t c memo united_states tax_court william r carol enyart petitioners v commissioner of internal revenue respondent docket no filed date benjamin r cooksey for petitioners mary ann waters for respondent memorandum opinion chiechi judge respondent determined a deficiency in and an accuracy-related_penalty under sec_6662 ’ on petition--- ers’ federal_income_tax tax for in the amounts of dollar_figure ‘a111 section references are to the internal_revenue_code in effect for the year at issue all rule references are to the tax_court rules_of_practice and procedure and dollar_figure respectively the issues remaining for decision are are petitioners required to include in their taxable_income for the year at issue the amount of dollar_figure as consider- ation for the covenant by petitioner william r enyart mr enyart not to compete with b l utility contractors inc b l we hold that they are are petitioners liable for the year at issue for the accuracy-related_penalty under sec_6662 we hold that they are this case was submitted fully stipulated the facts that have been stipulated are so found petitioners resided in south point ohio at the time the petition was filed in date mr enyart and john milem sr mr milem incorporated b él which issued to each of them percent of its common_stock in date mr enyart purchased all of mr milem’s b l common_stock and became its sole stockholder in date janet robinson griffiths ms griffiths purchased shares of b l common_stock as a result of a special meeting of b l’s stockholders in date b l issued two additional shares of its common_stock to mr enyart thereby making him and ms griffiths equal stockholders of b l from date through date b l experienced a period of financial hardship that caused its two stockholders mr enyart and ms griffiths to undergo a friendly disagree- ment over how to extricate b l from its financial difficulties mr enyart and ms griffiths ultimately agreed around date that mr enyart was to leave b l in order to implement that agreement mr enyart and b l entered into a sale and purchase agreement agreement dated date under that agree- ment inter alia mr enyart agreed to sell and b l agreed to buy all of his b l common_stock for dollar_figure payable at the time of b l’s purchase ie redemption of that stock that sale and purchase of mr enyart’s b l common_stock was effected in because ms griffiths also wanted mr enyart to enter into a covenant_not_to_compete with bé él but b l lacked the funds to pay him cash for such a covenant the agreement provided in pertinent part 6b enyart agrees and covenants that he will not directly or indirectly or as an officer or owner of any entity compete with b él in the bidding for or contracting for work upon any project where the price for work to be performed by either party is five hun- dred thousand dollars dollar_figure or more for a period of one year from the date of closing which is effective upon closing at a price of three hundred thousand dollars dollar_figure in equipment as further set forth below and a equipment of the value set forth in b above shall be transferred by b l to enyart at clos- ing such equipment shall be selected by enyart from - - the equipment listing attached hereto as exhibit a and shall be valued for transfer and payment purposes hereunder at one hundred fifteen per cent of the values set forth for the items of equipment selected by bnyart ob all such egquipment is presently subject_to financing liens and enyart agrees to accept the trans-- fer of such equipment subject_to such liens bé l will remain responsible for the payment of all such liens as now financed and shall furnish enyart with releases of lien when payment has been made and such liens are released by the financing institution s c if transfer of such equipment or any part thereof cannot be effected because of objection by the lending institution s or otherwise then enyart shall have the use of such equipment by appropriate lease or other reasonable method until the financed amounts shall have been paid_by b l and releases of lien se- cured at which time the equipment shall be transferred to enyart d enyart agrees that he will maintain at his own cost all insurance required by the lending institu- tion s on such egquipment and further agrees that so long as any of such equipment remains titled to b él he will furnish at his own cost liability insurance with a company acceptable to b él for the benefit of b él as to the use of such equipment in minimum amounts equal to those currently in force for b l’s benefit by the naming of b l as an additional or named insured on insurance policies held by enyart or other effective manner each such policy shall contain a provision that it may not be canceled for any reason without thirty days’ prior written notice to b l enyart shall furnish b él with written certificates of insur- ance evidencing the above insurance at all times containing the above provision b l agrees that it will pay one-half the cost of liability insurance in excess of one million dollars dollar_figure e enyart shall be fully responsible for the payment of all taxes license fees and similar costs relating to all equipment and other matters hereunder on a timely basis without contribution by b l f b l presently holds a policy on the life of --- - janet r griffiths in the face_amount of one million dollars dollar_figure and will name the lending institution s holding liens on the equipment involved herein as beneficiary ies in the amount necessary to pay such liens the parties further agree that they will execute such other and further documents as are reason- ably necessary to effect the sales and transfers con- templated herein pursuant to the agreement mr enyart selected dollar_figure worth of certain assets owned by b él b l equipment as consider- ation for his covenant_not_to_compete with bé l we shall refer to mr enyart’s covenant_not_to_compete with b l as mr enyart’s covenant on date pursuant to paragraph of the agreement mr enyart and b l entered into a bill of sale and conveyance bill of sale and conveyance which effected the transfer of the b l equipment from b l to mr enyart the bill of sale and conveyance provided in pertinent part for value received b l utility contractors inc an ohio corporation b él hereby bargains sells conveys assigns and transfers unto william r enyart enyart all items of equipment including but not limited to motor vehicles which are set forth on the list attached hereto and made a part hereof marked as attachment a subject_to the following terms and conditions enyart is fully familiar with each item herein conveyed and accepts same in an as is where is condition without warranty whether express or implied enyart shall be fully responsible for and pay any and all cost and expense involved directly or indirectly in the conveyance transfer and titling of such items including but not limited to sales or -- - transfer_taxes fees and recording costs enyart will transfer title to the listed equipment immediately upon delivery of this instrument and shall be fully responsible for all liabilities attached thereto except as set forth in paragraph below upon acceptance of this instrument enyart acknowledges that the items herein conveyed are jointly and or severally subject_to fi- nancing or other liens evidencing indebtedness owed thereon and accepts such items subject_to such liens b él will remain responsible for the payment of such indebtedness and will provide releases of such liens at such time as the indebtedness is paid and such releases are executed by the entities holding such liens enyart shall be responsible at his own cost for the fulfillment of all conditions of the financing docu- ments relating to such liens and indebtedness includ- ing but not limited to the providing of insurance thereon excepting only the payment of such indebted- ness enyart further agrees that he will execute any documents required by the entities holding liens for the transfer of titles to the equipment in date mr enyart incorporated bill enyart and sons contracting inc enyart company and used the b l equipment to capitalize it and its operations on date b l signed a promissory note payable to bank of ashland in the principal_amount of dollar_figure at dollar_figure percent interest per year b él’s promissory note which was to be paid in installments of dollar_figure that were to commence on date pursuant to the terms of b l’s promissory note b él gave a security_interest to bank of ashland in the goods or property being purchased b l’s deposit accounts and other rights to the payment of money and other_property described in that note as various vehicles bé l’s promissory - note was signed on behalf of b l by ms griffiths as vice presi- dent and mr enyart as president of bé l notes to b l’s financial statements for the periods ended date and indicated that b l’s long-term debt at the end of the period ended date consisted of inter alia a balance of dollar_figure with respect to b l’s promis-- sory note fyffe jones associates psc fyffe jones conducted a review of those financial statements which consisted principally of inguiries of b l personnel and analytical proce- dures applied to b l’s financial data the