internal_revenue_service number release date index number ------------------------------ ------------------------------- --------------------------------------------- ------------------------- department of the treasury washington dc person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 - plr-163830-03 date june company --------------------------- ----------------------- ---------------------- ---------------------- ------------------- --------------------------- --------------------- ------------------------------- ------------------ ------------------------------- ------------- ------------------------------ --------------------- ---------------------- ------------------ -------------------------------- ------------------- -------------------- ------------------- ---------------------------- ----------------- --------------------- ---------------------- ------------------ date date a b c d e f g h i j k l m n o p q r s t plr-163830-03 dear ------------- this letter responds to a letter dated date written on behalf of company requesting a ruling that company's split-dollar_life_insurance arrangements will not cause more than one class of stock within the meaning of sec_1361 of the internal_revenue_code facts according to the information submitted company is a calendar-year s_corporation that uses the accrual_method of accounting company was incorporated date and elected to be treated as an s_corporation effective date company has issued both voting and non-voting common_stock under state law each class has identical rights with respect to operating and liquidating distributions company proposes to enter into split-dollar_life_insurance agreements with trusts established for a b c d e f g h i j k l m n o p r s and t the recipients company intends to execute split-dollar insurance agreements with each of the recipients or with the irrevocable trusts established by the recipients recipients are obligated to pay company a portion of the premium equal to the lowest annual cost of insuring the joint lives of the insureds on the applicable policy determined in accordance with notice_2002_8 and final sec_1_61-22 t d company is required to pay the total premium if the recipient fails to timely pay their portion of the premium to company the payment by company to the insurance provider will be treated as a loan made by company to recipient upon the death of the survivor of the recipients company has the right to receive a portion of the proceeds of the policy equal to any outstanding loans owed to company by recipient plus the greater of the total amount of premiums_paid by company or the cash_surrender_value of the policy law and analysis any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for the year domestic_corporation that is not an ineligible_corporation and that meets the requirements specified in sec_1361 through d class of stock sec_1_1361-1 of the income_tax regulations provides that sec_1361 provides that s_corporations may not have more than one sec_1361 provides that the term small_business_corporation means a sec_1361 provides that the term s_corporation means with respect to sec_1_1361-1 provides that the determination of whether all plr-163830-03 except as provided in sec_1_1361-1 relating to instruments obligations or arrangements treated as a second class of stock a corporation is treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter articles of incorporation bylaws applicable state law and binding agreements relating to distribution and liquidation proceeds collectively the governing provisions a commercial contractual agreement such as a lease employment agreement or loan agreement is not a binding agreement relating to distribution and liquidation proceeds and thus is not a governing provision unless a principal purpose of the arrangement is to circumvent the one class of stock requirement of sec_1361 and sec_1_1361-1 because the agreements in this case provide that at the time company pays the premiums the recipients must reimburse company to the extent the payments confer an economic benefit to the recipients company's split-dollar_life_insurance agreements do not alter rights to distribution and liquidation proceeds conclusion therefore based solely on the facts submitted and the representations made we conclude that company's split-dollar_life_insurance agreements are fringe_benefits not a vehicle to circumvent the one class of stock requirement accordingly company’s split- dollar life_insurance arrangements do not create a second class of stock that would prevent company from qualifying as a small_business_corporation under sec_1361 except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transactions described above under any other provision of the code this ruling is directed only to the taxpayer on whose behalf it was requested sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer and your second listed authorized representative 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 plr-163830-03 the material submitted in support of the request for rulings it is subject_to verification on examination s david r haglund sincerely david r haglund senior technician reviewer branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


uil code release number release date date date internal_revenue_service e ge technical_advice_memorandum area manager taxpayer's name taxpayer's address taxpayer's identification_number years involved conference held legend s d o i o m m o t l t c a h s o v n a h a c s x n o date date o o p h date date date date date date date date date date date date date year year year t n a w m a i t t a t q a o i o v n t o h t c e x x s n kk issues whether w qualified as an insurance_company under sec_501 of the internal_revenue_code for tax years ending december of year and year whether w was a member of a controlled_group as defined in sec_1563 of the code as modified by sec_831 as of december of year if w was a member of a controlled_group as of december of year has w exceeded the premium limitation of dollar_figure set forth in sec_501 of the code for tax_year ending december of year whether w a foreign company that made an election under sec_953 of the code continues to qualify for the election if it is not an insurance_company whether w can rely on the determination_letter granted by the service allowing it to claim tax exempt status under sec_501 of the code ifw cannot rely on its determination_letter what is the effective date of revocation whether w is entitled to relief pursuant to sec_7805 of the code facts w was incorporated in r on date effective date w assumed the assets liabilities and insurance_business of p a former member of the c since its inception w has been owned by v a domestic_partnership during year v had several ownership changes as of january of year of the profits loss and capital interest were held by a and cc other individuals partner of v since date acquired a capital interest during the first aa months of year upon the sale of q to o in date q’s interest in v was sold to x an entity exempt under sec_501 of the code located in r in v and thus w as of date during december of year x acquired the profits and loss interests and the balance of the capital interests of the remaining individual partners but for a and b such that v and thus w was owned dd by x ee by a and ff by b by december of year v was owned z by a and x x owned an bb capital interest only q the managing w's predecessor p previously filed a form_1024 application_for recognition of exemption under sec_501 of the code on date described its activities as follows in its application ww p commenced writing business as a member of the c in date and continues to write business through the c until it ceased accepting business in date that time u executed an e agreement with the c and has been running off its business since that time through t at during the time u was writing business they wrote both property and casualty business on a direct facultative and treaty reinsurance basis u is committed to remaining as an active writer of insurance_business u is currently reviewing proposals that will facilitate its withdrawal from the c via an f agreement which will allow it to move its operations to a new jurisdiction where it cannot only run off its c business but can accept new business for its own account u has explored the possibility of joining the g and is negotiating with the h about redomesticating its charter to that state to enable it to begin writing insurance premiums in the state of action on these proposals is expected before mid-year date p described its present and future sources of financial support as follows as an insurance_company in run-off the primary source_of_income is from invested_assets the company is also recovering losses under a catastrophe reinsurance contract and currently expects to recover approximately dollar_figuregg over the next year the endeavors cited above will generate income from new business written in the new jurisdiction the service granted p tax exempt status under sec_501 of the code on date w filed a form_1024 on date seeking tax exempt status under sec_501 of the code w described its activities on form_1024 as follows w is the successor of p which was an underwriting member of the c w commenced writing business as a member of the c in date and continued to write business until date of that year when c ceased to accept business at that time u executed an e agreement with the c through a transfer of assets and liabilities on date w will continue the in the future the company will insurance_business of p from its domicile in r continue to insure business at a level which will qualify for the tax exemption w was formed specifically to continue the operation of p due to valid business reasons necessitated by the d shareholders of w are the same as p w further explained in date p executed an e agreement with the c and has been running off its business since that time through its j company in order for the c to cease operations p was forced to withdraw from the c and find a new jurisdiction where it could continue the run-off of the c business through a transfer of k p withdrew from the c and transferred its operation to w as of date w represented that its present and future sources of financial support would be derived from premium income and investment_income the service granted w’s request for tax exempt status on date w has made the election under