internal_revenue_service number release date index numbers - ------------------------------------- ------------------------------- ------------------------ --------------------- -------------------------- department of the treasury washington dc person to contact ----------------------------------------------------- --------- telephone number --------------------- refer reply to cc psi - plr-143527-05 date december ------------------------------------- x --------------------------------------------------- country d1 ------------------------- ------------ this letter responds to a letter dated date and subsequent dear ------------------------ correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to file an election to be treated as an association_taxable_as_a_corporation for federal tax purposes of country x intended to elect to be an association_taxable_as_a_corporation for federal tax purposes effective d1 however x inadvertently failed to timely file a form_8832 entity classification election the information submitted states that x was formed on d1 pursuant to the laws sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 sec_301_7701-3 provides that an eligible_entity may elect to be sec_301_9100-1 provides that the commissioner has discretion to grant a sec_301_7701-3 provides that an election under sec_301_7701-3 sec_301_9100-2 provides the rules governing automatic extensions of time for classified other than as provided in sec_301_7701-3 by filing form_8832 with the service_center designated on form_8832 will be effective on the date specified on form_8832 or on the date filed if no such date is specified on the form the effective date specified on form_8832 cannot be more than days prior to the date the form is filed and cannot be more than months after the date on which the form is filed 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 a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register making certain elections 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 requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file form_8832 and elect to be treated as an association_taxable_as_a_corporation for federal tax purposes effective d1 a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose the federal tax consequences of the transaction described above under any other provision of the code sec_6110 provides that it may not be used or cited as precedent except as specifically set forth above no opinion is expressed or implied as to based on the facts submitted and representations made we conclude that the this ruling is directed only to the taxpayer on whose behalf it was requested sec_301_9100-3 sets forth the standards the commissioner will use to in accordance with the power_of_attorney on file with this office a copy of this sincerely letter is being sent to x’s authorized representative enclosures copy of this letter copy for sec_6110 purposes heather c maloy associate chief_counsel passthroughs and special industries


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 b04 plr-137243-16 date date legend grantor_trust son daughter spouse friend relative relative relative grantor’s wife relative x y date date date date date date court state case statute --------------------------- --------------------------------------------------------------------------------- ------------------------------ ------------------------- ------------------------------------------- -------------------- --------------------------------- -------------------------- ---------------------------------------- ---------------------------- ---------------------------------------- -- ---- ------------------- ------------------------ ------------------- ------------------------ ----------------------- -------------------------- -------------------------------------------------------------------------------- --------------------------------------------------------------------------- --------------------- ----------------------------------------------------------------- -------------------------------------------------------------- plr-137243-16 dear -------------------------------------- this responds to the letter dated date and subsequent correspondence submitted on your behalf by your authorized representative concerning the generation-skipping_transfer gst tax consequences of modifications and a judicial construction of a_trust that is exempt from the application of gst tax imposed under sec_2601 of the internal_revenue_code code the facts and representations submitted are summarized as follows on date a date prior to date grantor created trust an irrevocable inter_vivos_trust for the primary benefit of son and son’s issue grantor and son died prior to date son was survived by spouse and daughter the granddaughter of grantor it is represented that no additions have been made to trust since its inception pursuant to a power to amend trust committee amended trust x times over a y-year period prior to date trust as amended restated and in effect on date provides that the trustees shall distribute one-half of the net_income of trust to son’s issue by right of representation and one-half of the net_income of trust to spouse during her lifetime or until she remarries upon spouse’s death or remarriage the trustees shall pay the entire net_income of trust to son’s issue then living by right of representation upon termination of trust the trustees shall distribute the principal and all undistributed_income to son’s then living issue by right of representation trust as in effect on date further provides that trust shall terminate at the expiration of years after the death of the last survivor of the following measuring lives son spouse all issue of friend who were living on the date preceding date and the three individuals who are designated as contingent beneficiaries in clause d of trust and all their issue who were living on the date preceding date however if all issue of son die prior to the expiration of years after the death of the above-designated measuring lives trust will terminate upon the death of son’s last surviving issue provided however that if spouse is then living and has not remarried trust shall terminate upon her subsequent death or remarriage clause d of trust as in effect on date designates the contingent beneficiaries of trust providing that in the event that trust is terminated by the death of son’s last surviving issue all undistributed_income and principal shall be distributed to relative relative and relative as contingent beneficiaries provided however that if any designated contingent beneficiary is not then living that beneficiary’s share of undistributed_income and principal shall be distributed to his or her surviving issue by right of representation relative relative and relative are plr-137243-16 either descendants of grantor’s grandfather or the father of grantor’s wife and are persons born before date committee as constituted on date consisted of three individuals unrelated to any beneficiary of trust trust as in effect on date grants committee a joint power exercisable at any time or from time to time by a majority of the members of committee and by the last survivor of them to change and alter any or all of the trusts declared in trust provided that this power as created or as amended by the committee must not extend to or be used to give any benefit in the trust property either direct or indirect except to the issue of the grandfather of grantor to the issue of the father of grantor’s wife or to any wife of son trust as in effect on date further provides committee with the power to appoint successor trustees pursuant to committee’s power to amend committee amended trust again on date date and date trust as amended on date provides that the trustees shall distribute one-half of the net_income of trust to son’s issue by right of representation and one-half of the net_income of trust to and among spouse or son’s issue in the discretion of the trustees trust as amended on date further provides that upon termination of trust the trustees shall distribute the principal and all undistributed_income to son’s then living issue by right of representation trust as amended on date includes a termination provision similar to that of trust as in effect on date trust as amended on date provides that trust will terminate upon the expiration of the 21-year period after the death of the last- surviving designated measuring life the termination provision includes the same language to describe the measuring lives as provided in trust as in effect on date except that the measuring lives formerly referred to as the three individuals who are designated as contingent beneficiaries in clause d of trust are referred to as the three individuals who are designated as contingent beneficiaries in clause c of trust which reflects the revised paragraph order of trust as amended on date similar to the termination provision of trust as in effect on date trust as amended on date provides that trust will terminate earlier if all issue of son die prior to the expiration of years after the death of the named measuring lives however trust as amended on date does not provide for trust to continue until spouse’s death or remarriage clause c of trust as amended on date designates two contingent beneficiaries of trust this is inconsistent with the reference to clause c in the termination provision of trust as amended on date which refers to three not two contingent beneficiaries of trust specifically clause c of trust as amended on date provides that in the event that trust is terminated by the death of son’s last surviving issue all undistributed_income and principal shall be distributed to relative and relative as contingent beneficiaries provided however that if either designated contingent beneficiary is not then living that beneficiary’s share of undistributed_income plr-137243-16 and principal shall be distributed to his or her surviving issue by right of representation relative is a descendant of the grandfather of grantor and is a person born after date the instrument amending trust on date states that committee intends that the amendment shall not be treated as a constructive_addition to trust for purposes of chapter and further states that to that end this amendment shall not be interpreted in a manner that would postpone or suspend the vesting absolute ownership or power of alienation of an interest in property held under the deed_of_trust for