internal_revenue_service number release date index number 860d --------------------------------------------------- ------------------------------------------------------ ----------------------------- ---------------- -------------------------------------- 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 fip b06 plr-102176-17 date date legend trustee 1a trustee 1b ------------------------------------------------------- ------------------------------------------------------------ trust --------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- - ---------- trust group a_trust group b_trust group c state1 state year year year company bank ----------------------------------- --------------------------- -------------------------------- -------------- -------------- ------- ------- ------- -------------------------------- ----------------------------------------- plr-102176-17 exchange date a b c month dear ------------------- ------------------------------------- ------------------------ ---- -- ----- ---------- this letter is in reply to a letter dated date in which trustee 1a and trustee 1b together referred to as trustees solely in their capacity as trustee or indenture trustee and separate trustee respectively of the real_estate mortgage investment conduits remics identified in appendix a hereto each a taxpayer and collectively the taxpayers request certain rulings in connection with each taxpayer’s qualification as a remic under sec_860a-860g of the internal_revenue_code specifically you have asked for the following rulings in the case of each taxpayer for which a timely valid and continuing remic election has been made in accordance with the applicable governing agreements as defined below none of i the execution of the settlement agreement as defined below ii the methodology for determining and the right to receive an allocable share as defined below of the settlement payment as defined below or iii the receipt of an allocable share of the settlement payment will cause such taxpayer to fail to meet the requirements of sec_860d in the case of each taxpayer for which a timely valid and continuing remic election has been made in accordance with the applicable governing agreements the receipt of an allocable share of the settlement payment will be treated as a payment received on qualified mortgages within the meaning of sec_1_860g-2 of the income_tax regulations in the case of each taxpayer for which a timely valid and continuing remic election has been made in accordance with the applicable governing agreements the distribution of an allocable share amount in accordance with the applicable governing agreements and the settlement agreement will not cause any regular_interest in such taxpayer plr-102176-17 to fail to qualify as a regular_interest as defined in sec_860g or the sole class of residual_interest in such taxpayer to fail to qualify as a residual_interest as defined in sec_860g in the case of each taxpayer for which a timely valid and continuing remic election has been made in accordance with the applicable governing agreements the receipt of an allocable share amount will not be treated as a prohibited_transaction within the meaning of sec_860f or as a contribution that is subject_to the tax imposed under sec_860g facts background trustee 1a acts as trustee or indenture trustee for a residential mortgage-backed securitization rmbs trusts trustee 1b acts as a separate trustee for the trusts and was appointed in connection with and for purposes of pursuing mortgage loan repurchase claims on behalf of the trusts each trust comprises one or more taxpayers each of which has elected to be treated as a remic within the meaning of sec_860d each of the a rmbs trusts is evidenced by a separate pooling and servicing agreement psa or an indenture indenture and related sale and servicing agreement ssa in addition each trust and taxpayer may have entered into mortgage loan purchase agreements and other related agreements each of the psas indentures ssas and other agreements a governing agreement and collectively the governing agreements the laws of state govern the rights and obligations of the parties to the governing agreements including trustees the annual_accounting_period for each taxpayer is the calendar_year and each taxpayer utilizes the accrual_method of accounting for maintaining its accounting books and filing its u s federal_income_tax return company is a bank_holding_company whose shares of common_stock are traded on the exchange company and its subsidiaries collectively bank constitute a banking and financial services organization the taxpayers function as residential mortgage loan securitization vehicles the taxpayers were established during the period of year through year for the primary purpose of raising financing in the securitization market with respect to pools of residential real_estate mortgage loans originated or acquired by bank the sponsor of the mortgage securitizations the securitization process for each trust and its related_taxpayers generally occurred as follows plr-102176-17 one or more bank entities as seller the seller sold portfolios of residential mortgage loans the mortgage loans to another bank entity the depositor for trusts governed by psas the depositor conveyed the mortgage loans to trustee 1a acting on behalf of the trusts and the taxpayers to be held in trust for trusts governed by an indenture and ssa the depositor conveyed the mortgage loans to a state statutory trust for the benefit of the noteholders and the owner trustee on behalf of the statutory trust assigned to trustee 1a as indenture trustees all of the statutory trust’s right title and interest in and to the mortgage loans several classes of trust certificates or notes representing variou sec_3 entitlements to the underlying mortgage pool’s cash flows then were issued and sold through an underwriter or underwriters to investors the investors in certain instances all or part of a class of issued certificates or notes may have been retained by bank for a period for each trust a master servicer servicer or both including applicable subservicers the servicer was charged with responsibility for among other things collecting debt service payments on the mortgage loans taking any necessary enforcement action against borrowers and remitting payments on a monthly basis for distribution to the investors in each securitization an election was made to treat the mortgage loans and certain related assets held by the applicable trust as one or more remics under the code the governing agreements for each taxpayer and securitization contain a series of representations and warranties made for the benefit of each trust in general these include representations that the mortgage loans had certain characteristics such as loan-to-value ratio property condition and mortgagor credit metrics that the mortgage loans were underwritten in all material respects in accordance with certain underwriting guidelines that the mortgage loans conform in all material respects to their descriptions in the investor disclosure documents and that the origination underwriting and collection practices of the seller and each servicer have been lawful and customary in the mortgage lending and servicing business the dispute in a letter dated date to bank a group of institutional investors the institutional investors alleged that a significant number of the mortgage loans with plr-102176-17 respect to which the institutional investors held investment certificates or notes had been sold or deposited into the rmbs trusts including the trusts based on false and or fraudulent representations and warranties by the mortgage originators the seller and or the depositor these assertions were based in part on the alleged excessive early default and foreclosure rates on and in respect to the mortgage loans bank and the institutional investors engaged in extensive negotiations over a period of b years in an effort to reach a settlement relating to the alleged breaches of the governing agreements the negotiations resulted in a settlement the settlement memorialized in a settlement agreement the settlement agreement between the institutional investors and bank the settlement agreement defines accepting trustee as a trustee that has accepted the settlement agreement on behalf of an rmbs trust or on behalf of one or more separate mortgage loan groups contained within an rmbs trust trustees are each an accepting trustee under the settlement agreement the settlement agreement defines settlement_trust as each rmbs trust including each taxpayer for which the applicable settlement trustee accepted and signed the settlement agreement with respect to all mortgage loans held by the trust and in the case where the applicable settlement trustee accepted and signed the settlement agreement on behalf of one or more but not all of the mortgage loan groups contained within an rmbs trust each such separate mortgage loan group for which the applicable settlement trustee accepted and signed the settlement agreement under the settlement agreement any rmbs trust or specific mortgage loan group contained within an rmbs trust for which the settlement agreement was not accepted is referred to as a non-settling trust none of the rmbs trusts that are taxpayers in their entirety constitute a non-settling trust each settling trust and each non-settling trust is treated as a separate trust for purposes of determining payment under the