internal_revenue_service number release date index number ------------------------------------- ----------------------------------------------- -------------------------------- ---------------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------------ telephone number ---------------------- refer reply to cc psi plr-122434-15 date november legend decedent ------------------------------------------------------ ------------------------ spouse ------------------------------------------------------ ----------------------------- date date -------------------------- --------------------------- dear -------------------- this letter responds to your personal representative’s letter of date and subsequent correspondence requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election under sec_2010 of the internal_revenue_code code portability election to allow a decedent’s surviving_spouse to take into account that decedent’s deceased spousal unused exclusion dsue amount the facts and representations submitted are as follows decedent died on date survived by spouse date is a date after the effective date of the amendment to sec_2010 which provides for portability of a dsue amount to a surviving_spouse to obtain the benefit of portability of decedent’s dsue amount to spouse decedent’s estate was required to file form_706 united_states estate and generation-skipping_transfer_tax return on or before the date that is nine months after decedent’s date of death or the last day of the period covered by an extension plr-122434-15 decedent’s form_706 was due on date the estate discovered its failure to elect portability after the due_date for making the election decedent’s estate represents that the value of decedent’s gross_estate is less than the basic exclusion amount in the year of the decedent’s death and that during her lifetime decedent made no taxable_gifts decedent’s estate requests an extension of time pursuant to sec_301_9100-3 to elect portability of decedent’s dsue amount pursuant to sec_2010 law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2010 provides that a credit of the applicable credit_amount shall be allowed to the estate of every decedent against the tax imposed by sec_2001 sec_2010 provides that the applicable credit_amount is the amount of the tentative_tax that would be determined under sec_2001 if the amount with respect to which such tentative_tax is to be computed were equal to the applicable_exclusion_amount on date congress amended sec_2010 effective for estates of decedents dying and gifts made after date to allow portability of a decedent’s unused applicable_exclusion_amount between spouses tax relief unemployment insurance reauthorization and job creation act of pub_l_no sec_303 124_stat_3296 sec_2010 provides that the applicable_exclusion_amount is the sum of the basic exclusion amount and in the case of a surviving_spouse the dsue amount sec_2010 generally provides that the basic exclusion amount is dollar_figure to be adjusted for inflation annually after calendar_year sec_2010 defines the dsue amount to mean the lesser_of a the basic exclusion amount or b the excess of -- i the applicable_exclusion_amount of the last deceased spouse of the surviving_spouse over ii the amount with respect to which the tentative_tax is determined under sec_2001 on the estate of such deceased spouse sec_2010 provides that a dsue amount may not be taken into account by a surviving_spouse under sec_2010 unless the executor of the estate of the deceased spouse files an estate_tax_return on which such amount is computed and makes an election on such return that such amount may be so taken into account the election plr-122434-15 once made shall be irrevocable no election may be made if such return is filed after the time prescribed by law including extensions for filing such return sec_2010 provides that the secretary shall prescribe regulations as may be necessary or appropriate to implement sec_2010 sec_20_2010-2t a of the estate_tax regulations as in effect on date provides that to allow a decedent’s surviving_spouse to take into account that decedent’s dsue amount the executor of the decedent’s estate must elect portability of the dsue amount on a timely-filed form_706 under sec_20_2010-2t a the due_date of an estate_tax_return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been granted under sec_20_2010-2t a the portability election is made by timely filing a complete and properly prepared estate_tax_return unless the executor satisfies the requirements for the election not to apply in sec_20_2010-2t a i sec_301_9100-1 provides that the commissioner may 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 six months except in the case of taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that the term statutory election means an election whose due_date is prescribed by statute the term regulatory election means 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_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute a request for relief under sec_301_9100-3 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 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 the due_date for the portability election is prescribed by statute in the case of an estate required to file an estate_tax_return under sec_6018 see sec_2010 sec_6075 plr-122434-15 and a in the case of an estate that is not required to file an estate_tax_return under sec_6018 the due_date is prescribed by regulation see sec_20_2010-2t a see also sec_20_2010-2 and revproc_2014_18 2014_7_irb_513 sec_2 accordingly in the latter case a taxpayer may seek an extension of time to elect portability under the provisions of sec_301_9100-3 sec_6018 requires the filing of an estate_tax_return in all cases where the gross_estate exceeds the basic exclusion amount in effect under sec_2010 for the calendar_year which includes the date of death for purposes of this determination under sec_6018 the basic exclusion amount is reduced but not below zero by the sum of -- a the amount of the adjusted_taxable_gifts within the meaning of sec_2001 made by the decedent after date plus b the aggregate amount allowed as a specific exemption under sec_2521 as in effect before its repeal by the tax reform act of with respect to gifts made by the decedent after date decedent’s estate represents that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is not required to file an estate_tax_return under sec_6018 under these facts the commissioner has discretionary authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly we grant an extension of time of days from the date of this letter in which to elect portability under sec_2010 the election should be made by filing a complete and properly-prepared form_706 and a copy of this letter within days from the date of this letter to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center stop cincinnati oh for purposes of electing portability a form_706 filed by decedent’s estate within days from the date of this letter will be considered to be timely filed 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 if it is later determined that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is required to file an estate_tax_return pursuant to sec_6018 the commissioner is without authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-122434-15 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely associate chief_counsel passthroughs special industries by karlene m lesho karlene m lesho senior technician reviewer office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


department of the treasury internal_revenue_service washington d c date number release date cc dom fs it a tl-n-6912-99 uilc internal_revenue_service national_office field_service_advice memorandum for district_counsel from assistant chief_counsel field service cc dom fs subject compensation expense deduction 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 company founder year year year year year tl-n-6912-99 year trust foundation option agreement a agreement b firm dollar_figurea dollar_figureb dollar_figurec dollar_figured dollar_figuree dollar_figuref dollar_figureg dollar_figureh dollar_figurej partnership a partnership b issue tl-n-6912-99 under the rules of sec_83 was company entitled to a compensation expense deduction as a result of its executives’ exercise of an option to purchase company shares or was that option earlier converted into a contract obligating the executives to purchase the shares which would have caused the sec_83 event to occur when the executives’ contractual rights became substantially_vested conclusion the restructuring plan and agreement b converted the option into a contract obligating the executives to purchase company shares thus company was not entitled to a compensation expense deduction attributable to the purported exercise of that option facts founder founded company in year and transferred all of his company shares to trust in year initially founder was the sole trustee and sole beneficiary of trust and upon his death trust’s company stock was to be contributed to foundation founder established foundation as a vehicle for continuing company after his death and because he wanted certain company executives who were the trustees of