review conducted by fyffe jones was substantially more limited in scope than an audit conducted in accordance with generally accepted auditing standards enyart company filed a u s_corporation income_tax return form_1120 for enyart company’s return which was signed by mr enyart in that return enyart company reported that it placed the b él equipment into service in and claimed a depreciation deduction with respect to that equipment it calculated that claimed depreciation deduction by using a cost_basis of slightly over dollar_figure the notes to b l’s financial statements for the periods ended date and indicated that b l had additional long-term debt at the end of consisting of dollar_figure of principal on a note payable to bank of ashland which was secured_by an unidentified truck and dollar_figure of principal on a note payable to bank of ashland that was described in those notes to b él’s financial statements as a renewable line of credit - b él issued a form 1099-b to mr enyart for that showed dollar_figure of income relating to the sale to b l of his b él stock b él also issued a form 1099-misc to mr enyart for that showed dollar_figure of income ie the value of the b l equipment that it transferred to mr enyart as consideration for mr enyart’s covenant petitioners filed a joint u s individual_income_tax_return form_1040 for joint_return which was signed by terry r fyffe mr fyffe as paid return preparer petitioners reported the dollar_figure that mr enyart received for the sale of his bél stock in schedule d capital_gains_and_losses schedule d of their joint_return petitioners did not report as ordinary_income in their joint_return the dollar_figure worth of b él equipment that b él transferred to mr enyart during for mr enyart’s covenant instead petitioners attached form_6252 installment_sale income form to that return petitioners reported in form_6252 the dollar_figure value of the b l equipment as the selling_price of certain unidentified property which they claimed was sold on the installment_method petitioners indicated in form_6252 that the unidentified property which they claimed was sold on the installment_method was acquired on date and sold on date petitioners claimed no basis in form_6252 for that property petitioners claimed in form_6252 that they received dollar_figure during with respect to the sale of the - unidentified property claimed to have been sold on the install- ment method and that their installment_sale income for equaled dollar_figure the dollar_figure of installment_sale income claimed in form_6252 was then reported as sec_1231 gain from in- stallment sales from form in form_4797 sales of business property which petitioners attached to their joint_return and as gain from form in schedule d of that return in the notice_of_deficiency notice issued to petitioners for the year at issue respondent determined that mr enyart received from b l as consideration for mr enyart’s covenant the bél equipment valued at dollar_figure consequently respondent determined in the notice to increase petitioners’ taxable_income for by dollar_figure respondent further determined in the notice that petitioners are liable for for the accuracy- related penalty under sec_6662 petitioners bear the burden of proving that the determina-- tions in the notice are erroneous see rule a 290_us_111 that this case was submit-- ted fully stipulated does not change that burden or the effect of a failure of proof see rule b 95_tc_82 affd 943_f2d_22 8th cir as a correlative determination respondent eliminated the dollar_figure of capital_gain that petitioners reported in schedule d of their joint_return as gain from form e sec_1231 gain from installment_sales from form respondent also made other correlative determinations -- - we turn first to the tax consequences for the year at issue that are attributable to mr enyart’s receipt of the b l equip- ment in return for his covenant_not_to_compete with b l as framed by petitioners in both their opening and reply briefs the issue that we must decide with respect to mr enyart’s covenant is what amount must petitioners report as gross_income for various equipment received pursuant to a covenant_not_to_compete agreement wherein petitioners received the right to use such equipment that was encumbered by financing for which petitioners were not liable having so framed the issue in this case relating to the b l equipment most of petitioners’ opening and reply briefs nonethe- less advance contentions and arguments in support of petitioners’ position that mr enyart did not constructively receive the b l equipment during the year at issue within the meaning of sec_1_451-2 income_tax regs according to petitioners the mere receipt of the b él equipment transferred pursuant to the covenant_not_to_compete which was encumbered by substantial debt for which petitioners were not liable constitutes a substantial restriction thereby disallowing the envokement sic of the con- structive receipt doctrine the constructive_receipt_doctrine addresses when income although not actually reduced to a taxpayer’s possession is constructively received by the taxpayer see sec_1_451-2 petitioners concede that any income that they have for the year at issue which is attributable to the b l equipment is ordinary_income and not capital_gain as reported in their joint_return income_tax regs petitioners rely on the portion of sec_1_451-2 income_tax regs which provides that income is not constructively received if the taxpayer’s control of its receipt is subject_to substantial limitations or restrictions id in the instant case the parties disagree over whether during mr enyart received ownership of the b l equipment as contended by respondent or received only the right to use that equipment as contended by petitioners the constructive_receipt_doctrine does not control resolution of that disagreement nor does that doctrine govern resolution of the parties’ dispute over the value of what mr enyart received during the year at issue in return for his covenant_not_to_compete with b l -according to petitioners’ reply brief the real issue for the court to decide is how to value the receipt of this bé l equipment given the amount of liens encumbering the property at such time as b l transferred that equipment to mr enyart petitioners have not however presented any evidence and make no argument about their position as to what the value of the bé l equipment that mr enyart received during is or the amount of ordinary_income that they have for that year as a result of b él’s transfer during that year of the b l equipment to mr enyart petitioners merely state in their opening brief under the matching principle petitioners reported the value of the b él equipment from a timing perspective with the amortization deduction taken by b él in their reply brief petitioners further state that they reported the receipt of the b l equipment in a manner consistent with the related amortization deduction taken by b l with whom petitioner negotiated the cove- nant not to compete this method was chosen as peti- tioner did not know how to value the receipt of the equipment under this set of facts and there appeared to be no statutory or case law on point petitioners advance a number of contentions to support their position that during the year at issue mr enyart received only the right to use the b l equipment including the following the b él equipment was subject_to virtually financing at the time it was transferred to mr enyart the agreement states that petitioners shall have use of such b l equipment until the financed amounts have been paid_by b l b l was in a dire financial position and its ability to pay off the substantial amount of debt encumbering the equipment was in grave guestion and there was a realistic possibility that bél would be unable to make the payments without the bank actually taking repossession of the equipment leaving petitioners without the equipment that was transferred pursuant to the agreement the record does not support the foregoing contentions of peti- tioners the agreement states that at the time the b l equipment was transferred to mr enyart it was subject_to some unspecified amount of liens it does not state as petitioners contend that that equipment was subject_to virtually financing furthermore contrary to petitioners’ contention the agreement provides that only if the lending institutions holding the liens to which the b l equipment was subject objected to the transfer by b él of that equipment or any part thereof to mr enyart so that such a transfer by b l could not be effected was mr enyart to have the use of such equipment by appropriate lease or other reasonable method until the financed amounts shall have been paid_by b l and releases of lien secured at which time the equipment shall be transferred to enyart there is nothing in the record that shows that any lending institution holding a lien on the b él equipment objected to the transfer by b l of such equipment to mr enyart nor does the record establish that b él’s transfer of the b l equipment to mr enyart could not have been and was not effected during the year at issue to the contrary the bill of sale and conveyance effected during that