sec_953 to be treated as a domestic_corporation for united_states income_tax purposes during year or year w had in-force coverage originating through the c which it assumed in the date reorganization with p w has been in run-off of the coverage originating from the c this run-off began in date under p and after the date reorganization continued under w through year and year from its inception through year w’s assets and surplus grew as part of its date form_1024 w reported date surplus of dollar_figureb on assets of dollar_figurec and loss_reserves of dollar_figured an equity contribution of dollar_figuree was made to w in date bringing its contributed surplus to dollar_figuref on assets of dollar_figureg the year financial statement for w indicates that it had surplus of dollar_figureh on assets of dollar_figurei with loss and loss expense provisions of dollar_figurej the year statement indicates w had surplus of dollar_figurek on assets of dollar_figure with loss and loss expense provisions of dollar_figurem the notes to the year statutory return filed with the insurance division of the r’s l indicate that in year w advanced dollar_figuren to x by a note that is non-interest bearing and has no fixed terms of repayment by the end of year surplus was dollar_figure on assets of dollar_figurep while assets and surplus were increasing losses appear to have been declining loss and loss expense was reported as dollar_figureq and dollar_figurer for year and year respectively on its forms w reported program service revenue’ ie insurance premiums attributable to its run-off of p’s previous insurance_business totaling dollar_figures and dollar_figuret for the tax years ending december of year and december of year respectively w also reported reinsurance income of dollar_figureu and dollar_figurehh for the tax years ending december of year and december of year respectively attributed to the reduction of loss loss expense provision w represents that while in prior and subsequent years its insurance activities were superficially more extensive because of market conditions the apparent dearth of activity during the years involved does not reflect the true nature and extent of its insurance activities during the years involved law and analysis issue one whether w qualified as an insurance_company under sec_501 of the code for years ending december of year and december of year an insurance_company other than life is exempt pursuant to sec_501 of the code if the written premiums for the taxable_year do not exceed dollar_figure if an entity is a part of a consolidated_group sec_501 provides that all net written premiums or direct written premiums of the members of the group are aggregated to determine whether the insurance_company meets the requirements of sec_501 for taxable years beginning after date sec_501 grants tax exempt status to insurance_companies other than life if i the gross_receipts for the taxable_year do not exceed dollar_figure and ii more than percent of such gross_receipts consist of premiums see pension funding equity act of publaw_108_218 title ll a b 118_stat_610 date this change in the law does not affect w however because the taxable years at issue in w are year and year neither the code nor the regulations define the terms insurance or insurance_contract the united_states supreme court however has explained that for an arrangement to constitute insurance for federal_income_tax purposes both risk shifting and risk_distribution must be present 312_us_531 the risk shifted and distributed must be an insurance risk see eg 572_f2d_1190 cir cert_denied 439_us_835 revrul_89_96 1989_2_cb_114 no single factor determines whether a company’s primary and predominant business activity for a taxable_year was the issuing of insurance or annuity_contracts or the reinsuring of risks underwritten by insurance_companies thus in some cases a start-up company or a company winding down operations may qualify as an insurance_company even if premiums represent less than half the receipts of the company provided the company's capital and efforts is devoted primarily to its insurance_business for the years involved an insurance_company for federal_income_tax purposes is a company whose primary and predominant business activity during the year was the issuing of insurance or annuity_contracts or the reinsuring of risks underwritten by insurance_companies sec_1_801-3 of the income_tax regulations w argues that its activities in prior and subsequent years are relevant to evaluate its activities in the years in question w represents that while in prior and subsequent years its insurance activities were superficially more extensive because of market conditions the apparent dearth of activity during the years involved does not reflect the true nature and extent of their insurance activities during the years involved w cites no authority in support of their argument this argument is contrary to the regulations and caselaw the regulation clearly requires ascertaining the activity done during the tax year’ sec_1_801-3 of the regulations in 344_fsupp_870 d s c aff'd per curiam 481_f2d_609 cir the court described this standard i t is apparent that the nature and character of the business actually done in a particular tax_year is controlling on whether a company is to be treated as an insurance_company under the law the test is applied on a year to year basis so it is possible for a company to qualify as a life_insurance_company in one year but not in the preceding or succeeding years and in 300_fsupp_387 n d tex rev'd on other grounds 425_f2d_1328 cir the court noted that mjoreover the test is to be applied to the taxpayer on a year by year basis as w notes companies running off in force coverage can qualify as insurance_companies see eg h_r conf_rep no cong 2d sess pincite ‘it is not intended that a company whose sole activity is the run-off of risks under the s7- company’s insurance contracts be treated as other than an insurance_company even if the company has little or no premium income w's financial condition is not consistent with that of an insurance_company that m’s r insurance practice issued a date newsletter insurance truly is in run-off issues in which the lead article was exit strategies for insurance companies’ ie i jnsurance companies captive or otherwise which are in run-off ie no longer writing new business the article identified as an implication of being in run-off that it is likely that the costs of conducting the run-off will become increasingly disproportionate in comparison to the level of activity and size of outstanding liabilities accordingly shareholders and directors will be concerned that the capital tied up in the run-off entity is providing a poor return if any the article then describes various options designed to hasten the closure process similarly in describing run-offs jacoby thwaites writes in winds of change run off business autumn that it's a very great mistake to look at run off insurance as if it were a live insurance_company suffering a temporary embarrassment of underwriters moreover t here’s a great deal of concern in the industry about capitalization - whether there is too much or too little about the need to deploy capital much more efficiently - and shareholders are deeply concerned about why they have capital tied up in run off accordingly it is in the interests of the new companies now entering the run off market those that are buying up run off companies instead of acting as outsourcing or management companies to be as efficient as possible the industry was in year moving towards a mechanism that tackles the business of run off by means of a capital base that buys it and then closes it as efficiently as possible in the hope of making something on the deal this contrasts with the current system in which run offs are typically operated by a management company on fee-based terms creating an incentive for delay a m best provides a well-known and commonly relied upon service rating the financial condition of insurance_companies among the tests a m best uses to test profitability is the operating ratio which measures overall pre-tax operational profitability and therefore does not reflect operating_expenses or capital_gains a m best considers that t he normal range for this test for all types of insurers is from to an operating ratio of more than indicates a company is unable to generate profits from its underwriting and investment activities see best's insurance reports - property casualty at xv and cover iv w's five year operating ratio for was ii for year and jj for year based on the foregoing w was not operated during year and year ina manner consistent with the goals of a run off business w’s assets and surplus increased without a corresponding increase in the proportion of its loss_reserves which if anything decreased w's expenses increased from year to year but this is largely attributed to bad_debt reinsurance loss management fees declined w did not undertake any efforts to either expedite closing the run off business or to develop additional business issue two whether w was a member of a controlled_group as defined in sec_1563 of the code as modified by sec_831 as of december year whether the corporation is a member of a controlled_group is relevant to determining whether it qualifies under sec_501 of the code as a tax exempt insurance_company in order to qualify the company’s net or direct written premiums for the tax_year must not be more than dollar_figure for purposes of determining whether the company has more than dollar_figure of premiums the company is treated as receiving the premiums received by all members of the controlled_group sec_501 provides that controlled_group has the meaning given such term by sec_831 under sec_831 the term controlled_group means any controlled_group as defined in sec_1563 with certain modifications sec_501 of the code provides that insurance_companies other than life_insurance_companies will be exempt from federal income taxes if their net or direct written premiums do not exceed dollar_figure in determining whether an insurance_company meets the dollar_figure premium limitation sec_501 provides that such company shall be treated as receiving amounts which are received by all other companies or associations which are members of the same controlled_group sec_501 refers us to the definition of a controlled_group in sec_831 under sec_831 the term controlled_group