settlement agreement settling trusts and non-settling trusts belong to one of three trust groups in the settlement agreement trust group a_trust group b and trust group c in month year trustees accepted and signed the settlement agreement subject_to among other conditions final court approval on behalf of the taxpayers plr-102176-17 the settlement agreement the settlement agreement provides for a settlement payment to be allocated among all of the settlement trusts the settlement payment and a release of claims against bank that arise under or are based upon the governing agreements and that relate to the origination sale delivery servicing and or administration of mortgage loans to or in each taxpayer the settlement agreement contains certain releases regarding the servicing of mortgage loans within the settlement trusts the settlement payment will be allocated among the settlement trusts in accordance with an agreed allocation formula that is based on the past and expected future losses associated with the mortgage loans held in all of the rmbs trusts an independent financial advisor the expert retained by the accepting trustees will perform any calculations required in connection with the allocation formula and those allocation calculations will be treated as final and accepted by the parties absent bad faith or manifest error the settlement payment allocations are determined by reference to the amount of net losses_incurred by each settlement_trust and each non-settling trust the expert will calculate the amount of net losses for each settlement_trust and for each non-settling trust that have been incurred and are estimated to be incurred from each trust’s inception to its expected termination the expert will determine the net_loss for each settlement_trust and non-settling trust that is a member of trust group a_trust group b or trust group c the individual trust loss for each settlement_trust and each non-settling trust that is a member of trust group a or trust group b the adjusted individual trust loss the adjusted individual trust loss is its individual trust loss for each settlement_trust and each non- settling trust that is a member of trust group c the adjusted individual trust loss equals the applicable_individual trust loss le sec_90 of the net losses associated with certain solvent mortgage loan originators that sold mortgage loans to bank for inclusion in trust group c the originators that sold such mortgage loans to bank may bear ultimate primary liability for the net losses attributable to representation and warranty breaches with respect to such mortgage loans as a result bank’s liability for net losses with respect to such acquired mortgage loans is viewed for purposes of the allocation formula as a secondary liability and the adjusted individual trust loss for each settlement_trust and each non-settling trust in trust group c is reduced to reflect bank’s lesser responsibility for such losses the expert will calculate the sum total of the adjusted individual trust losses for all settlement trusts and non-settling trusts the total adjusted trust losses the expert will then calculate the adjusted individual trust loss for each settlement_trust and each non-settling trust divided by the total adjusted trust losses the trust allocated settlement percentage plr-102176-17 the expert will calculate the allocable share of the settlement payment for each settlement_trust and for each non-settling trust by multiplying the amount of the settlement payment by the trust allocated settlement percentage for each settlement_trust and non-settling trust the allocable share only the settlement trusts will receive an allocable share of the settlement payment within c days of the completion of the expert’s calculation of each settlement trust’s allocable share and at the direction of trustees bank will wire each settlement trust’s allocable share into the related settlement trust’s collection or distribution account for further distribution to the investors in accordance with the distribution provisions of the applicable governing agreements each taxpayer represents that the distribution provisions of the settlement agreement do not alter the rights or obligations of the taxpayer or remic interests therein and that the distribution of allocable shares to the investors is consistent with the distribution provisions contained in the governing agreements that provide for the distribution of subsequent recoveries or unscheduled principal amounts received the settlement agreement requires that the distribution of the settlement trust’s allocable share to its investors be consistent with the applicable provisions contained in the settlement trust’s governing agreements that provide for the distribution of subsequent recoveries or unscheduled principal amounts received as the case may be the settlement agreement provides that each settlement trust’s distribution of allocable share amounts to the investors be characterized as distributions of principal in respect of remic regular_interest classes entitled to receive such distributions distributions to the investors who hold regular_interest classes entitled to receive principal will be made either in the order of seniority of such classes or on a pro-rata basis in accordance with applicable senior-subordinate principal distribution priority rules in the event a settlement trust’s distribution waterfall provisions and its current allocable share amount available for distribution would combine to result in a distribution of any amount on or in respect of any trust’s residual_interest class whether on the date of the distribution of an allocable share or on any subsequent distribution date that is not the final distribution date under the applicable governing agreement such amount shall not be paid on or distributed to such residual class instead the amount would be retained in the applicable settlement trust’s distribution account and on the next distribution date would be distributed to the applicable regular_interest investors entitled to receive a principal distribution of subsequent recoveries or unscheduled payments of principal consistent with the governing agreements the settlement agreement requires the accepting trustee for each settlement_trust to apply an aggregate notional amount equal to the amount of the settlement trust’s allocable share in the reverse order of previously allocated losses to increase and restore the balance of each applicable plr-102176-17 class of principal entitled remic regular_interest classes to which realized losses have been previously allocated to that remic regular_interest class pursuant to the governing agreements the investors will not be entitled to payment in respect of interest on the amount of such increases for any interest_accrual_period relating to the distribution date on which such increase occurs or any prior distribution date this requirement in the settlement agreement is intended only to increase and restore the balances of the regular_interest class securities and does not affect the distribution of the settlement payment law and analysis issue and qualified mortgages permitted_investments and payments received on qualified mortgages sec_860d provides that the terms real_estate_mortgage_investment_conduit and remic mean any entity that meets several requirements including that as of the close of the third month beginning after the startup_day and at all times thereafter substantially_all of the assets of the entity consist of qualified mortgages and permitted_investments sec_860g defines qualified_mortgage to include any obligation including any participation or certificate of beneficial_ownership therein which is principally secured_by an interest_in_real_property and which i is transferred to the remic on the startup_day in exchange for regular or residual interests in the remic ii is purchased by the remic within the 3-month period beginning on the startup_day if except as provided in regulations such purchase is pursuant to a fixed-price contract in effect on the startup_day or iii represents an increase in the principal_amount under the original terms of an obligation described in clause i or ii if such increase - i is attributable to an advance made to the obligor pursuant to the original terms of a reverse_mortgage_loan or other obligation ii occurs after the startup_day and iii is purchased by the remic pursuant to a fixed price contract in effect on the startup_day sec_860g defines permitted_investments to mean any cash_flow_investment qualified_reserve_asset or foreclosure_property sec_860g defines cash_flow_investment to mean any investment of amounts received under qualified mortgages for a temporary period before distribution to holders of interests in the remic sec_1_860d-1 provides that for purposes of the asset test of sec_860d substantially_all of a qualified entity’s assets are qualified mortgages and permitted_investments if the qualified_entity owns no more than a de_minimis amount of other assets sec_1_860d-1 sets forth a safe_harbor_rule which provides that the amount of assets other than qualified mortgages and permitted_investments is de plr-102176-17 minimis if the aggregate of the adjusted bases of those assets is less than one percent of the aggregate of the adjusted bases of all of the remic’s assets sec_1_860g-2 states that in determining what is a cash_flow_investment the term payments received on qualified mortgages includes among