a period measured from the date of creation of trust extending beyond any life in being at the date of creation of trust plus a period of years the amendment to trust on date amended only the termination provision of trust trust as amended on date provides that trust shall terminate at the expiration of years after the death of the last survivor of the following measuring lives son spouse all issue of friend who were living on the date preceding date and relative relative and relative and all their issue who were living on the date preceding date trust as amended on date continues to provide that trust will terminate earlier if all issue of son die prior to the expiration of years after the death of the named measuring lives the instrument amending trust on date states that with respect to the amendment to trust on date clause c was amended by committee with the sole intent of modifying the contingent beneficiaries of trust and not the intent of modifying the measuring lives to be used in determining the duration of trust the instrument amending trust on date also includes the same statement as in the prior instrument amending trust on date regarding the intention that the amendment not be construed or treated as a constructive_addition to trust for gst tax purposes from date through date members of committee and the trustees of trust serving from time to time have been individuals unrelated and not subordinate to any beneficiary of trust on date committee amended trust to provide that committee may not amend trust to benefit a committee member who may also be a_trust beneficiary or to benefit any person whom any committee member may be legally obligated to support and with regard to committee’s power to appoint trustees a successor to any trustee who is removed shall not be a_related_or_subordinate_party within the meaning of sec_672 of the code with respect to any committee member who may also be a_trust beneficiary or may be legally obligated to support any such beneficiary on date the trustees of trust sought judicial construction by court of the effect of the date amendment to trust under applicable state law in support of the trustees’ complaint for declaratory_judgment the trustees contend the express terms of trust as amended on date together with the express terms of the instrument plr-137243-16 amending trust on date support a construction that the addition of relative as a contingent beneficiary did not add relative as a measuring life in determining the duration of trust under the state common_law rule_against_perpetuities the date amendment was void ab initio see case and statute the state statutory rule_against_perpetuities in effect on date also prohibited and thereby prevented a violation of the rule by preventing an improper measuring life from being used to extend the duration of trust on date court issued an order construing trust as amended on date court determined that the termination provision as amended on date did not extend the duration of trust beyond any life in being at the date of the creation of trust plus a period of years in addition court determined that to the extent the termination provision of trust as amended on date purported to add a new measuring life for purposes of determining the duration of trust the provision was ineffective and invalid at the time of the amendment to trust on date ruling requested you have requested a ruling that the amendments to trust on date date and date and the judicial construction of trust as amended on date did not cause trust to lose its status as exempt from the application of gst tax imposed under sec_2601 law and analysis sec_2601 provides that a tax is imposed on every gst within the meaning of subchapter_b a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2612 provides that the term taxable_termination means a termination by death lapse of time release of a power or otherwise of an interest_in_property_held_in_trust where the property passes to a skip_person with respect to the transferor of the property sec_2612 provides that the term taxable_distribution means any distribution from a_trust to a skip_person other than a taxable_termination or a direct_skip under sec_2612 a direct_skip is a transfer subject_to federal estate or gift_tax made by a transferor to a skip_person section a of the tax_reform_act_of_1986 act provides that the gst tax is generally applicable to gsts made after date under b a of the act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the gst tax does not apply to a transfer from a_trust if the trust was irrevocable on date and no addition actual or constructive was made to the trust after that date plr-137243-16 sec_26_2601-1 provides that if an addition is made after date to an irrevocable_trust a pro_rata portion of subsequent distributions from and terminations of interests in property held in the trust is subject_to the provisions of chapter when an addition is made the trust shall be deemed to consist of two portions a portion not subject_to chapter and a portion subject_to chapter sec_26_2601-1 provides that the release exercise or lapse of a power_of_appointment other than a general power is not treated as an addition to a_trust if the power was created in an irrevocable_trust that is not subject_to the gst tax because it was irrevocable on date and in the case of an exercise the power was not exercised in such a way that may postpone or suspend the vesting absolute ownership or power of alienation of an interest in property for a period measured from the date of creation of the trust extending beyond any life in being at the date of creation of the trust plus a period of years plus if necessary a reasonable period of gestation the perpetuities period if a power is exercised by creating another power it will be deemed to be exercised to whatever extent the second power may be exercised a general_power_of_appointment is defined in sec_2514 as a power that is exercisable in favor of the individual possessing the power his estate his creditors or the creditors of his estate sec_25_2514-1 of the gift_tax regulations provides in part that a power_of_appointment is not a general_power_of_appointment if by its terms it is either a exercisable only in favor of one or more designated persons or classes other than the possessor or his creditors or the possessor's estate or the creditors of his estate or b expressly not exercisable in favor of the possessor or his creditors the possessor’s estate or the creditors of the possessor’s estate under sec_25_2514-1 a power_of_appointment includes all powers that are in substance and effect powers of appointment received by the donee of the power from another person regardless of the nomenclature used in creating the power and regardless of local property law connotations a power given to a donee to affect the beneficial_enjoyment of a_trust property or its income by altering amending or revoking the trust instrument or terminating the trust is a power_of_appointment sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under sec_26_2601-1 or hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status in general unless specifically provided otherwise the rules contained in this paragraph are applicable only for purposes of determining whether an exempt trust retains its exempt status for gst tax purposes thus unless specifically noted the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of gain for purposes of sec_1001 plr-137243-16 sec_26_2601-1 provides that the distribution of trust principal from an exempt trust to a new trust or retention of trust principal in a continuing trust will not cause the new or continuing trust to be subject_to the provisions of chapter if- either- i the terms of the governing instrument of the exempt trust authorize distributions to the new trust or the retention of trust principal in a continuing trust without the consent or approval of any beneficiary or court or ii at the time the exempt trust became irrevocable state law authorized distributions to the new trust or retention of principal in the continuing trust without the consent or approval of any beneficiary or court and the terms of the governing instrument of the new or continuing trust do not extend the time for vesting of any beneficial_interest in the trust in a manner that may postpone or suspend the vesting absolute ownership or power of alienation of an interest in property for a period measured from the date the original trust became irrevocable extending beyond any life in being at the date the original trust became irrevocable plus a period of years plus if necessary a reasonable period of gestation if a distributive power is exercised by creating another power it is deemed to be exercised to whatever extent the second power may be exercised sec_26_2601-1 provides that a judicial construction of a governing instrument to resolve an ambiguity in the terms of the instrument or to correct a scrivener's error will not cause an exempt trust to be subject_to the provisions of chapter if- the judicial action involves a bona_fide issue and the construction is consistent with applicable state law that would be applied by the highest court of the state in commissioner v estate of bosch 378_us_456 the supreme court considered whether a state trial court’s characterization of property rights conclusively binds a federal court or agency in a federal estate_tax controversy the court concluded that the decision of a state trial_court as to an underlying issue of state law should not be controlling when applied to a federal statute rather the highest court of the state is the best authority on the underlying substantive rule_of state law to be applied in the federal matter if there is no decision by that court then the federal authority must apply what it finds to be state law after giving proper regard to the state trial court's determination and to relevant rulings of other courts of the state in the present case trust was irrevocable on date under the terms of trust as in effect on and after date committee possesses a joint power to amend trust that cannot be exercised to give any benefit in the trust property except to the issue of the grandfather of grantor to the issue of the father of grantor’s wife or to any wife of son the power to amend trust is a power_of_appointment and is not a general_power_of_appointment see sec_25_2514-1 committee exercised its power to amend on date date and date under sec_26_2601-1 