department of the treasury internal_revenue_service tege eo examinations mail stop dal commerce st dallas texas tax_exempt_and_government_entities_division date date taxpayer_identification_number person to contact employee identification_number employee telephone number phone fax release number release date legend org organization name xx date address address org address certified mail - return receipt dear this is a final adverse determination regarding your exempt status under sec_501 of the internal_revenue_code our favorable determination_letter to you dated june 20xx is hereby revoked and you are no longer exempt under sec_501 of the code effective july 20xx the revocation of your exempt status was made for the following reason s organizations described in sec_501 and exempt under sec_501 must be both organized and operated exclusively for exempt purposes you have failed to produce documents to establish that you are operated exclusively for exempt purposes and that no part of your net_earnings inures to the benefit of private shareholders or individuals you failed to respond to repeated reasonable requests to allow the internal_revenue_service to examine your records regarding your receipts expenditures or activities as required by sec_6001 and sec_6033 of the code contributions to your organization are no longer deductible under sec_170 after july 20xx you are required to file income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the tax_year ending june 20xx and for all tax years thereafter in accordance with the instructions of the return processing of income_tax returns and assessments of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination under the declaratory_judgment provisions of sec_7428 of the code a petition to the united_states tax_court the united_states claims_court or the district_court of the united_states for the district of columbia must be filed before the day after the date this determination was mailed to you please contact the clerk of the appropriate court for rules regarding filing petitions for declaratory judgments by referring to the enclosed publication you may write to the united_states tax_court at the following address you also have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your ocal taxpayer_advocate at if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely nanette m downing director eo examinations enclosures publication tax eremer ano government entities division org address department of the treasury internal_revenue_service te_ge - stop 4925stp east 7th street st paul mn date taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation enclosures publication publication report of examination sincerely terri anderson internal revenue_agent letter catalog number 34809f form 886a explanation of items department of the ‘i'reasury - internal_revenue_service schedule no or exhibit name of taxpayer org june 20xx year period ended legend org organization name xx date issue whether org qualifies for exemption under sec_501 of the internal_revenue_code facts org filed a form_990 for the year ending june 20xx on january 20xx the internal revenue_agent sent a letter to org requesting status of organization on february 20xx the internal revenue_agent sent a copy of the letter of january 20xx to the address of the officer that signed the form_990 there has been no response from the organization law sec_6001 provides that every person liable for any_tax imposed by the irc or for the collection thereof shall keep adequate_records as the secretary_of_the_treasury or_his_delegate may from time to time prescribe sec_1_6001-1 in conjunction with sec_1_6001-1 provides that every organization exempt from tax under irc section 5019a and subject_to the tax imposed by sec_511 on its unrelated_business_income must keep such permanent books or accounts or records including inventories as are sufficient to establish the amount of gross_income deduction credits or other matters required to be shown by such person in any return of such tax such organization shall also keep books_and_records as are required to substantiate the information required by sec_6033 sec_1_6001-1 states that the books_or_records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law sec_1_6033-1 provides that every organization which has established its tight to exemption from tax whether or not it is required to file an annual return of information shall submit such additional information as may be required by the district_director for the form 886-a rev department of the treasury - internal_revenue_service page -1- department of the ‘l'reasury - internal_revenue_service form 886a name of taxpayer schedule no or exhibit year period ended explanation of items june 20xx org purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter_f sec_501 and the following chapter of the code and sec_6033 revrul_59_95 1959_1_cb_627 concerns an exempt_organization that was requested to produce a financial statement and statement of its operations for a certain year however its records were so incomplete that the organization was unable to furnish such statements the service held that the failure or inability to file the required information_return or otherwise comply with the provisions of sec_6033 and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for continuation of exempt status in accordance with the above cited provisions of the code and regulations under sec_6001 and sec_6033 organizations recognized as exempt from federal_income_tax must meet certain reporting requirements these requirements relate to the filing of a complete and accurate annual information and other required federal tax forms and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated_business_income_tax conclusion the organization has not provided any information on its activities to show that they are exempt_activities it is the irs’s position that the organization failed to meet the requirements under sec_6001 and sec_6033 to be recognized as exempt from federal_income_tax under sec_501 accordingly the organization’s exempt status is revoked effective july 20xx form_1120 returns should be filed for the tax periods ending on or after june 20xx form 886-a rev department of the treasury - internal_revenue_service page -2-


t c summary opinion united_states tax_court preston l kott petitioner v commissioner of internal revenue respondent docket no 30012-13s filed date preston l kott pro_se emile louis hebert iii for respondent summary opinion pugh judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed unless otherwise indicated all subsequent section references are to the internal_revenue_code in effect for the year in issue pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case on date respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax for and a penalty under sec_6662 of dollar_figure the issues for decision are whether petitioner is liable for the additional tax imposed by sec_72 for distributions from a sec_401 retirement_plan and whether petitioner is liable for a penalty under sec_6662 and b for a substantial_understatement_of_income_tax arising from his failure to report the distributions background some of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference petitioner lived in louisiana at the time his petition was filed during petitioner received distributions totaling dollar_figure from his sec_401 retirement_plan administered by ing life_insurance annuity co ing at the time of those distributions petitioner had not reached the age of 59½ petitioner withdrew the amounts because of financial hardship as he was delinquent in his mortgage payments and wanted to avoid foreclosure he did not include the distributions in his gross_income on hi sec_2011 federal_income_tax return petitioner does not dispute that he also failed to include a state tax_refund of dollar_figure in his gross_income discussion sec_72 imposes a additional tax on early distributions from a qualified_retirement_plan including a sec_401 retirement_plan see sec_4974 petitioner concedes that the distributions should have been included in his gross_income but argues that the additional tax should not be imposed because the distributions were due to financial hardship and therefore excepted from the additional tax under sec_72 sec_72 sets forth specific exemptions but those exemptions do not include a general financial hardship exemption see 111_tc_250 holding that a distribution received as a result of financial hardship was subject_to the sec_72 additional tax because no exception exists for financial hardship milner v commissioner tcmemo_2004_111 same gallagher v commissioner tcmemo_2001_34 holding that a distribution received by taxpayers because of financial hardship and used to pay bills tuition at their son’s private high school and other personal expenses was subject_to the sec_72 additional tax the burden of production with respect to the sec_72 additional tax is on the taxpayer see el v commissioner t c __ __ slip op pincite date petitioner does not argue that any of the existing statutory exemptions applies he also provided no evidence that he would qualify for the first-time- homebuyer exemption see cole v commissioner tcmemo_2006_44 in particular he made no showing that he used the distributions to pay acquisition costs for his home see id petitioner points the court’s attention to the exception in sec_1 k - d iii b income_tax regs which permits sec_401 retirement plans to make distributions to employees for payments necessary to prevent eviction from the employee’s principal_residence or foreclosure unfortunately for petitioner that regulation only permitted his sec_401 retirement_plan to make the hardship distributions to him it did not exempt the distributions from the