year the transfer by b l to mr enyart of the b l equipment and did not merely grant mr enyart the right to use that equipment the bill of sale and conveyance provided in pertinent part for value received b l hereby bargains sells conveys assigns and transfers unto william r enyart all items of the b él equipment subject_to the following terms and conditions enyart acknowledges that the items herein conveyed are jointly and or severally subject_to financing or other liens evidencing indebtedness owed thereon and accepts such items subject_to such liens bé l will remain responsible for the payment of such indebtedness and will provide releases of such liens at such time as the indebt- edness is paid and such releases are executed by the entities holding such liens enyart shall be responsible at his own cost for the fulfillment of all conditions of the financing documents re- lating to such liens and indebtedness including but not limited to the providing of insurance thereon excepting only the payment of such in- debtedness enyart further agrees that he will -- execute any documents required by the entities holding liens for the transfer of titles to the eguipment the record also shows that during the year at issue bé l was able to pay off as they fell due installments of b l’s promis-- sory note which might have encumbered the b l equipment in this connection b él signed the b l promissory note payable to bank of ashland around mid-date that note was in the principal_amount of dollar_figure and bore interest at dollar_figure percent per year which was to be paid in installments of dollar_figure that were to commence on date the notes to b l’s financial statements for the periods ended date and show that at the end of the balance remaining on the b l promis-- sory note was dollar_figure thus the record establishes that at least during the year at issue b l had the ability to and did satisfy its obligations under the b l promissory note to pay the monthly installments of principal and interest due under that note on the record before us we reject petitioners’ assertions that b l was in a dire financial position and its ability to pay off the substantial amount of debt encumbering the equipment was in grave question and that there was a realistic possibility ‘although the b l promissory note states that b l gave a security_interest to bank of ashland in inter alia goods or property that b l was purchasing and various vehicles it is not clear from that note or the remainder of the record whether some or all of the b l equipment was included within such goods property and vehicles -- - that b l would be unable to make the payments under the bé l promissory note without the bank actually taking repossession of the b l equipment leaving petitioners without the equipment that was transferred pursuant to the agreement based on our examination of the entire record before us we find that petitioners have failed to establish that b él trans-- ferred to mr enyart during the year at issue only the right to use and not ownership of the b l equipment ’ on that record we further find that petitioners have failed to establish that the value of that equipment was less than dollar_figure the value placed on that equipment by the agreement between b él and mr enyart accordingly we sustain respondent’s determination to increase petitioners’ taxable_income for the year at issue by dollar_figure we turn now to respondent’s determination that petitioners are liable for for the accuracy-related_penalty under sec_6662 sec_6662 imposes an accuracy-related_penalty equal to percent of the underpayment_of_tax resulting from a substantial_understatement_of_income_tax an understate- ment is equal to the excess of the amount of tax required to be tt is significant that during the year at issue mr enyart used the b él equipment to capitalize enyart company and its operations mr enyart thus exercised during the year at issue dominion and control_over the b él equipment it is also notewor- thy that enyart company claimed in its tax_return for a depreciation deduction with respect to the b él equipment which was based upon a cost_basis of slightly over dollar_figure -- - shown in the tax_return over the amount of tax shown in the tax_return see sec_6662 a and is substantial in the case of an individual if it exceeds the greater of percent of the tax required to be shown or dollar_figure see sec_6662 a the accuracy-related_penalty under sec_6662 does not apply to any portion of an underpayment if it is shown that there was reasonable_cause for such portion and that the taxpayer acted in good_faith see sec c the determination of whether a taxpayer acted with reasonable_cause and in good_faith depends on the pertinent facts and circumstances including the taxpayer’s efforts to assess his or her proper tax_liability the knowledge and experience of the taxpayer and the reliance on the advice of a professional such as an accountant see sec_1_6664-4 b income_tax regs in the case of claimed reliance on the accountant who prepared the taxpayer’s tax_return the taxpayer must establish that correct information was provided to the accountant and that the item incorrectly claimed or reported in the return was the result of the accountant’s error see 70_tc_158 petitioners argue that there was no substantial understate- ment of income_tax for and that therefore they are not liable for that penalty as a result of our holding that peti- tioners’ taxable_income for is to be increased by dollar_figure we reject that argument - petitioners argue in the alternative that respondent’s determination under sec_6662 is wrong because they acted in good_faith and with reasonable_cause in reporting only dollar_figure of capital_gain in their joint_return for the year at issue with respect to mr enyart’s receipt during that year of the bé l equipment to support that alternative argument petitioners contend that there was no statutory or case law to guide them in reporting mr enyart’s receipt of the b él equipment as consid- eration for mr enyart’s covenant and that they relied on mr fyffe to prepare their joint_return on the record before us we reject petitioners’ alternative position under sec_6662 gross_income includes the fair_market_value of property received in payment for services see sec_1_61-2 income_tax regs we have found that amounts paid_by a purchaser to a seller for a covenant_not_to_compete are ordinary_income to the seller since they are tantamount to payments for services 51_tc_306 affd 457_f2d_1022 9th cir see generally 340_f2d_97 6th cir affg 40_tc_511 105_tc_227 we have found that petitioners have failed to show that the value of the bé l equipment which b él transferred to mr enyart during the year at issue was less than dollar_figure on the record before us we reject petitioners’ contention that there was no statutory or case law -- - to guide them in determining the tax treatment of mr enyart’s receipt of the b él equipment in exchange for his covenant_not_to_compete with bél as for petitioners’ claimed reliance on mr fyffe on the instant record we reject that claim petitioners have failed to show what information they provided to mr fyffe in connection with his preparation of their joint_return in fact the record is devoid of any evidence regarding the preparation of that return and petitioners’ claimed reliance on mr fyffe based on our examination of the entire record before us we find that petitioners have failed to establish that they acted with reasonable_cause and in good_faith in taking the position reflected in their joint_return with respect to the b él equip- ment we further find on that record that petitioners have failed to establish any error in respondent’s determination that they are liable for for the accuracy-related_penalty under sec_6662 consequently we sustain that determination we have considered all of the contentions and arguments of petitioners that are not discussed herein and we find them to be without merit and or irrelevant to reflect the foregoing and the concession of petitioners decision will be entered for respondent