committee’s exercises of the power will be treated as an plr-137243-16 addition to trust if the exercise of the power may postpone or suspend the vesting absolute ownership or power of alienation of an interest in property for a period beyond the perpetuities period measured from the date of creation of trust the date amendment to trust created an ambiguity regarding the termination_date of trust on date court issued an order construing the date amendment court’s construction of the effect of the termination provision of trust as amended on date involved a bona_fide issue court’s determination that the date amendment to trust was void ab initio to the extent it purported to add relative as a measuring life for purposes of determining the duration of trust is consistent with applicable state law that would be applied by the highest court of state see case statute based on the above we conclude that committee’s joint exercise of the power to amend trust as exercised on date amended the contingent beneficiaries of trust but did not amend the termination provision of trust to postpone or suspend the vesting absolute ownership or power of alienation of an interest in property beyond the perpetuities period measured from the date of creation of trust accordingly committee’s exercise of the power to amend trust on date is not treated as an addition to trust under sec_26_2601-1 in addition committee’s joint exercise of the power to amend trust on date and date did not postpone or suspend the vesting absolute ownership or power of alienation of an interest in property for a period beyond the perpetuities period measured from the date of creation of trust accordingly committee’s exercises of the power to amend trust on date and date are not treated as additions to trust under sec_26_2601-1 the requirements of sec_26_2601-1 and c apply to determine whether trust retains its exempt status for gst tax purposes following the exercises of the discretionary power to amend trust on date date and date and court’s construction of the date amendment of trust under the governing instrument of trust as in effect on date committee is granted a broad discretionary power to amend trust based on the above analysis of the effect of the date amendment on the termination provision of trust we conclude that committee’s exercises of the power to amend trust on date date and date do not extend the time for vesting of any beneficial_interest in trust in a manner that may postpone or suspend the vesting absolute ownership or power of alienation of an interest in property for a period measured from date the date trust became irrevocable extending beyond any life in being on date plus a period of years accordingly we rule under sec_26_2601-1 that committee’s exercises of the power to amend trust on date date and date do not cause trust to be subject_to the gst tax provisions plr-137243-16 further because court’s construction of the date amendment of trust involved a bona_fide issue and is consistent with applicable state law that would be applied by the highest court of state we rule under sec_26_2601-1 that the date order of court construing the termination provision of trust does not cause trust to be subject_to the gst tax provisions accordingly we rule that the amendments to trust on date date and date and the judicial construction of trust as amended on date do not cause trust to be subject_to the provisions of chapter and therefore trust does not lose its status as exempt from the application of gst tax imposed under sec_2601 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 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely karlene lesho karlene lesho senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy of letter copy for sec_6110 purposes cc


id office uilc cca-911300-08 -------------- number release date from ------------------- sent thu pm to ------------------- cc --------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------- subject re even if status as tmp terminated if the tmp otherwise remained in existence the extension may be good under 97_tc_287 general_partner under state law has power to extend the statute for the other partners


internal_revenue_service number release date index number -------------------------------------------- ------------------------------ ---------------------------------------- ------------------------- re ----------------------------------------------- --------------------------------------------------------------- ---------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no ---------------- ----------------- telephone number --------------------- refer reply to cc psi b04 plr-150556-10 date june legend legend decedent state a year spouse child child child grandchild grandchild grandchild grandchild trust charity charity ----------------- ------------- ------- ------------------------- ---------------------------- ---------------------------- ------------------------- -------------------------------- ------------------------ ---------------------------------- --------------------- ------------------------------------------------------------------------------------------ ----------------------------------------------------------- ----------------------------------------------------- -------------------------------- ------- ------- year year great-grandchild ------------------------- great-grandchild ------------------------------ great-grandchild ----------------------------- great-grandchild ----------------------- great-grandchild ------------------- year trust -------- ---------------------------------------------------------------- ------------------------ -------------------------------------------------------------------- ----------------------- ------------------------------------------------------------------- trust trust plr-150556-10 ------------------------ ------------------------------------------------------------------------------------------ --------------------------------------------------------------- trust trust state b -------------------------------- ----------------------- -------------------- dear ------------------- this letter responds to your submission dated date and subsequent correspondence submitted by your authorized representative requesting rulings regarding the income gift and generation-skipping_transfer gst tax consequences of a proposed judicial construction of trust to permit sales of remainder interests in trust facts the facts submitted and representations made are as follows decedent a resident of state a died testate in year a date prior to article sixth of decedent's will created trust to benefit child child and his issue child and her issue and spouse under the will upon the termination of trust the trustee will distribute the corpus and undistributed_income to charity and charity trust will terminate upon the death of the last to die of spouse child child child grandchild grandchild grandchild grandchild great-grandchild great-grandchild and great-grandchild spouse child child and child are deceased child had no issue child is survived by grandchild grandchild grandchild and grandchild collectively grandchildren and eleven great-grandchildren collectively great-grandchildren which include great-grandchildren through under the will the grandchildren are the current income beneficiaries of trust this private_letter_ruling request pertains to the proposed sales of remainder interests in trust by great-grandchild great-grandchild great-grandchild great-grandchild and great-grandchild the will also contains a spendthrift_clause which provides that each beneficiary hereunder is hereby restrained from anticipating encumbering alienating or in any other manner assigning his or her interest or estate in either principal or income and is without power to do so nor shall such interest or estate be subject_to his or her liabilities or obligations nor to judgment or other legal process bankruptcy proceedings or claims of creditors or others all income and principal or either of them shall be payable and deliverable only and personally to the respective beneficiaries entitled thereto plr-150556-10 in year pursuant to a year court order and year settlement among the parties charity sold its remainder_interest in trust to the eleven great-grandchildren for purposes of this ruling after the sale great-grandchild great-grandchild great-grandchild great-grandchild and great-grandchild each owned a percent remainder_interest in trust in year pursuant to a court order great-grandchild purchased a percent remainder_interest in trust from great- grandchild and great-grandchild and great-grandchild each purchased a percent remainder_interest in trust from another of the great-grandchildren the year court order stated that the spendthrift_clause of trust does not prohibit the sales because the clause applies only to beneficial interests arising under the terms of decedent’s will and does not apply to interests acquired after decedent’s death under the year settlement great-grandchild great-grandchild great-grandchild great-grandchild and great-grandchild each propose to sell all or part of his or her remainder_interest in trust to trust trust trust trust and trust respectively trust trust trust trust and trust are trusts that were previously established by grandchild to benefit great-grandchild great-grandchild great-grandchild great-grandchild and great-grandchild respectively on the date of the proposed sales of the remainder interests in trust all of the assets of trust will be marketable_securities with the fair_market_value of the trust assets determined by prices listed on an established exchange each proposed seller intends to sell his or her remainder_interest in trust for a sales_price equal to i the fair_market_value of trust property as of the date of sale multiplied by ii the sec_7520 actuarial remainder factor then in effect and multiplied again by iii the fraction representing the portion of the entire remainder subject_to the sale the purchase_price will be paid in cash to the respective great-grandchild under the terms of trust trust trust trust and trust each great-grandchild is the primary beneficiary of his or her respective trust during his or her life subject_to certain withdrawal rights each trustee may in the trustee’s uncontrolled discretion at any time or times and for any reason pay any part of the net_income and principal of the trust to any among the primary beneficiary