means any controlled_group_of_corporations as defined in sec_1563 except that more than percent shall be substituted for at least percent’ each place it appears in sec_1563 and il subsections a and b d of sec_1563 shall not apply sec_1563 of the code contains multiple definitions of a controlled_group of sec_1563 enumerates four types of controlled groups during the corporations years at issue these groups were defined as follows parent-subsidiary controlled group--one or more corporations connected with a common parent through stock brother-sister controlled ownership of percent or more by voting power or value group--two or more corporations if five or fewer persons who are individuals estates or trusts own within the meaning of subsection d stock possessing percent or more by voting power or value of each corporation and more than percent by voting power or value of each corporation taking into account only identical stock ownership of each person combined group--three or more corporations each of which is a member of a group of corporations described by paragraph or and one of which is a common parent_corporation in a group described in paragraph and is included in a group of corporations described in paragraph and certain insurance companies--two or more insurance_companies subject_to taxation under sec_801 which are members of a controlled_group described in paragraph or shall be treated as a controlled_group_of_corporations separate from any other corporations that are members of the controlled_group_of_corporations described in paragraph or during the years at issue w was part of x’s parent-subsidiary_controlled_group a parent-subsidiary_controlled_group under sec_1563 consists of one or more chains of corporations connected through stock ownership with a common parent_corporation if-- a stock possessing at least percent of the total combined voting power of all classes of stock entitled to vote or at least percent of the total value of shares of all classes of stock of each of the corporations except the common parent_corporation is owned within the meaning of subsection d by one or more of the other corporations and b the common parent_corporation owns within the meaning of subsection d stock possessing at least percent of the total combined voting power of all classes of stock entitled to vote or at least percent of the total value of shares of all classes of stock of at least one of the other corporations excluding in computing such voting power or value stock owned directly by such other corporations again under sec_831 of the code more than percent shall be substituted for at least percent each place it appears in sec_1563 and subsections a and b d of sec_1563 shall not apply as of date x owned an bb capital interest only in v a partnership which wholly owned w by december of year x had acquired dd of the interests in v for the purpose of determining whether a corporation is a member of a parent-subsidiary_controlled_group the under sec_1563 partnership attribution_rules of sec_1563 apply s tock owned directly or indirectly by or for a partnership shall be considered as owned by any partner having an interest of percent or more in either the capital or profits of the partnership in proportion to his interest in capital or profits whichever such proportion is the greater therefore x is attributed ownership of w on these facts w was a member of x's parent-subsidiary_controlled_group as of date because x had acquired bb of the capital interest in w additionally w was a member of the x controlled_group as of december of year because x owned dd of the interests in w y is likewise a member of x's controlled_group because it is wholly owned by x the fact that sec_1563 of the code does not apply under sec_831 does not affect the analysis in this situation since x’s ownership of the interests in v qualifies w as part of x’s parent-subsidiary control group the fact that subsection b d does not apply likewise does not affect the analysis because as will be discussed further below the provisions of subsection b are applied to determine which members of a controlled_group are also component members according to the legislative_history of sec_1563 and the way that sec_1563 has historically been applied whether a corporation is a component member’ is irrelevant to the determination of whether it is a member of the controlled_group w argues that during the tax years at issue neither w nor x was part of a this argument is based on a misinterpretation of the statute and a controlled_group belief that an excluded corporation defined by sec_1563 of the code is not part of a controlled_group the taxpayer argues that w is an excluded corporation and not a member of a controlled_group for the taxable_year ended december of year under sec_1563 because it was only constructively owned for sec_1563 purposes by x for approximately kk days in the year likewise the taxpayer argues that x was not a member of the controlled_group because it was a tax-exempt corporation under sec_501 sec_1563 of the code defines component members of controlled_group_of_corporations as all the members of a controlled_group_of_corporations except excluded members excluded members are certain special status corporations section b lists each of the following corporations as an excluded_member of a controlled_group_of_corporations a corporation that is a member for less than one- half the number of days in the taxable_year preceding december a corporation exempt from taxation under sec_501 except a corporation subject_to tax on its unrelated_business_taxable_income under sec_511 a foreign_corporation subject_to tax under sec_881 an insurance_company subject_to taxation under sec_801 and a franchised_corporation w argues the term excluded_member of a controlled_group_of_corporations means that a corporation is excluded from membership in the controlled_group however excluded member’ is a term of art referring only to certain corporations excluded from sec_1563 of the code’s definition of component members and does not affect a corporation's status as a member of the controlled_group_of_corporations under sec_1563 the definitions in sec_1563 of the code are best understood by examining the way sec_1563 operated in the context of sec_1561 the provision for which sec_1563 was originally written at the time of the enactment of these sections corporations were subject_to a 30-percent normal_tax on all income and a 22-percent surtax on income greater than dollar_figure because of this large enterprises organized themselves into multiple corporations in order to reduce their tax_rate ie the enterprise enjoyed multiple surtax exemptions because each corporation claimed a surtax_exemption in response congress enacted sec_1561 and sec_1563 in order to limit the undue benefit large corporations were deriving from the creation of multiple corporate entities sec_1561 allowed the controlled_group a single surtax_exemption and that exemption was apportioned among component members of that controlled_group sec_1563 first identifies all the members of a single economic group by applying the controlled_group definition to all related corporate entities without regard to whether or not they are special status corporations then sec_1563 applies to determine which members of the controlled_group the component members would apportion the surtax_exemption for purposes of this apportionment the special status corporations were excluded in the context of sec_1561 of the code it does not make sense to say that the controlled_group does not include the special status corporations listed in sec_1563 for example if these special status corporations were excluded from sec_1563's definition of a controlled_group taxpayers would have still been able to simply circumvent sec_1561 by inserting special status entities between other controlled_group members to create multiple controlled groups each enjoying its own surtax_exemption the legislative_history of sec_1561 and sec_1563 of the code states a lthough the determination of the corporations included within a parent-subsidiary_controlled_group or a brother-sister_controlled_group is made without regard to the type of corporation involved provision is made to limit the reduction in the surtax_exemption or payment of the additional tax to those corporations referred to in the bill as component members whose income_tax is determined in whole or in part by reference to the normal and surtax rates thus exempt_organizations which do not have unrelated_business_income and foreign_corporations which are subject_to a flat_tax rate on their income_from_sources_within_the_united_states are not considered to be component members s rep no pincite emphasis added -ll- additionally the legislative_history of sec_1563 of the code illustrated by several examples that while tax-exempt corporations and corporations that were not members of a controlled_group at least one-half the year were excluded members they were nevertheless included as members of a controlled_group h_r rep at a202-202 example states life throughout calendar_year corporation p owns all the stock of corporation f which in turn owns all the stock of corporations x and corporation f is a foreign_corporation subject_to tax under sec_881 of the code on its u s source income corporation is a insurance_company subject_to tax under section of the code and corporations p and x are domestic corporations subject_to tax under sec_11 of the code each corporation files its returns on the basis of the calendar_year on date corporations p f x and are members of a parent-subsidiary_controlled_group of corporations as defined in sec_1563 however corporations f and are not component members of such group because they are excluded members within the meaning of sec_1563 and d thus on date the component members of the parent-subsidiary_controlled_group of which corporation p is the common parent are corporations p and x similarly longstanding regulations under sec_1563 of the code provide that members of a controlled_group under sec_1563 that are excluded members under sec_1563 nevertheless remain as members of the controlled_group for instance example of sec_1_1563-1 of the regulations states throughout corporation m owns all the stock of corporation f which in turn owns all the stock of corporations l-1 l-2 x and y m is a domestic mutual_insurance_company subject_to taxation under section f is a foreign_corporation