other_payments payments by a sponsor or prior owner in lieu of the sponsor’s or prior owner’s repurchase of a defective obligation as defined in sec_1_860g-2 that was transferred to the remic in breach of a customary warranty sec_1_860g-2 defines a defective obligation as a mortgage subject_to certain defects including that the mortgage does not conform to a customary representation or warranty given by the sponsor or prior owner of the mortgage regarding the characteristics of the mortgage or the characteristics of the pool of mortgages of which the mortgage is a part each taxpayer’s right to receive its allocable share under the settlement agreement arises from the mortgage loans the allocable share for each taxpayer is a contract claim that stems directly from the rights held by trustee on behalf of each taxpayer and its status as a remic therefore a taxpayer’s right to receive an allocable share is not an asset that is newly acquired by a remic after its startup date the execution of the settlement agreement the methodology used to determine a taxpayer’s allocable share and the receipt of the allocable share by a taxpayer arise from each taxpayer’s interest in the mortgage loans and its status as a remic and therefore will not cause any taxpayer to fail to meet the requirements under sec_860d the allocable share under the settlement agreement is the result of a dispute between the institutional investors and bank regarding whether the mortgage loans conveyed to each taxpayer violated customary representations and warranties under the respective governing agreements for purposes of the remic rules a defective obligation includes mortgages that do not conform to a customary representation or warranty given by the sponsor or prior owner of the mortgage regarding the characteristics of the mortgage or the characteristics of the pool of mortgages of which the mortgage is a part each taxpayer’s right to the allocable share under the settlement agreement is akin to a payment received by such taxpayer from a sponsor or prior owner in lieu of the sponsor or prior owner’s repurchase of such a defective obligation therefore pursuant to sec_1_860g-2 the allocable share will be considered a payment received on a qualified_mortgage pursuant to sec_1 860g- g ii issue regular and residual interests sec_860g defines a regular_interest in a remic to mean any interest in a remic which is issued on the startup_day with fixed terms and which is designated plr-102176-17 as a regular_interest if a such interest unconditionally entitles the holder to receive a specified principal_amount or other similar amount and b interest payments or other similar amount if any with respect to such interest at or before maturity i are payable based on a fixed rate or to the extent provided in regulations at a variable rate or ii consist of a specified portion of the interest payments on qualified mortgages and such portion does not vary during the period such interest is outstanding sec_860g defines a residual_interest in a remic to mean an interest in a remic which is issued on the startup_day which is not a regular_interest and which is designated as a residual_interest sec_860g defines the term startup_day to mean the day on which the remic issues all of its regular and residual interests sec_1_860g-1 provides that for purposes of sec_860g a remic designates an interest as a regular_interest by providing to the internal_revenue_service the information specified in sec_1_860d-1 in the time and manner specified in sec_1_860d-1 sec_1_860g-1 provides that a residual_interest is an interest in a remic that is issued on the startup_day and that is designated as a residual_interest by providing the information specified in sec_1_860d-1 at the time and in the manner provided in sec_1_860d-1 a residual_interest need not entitle the holder to any distributions from the remic sec_1_860g-1 provides that for purposes of sec_860g a regular_interest in a remic has fixed terms on the startup_day if on the startup_day the remic’s organizational documents irrevocably specify i the principal_amount or other similar amount of the regular_interest ii the interest rate or rates used to compute any interest payments or other similar amounts on the regular_interest and iii the latest possible maturity_date of the interest a remic regular_interest must be issued on the startup date with fixed terms a remic residual_interest is an interest in the remic issued on the startup date that is not a regular_interest taxpayers represent that the distribution provisions of the settlement agreement do not alter the rights or obligations of any of the taxpayers or the investors’ interests therein and that the distribution of allocable shares to the investors is consistent with the distribution provisions contained in the governing agreements that provide for the distribution of subsequent recoveries or unscheduled principal amounts received distributions that are made pursuant to these provisions are treated as and constitute distributions of underlying mortgage loan principal collections the settlement agreement also provides that should a principal payment become payable to a class of remic residual interests on a distribution date that is not the final distribution date under the applicable governing agreement such payment will be maintained in the distribution account and trustee shall distribute the retained amount on the next distribution date to the applicable regular_interest investors entitled plr-102176-17 to receive a principal distribution of subsequent recoveries or unscheduled payments of principal accordingly the distribution of an allocable share to the investors will not cause any regular_interest in a taxpayer to fail to qualify as a regular_interest or the sole class of residual_interest in the taxpayer to fail to qualify as a residual_interest issue tax on contributions after startup date and prohibited_transaction except as provided in sec_860g sec_860g imposes on any amount that is contributed to a remic after the startup_day a tax equal to percent of the amount contributed sec_860g provides that the tax on contributions after the startup date shall not apply to any contribution which is made in cash and is a a contribution to facilitate a cleanup call as defined in regulations or a qualified_liquidation b a payment in the nature of a guarantee c a contribution during the 3-month period beginning on the startup_day d a contribution to a qualified_reserve_fund by any holder of a residual_interest in the remic or e any other contribution permitted in regulations sec_860f imposes a tax equal to percent of the net_income_derived_from_prohibited_transactions sec_860f defines prohibited_transaction to mean one of the following a disposition of any qualified_mortgage transferred to the remic other than a disposition pursuant to i the substitution of a qualified_replacement_mortgage for a qualified_mortgage or the repurchase in lieu of substitution of a defective obligation ii a disposition incident to the foreclosure default or imminent default of the mortgage iii the bankruptcy or insolvency of the remic or iv a qualified_liquidation b the receipt of any income attributable to any asset which is neither a qualified_mortgage nor a permitted_investment c the receipt by the remic of any amount representing a fee or other compensation_for services or d gain from the disposition of any cash_flow_investment other than pursuant to any qualified_liquidation as discussed above the receipt of the allocable share by a taxpayer arises from the mortgage loans and each taxpayer’s status as a remic the allocable share arises in connection with each taxpayer’s interest in the mortgage loans and is neither a contribution of cash to the remic nor is it listed as a prohibited_transaction in sec_860f as a result the receipt of the allocable share by a taxpayer will not be treated as a prohibited_transaction within the meaning of sec_860f or as a contribution subject_to tax under sec_860g conclusion we hereby rule as follows in the case of each taxpayer for which a timely valid and continuing remic election has been made in accordance with the plr-102176-17 applicable governing agreement none of i the execution of the settlement agreement ii the methodology for determining and the right to receive an allocable share of the settlement payment or iii the receipt of an allocable share of the settlement payment will cause the taxpayer to fail to meet the requirements of sec_860d in the case of each taxpayer for which a timely valid and continuing remic election has been made in accordance with the applicable governing agreement the receipt of an allocable share of the settlement payment will be treated as a payment received on qualified mortgages within the meaning of sec_1_860g-2 of the income_tax regulations in the case of each taxpayer for which a timely valid and continuing remic election has been made in accordance with the applicable governing agreement the distribution of an allocable share amount in accordance with the applicable governing agreement and the settlement agreement will not cause any regular_interest in such taxpayer to fail to qualify as a regular_interest as defined in sec_860g or the sole class of residual_interest in such taxpayer to fail to qualify as a residual_interest as defined in sec_860g in the case of each taxpayer for which a timely valid and continuing remic election has been made in accordance with the