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-118629-18 date date re ------------------------------------------------------------- legend -------------------------------------------------------------------- ------------------------------------------------------------------------ ------------------- ---------------------------------------------- ------------------------- --------------------------------------------------------------------- grantor spouse date trust a -------------------------------------------------------------------- trust b -------------------------------------------------------------- trust c -------------------------------------------------------------------- grandchild a ------------------------------------------------------ grandchild b ------------------------------------------------------- grandchild c ---------------------------------------------------------- grandchild d ---------------------------------------------------- grandchild e ---------------------------------------------------------- grandchild f ------------------------------------------------ grandchild g ------------------------------------------------------ date accountant -------------------- law firm son son daughter state state statute ------------------------------------------------------ court ------------------------------------------------------------------------------------------------------------ ----------------------------------------------------------------------------------------------------------- ---------------------------- --------------------- ------------------------ -------------------- --------- ---------------- ---------------------------------------------------------------------------------------------- plr-118629-18 ---------------------------------------- date date date date date year year year year year year --------------------- --------------------- --------------------------- -------------------------- ------------------------- ------ ------ ------ ------ ------ ------ dear -------------- this letter responds to your letter dated date and prior correspondence submitted by your authorized representative requesting rulings on the gift estate and generation-skipping_transfer_tax consequences of court orders to reform three trusts to correct scrivener’s errors and to modify the trusts to clarify a provision in the trusts the facts and representations submitted are as follows on date in year grantor created three irrevocable trusts trusts a b and c for the benefit of his grandchildren son son and daughter are grantor’s children trust a is to be held for the benefit of son 1’s children grandchild a b and c trust b is to be held for the benefit of son 2’s children grandchild d and e trust c is to be held for the benefit of daughter’s children grandchild f and g grandchild a through g are referred to collectively as the beneficiaries and individually as beneficiary year is after date the trustee of trust a and c is son the trustee of trust b is son the terms of each trust are almost identical under article iii b of each trust the trustee shall immediately divide the trust property into equal parts setting aside one such part for the benefit of each beneficiary article iii b provides that the trustee may distribute so much of the income and principal of the trust to or for the benefit of the beneficiary for whom it has been set_aside in such amounts at such times and in such manner as the trustee in its sole discretion deems advisable for the beneficiary’s health education including college and professional education welfare and support in reasonable comfort and to permit the beneficiary to enter into or engage in a business or profession in which the trustee believes the beneficiary has reasonable prospects of success article iii b provides that the separate trust held for a beneficiary shall terminate upon the death of such beneficiary upon termination the remaining principal and any plr-118629-18 undistributed_income of such separate trust shall be distributed as the deceased beneficiary may appoint by a provision of the beneficiary’s will which expressly refers to the power_of_appointment given by the trust agreement any portion of the remaining principal and any undistributed_income of such separate trust that is not validly appointed in such manner shall be distributed to the then living lineal_descendants of the beneficiary per stirpes and if there is none then to the living lineal_descendants of son son or daughter depending upon the beneficiary’s trust per stirpes article iii c provides that notwithstanding the provisions of paragraph b of article iii at the time any property is initially placed in or later added to the trust each living beneficiary shall have the unrestricted right to demand and receive from the trust that share of such property which is allocated to that beneficiary’s trust the trustee shall notify each beneficiary of the existence of this right within fourteen days from its receipt of such property beneficiaries must exercise such right by a written instrument delivered to the trustee within thirty days from the date such notice is given or such right shall lapse grantor and spouse each made gifts to trusts a b and c in year sec_1 through and years through grantor and spouse elected to treat the gifts each made to each trust in year sec_1 through and years through as made by both under sec_2513 grantor died on date in year and bequeathed a portion of his estate to each of the trusts following grantor’s death in year sec_12 through spouse continued to make gifts to each trust spouse died on date in year several years after grantor’s death the trustees became aware that article iii b lacked the language necessary to prevent an appointment of trust property to non-family members and that the broad language could be construed as granting