additional tax under sec_72 because no statutory exemption applies petitioner is liable for the additional tax on the dollar_figure in distributions from his sec_401 retirement_plan administered by ing the second issue for decision is whether petitioner is liable under sec_6662 and b for the accuracy-related_penalty for an underpayment_of_tax attributable to a substantial_understatement_of_income_tax for there is a substantial_understatement_of_income_tax if the amount of the understatement exceeds the greater of of the tax required to be shown on the return for the tax_year or dollar_figure sec_6662 sec_1_6662-4 income_tax regs the understatement of income_tax is dollar_figure which exceeds dollar_figure therefore respondent has met his burden of producing evidence that petitioner’s underpayment was attributable to a substantial_understatement_of_income_tax and petitioner is liable for the penalty unless he comes forward with persuasive evidence that the penalty is inappropriate because for example he acted with reasonable_cause and in good_faith see sec_6664 116_tc_438 the decision as to whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances see sec_1_6664-4 income_tax regs generally the most important factor is the extent of the taxpayer’s effort to assess her or his proper tax_liability id see halby v commissioner tcmemo_2009_204 petitioner did not rely upon an adviser and admitted in testimony that the omission of the distributions from his taxable_income was an oversight ten percent of the total_tax required to be shown dollar_figure per the notice_of_deficiency is dollar_figure which is less than dollar_figure while petitioner might have been able to but did not establish reasonable_cause for omitting the additional tax he admitted that he did not consider the tax at the time he filed the return his candor is laudable but it does not establish reasonable_cause for the underpayment therefore the penalty is sustained to reflect the foregoing decision will be entered for respondent


department of the treasury internal_revenue_service tege exempt_organizations tax_exempt_and_government_entities_division commerce street - mc dal dallas texa sec_501 date date release number release date legend org- organization name xx - date org address taxpayer_identification_number form person to contact id number contact numbers telephone fax certified mail - return receipt requested dear in a determination_letter dated september 19xx you were held to be exempt from federal_income_tax under sec_501 of the internal_revenue_code based on recent information received we have determined you have not operated in accordance with the provisions of sec_501 of the code accordingly your exemption from federal_income_tax is revoked effective january 20xx this is a final adverse determination_letter with regard to your status under sec_501 of the code we previously provided you a report of examination explaining why we believe revocation of your exempt status is necessary at that time we informed you of your right to contact the taxpayer_advocate as well as your appeal rights you signed form 6018-a consent to proposed action agreeing to the revocation of your exempt status under sec_501 of the code you are required to file federal_income_tax returns for the tax period s shown above if you have not yet filed these returns please file them with the ogden service_center within days from the date of this letter unless a request for an extension of time is granted or unless an examiner's report for income_tax_liability was issued to you with other instructions file returns for later tax years with the appropriate service_center indicated in the instructions for those returns you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please contact the person whose name and telephone number are shown at the beginning of this letter sincerely nanette m downing director eo examinations org form 886-a attachment to notice of proposed revocation 20xx calendar tax_year legend org -- organization name state -name of state _xx- date issue whether org sec_501 facts continues to qualify for exemption under irc org _ was incorporated as a non stock corporation in the state in september 19xx it was created to promote and encourage the games of golf tennis and other sports and to promote social camaraderie in furtherance of its exempt purposes org owns leases and maintains a club house golf course and recreation facilities for its members and the general_public per the interview the treasurer stated that during the past few years membership has been dwindling and the organization has had to use its savings to help defray the cost of operating the golf course examination of the books_and_records for the tax_year 20xx determined that a percent of org’s gross_receipts were received from nonmember sources the 20xx form_990 indicated that nonmember income accounted for a percent of the organization’s gross_receipts law and analysis sec_501 provides for the exemption from federal_income_tax of clubs organized and operated for pleasure recreation and other non-profitable purposes substantially_all the activities of which are for such purposes and no part of the net_earnings of which inures to the benefit of any private shareholder sec_1_501_c_7_-1 a essentially repeats the language of sec_501 of the code but also states that in general this exemption extends to social and recreation clubs which are supported solely by membership fees dues and assessments however a club otherwise entitled to exemption will not be disqualified because it raises revenue from members through the use of club facilities or in connection with club activities public law amended sec_501 of the code to allow social clubs to receive some outside income without jeopardizing their exempt status specifically the senate_finance_committee report states a social_club is permitted to receive up to of its gross_receipts including investment_income from sources outside of its membership without losing its exempt status however within thi sec_35 limit not more than of gross_receipts should be derived from the use of a social club's facilities or services by the general_public page of org form 886-a attachment to notice of proposed revocation 20xx calendar tax_year revrul_60_324 states in part that a social_club exempt from federal_income_tax under sec_501 may lose its exemption if it makes its club facilities available to the general_public on a regular recurring basis since it may then no longer be considered to be organized and operated exclusively for its exempt_purpose revrul_68_638 states in part that a club formed to maintain a country club for the promotion and enjoyment of golf for its members receives as host of an annual golf tournament substantial income from the public and uses the income for club operating_expenses and improvements is not exempt under sec_501 revrul_69_219 states in part that a social_club that regularly holds it golf course open to the general_public charging established green fees that are used for maintenance and improvements of club facilities is not exempt under sec_501 government’s position org _ has failed to meet the percent limitation regarding gross_receipts from non member sources based on the facts of the examination the service has determined thatorg organization’s unrelated_business_income from nonexempt activities has increased each year resulting in failure to qualify for exempt status under sec_501 is no longer operated solely for the benefit of its members the couclusion the service has determined that the exempt status of org __ is revoked effective january 20xx page of


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-100914-01 date date legend x sec_1 sec_2 industry director d1 d2 d3 d4 d5 dear this letter responds to a and subsequent correspondence written on behalf of x by its authorized representative requesting that the service grant x an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to elect to treat two subsidiaries as qualified subchapter_s subsidiaries qsubs under sec_1361 of the code the information submitted states that x filed a form_2553 election to be a small_business_corporation with an effective date of d1 sec_1 and sec_2 filed elections to be treated as small_business corporations with an effective date of d2 on d3 all of the plr-100914-01 stock of sec_1 and sec_2 was contributed to x by the shareholders of those companies at the time of the transfer x’s officers determined that both sec_1 and sec_2 should be treated as qsubs of x for federal_income_tax purposes due to inadvertence the proper qsub elections for sec_1 and sec_2 were not filed by the due_date additionally x represents that prior to discovering the miscommunication x sec_1 and sec_2 filed tax returns for the tax_year beginning on d3 and ending on d4 as if the qsub elections had been timely filed x’s accountants discovered the error on d5 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 the 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 sec_1_1361-3 provides that a qsub election cannot be effective more than two months and days prior to the date of filing notice_2000_58 2000_47_irb_491 provides that form_8869 qualified_subchapter_s_subsidiary election should be used by all s_corporations wishing to elect qsub treatment as directed in instructions to the form sec_301_9100-1 of the procedure and administration regulations provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-2 and sec_301_9100-3 provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-1 sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government plr-100914-01 based on the information submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time until days from the date of this letter to file the forms to elect to treat sec_1 and sec_2 as qsubs effective d3 with the appropriate service_center a copy of this letter and the elections should be sent to the industry director 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 specifically no opinion is expressed concerning whether x otherwise was a valid s_corporation or whether sec_1 and sec_2 are valid qsubs for federal tax purposes this ruling is directed only to the taxpayer who requested it sec_6110 of the code 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 yours paul f kugler associate chief_counsel passthroughs and special industries enclosures copy of this letter