foundation to operate company in the same manner that he had during his lifetime despite those intentions its was also intended that foundation constitute a private charitable foundation four years later founder was advised that if foundation owned the company stock it would not be treated as a private charitable foundation for federal tax purposes as a result in year founder developed a revised plan to maintain company as a unit after his death the pertinent feature of that plan agreement a was the granting of a revocable nonstatutory option option for all of trust’s company stock to senior company executives the option was not exercisable until founder’s death and it expired months thereafter to participate in the option the executive had to be a member of company’s board_of directors at the time of founder’s death when granted the option had no readily_ascertainable_fair_market_value as that term is defined for purposes of sec_83 you have concluded that the executives’ partnership interests discussed below were transferred in_connection_with_the_performance_of_services became substantially_vested in company’s taxable_year ending in year and resulted in compensation expense deductions for that year we agree with those conclusions tl-n-6912-99 a significant feature of agreement a was that the option’s exercise price was to be redetermined annually using the same stock valuation method that had been adopted for company’s employee_stock_ownership_plan esop under that method both marketability and minority-interest discounts were applied thus because exercise of the option would convey a majority ownership_interest in company the executives were effectively afforded an opportunity to purchase control of company at a considerable discount in this regard according to the lawyer who drafted agreement a founder was aware of the discount intended to confer a benefit on the optionees in january of year after founder became incapacitated one of the optionees and an independent_trustee succeeded founder as trustees of trust shortly thereafter it was concluded that the option as then structured created significant problems among those problems were a perceived conflict of interest between the executives’ roles as directors and their roles as optionees and anticipated difficulties in paying the exercise price even with the discount ie as company’s value increased so did the option’s exercise price by june of year firm had developed a restructuring plan two of the objectives of which were allowing the executives to recognize some of the anticipated benefits of the option and providing assurance that it would be exercised additionally the restructuring plan was designed to harmonize a number of the basic principles inherent in the previous arrangement among which were preservation of the executives’ contingent equity interests attributable to the discounted exercise price the executives or the foundation becoming the eventual owners of company founder’s desire to have the executives acquire company at his death and founder’s intent to compensate the executives for their many years_of_service mindful of those objectives and principles company’s board_of directors approved a restructuring plan and agreement b under the plan of company’s executives each formed a separate s_corporation which in turn collectively formed a general_partnership partnership a thereafter company and partnership a formed another general_partnership partnership b and company transferred substantially_all of its assets and liabilities to partnership b in exchange for an 80-percent general_partnership interest in partnership b contemporaneously partnership a was transferred a substantially-nonvested percent general_partnership interest in partnership b one-third of which was to vest annually in each of the subsequent three years in december of year a conforming amendment was made to partnership a’s partnership_agreement under which all interests in partnership a were made substantially-nonvested tl-n-6912-99 in the restructuring plan memorandum explaining the transaction partnership a’s interest in partnership b was described as follows in summary the plan will subject_to certain vesting requirements place an aggregate equity_interest in company’s business collectively in the hands of the remaining optionees the transfer of this equity_interest will be in substitution for the contingent equity_interest which they now hold by virtue of the exercise price discount provided by the option emphasis added in order to complete this substitution the optionees will agree to pay the per share fair_market_value of company when they exercise the option ie the discount in the current exercise price will be eliminated the memorandum described the executives’ rights to the remaining portion of company as follows the option will remain outstanding following consummation of the plan and the optionees will enter into an option exercise agreement agreement b which will commit them to exercise of the option when it becomes exercisable agreement b will be supported by a standby credit facility and by the deposit of the surplus cash received by partnership a from partnership b in an escrow account emphasis added consistent with the above statements agreement b contained the following language in paragraph entitled exercise of company stock_option increase in exercise price a in the event that the stock_option shall become exercisable in accordance with its terms each of the optionees shall in accordance with the terms of the stock_option join in the exercise of the stock_option consistent with the terms of agreement b agreement a which was the stock_option agreement executed by founder before the restructuring was amended to provide as follows the stock_option agreement requires the option to be exercised within months of founder’s death emphasis added tl-n-6912-99 consistent with agreement b’s requirement that the option be exercised agreement b also required that the executives pay liquidated_damages if the option was not exercised specifically paragraph e of agreement b and the escrow agreement provided that the cash held in the escrow account would be returned to company if the option was not exercised additionally subparagraph a of agreement b entitled right of repurchase liquidated_damages provided as follows if the optionees i permit the period during which the stock_option is exercisable to expire without exercising the stock_option or ii prior to the stock option’s becoming exercisable have all ceased to be members of the board_of directors of company whether by death resignation or involuntary termination or otherwise each such circumstance a default then company shall upon the occurrence of such default have a perpetual option the repurchase option exercisable at any time to purchase or cause the partnership to redeem all but not less than all of the partners’ general_partnership interest in the partnership the exercise price of the repurchase option shall be equal to the fair_market_value of such partnership_interest determined as provided below as of the last day of the last full fiscal quarter of the partnership next preceding the date of the exercise notice under the restructuring plan some new requirements were imposed on the executives and on company which included the executives entering into five- year employment contracts with company company’s release from some deferred_compensation obligations to the executives unless an executive’s employment was involuntarily terminated prior to the purchase of company stock and the amendment of company’s esop to provide that company was required to purchase the company shares owned by the esop at their fair_market_value ie without marketability or minority interest discounts and without adjustment for certain special allocations in the partnership b partnership_agreement if there was a bona_fide offer to acquire trust’s company shares company agreed to purchase the esop’s shares at the higher of that offer price or the formula price contained in the revised esop agreement annual valuations of company’s stock would continue the parties implemented the restructuring by forming partnership b agreement b also provided that until the earlier to occur of the exercise or the expiration of the option the executives would cause partnership a to annually tl-n-6912-99 deposit all excess cash to an escrow account excess cash was defined as all cash distributions made by partnership b to partnership a during the fiscal_year in excess of the optionees’ federal state and local_tax liabilities attributable to the operation of partnership b and the income generated by the escrow account the escrow agreement which was between partnership a company the executives and firm containing the escrow account mentioned in the restructuring plan provided that the escrowed funds would be released as follows if prior to the death of founder all of the executives ceased to be members of the board_of directors company would receive the funds if the option was exercised partnership a would control release of the funds if the option expired unexercised company would receive the funds and if partnership a company and trust jointly agreed the funds would be released as so agreed firm was the escrow agent