a general_power_of_appointment to the beneficiaries this would result in inclusion of trust property in each beneficiary’s gross_estate it is represented that such a result was contrary to grantor’s intent on date son in his capacity as the trustee of trust a and trust c and as representative by joinder of trust b petitioned court to reform trusts a b and c to include the necessary limiting language to qualify each beneficiary’s power_of_appointment as a limited_power_of_appointment expressly prohibiting the appointment of trust assets to a beneficiary such beneficiary’s estate the creditors of such beneficiary and the creditors of such beneficiary’s estate the petition was supported by three affidavits one each from grantor’s accountant law firm and son in his capacity as the trustee of trusts a and c and as representative by joinder of trust b accountant swore that grantor intended the trusts to be gst exempt law firm swore that grantor did not recognize that including the power_of_appointment language would result in including the trust assets in each beneficiary’s gross_estate plr-118629-18 on date court issued an order effective date that limited the power_of_appointment language in article iii b to exclude the beneficiary the beneficiary’s estate the creditors of the beneficiary and the creditors of the beneficiary estate on date court issued an amended order clarifying that the trusts terminate at the death of the named grandchild and that per stirpes distributions are to be outright and in fee the amended order clarifies that each separate trust held for a beneficiary shall terminate upon the death of such beneficiary this is consistent with the provisions of each trust as originally executed further the amended order clarifies that each trust shall provide that upon such termination the remaining principal and any undistributed_income of such separate trust shall be distributed as such deceased beneficiary may appoint to or for the benefit of one or more of the lineal_descendants of the child of the grantor son son or daughter depending upon the trust who is a lineal ascendant of such beneficiary but excluding such beneficiary such beneficiary’s estate the creditors of such beneficiary and the creditors of such beneficiary’s estate the default provisions of each trust remain unchanged both orders were issued contingent upon a ruling from the internal_revenue_service on date court issued a second amended order that reforms article iii c to limit the beneficiary’s withdrawal right to the lesser_of that amount equal to the greater of that amount which under sec_2514 will not be considered a release of a power_of_appointment as the result of a lapse of the power currently the greater of dollar_figure or five percent of the aggregate value of the assets out of which or the proceeds of which the exercise of the lapsed power could be satisfied or that amount that under sec_2503 may be excluded in computing the total_amount_of_gifts made during such calendar_year or the fair_market_value of any property determined as of the date of the gift added to this trust by gift during such calendar_year this order is also contingent upon a ruling from the internal_revenue_service you have requested the following rulings the judicial reformation and modification of trusts a b and c will not cause the corpus of such trusts to be included in the gross_estate of spouse for federal estate_tax purposes trusts a b and c as reformed and modified do not provide the beneficiaries with general powers of appointment over the assets of such beneficiary’s trust under sec_2514 or sec_2041 and upon the death of the beneficiary the assets of the deceased beneficiary’s trust will not be includible in such beneficiary’s gross_estate under sec_2041 the judicial reformation and modification of trusts a b and c do not constitute the exercise or release of any general powers of appointment by a beneficiary resulting in a gift under sec_2514 plr-118629-18 trust a b and c are skip persons as defined under sec_2613 and accordingly the deemed_allocation rules of sec_2632 apply to allocate grantor’s and spouse’s gst_exemption to the year through year and year through year gifts_and_bequests to trust a b and c ruling_request 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 shall include the value of all property to the extent of the interest therein of the decedent at the time of the decedent’s death sec_2036 provides that the value of the decedent’s gross_estate includes the value of all property to the extent of any interest transferred by the decedent with respect to which the decedent has retained for life either an income_interest in the property or the right to designate the persons who will possess or enjoy the property or have an interest in the income of the property sec_2038 provides that in the case of transfers after date 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 case of a bona_fide sale for an adequate_and_full_consideration in money or money’s worth by trust or otherwise where the enjoyment thereof was subject at the date of death to any change through the exercise of a power in whatever capacity exercisable by the decedent alone or by the decedent in conjunction with any other person without regard to when or from what source the decedent acquired such power to alter amend revoke or terminate or when any such power is relinquished during the 3-year period ending on the date of the decedent’s death in the present case trusts a b and c are irrevocable trusts during year through year and year through year spouse and grantor consented to treat their gifts as having been made one-half by each donor accordingly spouse and grantor are each treated as the transferor of one-half of the total transfers to the trusts during those years during year sec_12 through spouse made gifts to each