not engaged_in_a_trade_or_business_within_the_united_states l-1 and l-2 are domestic life_insurance_companies subject_to taxation under section and x and y are domestic corporations subject_to tax under sec_11 of the code each corporation uses the calendar_year as its taxable_year on date m f l-1 l-2 x and y are members of a parent-subsidiary_controlled_group of corporations however under subparagraph ii of this paragraph m f l-1 and l-2 are treated as excluded members of the group on date thus on date the component members of the parent-subsidiary_controlled_group of which m is the common parent include only x and y furthermore since subparagraph ii e of this paragraph does not result in l-1 and l-2 being treated as excluded members of an insurance group l-1 and l-2 are component members of an insurance group on date reading sec_1563 of the code to provide that excluded members are not members of a controlled_group is problematic not only because it is inconsistent with the legislative_history of sec_1563 and the way in which sec_1563 has been historically applied but more importantly because it could exclude controlled_group members from the application of rules which were clearly intended to apply to such members for example sec_267 defers a loss on the sale of property between two members of the same controlled_group assume a wholly-owned u s subsidiary sells loss property to its foreign parent subject_to tax under sec_881 realizing a loss generally sec_267 would require the loss be deferred however if controlled_group is understood to exclude the types of corporations listed in sec_1563 then arguably sec_267 would not apply to this transaction because the foreign parent would not be a member of the controlled_group under sec_1563 because the foreign parent would be an excluded member’ under sec_1563 this reading of the definition of a controlled_group would have an adverse effect on the administration of sec_267 and contravenes the intent of sec_267 w points to an amendment to sec_501 of the code effective generally for years after providing that subsections b and c of sec_1563 shall be disregarded w argues that t he legislative_history of these amendments makes it clear that this was a change in the law and that prior to neither tax-exempt nor foreign_corporations were included in a controlled_group under sec_501 therefore the argument is that in the tax years at issue here tax-exempt and foreign_corporations were excluded from the controlled_group under sec_501 and c for the years after the amendment would act to include these corporations in the controlled_group however as already discussed above a controlled_group under sec_1563 and for the purpose of sec_501 and c is not limited to only the component members of the group the clear intent of the amendment is that the income of all members of a controlled_group be considered for the purpose of sec_501 and c the legislative_history of sec_501 included no mention of the reason for the change in the statutory language in however the amendment did not provide that tax-exempt and foreign_corporations were excluded from the controlled_group under sec_1563 and for the purpose of sec_501 and c either before or after the effective date of the amendment because the x group obtained the requisite control during the tax_year ending december of year w became a member of that group during the tax_year ended december of year issue three if w was a member of a controlled_group as of december of year has w exceeded the premium limitation of dollar_figure set forth in sec_501 of the code for tax_year ending december of year because of the change in partnership structure detailed above during year w is considered a member of the controlled_group beginning with the tax period ending december of year during the tax years ending december of year and december of year net written premiums or if greater direct written premiums for the year are required to be aggregated with w for the period ending december of year neither form_990 return reported written premiums but rather premiums earned in the amount of dollar_figures for w and dollar_figurev for x thus for tax years ending year net written premiums did not exceed dollar_figure for the period ending december of year w again reported earned premiums of dollar_figurew with no written premiums however for tax_year ending year x filed form 1120-pc u s property and casualty insurance_company income_tax return showing net written premiums of dollar_figurex thereby exceeding the statutory limit of dollar_figure when aggregated with x the dollar_figure limitation is exceeded for w issue four whether w a foreign company that made an election under sec_953 of the code continues to qualify for the election if it is not an insurance_company sec_953 of the code reads as follows b termination if a corporation which made an election under to meet the requirements of paragraph subparagraphs a b and c of paragraph for any subsequent taxable_year such election shall not apply to any taxable_year beginning after such subsequent taxable_year for any taxable_year fails in addition section dollar_figure of revproc_2003_47 2003_2_cb_55 further clarifies the termination procedures applying to a sec_953 election as follows dollar_figure termination or revocation of sec_953 election once approved the election generally remains effective for each subsequent taxable_year in which the requirements of this revenue_procedure and sec_953 of the code are satisfied unless revoked by the electing_corporation with the consent of the commissioner however if the electing_corporation fails to timely file a return pay the tax due as stated on the return or comply with any other requirement for making the this revenue_procedure and sec_953 the election contained in his discretion may terminate the election as of the commissioner in beginning of the taxable_year after the taxable_year with respect to which lf an election is terminated or revoked the foreign the failure occurs be barred from making another corporation and its successors will election under sec_953 without the consent of the commissioner sec_953 of the code sets forth the requirements for a foreign_corporation to elect to be treated as a domestic_corporation one requirement contained in sec_953 is that the electing_corporation would qualify under part i or il of subchapter_l for the taxable_year if therefore a corporation that failed to qualify as an insurance_company under part or il of subchapter_l would fail the sec_953 election requirement contained in sec_953 in that case the commissioner may revoke the corporation's sec_953 election in the year following the year that the corporation failed to qualify as an insurance_company it were a domestic_corporation thus if it is determined that w failed to qualify as an insurance_company during the year or year taxable years the commissioner may revoke the sec_953 of the code election in the year following the first year in which w failed to qualify as an in addition any revocation of w's sec_953 election by the insurance_company commissioner would bar w from making another sec_953 election without the consent of the commissioner in this respect since w failed to qualify as an insurance_company during year and subsequent years w's sec_953 election is revoked for all tax years after year conclusions w is not an insurance_company exempt from tax pursuant to sec_501 of the code as of december of year w is a member of a controlled_group as defined in sec_1563 of the code as of december of year since w is a member of a controlled_group as of december of year w has exceeded the premium limitation of dollar_figure set forth in sec_501 of the code for tax_year ending december of year since w failed to qualify as an insurance_company during the year or year taxable years the commissioner revokes the sec_953 election in the year following the first year in which w failed to qualify as an insurance_company in this case revocation of the sec_953 election is effective for tax_year ending december of year w is not entitled to relief pursuant to sec_7805 of the code for tax years beginning january of year therefore w cannot rely on its determination_letter effective tax years beginning january of year subsequent to year w filed forms 1120-pc this conclusion is responsive to your issue sec_5 and for tax years a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 of the code provides that it may not be used or cited as precedent - end -


internal_revenue_service department of the treasury washington dc person to contact telephone number reter reply to cc dom fi p plr-100007-99 date may legend county company manager bonds date date date o i b dear n this letter is in reply to your request for a ruling that investment fees paid_by the county to the company and the manager are direct administrative costs which if reasonable may be treated as qualified administrative costs within the meaning of sec_1_148-5 i of the income_tax regulations facts and representations you make the following factual representations the company and the manager have entered into an agreement pursuant to which the manager provides investment management services and the company markets those services 2y plr-100007-99 on date the county advertised for a statement of qualifications from firms interested in serving as investment manager for the county's funds with the goal of increasing investment_yield by actively trading the county's portfolio on date the county entered into a contract with the manager to provide investment services to the county contract the manager has full discretion and authority in accordance with the county's investment guidelines to make all investment decisions with respect to certain of the county's funds without obtaining prior approval and to buy sell or otherwise trade eligible securities under the with respect to the services provided the company conducts from this review the county and the company determine daily analysis of the county's cashflow sources and uses and determines which of the county's investments are scheduled to mature the assets available for investment on that day the company then contact the manager to review the assets available for investment and update the future cashflow requirements of the county the company uses this information to select investments meeting the investment guidelines of the county that will maximize the county's return while allowing