on december of year in anticipation of a proposed change in the tax law that was intended to limit the deductibility of executive compensation company accelerated the full vesting of the executives’ interests in partnership a and partnership a’s 20-percent interest in partnership b as a result the executives included the fair market values of their individual partnership interests in their year gross incomes under the rules of sec_83 in year founder unexpectedly died after founder’s death third parties approached the executives with proposals to purchase company and firm requested and received a right_of_first_refusal enabling it to match one of the offers eventually firm and the executives agreed to a sale of company which included the following terms the three executives would purchase certain company assets that firm did not want for balloon payment notes of dollar_figuref upon exercise of the option firm would purchase the optioned stock from the executives for a total of dollar_figureg which reflected the cancellation of the dollar_figuref in balloon payment notes firm would purchase the three s corporations’ interests in partnership a for an aggregate amount of dollar_figureh and the executives would enter into employment agreements consulting agreements and non-competition agreements with firm tl-n-6912-99 at the time that the restructuring plan was formulated it was assumed that the executives would finance at least part of the shares’ purchase_price and a dollar_figuren shelf note facility was obtained for that purpose however because the purchase and sale of the stock to firm were scheduled to take place at the same time the executives did not need to obtain financing for the purchase close in time to the transactions’ closings firm and the executives revised the acquisition agreement to address certain tax issues one change provided that company would claim a compensation expense deduction attributable to the exercise of the option that would not exceed the difference between firm’s purchase_price for the stock and the option’s exercise price determined by the parties to be the dollar_figureb at issue another change was that firm agreed to in effect gross up the executives by agreeing to pay them percent of its first in tax savings resulting from the deduction any_tax savings exceeding were to be paid percent to the executives and percent to firm analysis under sec_83 if in_connection_with_the_performance_of_services property is transferred to any person other than the service_recipient the excess of the fair_market_value of the property determined on the first day that the transferee's rights in the property are not subject_to a substantial_risk_of_forfeiture over the amount_paid for the property is included in the service provider's gross_income for the taxable_year that includes that day according to sec_83 the service_recipient is allowed a deduction of the amount included in the service provider’s gross_income under sec_83 stated differently property is not taxable under sec_83 until it is transferred to and substantially_vested in the service provider or beneficiary thereof until the property becomes substantially_vested the transferor of the property is considered to be the owner of the property and any income from the property received by the service provider or beneficiary thereof constitutes additional compensation to the service provider for the taxable_year in which it is received see sec_1_83-1 a transfer of property occurs when a person acquires a beneficial_ownership interest in the property disregarding any lapse_restriction as defined in sec_1_83-3 see sec_1_83-3 the grant of an option to purchase property does not constitute a transfer of such property see the first sentence of sec_1_83-3 tl-n-6912-99 as a preliminary matter was the option or the contract transferred in_connection_with_the_performance_of_services sec_1_83-3 provides that property transferred to an employee or an independent_contractor or beneficiary thereof in recognition of the performance or the refraining from performance of services is considered transferred in_connection_with_the_performance_of_services within the meaning of sec_83 the transfer of property is subject_to sec_83 if it is in respect of past present or future services when addressing the intended scope of the term in_connection_with_the_performance_of_services the court in montelepre systemed inc v commissioner tcmemo_1991_46 aff’d 956_f2d_496 5th cir stated as follows by using the term in connection with the plain language of the statute does not require the property to be transferred as compensation_for the performance of services citing alves and macnaughton rather the statute only envisions some sort of relationship between the services performed and the property transferred t c memo at page emphasis added various judicial decisions have developed the required nexus of this relationship and there are essentially four factors that those decisions have considered whether the property right is granted at the time the employee or independent_contractor signs his employment contract whether the property restrictions are linked explicitly to the employee's or independent contractor's tenure with the employing company whether the consideration furnished by the employee or independent_contractor in exchange for the transferred property is services and the employer's intent in transferring the property see 92_tc_612 aff’d 920_f2d_1335 7th cir 806_f2d_169 8th cir aff’g 85_tc_663 and 734_f2d_478 9th cir based on the information submitted it is clear that the option both before and after its revision was transferred in_connection_with_the_performance_of_services in this regard we note that under no circumstances could the option be exercised by an executive who left company prior to its becoming exercisable ie the executives had to perform substantial future services in order to exercise the revised option tl-n-6912-99 was company entitled to a compensation expense deduction as a result of its executives’ exercise of an option or was the option earlier converted into a contract obligating the executives to purchase the shares which caused the sec_83 event to occur when the executives’ contractual rights became substantially_vested sec_83 provides that sec_83 does not apply to the transfer of an option without a readily_ascertainable_fair_market_value in this case were we to conclude that an option was transferred to the executives it would clearly be an option without a readily_ascertainable_fair_market_value because the underlying stock was not traded on any established_securities_market and because the option was not immediately exercisable see sec_1_83-7 and b however for the following reasons we conclude that these rules applicable to options did not apply in the case because upon completion of the restructuring plan the executives’ option was converted into a contract to purchase company and the contract became vested in the executives when they were serving on company’s board at the date of founder’s death thereafter the contract remained an option in name only the term property is not defined in the statute however that term is broadly defined in sec_1_83-3 as including real and personal_property other than either money or an unfunded and unsecured promise to pay money or property in the future clearly under this definition a contract to purchase would be included in the term property although sec_83 and the regulations thereunder do not define the term option for purposes of that section sec_1 a provides a currently useful definition of option that was also applied by the predecessor regulations to sec_83's regulations the term option includes the right or privilege of an individual to purchase stock from a corporation by virtue of an offer of the corporation continuing for a stated period of time whether or not irrevocable to sell such stock at a specified price such individual being under no obligation to purchase such right or privilege when granted must be evidenced in writing the individual who has such right or privilege is referred to as the optionee and the corporation offering to sell stock under such an arrangement is referred to as the optionor while no particular form of words is necessary the written option should express among other things an offer to sell at the option_price tl-n-6912-99 and the period of time during which the offer shall remain open emphasis added in 85_f3d_440 9th cir rev’g tcmemo_1994_45 the court_of_appeals for the ninth circuit considered the issue of whether the service provider was transferred a contract to purchase stock or an option the court held that a binding contract requiring a service provider to purchase a service recipient’s stock is property for purposes of sec_83 and that if such a contract is taxable under the rules of sec_83 then the subsequent purchase of stock pursuant to that contract is not the court found that when the service provider entered into the contract he became personally obligated to purchase the stock as long as the service_recipient completed a reorganization regardless of whether he thought that the stock continued to be an attractive purchase the court noted that the fact that the service provider was obligated to pay