all of the outstanding shares of x from a trust1 and trust2 on date5 x was merged with and into z a limited_liability_company formed under the laws of state that is wholly-owned by y x represents that x and x’s shareholders have filed tax returns consistent with x being an s_corporation since date3 until date4 x further represents that the circumstances resulting in the termination of x’s s_corporation_election were inadvertent and were not motivated by tax_avoidance or retroactive tax planning x and each person who was a shareholder of x at any time since date3 until date4 agree to make any adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary with respect to such period plr-101970-19 law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that a small_business_corporation means a domestic_corporation that is not an ineligible_corporation and that does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides in pertinent part that a qsst whose beneficiary makes an election under sec_1362 will be treated as a_trust described in sec_1361 and the qsst’s beneficiary will be treated as the owner for purposes of sec_678 of that portion of the qsst’s s_corporation stock to which the election under sec_1361 applies under sec_1361 a beneficiary of a qsst may elect to have sec_1361 apply under sec_1361 the election will be effective up to days and two months before the date of the election sec_1361 provides that for purposes of sec_1361 the term qualified_subchapter_s_trust means a_trust a the terms of which require that - i during the life of the current income_beneficiary there shall be only one income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of such beneficiary’s death or the termination of the trust and iv upon termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to that beneficiary and b all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to one individual who is a citizen or resident_of_the_united_states sec_1_1361-1 of the income_tax regulations provides that the current income_beneficiary of the trust must make the election by signing and filing with the service_center with which the corporation files its income_tax return the applicable form or a statement including the information listed in sec_1_1361-1 sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business plr-101970-19 corporation a termination of an s_corporation_election under sec_1362 is effective on or after the date of cessation sec_1362 provides in pertinent part that if an election under sec_1362 by any corporation was terminated under sec_1362 or the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified under sec_1362 agrees to make the adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary for that period then notwithstanding the circumstances resulting in such termination the corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and the representations made we conclude that x’s s_corporation_election terminated on date3 due to the failure by b and c to properly and timely file qsst elections on behalf of trust1 and trust2 respectively we conclude that this terminating event was inadvertent within the meaning of sec_1362 pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation on date3 until date4 unless x’s s_corporation_election otherwise terminated under sec_1362 this ruling is contingent upon b and c filing qsst elections on behalf of trust1 and trust2 respectively with an effective date of date3 within days of the date of this letter a copy of this letter should be attached to each qsst election 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 specifically no opinion is expressed or implied regarding x’s eligibility to be an s_corporation or the validity of its s_corporation_election further no opinion is expressed or implied as to whether trust1 and trust2 qualify as qssts the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for a ruling it is subject_to verification on examination 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 plr-101970-19 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely caroline e hay assistant to the branch chief branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number info release date date dear this letter is in response to your date request of commissioner rossotti to grant expeditious handling of your constituent’s application_for a tax exemption your constituent intends to apply for a tax exemption in the near future i am enclosing a copy of revproc_2000_1 2000_1_irb_4 which describes the internal revenue service’s irs administrative procedures and requirements for issuing a letter_ruling section provides information about the expeditious handling of a letter_ruling request and lists what a taxpayer must submit to the irs when requesting expeditious handling the irs encourages your constituent to ensure that its letter_ruling request complies with all the requirements of revproc_2000_1 and in particular those of section a letter_ruling request that complies with revproc_2000_1 provides the irs not only with information necessary to promptly respond to a request for expeditious handling but to comprehensively address the substantive issues in the letter_ruling i hope this information is helpful to you and to your constituent if you have any questions please call me at sincerely paul f kugler associate chief_counsel passthroughs and special industries enclosure


internal_revenue_service uil no number release date date legend cc dom fi p 4-plr-102784-99 trust the grantors initial trustee s date a ic x y z dear this letter responds to your request dated date requesting a ruling under sec_72 of the internal_revenue_code regarding a deferred_annuity_contract to be purchased by trust additional information was submitted in a letter dated date the objective of the following arrangement is that initial trustee of trust together with his wife the grantors of trust desire to make a gift in trust for the benefit of s the initial trustee’s son and his descendants in order to maximize the potential investment gains from the initial gift the grantors desire that the investment gains from the gift benefit from tax_deferral thus they propose to use a deferred_annuity the grantors also want to protect the assets from creditors and even protect the child s from making ill advised judgments on his own by not allowing him a measure of control of the assets in trust until his retirement years to further the above purposes trust was established on date a as a complex irrevocable_trust the grantors will contribute cash to trust which will be used by trust to purchase a deferred_annuity from ic a commercial life_insurance_company s will be the annuitant the annuitization date will be when s now age x reaches age y trust will continue for s’s lifetime and will terminate upon s’s death however to the extent that s has descendants subtrusts for those descendants eg children and or grandchildren will be created at the time of his death generally these subtrusts will have identical terms to trust if however s dies without descendants unappointed trust property will be distributed generally outright to relatives of the grantors or s initial trustee of trust or successor trustee once the annuity_contract is purchased will have the power to select the annuitization options and to terminate the annuity_contract at any time subject_to the terms of the annuity_contract the arrangement begins with the grantors contributing cash to trust more specifically the grantors propose to make a one time gift of cash to trust of dollar_figurez and after a day waiting_period trust will purchase a variable deferred_annuity_contract from i c under trust’s terms while either of the grantors is serving as trustee the trustee will be required to accumulate all income in trust and make no distributions of income or principal if neither of the grantors is serving as trustee such as at the time of the annuitization date of the annuity_trust allows for the trustee to distribute to the beneficiary of trust eg s or his descendants such amounts of income and principal of trust as are necessary when added to the funds reasonably available to such beneficiary from other sources known to the trustee to provide for the beneficiary’s health support maintenance and education taking into consideration age education and station in life the only other triggering event whereby funds could be distributed from trust during the annuity accumulation_phase while s is still alive and one of the grantors is serving as trustee is if additional gifts were made by the grantors at this juncture there would be another day opportunity for s to make a claim against trust eg for the value of the current gift assuming that s attains the age of y years the annuitization date the annuity will annuitize inside of trust the day waiting_period prior to investing the contributed funds into the annuity is intended to conform to certain language in trust that is designed to allow for the possibility however remote that s or a parent or guardian acting on his behalf would for example withdraw the value of a current gift made by the grantors to trust such that trust will receive whatever annuitization option that is selected by trust also at the same time according to trust language s to the extent that he had not already done so will replace the grantors as the trustee of trust as indicated above once neither of the grantors serves as trustee it is possible for distributions to be made from trust the standards for making distributions from trust however are limited to the amounts necessary when added to other funds reasonably available to such beneficiary from other sources known to the trustee to provide for the beneficiary’s health support maintenance and education taking into consideration age education and station in life if s were to die after trust begins to receive annuity payments but prior to the completion of annuitization the assets will continue to remain in trust for s’s descendants or blood relatives if s has no descendants living at the time of his death there will be a per stirpes distribution of trust property distribution to the descendants of the grantors unless s has exercised his special_power_of_appointment in no event will a nonnatural person be a contingent beneficiary s has a special power to appoint by will or after age y by separate document all or any part of the property remaining in trust to any person related to s by blood marriage or adoption this special_power_of_appointment however shall not be exercisable in favor of s s’s creditors s’s estate or the creditors of s’s estate law and analysis sec_72 provides that if an annuity_contract is held by a person who is not a natural_person then such contract shall not be treated as an annuity_contract for purposes of subtitle a other than subchapter_l and the income_on_the_contract for any taxable_year of the policyholder shall be treated as ordinary_income received or accrued by the owner during such taxable_year sec_72 further provides that if an annuity_contract is held by a_trust or other entity as an agent for a natural_person then sec_72 shall not apply the annuity_contract provides for a number of annuitization options in addition to a single_life_annuity which would cease with the last payment due prior to the death of the annuitant ie s for example an alternative option is a life_annuity with a period certain whereby monthly payments are paid for the life of the annuitant with a period certain of not less than or years the legislative_history to sec_72 states that if an annuity_contract is held by a person who is not a natural_person such as a corporation then the contract is not treated as an annuity_contract for federal_income_tax purposes and the income_on_the_contract for any taxable_year is treated as ordinary_income received or accrued by the owner of the contract during the taxable_year however the legislative_history further provides that in the case of an annuity_contract the nominal owner of which is not a natural_person eg a corporation or a_trust but the beneficial_owner of which is a natural_person the contract is treated as held by a natural_person h_r conf_rep no 99th cong 2d sess vol ii vol c b the following representations were made in connection with this ruling_request a s is a natural_person as that term is used in sec_72 b the grantors of trust are not considered to be the owners of trust for purposes of c the annuity_contract at issue satisfies the terms of sec_72 d under no circumstances will trust distribute the annuity_contract to anyone other than s or s’s descendants or relatives of s or the grantors all of these contingent beneficiaries will be natural persons accordingly based solely on the information submitted and the representations made we hold as follows the annuity_contract held by trust is considered owned by a natural_person for purposes of sec_72 except as specifically set forth above no opinion is expressed as to the tax treatment of the annuity_contract or trust under the provisions of any other section of the code or the income_tax regulations specifically no opinion is expressed as to whether or not the annuity_contract is in fact an annuity_contract under sec_72 in addition no opinion is expressed or implied as to the tax treatment of the transaction under the estate gift or generation-skipping_transfer_tax provisions finally no opinion is expressed as to whether the annuity_contract meets the requirements of sec_72 the ruling is based on the facts presented and the applicable law in effect on the date of this letter if there is a change in material fact or law state or federal before the transactions considered in this ruling take effect the ruling will have no force or effect this ruling letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to the federal_income_tax return to which it is relevant sincerely yours assistant chief_counsel financial institutions and products by signed by donald j drees jr donald j drees jr senior technician reviewer branch


internal_revenue_service number release date index number --------------------------- --------------------------- ---------------------------------------------------- ----------------------- in re ----------------------------------------------- -------- --------------------------------------- ----------------------------------------------- ----------------------- department of the treasury washington dc person to contact ---------------- id no ------------- telephone number --------------------- refer reply to cc psi b09 - plr-162104-02 date april legend son trust ------------------------------------------------------------------------------------ ------------------------- ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ ----------------------- ---------------------- -------------------------------- --------------------------------- ---------------- ------------------------------------------ --------- --------------------- ---------------------- --- ---------------- -------------------------------------------- ------------------- --------- ------------------------- --- -------------------------- ----------------------------------------- ------------------------- -------------------- date donor spouse daughter grandchild a trustee date b date bank family trusts c partnership d partnership partnership corporation e date successor trustee ---------------------- date ------- plr-162104-02 date family date date court ---------------- ----------------- -------------- ---------------- ------------------------------------------------------------------------------------ -------------------- this is in response to your letter dated date and prior ---------------------- ------ ---------------- -------------------- the information submitted and representations made are summarized as follows date f family grandchild dear ------------ correspondence submitted on behalf of son as trustee of the trust requesting a ruling regarding the generation-skipping_transfer gst tax consequences of a settlement agreement modifying the terms of a_trust that is exempt from the application of the gst tax imposed under sec_2601 of the internal_revenue_code on date a date prior to date donor and spouse each established four virtually identical irrevocable inter_vivos trusts one for the benefit of each of their four then living grandchildren each of the trusts provides either son or daughter with a right to a percentage of the yearly net_income of the trust the trust the subject of the instant ruling_request is one of the eight trusts established on date and was established by donor for the primary benefit of grandchild and grandchild 1's issue on date donor transferred dollar_figurea to the trust it is represented that no additions have been made to the trust subsequent to the initial funding original trustees the trust provides generally that commencing on date the trustees shall pay to daughter b percent of the yearly trust income the balance of the net_income of the trust is to be paid to grandchild for his maintenance support education business needs and other trustee-approved requirements after grandchild reaches age sixteen for so long as both son and daughter are living and serving as original trustees the original trustees son and daughter shall not be required to account to either beneficiaries or representatives of beneficiaries at any time regarding the handling of trust properties or the withholding or distributing of trust income or corpus successor trustees shall pay the net_income to the beneficiary grandchild of this trust namely grandchild during his life for the purposes and in the amounts set forth above upon the death of grandchild if the trust is still operative and in effect the trustees and successor trustees shall pay the net_income first to the issue of the preamble of the trust provides that daughter son and trustee shall be the article third of the trust provides generally that the original trustees and the trust the three other trusts established by donor and the four trusts article fourth of the trust provides generally that the trust shall continue to be plr-162104-02 grandchild should grandchild leave no issue the trustees and successor trustees shall pay the net_income in equal shares to donor’s other grandchildren who may have survived grandchild or the issue of donor’s other grandchildren who may have predeceased grandchild provided however the shares of any deceased grandchildren shall be divided per capita among all the issue of said deceased grandchildren upon the death of all of donor’s grandchildren if such deaths take place during the operation of this trust the income to be paid to grandchild shall be paid should grandchild leave no issue per capita to the living issue of donor’s other grandchildren established by spouse each contain an equalization provision in order to ensure that any grandchild born after date would be provided for in a manner similar to that of donor and spouse’s four then living grandchildren pursuant to the equalization provision upon the birth of any grandchild after date each of the trusts established by donor shall contribute a portion of its income and corpus to a new trust to be held under the same conditions for the subsequently born grandchild operative so long as any of the trustees herein named are living the trust shall terminate only after all of the deaths of the trustees the particular time of termination after said deaths shall be either on a date twenty-one years after the death of the last trustee or date whichever is earlier as between the said two times following the deaths of the trustees upon termination of this trust the successor trustee shall pay over deliver and convey the trust estate with its accumulations and all undistributed_net_income to grandchild absolutely if grandchild is then living in the event that grandchild shall have died prior to the disposition of this trust the successor trustees shall distribute the trust estate to any living issue of grandchild should grandchild leave no issue the successor trustees shall distribute the trust estate in equal shares to donor’s other grandchildren who may have survived grandchild or the issue of donor’s grandchildren who have predeceased grandchild provided however the shares of any deceased grandchildren shall be divided per capita among all the living issue of said deceased grandchildren upon the death therefore of all donor’s grandchildren if such deaths take place prior to the termination of this trust the trust corpus herein provided to be paid to grandchild should he leave no issue shall be paid per capita to the living issue of donor’s other grandchildren three successor trustees at least one of which is a national bank with a_trust department the successor trustees shall be unanimously appointed by the original trustees son and daughter by means of a written instrument legally effecting such appointment after the death of either daughter or son if no such appointment has been made it shall be the obligation of the survivor of them within ten days after the death of the other to appoint successor trustees any appointment of successor trustees may be revoked at any time by both daughter and son if the two of them are article fifth of the trust provides generally that there shall not be more than after the execution of the trust on date four additional grandchildren were plr-162104-02 living or either of them if one is deceased and new successor trustees appointed in the place of the ones removed should the original trustees for any reason fail to appoint specific successor trustees the bank shall serve as successor trustee the appointment of successor trustees shall become effective on the deaths of both original trustees daughter and son should trustee survive both daughter and son the successor trustee shall serve together with trustee in administering this trust the appointment of successor trustees shall not become effective so long as either of the original trustees son and daughter are living son or daughter shall have the right to administer this trust alone born pursuant to the equalization provisions for after-born grandchildren contained in the trust and in the three similar trusts established by donor on date four additional trusts one for each after-born grandchild were established by donor pursuant to the equalization provisions for after-born grandchildren contained in the four similar trusts established by spouse four additional trusts one for each after-born grandchild were established by spouse thus a total of eight trusts were established by donor and eight trusts were established by spouse collectively the parties refer to these sixteen trusts as the family trusts each of the family trusts invests directly or indirectly in publicly held stock and securities real_estate interests in closely-held entities and other miscellaneous assets each of the family trusts owns a c percent limited_partnership_interest in partnership partnership owns a d percent general_partnership interest in partnership partnership is a class b limited_partner in partnership corporation owns a e percent general_partnership interest in partnership and a e percent general_partnership interest in partnership corporation is wholly owned by son appointed successor trustee successor trustee resigned in date since date son has served as the sole trustee family retained the services of an attorney because they were unsatisfied with son’s administration of various trusts offers and counteroffers of settlement were continually made however settlement negotiations broke down around the end of date things that son breached his fiduciary obligations relating to the investment administration management and use of the family trusts’ funds that various related_party transactions were improper and that trust accounts were incorrect before the time for filing an answer to these complaints expired a death in the family led the respective parties to attempt to resolve their disputes again after lengthy negotiations a basis for settlement was reached and finally reduced to writing on date the settlement agreement in date daughter and members of her family collectively referred to as on date daughter and trustee resigned as trustees successor trustee was on date family filed three complaints in the court alleging among other article second paragraph b of the trust will be modified to provide that the plr-162104-02 as a result of the settlement agreement the following modifications will be made to the trust article first of the trust will be modified in part to provide that reference to the term net_income shall not be deemed to include accumulated but undistributed_income of the trust article second paragraph a of the trust will be modified to provide generally that commencing on date the trustees shall pay to daughter at such times and in such amounts as daughter in her own discretion might require f percent of the yearly net_income of the trust upon the death of daughter and until the trust terminates the trustees shall pay f percent of the yearly net_income of the trust to daughter’s then living lineal_descendants per stirpes trustees shall pay the balance of the net_income including that which is not distributable and that which is not distributed to or taken by daughter or her lineal_descendants to the beneficiary or the beneficiaries hereinafter designated for so long as either daughter or son shall be living in such amounts and at such times after the beneficiary has reached the age of sixteen years as the trustees shall deem necessary and proper for the maintenance support education business needs and other trustee-approved requirements of the beneficiary or beneficiaries all net_income not distributed shall be accumulated and added to corpus in addition the provision in article second paragraph b that provides that the original trustees son and daughter shall not be required to account to beneficiaries at any time regarding the handling of trust properties or the withholding or distributing of trust income or corpus will be deleted order to ensure that any grandchildren born after the execution of this trust agreement an after-born grandchild shall be provided for in a manner equal to that of grandchild and donor’s other grandchildren who are living as of date for whom donor has established three other trusts donor specifically directs as follows upon the birth of any after-born grandchild there shall be allocated to such after-born grandchild as a separate trust a portion of the assets of this trust determined by multiplying the fair_market_value of the assets of this trust by a fraction the numerator being one and the denominator being the total number of donor’s grandchildren whether then living or deceased each trust so set_aside for an after-born grandchild shall be held administered and disposed of for such grandchild as otherwise provided in this trust subject_to the following such trust shall be subject_to further division upon the birth of additional after-born grandchildren each after-born grandchild for whom an additional trust is established pursuant to this paragraph shall be considered the beneficiary of such trust and after his or her death his or her issue shall be beneficiaries as provided herein separate trusts similarly established for a beneficiary may be combined into one trust by the trustees in such event if daughter or son has any rights to receive a percentage of the income from a separate trust such rights shall continue as to a combined trust provided such percentage shall be article third of the trust will be modified in part to provide generally that in plr-162104-02 recomputed for a combined trust based upon the percentage of the assets of the combined trust represented by assets from each separate trust at the time of combination multiplied by the percentage of income to which son or daughter was entitled from such separate trust and such products shall be added together to produce the recomputed percentage of income to which son or daughter is entitled from a combined trust whether or not the separate trusts for an after-born grandchild are combined the date of termination of each trust or portion of a combined trust shall be determined by the provisions of the trusts from which such trusts or portions were created article fourth of the trust will be modified in part to provide generally that the trust shall continue to be operative so long as any of the original trustees are living upon termination of the trust the successor trustee shall pay over deliver and convey the trust estate as then constituted to grandchild absolutely if grandchild is then living article fifth of the trust will be modified to provide generally that in the event of the death resignation or incapacity of son to serve as a trustee his successor shall be that person or persons whom son designates a through a separate written instrument delivered during his life to the other serving trustee or b in his last will and testament which is admitted to probate any written instrument under article fifth clause a shall be witnessed by two individuals and notarized the latest dated written instrument or last will and testament shall control if a successor trustee is not serving or is not nominated herein then a successor trustee the family trustee shall be nominated appointed and confirmed by a majority of the then living lineal_descendants of son family who are sui juris notwithstanding anything to the contrary or otherwise after the death of son the family beneficiaries who are sui juris may by majority vote remove the family trustee for any reason and appoint a new family trustee and if the then acting family trustee becomes incapacitated or incompetent shall replace such trustee grandchild and his successors the family trustee is the successor trustee to daughter in the event of the death resignation or incapacity of the family trustee then a successor trustee shall be nominated appointed and confirmed by a majority of daughter if she is then living and her then living lineal_descendants who are sui juris family notwithstanding anything to the contrary or otherwise the members_of_family who are sui juris may by majority vote remove the family trustee for any reason and appoint a new family trustee and if the then acting family trustee becomes incapacitated or incompetent shall replace such trustee there shall at all times be a one trustee who is son or who is selected by either son or family and b one trustee who is grandchild or is selected by family no trustee shall vote or participate in any manner on any discretionary distribution of income or principal to himself or herself or to a beneficiary to whom such trustee is related to or subordinate to within the meaning of sec_672 or to a person whom such trustee or beneficiary is legally obligated to support the trustee who is so restricted in his or her participation in any trustee action under this section shall by written document delivered to the other then acting trustee designate a third party who is not the settlement agreement has been approved by the court conditioned upon a plr-162104-02 related to or subordinate to within the meaning of sec_672 such restricted trustee or the beneficiary to act as a special trustee solely for the purpose of exercising such discretion and the special trustee shall exercise that discretion provided however that such special trustee shall be subject_to the same terms and limitations applicable to any other named trustee favorable ruling by the service on the effect the settlement agreement has on the trust’s exemption from the gst tax son as trustee of the trust has requested rulings that the following aspects of the settlement agreement will not adversely affect the gst exempt status of the trust the modifications and changes to the trust concerning the appointment and removal of a trustee and the method of appointing successor trustees the resolution of the issue of the proper construction and application of the equalization provisions of the trust the construction of the trust as to the right to income from the trust after the death of daughter by continuing daughter’s right to income upon her death for daughter’s lineal_descendants until the termination of the trust and otherwise continuing the right to discretionary distributions of income to the remainder beneficiaries the resolution of the issue of the proper construction of the trust with respect to accumulated but undistributed_net_income the elimination of language regarding trustee accountings and the resolution of various economic issues between the parties including but not limited to a equalization of the trust corpus between the family trusts so that the assets of each trust are identical as of the effective date of the settlement agreement b equalization of the right to income of the family trusts so that as of the effective date of the settlement and thereafter the family trusts remain equalized c the transfer of stock of corporation equally to each family_trust d the purchase and or redemption of the interests of the partnership in partnership and e the reimbursement of family 1’s legal fees and costs incurred in the dispute distribution a taxable_termination and a direct_skip under b a of the tax_reform_act_of_1986 and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the generation-skipping_transfer_tax provisions do not apply to any generation-skipping_transfer under a_trust as defined in sec_2652 that was irrevocable on date however this exemption does not apply if additions actual or constructive are made to the trust after date date will be considered an irrevocable_trust except as provided in sec_2611 defines the term generation-skipping_transfer as a taxable sec_26_2601-1 provides that any trust in existence on sec_2601 imposes a tax on every generation-skipping_transfer sec_26_2601-1 provides rules for determining when a modification sec_26_2601-1 provides that a court-approved settlement of a bona plr-162104-02 sec_26_2601-1 or c which relates to property includible in a grantor’s gross_estate under sec_2038 and sec_2042 in the present case the trust is considered to have been irrevocable on date because neither sec_2038 nor sec_2042 applies judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax under sec_26_2601-1 or hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status the rules contained in sec_26_2601-1 are applicable only for purposes of determining whether an exempt trust retains its exempt status for generation-skipping_transfer_tax purposes 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 capital_gain for purposes of sec_1001 fide issue regarding the administration of the trust or the construction of terms of the governing instrument will not cause an exempt trust to be subject_to the provisions of chapter if the settlement is the product of arm’s length negotiations and the settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement a settlement that results in a compromise between the positions of the litigating parties and reflects the parties’ assessments of the relative strengths of their positions is a settlement that is within the range of reasonable outcomes and there have been no additions made to the trust after date accordingly the trust is exempt from the gst tax under sec_26_2601-1 agreement is a settlement of a bona_fide issue the product of arm’s length negotiations and is within the range of reasonable outcomes under the governing instrument and applicable state law therefore provided that the court approves the proposed agreement the modifications will not violate b a of the tax_reform_act_of_1986 and will not affect the exempt status of the trust representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party if there is a change in material fact or law local or federal before the transactions considered in this ruling take effect the ruling will have no force or effect 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 in the present case the trust was created and became irrevocable on date based on the facts presented and the representations made the settlement the rulings contained in this letter are based upon information and except as expressly provided herein no opinion is expressed or implied plr-162104-02 concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition no opinion is expressed or implied with respect to the income_tax consequences of any transaction the code provides that it may not be used or cited as precedent being sent to son as trustee of the trust this ruling is directed only to the taxpayer requesting it sec_6110 of pursuant to the power_of_attorney on file with this office a copy of this letter is sincerely melissa c liquerman branch chief branch office of associate chief_counsel passthroughs special industries enclosure copy for sec_6110 purposes