the county to meet its cashflow requirements all of the security trades executed by the manager are made through third party institutional traders unrelated to the company and the manager verifies that the trades have been executed and settled and notifies the county of the same the manager with the assistance of later in the day the company the county and for these services the company and manager receive a fee the investment advisory fee based on the average asset balance under management inclusive containing a component for investment advice and a component for executing transactions fees or sales charges are paid_by the county to execute a specific trade rebate tracking and reporting services for the county neither the company nor the manager performs the investment advisory fee is all- no additional transaction as of date the company and the manager were managing approximately dollar_figurea of county funds sb are the proceeds of tax-exempt_bonds including the bonds the company is a holder of the bonds of this amount approximately law_ and analysis sec_103 of the internal_revenue_code excludes from gross_income interest on any state_or_local_bond sec_103 however the exclusion does not apply to any arbitrage_bond under olen plr-100007-99 sec_148 defines the term arbitrage_bond as any bond issued as part of an issue any portion of the proceeds of which are reasonably expected at the time of issuance of the bonds to be used directly or indirectly investments or indirectly to acquire higher_yielding_investments to replace funds that were used directly or to acquire higher yielding sec_148 defines the term higher_yielding_investments as any investment_property which produces a yield over the term of the issue which is materially higher than the yield on the issue sec_1_148-5 provides in general rules for computing the yield and value of investments allocated to an issue for various purposes under part that sec_1_148-5 provides in the yield on an investment allocated to an issue is the discount rate that when used in computing the present_value as of the date the investment is first allocated to the issue of all unconditionally payable receipts from the investment produces an amount equal to the present_value of all unconditionally payable payments for this purpose payments means for the investment amounts to be actually or constructively paid to acquire the investment and receipts means amounts to be actually or constructively received from the investment such as earnings and return of principal sec_1_148-5 provides that except as otherwise provided an allocation of gross_proceeds of an issue to a payment or receipt on an investment is not adjusted to take into account any costs or expenses paid directly or indirectly to purchase carry sell or retire the investment administrative costs administrative costs generally do not increase the payments for or reduce the receipts from investments thus these sec_1_148-5 i provides that thus qualified administrative costs or decrease the receipts in determining payments and receipts on nonpurpose_investments qualified administrative costs are taken inte account increase the payments for from the investments are reasonable direct administrative costs other than carrying costs such as separately_stated brokerage or selling commissions but not legal and accounting fees recordkeeping custody and similar costs overhead costs and similar indirect_costs of the issuer qualified administrative costs general plr-100007-99 such as employee salaries and office expenses and costs associated with computing the rebate amount under sec_148 are not qualified administrative costs general administrative costs are not reasonable unless they are comparable to administrative costs that would be charged for the same investment or a reasonably comparable investment if acquired with a source of funds other than gross_proceeds of tax-exempt_bonds in it is useful to review the relevant history of sec_1 on date regulations the regulations e under sec_148 were published in proposed and temporary form the principal objective of the regulations was to present the detailed computational rules for calculating rebate regulations provided that the price paid for an investment shall not be increased by brokerage commissions administrative expenses or similar expenses in date proposed_regulations were issued that the preamble to these regulations stated that permitted direct administrative costs to be taken into account for determining payments and receipts on investments held by commingled funds the exception was included to simplify commingled fund accounting by permitting commingled funds to pass through net_income to investors without grossing up' income to reflect direct qualified administrative costs of the commingled fund administrative costs were defined to include audit safekeeping custody brokerage recordkeeping and similar costs in date final regulations the regulations were these regulations responded to comments received on the administrative costs were defined in the issued proposed_regulations by providing that all reasonable_administrative_costs for investments in regulated_investment_companies and certain commingled funds could be taken into account regulations as including costs paid_by or on behalf of an issuer for brokerage or selling commissions legal and accounting fees investment advisory fees recordkeeping safekeeping custody and similar costs and expenses of a fund requirement in the regulations that the costs be direct to be taken into account there was no in date proposed_regulations were issued to consolidate and simplify the existing arbitrage and rebate requlations administrative costs could be taken into account in computing yield and rebate for all nonpurpose_investments examples of direct administrative costs was provided these regulations provided that reasonable direct no list of the current regulations provide one rule for investments in regulated_investment_companies and certain commingled funds and another rule for other nonpurpose_investments for regulated plr-100007-99 investment companies and certain commingled funds all reasonable_administrative_costs even if indirect are taken into account for other nonpurpose_investments only reasonable direct administrative costs are taken into account current regulations provide examples of those costs that can be qualified administrative costs and those that cannot as noted above the based on this history it can be concluded that the regulations were drafted in part to acknowledge the accounting problems raised by requiring a breakdown of administrative costs associated with regulated_investment_companies and certain commingled funds similar accounting problem for other nonpurpose_investments other nonpurpose_investments the current regulations mandate that administrative costs be broken down a brokerage fee and an impermissible fee such as an accounting fee the brokerage fee is not permitted to be taken into account unless it the regulations however do not acknowledge a for if a fee includes both is separately_stated the regulatory history also supports the conclusion that the the current regulations provide a more limited current regulations permit only a very narrow category of costs to be taken into account for nonpurpose_investments that are not investments in a regulated_investment_company or certain commingled funds list of direct costs that can be taken into account than was provided in the date proposed regulation the prior regulations the current regulations provide that brokerage and selling commissions or similar costs must be separately_stated connected to the buying and selling of investments are permitted costs we conclude that only costs that are directly also unlike in the instant case the investments are not investments in a regulated_investment_company or a commingled fund accordingly the investment advisory fee may be taken into account only if brokerage or selling commission a cost such as a separately_stated it is the taxpayer argues that the investment advisory fee is similar to a brokerage and selling commission investment advice is inherent in most brokerage commissions and that it would be impossible to determine how much of the brokerage commission is associated with investment advice case does not require us to decide whether an issuer can never take investment advice into account as part of a separately_stated brokerage commission it argues that this here the contract provides the manager with broad portfolio management responsibilities analysis of the county's cashflow sources and uses and the investments scheduled to mature assets available for investment and the county's future cashflow requirements the manager and company select investments that after reviewing the county's the company conducts a daily o plr-100007 -99 meet the investment guidelines of the county trades are executed through traders unrelated to the company and the investment advisory fee the county pays is all- the manager inclusive all security we conclude that while the investment advisory fee includes brokerage and selling commissions it also includes fees that are the fee compensates the not permitted to be taken into account manager and company for very broad investment management services more in the nature of portfolio management these services may be associated with the purchase or sale of investments they are not directly connected to the buying and selling of investments while conclusion based on the foregoing analysis we conclude that the investment advisory fee paid_by the county to the company and the manager for their investment management services is not a direct administrative cost which may be treated as administrative cost within the meaning of i sec_1_148-5 a qualified except as specifically ruled above no opinion is expressed concerning this transaction under any provision of the code or specifically no opinion is expressed regulations thereunder concerning whether interest on the bonds is excludable from gross_income under sec_103 this ruling letter is addressed only to the taxpayer who sec_6110 provides that it may not be requested it used or cited as precedent enclosure copy for sec_6110 purposes sincerely yours assistant chief_counsel financial institutions products by rebecca l harrigal chief branch rly