the stock’s purchase_price was strong evidence that he had already received property under sec_83 when he made that binding commitment on this point the court states at page moreover the shareholder agreement provided for the number and price of the class b stock the taxpayer would purchase after gsm’s recapitalization not for the stock he could purchase emphasis provided by the court in reaching its conclusions the theophilos court referenced moser v western harness racing association p 2d cal ct app where moser stated that an offer to purchase stock and to accept and pay for it upon specified conditions becomes binding upon the parties when it is accepted by the corporation and the subscriber can thereafter withdraw only upon the failure of the corporation to meet the conditions it also referenced ballantine on corporations sec_193 pincite which states that ordinarily a conditional subscription should be regarded if possible as constituting a present contract with conditions precedent to the duty to pay or to deliver a certificate from which the subscriber cannot withdraw unless the corporation fails in performance of the condition an application of the above-cited authorities to the facts in this case requires us to conclude that the option was converted by the restructuring plan and agreement b into a contract to purchase company shares and that the contract became vested in the executives who remained on company’s board_of directors when founder died five factors lead us to that conclusion first the parties noted that the executives could not afford to exercise the option in its form prior to restructuring and thus devised a plan that would effectively guarantee its exercise second the parties specifically noted in agreement b that the perpetual compensatory element that existed in the initial option was exchanged for the tl-n-6912-99 partnership interests and that thereafter the executives would pay full value for the remainder of company third after revision of the option all of the transaction documents provided that the option would be exercised not that it could be exercised a particular notable fact since unlike the situation in theophilos the purchase_price was to be reduced if the value of company decreased fourth agreement b called for damages to be suffered by the executives if they failed to purchase the stock a provision that is not compatible with an option finally the executives were prepared to purchase the shares using a standby_letter_of_credit in a transaction that would never have been absent a gross up payment treated by them as compensatory we anticipate that company citing to sec_1_83-3 will oppose this conclusion by contending that the transaction continued to be in substance an option after agreement b was executed because the executives’ personal liability was limited under the damages clause sec_1_83-3 provides in part as follows the grant of an option to purchase certain property does not constitute a transfer of such property in addition if the amount_paid for the transfer of property is an indebtedness secured_by the transferred property on which there is no personal liability to pay all or a substantial part of such indebtedness such transaction may be in substance the same as the grant of an option the determination of the substance of the transaction shall be based upon all the facts and circumstances the factors to be taken into account include the type of property involved the extent to which the risk that the property will decline in value has been transferred and the likelihood that the purchase_price will in fact be paid in fact this could be viewed as a stronger case than theophilos for reaching the conclusion that a contract was transferred rather than an option in theophilos the employee agreed to purchase the stock for a fixed price and thereafter until the stock was actually purchased did nothing here after the restructuring a mechanism was put in place to ensure that the stock would in fact be purchased and those damages could have been significant the executives would have been required to sell their partnership interests back to company for a price that would have been determined at least three months prior to the sale and would have forfeited the amount held in escrow which could have been significant if founder had not unexpectedly died tl-n-6912-99 even were we to concede we do not that the damages clause in agreement b was in substance tantamount to a purchase with nonrecourse_financing we believe that other surrounding facts and circumstances indicate that but for firm’s offer there was a transfer of a contract a transfer of a contract occurred because the facts and circumstances in toto indicate that there was a likelihood that the purchase_price would be paid chief among those facts is the type of property involved which was a contract to purchase a controlling_interest in a company that for many years had been the executives’ employer that is even if at the vesting date of the contract the value of company was less than the executives’ purchase_price there would have been a likelihood that the purchase_price would have been paid_by the executives in order to ensure that their future employment was not jeopardized other facts that show a likelihood that the purchase_price would have been paid include as previously mentioned the language of agreement b that required_payment and the restructuring plan which was designed to ensure payment case development hazards and other considerations we think that the facts submitted provide a strong basis for concluding that the revised option was actually a contract even so the service faces some litigation hazards in theophilos the service and the courts had the advantage of having contentious parties before them an employer and an ex-employee each with strong differences of opinion as to how their transaction should be taxed in contrast here because the executives were paid a portion of company’s tax saving it would be against their interests to testify that they were not paid compensation income and they may contend that they were never committed to purchase the stock under the contract the service should however be able to overcome those arguments by referencing the above-cited provisions of the documents by noting that here the executives’ purchase_price increased or decreased dollar for dollar with the changing value of company a fact not present in theophilos and by noting that until firm insisted that the executives include part of firm’s purchase_price as compensation the option as revised had nowhere been characterized as a compensatory transaction example of sec_1_83-3 which interprets sec_1_83-3 notes that the mere existence of nonrecourse_financing does not require the conclusion that property has not been transferred tl-n-6912-99 that company will probably contend as mentioned above that the mere existence of a liquidated_damages clause which relieved the executives of any threat that company could put the stock to them and thereby create a personal debt obligation from them to company requires a conclusion that the option until the closing date always retained the attributes of an option given the fact that there has been little litigation in this area other than the cases discussed above it is difficult to predict how a court will view the liquidated_damages clause on balance it seems that a successful response to the anticipated liquidated_damages argument in addition to that mentioned above would be that under general contract law specific performance of a sales contract is almost never awarded so the fact that company could not have put the stock to the executives does not mean that a contractual requirement to purchase did not exist additionally because general contract law requires that damages be mitigated and that thereafter the only damages available to sellers are lost profits agreement b’s statement that if a default occurs hereunder for any reason the parties hereto agree that the trust and company will suffer damages which are substantial but difficult to ascertain lends credence to the argument that the option was under local law a binding contract to purchase thus in a court’s view the existence of the liquidated_damages clause may serve to bolster the argument that the executives had a contract not an option deborah a butler by clifford m harbourt senior technician reviewer see generally the law of contracts 4th edition calamari perillo sections and tl-n-6912-99 income_tax accounting branch