applicable governing agreement the receipt of an allocable share amount will not be treated as a prohibited_transaction within the meaning of sec_860f or as a contribution that is subject_to the tax imposed under sec_860g this ruling’s application is limited to the facts representations code sections and regulations cited herein except as specifically ruled upon above no opinion is expressed concerning any federal_income_tax consequences related to the facts herein under any other provisions of the code specifically we do not rule whether any taxpayer qualifies as a remic under sec_860a-860g or whether any mortgage loan qualifies as a qualified_mortgage as defined in sec_860g this ruling is directed only to the taxpayers that requested it sec_6110 provides that it may not be used or cited as precedent in accordance with the provisions of a power_of_attorney on file we are sending a copy of this ruling letter to your authorized representative plr-102176-17 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely john w rogers iii john w rogers iii senior technician reviewer branch office of associate chief_counsel financial institutions products enclosure copy for sec_6110 purposes cc ------------------------------------ -------------------------------------------------------- --------------------------------------------------- --------------------------------------------------------- -------------------------------------------- ---------------------------------- ---------------------------------- --------------------------------------------------------- ------------------------------------- plr-102176-17 appendix a remic name ------------------------------------------------------------------------------------------------------------------- ----------------------- ------------------------------------------------------------------------------------------------------------------- --------------------------------- ------------------------------------------------------------------------------------------------------------------- ---------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------------- ------------------------------------------------------------------------------------------------------------------- ---------------------------------- ------------------------------------------------------------------------------------------------------------------- --------------------------------- ------------------------------------------------------------------------------------------------------------------- --------------------------------- ------------------------------------------------------------------------------------------------------------------- --------------------------------- ------------------------------------------------------------------------------------------------------------------- --------------------------------- ------------------------------------------------------------------------------------------------------------------- --------------------------- ------------------------------------------------------------------------------------------------------------------- ----------------------- ------------------------------------------------------------------------------------------------------------------- ----------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------------------ ------------------------------------------------------------------------------------------------------------------- ------------------------------------ ------------------------------------------------------------------------------------------------------------------- --------------------------------- ------------------------------------------------------------------------------------------------------------------- --------------------------------- ------------------------------------------------------------------------------------------------------------------- ---------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------- ------------- ------------- ------------- ------------- ----------- ein ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------- ------------------- -------------- ------------------- ------------- ------------------- -------------- ------------------- ------------- ------------------- -------------- ------------------- ------------- ------------- ------------------- ------------------- -------------- ------------------- ------------- ------------------- -------------- ------------------- ------------- ------------- ------------------- ------------------- plr-102176-17 ------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------- ------------------------------------------------------------------------------------------------------------------- ---------------------------------- ------------------------------------------------------------------------------------------------------------------- ---------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------------- ------------------------------------------------------------------------------------------------------------------- ---------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------------- ------------------------------------------------------------------------------------------------------------------- ----------------------------------- ------------------------------------------------------------------------------------------------------------------- ----------------------------------- ------------------------------------------------------------------------------------------------------------------- ----------------------------- ------------------------------------------------------------------------------------------------------------------- ---------------------------- ------------------------------------------------------------------------------------------------------------------- ----------------------- ------------------------------------------------------------------------------------------------------------------- -------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------------ ------------------------------------------------------------------------------------------------------------------- ------------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------- -------------- ------------------- ------------- ------------------- -------------- ------------------- ------------- ------------------- -------------- ------------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- -------------------


internal_revenue_service number release date index number department of the treasury washington dc person to contact telephone number refer reply to cc corp b03-plr-160185-02 date date re legend distributing controlled bank state a state b state c plr-160185-02 business r x dear this letter responds to your letter dated date requesting rulings on the federal_income_tax consequences of a proposed transaction the information in that request and in the subsequent correspondence of date date date and date is substantially set forth below distributing is a state a corporation using the accrual_method of accounting distributing is the common parent of an affiliated_group filing a consolidated federal_income_tax return distributing is a publicly traded holding_company owning all of the outstanding_stock of bank and controlled controlled is a wholly-owned subsidiary of distributing and is a state b corporation controlled joins in the consolidated federal_income_tax return filed by distributing and is an accrual basis taxpayer controlled is engaged in business r bank is a wholly-owned subsidiary of distributing operating under a national charter with its principal_place_of_business in state c bank joins in the consolidated federal_income_tax return filed by distributing and is an accrual basis taxpayer bank is engaged in the banking business distributing has supplied information which indicates that controlled’s business r and bank’s banking business each have had gross_receipts and operating_expenses representative of the active_conduct of such businesses for each of the past five years distributing desires to expand bank through a borrowing or stock offering but are unable to effectuate a borrowing or stock offering in the current structure distributing has demonstrated that it will be able to raise significantly more money through a borrowing or stock offering if bank and controlled are separated therefore distributing has proposed the separation of bank and controlled by effecting a spin-off of controlled to the shareholders of distributing accordingly i ii distributing will cause controlled to split its shares of common_stock in order to avoid issuing fractional shares of controlled to distributing shareholders in the distribution distributing will transfer to each distributing shareholder controlled voting shares pro_rata according to their ownership of shares in distributing distributing will not retain any stock_or_securities of controlled plr-160185-02 iii iv options to purchase distributing stock issued to controlled employees will be canceled or made exercisable for controlled stock distributing will raise within one year of the distribution at least dollar_figurex in a borrowing and or stock offering with such proceeds to be used to expand bank’s business in the case of a stock offering the stock issued will comprise less than percent of the total combined voting power of all classes of stock of distributing entitled to vote and also less