t c summary opinion united_states tax_court afi abdi petitioner v commissioner of internal revenue respondent docket no 18526-09s filed date afi abdi pro_se derek w kaczmarek for respondent gerber judge this case was heard pursuant to the provisions of section of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure and this opinion shall not be treated as precedent for any other case respondent determined a dollar_figure deficiency in petitioner’s federal_income_tax and a dollar_figure penalty under sec_6662 and b at trial respondent conceded the penalty leaving the following issues for the court’s consideration whether petitioner is entitled to head_of_household filing_status and whether petitioner is entitled to the earned_income_tax_credit background petitioner resided in arizona when his petition was filed petitioner his wife and their five children resided in the same dwelling for the entire taxable_year petitioner and his wife were married before and were married throughout the tax_year on his federal_income_tax return petitioner reported his filing_status as head_of_household and claimed two dependent_children he also sought an earned_income_tax_credit of dollar_figure respondent determined that petitioner’s filing_status was married_filing_separately and that he was not entitled to an earned_income_tax_credit discussion generally the commissioner’s notice_of_deficiency determinations are presumed correct and taxpayers bear the burden of proving otherwise rule a 290_us_111 there is no question in this case concerning the burden_of_proof in the circumstances of this case the fact that petitioner was married and resided with his wife throughout the entire taxable_year causes him to be disqualified from claiming head_of_household filing_status under sec_2 although there are some exceptions to that general_rule petitioner has not shown that any exception applies petitioner also claimed an earned_income_tax_credit under sec_32 that credit is available to individuals who meet certain requirements under sec_32 a married individual is eligible for the credit only if he files a joint_return for the taxable_year petitioner did not file a joint_return for the taxable_year and accordingly he is not entitled to an earned_income_tax_credit to reflect the foregoing decision will be entered for respondent as to the income_tax deficiency and for petitioner as to the accuracy- related penalty


id office uilc cca_2010012514472049 --------------------- number release date from --------------------- sent monday date pm to ----------------- cc --------------------------------------- subject fw case with sec_332 tax exempt_income issue -------- - the email below was prepared by ---------------of ---------------in regarding whether the basis of stock of a subsidiary that is liquidated under sec_332 is tax-exempt_income within the meaning of reg sec_1_1366-1 she concluded based partly on an analogous consolidated_return regulation that it should not be tax-exempt_income for that purpose as i indicated in my previous email the taxpayer generally has accurately described the operation of sec_332 in the nonconsolidated context in such cases with respect to the subsidiary's assets that are distributed to its parent the subsidiary's gain_or_loss in its assets is not recognized at the time of the liquidation however such gain_or_loss is preserved because the parent takes a carryover_basis in such assets thus the gain_or_loss will be recognized upon the later sale of the assets by the parent in contrast the parent's gain_or_loss in its subsidiary stock will never be recognized in effect the parent's basis in the subsidiary's stock is obliterated in the liquidation of course the fact that the taxpayer accurately described the operation of sec_332 does not mean that the taxpayer is correct that amounts that are realized but not recognized under sec_332 constitute tax exempt_income for purposes of sec_1366 as discussed below we think the better view is that such amounts are not tax-exempt_income in my earlier email i also indicated that i was looking into any differences in treatment in the consolidated context because the taxpayer referred to certain consolidated provisions as bearing on the analysis of whether tax exempt_income includes gain excluded under sec_332 a nonrecognition_provision lastly i also indicated that i was looking into the questions of whether the step transaction should apply to the deemed liquidation that occurs pursuant to the q sub election i will address both questions below first with respect to sec_332 liquidations in the consolidated_group context in most instances the liquidation of a solvent subsidiary will be subject_to sec_332 as is the case in the non- consolidated context p will not recognize any gain_or_loss on exchanging stock for assets of a p's basis in the assets received from s will be the same as s's adjusted_basis again any appreciation in p's s shares will be eliminated without recognition please note that it is possible that the parent will recognize gain_or_loss at the time of the liquidation however this gain_or_loss is not the result of the liquidation itself which continues to be tax-free to the parent and the subsidiary instead the gain_or_loss recognized by the parent if any would result from previous intercompany_transactions with respect to that stock such as an earlier purchase of the subsidiary stock from another member of the group gain_or_loss from intercompany_transactions normally is deferred and taken in account based on later events such as when the property is depreciated or leaves the group since the parent's stock basis in the subsidiary disappears in the liquidation any further deferral with respect to the subsidiary's stock is not possible thus the liquidation while tax-free may trigger gain_or_loss previously incurred with respect to the subsidiary's stock with respect to the specific question at hand whether the amounts that are realized but not recognized under sec_332 constitute tax-exempt_income within the meaning of sec_1_1366-1 we disagree with the taxpayer we tend to think of tax- exempt_income in the more traditional sense of interest on tax-exempt_bonds which increases basis but on which no tax is paid or as dividends that are excluded from income or for which you get a dividends received deduction as opposed to transactions in which the taxpayer exchanges one thing for another as in a sec_332 transaction where the taxpayer exchanges it stock in the subsidiary for the subsidiary’s assets in a sec_332 transaction the parent’s basis in its subsidiary’s stock is eliminated without gain_or_loss however the parent also succeeds to the subsidiary’s tax_attributes under sec_381 including its net operating losses under the consolidated_return_regulations the parent is considered to be the successor to the subsidiary in a sec_332 transaction see j and j ex the most analogous provision that we have to sec_1_1366-1 is the investment_adjustment regulation cited by the taxpayer sec_1_1502-32 which states that if in the consolidated_group context a subsidiary liquidates into its parent the subsidiary's tax- exempt_income is its income and gain which is taken into account but permanently excluded from its gross_income and which increases directly or indirectly the basis of its assets or an equivalent amount the regulation then specifically states that the subsidiary's tax-exempt_income does not include gain not recognized under sec_332 from the liquidation of a lower- tier subsidiary the language of the two regulatory provisions is strikingly similar we are not persuaded by the taxpayer’s efforts to distinguish the -32 regulation see also c ii an amount_realized but not recognized under sec_332 is not permanently and explicitly disallowed for purposes of deciding whether s’s items of income or gain will be redetermined to be excluded from gross_income f ex intercompany stock sale followed by liquidation noting that b’s unrecognized_gain under sec_332 is not permanently and explicitly disallowed under the code we also note that the taxpayer’s view could lead to absurd results for example assume that parent an s_corporation has one shareholder m who has a dollar_figure basis in parent parent has one asset with a dollar_figure basis and a fair_market_value of dollar_figure parent forms a wholly owned subsidiary c1 which is a c_corporation by contributing the asset to c1 parent has a dollar_figure basis in c1 and c1 has a dollar_figure basis in the asset then c1 forms a wholly owned subsidiary c2 which also is a c_corporation by contributing the asset to c2 c1 now has a dollar_figure basis in c2 and c2 has a dollar_figure basis in the asset further assume that at a time with the asset’s fmv remains dollar_figure parent makes q sub elections for both c1 and c2 pursuant to the q sub elections c1 is deemed to liquidate into parent and then c2 is deemed to liquidate into parent under sec_332 and related provisions when c1 liquidates into parent c1 will not recognize the dollar_figure gain on its asset the stock it holds in c2 sec_337 and parent will not recognize the dollar_figure gain on c1 stock sec_332 parent will take a dollar_figure basis in the c2 stock then when c2 liquidates into parent c2 will not recognize its dollar_figure gain on the asset sec_337 and parent will not recognize its dollar_figure gain on c2 stock sec_332 at the end of the day parent should end up where it started with one asset with an adjusted_basis of dollar_figure and a fair_market_value of dollar_figure m would continue to hold parent stock with a dollar_figure basis under taxpayer’s view however as we understand it when c1 liquidates into parent resulting in parent’s realization but nonrecognition of dollar_figure gain on its c1 stock tax exempt_income of dollar_figure is created which passes through to m and increases m’s basis in parent then when c2 liquidates into parent parent’s realization but nonrecognition of dollar_figure gain on its c2 stock creates another dollar_figure of tax exempt_income which passes through to m and increases m’s basis in parent now parent holds one asset with a basis of dollar_figure and a fair_market_value of dollar_figure however m now has a dollar_figure basis in parent thus under taxpayer’s view taxpayer can create unlimited basis simply by creating subsidiaries and then liquidating them this cannot be right with respect to the application of step transaction we generally do not apply the step transaction when a liquidation is followed by a sale of assets to an unrelated third party however when a liquidation is followed by the reincorporation of the assets there may well be a step transaction issue in this case there is a liquidation followed six months later by an incorporation both by virtue of the s sub provisions the termination of the q sub elections that causes the reincorporation of the assets is occasioned by the sale of ----------------------to an unrelated third party thus this case presents an interesting issue concerning the application of the step_transaction_doctrine however because the sale ----------is according to the taxpayer subject_to various regulatory approvals and assuming that there is some teeth to those regulatory processes and that such approvals are not routinely granted we do not think the step transaction will apply in this case if further factual development indicates that the regulatory approvals are pro forma please let us know and we will reexamine the step transaction issue i will be out of the office july i will return on mon july ------