department of the treasury internal_revenue_service washington d c t date ct c lil f999 pb - contact person id number ope ld-t- telephone number dear sir madam you are requesting a ruling that the reorganization of a adversely affect the tax-exempt or public charity status of j generate any unrelated_business_taxable_income under sec_511 internal_revenue_code mo ’ f will not or c nor of the facts background f is exempt under sec_501 described in sec_509 a j and a are exempt under sec_501 c sec_509 b a iii of the code and a of the code of the code and is f is the sole member of an organization j and a is described in sec_509 is described in and of the code j f conducts programs of education in clinical medicine and medical the clinical c science medical_research and comprehensive medical_care is also the physician practice within f has always been referred to sole member of two local sec_501 hospitals that provide inpatient and related_services sole member of a number of regional health care providers referred to these facilities are know as in addition f is the as as s m f a majority of the members of f's board_of trustees are public trustees consisting of community and civic leaders comprised of physician and administrative individuals from f substantive conflicts of interest policy the balance of the board is f has a presently both j and a are subsidiaries of f consequently the education research and medical practice activities at these sites are conducted in subsidiaries of performed directly in while the activities conducted at_f f c are the proposed reorganization with the growth of j and a operations and the need to coordinate the new parent_corporation will be named f f has adopted restated articles of incorporation and strategic and other planning policies and fundraising across the entire s proposes to reorganize restated bylaws which change its name to c and creates a new parent_corporation the new parent will be referred to become the sole member of new f neither j or a will be required to amend their corporate documents because those documents now provide that f the subsidiary organizations of new f--c corporations consequently j and a--will become brother-sister c will continue to serve as the parent of because the new parent will be named is the sole member to avoid confusion at the same time new f will as new f and c a s j f for technical state law reasons and to implement the transaction on the desired effective date january an amendment operative on the effective date to new f again to avoid confusion o will still be referred to will change the name of back new f has been incorporated as as new f new f simultaneously with this ruling has been recognized as exempt of the code and is other than a private_foundation an organization described in sec_509 a and under sec_501 because it b a vi is of the code as organized new f will be involved in overall strategic planning overall policy development system-wide medical education and medical_research planning capital and operating budgeting capital and resource allocation system-wide fundraising system-wide human resource planning legal compliance system-wide accounting and reporting and oversight of taxable each of the operating organizations that new f entities within the system will be the sole member of will be responsible for implementation of system- wide policies coordination of medical education medical_research and clinical care delivery for the region for which it has accountability new f will be funded primarily by assessments from the operating entities for their allocated portion of system-wide functions cost sharing arrangements and fundraising activities portions of the investment portfolio of new f will also hold and or manage s like a and j c will have a board_of directors which consists of physicians and administrators employed by c responsible for the day-to-day medical education medical_research and clinical operations of their respective organizations member has the following important structural and financial reserved powers over a and c that require its approval or action a’s and j’s boards will be as the sole new f j e e e approval of capital operating research and education budgets and capital expenditures compensation of employed physicians incurrence of debt sale or transfer of assets other than in the ordinary course of business e e election of the members of the board_of directors through its right to amend the bylaws the member may also ultimately remove c directors election of the ceo amendment of articles of incorporation and bylaws in addition new f has the right to approve mergers dissolution and new f has the power to establish policies that must be adopted and major corporate transactions issues the policies followed by the other entities within s including a include human resources employee compensation and benefits risk management labor relations fundraising governmental relations and public affairs cash management and tax-exempt_financing materials management and information systems in connection with major policy j and c finally rulings requested the implementation of the reorganization will not adversely affect c's j's and afs sec_501 status the implementation of the reorganization will not adversely affect or change the status as other than a private_foundation under c and j and sec_509 sec_509 b a iii of the code of of and a the flow of funds or accounting entries between new f and c a reflecting assessments for administrative and other services performed by new f or other exempt affiliated entities within s cost allocations for administrative and other services as distributions of cash without consideration as reorganization or structure of the organizations will not result in unrelated_business_taxable_income to new f the meaning of sec_511 a result of the j and a within of the code c j and as the transfer of assets from c investment funds on behalf of the entire s will not result in unrelated_business_taxable_income to the organization within the meaning of sec_511 to permit new f to manage of the code to new f law and rationale sec_50l a of the code provides an exemption from federal_income_tax for organizations described in sec_501 including organizations that are organized and operated exclusively for charitable educational or scientific purposes sec_1 c -1 d of the income_tax regulations provides that of the code in its generally the term charitable is used in sec_501 accepted legal sense revrul_69_545 1969_2_cb_117 recognizes that the promotion of a charitable purpose within the meaning of sec_501 of the health is code revrul_78_41 1978_1_cb_148 concludes that a_trust created by an exempt hospital for the sole purpose of accumulating and holding funds to be used to satisfy malpractice claims against the hospital is operated exclusively for charitable purposes and is exempt under sec_501 c of the code sec_511 of the code imposes a tax on the unrelated_business_taxable_income of organizations described in sec_50l c sec_512 of the code defines the term unrelated_business_taxable_income as the gross_income derived by any organization from any unrelated_trade_or_business regularly carried on by it computed with the modifications listed in sec_512 less certain allowable deductions sec_512 of the code provides generally that rents_from_real_property and its incidental related personal_property are not unrelated_business_income unless the property is debt-financed under sec_514 code related to the exercise or performance by such organization of its charitable functions debt-financed_property does not include any property substantially of the sec_512 of the code requires that notwithstanding paragraphs property must be included in unrelated_business_taxable_income the net_income realized with respect to debt-financed or sec_512 b of the code exempts from the definition of unrelated_business_taxable_income all gains and losses from the sale exchange or other_disposition of non-inventory items and items not held_for_sale in the ordinary course of business sec_512 of the code limits the exclusion of interest annuities royalties and rents provided by sec_512 where such amounts are derived from a controlled organization and sec_1_512_b_-1 of the regulations provides that if an exempt_organization has control of another organization the controlling_organization shall include as taxable_income the amount of interest annuities royalties and rents derived from the controlled organization determined in accordance with the formula described in sec_512 regulations an item_of_gross_income in computing its unrelated business of the code and sec_1_512_b_-1 of the sec_513 of the code defines unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of the organization for income or funds or the use it makes of the profits derived to the exercise of the organization's exempt purposes or functions - sec_1_513-1 of the regulations provides that a trade_or_business is related to exempt purposes in the relevant sense only where the conduct of business activities has a causal relationship to the achievement of exempt purposes and it substantial one business from which a particular amount of gross_income is derived to substantially related to purposes for which exemption is granted the production or distribution of the goods or performance of the services from which the gross_income is accomplishment of those purposes the regulation states that for the conduct of trade or be is substantially related only if the causal relationship is derived must contribute importantly to the a sec_514 of the code provides for the taxation under sec_512 of of the code income from debt-financed_property sec_514 b a i however provides that the definition of debt-financed_property does not include any property substantially_all the use of which is substantially related to the exercise or performance by such organization of the charitable purposes constituting the basis for its exemption under sec_501 analysis the purposes of j a and c will