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-136111-14 date march internal_revenue_service number release date index number ------------------------ -------------- ---------------------- ------------------------ in re -------------------------------------------- -------------------------------- legend ------------------------------------------------------------------------ ---------------------- taxpayer ----------------------------------------------------------------------------------- spouse --------------------------------------- ----------------------------------------------------------------------------------- trust ----------------------------------------------------------------------------------------------------------- date date date year year x y accountant --------------------------- -------------------- -------------------- ------- ------- ---------- ------------------------------------------------- -------------------------------------- dear ---------------- this letter responds to your authorized representative’s letter of date plr-136111-14 and other correspondence requesting an extension of time under sec_2642 of the internal_revenue_code and sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to elect out of the generation-skipping_transfer gst tax exemption automatic allocation rules the facts as represented are as follows on date taxpayer’s spouse spouse created an irrevocable_trust trust under paragraph of trust y of the trust property is to be held for the benefit of her children during her life trust provides that if taxpayer survives spouse taxpayer may exercise a limited testamentary_power_of_appointment over a portion of the trust property which may include property initially held in the trusts established for the benefit of their children in favor of any one or more of spouse’s descendants spouse transferred dollar_figurex to trust on date and another dollar_figurex to trust on date accountant prepared the form sec_709 united_states gift and generation-skipping_transfer_tax returns for year and year in which taxpayer and spouse elected to split the gifts for the trusts established for the benefit of their children under sec_2513 the returns did not include an election out statement described in sec_26_2632-1 and sec_26_2632-1 example to avoid the allocation of gst_exemption the failure to include the election out statement was later discovered taxpayer now seeks a ruling granting an extension of time to elect out of the automatic allocation rules with respect to the transfers to date no taxable_distributions taxable terminations or any other events have occurred with respect to the trusts that would give rise to a gst tax_liability sec_2601 imposes a tax on every generation-skipping_transfer a generation- skipping transfer is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the 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 under sec_2642 the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer is the excess if any of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of the gst_exemption under sec_2631 allocated to the trust or to property transferred in a direct_skip and the denominator of which is the value of the property transferred to the trust or involved in the direct_skip sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption amount which may be allocated by such individual or his executor to any property with respect to which such individual is the plr-136111-14 transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2631 provides that for purposes of subsection a 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 for purposes of sec_2632 the term indirect_skip means any transfer of property other than a direct_skip subject_to the tax imposed by chapter made to a gst_trust as defined in sec_2632 under sec_2632 and ii an individual may elect to have the automatic allocation rule in sec_2632 not apply to an indirect_skip or to any or all transfers made by such individual to a particular trust sec_2632 provides that an election under sec_2632 may be made on a timely filed gift_tax_return for the calendar_year for which the election is to become effective sec_26_2632-1 b iii of the generation-skipping_transfer_tax regulations provides in part that to elect out the transferor must attach a statement election out statement to a form_709 filed within the time period provided in sec_26_2632-1 whether or not any transfer was made in the calendar_year for which the form_709 was filed and whether or not a form_709 otherwise would be required to be filed for that year the election out statement must identify the trust except for an election out under sec_26_2632-1 and specifically must provide that the transferor is electing out of the automatic allocation of gst_exemption with respect to the described transfer or transfers further unless the election out is made for all transfers made to the trust in the current_year the current-year transfers to which the election out is to apply must be specifically described or otherwise identified in the election out statement sec_26_2632-1 provides in part that to elect out the form_709 with the attached election out statement must be filed on or before the due_date for timely filing within the meaning of sec_26_2632-1 of the form_709 for the calendar_year in which the first transfer to be covered by the election out was made sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph plr-136111-14 sec_2642 provides that in determining whether to grant relief under sec_2642 the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_2_cb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a gst_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-1 through sec_301 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 section provides an automatic_extension of time for making certain elections sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose date is prescribed by a regulation and not expressly provided by statute in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_301_9100-3 provides in part that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government sec_301_9100-3 provides in part except as provided in sec_301_9100-3 through iii 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 based on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 are satisfied therefore taxpayer and spouse are granted an extension of time of days from the date of this letter to elect out of the automatic allocation rules under sec_2632 for the transfers to trust during year plr-136111-14 and year the election should be made on supplemental form sec_709 and filed with the internal_revenue_service center in cincinnati a copy of this letter should be forwarded to the internal_revenue_service cincinnati service_center - stop cincinnati oh for association with the form_709 you should attach a copy of this letter to the supplemental form sec_709 we have enclosed a copy for this purpose in accordance with the power_of_attorney on file with the office we have sent a copy of this letter to your authorized representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically ruled 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 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely associate chief_counsel passthroughs and special industries melissa c liquerman branch chief branch enclosure copy for sec_6110 purposes


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si 4-plr-116045-99 date date legend decedent date date date date spouse child child child grandchildren plr-116045-99 nieces trust state dear this is in response to your letter dated date and prior correspondence in which you requested a ruling that the disclaimers executed and delivered by spouse child child grandchildren and nieces constituted qualified disclaimers under sec_2518 of the internal_revenue_code decedent executed a will on date decedent died on date survived by spouse child child child grandchildren and nieces decedent’s will was admitted to probate on date at the time of decedent’s death grandchildren had no living issue under the terms of decedent’s will the residue of his estate passed to trust trust provides that at decedent’s death trust property is to be divided into a marital trust and a residuary distribution decedent was the settlor of a revocable_trust trust which was most recently amended on date child and child are serving as trustees of the trust neither trust nor decedent’s will as drafted provide for the distribution_of_property under the circumstances where the disclaimants predeceased decedent therefore any disclaimed property passes to decedent’s heirs-at-law according to state law the marital trust is to be funded with the smallest fraction of the trust property sufficient to reduce the total estate_tax payable to the smallest amount after taking into account all allowable credits and deductions available to the decedent’s estate the marital trust provides spouse with a lifetime income_interest that qualifies as an income_interest for life under sec_2056 in addition trustees are authorized to distribute such amounts from the principal of the marital trust as trustees deem necessary or advisable for the spouse’s health maintenance in reasonable comfort and best interests after funding the marital trust the remaining trust property is to be distributed as follows a thirty-five percent to child and if child is not then living to child 1's descendants then living per stirpes b thirty-five percent to child and if child is not then living to child 2's descendants then living per stirpes c two and one-half percent 2½ to each of decedent’s eight grandchildren and two nieces and if a grandchild or niece is not then living to grandchild’s or niece’s estate and d five percent in the sole discretion of trustees to be distributed among those persons who are providing in-home personal care to decedent and spouse and who have provided such care for at least two and one-half 2½ plr-116045-99 years it is represented that the five percent residuary distribution of trust will be made by the trustees to various caregivers and that those interests will not be increased or diminished by the disclaimers it is also represented that none of the disclaimants have received any distributions from trust it is further represented that there