than percent of the total value of all classes of stock of distributing the taxpayers have made the following representations in connection with the proposed transaction a b c d e f no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing the five years of financial information submitted on behalf of bank is representative of the present operations of bank and with regard to such corporation there have been no substantial operational changes since the date of the last financial statements submitted the five years of financial information submitted on behalf of controlled is representative of the present operations of controlled and with regard to such corporation there have been no substantial operational changes since the date of the last financial statements submitted immediately after the distribution at least percent of the fair_market_value of the gross assets of distributing will consist of the stock and securities of bank which will be engaged in the active_conduct_of_a_trade_or_business as defined in sec_355 following the transaction distributing through bank and controlled will each continue the active_conduct of its business independently and with its separate employees the distribution of the stock of controlled is carried out for the following corporate business_purpose to enable distributing to achieve the expansion of bank’s business by raising capital through either a borrowing or a stock offering or some combination of the two the distribution of the stock of controlled is motivated in whole or in substantial part by this corporate business_purpose plr-160185-02 g h i j k l m n there is no plan or intention by any shareholder who owns five percent or more of the stock of distributing and management of distributing to its best knowledge is not aware of any plan or intention on the part of any particular remaining shareholder or security holder of distributing to sell exchange transfer by gift or otherwise dispose_of any of their stock in or securities of either distributing or controlled after the transaction there is no plan or intention by either distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the transaction other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 there is no plan or intention to liquidate either distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the transaction except in the ordinary course of business there are no liabilities being assumed by controlled in connection with the transaction no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution of the controlled stock immediately before the distribution items of income gain loss deduction and credit will be taken into account as required by the applicable inter- company transaction regulations further distributing’s excess_loss_account if any with respect to controlled stock will be included in income immediately before the distribution payments made in connection with all continuing transactions if any between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length the distribution is not part of a plan or series of related transactions within the meaning of sec_355 of the internal_revenue_code pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the total combined voting power of all classes of stock entitled to vote or stock possessing percent or more of the total value of all classes of stock of distributing or controlled based solely on the information submitted and on the representations set forth above we hold as follows plr-160185-02 no gain_or_loss will be recognized by distributing upon the distribution of its stock in controlled to its shareholders sec_355 no gain_or_loss will be recognized by and no amount will be included in the income of distributing’s shareholders on their receipt of the controlled stock sec_355 the aggregate basis of the distributing stock and of the controlled stock in the hands of distributing shareholders after the distribution will be the same as the aggregate basis of distributing stock in the hands of distributing shareholders immediately prior to the distribution allocated between the distributing stock and the controlled stock in proportion to the fair_market_value of each corporation’s stock in accordance with sec_1_358-2 of the income_tax regulations sec_358 b and c the holding_period of the controlled stock received by each distributing shareholder in the distribution will include the holding_period of the distributing stock held by such shareholder immediately before the distribution provided that such shareholder held the distributing stock as a capital_asset on the date of the distribution sec_1223 proper allocation of earnings_and_profits between distributing and controlled will be made under sec_1_312-10 and sec_1_1502-33 except as expressly provided herein we express no opinion concerning the federal_income_tax consequences of any aspect of the proposed transaction or under any other provisions of the code or regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above rulings this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to distributing the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination plr-160185-02 a copy of this letter should be attached to the federal_income_tax returns of the taxpayers involved for the taxable_year in which the transaction covered by this ruling letter is consummated sincerely ken cohen senior technician reviewer branch office of associate chief_counsel corporate cc


internal_revenue_service number release date index number ----------------------------------- -------------------------- ------------------------------ re ------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------- id no ------------------ telephone number ---------------------- refer reply to cc psi plr-139913-15 date march legend decedent date spouse date dear ------------------ --------------------------------------- ------------------ ------------------------ ----------------------------------- ------------------ ------------------- this letter responds to your authorized representative’s letter of date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election under sec_2010 of the internal_revenue_code code to allow a decedent’s surviving_spouse to take into account that decedent’s deceased spousal unused exclusion dsue amount the facts and representations submitted are as follows decedent died on date survived by spouse date is a date after the effective date of the amendment to sec_2010 which provides for portability of a dsue amount to a surviving_spouse to obtain the benefit of portability of decedent’s dsue amount to spouse decedent’s estate was required to file form_706 united_states estate and generation-skipping_transfer_tax return on or before the date that is nine months after decedent’s date of death or the last day of the period covered by an extension decedent’s form_706 was due on date but the estate did not file a timely form_706 to make the portability election the estate discovered its failure to elect portability after the due_date for making the election plr-139913-15 it is represented that the value of decedent’s gross_estate is less than the basic exclusion amount in the year of decedent’s death including any taxable_gifts made during her lifetime you request an extension of time pursuant to sec_301_9100-3 to elect portability of decedent’s dsue amount pursuant to sec_2010 law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2010 provides that a credit of the applicable credit_amount shall be allowed to the estate of every decedent against the tax imposed by sec_2001 sec_2010 provides that the applicable credit_amount is the amount of the tentative_tax that would be determined under sec_2001 if the amount with respect to which such tentative_tax is to be computed were equal to the applicable_exclusion_amount on date congress amended sec_2010 effective for estates of decedents dying and gifts made after date to allow portability of a decedent’s unused applicable_exclusion_amount between spouses tax relief unemployment insurance reauthorization and job creation act of pub_l_no sec_303 124_stat_3296 sec_2010 provides that the applicable_exclusion_amount is the sum of the basic exclusion amount and in the case of a surviving_spouse the dsue amount sec_2010 generally provides that the basic exclusion amount is dollar_figure to be adjusted for inflation annually after calendar_year sec_2010 defines the dsue amount to mean the lesser_of a the basic exclusion amount or b the excess of -- i the applicable_exclusion_amount of the last deceased spouse of the surviving_spouse over ii the amount with respect to which the tentative_tax is determined under sec_2001 on the estate of such deceased spouse sec_2010 provides that a dsue amount may not be taken into account by a surviving_spouse under sec_2010 unless the executor of the estate of the deceased spouse files an estate_tax_return on which such amount is computed and makes an election on such return that such amount may be so taken into account the election once made shall be irrevocable no election may be made if such return is filed after the time prescribed by law including extensions for filing such return plr-139913-15 sec_2010 provides that the secretary shall prescribe regulations as may be necessary or appropriate to implement sec_2010 sec_20_2010-2t a of the estate_tax regulations as in effect on date provides that to allow a decedent’s surviving_spouse to take into account that decedent’s dsue