not change as a result of the proposed reorganization and the corresponding amendments to their respective articles of incorporation and bylaws operate to accomplish its respective exempt purposes under sec_501 of the code organizational structure will adversely affect j's exemption under section of c of the code therefore neither the act of reorganization nor the resulting each of these organizations will continue to a's and c's continued because j and c will continue to receive their support from the same sources after the reorganization the reorganization will not adversely affect their respective classification as non-private foundations a as a parent new f will provide guidance and direction to all of the a affiliated tax-exempt organizations in mechanism for coordinating the activities of all of the affiliates in support of their charitable purposes part of the system within the meaning of rev new f will also serve as new f will be considered an integral rul s in of the code will not be applicable with respect to the the reorganization transfer and related transactions by j and new f will not adversely affect their exempt status because the transferred assets the tax on unrelated_business_income will be put to the same charitable uses imposed by sec_511 transactions among the tax-exempt affiliated organizations of sec_513 business any trade_or_business which contributes importantly to the accomplishment of transfers and provisions of services among the affiliated tax exempt entities within dollar_figure will contribute to their mission of health care in the community therefore the reorganization and transactions described above will not result of the code for jd in unrelated_business_income under sec_511 through a of the code excludes from the definition of unrelated trade or an organization's exempt_purpose the proposed asset c and new f s because a conclusion accordingly based on all the facts and circumstances described above we rule as follows the implementation of the reorganization will not adversely affect c’s j's and a’s sec_501 status the implementation of the reorganization will not adversely affect or change the status as other than a private_foundation under sec_509 b a iii c and j and sec_509 of the code of of a and the flow of funds or accounting entries between new f and c reflecting assessments for administrative and other services performed by new f or other exempt affiliated entities within s allocations for administrative and other services as distributions of cash without consideration as structure of the organizations will not result in unrelated business a result of the reorganization or as cost j and a ssi taxable_income to new f the code c j and a within the meaning of sec_511 of the transfer of assets from c to new f to permit new f to manage investment funds on behalf of the entire s will not result in unrelated_business_taxable_income to the organization within the meaning of sec_511 of the code these rulings do not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described these rulings are directed only to the organizations that requested of the code provides that they may not be used or them cited as precedent sec_6110 these rulings are based on the understanding that there will be no material_change in the facts upon which they are based have a bearing on your tax status should be reported to the service informing your key district_director of these rulings ruling letter in your permanent records please keep this any changes that may we are sincerely yours marvin fe cander marvin friedlander chief exempt_organizations technical branch 5t2


qwhuqdo 5hyhqxh 6huylfh department of the treasury number release date index no washington dc person to contact telephone number refer reply to cc ita - plr-136169-01 date date company parent trust church dear this responds to a private_letter_ruling request of date submitted by your authorized representative seeking rulings that payments made under a promotional program to charitable or civic organizations will be treated as advertising or promotional expenses requested ruling sec_1 all benefit payments made under the charitable giving program to tax exempt charitable and educational organizations described in sec_170 of the internal_revenue_code will be deductible by company as ordinary and necessary business_expenses under sec_162 and will not be treated as charitable_contributions under sec_170 all benefit payments made under the charitable giving program to civic organizations not described in sec_170 other than political and lobbying organizations described in sec_1_162-29 of the income_tax regulations will be deductible by company as ordinary and necessary business_expenses under sec_162 all benefit payments made under the charitable giving program to church or its affiliates will be deductible by company as ordinary and necessary business_expenses under sec_162 and will not be treated as constructive dividends under sec_301 conclusions plr-136169-01 all benefit payments made under the charitable giving program to tax exempt charitable and educational organizations described in sec_170 of the internal_revenue_code will be deductible by company as ordinary and necessary business_expenses under sec_162 and will not be treated as charitable_contributions under sec_170 the deduction will be subject_to the disallowance provisions of sec_162 and the regulations thereunder all benefit payments made under the charitable giving program to civic organizations not described in sec_170 other than political and lobbying organizations described in sec_1_162-29 of the regulations will be deductible by company as ordinary and necessary business_expenses under sec_162 the deduction will be subject_to the disallowance provisions of sec_162 and the regulations thereunder all benefit payments made under the charitable giving program to church or its affiliates will be deductible by company as ordinary and necessary business_expenses under sec_162 and will not be treated as constructive dividends under sec_301 facts company is a wholly owned corporate subsidiary of parent a holding_company owning other taxable subsidiaries parent files a consolidated u s income_tax return with company and all of parent’s subsidiaries parent is wholly owned by trust an irrevocable_trust established and operated for religious charitable and educational_purposes pursuant to sec_509 and sec_1_6033-2 trust is a supporting_organization and an integrated auxiliary of church a tax-exempt religious_organization company is engaged in the business of providing life_insurance to customers throughout the united_states most of company’s insurance contracts are sold individually through its career and independent agent distribution channels church and its nonprofit supporting and subordinate organizations are generally exempt from federal_income_tax under sec_501 and sec_501 proposed transaction in recent years company has come under increasing competitive pressure from larger national insurance firms as a new marketing and advertising strategy for its life_insurance policies company has decided to initiate a promotional program the charitable giving program or the program in which company would pay as a policy benefit an amount generally equal to one percent of the face_amount of a life_insurance_policy to a charitable or civic organization designated by the policy owner other than organizations engaging in activities for which a deduction is denied under sec_162 relating to political or lobbying organizations it is anticipated that most but not all of the charitable or civic organizations receiving payments would be organizations described in sec_170 these payments would be paid entirely by company out of its plr-136169-01 business_assets and would not come out of the death_benefit proceeds of the life_insurance_contract the purpose of the program is to give company’s insurance products an additional benefit that distinguishes them from the products of other life_insurance_companies company anticipates that the program will ultimately produce additional sales of insurance products company believes that when implemented the program will provide a significant marketing opportunity for company the program should allow company to provide a benefit not currently available under most competitors’ life_insurance policies the program will not cost policy owners anything and yet will give them the satisfaction of knowing that through their insurance_contract with company they can help the charitable or civic organization of their choice it is anticipated that this benefit will induce sales by giving company a marketing advantage it is also anticipated that because this benefit would be forfeited if the life_insurance_policy is allowed to lapse policy owners will be encouraged to renew and retain their policies over the years in short the program is intended to increase company’s income in the future the program will allow future purchasers of universal or whole life policies to designate as qualified beneficiaries sec_501 charitable organizations as well as civic organizations without regard to their status under sec_501 purchasers of term life_insurance and prior purchasers of universal or whole life policies will not be eligible