and the primary beneficiary’s issue whenever born any net_income not distributed will be added to the principal of the trust a primary beneficiary is granted a testamentary special power to appoint the trust property to any persons in a specified class trust trust trust trust and trust will terminate unless sooner terminated upon the first to occur of the death of the primary beneficiary and all of his or her issue whenever born and the expiration of years of certain lives in being upon termination the trustee shall distribute the remaining principal of the trust to the then living issue of the primary beneficiary by right of representation if there are no living issue of the primary beneficiary remaining trust principal is distributable to the living issue of grandchild by right of representation plr-150556-10 and in default of such issue to the heirs of grandchild as determined under the laws of intestacy of state b it is represented that no additions constructive or otherwise have been made to trust subsequent to date and that other than the earlier court order and settlement_trust has not been amended or otherwise altered in any manner since date the trustee of trust petitioned the appropriate court for an order that construes the spendthrift provision of trust to permit the proposed sales the court’s order states that the spendthrift_clause of trust does not prohibit the proposed sales of the purchased remainder interests because the spendthrift_clause does not apply to the interests acquired after decedent’s death under the year settlement but only to beneficial interests arising under the terms of decedent’s will itself the trustee has requested the following rulings the court construction of the spendthrift_clause and the provisions of trust to allow the proposed sales of remainder interests in trust will not affect the exempt status of trust for gst tax purposes the proposed sales of remainder interests in trust will not affect the exempt status of trust for gst tax purposes the proposed sales of remainder interests in trust will not result in any taxable_gifts for federal gift_tax purposes as to the buyers or sellers of such interests the court approval of the proposed sales of remainder interests in trust will not result in the recognition of gain_or_loss to trust or any trust beneficiaries a gain_or_loss for each of the proposed sales will equal the difference between the amount_realized for the remainder_interest and the adjusted_basis of the remainder_interest law and analysis ruling sec_1 sec_2601 of the internal_revenue_code imposes a tax on each generation-skipping_transfer which includes under sec_2611 a taxable_distribution a taxable_termination and a direct_skip sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption amount which may be allocated by such plr-150556-10 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 under sec_2652 for purposes of chapter the term transferor means the decedent in the case of any property subject_to tax imposed by chapter and the donor in the case of any property subject_to tax imposed by chapter the individual with respect to whom property was most recently subject_to federal estate or gift_tax is the transferor of that property for purposes of chapter sec_26_2652-1 of the generation-skipping_transfer_tax regulations thus an individual may be a transferor even though there is no transfer of property under local law at the time the federal estate or gift_tax applies sec_26_2652-1 provides that for purposes of chapter a transfer is subject_to federal gift_tax if a gift_tax is imposed under sec_2501 without regard to exemptions exclusions deductions and credits under a of the tax_reform_act_of_1986 act the generation-skipping_transfer_tax is generally applicable to generation-skipping transfers made after date under b a of the act and sec_26_2601-1 the tax does not apply to any generation-skipping_transfer from a_trust if the trust was irrevocable on date and no addition actual or constructive was made to the trust after that date under sec_26_2601-1 any trust in existence on date will be considered irrevocable unless the settlor had a power that would have caused inclusion of the trust in his or her gross_estate under sec_2038 or sec_2042 if the settlor had died on date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax will not cause the trust to lose its exempt status sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy paragraph b i a b or c of this section by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer plr-150556-10 in the present case trust is not subject_to gst tax because it became irrevocable before date it is represented that no additions constructive or otherwise have been made to trust subsequent to that date the court construction of the spendthrift_clause and the provisions of trust to allow the proposed sales of remainder interests in trust will not shift any beneficial interests in trust to a lower generation and will not extend the time for vesting of any beneficial_interest in trust beyond the period provided for in the original trust accordingly based upon the facts submitted and the representations made and pursuant to sec_26_2601-1 we conclude that the court construction of the spendthrift_clause and the provisions of trust to allow the proposed sales of remainder interests in trust will not affect the exempt status of trust for gst tax purposes further the proposed sales of remainder interests in trust will not affect the exempt status of trust for gst tax purposes we note that under sec_2652 grandchild is the transferor of trust trust trust trust and trust for gst tax purposes ruling sec_2501 imposes a tax on the transfer of property by gift by an individual sec_2511 provides that the tax imposed by sec_2501 applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2512 provides that if a gift is made in property the value thereof at the date of the gift shall be considered the amount_of_the_gift sec_2512 provides that where property is transferred for less than an adequate_consideration in money or money’s worth then the amount by which the value of the property exceeded the value of the consideration is deemed a gift under sec_25_2512-5 of the gift_tax regulations in general the fair_market_value of remainders transferred by gift is the present_value of the remainders determined by use of the appropriate sec_7520 actuarial factor sec_7520 provides that the value of an annuity any interest for life or a term of years or any remainder_interest or reversionary_interest is determined under tables prescribed by the secretary and by using an interest rate rounded to the nearest two-tenths of one percent equal to percent of the applicable federal midterm rate for the month in which the valuation_date falls in the proposed sales of remainder interests in trust the sales_price of the remainder interests will equal the fair_market_value of trust assets on the date of sale multiplied by the sec_7520 actuarial remainder factor then in effect and then multiplied plr-150556-10 by the fraction representing that portion of the remainder_interest subject_to the sale the sales_price will be paid in cash based upon the facts submitted and the representations made we conclude that the proposed sales of remainder interests in trust will not result in any taxable_gifts for federal gift_tax purposes as to the buyers or sellers of such interests ruling sec_61 provides that gross_income means all income from whatever source derived sec_61 provides that gross_income includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in such section for determining loss over the amount_realized sec_1001 provides that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received sec_1001 provides that except as otherwise provided in subtitle a the entire amount of the gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or as loss sustained an exchange of property results in the realization of gain_or_loss under sec_1001 if the properties are materially different 499_us_554 in cottage savings the supreme court held that mortgage loans made to different obligors and secured_by different homes embody distinct legal entitlements and that the taxpayer realized losses when it exchanged participation interests in different loans id in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent id pincite the issue for purposes of this ruling is whether great-grandchild great-grandchild great-grandchild great-grandchild and great-grandchild would have the same property interests and legal entitlements as a result of the court’s determination that the spendthrift_clause does not prohibit the proposed sales of the remainder interests it is represented that the court has entered a preliminary order determining that the plr-150556-10 spendthrift_clause does not prohibit the proposed sales the court’s preliminary order becomes effective only upon the issuance of the requested letter_ruling accordingly because the court’s construction of the spendthrift_clause does not change the property interests and legal entitlements of the remaindermen the court’s construction of the spendthrift_clause does not give rise to a realization of income to the trust or any of the beneficiaries under sec_61 or sec_1001 ruling sec_1001 sec_1001 and sec_1001 as set forth above apply to this ruling_request as well additionally sec_1001 provides that in determining gain_or_loss from the sale_or_other_disposition of a term_interest_in_property that portion of the adjusted_basis of such interest which is determined pursuant to sec_1014 sec_1015 or sec_1041 to the extent that such adjusted_basis is a portion of the entire adjusted_basis of the property shall be disregarded the term term_interest_in_property means a life interest in property an interest in property for a term of years or an income_interest in a_trust sec_1_1001-1 provides that the term term_interest_in_property does not refer to remainder or reversionary interests in the property itself or other interests in property which will ripen into ownership of the entire property upon termination or failure of a preceding term_interest sec_1012 generally provides that the basis_of_property shall be the cost of the property sec_1_1012-1 defines cost to be the amount_paid for the property in cash or other_property in the present case great-grandchild great-grandchild great-grandchild great-grandchild and great-grandchild purchased their initial remainder interests in trust from an unrelated third party charity in addition great-grandchild great-grandchild and great-grandchild purchased a portion of their respective remainder interests in trust from other relatives consequently under sec_1012 the basis of each great-grandchild great-grandchild great-grandchild great-grandchild and great-grandchild respective remainder_interest in trust is the amount that each paid for the property accordingly we conclude that each seller will realize gain_or_loss from the sale of their remainder_interest in an amount equal to the difference between his or her amount_realized over the cost that the seller incurred to acquire his or her remainder_interest pursuant to sec_1001 any gain realized must be recognized any loss realized is subject_to disallowance under sec_267 we express no opinion on whether the proposed sales are authorized under trust or applicable state laws plr-150556-10 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 except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely _____________________________ lorraine e gardner senior counsel branch passthroughs special industries enclosures copy for sec_6110 purposes cc