department of the treasury internal_revenue_service washington d c tax exewpt ano government entities bivision number release date date uil cade contact person identification_number telephone number employer_identification_number dear we have considered your ruling_request relating to the provision of survivorship benefits to non- spousal non-dependent domestic partners facts you are a voluntary employees’ beneficiary association described in sec_601 of the internal_revenue_code code under the plan’s trust two types of death_benefits are available upon the death of a participant a lump sum payment to the participant's designated_beneficiary and monthly survivorship payments to either the participant's surviving_spouse and children or the participant's nen-spousal domestic pariner who is a dependent of the participant within the meaning of sec_152 and who meets certain other requirements you are governed by a managing board your managing board proposes to adopt a resolution to amend the plan's trust to remove the requirement that to be eligible to receive monthly survivorship payments a participant's non-spousal domestic partner must also be a dependent’ of the participant within the meaning of sec_152 of the code thus under this proposed amendment the non-spousal domestic partner of a participant whe otherwise meets the applicable_requirements of the plan would be eligible to receive monthly survivership payments whether or not the partner is also a dependent of the participant within the meaning of sec_152 ruling requested your status as a voluntary employee_benefits association described in sec_501 of the code will not be adversely affected by the amendment to your plan to permit non-spausal non- dependent domestic partner beneficiaries to be eligible to receive monthly survivorship payments under the plan sec_501 of the code states law voluntary employses’ beneficiary associations providing for the payment of life sick accident or other_benefits to the members of such association or their dependents or designated beneficiaries if no part of the net earings of such association inures other than through such payments to the benefit of any private_shareholder_or_individual sec_1 c -1 of the income_tax regulations ‘regulations’ states to be described in sec_501 an organization must meet all of the following requirements the organization provides for the payment of life sick accident or other_benefits to its members or their dependents or designated beneficiaries sec_1_501_c_9_-3 of the regulations states the life sick accident or other_benefits provided by a voluntary employees’ beneficiary association must be payable to its members their dependents or their designated beneficiaries analysi sec_1 c -3 b of the regulations states payable by reason of the death of a member or the term life benefits means a benefit dependent currently under the plan's trust two types of death_benefits are available upon the death of a participant a lump sum payment to the participant's designated_beneficiary and monthly survivorship payments to either the participant's surviving_spouse and children or the participant's non-spousal domestic partner who is a dependent of the participant within the meaning of sec_152 of the cade and who meets certain other requirements you propose to amend the plan’s trust to remove the requirement that to be eligible to receive monthiy survivorship payments a participant's non-spousal domestic partner must also be a dependent of the participant within the meaning of sec_152 of the code sec_504 c of the code and sec_1 c -1 c of the regulations states that an organization described in these provisions is one that provides life sick or other_benefits to a its members or b their dependents or c their designated beneficiaries in addition sec_1_501_c_9_-3 states that these benefits must be payable to the organization's a members or b their depandents or c their designated beneficiaries ner the regulations defines the term designated beneficiaries for purposes of sec_501 c of the code nor does the legislative_history of sec_501 explain the meaning of this neither the statute furthermore no case law addresses the meaning of this term therefore itis term appropriate to interpret this term using its plain meaning the proposed amendment to your plan's trust would permit the non-spousal domestic partner of a participant who otherwise meets the applicable_requirements of the plan to be eligible to teosive monthly survivorship payments whether or not the partner is also a dependent of the participant within the meaning of sec_152 of the code sec_501 c of the code and sec_1 -1 c and c -3 a of the regulations permit a participant in a voluntary employees’ beneficiary association to make death_benefits available to the participant's designated beneficiaries there is no requirement that the beneficiary of a death_benefit must also be a dependent of the participant under your plan’s trust two death_benefits are available by reason of the death of the participant lump sum payments and monthly survivorship payments therefore just as a lump sum may be paid to a beneficiary who is not also a dependent of the participant so may the monthly survivorship payments because both are payable by reason of the participant's death accordingly your proposed amendment to permit a non-spousal non-dependent beneficiary to qualify to receive monthly survivorship payments would be permissible under sec_501 c of the code and sec_1 of the regulations ruling your status as a voluntary employee_benefits association describad in sec_501 of the code will not be adversely affected by the amendment to your plan to permit nan-spausal non- dependent domestic partner beneficiaries to be eligible to receive monthly survivorship payments under the plan 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 based on the facts as they were presented and on the understanding that there will be no material changes in these facts ‘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 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 does not address the applicability of any 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 sincerely manager exempt_organizations technical group enclosure notice


department of the treasury internal_revenue_service washington d c date number release date cc dom fs fi p tl-n-5272-99 uil internal_revenue_service national_office field_service_advice memorandum for from deborah a butler assistant chief_counsel cc dom fs subject credit enhanced bonds this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend development town districts state district a district b authority individual x individual y appraiser corporation corporation corporation corporation corporation limited_partnership city bonds class a remic bonds class b remic bonds year year year year year year date date a b c d e f g h i j k l m n o p issues whether the issuance of bonds was structured in such a manner that it was expected that the credit enhancement provider would pay the debt service on the bonds rather than the issuer whether the credit enhancement for the bonds which is secured_by lease payments received from a united_states agency creates an indirect federal guarantee of the bonds whether the issuance of bonds was an abusive arbitrage device that overburdened the market for tax-exempt_bonds conclusion based on the facts provided it appears that the credit enhancement provider rather than the issuer would pay the debt service on the bonds such arrangement may be inconsistent with the purposes of sec_103 of the internal_revenue_code the credit enhancement for the bonds is secured_by lease payments received from a united_states agency the arrangement appears to create an indirect federal guarantee of the bonds there is an argument that the bond issuance overburdened the market considering the amount of bonds that have been issued without a clear governmental purpose we recommend additional development before asserting this position however facts background the development is located in town in year districts were organized to provide water sewer street park safety and recreation improvements within the development districts are quasi-municipal corporations created under the laws of state and are political subdivisions the preparation and approval of a service plan is a requirement under state statute for the organization of a district the service plans for each district consist of a financial and engineering survey showing how proposed services are to be provided and financed in year district a filed for bankruptcy protection under chapter of the united_states bankruptcy code after it defaulted on general obligation bonds it had issued in the amount of dollar_figurea in connection with district a' s subsequent reorganization corporation purchased from district a b acres of property within development for dollar_figurec or approximately dollar_figured per acre individual x is the sole owner of corporation further individual y is a vice president of corporation and a director of each of the districts district a originally acquired the property that was sold to corporation by foreclosing