for the program while the amount of payments under the program will generally equal one percent of a policy’s face_amount the program provides for a minimum payment and a maximum payment upon the death of the insured a payment will be made by company to the designated organization if the designated organization is no longer able to receive donations at the time of the insured’s death company will substitute another organization chosen by a designated policy beneficiary a payment made under the program will not be a guaranteed benefit for purposes of the life_insurance_contract accordingly the provisions of the program may be altered or discontinued in the future company will not provide a list of qualified organizations from which a designated organization must be selected instead policy owners will make their own designations based upon their own interests a policy owner will be permitted to change the designation at any time prior to the death of the insured because company sells most of its insurance policies where there are a significant number of members of church it is predictable that some policy owners may choose to designate church or one of its affiliated charitable or educational organizations as a beneficiary under the program there is no way to estimate what proportion of the purchasers of life_insurance policies might designate church or its affiliates company does not ask the religious affiliation of any of its customers and does not maintain this information in its records further by law company is not permitted to inquire into the plr-136169-01 religious affiliation of any of its employees or agents even if company were permitted to obtain this information any prediction regarding what organizations might be designated under the program would be quite speculative company expects to receive substantial benefits from the program in the form of additional sales of life_insurance policies issue law and analysis sec_162 allows a deduction for all of the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business sec_1 a provides that among the items included in business_expenses are advertising and other selling_expenses sec_162 denies a deduction for certain lobbying and political_expenditures see sec_1_162-29 sec_170 allows as a deduction any charitable_contribution as defined in sec_170 payment of which is made within the taxable_year sec_1_162-15 provides in part that donations to organizations other than those described in sec_170 which bear a direct relationship to the taxpayer’s business and are made with a reasonable expectation of a financial return commensurate with the amount of the donation may constitute allowable deductions as business_expenses see also sec_1_170a-1 in revrul_72_314 1972_1_cb_44 a stock brokerage firm donated an amount equal to percent of its commissions to a charitable_organization whose purpose was to combat local community deterioration the taxpayer emphasized in advertisements to its customers and to potential customers that these payments would enable the customers to benefit the organization and the community it serves without incurring additional expenses the taxpayer also advised the organization of the procedure used in soliciting business and that it would pay the organization percent for the privilege to advertise that such procedure was in effect the taxpayer reasonably expected to derive new business and retain the business of existing customers by implementing this program therefore the payments to the charitable_organization were held deductible as ordinary and necessary business_expenses under sec_162 as stated above the program will not permit the purchaser of a life_insurance_policy to designate as a payment recipient an organization engaging in activities for which a deduction would not be allowed under sec_162 company represents that it expects to receive substantial benefits from the program in the form of additional sales of life_insurance policies in addition company anticipates that because this benefit would be forfeited if the life_insurance_policy is allowed to lapse policy owners will be encouraged to renew and retain their policies over the years the program is intended to increase company’s future income therefore the payments other than payments for lobbying_expenses under the plr-136169-01 program will be deductible as ordinary and necessary business_expenses under sec_162 see 49_tc_695 acq 1971_2_cb_3 issue as discussed above in our analysis of the first requested ruling sec_162 allows a deduction for all of the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business sec_1_162-1 provides that among the items included in business_expenses are advertising and other selling_expenses sec_162 denies a deduction for certain lobbying and political_expenditures see also sec_1_162-29 as stated in the description of the proposed transaction the program will not permit the purchaser of a life_insurance_policy to designate as a payment recipient an organization which engages in activities for which a deduction would not be allowed under sec_162 the same reasoning in our analysis of the first requested ruling applies to benefit payments made under the program to organizations not described in sec_170 company represents that the purpose of the benefit payments under the program is to produce additional sales of insurance products company also anticipates that because this benefit would be forfeited if the life_insurance_policy is allowed to lapse policy owners will be encouraged to renew and retain their policies over the years the program is intended to increase company’s future income therefore the payments other than payments for lobbying_expenses under the program will be ordinary and necessary business_expenses under sec_162 see sec_1_162-1 issue sec_301 states that a distribution_of_property as defined in sec_317 made by a corporation to a shareholder with respect to its stock shall be treated as a dividend sec_1_301-1 states that the property so distributed is treated as a dividend only if the amount is paid to a shareholder in his capacity as such in the present case benefit payments by company to church or organizations affiliated with church would not be made due to church’s capacity as the indirect owner of company rather such a payment would be made because a policy owner chose to designate church or the affiliated organization as the recipient of the benefit payment under the program church and its affiliated charitable and educational institutions affiliates of company’s indirect shareholder the trust are part of a larger class of organizations eligible for designation as a beneficiary under the program because any payments church or its affiliated nonprofit entities might receive under the program would be as a result of their membership in that larger class and not with respect to church’s indirect ownership of company’s stock these payments would not be treated as dividends plr-136169-01 a payment by a corporation may be found to be a constructive_dividend when the charity controls the corporation or the charity is the beneficiary of a_trust controlling the corporation for example in cosby valve gage co v commissioner 380_f2d_146 1st cir a business attempted to deduct an in-kind payment of property to its sole shareholder a charitable foundation while noting that the payment fell within the literal definition of a charitable_contribution the court concluded that dividend treatment was proper because the charitable foundation controlled the corporation making the payment and any other result would give businesses owned by charities an advantage over businesses owned by non-charities see also 416_f2d_867 5th cir c f mueller co v 479_f2d_678 3d cir revrul_68_296 1968_1_cb_105 a business corporation that is wholly owned whether actually or beneficially by an organization exempt under sec_501 of the code as a charitable_organization is not entitled to a charitable_contribution_deduction for property transferred without consideration to its sole shareholder or beneficial_owner payments made by company under the program to church or its affiliated entities are distinguishable from the payments at issue in the cases cited above since the payments will be a result of a choice made by third parties over whom church church’s affiliates and company have no control and who are not under a legal_obligation to act for the benefit of church or church’s affiliates the owners of the life_insurance contracts will be permitted to designate any charitable or civic organization they wish and they may change that designation throughout the life of the insurance_contract therefore all benefit payments made under the program to church or its affiliates will be deductible by company as ordinary and necessary business_expenses under sec_162 and will not be treated as constructive dividends under sec_301 caveats a copy of this letter must be attached to any income_tax return to which it is relevant we enclose a copy of the letter for this purpose also enclosed is a copy of the letter_ruling showing the deletions proposed to be made in the letter when it is disclosed under sec_6110 of the internal_revenue_code except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that this letter may not be used or cited as precedent sincerely yours clifford m harbourt senior technician reviewer branch office of associate chief_counsel income_tax and accounting enclosures


significant index no department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division aug tiep ratt ay in re company sub c sub h t suba sub n sub p bank h bank c bank g a this letter constitutes notice that withdrawing pursuant to your authorized representative's letter of your request for a waiver of the minimum_funding_standard for the above-named the case has been closed by plan for the plan_year ending december this office and pursuant to your request of modification of the waiver of the minimum_funding_standard for the plan for the plan_year ending december dated date and b a waiver of the minimum_funding_standard have been granted for the plan for the plan_year ending december subject_to the following conditions which was granted in our ruling letter your requests for a a i ii iii iv by the later of a days from the date of the ruling letter or b the earlier of i the date the pbgc notifies the service in writing that this condition has not been met or ii days from the date of the ruling letter collateral be provided to the plan in a form acceptable to the pbgc and shall constitute a pledge of sub a’s stock subordinated to bank h prior to the sale of sub h and ii a pledge of sub n’s and sub p’s and any subsidiary’s assets subordinated to bank c and bank g to secure the amount of the waived funding deficiencies as well as the entire amount of the plan’s unfunded benefit liability as of the date of the ruling letter and within days after the sale of sub h any excess_proceeds to the extent deductible by the company and up to the lesser_of a the total amount of the waivers of the minimum_funding_standard for the plan for the plan years plu sec_50 of the remaining excess ending december proceeds above this amount or b the amount necessary to fully fund the plan on a termination basis that is realized from the sale of sub h shall be contributed to the plan within days from the closing of the sale of sub h for purposes of this condition the term excess_proceeds shall mean those funds remaining after payment of an amount necessary to pay all obligations in full to bank h under its loan agreements with the company and sub a and after satisfaction of all taxes and costs incurred in connection with the sale if the contribution of excess_proceeds creates a credit balance in the funding_standard_account for the plan then such credit balance shall be maintained in the funding_standard_account of the plan until it is equal to or greater than the outstanding balance of the amortization base with respect to the waived amount that is established and maintained under sec_412 of the code after which a credit balance will be maintained that is not less than the outstanding balance of the amortization base with respect to the waived amount the company makes contributions to the plan in amounts sufficient to meet the minimum_funding_standard for the plan for the plan_year ending december within days of the date of the ruling letter and the company makes contributions to the plan in amounts sufficient to meet the minimum_funding_standard for the plan for the plan_year ending december of the minimum_funding_standard by date without applying for a waiver your authorized representative agreed to these conditions in a letter dated ending december if any one of the conditions is not met the waivers for the plan years are retroactively null and void and december the conditional waivers have been granted in accordance with sec_412 of the internal_revenue_code code and sec_303 of the employee_retirement_income_security_act_of_1974 erisa the amount for which these conditional waivers have been granted is the contribution that would otherwise be required to reduce the balance in the funding_standard_account to zero as of date and date the company is a privately-owned global developer producer and marketer of specialty chemical products its principal business is the manufacturing and distribution of fertilizer and crop protection chemicals the company had consolidated_group revenue in excess of company’s revenues are grouped into three general product categories specialty plant nutrient industrial chemicals and organic chemicals customers of the company include manufacturers and assets in excess of the oe for the company’s business has been affected by economy since the company's principal subsidiary sub h has suffered a substantial business hardship due to increases in supply of its primary product potassium nitrate this subsidiary is the world’s largest producer of potassium nitrate and corner sec_2 of the market in this chemical these increases were the result of plant expansions by both the company and its competitors at the same time the annual rate of growth in demand declined historically the demand for potassium nitrate grew at a rate of annually since however this rate has declined to annually the increase in supply over demand caused the company’s competitors to drastically reduce prices which forced the company to cut its prices as well these lower prices occurred at a time when prices for raw materials were increasing which eroded the company’s gross margins furthermore the strong - detrimental effect on profits because the company’s operating revenues are dominated by the which prevailed from had a but its expenses are derived in ' during the first quarter of a subsidiary of the company and the original sponsor of the plan sub c filed a petition under chapter of the u s bankruptcy code this subsidiary had experienced a sharp reduction in its revenues due to a lack of contract manufacturing and a general recession in the chemical business the subsidiary was highly leveraged and unable to meet its bank covenants and an acute liquidity crisis forced it into bankruptcy operations at the subsidiary were suspended immediately after the bankruptcy filing and are not expected to resume the company then assumed responsibility for the plan the company has taken steps to improve its profitability workforce from employees to approximately it has reduced its the company has also streamlined operations and reduced operating_expenses various programs have been initiated to increase prices when possible introduce new product mixes enter new markets and increase operational efficiency the company feels that these changes and an improving economy will allow it to generate the cash flows necessary to sustain operation and continue funding the plan financial information provided by the company shows increased revenues and declining expenses as well as improving profitability the company has or is in the process of selling some of its assets to streamline operations and reduce debt the _ sub a has sold it sec_50 interest in three joint company’ ventures and used some of the proceeds from this sale to fund the plan contemplated to be completed by the end of the sale of the sub h’s stock is through while the above-mentioned sales do indicate an improvement in the company's financial position we must note that the company has not been able to meet the minimum_funding requirements for the plan for the plan years ending december liability basis as of date however the company has committed to funding and the plan for the plan years ending december will contribute to the plan a portion of any excess_proceeds that are generated by the sale of sub h’s stock hence the modification of the waiver of the minimum_funding_standard previously granted for the plan_year ending december of the minimum_funding_standard for the plan_year ending december been granted subject_to the conditions set forth above and the plan is only funded on a current and december and a waiver have your attention is called to sec_412 of the code and sec_304 of erisa which describe the consequences that would result in the event the plan is amended to increase benefits change the rate in the accrual_of_benefits or to change the rate of vesting while any portion of the waived_funding_deficiency remains unamortized please note that any amendment to a profit sharing plan or any other retirement plans covering employees covered by this plan maintained by the company to increase the liabilities of those plans would be considered an amendment for purposes of sec_412 of the code and sec_304 of erisa similarly the establishment of a new profit sharing plan or any other retirement_plan by the company covering employees covered by this plan would be considered an amendment for purposes of sec_412 of the code and sec_304 of erisa this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent the date of this when filing form_5500 for the plan_year ending december letter should be entered on schedule b actuarial information for this reason we suggest that you furnish a copy of this letter to the enrolled_actuary who is responsible for the completion of the schedule b we have sent a copy of this letter to the manager ep classification in to the manager ep compliance unit in authorized representative pursuant to a power_of_attorney on file in this office and to your if you require further assistance in this matter please contact sincerely yours fe arol d géld director employee_plans