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-105039-10 date date in re -------------------------------------------- ---------------------------------------------------------- --------------------- legend ---------------------------- testator -------------------------------------- child a ----------------------------- child b --------------------------------------- child c -------------------------------- stock ------------------------------------------------------------------------------ stock trust ------------------------------------------------------------------------------ residuary_trust children’s agreement ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------- state state a date date date date date date a b c d stock trust a residuary_trust a cite --------------------------------------------------------------------------------------------------- cite --------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------ ------------------ ---------- -------------------- ------------------- -------------------------- ------------------------- ------------------------- ----------------------- ------ ------- ------ ------ ------------------------------------------------------------------------ --------------------------------------------------------------------------------- ------------------------------------------------------------------------ plr-105039-10 ------------------------------------------------------ cite cite ------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------- cite ------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------ cite ------------------------------------------------------------------------ ------------------------------------------------------- cite cite ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------- highest court highest court of state a state court state statute ------------------------------------------- ----------------------------------- ------------------------------------------------------------------------ --------------------------------------------------------------------------------- ------------------------------------------------------------------------ --------------------------------------------- state governing statute a state governing statute b state a statute q r s t u v x y z --------------------------------------------- ------------------------------------------------- --------------------------------- ---- ---- ---- ---- -------- -------- --------- ------ ------------ dear ------------------- this responds to the date letter from your authorized representative requesting rulings on the income gift estate and generation-skipping_transfer gst tax consequences of a proposed settlement agreement the facts and representations are as follows testator died a resident of state on date he was survived by three children child a child b and child c the children five grandchildren the five grandchildren were then living there were no great-grandchildren at the time under articles third and eighth of testator’s will the will his shares of stock were to be held in trust the stock trust trust income was to be divided equally among the children on a child’s death the child’s income share was to be divided equally among the child’s then living children testator’s grandchildren the stock trust was plr-105039-10 to terminate twenty-one years after the death of testator’s last surviving grandchild when the principal would be divided equally per capita among testator’s then living great-grandchildren and deceased great-grandchildren whose then living descendants would take by representation under article twenty-second of the will the residue of testator’s estate was to be held in another trust the residuary_trust the residuary_trust provisions were identical to those of the stock trust except that the residuary_trust was to terminate when testator’s youngest great-grandchild reached age twenty-one the rule_against_perpetuities under the state rule_against_perpetuities in effect at testator’s death a bequest of a future_interest was void if considered prospectively at the testator’s death there was a possibility that the interest would not vest by the end of twenty-one years after the death of a life or lives in being at the testator’s death the permissible period a bequest to a class was void if there was a possibility that all the members of the class would not be ascertained and take vested interests within the permissible period a void specific_bequest passed to the testator’s residuary_estate if the testator’s disposition of the residuary_estate was void as well the residuary_estate passed as a reversion by intestacy cite in this case at testator’s death it was possible for the children to have additional children so that there could be grandchildren whose lives were not then in being this was the pivotal factor in determining whether his bequests of stock trust and residuary_trust income and remainders to his grandchildren and great-grandchildren violated the rule_against_perpetuities testator’s bequest of lifetime income interests to the grandchildren was to all of his grandchildren as a class a grandchild born after testator’s death would be part of the grandchildren’s class and would receive stock trust income_for_life based on this it was considered possible that not all of the grandchildren’s income interests would vest during lives in being at testator’s death testator’s bequests of remainders to his great-grandchildren were to vest only after all of testator’s grandchildren died the life of a grandchild born after testator’s death would also be a measuring life therefore at testator’s death it was possible that the certain annuities were also created that have since terminated each trust considered herein ie stock trust and residuary_trust in the will and stock trust a and residuary_trust a under the children’s agreement provided for distribution of the remainder at the end of twenty-one years following the death of the last survivor of the persons whose lives measured the duration of that trust because the perpetuities issue in this case centers on the lives measuring a respective trust’s duration and not on the twenty-one year period following the death of the last survivor the twenty-one year period is hereafter assumed to be a part of each trust’s duration even though it is not specifically stated plr-105039-10 time for vesting of the great-grandchildren’s remainders would be based on a life not in being at testator’s death accordingly the validity of these bequests was in doubt the bequests in the stock trust if void passed to the residuary_trust at testator’s death the bequests in the residuary_trust if void passed to testator’s intestate estate as a reversionary_interest the children’s agreement the children were testator’s heirs at law they acquired his property passing by intestacy consequently on date shortly after testator died the children entered into an agreement the children’s agreement revising the time when the great-grandchildren’s remainders were to vest under the children’s agreement the trusts were to terminate and the great-grandchildren’s remainders were to take effect on the death of the survivor of the children and five grandchildren that is lives in being at testator’s death the children’s agreement also changed the will’s pro_rata distribution of the stock trust and residuary_trust remainder to a per stirpes distribution on termination trust principal would be divided into three equal parts and distributed per stirpes under this revision the great-grandchildren descended from child a would share one third of the principal per stirpes those descended from child b would share a second third per stirpes and those descended from child c would share the last third per stirpes in all other respects the terms of the revised stock trust stock trust a and residuary_trust residuary_trust a were the same as those provided in testator’s will on a date before date testator’s shares of stock were transferred to stock trust a residuary_trust a was not funded it is represented that no additions have been made since then the litigation over more than x decades the trust beneficiaries and others have instituted actions for state court determinations regarding testator’s will and the children’s agreement specifically in cite the highest court of state highest court considered testator’s bequests of income interests to the grandchildren the court reasoned that under testator’s will a grandchild’s income_interest would vest when his or her parent child a child b or child c died thus the grandchildren’s class would necessarily close at the death of the last survivor of the children who were in being at testator’s death highest court held that therefore the bequest of lifetime income interests to the grandchildren as a class did not violate the rule_against_perpetuities the court held the stock trust created in the will to be valid through the lives of the grandchildren testator’s bequest to the grandchildren though valid did not provide for distribution of a grandchild’s income share when the grandchild died before the trust ended on the death of the first grandchild to die on date the trustees petitioned the state court for instructions the state court held that based on testator’s intent a deceased grandchild’s