trust accordingly spouse is the transferor of those gifts to the trusts during those years however spouse did not retain any right or interest in the trusts spouse did not retain a beneficial_interest in the trusts and did not retain the right to alter amend revoke or terminate any of the trusts further spouse did not retain the right to designate who would possess or enjoy the property or income derived from the trusts the reformation and modification of trusts a b and c were made pursuant to court orders and not as a result of rights retained by spouse accordingly based upon the facts submitted and representations made we conclude that the judicial reformation and modification of plr-118629-18 trusts a b and c will not cause the corpus of trust a b and c to be included in the gross_estate of spouse for federal estate_tax purposes ruling_request sec_2 and sec_2001 provides that a tax is imposed on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2031 provides generally that the value of the gross_estate of the decedent shall be determined by including to the extent provided for in sec_2031 through the value at the time of his death of all property real or personal tangible or intangible wherever situated sec_2041 provides that the value of the gross_estate includes the value of all property to the extent of any property with respect to which the decedent has at the time of his death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released such a power_of_appointment by a disposition which is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent's gross_estate under sec_2035 to inclusive for purposes of sec_2041 the power_of_appointment shall be considered to exist on the date of the decedent's death even though the exercise of the power is subject_to a precedent giving of notice or even though the exercise of the power takes effect only on the expiration of a stated period after its exercise whether or not on or before the date of the decedent's death notice has been given or the power has been exercised sec_2041 provides that for purposes of sec_2041 the term general_power_of_appointment means a power which is exercisable in favor of the decedent his estate his creditors or the creditors of his estate sec_2041 provides that the lapse of a power_of_appointment created after date during the life of the individual possessing the power shall be considered a release of such power sec_2501 imposes a gift_tax for each calendar_year on the transfer of property by gift during the year by an individual sec_2511 provides that the gift_tax shall apply 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 for gift_tax purposes sec_2514 provides that the exercise or release of a general_power_of_appointment created after date shall be deemed a transfer of property by the individual possessing such power plr-118629-18 sec_2514 provides that the term general_power_of_appointment means a power which is exercisable in favor of the individual possessing the power his estate his creditors or the creditors of his estate sec_2514 provides that the lapse of a power_of_appointment created after date during the life of the person possessing the power is considered a release of the power sec_25_2514-3 of the gift_tax regulations provides in part that in any case where the possessor of a general_power_of_appointment is incapable of validly exercising or releasing a power by reason of minority or otherwise and the power may not be validly exercised or released on his behalf the failure to exercise or release of his power is not a lapse of the power however sec_2514 provides that a lapse during any calendar_year is considered as a release so as to be subject_to the gift_tax only to the extent that the property which could have been appointed by exercise of the lapsed power_of_appointment exceeds the greater of i dollar_figure or ii percent of the aggregate value at the time of the lapse of the assets out of which or the proceeds of which the exercise of the lapsed power could be satisfied state statute provides that upon application of a settlor or any interested person the court may reform the terms of a_trust even if unambiguous to conform the terms to the settlor's intent if it is proved by clear_and_convincing evidence that both the accomplishment of the settlor’s intent and the terms of the trust were affected by a mistake of fact or law whether in expression or inducement in determining the settlor’s original intent the court may consider evidence relevant to the settlor’s intent even though the evidence contradicts an apparent plain meaning of the trust instrument in 387_us_456 the 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 this respect the federal_agency may be said in effect to be sitting as a state court in the present case an examination of the relevant trust instruments affidavits and representations of the parties strongly indicates that grantor and spouse did not intend for the beneficiaries of trusts a b and c to have inter_vivos or testamentary general powers of appointment in reforming the trusts court found that there was clear_and_convincing evidence that the language in article iii b and article iii c were scrivener's errors and that the reformation and modification of the trusts was necessary and appropriate to achieve grantor’s and spouse’s objectives and that the reformation was not contrary to grantor's and spouse’s intentions plr-118629-18 consequently based on the facts submitted and representations made we conclude that the court's orders of date date and date reforming and modifying the trust instruments based on scrivener's errors are consistent with applicable state law that would be applied by the highest court of that state trusts a b and c as reformed and modified pursuant to the court's orders do not provide the beneficiaries with either inter_vivos or