is no agreement expressed or implied between or among the parties that any of the disclaimants will be compensated or benefited in any way in consideration for executing the disclaimers child and child as both beneficiaries and trustees of trust grandchildren and nieces in accordance with the requirements of the laws of state executed and delivered written disclaimers of some of their respective rights to receive property under decedent’s will trust and state intestacy statute on date spouse did not execute a disclaimer of her rights to receive property under decedent’s will and trust spouse only disclaimed her rights under state intestacy law child and child each disclaimed one-third of his interest as a beneficiary of the residuary distribution under paragraph of the trust and one-third of his interest as a remainder beneficiary of the marital trust established under paragraph of the trust spouse child child grandchildren and nieces in accordance with sec_732 and dollar_figure of the state probate code pertaining to intestate_succession executed disclaimers of all rights to receive an intestate share of the decedent’s probate_estate as an heir at law to the extent such intestate share includes the disclaimed trust property grandchildren and nieces disclaimed the respective interests that each would be entitled to receive as a result of child 1's and child 2's disclaimers a guardian ad litem was appointed for a minor grandchild and court approval provided for minor grandchild to disclaim her respective interest child and child as trustees disclaimed the trust’s interest as sole residuary devisee under decedent’s will paragraph n of the trust authorizes the trustees to disclaim any property or any interest in property if in the discretion of the trustee such disclaimer is advisable considering the interests of the beneficiaries as a whole child as the agent acting under a durable_power_of_attorney executed by spouse disclaimed the intestate share on behalf of spouse section of the durable_power_of_attorney provides that child as agent is authorized to execute a disclaimer on behalf of spouse as a beneficiary of any estate_or_trust if in the discretion of my agent such disclaimer is advisable considering all relevant factors as a result of the disclaimers executed and delivered child became entitled to receive all of the disclaimed trust property as the sole remaining heir at law section a of the state probate code provides that a beneficiary may disclaim any interest in property which would pass unless disclaimed to the beneficiary as beneficiary of an inter_vivos_trust under b of the state probate code a disclaimer may be made for a minor beneficiary by a guardian ad litem if the circuit_court having jurisdiction finds that it is in the best interests of those interested in the estate of such beneficiary and of those who take the beneficiary’s interest by virtue of the disclaimer and not detrimental to the best interests of the plr-116045-99 beneficiary to make the disclaimer section a of the state probate code states that unless the grantor has provided otherwise by a nontestamentary instrument the disclaimed interest shall be distributed as if the disclaimant had died immediately preceding the death or other event which causes him or her to become finally ascertained as a beneficiary any interest in property disclaimed shall never vest in the disclaimant sec_732 a of the state probate code provides that a beneficiary may disclaim his or her succession to any interest in property that unless disclaimed would pass to the beneficiary by intestate_succession or devise or as beneficiary of a testamentary gift to any nontestamentary trust under sec_732 b and of the state probate code a disclaimer may be made for a minor beneficiary by a guardian ad litem if the circuit_court having jurisdiction finds that it is in the best interests of those interested in the estate of such beneficiary and of those who take the beneficiary’s interest by virtue of the disclaimer and not detrimental to the best interests of the beneficiary to make the disclaimer sec_732 a of the state probate code states that unless the decedent has provided otherwise by will or other appropriate instrument the disclaimed interest shall be distributed as if the disclaimant had died immediately preceding the death or other event which causes him or her to become finally ascertained as a beneficiary any interest in property disclaimed shall never vest in the disclaimant sec_732 of the state probate code provides that if the residue is devised to two or more persons and the share of one of the residuary devisees fails for any reason his or her share passes to the other residuary devisees or to the other residuary devisees in proportion to their interests in the residue under sec_732 of the state probate code the intestate share of the surviving_spouse is a if there is no surviving lineal descendant of the decedent the entire intestate estate b if there are surviving lineal_descendants of the decedent all of whom are lineal_descendants of the surviving_spouse also the first dollar_figure of the intestate estate plus one-half of the balance of the intestate estate property allocated hereunder to the surviving_spouse to satisfy the dollar_figure shall be valued at the fair_market_value on the date of the decedent's death c if there are surviving lineal_descendants one or more of whom are not lineal_descendants of the surviving_spouse one-half of the intestate estate under sec_732 of the state probate code the part of the intestate estate not passing to the surviving_spouse under sec_732 or the entire intestate estate if there is no surviving_spouse descends as follows to the lineal_descendants of the decedent if there is no lineal descendant to the decedent's father and mother equally or to the survivor of them if there is none of the foregoing to the decedent's brothers and sisters and the descendants of deceased brothers and sisters if there is none of the foregoing the estate shall be divided one-half of which shall go to the decedent's paternal and the other half to the decedent's maternal kindred in the following order a to the grandfather and grandmother equally or to the survivor of them b if there is no grandfather or grandmother to uncles and aunts and plr-116045-99 descendants of deceased uncles and aunts of the decedent c if there is no paternal kindred or if there is no maternal kindred the estate shall go to such of the kindred as shall survive in the order aforesaid if there is no kindred of either part the whole of such property shall go to the kindred of the last deceased spouse of the decedent as if the deceased spouse had survived the decedent and then died intestate entitled to the estate sec_2046 provides that for estate_tax purposes disclaimers of property interests passing upon death are treated as provided in sec_2518 sec_2518 provides that if a person makes a qualified_disclaimer of an interest in property the estate gift and generation-skipping_transfer_tax provisions will apply to that interest as if it had never been transferred to such person under sec_2518 the term qualified_disclaimer means an irrevocable and unqualified refusal by a person to accept an interest in property provided the disclaimer is in writing the disclaimer is received by the transferor of the interest his legal_representative or the holder of legal_title to the property to which the transfer relates not later than the date which is months after the later of the date on which the transfer creating the interest in such person is made or the date on which the person refusing the interest attains age the person disclaiming the interest has not accepted the interest or any of its benefits and as a result of the disclaimer the interest passes without any direction by the person making the disclaimer and passes either to the spouse of the decedent or to a person other than the person making the disclaimer sec_2518 provides that a disclaimer of an undivided portion of an interest which meets the foregoing requirements will be treated as a qualified_disclaimer of such portion of the interest under sec_25_2518-1 of the gift_tax regulations if a qualified_disclaimer is made the property is treated for federal gift estate and generation-skipping_transfer_tax purposes as passing directly from the transferor and not from the disclaimant to the person entitled to receive the property as a result of the disclaimer thus the disclaimant is not treated as making a gift under sec_25_2518-2 if a disclaimer made by a person other than the surviving_spouse is not effective to pass completely an interest in property to a person other than the disclaimant because i the disclaimant also has a right to receive such property as an heir at law residuary beneficiary or by any other means and ii the disclaimant does not effectively disclaim these rights the disclaimer is not a qualified_disclaimer with respect to the portion of the disclaimed property which the disclaimant has a right to receive for example if a disclaimant who is not a surviving_spouse disclaims a specific_bequest of a fee simple interest and as a result of the disclaimer the property passes to a_trust in