amount the executor of the decedent’s estate must elect portability of the dsue amount on a timely-filed form_706 under sec_20_2010-2t a the due_date of an estate_tax_return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been granted under sec_20_2010-2t a the portability election is made by timely filing a complete and properly prepared estate_tax_return unless the executor satisfies the requirements for the election not to apply in sec_20_2010-2t a i sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that the term statutory election means an election whose due_date is prescribed by statute the term regulatory election means an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute a request for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election the due_date for the portability election is prescribed by statute in the case of an estate required to file an estate_tax_return under sec_6018 see sec_2010 sec_6075 and sec_6018 in the case of an estate that is not required to file an estate_tax_return under sec_6018 the due_date is prescribed by regulation see sec_20_2010-2t a see also sec_20_2010-2 and revproc_2014_18 2014_7_irb_513 sec_2 plr-139913-15 accordingly in the latter case a taxpayer may seek an extension of time to elect portability under the provisions of sec_301_9100-3 sec_6018 requires the filing of an estate_tax_return in all cases where the gross_estate exceeds the basic exclusion amount in effect under sec_2010 for the calendar_year which includes the date of death for purposes of this determination under sec_6018 the basic exclusion amount is reduced but not below zero by the sum of -- a the amount of the adjusted_taxable_gifts within the meaning of sec_2001 made by the decedent after date plus b the aggregate amount allowed as a specific exemption under sec_2521 as in effect before its repeal by the tax reform act of with respect to gifts made by the decedent after date it is represented that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is not required to file an estate_tax_return under sec_6018 under these facts the commissioner has discretionary authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly we grant an extension of time of days from the date of this letter in which to elect portability under sec_2010 the election should be made by filing a complete and properly-prepared form_706 and a copy of this letter within days from the date of this letter to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center stop cincinnati oh for purposes of electing portability a form_706 filed by decedent’s estate within days from the date of this letter will be considered to be timely filed the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination if it is later determined that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is required to file an estate_tax_return pursuant to sec_6018 the commissioner is without authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void plr-139913-15 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely associate chief_counsel passthroughs special industries by melissa c liquerman melissa c liquerman chief branch passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter


internal_revenue_service number release date index number --------------------------- ------------------ ------------------------------------- re------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number -------------------- refer reply to cc psi plr-123150-14 date december legend -------------------- testator ----------------------------------------------------------------------- trust -------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- ---------------------------------------------------------------------- corporate trustee a ------------------------------------------------------------------------ corporate trustee b ----------------------------------------------------------- corporate trustee c ----------------------------- corporate trustee d --------------------------------------------- child a ---------------------- child b ---------------------- child c --------------------------------- grandchild c ------------------------------------------------------------------------ grandchild a-1 -------------------------- grandchild a-2 --------------------- individual ----------------------- trust a ----------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------- trust b -------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------ ----------------------------------------------------------------------- plr-123150-14 --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------- share ----------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --- ------------------------------------------------------------------------------------ ------------------------------------------------------------- ------------------ ------------------- ------------------ ------- ------- ------- ------- -------- --------------------------------------------------------- ----------------------------------------------------------------------- share --------------------------------------------------------------------------------------------------- date date date year year year year state court state act ------- ------------------------------------------------------ --------------------------------------------------------------------------------------------------------------- ---------------------------------------------------- cite ------------------------------------------------------------------------ cite ------------------------------------------------- cite cite ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- dear ---------------- this responds to your authorized representatives’ letter dated date and subsequent correspondence requesting rulings concerning the income gift estate and generation-skipping gst tax consequences of a settlement agreement facts testator died testate on date prior to date a resident of state he was survived by two children child a and child b a third child child c predeceased testator child c was survived by her child grandchild c testator’s last will and testament will established a_trust trust for the benefit of his lineal_descendants article first paragraph a of trust provides that the trustees are to pay the net_income quarterly in equal shares to child a child b and grandchild c if plr-123150-14 any of them is not living on an income payment_date the trustees are to pay over his or her share of the income by right of representation to his or her issue then living article first paragraph b provides that trust is to end upon the death of the survivor of child a child b and grandchild c at which time the trustees are to distribute the trust principal by right of representation to testator’s then living issue article second provides in relevant part that corporate trustee a child a child b and grandchild c are to be the trustees child a died in year survived by two children grandchild a-1 and grandchild a-2 child b is living grandchild c is living_trust will terminate when the survivor of child b and grandchild c has died corporate trustee a and its successor_corporation served as a co-trustee until year at present one-third of the trust income is paid to grandchild a-1 and grandchild a-2 as successors to child a’s income_interest another third of the income is paid to child b the last third of the income is paid to grandchild c the current presumptive remainder beneficiaries are i grandchild a-1 and grandchild a-2 ii child b’s three children and iii grandchild c’s four children the trust assets consist primarily of investment_assets it is represented that no actual or constructive additions have been made to trust since its inception in year child b and grandchild c as co-trustees petitioned the court to appoint an institutional co-trustee to restore the trustee structure as originally constituted under the will by court order of date corporate trustee b was appointed co-trustee of trust corporate trustee b was subsequently acquired by corporate trustee c accordingly the current co-trustees are child b and grandchild c and corporate trustee c following the year court proceedings the trustees modified the written investment policy of trust to invest and manage the trust assets in accordance with the state act under the modification in part an independent fiduciary as a trustee may equitably adjust between principal and income by allocating an amount of income to principal or an amount of principal to income to the extent the independent fiduciary considers appropriate if the terms of the trust describe the amount that may or must be distributed to a beneficiary by referring to the trust’s income in deciding whether and to what extent to exercise this power the independent fiduciary is to consider certain factors such as the assets held in the trust the extent to which they consist of financial_assets interests in closely held enterprises tangible and intangible personal_property or real_property the extent to which an asset is used by a beneficiary and whether an asset was purchased by the trustee or received from the settlor plr-123150-14 pursuant to the modification corporate trustee c exercised its authority to equitably adjust trust receipts between income and principal thereafter child b expressed concern and objected to corporate trustee c’s actions in exercising its adjustment powers the disagreements over these actions have resulted in a rift in the family