testamentary general powers of appointment over the assets of each respective beneficiary’s trust under sec_2041 and sec_2514 accordingly based on the facts submitted and the representations made we conclude that the judicial reformation and modification of trusts a b and c do not constitute the exercise or release of a general_power_of_appointment by a beneficiary resulting in a gift under sec_2514 and that the assets of the deceased beneficiary’s trust will not be includible in such beneficiary’s gross_estate under sec_2041 ruling_request sec_2601 imposes a tax on every generation-skipping_transfer gst made by a transferor to a skip_person a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of gst tax imposed by sec_2601 is the taxable_amount multiplied by the applicable_rate sec_2641 defines the applicable_rate as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer sec_2652 provides that except as provided in sec_2652 or sec_2653 the term transferor means in the case of any property subject_to the tax imposed by chapter the decedent and in the case of any property subject_to the tax imposed by chapter the donor an individual shall be treated as transferring any property with respect to which such individual is the transferor sec_2652 provides that if under sec_2513 one-half of a gift is treated as made by an individual and one-half of such gift is treated as made by the spouse of such individual such gift shall be so treated for purposes of chapter sec_2652 provides that a person has an interest_in_property_held_in_trust if at the time the determination is made such person has a right other than a future right to receive income or corpus from the trust sec_2631 provides that for year sec_1 through for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor plr-118629-18 sec_2631 provides that for years through for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption amount which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2631 provides that for years through for purposes of sec_2631 the gst_exemption amount for any calendar_year shall be equal to the basic exclusion amount under sec_2010 for such calendar_year sec_2632 provides that if any individual makes a direct_skip during his lifetime any unused portion of such individual’s gst_exemption shall be allocated to the property transferred to the extent necessary to make the inclusion_ratio for such property zero if the amount of the direct_skip exceeds such unused portion the entire unused portion shall be allocated to the property transferred sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides that if a direct_skip occurs during the transferor’s lifetime the transferor’s gst_exemption not previously allocated unused gst_exemption is automatically allocated to the transferred property but not in excess of the fair_market_value of the property on the date of the transfer sec_26_2632-1 provides that the automatic allocation of gst_exemption is irrevocable after the due_date and is effective as of the date of the transfer to which it relates sec_2632 provides that any portion of an individual’s gst_exemption which has not been allocated within the time prescribed by sec_2632 shall be deemed to be allocated first to property which is the subject of a direct_skip occurring at such individual’s death sec_26_2632-1 provides that a decedent’s unused gst_exemption is automatically allocated on the due_date for filing form_706 to the extent not otherwise allocated by the decedent’s executor on or before that date sec_2612 provides that the term direct_skip means a transfer subject_to a tax imposed by chapter or of an interest in property to a skip_person sec_2613 provides that for purposes of chapter the term skip_person means a natural_person assigned to a generation which is two or more generations below the generation assignment of the transferor or a_trust if all interests in such trust are plr-118629-18 held by skip persons or if there is no person holding an interest in such trust and at no time after such transfer may a distribution including distributions in termination be made from such trust to a non-skip_person in the present case grantor and spouse made gifts to trusts a b and c the primary beneficiaries of trusts a b and c are the grandchildren of grantor and spouse pursuant to the reformation of trusts a b and c the beneficiaries possess testamentary limited powers of appointment to appoint to one or more of the lineal_descendants of son son or daughter depending upon which trust in default of the exercise the trust property passes to lineal_descendants of that grandchild or if there are none to the living descendants of son son or daughter depending upon which trust the beneficiaries lineal_descendants of the beneficiaries of son son and daughter are persons assigned to a generation which is two or more generations below the generation assignment of the grantor and accordingly the beneficiaries are skip persons as defined under sec_2613 accordingly we conclude trust a b and c are skip persons as defined under sec_2613 and the gifts to trusts a b and c are direct skips as defined in sec_2612 because grantor and spouse consented to split_gifts under sec_2513 for year through year and year through year grantor and spouse are treated as the transferor of one-half of the year through and year through year gifts to the trusts under sec_2652 therefore based on the facts submitted and representations made we conclude that the deemed_allocation rules under sec_2632 apply to allocate grantor’s and spouse’s unused gst_exemption to one-half each of the year through year and year through year gifts to the trusts and to allocate grantor’s unused gst_exemption to the bequests to the trusts in year and to allocate spouse’s unused gst_exemption to the year through year gifts to trusts a b and c 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 the rulings contained in this letter are based upon information and representations submitted by the taxpayers 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 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-118629-18 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 lorraine e gardner lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes


department of the treasury int ernal revenue service washington d c date o f f i c e o f c h i e f c o u n s e l number release date cc psi tl-n-1271-01 uilc internal_revenue_service national_office field_service_advice memorandum for associate area_counsel large and mid-size businesses area from associate chief_counsel passthroughs and special industries cc psi subject federal tax classification of an agreement this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent legend a b x agreement year year date date date tl-n-1271-01 product territory dollar_figuren1 dollar_figuren2 dollar_figuren3 n4 dollar_figuren5 dollar_figuren6 n7 dollar_figuren8 issue whether the agreement between a and b created a partnership for federal tax purposes and if so whether the partnership created under the agreement was required to withhold under sec_1446 conclusion although an argument could be made that the agreement between a and b created a partnership for federal tax purposes we believe that further factual development of the case is necessary however before conclusive advice can be provided or the relative merits of the government’s case can be evaluated because we are unable to determine whether the agreement between a and b created a partnership for federal tax purposes we do not reach the issue of whether any such partnership created under the agreement was required to withhold under sec_1446 facts in year a and b entered into agreement whereby a was to be the exclusive distributor of product for b in territory in year a and b modified the terms of the agreement tl-n-1271-01 the agreement provided that with respect to the parties would determine and mutually agree upon the marketing expense which was comprised of the total expenditures_for promotion publicity and market research of an in connection with the sale and distribution of product in territory b was required to remit its share of the marketing expense to a after its receipt of monthly invoices from a detailing the marketing expenses during the preceding monthly period subject_to the prior general acceptance of b a had the sole authority to decide upon the nature and content of all materiels and programs for product the territory it was the understanding of the parties that they would meet every at specified times to determine the budget and the allocation of the general_expenses among the various types of marketing expenses such as promotion publicity and or market research in connection with product the agreement provided that with respect to sales and purchases the parties could not change either b’s production cost production cost which was used to calculate b’s selling_price selling_price of the product to a or a’s selling cost selling cost of distributing product without three months prior written notice by the party initiating the change to the other the parties were required to provide documents to substantiate the change a had the right to order product from b for shipment to customers designated by a additionally a was required to submit to b quarterly reports setting forth its sales state by state any reports it may obtain from its wholesalers the breakdown of marketing expenses during such quarterly period and any other pertinent information with respect to the sale and distribution of the product the parties agreed that a would remit one-half of its gross_profit gross_profit to b after the close of each month during the term of the agreement the agreement defined gross_profit as the extent to which a’s revenues from the resale of the product to its customers exceed the sum of a’s net cost net cost of purchasing the product from b plus b’s selling cost by way of example the agreement provided that if during a particular month the net cost was dollar_figuren2 the selling cost was dollar_figuren1 the selling_price was dollar_figuren3 and n4 were sold then the total amount to be shared would be dollar_figuren5 and a was required to remit dollar_figuren6 to b after the close of such month the parties agreed that in the event the actual selling cost of the product on the date of b’s invoice to a differed from the calculated selling cost agreed upon by the parties the difference would be shared equally between the parties on a monthly basis the parties did not file a partnership return nor does it appear that they held themselves out formally as joint venturers however a’s owner publically used the tl-n-1271-01 word partnership to describe the relationship between a and b the parties did not formally set up a separate_entity to account for the income of losses of the business arrangement however a maintained separate_accounts to track the profits from the sale of product that it remitted to b and to track the gain_or_loss from the exchange rate differential additionally a and b agreed that upon a minimum of ten days written notice either party would make available to the other party for inspection during normal business hours such books_and_records as pertain to the terms and conditions of the agreement the parties agreed upon the following b agreed not to sell product to any other purchaser inside the territory a would undertake the distribution of any new product b introduced into the territory a agreed to exercise its best efforts to effect promote maintain and expand distribution and sale of product in all parts of the territory a agreed to furnish to b a monthly report showing unit and dollar sales of product to each wholesaler