which the disclaimant has a remainder_interest the disclaimer will not be a qualified_disclaimer unless the remainder_interest is also disclaimed under sec_25_2518-3 a disclaimer of an undivided portion of a separated interest in property can be a qualified_disclaimer further the disclaimer of an undivided portion of an interest in a_trust may be qualified if the requirements of sec_25_2518-3 are satisfied under plr-116045-99 sec_25_2518-3 an undivided portion of a disclaimant’s separate interest in property must consist of a fraction or percentage of every substantial interest or right owned by the disclaimant in such property and must extend over the entire term of the disclaimant’s interest for such property sec_25_2518-3 provides that a disclaimer of a specific pecuniary amount out of a pecuniary or nonpecuniary bequest or gift which satisfies the other requirements of a qualified_disclaimer under sec_2518 and the corresponding regulations is a qualified_disclaimer provided that no income or other benefit of the disclaimed amount inures to the benefit of the disclaimant either prior to or subsequent to the disclaimer thus following the disclaimer of a specific pecuniary amount from a bequest or gift the amount disclaimed and any income attributable to such amount must be segregated from the portion of the gift or bequest that was not disclaimed sec_25_2518-2 example describes a situation where d a resident of state y died testate on date e an heir at law of d received specific bequests of certain severable personal_property from d e disclaimed the property transferred by d under the will the will had no residuary clause and made no provision for the distribution_of_property in the case of a beneficiary’s disclaimer the disclaimer laws of state y provide that such property shall pass to the decedent ‘s heirs at law in the same manner as if the disclaiming beneficiary had died immediately before the testator’s death the example concludes that because state y’s law treats e as predeceasing d the property disclaimed by e does not pass to e as an heir at law or otherwise consequently if the remaining requirements of sec_2518 are satisfied e’s disclaimer is a qualified_disclaimer under sec_2518 in sec_25_2518-2 example the facts are the same as in example except that state y has no provision treating the disclaimant as predeceasing the testator the example concludes that e’s disclaimer satisfies sec_2518 only to the extent that e does not have a right to receive the property as an heir at law had e disclaimed both the share e received under d’s will and e’s intestate share the requirement of sec_2518 would have been satisfied in the present case based on the representations made and the facts presented we conclude that the disclaimers filed by spouse child and child as both beneficiaries and trustees of trust grandchildren and nieces satisfied the four requirements under sec_2518 the first requirement was satisfied because the disclaimers were in writing the second requirement was satisfied because the disclaimers were delivered within nine months of decedent’s death to a fiduciary who holds legal_title to the interests to be disclaimed the third requirement was satisfied because the disclaimants did not and will not accept any of the disclaimed interests or benefits the fourth requirement was satisfied because the disclaimed property passed to recipients other than the disclaimants and did not pass to any recipient at the direction of the disclaimants the ruling contained in this letter is 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-116045-99 except as specifically ruled 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 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 pursuant to powers of attorney on file a copy of this letter is being sent to spouse child and child as both beneficiaries and trustees of trust grandchildren and nieces sincerely yours by robert g honigman acting assistant to the branch chief branch enclosure copy for sec_6110 purposes


internal_revenue_service number release date index number --------------------- ---------------------------------------------- ---------------------------------------------------- --------------------------------- ------------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc corp plr-143532-06 date date ----------------- --------------------- legend legend parent ----------------------------------------------------------------- distributing ------------------------------------------------------------------- ----------------------------------------------------------- distributing ------------------------------- ------------------------------------------------------------------- ----------------------------------------------------------- distributing ------------------------------- ------------------------------------------------------------------- ----------------------------------------------------------- controlled ------------------------------------------------------------------------ ----------------------------------------------------------- sub ------------------------------------------------------------------- ----------------------------------------------------------- sub ------------------------------------------------------------------- ----------------------------------------------------------- sub --------------------------- --------------------------- ---------------------------------------------- ------------------------------------------------- ------------------------------------------------- ---------------------------------------------------------------- ---------- plr-143532-06 --------------------------------------------------------------- ----------------------------------------------------------- sub ------------------------------------------------------------------- ----------------------------------------------------------- llc -------------------------------------------------------------------------- n country a business a business b business c business d x y state a z industry dear --------------- --------------------------- ------------------------- ------------ ---------- ---------- ---------------------------------------- ---------------------------------------- ------------------------------------------------ this letter responds to your date letter requesting rulings on certain federal_income_tax consequences of a series of proposed transactions the information provided in that letter and in later correspondence is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process in particular this office has not reviewed any information pertaining to and has made no determination regarding whether the proposed transaction i satisfies the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii is used principally as a device for the plr-143532-06 distribution of the earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 a b of the internal_revenue_code and sec_1 d and iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 summary of facts parent a country a corporation is the common parent of a corporate group composed of various domestic and foreign_corporations engaged in business a business b business c and business d parent wholly owns distributing distributing owns all of the common_stock of distributing and all of the common_stock of sub distributing owns all of the common_stock of distributing and sub owns all of the preferred_stock of distributing distributing owns x percent less than 50-percent of the common_stock of controlled sub owns the remainder of the outstanding_stock of controlled representing y percent greater than 50-percent distributing also owns 100-percent of the common_stock of sub sub is actively_engaged_in_business a controlled owns 100-percent of the common_stock of sub sub is actively_engaged_in_business d distributing distributing distributing sub sub sub sub and controlled file a consolidated federal_income_tax return with distributing as the common parent of the u s affiliated_group the distributing consolidated_group financial information has been received indicating that business a as conducted by sub and business d as conducted by sub has each had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the five years preceding the proposed transaction pre-distribution transaction immediately prior to the proposed distribution distributing will form llc a state a limited_liability_company which distributing will be the sole member sub will merge with and into llc under state a law llc will not make an election to be treated as an association for u s federal_income_tax purposes and is intended by the parties that the merger be treated as a liquidation of the assets of sub including the stock of sub to distributing proposed transaction in order to accomplish the stated business purposes distributing has proposed the following transaction to separate its business a from its business d collectively the proposed transaction plr-143532-06 i distributing will distribute all of the outstanding_stock of controlled to distributing the internal distribution ii distributing will distribute all of the outstanding_stock of controlled to distributing the internal distributing iii distributing will distribute all of the outstanding_stock of controlled to parent the external distribution representations the taxpayer makes the following representations regarding the internal distribution described above in step i a requested herein internal distribution will occur within one year of receiving the rulings b any incurred in connection with internal distribution distributing and controlled each will pay its or their own expenses if c internal distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation d internal distribution will not constitute stock_or_securities the indebtedness if any owed by controlled to distributing after e other than trade account indebtedness created in the ordinary course of business through continuing transactions and payables created for any transitional services reflecting the fair_market_value of providing these services no intercorporate debt will exist between distributing and controlled at the time of or subsequent to internal distribution 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 the corporation g sub will constitute a member of the affiliated_group of distributing within the meaning of sec_355 at the time of internal distribution sub will constitute a member of the affiliated_group of controlled within the meaning of sec_355 at the time of internal distribution j i k h plr-143532-06 no person will hold a 50-percent_or_greater_interest in the stock of distributing or controlled after internal distribution within the meaning of sec_355 who did not hold such an interest immediately before the transaction sub will merge with and into a newly formed single-member llc before internal distribution date with distributing as its sole member sub will not elect to be treated as an association for federal_income_tax purposes moreover the fair_market_value of sub 1’s assets will exceed its respective liabilities both at the date of adoption of the merger plans and immediately before the time when the merger will occur the five years of financial information submitted on behalf of sub is representative of sub 2’s present operations and with regard to sub 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 sub controlled’s wholly-owned subsidiary is representative of sub 3’s present operations and with regard to sub there have been no substantial operational changes since the date of the last financial statements submitted following internal distribution distributing through sub and controlled through sub will continue the active_conduct of its business independently and with its separate employees or employees of the other members of its affiliated_group m subsequent to internal distribution distributing and other members of its affiliated_group may enter into certain mutually beneficial commercial arrangements with controlled and its subsidiaries to service customers who seek bundled solutions the compensation_for such services will be an arm’s-length price intended to reflect the fair_market_value of providing these services moreover distributing and other members of its affiliated_group may provide controlled and its subsidiaries with transitional services including tax support and treasury services these transitional services are not expected to exceed months any compensation paid for such services will be based on the actual costs incurred by the party rendering the service plus an arm’s-length premium internal distribution is carried out for the corporate business_purpose of facilitating the external distribution the distribution of the stock of controlled is motivated in whole or substantial part by this corporate business_purpose of the earnings_and_profits of distributing or controlled or both internal distribution is not used principally as a device for the distribution n o l q p plr-143532-06 for purposes of sec_355 immediately after internal distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing 50-percent or more of the total combined voting power of all classes of distributing stock entitled to vote or 50-percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on internal distribution date for purposes of sec_355 immediately after internal distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing 50-percent or more of the total combined voting power of all classes of controlled stock entitled to vote or 50-percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of internal distribution or ii attributable to distributions on distributing stock_or_securities that were acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of internal distribution immediately before internal distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_32_irb_6 and as currently in effect sec_1_1502-13 as published by t d further distributing 1’s excess_loss_account with respect to the stock of controlled if any will be included in income before internal distribution see sec_1_1502-19 r s neither distributing nor controlled is an investment_company as defined in sec_368 and iv t as a result of internal distribution sub is not entitled to any distribution by virtue of its ownership of distributing preferred_stock other than those distributions under the terms of the distributing preferred_stock which it is entitled to receive regardless of internal distribution the taxpayer makes the following representations regarding the internal distribution described above in step ii u internal distribution will occur within one year of receiving the rulings requested herein v distributing and controlled each will pay its or their own expenses if any incurred in connection with internal distribution plr-143532-06 w internal distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation x the indebtedness if any owed by controlled to distributing after internal distribution will not constitute stock_or_securities y other than trade account indebtedness created in the ordinary course of business through continuing transactions and payables created for any transitional services reflecting the fair_market_value of providing these services no intercorporate debt will exist between distributing and controlled at the time of or subsequent to internal distribution z 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 the corporation aa sub will constitute a member of the affiliated_group of distributing within the meaning of sec_355 at the time of internal distribution sub will constitute a member of the affiliated_group of controlled within the meaning of sec_355 at the time of internal distribution bb no person will hold a 50-percent_or_greater_interest in the stock of distributing or controlled after internal distribution within the meaning of sec_355 who did not hold such an interest immediately before the transaction cc following internal distribution distributing through sub and controlled through sub will continue the active_conduct of its business independently and with its separate employees or employees of the other members of its affiliated_group dd subsequent to internal distribution distributing and other members of its affiliated_group may enter into certain mutually beneficial commercial arrangements with controlled and its subsidiaries to service customers who seek bundled solutions the compensation_for such services will be an arm’s-length price intended to reflect the fair_market_value of providing these services moreover distributing and other members of its affiliated_group may provide controlled and its subsidiaries with transitional services including tax support and treasury services these transitional services are not expected to exceed months any compensation paid for such services will be based on the actual costs incurred by the party rendering the service plus an arm’s-length premium plr-143532-06 ee internal distribution is carried out for the corporate business_purpose of facilitating the external distribution the distribution of the stock of controlled is motivated in whole or substantial part by this corporate business_purpose ff internal distribution is not used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both gg for purposes of sec_355 immediately after internal distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing 50-percent or more of the total combined voting power of all classes of distributing stock entitled to vote or 50-percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on internal distribution date hh for purposes of sec_355 immediately after internal distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing 50-percent or more of the total combined voting power of all classes of controlled stock entitled to vote or 50-percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of internal distribution or ii attributable to distributions on distributing stock_or_securities that were acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of internal distribution ii immediately before internal distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_32_irb_6 and as currently in effect sec_1_1502-13 as published by t d further distributing 2’s excess_loss_account with respect to the stock of controlled if any will be included in income before internal distribution see sec_1_1502-19 jj the five years of financial information submitted on behalf of sub is representative of sub 2’s present operations and with regard to sub there have been no substantial operational changes since the date of the last financial statements submitted kk the five years of financial information submitted on behalf of sub controlled’s wholly-owned subsidiary is representative of sub 3’s present operations and with regard to sub there have been no substantial operational changes since the date of the last financial statements submitted plr-143532-06 in sec_368 and iv distribution described above in step iii ll neither distributing nor controlled is an investment_company as defined the taxpayer makes the following representations regarding the external mm the external distribution will occur within one year of receiving the rulings requested herein nn distributing and controlled each will pay its or their own expenses if any incurred in connection with the external distribution oo the external distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation pp the indebtedness if any owed by controlled to distributing after the external distribution will not constitute stock_or_securities qq other than trade account indebtedness created in the ordinary course of business through continuing transactions and payables created for any transitional services reflecting the fair_market_value of providing these services no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the external distribution rr 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 the corporation ss sub will constitute a member of the affiliated_group of distributing within the meaning of sec_355 at the time of the external distribution sub will constitute a member of the affiliated_group of controlled within the meaning of sec_355 at the time of the external distribution tt no person will hold a 50-percent_or_greater_interest in the stock of distributing or controlled after the external distribution within the meaning of sec_355 who did not hold such an interest immediately before the transaction uu following the external distribution distributing through sub and controlled through sub will continue the active_conduct of its business independently and with its separate employees or employees of the other members of its affiliated_group plr-143532-06 its affiliated_group may enter vv subsequent to the external distribution distributing and other members into certain mutually beneficial commercial of arrangements with controlled and its subsidiaries to service customers who seek bundled solutions the compensation_for such services will be an arm’s-length price intended to reflect the fair_market_value of providing these services moreover distributing and other members of its affiliated_group may provide controlled and its subsidiaries with transitional services including tax support and treasury services these transitional services are not expected to exceed months any compensation paid for such services will be based on the actual costs incurred by the party rendering the service plus an arm’s-length premium ww the external distribution is an integral part of a global restructuring plan of aligning business d conducted by controlled and its subsidiaries under a worldwide holding_company dedicated to that core business parent believes that such a worldwide restructuring will give each core business the independence required to use their dedication and entrepreneurship to focus on their clients and their service development and to move to the forefront of the development of the z industry the distribution of the stock of controlled is motivated in whole or in substantial part by this corporate business_purpose xx the external distribution is not used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both yy for purposes of sec_355 immediately after the external distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing 50-percent or more of the total combined voting power of all classes of distributing stock entitled to vote or 50-percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the external distribution date zz for purposes of sec_355 immediately after the external distribution no person determined after applying the aggregation rules of sec_355 will hold stock possessing 50-percent or more of the total combined voting power of all classes of controlled stock entitled to vote or 50-percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the external distribution date or ii attributable to distributions on distributing stock_or_securities that were acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the external distribution plr-143532-06 aaa the five years of financial information submitted on behalf of sub is representative of sub 2’s present operations and with regard to sub there have been no substantial operational changes since the date of the last financial statements submitted bbb the five years of financial information submitted on behalf of sub controlled’s wholly-owned subsidiary is representative of sub 3’s present operations and with regard to sub there have been no substantial operational changes since the date of the last financial statements submitted ccc immediately before the external distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_32_irb_6 and as currently in effect sec_1_1502-13 as published by t d further distributing 3’s excess_loss_account with respect to the stock of controlled if any will be included in income before the external distribution see sec_1_1502-19 ddd neither distributing nor controlled is an investment_company as defined in sec_368 and iv rulings based solely on the information submitted and the representations made we rule as follows on internal distribution step i no gain_or_loss will be recognized by and no amount will be included in the income of distributing on its receipt of controlled’s common_stock sec_355 no gain_or_loss will be recognized by distributing upon the distribution to distributing of all of the controlled common_stock sec_355 the holding_period of the controlled common_stock received by distributing will include the holding_period of distributing common_stock with respect to which the controlled common_stock is distributed provided that such distributing common_stock is held as a capital_asset on the date of internal distribution sec_1223 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be adjusted in accordance with sec_1 b as follows on internal distribution step ii based solely on the information submitted and the representations made we rule plr-143532-06 no gain_or_loss will be recognized by and no amount will be included in the income of distributing on its receipt of controlled’s common_stock sec_355 no gain_or_loss will be recognized by distributing upon the distribution to distributing of all of the controlled common_stock sec_355 the holding_period of the controlled common_stock received by distributing will include the holding_period of distributing common_stock with respect to which the controlled common_stock is distributed provided that such distributing common_stock is held as a capital_asset on the date of internal distribution sec_1223 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be adjusted in accordance with sec_1 a based solely on the information submitted and the representations made we rule as follows on the external distribution step iii no gain_or_loss will be recognized by and no amount will be included in the income of parent on its receipt of controlled’s common_stock sec_355 no gain_or_loss will be recognized by distributing upon the distribution to parent of all of the controlled common_stock sec_355 the holding_period of the controlled common_stock received by parent will include the holding_period of distributing common_stock with respect to which the controlled common_stock is distributed provided that such distributing common_stock is held as a capital_asset on the date of the external distribution sec_1223 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made in accordance with sec_1 b caveats no opinion is expressed about the tax treatment of the proposed transaction described above under other provisions of the code and regulations or the tax treatment of any condition existing at the time of or effects resulting from the proposed transaction that is not specifically covered by the above rulings in particular no opinion is expressed regarding i whether the proposed transaction satisfies the business_purpose requirement of sec_1_355-2 ii whether the proposed transaction is used principally as a device for the distribution of the earnings_and_profits of any or all of plr-143532-06 distributing distributing distributing and controlled iii whether the proposed transaction is part of a plan or series of related transactions under sec_355 and iv the tax consequences of the pre-distribution transaction procedural statements this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling in accordance with the power_of_attorney on file in this office a copy of this ruling letter will be sent to your authorized representatives sincerely ____________________________________ richard k passales senior counsel branch office of associate chief_counsel corporate