children succeeded to the income share for the duration of plr-105039-10 highest court then considered testator’s bequest of remainders to his great-grandchildren the court reasoned that the grandchildren’s life estates preceded the remainders and the grandchildren’s class was not limited to lives in being at testator’s death because the remainders would take effect only after all of those including afterborn grandchildren died it was possible that the remainders would not vest within lives in being at testator’s death therefore highest court held the stock trust remainders to be void and illegal as violating the rule_against_perpetuities cite state statute the wait and see rule nearly y decades after highest court rendered its decision in cite the state legislature enacted state statute state statute provides a wait and see rule in determining whether a future_interest satisfies the rule_against_perpetuities or is void under the wait and see rule a future_interest does not violate the rule_against_perpetuities if actual events demonstrate that the interest did in fact vest by the end of the permissible period state statute applies retroactively to all interests heretofore created following the enactment of state statute highest court considered the statute’s retroactivity cite in the case before the court the trust was created many decades before state statute was enacted at the time of creation certain interests were void as violating the rule_against_perpetuities however highest court applied state statute’s wait and see rule to conclude in retrospect that the interests were not void and did not violate the rule_against_perpetuities as a result the courts of state now apply the wait and see rule retroactively to conclude that a future_interest that was void when created many years before state statute was enacted is not void because in hindsight it vested before the permissible period ended accordingly such otherwise void interests are retroactively sustained as not violating the rule_against_perpetuities cite however highest court has not yet addressed due process issues that may be presented the trust cite by inference highest court also considered testator’s bequest of the residuary_trust remainders highest court in effect confirmed that the stock trust remainder and residuary_trust remainder passed by intestacy to the children however the court did not rule on how the remainder would pass to the great-grandchildren in contrast the legislature of state a enacted state a statute which like state statute retroactively applies a wait and see rule to determine whether a future_interest that was void at the time it was created before the state a statute was enacted did in fact vest during the permissible period highest court of state a refused to apply the wait and see rule retroactively despite the relevant language in state a statute instead that court addressed issues of constitutionality and held that state a statute could not be applied retroactively to destroy vested or substantive rights created before state a statute was enacted cite plr-105039-10 the actualities in this case no additional grandchildren were born after testator’s death the lives of the children and the five grandchildren were all in being at testator’s death all of the children have died the last survivor of the five grandchildren died on date at the time there were z great-grandchildren of testator the trust will terminate twenty-one years after date which is date of testator’s z great-grandchildren a descended from child a b descended from child b and c descended from child c if the wait and see rule is applied to validate testator’s bequest of remainders to his great-grandchildren the principal would be divided into z equal shares and distributed under the will alternatively if testator’s disposition of the remainders is considered void the principal would be divided into three equal shares and distributed per stirpes under the children’s agreement the portion of a one-third share distributable to a great-grandchild would depend on the framework of the family line ie child a’s child b’s or child c’s to which that great-grandchild belongs great-grandchildren’s litigation there is a substantial difference between what a great-grandchild would receive in a per capita distribution and what he or she would receive in a per stirpes distribution on date the great-grandchildren benefitting from a per capita distribution the per capita parties instituted their action in state court for adjudication on the distribution of the stock trust remainder the great-grandchildren benefitting from a per stirpes distribution the per stirpes parties opposed the suit and also requested adjudication in addition an action was instituted concerning the distribution of income during the twenty-one year period state court combined the proceedings to consider the income and principal issues together cite over a d-year period guardians ad litem were appointed there was extensive discovery counsel filed three voluminous sets of briefs and the court heard two days of oral arguments the per capita parties argued that the wait and see test of state statute now applies under that test testator’s the will’s disposition of the stock trust remainder does not violate the rule_against_perpetuities therefore the stock trust principal is distributable per capita to testator’s living great-grandchildren and deceased great-grandchildren whose living descendants would take by representation the per stirpes parties argued that the highest court’s determinations were final and those rulings can not now be constitutionally impaired by a later-in-time state statute or judicial_ruling because highest court determined the remainders in the will to be void they passed as reversionary interests by intestacy to the children as such the remainders passed per stirpes under the children’s agreement plr-105039-10 some parties argued that trust income should be distributed per stirpes through the roots of the children for the duration of the stock trust others argued that the income is distributable per capita the court encouraged the parties to explore ways to resolve their differences through negotiation and compromise rather than through continued litigation among the potential outcomes regarding trust principal was a judicial_ruling that i ii iii principal is distributable per capita on date under the terms of the stock trust in the will or principal is distributable per stirpes on date under the terms of the children’s agreement or principal was distributable as of the last surviving grandchild’s death under the residuary_trust in the will which vested or will vest in the takers under the residuary_trust among the potential outcomes regarding trust income was a judicial_ruling that iv v vi income is distributable per stirpes from the death of the last surviving grandchild to date under either the will or the children’s agreement or income is distributable per capita from the death of the last surviving grandchild to date under the will or the children’s agreement or all rights to receive stock trust income terminated when the last surviving grandchild died at which time the stock trust principal was distributable under the residuary_trust of the will the great-grandchildren’s settlement agreement the parties negotiated extensively at the outset they agreed that the issues could be settled using a fractional difference settlement based on an assessment of the relative strengths of their adverse positions under the general framework of the compromise the great-grandchildren’s settlement agreement the ggc agreement provides for the stock trust principal to be divided into z separate shares based on the number of testator’s then living great-grandchildren and deceased great-grandchildren with then living children the share of a deceased great-grandchild will be divided per stirpes among that for purposes of describing the ggc agreement the stock trust and stock trust a are considered to be the same trust plr-105039-10 great-grandchild’s living descendants the stock trust assets will be divided in accordance with certain percentages the formula of the compromise provides for a q per stirpes r per capita fractional difference as to income and an s per stirpes t per capita fractional difference as to principal after the division into separate shares u of each great-grandchild’s share will be distributed outright to the great-grandchild if living or if the great-grandchild is deceased to his or her living descendants per stirpes the remaining v of each share will continue in trust for such great-grandchild or such descendants until the termination_date date each share will be a separate trust the respective great-grandchild or deceased great-grandchild’s descendants will be the sole beneficiary of the share for distributions of income and principal a sophisticated algorithm taken to thirteen decimal places will be used in the pro_rata division and outright distributions the division will take into account both the market_value and respective tax bases of the assets the ggc agreement was presented to state court for consideration the state court approved the settlement and ordered the division and distribution of the stock trust as set forth in the ggc agreement the ggc agreement is subject_to a favorable ruling from the internal_revenue_service you have asked for the following rulings the terms of the ggc agreement will not cause distributions from the stock trust or the continuing separate settlement trusts to become subject_to the generation-skipping_transfer_tax the terms of the ggc agreement will not cause any party to the agreement to make a gift to any other party to the ggc agreement the terms of the ggc agreement will not cause any party to the agreement to be required to include trust assets in his or her gross_estate unless such assets are distributable or have been distributed to such party prior to his or her death the terms of the ggc agreement will not cause any party to the agreement to realize income from the sale_or_exchange of any trust assets or interests ruling generation-skipping_transfer gst tax sec_2601 of the internal_revenue_code imposes a tax on every generation-skipping_transfer which is defined under sec_2611 as a taxable_distribution a taxable_termination or a direct_skip under of the tax_reform_act_of_1986 the act gst tax is generally applicable plr-105039-10 to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the