and a desire by some family members to have different trustees and separate trusts for some of the beneficiaries in year child b filed a petition with the court to divide trust and administer the divided trusts as separate trusts child b’s stated reasons for the division were that it would facilitate investment management and administrative decisions regarding the share for child b and his family that would be consistent with their investment philosophy child b’s petition was met with opposition from the other beneficiaries and corporate trustee c they were concerned that among other things the division of trust violated the testamentary intent of testator and violated a material purpose of trust they were also concerned that the division of trust into new smaller trusts would result in the loss of economic efficiencies enjoyed by the existing trust child b’s petition was answered by the other beneficiaries who raised a counterclaim they requested that the court construe the words by right of representation in the context of testator’s will they asserted that construction of the term could affect future distributions from trust whether or not trust was divided that is depending on the order of deaths and whether or not there were future births in the family there were three possible constructions that could produce substantially different distributions of income and principal of trust see cite cite and cite see also cite after an adversarial process before the court and extensive settlement negotiations the trustees and beneficiaries of trust agreed to a settlement settlement agreement under which trust will terminate and its assets will be divided into two trusts trust a and trust b_trust a equal in value to one-third of the value of trust will be held as a separate trust for child b and his descendants trust b equal in value to two-thirds of the value of trust will be held as a separate trust for grandchild c and her descendants and child a’s descendants to the extent it is administratively feasible the division of assets will be pro_rata in addition the parties agreed that the term by right of representation will be construed to require a per stirpes distribution of trust assets among the descendants of testator with the first division to be made at the child level ie at the level of child a child b and child c even if that generation has no living descendants on date the court issued an order approving and adopting the terms of the settlement agreement the order provides in part that beginning on the date of division and continuing until termination trust a and trust b i shall be treated as completely separate and distinct trusts for all purposes and ii shall be governed by the plr-123150-14 existing provisions of trust except to the extent modified by certain provisions as described below trust a child b will receive the trust a income quarterly for his life after child b’s death his children will receive the income in equal shares if any child should die that child’s children will receive the child’s share of the income in equal shares if child b and all of his issue die before the termination of trust a the assets of trust a will be added to trust b on the death of the survivor of child b and grandchild c trust a will terminate and the trust a assets will be distributed to the then-living descendants of child b by right of representation child b and his three children will be the individual co-trustees of trust a corporate trustee d will be appointed as a co-trustee by a document signed prior to the effective date of the trust division and effective upon the creation of trust a a corporate trustee will remain in service until trust a terminates the corporate trustee will have all the powers under state law to exercise the trustee’s powers to adjust between income and principal pursuant to the provisions of the state act trust b grandchild a-1 grandchild a-2 grandchild c and individual will be the co-trustees of trust b corporate trustee c will serve as the corporate trustee trust b will consist of two shares share and share the income of share will be distributed quarterly to grandchild c the income of share will be distributed quarterly in equal shares to grandchild a-1 and grandchild a-2 if any of those persons should die during the term of the trust his or her income share will be paid to his or her descendants by right of representation on the death of the survivor of child b and grandchild c trust b will terminate share will be distributed to the then-living descendants of grandchild c by right of representation and share will be distributed to the then-living descendants of child a by right of representation you have asked for the following rulings the terms of the settlement agreement including the trust division and the construction of the phrase by right of representation will not cause a distribution from or the termination of any interest in trust trust a or trust b to be subject_to the generation-skipping_transfer_tax plr-123150-14 the terms of the settlement agreement including the trust division and the construction of the phrase by right of representation will not cause any person to make a gift to any beneficiary of trust trust a or trust b the terms of the settlement agreement including the trust division and the construction of the phrase by right of representation will not cause the assets held in trust trust a or trust b to be included in the gross_estate of a beneficiary who dies prior to the termination of such trust following the termination of trust and the resulting division of trust pursuant to the settlement agreement trust a and trust b will be treated as separate trusts the terms of the settlement agreement including the trust division and the construction of the phrase by right of representation will not cause any party to the settlement agreement to realize income from the sale_or_exchange of any trust assets or interests law and analysis ruling sec_2601 of the internal_revenue_code imposes a tax on every generation-skipping_transfer which is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip under of the tax_reform_act_of_1986 the act gst tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the tax does not apply to a transfer under a_trust that was irrevocable on date except to the extent the transfer is made out of corpus added to the trust by an actual or constructive_addition after date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax under sec_26_2601-1 will not cause the trust to lose its exempt status these rules are applicable only for purposes of determining whether an exempt trust retains exempt status for generation-skipping_transfer_tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a court-approved settlement of a bona_fide issue regarding the administration of the trust or the construction of terms of the plr-123150-14 governing instrument will not cause an exempt trust to be subject_to the provisions of chapter if the settlement is the product of arm's length negotiations and the settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement a settlement that results in a compromise between the positions of the litigating parties and reflects the parties' assessments of the relative strengths of their positions is a settlement that is within the range of reasonable outcomes sec_26_2601-1 provides that a judicial construction of a governing instrument to resolve an ambiguity in the terms of the instrument or to correct a scrivener's error will not cause an exempt trust to be subject_to the provisions of chapter if the judicial action involves a bona_fide issue and the construction is consistent with applicable state law that would be applied by the highest court of the state sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy sec_26_2601-1 b or c by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust sec_26_2601-1 example describes a situation where in grantor established an irrevocable_trust for the benefit of his two children a and b and their issue under the terms of the trust the trustee has the discretion to distribute income and principal to a b and their issue in such amounts as the trustee deems appropriate on the death of the last to die of a and b the trust principal is to be distributed to the living issue of a and b per stirpes in the appropriate local court approved the division of the trust into two equal trusts one for the benefit of a and a's issue and one for the benefit of b and b's issue the trust for a and a's issue provides that the trustee has the discretion to distribute trust income and principal to a and a's issue in such amounts as the trustee deems appropriate on a's death the trust principal is to be distributed equally to a's issue per stirpes if a dies with no living descendants the principal will be added to the trust for b and b's issue the trust for b and b's issue is identical except for the beneficiaries and terminates at b's death at which time the trust principal is to be distributed equally to b's issue per stirpes if b dies with no living descendants principal will be added to the trust for a and a's issue the example concludes that the division of the trust into two trusts does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the division in addition the division does not extend the time for vesting of any beneficial_interest in plr-123150-14 the trust beyond the period provided for in the original trust therefore the two partitioned trusts