on a lien against the original developer of the development the original developer acquired the property e acres in year for less than dollar_figuref per acre the purchase_price for the property was determined by appraiser an independent_appraiser as a result of the events culminating in district a's bankruptcy each of the districts and town executed an agreement requiring each district to submit an amendment to its service plan outlining its anticipated development before beginning any future development within development town will not formally consider amendments to any district’s service plan until all districts amend their service plans the current transaction authority was organized in year under state law as a nonprofit corporation to further the purposes of district b authority is authorized to issue bonds and other obligations payable from the revenues of the authority individuals x and y are members of the board_of directors of authority on date authority issued the bonds the bonds were issued for the purpose of acquiring real_property upon which authority purportedly intended to construct certain public improvements including a golf course and recreational facilities in fact proceeds were used to acquire g acres of land and water rights within the development from corporation for dollar_figureh or approximately dollar_figurei per acre at the time of the acquisition corporation was the owner of approximately j of the property within the development the purchase_price for the property was also determined by appraiser the bonds are limited obligations of authority payable solely from funds held under the indenture including capitalized_interest deposited from the proceeds of the bonds revenues of the authority and payments made under a credit enhancement revenues include all income rents receipts and profits of the authority the offering documents for the bonds however indicate that revenues were expected to consist primarily of amounts generated by the operation of a golf course in connection with the issuance of the bonds the districts also entered into the operating_agreement and the intergovernmental_agreement obligating the districts to provide funds to district b for payment to authority to the extent that its revenues are insufficient to pay debt service on the bonds such funds would be derived from a mill levy that is subject_to certain limitations including a k mill limitation on taxable property within the districts however the operating_agreement and the intergovernmental_agreement do not become effective until an amendment to the districts’ service plans authorizing the mill levy is approved by the town or the districts receive an opinion of counsel that the mill levy may be imposed without regard to any service plan amendment authority also entered into the development agreement with corporation the development agreement provides that until the mill levy described in the operating_agreement and the intergovernmental_agreement is imposed development charges will be assessed on the property corporation owns in development such charges are to equal the amount which would be generated by a mill levy against all of the taxable property in the districts the charges to be imposed by the authority however are determined by its board_of directors your memorandum indicates that no payments have been received from corporation under the development agreement prior to issuing the bonds authority obtained a market analysis and revenue projection with respect to the planned golf course and the residential development of the districts the analysis performed by appraiser concluded that projected revenues are expected to be sufficient to pay debt service on the bonds appraiser based its conclusions on the assumption that town will grant required zoning changes in a timely manner the purchase_price for the sale of the property to authority was determined by using the market analysis described above as there has been no development of the property and few if any comparative sales the price was calculated by considering the highest_and_best_use of the property in development this appraisal takes into account cash_flow from the facilities authority expected to construct in contrast to this valuation you indicate that district a acquired l acres within development in year for dollar_figurem per acre at the time of issuance authority had not obtained any of the necessary permits or zoning changes to construct the golf course or other recreational facilities consequently the offering memorandum for the bonds discloses that if those facilities are not completed there will be no revenues for the payment of debt service further the offering memorandum states that if the golf course and recreational facilities are built but the residential development is not completed then the amount of revenues collected by the districts could be insufficient to pay debt service on the bonds your memorandum indicates that town has not approved amendments to any of the districts’ service plans and as recently as year town was not even considering amendments to any service plan no infrastructure construction has begun in development at the present time there are no material contracts with respect to the development of the project moreover substantial additional financing would have to occur to commence construction the credit enhancement as stated the indenture for the bonds provides that the payment of principal and interest on the bonds should be credit enhanced by corporation corporation commenced operation on date for the purpose of providing the credit enhancement on the bonds corporation is a wholly owned subsidiary of corporation individual x is the president of corporation and owns n of corporation under the credit enhancement agreement between corporation and authority corporation guaranteed_payment of the bonds from date until maturity or redemption the indenture provides that all payments of principal and interest on the bonds except for interest for the period prior to date shall be made from the proceeds of draws on the credit enhancement a portion of the bond proceeds funded a debt service reserve fund sufficient to meet debt service payments until the time the credit enhancement became effective upon issuing the bonds the authority paid corporation a dollar_figureo fee for the credit enhancement which amount equals of the bond proceeds corporation turned the fee over to corporation corporation was formed solely to purchase certain loans from its parent company corporation and to issue its real_estate_mortgage_investment_conduit bonds remics corporation is wholly owned by corporation and commenced its operations on date by issuing its class a remic bonds and its class b remic bonds together with the class a remic bonds the remic bonds the remic bonds are payable from notes secured_by lease payments constituting a general obligation of the united_states the proceeds from the class a remic bonds were used to make loans to limited_partnership to construct an office building in city your memorandum indicates that individual x also used the proceeds from the sale of land to the authority to finance construction of the building in city limited_partnership issued notes with respect to the loans received limited_partnership is the owner of the office building corporation holds a interest in limited_partnership individual x and family members own of corporation limited_partnership entered into a year lease of the office building with a united_states agency acting by and through the general services administration the government lease limited_partnership assigned the payments under the lease to corporation as collateral for the construction loans the notes and lease agreement received from limited_partnership provide the security for the remic bonds payments under the government lease begin on date such payments are sufficient to pay principal and interest on the remic bonds in exchange for all its no-par value stock corporation acquired the class b remic bonds from corporation to secure its obligations under the credit enhancement agreement with authority corporation then pledged and delivered to the trustee for the bonds the class b remics a credit rating agency stated that the bonds and the remic bonds are secured ultimately by the u s government’s obligation to make payments under the government lease the coupon rates and maturities on the bonds are similar to the those on the class b remic bonds the offering memorandum for the bonds provides that it is a condition to issuance of the bonds that counsel for the united_states render an opinion that the obligation under the lease constitutes an absolute and unconditional obligation of the united_states in the event any payments that are due under the lease are not made limited_partnership or the trustee would be entitled in the opinion of counsel for the government to enforce the payment obligations of the united_states in accordance with the terms of the lease finally from date all payments of principal and interest on the bonds has apparently been made from draws on the credit enhancement authority is required to reimburse corporation for amounts paid under the credit enhancement agreement but has currently not done so as it has no source of revenues law and analysis revrul_94_42 sec_103 of the sec_1 provides that gross_income does not include interest on any state_or_local_bond sec_1_103-1 provides that interest on obligations of a state territory a possession_of_the_united_states the district of columbia or any political_subdivision thereof is not includable in gross_income except as otherwise provided the exclusion_from_gross_income of interest on obligations of states and political subdivisions thereof is not all-embracing