tax does not apply to a transfer under a_trust that was irrevocable on date except to the extent the transfer is made out of corpus added to the trust by an actual or constructive_addition after date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under sec_26_2601-1 will not cause the trust to lose its exempt status these rules are applicable only for purposes of determining whether an exempt trust retains exempt status for gst tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a court-approved settlement of a bona_fide issue regarding the administration of the trust or the construction of terms of the governing instrument will not cause an exempt trust to be subject_to chapter if the settlement is the product of arm's length negotiations and the settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement a settlement that results in a compromise between the positions of the litigating parties and reflects the parties' assessments of the relative strengths of their positions is a settlement that is within the range of reasonable outcomes in this case the stock trust was irrevocable on date further it is represented that there have been no actual or constructive additions to the stock trust after date accordingly the stock trust is exempt from gst tax under sec_26_2601-1 the terms of the ggc agreement including the proposed division of the stock trust into separate shares and partial distributions of principal are the result of a settlement of substantial issues between the per capita parties and the per stirpes parties these issues have been tenaciously litigated over more than x decades highest court rendered opinions regarding these trusts many years ago however state statute has since been enacted with retroactive effect and highest court has affirmed state statute’s retroactive application to a similarly-created trust in light of this that court’s earlier determinations of the issues in this case are now in question we conclude that the ggc agreement constitutes a settlement of bona_fide issues concerning the provisions of the stock trust and its administration we also conclude that the terms of the ggc agreement are the product of arm's length negotiations they represent a compromise between the positions of the parties and reflect the parties' assessments of the relative strengths of their positions we further conclude that the ggc agreement is within the range of reasonable outcomes under the plr-105039-10 governing instruments and the applicable state law addressing the issues resolved in the ggc agreement accordingly based upon the facts submitted and the representations made we rule that the division of the stock trust into the z separate great-grandchildren’s trusts and the distributions to the living great-grandchildren and the descendants by representation of a deceased great-grandchild made in accordance with the ggc agreement will not cause the stock trust the continuing separate stock trusts or the distributions as described above to be subject_to the generation-skipping_transfer_tax ruling gift_tax issue sec_2501 provides that a tax is imposed for each calendar_year on the transfer of property by gift during such calendar_year sec_2511 provides that the gift_tax applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-1 of the gift_tax regulations provides that as to any property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave in him or her no power to change its disposition whether for his or her own benefit or for the benefit of another the gift is complete sec_25_2511-1 provides that any transaction in which an interest in property is gratuitously passed or conferred upon another regardless of the means or device employed constitutes a gift subject_to tax whether an agreement settling a dispute is effective for gift_tax purposes depends on whether the settlement is based on a valid enforceable claim asserted by the parties and to the extent feasible produces an economically fair result see 674_f2d_761 9th cir citing 387_us_456 thus state law must be examined to ascertain the legitimacy of each party's claim if it is determined that each party has a valid claim the service must determine that the distribution under the settlement reflects the result that would apply under state law if there is a difference it is necessary to consider whether the difference may be justified because of the uncertainty of the result if the question were litigated the proposed settlement is a mediated settlement and is based on arm's length negotiations among all the parties all interested parties who hold or may hold an interest in the trusts including any minors and unborn heirs have been represented in the negotiations as discussed above the ggc agreement represents the resolution of a bona_fide plr-105039-10 controversy between the parties the terms of the ggc agreement are the product of arm's length negotiations and represent i a compromise between the positions of the per capita parties and the per stirpes parties and ii reflect the parties' assessments of the relative strengths of their positions we further conclude that the ggc agreement is within the range of reasonable outcomes under the governing instruments and applicable state law accordingly based on the facts submitted and representations made we conclude that the terms of the ggc agreement as described above will not cause any of the beneficiaries to have made a taxable gift_for purposes of the federal gift_tax under sec_2501 ruling estate_tax issue 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_2033 provides that the value of the gross_estate includes the value of all property to the extent of the interest therein of the decedent at the time of death sec_2035 provides that if the decedent transferred an interest in property or relinquished a power with respect to any property during the 3-year period ending on the date of death and the value of the property or interest therein would have been included in the gross_estate under sec_2036 sec_2037 sec_2038 or sec_2042 if the interest or power had been retained by the decedent on the date of death then the value of the gross_estate includes the value of the property or interest that would have been so included sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in the case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period that does not in fact end before his death possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income from the property sec_2037 provides that the value of the gross_estate includes the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise if possession or enjoyment of the property can through ownership of such interest be obtained only by surviving the decedent and the decedent has retained a reversionary_interest in the property and the value of such reversionary_interest immediately before the death of the decedent exceed sec_5 percent of the value of such property plr-105039-10 sec_2038 provides that the value of the gross_estate includes the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona fine sale for adequate_and_full_consideration in money_or_money's_worth by trust or otherwise where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power either by the decedent alone or in conjunction with any person to alter amend or revoke or where the decedent relinquished any such power during the 3-year period ending on the date of the death sec_2041 provides that the value of the gross_estate shall include the value of all property with respect to which the decedent possessed a general_power_of_appointment at the time of death sec_2041 defines the term general_power_of_appointment as a power that is exercisable in favor of the decedent the decedent's_estate the decedent's creditors or the creditors of the decedent's_estate in order for sec_2035 through to apply a decedent must have made a transfer of property or an interest therein except in the case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth under which the decedent retained an interest in or power over the income or corpus of the transferred property as discussed above the ggc agreement represents the resolution of a bona_fide controversy between the parties it is a settlement of bona_fide issues and is the product of arm's length negotiations it reflects the parties' assessments of the relative strengths of their positions no great-grandchild or deceased great-grandchild’s descendants by representation has made a transfer to the stock trust or to any other great-grandchild by reason of the settlement agreement accordingly based upon the facts submitted and representations made we conclude that the terms of the ggc agreement will not cause any party to the agreement to have made a transfer within the meaning of sec_2035 through however once the ggc agreement becomes effective any trust property actually distributed or receivable by a beneficiary or his or her assignee would generally be included in the beneficiary’s federal transfer_tax base see eg sec_2033 sec_2041 sec_2501 ruling income_tax issue sec_61 provides that gross_income includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized plr-105039-10 sec_1001 provides that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained 499_us_554 addresses the issue of whether a sale_or_exchange that has taken place results in the realization of gain_or_loss under sec_1001 in cottage savings a financial_institution exchanged its interests in one group of residential mortgage loans for another lender's interests in a different group of residential mortgage loans the two groups of mortgages were considered substantially identical by the agency that regulated the financial_institution the supreme court in cottage savings u s pincite concluded that sec_1_1001-1 reasonably interprets sec_1001 and stated that an exchange of property gives rise to a realization event under sec_1001 if the properties exchanged are materially different in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent cottage savings u s pincite the court held that mortgage loans made to different obligors and secured_by different homes did embody distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans cottage savings u s pincite in the present case state governing statute a allows the court for cause shown to authorize the division of a_trust into two separate trusts on such terms and conditions and with such notice as the court directs in addition state governing