resulting from the division will not be subject_to the provisions of chapter in this case trust was irrevocable on date it is represented that there have been no actual or constructive additions to the trust after date the settlement agreement and court order resolve bona_fide issues ie the construction of the words by right of representation as intended by testator and the administration of trust under the state act the settlement agreement is the product of arm's length negotiations and is within the range of reasonable outcomes under trust and state law finally the settlement agreement and court order construing the term by right of representation and dividing trust will not shift a beneficial_interest in trust to a lower generation beneficiary and will not extend the time for vesting of any beneficial_interest in trust accordingly based on the facts submitted and representations made we conclude that the terms of the settlement agreement including the trust division and construction of the phrase by right of representation will not cause distributions from or the termination of any interest in trust trust a or trust b to be subject_to the gst tax imposed by sec_2601 ruling sec_2501 provides that a tax is imposed for each calendar_year on the transfer of property by gift during such calendar_year by any individual resident or nonresident sec_2511 provides that the tax imposed by sec_2501 will 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 sec_25_2511-1 of the gift_tax regulations provides that any transaction in which an interest in property is gratuitously passed or conferred upon another regardless of the means or device employed constitutes a gift subject_to tax whether an agreement settling a dispute is effective for gift_tax purposes depends on whether the settlement is based on a valid enforceable claim asserted by the parties and to the extent feasible produces an economically fair result see 674_f2d_761 9th cir citing 387_us_456 thus state law must be examined to ascertain the legitimacy of each party's claim if it is determined that each party has a valid claim the service must determine that the settlement reflects the result that would apply under state law if there is a difference it is necessary to consider whether the difference may be justified because of the uncertainty of the result if the question were litigated plr-123150-14 as discussed above the issues resolved by the settlement agreement and court order concerning the construction of trust and its administration are bona_fide issues based upon valid enforceable claims by the interested parties the settlement agreement resolves conflicts concerning distributions of income and principal and is reflective of the rights of the parties under applicable state law that would be applied by the highest court of state accordingly based on the facts submitted and representations made we conclude that the terms of the settlement agreement will not cause any person to make a gift to any beneficiary of trust trust a or trust b ruling 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_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 his death sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for adequate_and_full_consideration in money_or_money's_worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom sec_2037 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time after date made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise if possession or enjoyment of the property can through ownership of such interest be obtained only by surviving the decedent and the decedent has retained a reversionary_interest in the property but in the case of a transfer made before date only if such reversionary_interest arose by the express terms of the instrument of transfer and the value of such reversionary_interest immediately before the death of the decedent exceeds five percent of the value of such property sec_2038 provides that the value of the decedent's 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 adequate_and_full_consideration in money_or_money's_worth by trust or otherwise where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power in whatever capacity exercisable by the decedent alone or by the decedent in plr-123150-14 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 where any such power is relinquished during the three-year period on the date of the decedent's death sec_2041 provides that the value of the gross_estate shall include 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 a power_of_appointment by a disposition that is of such nature that if it were a transfer of property owned by the decedent the property would be includible in the decedent's gross_estate under sec_2035 to sec_2041 provides that a general_power_of_appointment is a power that is exercisable in favor of the decedent the decedent's_estate the decedent's creditors or the creditors of the decedent's_estate however a power to consume invade or appropriate property for the benefit of the decedent that is limited by an ascertainable_standard relating to the health education support or maintenance of the decedent shall not be deemed a general_power_of_appointment in this case no person made a transfer to trust other than testator at his death on date the income and terminating distributions from the divided trusts will follow the same pattern as they would have had trust not been divided the income beneficiaries will be entitled to distributions quarterly and the remaindermen will be entitled to receive the trust property only upon surviving termination of the respective trust the terms of the settlement agreement do not cause any transfers or create any general powers of appointment that would cause any of the trust property to be included in the estate of a beneficiary under sec_2036 sec_2038 or sec_2041 consequently the terms of the settlement agreement will not cause any beneficiary of trust trust a or trust b who dies prior to the termination of such trust to include trust assets in his or her taxable_estate other than i trust assets that have been distributed to him or her prior to death or ii such quarterly distributions of income that were past due and not paid in accordance with the trust terms during a beneficiary’s life and to which he or she has a legally enforceable claim at death ruling sec_643 provides that for purposes of subchapter_j of chapter of subtitle a under regulations prescribed by the secretary two or more trusts shall be treated as one trust if such trusts have substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries and a principal purpose of such trusts is the avoidance of the tax_imposed_by_chapter_1 plr-123150-14 section b of the tax_reform_act_of_1986 provides that sec_643 shall apply to taxable years beginning after date except that in the case of a_trust that was irrevocable on date it shall apply only to that portion of the trust that is attributable to contributions of corpus after date the taxpayers represent that in this case trust a and trust b will have different beneficiaries the taxpayers also represent that no actual or constructive additions have been made to trust since its inception prior to date based on the facts submitted and the representations made we conclude that as long as trust a and trust b are separately managed and administered they will be treated as separate trusts for federal tax purposes ruling sec_61 and provides that gross_income includes gains derived from dealings in property and income from an interest in a_trust sec_1001 provides that the gain from the sale_or_other_disposition of property is the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss is the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized under sec_1001 the amount_realized from the sale_or_other_disposition of property is the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a of the code the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property must be recognized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained a partition of jointly owned property is not a sale_or_other_disposition of property if the co-owners of the joint property sever their joint_interests but do not acquire a new or additional interest as a result thereof thus neither gain nor loss is realized on a partition see revrul_56_437 1956_2_cb_507 conversion of a joint_tenancy in stock to a tenancy_in_common in order to eliminate the survivorship feature and the partition of a joint_tenancy in stock are not sales or exchanges similarly divisions of trusts are also not sales or exchanges of trust interests if each asset is divided pro_rata among the new trusts see revrul_69_486 1969_2_cb_159 pro_rata distribution of trust assets not a sale_or_exchange here the division of trust into trust a and trust b will not result in any shift in beneficial_interest in the assets of trust accordingly the division of trust as described will not result in the realization of gain_or_loss under sec_61 and sec_1001 in addition the plr-123150-14 agreement regarding construction of the term by right of representation will not result in the realization of gain_or_loss under sec_61 and sec_1001 except as expressly provided herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code these rulings are directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely leslie h finlow senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosure copy of letter for sec_6110 purposes