and applies only where consistent with the purposes of sec_103 see 65_f2d_575 2d cir an overriding purpose of sec_103 is to enable state and local governments to borrow at subsidized interest rates to carry out governmental purposes revrul_94_42 1994_2_cb_15 further revrul_94_42 provides that amounts paid_or_accrued under an agreement guaranteeing payment on bonds is not excludable from gross_income under sec_103 if the agreement is not incidental or is in substance a separate debt_instrument or similar investment when purchased an agreement is considered as both incidental and not a separate debt_instrument or similar investment only if at the time it is purchased the amount_paid to obtain the agreement is reasonable customary and consistent with the reasonable expectation that the issuer of the bonds rather than the insurer will pay debt service on the bonds in revrul_94_42 a county issued zero coupon bonds having a year maturity and a stated redemption price of dollar_figurex the bonds were payable solely from the revenues of the facility acquired with the bonds at the time of issuance there was significant risk that revenues from the facility would be insufficient to pay debt service in an unrelated transaction m the sole holder of the bonds entered into an agreement with g under the agreement m paid g 14x in exchange for g guaranteeing the payment of all scheduled debt service on the bonds to m or any subsequent holders g then purchased 14x of u s treasuries in connection with its agreement with m the treasuries had a yield of the treasuries were transferred to a_trust to secure the payment of the bonds the principal and references to the internal_revenue_code are to the 1986_code unless otherwise stated_interest on the treasuries will be sufficient to pay off all debt service on the bonds g is unrelated to either the county or m the agreement with g allowed m to obtain the highest rating for the bonds from a national rating agency m then sold the bonds to the general_public for a price of dollar_figurex giving the purchasers an annual yield of approximately revrul_94_42 held that treating amounts paid_or_accrued under the g agreement as excludable from gross_income would be inconsistent with the purposes of sec_103 amounts paid_or_accrued under an agreement guaranteeing payment on bonds is not excludable from gross_income under sec_103 if the agreement is not incidental or is in substance a separate debt_instrument or similar investment when purchased id while the facts of the instant case do not fit squarely within those described in revrul_94_42 the information provided calls into question the economic_substance of this transaction it is axiomatic that the economic_substance of a transaction rather than its form governs for tax purposes 293_us_465 the characterization of a transaction by the parties is not determinative for federal tax purposes 469_us_131 first it is questionable whether any of the parties to this transaction expected authority to generate sufficient revenues to pay the required debt service on the bonds to this day there is doubt regarding the economic viability of the development as construction has yet to commence the market analysis prepared by appraiser concluded that the proposed golf course would generate sufficient revenues to pay debt service but at the time it was prepared the districts had yet to obtain the necessary approval from town to even begin infrastructure development from the information provided it appears that there is still no clear plan for beginning_construction further it is acknowledged that additional financing would be required to proceed with any development as the proceeds from the bonds merely provided for the acquisition of the real_property although authority entered into a number of agreements with the districts providing for an alternative source of revenues those agreements were also contingent upon the parties obtaining approval from the local_government a process which apparently has not been started accordingly given the number of contingencies that would have to occur before authority earned any revenues there is a valid argument that the parties did not reasonably expect authority to pay the debt service on the bonds in addition the facts suggest that the credit enhancement agreement was not merely incidental to the bonds but in substance a separate debt_instrument to which bondholders would look for the payment of debt service the remic bonds were issued by corporation ostensibly to provide financing for the construction of the office building in city the remic bonds are backed by the payments due under the government lease while the class a remic bond proceeds were apparently loaned to limited_partnership the class b remic bonds were obtained by corporation and pledged to secure the credit enhancement agreement with authority since it appears unlikely that authority will have sufficient revenues to pay debt service on the bonds the credit enhancement agreement ultimately secured_by the government lease is arguably separate from rather than incidental to the bonds based on the facts provided there is a strong argument that the parties expected the credit enhancement agreement rather than authority to pay debt service on the bonds the credit enhancement agreement secured_by the class b remics appears to be a separate debt_instrument rather than incidental to the bonds accordingly the transaction was arguably structured in a manner that is inconsistent with the purposes of sec_103 see rev_rul federal guarantee sec_103 of the internal_revenue_code provides that gross_income does not include interest on certain state_or_local_bonds sec_149 however provides that sec_103 does not apply to a state_or_local_bond that is federally guaranteed sec_149 provides that a bond is federally guaranteed if i the payment of debt service on the bond is guaranteed in whole or in part by the united_states or any agency_or_instrumentality thereof ii percent or more of the proceeds of the issue of which the bond is a part is to be used to make loans the payment of which is to be guaranteed in whole or in part by the united_states or any agency_or_instrumentality thereof or is to be directly or indirectly invested in federally insured deposits or accounts or iii the payment of debt service on the bond is otherwise indirectly guaranteed in whole or in part by the united_states or any agency_or_instrumentality thereof the prohibition under sec_149 applies not only to direct guarantees but also in circumstances where an underlying arrangement may result in the federal government indirectly guaranteeing debt service on an obligation congress intended that the determination of whether a federal guarantee exists be based on the underlying economic_substance of a transaction taking into account all facts and circumstances see h_r rep no pincite the legislative_history to sec_149 suggests that an indirect federal guarantee may arise where the federal government contracts to purchase the output of a bond-financed facility id similarly where the federal government leases property there may be an indirect guarantee by the united_states in the instant case no facts have been developed that would evidence a direct guarantee by the federal government the current question rather is whether the payments received under the government lease that ultimately secure the credit enhancement agreement create an indirect federal guarantee of the bonds as discussed we concur there is a question as to whether authority expected to have sufficient revenues to pay debt service on the bonds the indenture specifically states that all payments of principal and interest on the bonds except for interest for the period prior to date shall be made from draws on the credit enhancement it is beyond dispute that the credit enhancement agreement is secured_by the payments under the government lease moreover the offering memorandum for the bonds provides that it is a condition for issuance of the bonds that counsel for the united_states render an opinion that the obligation to pay rent under the lease constitutes an absolute and unconditional obligation of the government in the event any payments that are due under the lease are not made limited_partnership or the trustee would be entitled to enforce the payment obligations of the united_states in accordance with the terms of the lease the legislative_history to sec_149 specifically states that payments under a governmental lease may constitute an indirect guarantee from the facts provided it appears that the bonds are indirectly guaranteed by the federal government the issuance of the bonds was apparently conditioned on the parties obtaining an opinion from government counsel that the government lease was an unconditional obligation of the federal government this may be a contractual obligation of the federal government of the type described in the legislative_history before making a final_determination with respect to this matter we request that you provide us with a copy of the lease in question so that we may examine the terms anti-abuse sec_1_148-10 generally provides that bonds of an issue are arbitrage_bonds under sec_148 if an abusive arbitrage device is used in connection with the issue furthermore sec_1_148-10 provides that paragraph a of sec_1_148-10 is to be applied and interpreted broadly to carry out the purposes of sec_148 as further described in sec_1_148-0 of the regulations sec_1_148-10 generally defines abusive arbitrage device as any_action that has the effect of i enabling the issuer to exploit the difference between tax-exempt and taxable interest rates to obtain a material financial advantage and ii overburdening the tax-exempt_bond market sec_1_148-10 generally provides that an action