statute b gives trustees the power to distribute in cash or in_kind or partly in each and allocate particular assets in proportionate or disproportionate shares in this case the court order approving the ggc agreement orders the division and distribution of the stock trust as set forth in the ggc agreement accordingly the court approved the non-pro rata distributions called for in the ggc agreement and further authorized the trustees to make the necessary transfers and assignments of the unconverted investment securities t herein awarded in_kind accordingly the submission concludes that the distribution scheme in this case is authorized by state law we agree the stock trust will be divided into z trusts on a non pro-rata basis under the state statutes cited above the court has the authority to authorize the trustees to make this type of non pro-rata apportionment thus the proposed division and distribution of the plr-105039-10 stock trust assets among the z trusts will not result in a material difference in_kind or extent of the legal entitlements enjoyed by the beneficiaries within the meaning of cottage savings accordingly based upon the facts submitted and representations made we conclude that the division of the stock trust into the z great-grandchildren’s trusts will not result in the recognition of gain_or_loss under sec_1001 by the stock trust any beneficiary of the stock trust or any separate great-grandchild’s trust the rulings in this letter pertaining to the federal estate and or generation-skipping_transfer_tax apply only to the extent that the relevant sections of the internal_revenue_code are in effect during the period at issue except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours leslie h finlow acting senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosure copy for purposes


internal_revenue_service number release date index number -------------------------- ------------------------------------------ ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ----------- telephone number ---------------------- refer reply to cc ita b04 plr-109158-14 date date legend ------------------------------------------------------ ---------------------------------------------------- ---------------------------------------------------------- -------------------------------------------------------------- ----------------------------------------------------- --------------------------------------------------------------------------------- individual taxpayer llc1 llc2 lp1 lp2 ----------------------------------------------------------------------------------------------------------- year year dollar_figurea dollar_figureb dollar_figurec dollar_figured dollar_figuree dollar_figuref accountant firm ------- ------- ------------ ------------ -------------- ------------ -------------- ------------ -------------------------------- ------------------------------- dear -------------- this letter responds to your letter requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to make a regulatory election specifically you have requested an extension of time to make an election under sec_108 of the internal_revenue_code and sec_1_108-5 of the income_tax regulations to exclude income resulting from the discharge of qualified_real_property plr-109158-14 business indebtedness and to reduce the basis of depreciable real_property effective for taxpayer’s year tax_return facts individual reports income on a calendar_year uses the cash_receipts_and_disbursements_method of accounting and is the sole shareholder of taxpayer an s_corporation taxpayer uses the cash_receipts_and_disbursements_method of accounting reports income on a calendar_year and is a real_estate brokerage company taxpayer has an ownership_interest either directly or indirectly in partnerships llc1 llc2 lp1 and lp2 in year llc2 lp1 and lp2 entered into debt modification agreements whereby a portion of each note held by each partnership was forgiven which resulted in cancellation_of_indebtedness_income cod in the same year taxpayer received schedule k-1s from i llc1 that showed cod in the amount of dollar_figurea dollar_figureb of which qualifies for exclusion under sec_108 ii lp1 that showed cod in the amount of dollar_figurec dollar_figured of which qualifies for exclusion under sec_108 and iii lp2 that showed cod in the amount of dollar_figuree dollar_figuref of which qualifies for exclusion under sec_108 the three schedule k-1s were provided to accountant who was engaged to prepare taxpayer’s year form_1120s accountant a qualified_tax preparer with many years of experience properly excluded the eligible portion of cod as provided in each schedule_k-1 however due to an oversight accountant failed to complete and include form_982 taxpayer’s year form_1120s was timely filed in year taxpayer provided firm with a copy of its year form_1120s to review in anticipation of hiring firm as its new accountant upon review of the return firm noticed that the cod eligible for exclusion under sec_108 was actually excluded but form_982 was not included with form_1120s after discovering accountant’s oversight in not including the form_982 making the election under sec_108 and sec_1_108-5 on taxpayer’s year form_1120s taxpayer filed this request for an extension of time to make the election taxpayer accountant and firm have submitted affidavits consistent with the above facts taxpayer represents that granting relief under sec_301_9100-3 will not result in a lower tax_liability in the aggregate for all years to which the election applies than taxpayer and all interested parties would have had if the election had been timely made taking into account the time_value_of_money taxpayer’s adjusted_basis in the depreciable_property is greater than the amount of cod income taxpayer will not exclude an amount under sec_108 that exceeds the excess of the principal_amount of indebtedness over the fair_market_value of the real_property taxpayer will reduce basis in its depreciable real_property on the year tax_return and taxpayer will plr-109158-14 reduce only the basis of depreciable real_property that would have been eligible for such basis_reduction if the election had been timely made on the original return law and analysis sec_108 provides that gross_income does not include any amount that but for sec_108 would be includible in gross_income by reason of the discharge_of_indebtedness if in the case of a taxpayer other than a c_corporation the indebtedness discharged is qualified_real_property_business_indebtedness sec_108 provides in general that the amount excluded under sec_108 with respect to any qualified_real_property_business_indebtedness shall not exceed the excess of the outstanding principal_amount of such indebtedness immediately before the discharge over the fair_market_value of the real_property described in sec_108 as of such time sec_108 requires a taxpayer to make an election to exclude cod income under sec_108 sec_108 provides that in the case of a partnership sec_108 and sec_108 are applied at the partner level sec_1_108-5 provides that the election under sec_108 is made on the timely filed including extensions federal_income_tax return for the taxable_year in which the taxpayer has discharge_of_indebtedness income that is excludible from gross_income under sec_108 the election is made on a completed form_982 reduction of tax_attributes due to discharge_of_indebtedness and sec_1082 basis_adjustment sec_301_9100-1 through sec_301_9100-3 provide the standards that the service will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-3 provides that requests for extension of time for regulatory elections other than automatic extensions covered in sec_301_9100-2 will be granted when the taxpayer provides evidence including affidavits to establish that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government under sec_301_9100-3 a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election however a taxpayer is not considered to have reasonably relied on a qualified_tax professional if the taxpayer knew or should have known that the professional was not competent to render advice on the regulatory election or was not aware of all relevant facts in addition sec_301_9100-3 provides that a taxpayer is deemed not to have acted reasonably and in good_faith if the taxpayer- plr-109158-14 i seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested ii was informed in all respects of the required election and related consequences but chose not to make the election or iii uses hindsight in requesting relief sec_301_9100-3 provides that the commissioner will grant a reasonable extension of time to make the regulatory election only when the interests of the government will not be prejudiced by the granting of relief sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in a taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money similarly if the tax consequences of more than one taxpayer are affected by the election the government's interests are prejudiced if extending the time for making the election may result in the affected taxpayers in the aggregate having a lower tax_liability than if the election had been timely made sec_301_9100-3 provides that the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable_year that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer's receipt of a ruling granting relief under this section under the facts submitted by taxpayer we conclude that taxpayer has acted reasonably and in good_faith under sec_301_9100-3 in addition we conclude that granting relief will not prejudice the interests of the government under sec_301_9100-3 conclusion based solely on the information submitted and the facts as represented in the ruling_request we grant taxpayer an extension of days from date the date we sent the letter to file an amended year return to make the election under sec_108 and sec_1_108-5 the election is to be made on form_982 except as expressly provided in the preceding paragraph we do not express or imply an opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically this letter does not rule on whether the amount of income at issue is properly treated as cancellation of indebtedness plr-109158-14 income under sec_61 in addition this letter also does not rule on whether the income in fact qualifies for exclusion from income under sec_108 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely michael j montemurro branch chief branch income_tax accounting