department of the treasury i n t e r n a l r e v e n u e s e r v i c e washington d c date cc ita b04 ------------- genin-128495-05 office_of_chief_counsel number info release date uil ------------------------------------- ------------------------------- ------------------------------ dear --------------------- i am responding to your letter dated date requesting information about the tax treatment of transfer_tax and commission expenses associated with the sale of your home i hope that the following general information is helpful under sec_121 of the internal_revenue_code gain from the sale of your main home is not included in your gross_income if certain requirements are met the maximum gain excluded from income on a sale is dollar_figure for married individuals filing a joint_return in order to determine the gain on the sale of your home you must first determine the amount_realized from the sale the amount_realized on the sale is the selling_price of the home less any related selling_expenses the gain equals the amount_realized on the sale of your home minus your basis in the home the commission and transfer_taxes associated with the sale of your home are examples of selling_expenses the transfer_tax associated with the purchase of your new home is added to your basis in the new home accordingly neither the commission nor the transfer_taxes are deductible on your tax_return i have enclosed a copy of publication selling your home you can find information about your questions on page sec_4 and of publication if you have any additional questions please contact --------------------- identification_number --------------or me at -------------------- sincerely michael j montemurro branch chief office of associate chief_counsel income_tax accounting enclosure


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 b02 plr-129834-13 date date legend x sec_1 sec_2 sec_3 sec_4 sec_5 s6 s7 country a country b country c ----------------------------------- ---------------------- -------------------------------------------------------------- ---------------------- ---------------------------------------------- ----- --------------- ---------------------------------------------------- ---------------------- ----------------------------------------------------------- ---------------------- -------------------------------------------------- ---------------------- ------------------------------------------------------------- ---------------------- ------------------------------------------- ---------------------- ---------- ---------- ---------------- plr-129834-13 country d country e date date date date date date date dear -------------- -------- --------------------- ----------------------- ---------------- --------------------------- ------------------------ ------------------ --------------------- --------------------- this is in response to a letter dated date submitted by x on behalf of sec_1 sec_2 sec_3 sec_4 sec_5 s6 and s7 requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for sec_1 sec_2 sec_3 sec_4 sec_5 s6 and s7 to file entity classification elections the information submitted states that sec_1 and sec_2 were formed under the laws of country a on date and date respectively the information further states that sec_3 and sec_4 were formed under the laws of country b on date sec_5 was formed under the laws of country c on date s6 was formed under the laws of country d on date and s7 was formed under the laws of country e on date x represents that sec_1 sec_2 sec_3 sec_4 sec_5 s6 and s7 are foreign entities eligible to make an entity classification election for federal tax purposes effective date however sec_1 sec_2 sec_3 sec_4 sec_5 s6 and s7 each failed to timely file a valid form_8832 entity classification election to elect their respective intended entity classification sec_301_7701-3 of the income_tax regulations provides that an eligible_entity with at least two members may elect to be classified as either an association and thus a corporation under sec_301_7701-2 or as a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner plr-129834-13 sec_301_7701-3 further provides that so long as a business_entity is not classified as a corporation under sec_301_7701-2 or an eligible_entity it may elect its classification for federal tax purposes sec_301_7701-3 provides that except as provided in sec_301_7701-3 unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides that for purposes of sec_301_7701-3 a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to seventy-five days prior to the date the form is filed or up to twelve months after the date on which the form is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government based solely on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly sec_1 sec_2 sec_3 sec_4 sec_5 s6 and s7 are granted an extension of days from the date of this letter to elect to be classified as a corporation for federal tax purposes effective date the elections should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to each election seven copies are enclosed for that purpose plr-129834-13 this ruling is contingent on the owner of sec_1 sec_2 sec_3 sec_4 sec_5 s6 and s7 filing within days of this letter all required returns affected returns and amended income_tax returns consistent with the requested relief in this letter to the extent appropriate these returns must include but are not limited to form_5471 information_return of u s persons with respect to certain foreign_corporations such that these forms and returns reflect the consequences of the relief granted in this letter a copy of this letter should be attached to any such returns except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter will be sent to x's authorized representatives sincerely associate chief_counsel passthroughs special industries by ________________________________ melissa c liquerman chief branch office of associate chief_counsel passthroughs special industries enclosure seven copies of this letter copy for sec_6110 purposes


department of the treasury washington dc person to contact ---------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 - plr-160157-03 date jan internal_revenue_service number release date index number --------------------------------- -------------------------------- ------------------------------ ------------------------------------- in re --------------------------------------------------- -------------------------------------------- ------------------- --------------------------- ------------------ ---------------------------------------- --------------------- - x ----------------------------------------------------------------- ----------------------- --------------------- ------------------------ country date dear ------------------- requesting a ruling under sec_301_9100-3 of the procedure and administration regulations that x be granted an extension of time to elect to be a corporation under sec_301_7701-3 facts this letter responds to a letter dated date written on behalf of x according to the information submitted x a country limited_partnership with more than one member intended to elect to be a corporation for federal tax purposes effective on date however due to inadvertence the form_8832 entity classification election was not timely filed law and analysis sec_301_7701-3 provides in part 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 this section an eligible_entity with more than one member can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or as a partnership sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing form_8832 with the service_center designated on the form sec_301_7701-3 provides in part that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic_extension of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusions based solely on the facts submitted and the representations made we conclude that x has satisfied the requirements of sec_301_9100-3 as a result x is granted an extension of time of sixty days from the date of this letter to file a properly executed form_8832 with the appropriate service_center and elect to be treated as a corporation for federal_income_tax purposes effective date that purpose a copy of this letter should be attached to the election a copy is enclosed for except as specifically set forth above no opinion is expressed or implied concerning the federal tax consequences of the facts described above under any other provision of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer and second listed authorized representative sincerely heather c maloy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


vil so vs- department of the treasury internal_revenue_service washington d c contact person 1d number telephone number do-e -t i date sep employer_identification_number key district_office r r r e d a o c y dear sir or madam this is in response to a letter from your authorized representative requesting a series of rulings on your behalf regarding the tax consequences associated with the transaction described below dis recognized as exempt from federal_income_tax under sec_501 c of the internal_revenue_code and is classified as a nonprivate foundation under sec_509 of the code it is organized and operated to improve health care services in rural areas by coordinating resources providing technical assistance and advocating for an accessible and quality health care delivery system it is governed by a board_of directors composed of thirteen individuals seven of whom occupy full time governmental health care positions you have requested rulings concerning your operation of a rural health infrastructure revolving loan fund program the primary purpose of this activity is to improve health care access and delivery by funding appropriate health care services in health professions shortage areas medically underserved areas and economically depressed areas in rural k you have stated that the viability of this activity is dependent among other things upon receipt of a loan for l dollars from m m is a governmental_unit you have stated that joan funds will be available to a wide range of both nonprofit and for profit health care organizations including primary care centers governmental and nonprofit hospitals outpatient primary care clinics mental health providers emergency medical service organizations county health departments long term care organizations and physicians and mid-level medical specialists such as nurse practitioners and health care networks you state that social welfare and trade associations exempt under sec_501 c and c of the internal_revenue_code may also be recipients of these loans gs you have stated that you will not enter into any joint_venture with a for profit health care provider or any other for profit entity every loan recipient will be required to demonstrate that it is unable to finance the proposed project from its own resources or through commercial credit or governmental programs at reasonable rates and terms you have stated that the priority of the loan fund is aimed at improved access to health care services in areas presently devoid of such services and you forsee using the loan fund to recruit health care providers into underserved areas improve the availability of services or retain existing services where continued availability is at risk you provided the following examples of situations involving retention as opposed to recruitment in which you would give serious consideration a the medical office of a health care provider is damaged by fire flood etc and insurance proceeds and sources of funds from commercial institutions are insufficient or commercially unreasonable to restore the structure and resume the provision of health care services b a sole family practice physician needs a second practitioner to handle the caseload and the medical office would then need expansion but funding from commercial sources are unavailable or offered at unreasonable terms and c a particular itam of medical equipment which is unavailable is needed to fight disease and the medical practitioner cannot secure a commercial loan with reasonable terms you have stated that in each of these situations you would also require a for profit entity to provide some reasonable amount of free care and to render care to medicare and medicaid beneficiaries current evidence of community need and compliance with the rules and regulations of m you have stated that pricing or interest rates on toans will be determined by arm's length negotiation but if a for profit entity is involved the rate of interest will never be less than the prime rate you have also stated that no loans may be granted to organizations or for activities related to your officers directors employees or members of their families you have requested the foliowing rulings in connection with this transaction whether the activities proposed to be conducted in connection with the loan program further a charitable purpose whether the activities proposed to be conducted in connection with the loan program would threaten your tax exempt status under sec_501 c of the code whether the operation of the loan fund is substantially related to your charitable purposes and therefore not subject_to the unrelated_business_income_tax within the meaning of sec_511 through of the code sec_501 of the code provides an exemption from federal_income_tax for organizations described in sec_501 including organizations that are organized and operated exclusively for charitable educational or scientific purposes sec_1_501_c_3_-1 of the income_tax regulations provides that the term charitable is used in sec_501 of the code in its generally accepted lega sense revrul_69_545 1969_2_cb_117 recognizes that the promotion of health is a charitable purpose within the meaning of sec_501 c of the code n revrul_67_149 1967_1_cb_133 provides that an organization providing only financial assistance to organizations exempt under sec_501 c of the code may qualify for exemption under sec_501 revrul_73_313 1973_2_cb_174 provides that an organization formed and supported by residents of an isolated rural community to provide a medical building and facilities at reasonable rent to attract a doctor who would provide medical services to the entire community is exempt under sec_501 of the code revrul_74_587 1974_2_cb_162 provides that a nonprofit organization formed to relieve poverty and fight community deterioration through a program of financial assistance in the form of low cost or long term toans to various businesses in economically depressed areas is exempt under sec_501 of the code although some of the individuals receiving financial assistance in their business endeavors may not themselves qualify for charitable assistance that fact does not detract from the charitable nature of the program the recipients of the loans are merely the instruments by which the charitable purposes are sought to be accomplished revrul_77_69 1977_1_cb_143 states that an organization engaged in health planning and resources development aimed at providing adequate health care for a specific geographic area is operated exclusively for charitable purposes and qualifies for exemption under sec_501 of the code revrul_97_21 1997_1_cb_121 provides examples illustrating whether nonprofit hospitals that provide incentives to physicians to join their medical staffs or to provide medical services in the community violate the requirements for exemption as organizations described in sec_501 of the code sec_501 organizations do not jeopardize their exempt status by transferring their assets to other organizations exempt under sec_501 where the assets transferred are used to further exempt charitable purposes sec_1_501_c_3_-1 1mii of the regulations provides in part that an organization is not organized or operated for charitable purposes unless it serves a public rather than a private interest thus to meet the requirements for exemption it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlted directly or indirectly by such private interests sec_511 of the code imposes a tax on the unrelated_business_income of organizations described in sec_501 sec_512 of the code defines unrelated_business_taxable_income as the gross_income derived by an organization from any unrelated_trade_or_business regularly carried on by it less the allowable deductions which are directly connected with the carrying on of the trade_or_business with certain modifications sec_512 of the code provides that rents_from_real_property and its incidental related personal_property are not treated as unrelated_business_income unless the real_property is debt- financed under sec_514 debt-financed_property does not include any property substantially related to the exercise or performance by such organization of its exempt purposes sec_513 of the code defines unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of the organization for funds or the use it makes of the profits derived to the exercise of the organization’s exempt purposes or functions sec_1_513-1 of the regulations provides in part that a trade_or_business is related to exempt purposes only where the conduct of the business activities has a causal relationship to the achievement of exempt purposes and it is substantially related for purposes of sec_513 of the code only if the causat relationship is a substantial one thus for the conduct of trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of exempt purposes sec_514 of the code defines debt-financed_property as any property which is held to produce income and with respect to which there is an acquisition_indebtedness at any time during the taxable_year j will not adversely affect its exempt status under sec_501 c of the code by the proposed transaction as the operation of the loan program is designed to promote health in medically underserved and economically depressed areas program described in revrul_74_587 supra and the organizations in revenue rulings and supra seeking to recruit and retain essential medical service providers in a community your loan program furthers a recognized charitable goal the health of the communities where your loans will be made you have incorporated adequate safeguards in your loan program to insure that your program does not constitute the inurement of your assets into the hands of private individuals any benefit derived by for profit entities is incidental to the benefit derived by the members of the communities that will be able to obtain essential health care services as a result of your loan program like the organization operating a loan in this case it is to promote your loan program is substantially related to your charitable purposes and activities therefore it is not an unrelated_trade_or_business and is not subject_to the unrelated_business_income_tax accordingly based on all the facts and circumstances described above we rule as follows the activities proposed to be conducted in connection with the loan program further a charitable purpose the activities proposed to be conducted in connection with the loan program wouid not threaten your tax exempt status under sec_501 of the code the operation of the loan fund is substantially related to your charitable purposes and therefore not subject_to the unrelated_business_income_tax within the meaning of sec_511 through of the code these rulings are based on the understanding that there will be no material changes in the facts upon which they are based these rulings are directed only to the organization that requested them sec_6110 of the code provides that they may not be used or cited by others as precedent these rulings do not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described we are informing your key district_director of this action please keep a copy of these rulings in your permanent records sincerely marvin frieflander marvin friedlander chief exempt_organizations technical branch