overburdens the tax-exempt_bond market if it results in issuing more bonds issuing bonds earlier or allowing bonds to remain outstanding longer than is otherwise reasonably necessary to accomplish the governmental purpose of the bonds based on all the facts and circumstances factors evidencing an overissuance include the issuance of an issue the proceeds of which are reasonably expected to exceed by more than a minor portion as defined in sec_148 the amount necessary to accomplish the governmental purposes of the issue or an issue the proceeds of which are in fact substantially in excess of the amount of sale proceeds allocated to expenditures_for the governmental purposes of the issue from the facts provided there is a potential argument that the bonds overburden the tax-exempt_bond market since formation of the districts approximately dollar_figurep of bonds have been issued on a tax-exempt basis without any resulting development substantial additional financing would be required to even begin the required infrastructure improvements in development at the time the bonds were issued the permits and zoning changes necessary to begin construction had not been obtained as a result there is a valid question as to whether authority expected to have sufficient revenues to pay debt service on the bonds the doubt surrounding the economic viability of the development raises the question as to whether there was a legitimate governmental purpose behind the issuance of the bonds and whether more tax-exempt_bonds were issued than necessary however an argument that an issuance of bonds constitutes an abusive arbitrage device is highly dependent on the facts and circumstances to successfully argue that the bonds overburdened the market it would be necessary to challenge the validity of the property appraisal and market analysis performed by appraiser although the facts indicate that the appraiser’s report was at the very least overly optimistic there is insufficient information to prove it was flawed at the time it was prepared accordingly we recommend additional development before asserting this argument case development hazards and other considerations based on the available facts we concur that the transaction in question appears inconsistent with the intent of sec_103 the troubled financial history of the development the questions concerning the fair_market_value of the underlying real_estate the relationship between the parties and the amount of bonds issued all provide evidence that the transaction was structured so that the credit enhancement agreement would pay debt service on the bonds rather than authority such evidence would support the argument that the principles stated in revrul_94_42 are applicable and interest on the bonds is not tax-exempt further there is a strong argument that the payments under the government lease create an indirect federal guarantee proscribed by sec_149 evidence supporting this argument includes the offering memorandum providing that the issuance was contingent upon obtaining a legal opinion that the lease arrangement was a valid obligation of the united_states and the fact that the indenture provides that all debt service after date is paid from by the credit enhancement agreement which in turn is secured_by the lease payments arguing that the bonds violate sec_103 because the debt service is expected to be paid_by the credit enhancement agreement is not only fact sensitive but requires reliance on a revenue_ruling that has not been tested in any jurisdiction similarly there is virtually no published guidance or judicial authority regarding what constitutes an indirect federal guarantee your memorandum also indicates that purchasers of the bonds were to exchange the bonds pursuant to an exchange_offer from the information available however we are unable to ascertain the details of this arrangement to properly address the issues in this case we believe it is necessary to develop this point finally it may be helpful to have our legal position supported by technical_advice we are willing to provide any additional assistance you may require in preparing this case for a request for technical request please call if you have any further questions by joel e helke joel e helke branch chief financial institutions products cc


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division mar uniform issue list legend taxpayer a irab irac account d trust e financial_institution f financial_institution g financial_institution h amount dear this is in response to your request dated date as supplemented by correspondence dated date in which you request through your authorized representative a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a represents that he received a distribution equal to amount from ira b an annuity_contract described under sec_408 of the code which was maintained by financial_institution f taxpayer a asserts that his failure to accomplish a rollover of amount within the 60-day period prescribed by d a was due to a combination of factors including caring for his terminally-ill wife grieving her loss after her death being provided with confusing distribution forms and relying on financial_institution g to effectuate the rollover taxpayer a wa sec_77 years old on the date of the distribution on date taxpayer a purchased an ira annuity_contract ira b the initial guarantee period for ira b was years in taxpayer a received correspondence from financial_institution f informing taxpayer a that ira was scheduled to mature on date as with previous iras taxpayer a planned to roll over the cash_surrender_value of ira b by direct transfer into ira c an individual_retirement_account under sec_408 of the code which was maintained by financial_institution g financial_institution g had been taxpayer a's investment_advisor for over years taxpayer a maintained his retirement account ira c and a non-ira account account d with financial_institution g account dis a non-ira account held within trust e a revocable_living_trust established by taxpayer a and his spouse taxpayer a and his spouse were the grantors and co-trustees of trust e in correspondence dated date financial_institution f informed taxpayer a that if he did not act by date ira would automatically renew at a substantially lower rate in early may while taxpayer a was waiting for further instructions from financial_institution f regarding how to effectuate a rollover of the proceeds from ira to ira c taxpayer a's spouse of years was diagnosed with a terminal illness after her diagnosis taxpayer a began caring for his wife at home prior to her move to hospice care during the latter part of may taxpayer a received the surrender request form sent by financial_institution f taxpayer a was confused by the form which did not specifically provide a rollover option taxpayer a distraught over his wife's condition and preoccupied with her care completed the form by identifying account d a non-ira account as the account into which the proceeds from ira b should be deposited taxpayer a mailed the surrender request form back to financial_institution f on date on date taxpayer a's spouse died on date financial_institution f wired amount to non-ira account d you represent that under state law and the terms of trust e taxpayer a is the surviving grantor and sole trustee and has full ownership and control_over the assets in non-ira account d on date a date within the 60-day rollover period taxpayer a completed a beneficiary distribution form received from financial_institution g regarding the disposition of his deceased wife's ira maintained by financial_institution g taxpayer a indicated on the form that the assets in her ira should be rolled over to ira c at this time taxpayer a did not follow up with financial_institution g to confirm that the distribution of amount from ira b had been rolled over into ira c because taxpayer a assumed that financial_institution g had properly handled his financial affairs and that amount had been rolled over into ira c taxpayer a represents that amount has not been used for any other purpose based on the above facts and representations taxpayer a requests that the service waive the 60-day rollover requirement with respect to the distribution of amount from ira band that taxpayer a be given a period of days from the issuance of a private_letter_ruling to roll over amount into an ira sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 sec_408 of the code provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money or any other_property is paid into an ira for the benefit of such individual not later than the 60th day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 d does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 d a i from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 d do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary_of_the_treasury may waive the 60-day requirement under sec_408 and sec_408 where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 d revproc_2003_16 i r s date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuantto sec_408 of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information and documentation submitted by taxpayer a are consistent with his assertion that the failure to accomplish a rollover of amount within the day period prescribed by d a of the code was due to a combination of factors including caring for his terminally-ill wife grieving her loss after her death being provided with confusing distribution forms and relying on financial_institution g to effectuate the rollover therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount from ira b taxpayer a is granted a period of days from the issuance of this ruling letter to contribute amount into an ira account provided all other requirements of sec_408 d except the 60-day requirement are met with respect to such contributions amount will be considered a rollover_contribution within the meaning of sec_408 this ruling does not authorize the rollover of amounts that are required to be distributed by sec_408 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_611 o k of the code 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_ruling is being sent to your authorized representative if you wish to inquire about this ruling please contact at please address all correspondence to se t ep ra t1 sincerely yours r a-- vv -r1 t-- ' carlton a watkins manager employee_plans technical group enclosures notice of intention to disclose deleted copy of this letter cc