a also agreed to furnish a monthly statement of a’s inventory of product a breakdown of marketing expenses and any other pertinent information requested by b with respect to the sale and distribution of product a agreed to consult with b before making its price resale determination and to give consideration b views and suggestions as to the resale prices a would not begin or stop selling product to any wholesaler without first obtaining the written consent of b which will be granted unless b reasonably believed that promotion or sale of product will thereby be adversely affected the parties agreed to meet at least once every six months to determine and agree upon promotional and sales objectives strategy programs and budgets a a greed that the appointment of to be used to promote product in the would be subject_to the prior written approval of b b would have the right to terminate the agreement if p or any company directly or indirectly owned by p gained access to any of the confidential information covered by the provisions of the agreement a agreed to keep strictly confidential and not to disclose any b trade secret information concerning product on date a and b entered into a agreement which all of the rights and obligations of the parties under the agreement also on date a and x entered into an agreement in connection with the of the existing agreement x was to pay a of dollar_figuren8 or an adjusted amount if the number of units of product by a for a specified period of date to date exceeded n7 units tl-n-1271-01 law and analysis in your request for advice you have asked that we consider whether the agreement between a and b created a partnership for federal tax purposes because the case requires further factual development we are unable to evaluate the relative merits of the government’s case therefore we have provided a general discussion of the issues raised by your request for your reference as you develop the facts surrounding the agreement and to advise you of the service’s litigating position prior to date the classification of any particular organization was determined under the tests and standards set out in old sec_301_7701-2 sec_301_7701-3 and sec_301_7701-4 of the procedure and administration regulations old sec_301_7701-2 set forth six major characteristics ordinarily found in a pure corporation which taken together distinguish it from other organizations these are associates an objective to carry on business and divide the gains therefrom continuity_of_life centralization of management liability for corporate debts limited to corporate property and free_transferability_of_interests old sec_301_7701-2 provided that whether an organization is to be classified for federal_income_tax purposes as a partnership or as an association depends upon the extent to which the organization possesses the following characteristics ordinarily found in a corporation centralization of management continuity_of_life free_transferability_of_interests and limited_liability an organization which possesses three or more of these corporate characteristics will be treated as an association_taxable_as_a_corporation an organization which possesses two or less of the above characteristics will generally be classified as a partnership for federal_income_tax purposes old sec_301_7701-2 provided that characteristics common to partnerships and corporations are not material in attempting to distinguish between an association and a partnership old sec_301_7701-2 provided that because associates and an objective to carry on a business and divide the gains therefrom are generally common to corporations and partnerships an organization that has such characteristics will be classified as a partnership if it lacks at least two of the remaining four characteristics sec_761 and sec_7701 of the internal_revenue_code provide in part that the term partnership includes a syndicate group pool joint_venture or other unincorporated organization through or by means of which any business financial operation or venture is carried on and which is not a_trust estate or corporation a partnership is created for income_tax purposes when persons join together their money goods labor or skill for the purposes of carrying on a trade profession or business and when there is a community of interest in the profits and losses 327_us_280 whether a partnership exists tl-n-1271-01 depends on whether the taxpayer and others intended to join together in order to carry on a business for joint economic gain 337_us_733 the following factors none of which are conclusive are evidence of this intent the agreement of the parties and their conduct in executing its terms the contributions if any which each party has made the venture the parties’ control_over income and capital and the right of each to make withdrawals whether each party was a principal and coproprietor sharing a mutual proprietary interest in the net profits and having an obligation to share losses or whether one party was the agent or employee of the other receiving for his services contingent_compensation in the form of a percentage of income whether business was conducted in the joint names of the parties whether the parties filed federal partnership returns or otherwise represented to respondent or to persons with whom they dealt that they were joint venturers whether separate books of account were maintained for the venture and whether the parties exercised mutual control_over and assumed mutual responsibilities for the enterprise see 42_tc_1067 case development hazards and other considerations tl-n-1271-01 this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views please call if you have any further questions associate chief_counsel passthroughs and special industries by dianna k miosi chief branch associate chief_counsel passthroughs and special industries