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc corp - plr-127299-00 date date legend purchaser target target target country a date date date date date year sellers x plr-127299-00 tax representative company officials tax professionals dear this letter responds to your request dated date requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations on behalf of purchaser and sellers to make an election specifically purchaser and sellers want to make a sec_338 election under sec_338 and sec_338 of the internal_revenue_code and sec_1_338_h_10_-1 of the income_tax regulations the election with respect to purchaser’s purchase of target stock on date all citations in this letter to regulations under sec_338 are to regulations in effect on date additional information regarding the request was received in letters dated date date and date the material information submitted is summarized below purchaser is a country a corporation formed in year for the purpose of acquiring stock of target target and target together the targets purchaser uses the accrual_method of accounting and is treated as a controlled_foreign_corporation under sec_957 of the code prior to their acquisitions targets were s_corporations for federal_income_tax purposes and were owned by sellers individuals and grantor trusts treated for federal tax purposes as owned by individuals targets used the accrual_method of accounting on date purchaser acquired x of each of the targets’ stock from sellers for cash in a taxable transaction on date target and target were merged into target it is represented that purchaser was not related to sellers within the meaning of sec_338 and purchaser’s acquisition of the stock of each of the targets qualified as a qualified_stock_purchase as defined in sec_338 purchaser and sellers intended to file the election which was due on date however for various reasons the election was not filed on date after the due_date of the election purchaser and sellers discovered that the election was not filed and decided that a petition for relief under sec_301 was appropriate on date tax representative was engaged to assist in the preparation of the request which was filed shortly thereafter the period of limitations on assessment under sec_6501 has not expired for purchaser’s target 3's or its successor’s or any of the sellers’ taxable years in which the acquisition occurred the taxable years in which the election should have been filed or any taxable years that would have been affected by the election had plr-127299-00 it been timely filed sec_338 permits certain stock purchases to be treated as asset acquisitions if the purchasing_corporation makes or is treated as having made a sec_338 election or a sec_338 election and the acquisition is a qualified_stock_purchase sec_1_338_h_10_-1 provides that if a sec_338 election is made for target a sec_338 election is deemed made for target sec_338 defines a qualified_stock_purchase as any transaction or series of transactions in which stock meeting the requirements of sec_1504 of corporation is acquired by another corporation by purchase during the 12-month_acquisition_period sec_338 provides that the term purchase means any acquisition of stock but only if i the basis of the stock in the hands of the purchasing_corporation is not determined in whole or in part by reference to the adjusted_basis of such stock in the hands of the person from whom acquired or under sec_1014 relating to property_acquired_from_a_decedent ii the stock is not acquired in an exchange to which sec_351 sec_354 sec_355 or sec_356 applies and is not acquired in any other transaction described in regulations in which the transferor does not recognize the entire amount of the gain_or_loss realized on the transaction and iii the stock is not acquired from a person the ownership of whose stock would under sec_318 other than paragraph thereof be attributed to the person acquiring such stock sec_338 permits the purchasing and selling corporations to elect jointly to treat the target_corporation as deemed to sell all of its assets and distribute the proceeds in complete_liquidation the sale of stock included in the qualified_stock_purchase generally is ignored a sec_338 election may be made for target only if it is a member of a selling_consolidated_group a member of a selling affiliated_group filing separate returns or an s_corporation sec_1_338_h_10_-1 gain_or_loss on the deemed sale is included in the consolidated_return of the selling group unless the target_corporation is a member of a selling affiliated_group filing separate returns or an s_corporation sec_1_338_h_10_-1 provides that a sec_338 election may be made for the target_corporation if the purchasing_corporation makes a qualified_stock_purchase of the target_corporation stock sec_1_338_h_10_-1 provides that if a sec_338 election is made for the target_corporation it is irrevocable sec_1_338_h_10_-1 provides that a sec_338 election is jointly made by a purchaser and the selling_consolidated_group or selling affiliate or s_corporation shareholders on form_8023 in accordance with the instructions to the form the regulations further provide that the election must be made not later than the 15th day of the ninth month beginning after the month in which the acquisition occurs the instructions to form_8023 provide that a sec_338 election must be made jointly by the purchasing_corporation and the common parent of the selling_consolidated_group or selling affiliate or s_corporation shareholders the instructions provide that the form must be signed by a person authorized to act on behalf of each corporation and if plr-127299-00 made for an s_corporation it must be signed by each s_corporation shareholder who sells target stock in the qualified_stock_purchase the instructions further provide that the signatures dates and titles if applicable of those persons must be provided in a signature attachment and they provide specific details as to the preparation of the signature attachment and its attachment to form_8023 sec_1_338-1 provides that the united_states_shareholders as defined in sec_951 of a foreign purchasing_corporation that is a controlled_foreign_corporation as defined in sec_957 taking into account sec_953 may file a statement of sec_338 election on behalf of the purchasing_corporation if the purchasing_corporation is not required under sec_1_6012-2 other than sec_1_6012-2 to file a united_states income_tax return for its taxable_year that includes the acquisition_date form_8023 must be filed as described in the form and its instructions and also must be attached to form_5471 filed with respect to the purchasing_corporation by each united_states_shareholder for the purchasing_corporation under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1_338_h_10_-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for purchaser and sellers to file the election provided purchaser and sellers show they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by purchaser target company officials and tax professionals explain the circumstances that resulted in the failure to timely file a valid election the information establishes that competent tax professionals were responsible for the election and were aware of all relevant facts the information also establishes that company officials purchaser and sellers relied on the tax professionals to make the election and that the interests of the government plr-127299-00 will not be prejudiced if relief is granted see sec_301_9100-3 based on the facts and information submitted including the representations made we conclude that purchaser and sellers have shown they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-1 until days from the date_of_issuance of this letter for purchaser and sellers to file the election with respect to the acquisition of the stock of target as described above the above extension of time is conditioned on the filing within days of the issuance of this letter of all returns and amended returns if any necessary to report the transaction in accordance with the election and the taxpayers' purchaser’s target 3's or its successor’s and sellers’ tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers’ tax_liability for the years involved a determination thereof will be made by the applicable director’s office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers’ tax_liability is lower sec_301_9100-3 purchaser and sellers must file the election in accordance with sec_1_338_h_10_-1 that is a new election on form_8023 must be executed on or after the date of this letter which grants an extension and filed in accordance with the instructions to the form a copy of this letter must be attached to the election form purchaser and sellers must file or amend as applicable their returns to report the transaction as a sec_338 transaction for the taxable_year in which the transaction was consummated and for any other affected_taxable_year and to attach to the returns a copy of this letter and a copy of the election we express no opinion as to whether the acquisition sale of the target stock qualifies as a qualified_stock_purchase under sec_338 whether the acquisition sale of target stock qualifies for sec_338 treatment or if sec_338 is applicable the amount and character of gain_or_loss if any recognized on target 3's deemed asset sales and deemed liquidation or the amount of the deemed sale gain if any the s shareholders will take into account under sec_1366 and sec_1367 or the amount if any of gain_or_loss recognized by the s shareholders as a result of the deemed liquidation under sec_331 see sec_1_338_h_10_-1 in addition we express no opinion as to the tax consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling for purposes of plr-127299-00 granting relief under sec_301_9100-1 we relied on certain statements and representations made by the taxpayers however the director should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-1 to file the election penalties and interest that would otherwise be applicable if any continue to apply purchaser must provide each of the sellers with a copy of this letter this letter is directed only to the taxpayer s who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours associate chief_counsel corporate by mark s jennings chief cc corp


internal_revenue_service number release date index number department of the treasury washington dc in re person to contact telephone number refer reply to cc psi 9-plr-144486-02 date date legend trusts trust trust primary beneficiary trust primary beneficiary trust trustor spouse settlors date date company state year dear this is in response to your letter dated date requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations and sec_2642 of the internal_revenue_code to make allocations of trustor’s generation-skipping_transfer gst tax exemption to transfers made to irrevocable trusts plr-144486-02 a summary of the facts and representations submitted is as follows on date trustor and spouse settlors formed two trusts trust and trust one for the benefit of each of their children and their children’s spouses and descendants article i i and of each trust provide that during the life of the settlors’ child for whom the trust was established the primary beneficiary trustee shall pay income and principal to the primary beneficiary and his or her issue to provide for their health education support and maintenance article i sec_1 provides that trustee shall pay as much of the trust’s principal to the primary beneficiary’s spouse issue and the spouses of the issue as requested in writing by the primary beneficiary article i sec_1 provides the primary beneficiary with a testamentary limited_power_of_appointment to appoint the remaining trust estate among the primary beneficiary’s spouse issue and the spouses of the issue article i sec_1 provides the primary beneficiary with a testamentary general_power_of_appointment over any portion of the trust estate that is not exempt from the gst tax article i sec_1 provides that any portion of the trust estate not appointed under the provisions of article i sec_1 and is to be held in a single trust until the later of the death of the primary beneficiary’s spouse or the date the primary beneficiary’s youngest then living child attains age during this period the trustee shall pay income and principal to the primary beneficiary’s spouse issue and the issue’s spouses to provide for their health education support and maintenance article i sec_1 provides that upon the later of the primary beneficiary’s spouse’s death or the date the primary beneficiary’s youngest then living child attaining age the trust estate shall be divided into as many equal shares as there are then living children of the primary beneficiary and deceased children of the primary beneficiary leaving issue article i sec_1 a provides that the trustee of a_trust held for the benefit of the primary beneficiary’s then living child or the then living issue of a deceased child beneficiary shall pay the beneficiary thereof income and principal deemed necessary to provide for his or her health education support and maintenance article i sec_1 b provides that the trustee shall distribute so much of the principal from the beneficiary’s trust to the beneficiary’s spouse issue and spouses of the issue as the beneficiary shall request in writing article i sec_1 c provides the beneficiary with a testamentary limited_power_of_appointment to appoint the trust estate among the beneficiary’s spouse issue and the spouses of the issue article i sec_1 d provides that if the beneficiary dies before his or her trust terminates the balance of the trust shall be divided equally by right of representation and held as separate trusts for the benefit of his or her surviving issue by right of representation if any if none the balance of the trust shall be divided equally by right of representation and distributed to the trusts established for his or her surviving siblings and the issue of plr-144486-02 any deceased siblings if any if none the balance of the trust shall be divided equally by right of representation and distributed to the trusts established for the primary beneficiary’s surviving issue article i sec_1 provides that the trust shall terminate at the earlier of the death of the last survivor of the settlors’ issue or years after the death of the last survivor of the settlors’ descendants who were living on date article i sec_1 provides that if any issue of the primary beneficiary are living when the trust terminates the trust estate shall be distributed outright to the issue by right of representation article i sec_1 provides that upon the termination of the trust if no issue of the primary beneficiary are living the trustee shall distribute the trust estate outright to the then living issue of the primary beneficiary’s siblings by right of representation on date settlors each transferred shares of stock in company to each trust settlors retained an accounting firm to prepare each of their united_states gift and generation-skipping_transfer_tax returns form sec_709 reporting these transfers settlors each elected under sec_2513 to treat their gifts to the trusts as having been made one-half by each of them the accounting firm mistakenly failed to allocate settlors’ gst exemptions to the assets transferred to each trust on the form sec_709 further a notice of allocation was not attached to the form sec_709 during year settlors’ attorney discovered the failure to properly allocate settlors’ gst exemptions to the date transfers it has been represented that trustor has not made any transfers to trusts or skip persons to which trustor’s gst_exemption was or was required to be applied trustor has requested an extension of time under sec_2642 and sec_301_9100-3 to make a late gst_exemption allocation to the date transfers to the trusts and that such allocation will be based on the value of the property transferred to the trusts on date law and analysis sec_2601 imposes a tax on every generation-skipping_transfer gst a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip plr-144486-02 sec_2631 as in effect for the year involved provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under sec_2631 which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides that an allocation of gst_exemption to property transferred during the transferor’s lifetime other than in a direct_skip is made on form_709 sec_2642 provided that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer or is deemed to be made under sec_2632 or c - a the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period its value at the time of the close of the estate_tax_inclusion_period and b such allocation shall be effective on and after the date of such transfer or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period on and after the close of such estate_tax_inclusion_period sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment sec_2642 provides that in determining whether to grant relief the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant sec_2642 further provides that for purposes of determining whether to grant relief the time for making the allocation shall be treated as if not expressly prescribed by statute notice_2001_50 2001_34_irb_189 provides that under sec_2624 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a generation-skipping_trust are to be treated as if not expressly prescribed by statute plr-144486-02 the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a notice published in the internal_revenue_bulletin in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 under the provisions of sec_301_9100-3 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish 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 sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore trustor is granted an extension of time of sixty days from the date of this letter to allocate trustor’s available gst_exemption to the date transfers to the trusts the allocations once made will be effective as of date the date of the transfers to the trusts the value of the assets transferred to the trusts on date will be used in determining the amount of the trustor’s gst_exemption to be allocated to the transfers the allocation for trustor should be made on a separate supplemental form_709 for the date year and filed with the internal_revenue_service center cincinnati ohio a copy of this letter should be attached to the supplemental form_709 a copy is enclosed for this purpose 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 plr-144486-02 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 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 the taxpayers sincerely heather c maloy heather c maloy associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes