internal_revenue_service national_office technical_advice_memorandum date tam-138289-03 cc intl b05 number release date index uil no case-mis no advisee's office taxpayer's name taxpayer's address taxpayer's identification no years involved date of conference ---------------------------- ----------------------------- --------------------------------------- ---------------- ----------------------------- legend parent1 parent2 sub1 sub2 fsub3 country1 date1 date2 date3 date4 date5 date6 date7 date8 date9 date10 date11 date12 amount1 amount2 amount3 amount4 ----------------------- -------------------------------------------- ------------------------ ------------------------------- ------------------------------------------- -------- -------------------------- -------------------------- -------------------------- ----------------------- ---------------------- -------------------------- -------------------------- ------------------ ------------------------- --------------------------- --------------------------- --------------------- --------------- --------------- --------------- --------------- --------------- ----------------- --------------- ----------- ------- ------------- ----------- ----------- ----------- ----------- ------------- ------------- ------- ------- ------- ------- ------------------ ------------------------ ------------------------ --------------------------- -------------------- ----- ---- ------ ------ ------------- ------- amount5 amount6 amount7 amount amount9 amount10 amount11 amount12 amount13 amount14 amount15 amount16 year1 year2 year3 year4 business type1 firm1 person1 person2 percent1 percent2 percent3 percent4 title1 title2 issue s whether certain subordinated loan agreements the instruments are equity for u s federal_income_tax purposes assuming the instruments are equity for u s federal_income_tax purposes whether sub2 the holder of the instruments should include in income deemed dividends from the instruments conclusion s the instruments are properly characterized as equity for u s federal_income_tax purposes sub does not need to include in income any deemed dividends from the instruments facts parent1 a domestic_corporation is the parent of a u s consolidated_group this group includes sub1 a wholly-owned domestic subsidiary of parent1 and sub2 a wholly- owned domestic subsidiary of sub1 for purposes of the discussion herein parent1 sub1 and sub2 are referred to collectively as the taxpayer during taxable years year1 through year3 sub2 made a number of investments in fsub3 sub2’s wholly-owned country1 subsidiary sub2 and fsub3 are referred to collectively herein as the parties the investments consisted of both i a series of interest-bearing notes and ii a series of subordinated loan agreements at issue in this case is the proper treatment of the subordinated loan agreements the instruments the instruments are non-interest bearing instruments with no fixed maturity_date under the terms of the instruments the rights of the lender sub are subordinate to the rights of all creditors of the borrower fsub3 but are superior to all rights of the shareholders of the borrower thus in the event of liquidation or bankruptcy repayment of the instruments would occur after all creditors claims have been satisfied but before any payments or distributions to the shareholders under country1 law except in the case of a liquidation or bankruptcy of fsub3 any payments made with respect to the instruments are determined solely at the discretion of fsub3 in other words sub2 as holder of the instruments has no legal right under country1 to force any payment of principal or interest taxpayer has consistently characterized the instruments as equity for u s federal_income_tax purposes for all taxable years for example no interest_income with respect to the instruments was reflected on taxpayer’s form_1120 for the taxable years at issue furthermore no interest_expense with respect to the instruments was deducted in determining fsub3’s earnings_and_profits and the amounts advanced pursuant to the instruments were not included in the amount of the maximum loan balance outstanding as reflected on schedule m on fsub3’s form_5471 for each taxable_year at issue the form_5471 schedule f balance_sheet reported the instruments as common_stock in addition the instruments were consistently reported as equity contributions on form_926 for all relevant years the instruments have been characterized as inter-company indebtedness on fsub3’s financial statements however the instruments were eliminated in sub1’s consolidated financial statements for book purposes the instruments would be eliminated regardless of whether they were characterized as equity or debt the parties intended to create an equity_investment in fsub3 for u s tax purposes the parties made use of the instruments to minimize country1 taxes on date8 sub2 approached country1 tax authorities to obtain an advance clearance regarding the capital_tax treatment of the instruments country1 tax authorities confirmed that the instruments would be treated as indebtedness for country1 capital_tax purposes as a consequence no country1 capital_tax was imposed on the transfer of funds pursuant to the instruments for the tax years at issue fsub3 made interest payments on the interest-bearing notes but no interest or principal payments on the instruments - consistent with the parties’ intention to treat the amounts advanced under the instruments as an equity_investment fsub3’s projected cash flows at the time the instruments were executed as well as its actual cash flows during the term of the instruments through the end of the years at issue would have been insufficient to make payments on the instruments country1 capital_tax and income_tax law commercial and corporate law and accounting rules for purposes of country1 commercial and corporate law capital_tax income_tax law and statutory accounting rules the principal of the instruments is treated as indebtedness accordingly the parties have treated the instruments as indebtedness for such purposes country1 civil law does not legally require that principal or interest ever be paid for the instruments to qualify as indebtedness however country1 law requires interest to be imputed on the instruments on an annual basis fsub3 does not pay the imputed_interest to sub2 and the imputed_interest is treated as an equity contribution to fsub3 which is subject_to country1 capital_tax law and analysis in support of treating the instruments as debt not equity irs examiners make two arguments first the instruments should be treated as debt for u s tax purposes because taxpayer cannot disavow the form of the instruments and the instruments are debt in country1 and the instruments are in substance debt not equity under u s tax principles second assuming the instruments are equity for u s tax purposes the interest imputed on the instruments under foreign law should be treated as deemed dividends_paid to sub2 for u s income_tax purposes taxpayer responds to these arguments as follows first the instruments are equity not debt for u s tax purposes because taxpayer has consistently treated the instruments as equity for u s tax purposes and has never disavowed the form of the instruments and the instruments are equity under debt equity principles second sub2 did not receive dividends from the instruments under sec_301 and thus there is no basis for deeming that dividends were paid for u s tax purposes a the instrument is equity for u s tax purpose sec_1 the nondisavowal rule does not apply in general the substance rather than the form of a transaction governs for federal_income_tax purposes 324_us_331 293_us_465 however courts have long recognized that a taxpayer is free to structure his transactions as he chooses but once having done so must accept the consequences of his choice whether contemplated or not and may not enjoy the benefit of some other route he might have chosen to follow but did not 417_us_134 for this reason the courts have generally subjected taxpayers to a heightened standard of proof among other requirements before permitting them to disavow the form chosen and have the transaction taxed in accordance with substance see eg 641_f2d_376 5th cir 99_tc_561 fnma v commissioner 90_tc_405 based on the facts provided taxpayer has not disavowed the form it originally chose taxpayer has consistently characterized the instruments as equity for u s income_tax purposes for all taxable years for example no interest_income with respect to the instruments was reflected on the taxpayer’s form_1120 for the taxable years at issue furthermore no interest_expense with respect to the instruments was deducted in determining fsub3’s earnings_and_profits and the amounts advanced pursuant to the instruments were not included in the amount of the maximum loan balance outstanding as reflected on fsub3’s form_5471 for each taxable_year at issue the form_5471 balance_sheet reported the instruments as common_stock for each taxable_year at issue in addition the instruments were consistently reported as equity contributions on form_926 for all relevant years accordingly taxpayer is not subject_to the heightened standard of proof here because taxpayer did not disavow its form the instruments are equity under debt equity principles examinations also argues that the instruments should be treated as in substance debt not equity based on the eight factors set forth in notice_94_47 1994_1_cb_357 taxpayer argues that the instruments should be treated as equity based on the factors in notice_94_47 as well as additional common_law factors not addressed in notice_94_47 a notice_94_47 factors notice_94_47 provides that the characterization of an instrument as debt or equity for u s federal_income_tax purposes depends on the terms of the instrument and all surrounding facts and circumstances among the factors that may be considered in making such a determination are the following i whether there is an unconditional promise on the part of the issuer to pay a sum certain on demand or at a fixed maturity_date that is in the reasonably foreseeable future ii whether the holder possesses the right to enforce the payment of principal and interest iii whether the rights of the holder of the instrument are subordinate to rights of general creditors iv whether the instrument gives the holder the right to participate in the management of the issuer v whether the issuer is thinly capitalized vi whether there is identity between the holders of the instrument and the equity holders of the issuer vii the label placed upon the instrument by the parties and viii whether the instrument is intended to be treated as debt or equity for non-tax purposes including regulatory rating agency or financial_accounting purposes the weight given to any factor depends upon all of the facts and circumstances 326_us_521 the application of the foregoing factors is discussed below i whether there is an unconditional promise to pay a sum certain on demand or at a fixed maturity_date it is a well-established principle that a fixed maturity_date or repayment on demand is virtually essential for an instrument to be characterized as debt for u s federal_income_tax purposes and thus the lack of such a date strongly suggests that in substance the instrument is equity see eg laidlaw transportation inc v commissioner 75_tcm_2598 citing 464_f2d_394 5th cir the instruments do not provide for a fixed maturity_date or for repayment on demand accordingly this factor weighs strongly in favor of treating the instruments as equity ii whether the interest holders possess the right to enforce the payment of principal and interest courts have historically treated an instrument as equity when under the terms of the instrument the holder lacks the right to enforce payment of principal and interest see eg 107_f2d_3 5th cir the instruments do not provide for interest payments also the instruments only provide sub2 with a limited right to repayment of principal on condition of the dissolution or bankruptcy of fsub3 thus this factor also suggests the instruments are equity iii whether the rights of holders of the instrument are subordinate to the rights of general creditors if the rights of a related-party lender are subordinate to the rights of other corporate creditors such subordination generally is strong evidence that the related-party advance is an equity contribution rather than a loan because it indicates that the related_party shares more in the risks of the venture 52_tc_867 aff’d 435_f2d_118 6th cir under the instruments the rights of sub the lender are subordinate to the rights of all creditors of fsub3 the borrower but are superior to all rights of the shareholders sub2 of fsub3 thus this factor also strongly favors characterizing the instruments as equity iv whether the instrument gives the holder the right to participate in the management of the issuer sub2 the holder of the instruments is the sole shareholder of fsub3 the issuer of the instruments because sub2 controls fsub3 without regard to the instruments this factor is controlling v whether the issuer is thinly capitalized courts generally consider a borrower’s debt-to-equity_ratio and other financial data in deciding if it is thinly capitalized because thin or inadequate capitalization suggests that an advance is equity see eg 748_f2d_1365 9th cir however there is no maximum or minimum debt-to-equity_ratio that defines whether an instrument is debt or equity and courts often weigh other factors such as the purported borrower’s cash_flow and other means by which the borrower could repay the loan more heavily than the debt-to-equity_ratio see 827_f2d_1409 9th cir in light of the fact that fsub3's cash_flow appears to be insufficient to pay principal and interest on the instruments the taxpayer may be inadequately capitalized however it is not possible to determine from the facts whether this is the case vi whether there is identity between holders of the instrument and stockholders of the issuer the holder of the instruments sub2 and the sole shareholder of fsub3 are the same thus this factor supports treating the instruments as equity vii the label placed upon the instrument by the parties the instruments are entitled loan agreement for country purposes thus this factor supports debt treatment for federal_income_tax purposes viii whether the instrument is intended to be treated as debt or equity for non- tax purposes taxpayer characterizes the instruments as equity for u s federal_income_tax purposes but as debt for country1 book and tax purposes for u s book purposes the taxpayer consolidates fsub3 and sub2 so all inter-company debt and equity is eliminated in consolidation as discussed above the foreign law characterization of the instruments has little or no weight because country1 and the u s use different standards for classifying instruments as debt or equity for these reasons this factor has little or no impact on the federal_income_tax characterization of the instruments based on the foregoing analysis of the notice_94_47 factors the instruments are properly characterized as equity for u s federal_income_tax purposes taxpayer notes that notice_94_47 only addresses a portion of the debt equity characterization factors that have been developed in the case law some additional factors derived from the case law also support characterizing the instruments as equity the fact that a corporation cannot borrow similar amounts at rates and terms similar to those of the instrument from third parties strongly suggests that the instrument is equity a touchstone of economic reality is whether an outside lender would have made the payments in the same form and on the same terms 89_tc_816 as noted above the instruments by their terms gives the holder no right to interest or any other return on the funds advanced no right to demand repayment of the funds advanced except as a liquidation preference that is subordinate to the claims of fsub3’s general creditors it is very doubtful that any third-party creditor would lend funds on such terms thus this factor strongly suggests that the instruments should be treated as equity based on the debt equity factors in notice_94_47 and case law discussed above we conclude that the instruments are properly treated as equity not debt b examinations further contends that if the instruments are characterized as equity sub2 should be treated as receiving deemed dividends from fsub3 for u s federal_income_tax purposes because fsub3 is treated for foreign law purposes as imputing interest on the instruments which is deemed re-contributed as a capital_contribution and country1’s tax treatment of the instruments results in an increase in share capital which confers a benefit on sub2 that constitutes a distribution_of_property for u s federal_income_tax purposes taxpayer counters that country1 tax treatment does not control u s federal_income_tax characterization and the economic effects of a fictional capital_contribution under foreign law does not create a dividend distribution on the instruments it is well established that u s tax provisions are interpreted according to u s tax concepts absent a clear congressional expression that foreign tax concepts control 302_us_573 goodyear tire rubber co v commissioner 493_us_132 in general sec_301 provides rules governing the distribution_of_property by a corporation to a shareholder with respect to stock a distribution may be actual or constructive the hallmark of a constructive distribution is value passing from or sufficiently specific_economic_benefit conferred by the corporation to the shareholder for which the shareholder did not give value in the country1 tax treatment does not create a deemed_dividend exchange u s v smith f 2d big_number 5th cir sec_301 generally provides rules for determining the amount of any distribution that constitutes a dividend for foreign law purposes interest payments were imputed from fsub3 to sub2 and the imputed amounts were treated as contributed to fsub3 as capital contributions however fsub3 did not make any actual distributions to its shareholder sub2 furthermore the imputed_interest and corresponding capital_contribution did not confer value on sub2 because it is the sole shareholder of fsub3 because sub2 did not receive an actual or constructive distribution from fsub3 sub2 did not receive dividends from sub for u s tax purposes caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc intl br1-plr-118735-02 date date ty a date b country c date d dear this is in response to a letter dated date requesting a ruling that a’s prospective loss of lawful permanent resident status expatriation will not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code the information submitted for consideration is substantially as set forth below 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 a was born on date b in country c a came to the united_states for employment reasons and obtained a green card a is a citizen of country c where he now lives on date d a will relinquish his green card a will be subject_to country c tax on his worldwide income on the date of a's expatriation his net_worth will exceed the applicable_amount set forth in sec_877 sec_877 generally provides that a citizen who loses u s citizenship or a u s long-term_resident who ceases to be taxed as a lawful permanent resident individuals plr-118735-02 who expatriate within the 10-year period immediately preceding the close of the taxable_year will be subject_to the special rules of sec_877 for such taxable_year unless such loss did not have for one of its principal purposes the avoidance of u s taxes sec_2107 and sec_2501 provide special estate and gift_tax regimes respectively for individuals who expatriate with a principal purpose to avoid u s taxes a former u s citizen or former u s long-term_resident will be treated as having expatriated with a principal purpose to avoid u s taxes for purposes of sec_877 sec_2107 and sec_2501 if the individual’s average income_tax_liability or the individual’s net_worth on the date of expatriation exceed certain thresholds see sec_877 sec_2107 and sec_2501 a former u s citizen whose net_worth or average tax_liability exceeds these thresholds however will not be presumed to have a principal purpose of tax_avoidance if that former citizen is described within certain statutory categories and submits a request for a ruling within one year of the date of loss of u s citizenship for the secretary’s determination as to whether such loss had for one of its principal purposes the avoidance of u s taxes see sec_877 sec_2107 and sec_2501 under notice_98_34 1998_2_cb_29 modifying notice_97_19 1997_1_cb_394 a former long-term_resident whose net_worth or average tax_liability exceeds the applicable thresholds will not be presumed to have a principal purpose of tax_avoidance if that former resident is described within certain categories and submits a complete and good_faith request for a ruling as to whether such loss had for one of its principal purposes the avoidance of u s taxes notice_98_34 requires that certain information be submitted with a request for a ruling that an individual’s expatriation did not have for one of its principal purposes the avoidance of u s taxes a is eligible to request a ruling pursuant to notice_98_34 because he is a citizen and resident fully subject_to tax in country c the country in which he was born a submitted all of the information required to be submitted by notice_97_19 as modified by notice_98_34 including additional information requested by the service after review of the submission accordingly based solely on the facts submitted and the representations made we conclude that a has made a complete and good_faith submission in accordance with sec_877 and notice_98_34 therefore a will not be presumed under sec_877 to have as one of his principal purposes for expatriating the avoidance of u s taxes we further conclude that a will not be treated under sec_877 as having as one of his principal purposes for expatriating the avoidance of u s taxes because plr-118735-02 the information submitted clearly establishes the lack of a principal purpose to avoid taxes under subtitle a or b of the code except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition no opinion is expressed as to a’s u s tax_liability for the taxable years prior to or after his expatriation under sections of the code other than sec_877 sec_2107 and sec_2501 a copy of this letter must be attached to a’s u s income_tax return for the year in which a obtained the ruling whether or not a is otherwise required to file a return this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file in this office a copy of this letter will be sent to a sincerely senior technical reviewer cc intl br1


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 intl b02 plr-145373-08 date date ty ------- legend taxpayer fc parent fc year year year firm q firm r -------------------- ------------------ -------------------------------------- ----------------- ------------------------------------------ ----------------- ------- ------- ------- --------------------- --------------------------- dear ------------------------- this is in response to letters dated date and date and subsequent correspondence submitted by taxpayer’s authorized representative that requested the consent of the commissioner of the internal_revenue_service commissioner for taxpayer to make a retroactive qualified_electing_fund qef election under sec_1295 of the internal_revenue_code code and sec_1_1295-3 with respect to taxpayer’s investment in fc plr-145373-08 the ruling contained in this letter is based upon information and representations submitted on behalf of taxpayer by his authorized representative and accompanied by a penalties of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of this request_for_ruling such material is subject_to verification on examination the information submitted in the request is substantially as set forth below facts taxpayer is a former u s citizen who owns an interest in parent fc which is the owner of fc fc and parent fc are both foreign_corporations constituting pfics within the meaning of sec_1297 taxpayer was a u s citizen in year when fc was formed fc continued to qualify as a pfic through its year tax_year when taxpayer ceased to be a u s citizen for year through year taxpayer engaged firm q for preparation of his individual u s tax_return firm q employs experienced tax professionals to provide tax_advice on a wide variety of tax matters including international tax firm q advised taxpayer with regard to u s federal_income_tax matters including taxpayer’s ownership of fc taxpayer relied on firm q to provide advice with respect to filing and reporting requirements in general as well as any elections or statements that would be necessary to elect specific tax treatment in year parent fc engaged firm r to provide tax services in connection with the u s tax implication of various related investments in the course of this evaluation firm r determined that fc might qualify as a pfic under sec_1297 beginning in year with respect to taxpayer based on firm r’s determination regarding the potential pfic status of fc and parent fc taxpayer requested firm r to submit a private_letter_ruling request to make a retroactive qef election with respect to fc under sec_1_1295-3 retroactive to year and effective for all subsequent years taxpayer has submitted an affidavit under penalties of perjury describing the events that led to his failure to make the qef election by the election due_date including the roles of firm q and firm r taxpayer represents that he provided information regarding the ownership and financial data of fc to firm q taxpayer represents that in the relevant years fc was not identified as a pfic and taxpayer did not receive any advice regarding the availability of a qef election with respect to fc taxpayer has paid an amount sufficient to eliminate any prejudice to the united_states government as a consequence of his inability to file amended returns in accordance with a signed closing_agreement between taxpayer and the commissioner further taxpayer has agreed to file an amended_return for each of his subsequent taxable years affected by the retroactive election if any plr-145373-08 taxpayer represents that as of the date of this request_for_ruling the pfic status of fc has not been raised by the irs on audit for any of the taxable years at issue ruling requested taxpayer requests the consent of the commissioner to make a retroactive qef election with respect to fc under sec_1_1295-3 retroactive to year law sec_1295 provides that a pfic will be treated as a qef with respect to a taxpayer if an election by the taxpayer under sec_1295 applies to such pfic for the taxable_year and the pfic complies with such requirements as the secretary may prescribe for purposes of determining the ordinary_earnings and net capital_gains of such company under sec_1295 a qef election may be made for any taxable_year at any time on or before the due_date determined with regard to extensions for filing the return for such taxable_year to the extent provided in regulations such an election may be made after such due_date if the taxpayer failed to make an election by the due_date because the taxpayer reasonably believed the company was not a pfic under sec_1_1295-3 a shareholder may request the consent of the commissioner to make a retroactive qef election for a taxable_year if the shareholder reasonably relied on a qualified_tax professional within the meaning of sec_1_1295-3 granting consent will not prejudice the interests of the united state sec_3 government as provided in sec_1_1295-3 the request is made before a representative of the internal_revenue_service raises upon audit the pfic status of the corporation for any taxable_year of the shareholder and the shareholder satisfies the procedural requirements of sec_1 f the procedural requirements include filing a request for consent to make a retroactive election with and submitting a user_fee to the office of the associate chief_counsel international sec_1_1295-3 additionally affidavits signed under penalties of perjury must be submitted that describe the events that led to the failure to make a qef election by the election due_date the discovery of such failure plr-145373-08 the engagement and responsibilities of the qualified_tax professional and the extent to which the shareholder relied on such professional sec_1_1295-3 and iii conclusion based on the information submitted and representations made with taxpayer’s ruling_request we conclude that taxpayer has satisfied sec_1_1295-3 accordingly consent is granted to taxpayer to make a retroactive qef election with respect to fc for year provided that taxpayer complies with the rules under sec_1_1295-3 regarding the time and manner for making the retroactive qef election we have accordingly approved a closing_agreement with the taxpayer with respect to those issues affecting his tax_liability on the basis set forth above pursuant to our practice with respect to such agreements the agreement contains a stipulation to the effect that any change or modification of applicable statutes enacted subsequent to the date of this agreement and made applicable to the taxable_period involved will render the agreement ineffective to the extent that it is dependent upon such statutes except as specifically set forth above no opinion is expressed or implied concerning the u s federal tax consequences of the facts described above under any other provision of the code this private_letter_ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter_ruling must be attached to any federal_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 with this office a copy of this letter is being sent to your authorized representatives sincerely barbara e rasch senior technical reviewer branch international


internal_revenue_service department of-me réasury significant index no thdefinbah tye sopkact participants parenn ta cantant- talanbanaabiumhar trefpr reel yrtoa date jul in re this letter constitutes notice that with respect to the above-named money_purchase_pension_plan we have granted a conditional waiver of the minimum_funding_standard for the plan_year ending date you previously withdrew your request for an application_for approval of a plan amendment that would have retroactively reduced benefits for the plan_year ending date this conditional waiver for the plan_year ended june granted in accordance with sec_412 of the internal_revenue_code and sec_303 of the employee_retirement_income_security_act_of_1974 erisa waived amount_is the contribution which would otherwise be required to reduce the balance in the funding_standard_account to zero as of the end of the plan_year for which this conditional waiver has been granted has been the the company has a july 1-june fiscal_year years ended date-2000 the company had net operating losses for its fiscal years ended date and the company had negative net_worth and working_capital for the three fiscal the company filed for bankruptcy on date and emerged from bankruptcy protection on date an ambitious cost-cutting program there has been a sharp decrease in the size of its workforce company hired an outside management-consulting firm in date to help manage the company after the company’s ceo resigned in the prior month the plan has been amended so that there are no further accruals of employer contributions for plan years after date but there woutd be employer contributions to amortize this conditional waiver however there is still some uncertainty as to the likelihood of recovery expectations it has closed three facilities since then it has embarked on also the because of the recovery prospects of the sponsor are uncertain the waiver is granted subject_to the following conditions the contributions required to satisfy the minimum_funding_standard taking into account this waiver for the plan years ended date and which are the contributions to amortize the waiver are to be timely made as defined in code sec_412 and -2- the company adopts an amendment to reflect the waiver as described below if either of these conditions is not satisfied the waiver is retroactively null dated date sent by your authorized representative you agreed to these conditions in a letter and void when a defined_contribution_plan receives a waiver of the minimum_funding requirements the plan in accordance with revrul_78_223 must be amended to reflect the waiver if the plan does not otherwise provide for such waiver if no amendment_is submitted the irs may issue a ruling letter section dollar_figure of revproc_94_41 provides that the applicant requesting a_waiver need not submit an amendment designed to satisfy rev granting a conditional funding waiver requiring the adoption of an amendment supplied by the irs request we are granting the waiver subject_to your adoption of the enclosed proposed amendment reasonable_time this waiver is null and void with our amendment or would tike to modify it consider any such request if such request is submitted in writing to us no later than days from the date of this letter such request would require a user_fee in accordance with revproc_2001_8 i r b your letter should clearly state the exact changes you propose if that amendment is not adopted within a because no amendment accompanied your in any way we will however if you disagree rul your attention is called to code sec_412 which describes the consequences which would result in the event the plan is amended to increase benefits change the rate in the accrual_of_benefits or to change the rate of vesting while any portion of the waived_funding_deficiency remains unamortized this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that others may not use it or cite it as precedent because we have granted a waiver of the minimum_funding filing form_5500 for the plan_year ending actuarial information must be filed the date of this letter should be entered on schedule b actuarial information see the instructions for line of schedule r whoever will complete the schedule to the employee_plans classification manager in a copy of this letter should be furnished to we have sent a copy of this letter date schedule b standard when sincerely ulirk dollar_figure- james e holland jr manager employee_plans actuarial group tax_exempt_and_government_entities_division attachment i i the employer if unable to satisfy the minimum_funding_standard for given plan_year may apply to the internal_revenue_service for a a waiver of the minimum_funding_standard following provisions apply if the waiver is granted the the valuation_date for a given plan_year is the last day of each plan_year an adjusted account balance shall be maintained for each plan participant whose actual account balance is less than or equal to his or her adjusted account balance a for the plan_year for which the first waiver is granted the adjusted account balance as of the valuation_date for each affected plan participant equals the participant's actual account balance plus the amount that such participant would have received if the amount waived had been contributed b for each plan_year following the plan_year for which a waiver is granted the adjusted account balance of each participant affected by such waiver calculated as of the valuation_date for that year equals the adjusted account balance as of the valuation_date in the prior plan_year plus the amount equal to the actual investment return credited or charged to the participant's actual account balance plus the amount equal to of the excess of the amount in over the participant's actual account balance calculated as of the same date plus the amount equal to such participant's allocated share of the employer's required_contribution whether or not waived for the plan_year determined without regard to adjusted waiver payments and discretionary contributions minus the amount of the participant's adjusted account balance forfeited during the plan_year under the plan's provisions for a given plan_year the employer is required to contribute a certain amount_in order to satisfy the minimum_funding_standard for such plan_year that follows a plan_year for which a waiver of the minimum_funding_standard was granted the amount equals for each plan_year 30s the amount due in accordance with the plan's contribution formula without regard to this section plus the adjusted waiver amount the adjusted waiver amount for a given plan_year equals the sum of the amounts necessary to amortize each waived_funding_deficiency over a period of plan measured from the valuation_date of the plan_year for which the corresponding waiver was granted at t interest compounded annually minus years the sum of the amounts necessary to amortize the total of each year's forfeitures and other experience gains which have arisen since the first waiver was granted over a period of plan years measured from the valuation_date of the plan_year in which the corresponding forfeitures and gains arose at interest compounded annually ptu sec_5 the sum of the amounts necessary to amortize the total of each year's experience losses which have arisen since the first waiver was granted over a period of plan years measured from the valuation_date of the plan_year in which the corresponding losses arose at interest compounded annually an amount equal to the adjusted waiver amount must be contributed only until each actual account balance equals the adjusted account balance provides that employer contributions shall be reduced immediately by forfeitures is revoked until each participant's actual account balance equals that participant's adjusted account balance any plan provision which discretionary employer contributions which are in addition to the amounts contributed to satisfy standard can be made in any given pian year however the total employer_contribution for the plan_year cannot exceed the then remaining underfunded amount the sum of the adjusted account balances minus the total plan assets the minimum_funding the adjusted waiver payments discretionary contributions and forfeitures of actual account balances for the current plan_year shall be allocated as of that year's valuation_date to the actual account balance of each affected plan participant each time_a waiver is granted an original waiver amount owa will be determined for each affected plan participant the amount that was waived the owa equals the participant's portion of commencing with the valuation_date of the plan_year for which a waiver is granted a remaining original waiver amount rowa must be calculated for each affected plan participant rowa on the valuation_date of a succeeding plan rowa equals the prior plan year's rowa multiplied t minus the forfeiture of amounts in the prior year's rowa incurred in the current plan_year minus the allocation with respect to the owa for the current plan_year corresponding rowa will be established for each affected plan participant as_of such valuation_date the owa equals the ear the by for each waiver that is granted one owa and a the sum of the adjusted waiver payments discretionary contributions and forfeitures of the actual account balances for a given plan_year are allocated to those participants who have rowa's by multiplying the sum of these three amounts by the fraction ci ii the numerator of which equals the sum of owa's for a particular participant and the denominator of which equals the sum of the owa’s for all participants to determine the portion of this allocation which is to be assigned to a given rowa multiply the allocation by the corresponding owa then divide the particular participant by the sum of the owa's for if the calculation of a rowa results in a value which is less than zero then the rowa is set equal to zero the corresponding owa is set equal to zero and the excess payments will be reallocated to the remaining rowa's a distribution is determined by multiplying a participant's vested percentage by his or her adjusted account balance however distributions from the plan may not exceed a participant's actual account balance if so limited plan participants shall receive subsequent distributions derived from future adjusted waiver payments all_the amounts described in paragraph of this section shall first be applied to the actual account balance of the affected rank and file participants until the actual account balance for_each adjusted account balance as determined in paragraph participant is equal to his or her t is the interest rate determined on the first day year in accordance with sec_412 of the internal as tn effect at the time the waiver was requested of the plan revenue code z0y


internal_revenue_service number release date index number --------------------------------- --------------------------------- ------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------ id no ----------------- telephone number ---------- refer reply to cc psi plr-128559-09 date november --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ legend trustors original trust trust trust d trust e trust f trust g trustee successor trustee a b c d e f g h i j k l m court court --------------------------------------------------------- ---------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------- --------------------------- -------- --------------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ------------------------------------------------------------------------------------ --------------------------------------------------------------------------------- ---------------------------- -------------- ----------------------------- ---------------------------- ------------------------------ --------------------------- ---------------------- -------------------------- ------------------------ ----------------------------- ----------------------------- --------------------- ---------------------- ------------------------------ ------------------------- ----------------------------------------------------------- ------------------------------------------------------ plr-128559-09 settlement agreement state date date year year state statute state statute -------------------------------------------------------------- ------------ --------------------------- ---------------- ------- ------- ----------------------------------------- ---------------------------------------------- dear ------------------ this letter responds to your submission dated date requesting rulings on the income gift and generation-skipping_transfer_tax consequences of the proposed division of a_trust the facts submitted and the representations made are as follows on date in year which is prior to date trustors created an irrevocable_trust original trust for the benefit of the issue of a b and c ie their grandchildren and grandchildren’s issue a b and c are trustors’ children and are each referred to as the primary descendant on date pursuant to a settlement agreement court ordered original trust severed into three separate and equal trusts a_trust for the benefit of the issue of a a_trust for the benefit of the issue of b and a_trust for the benefit of the issue of c the trust created for the benefit of the issue of a_trust is the subject of this ruling date is prior to date trustee is the corporate trustee and currently the sole trustee of trust trust’s terms are identical to the terms of original trust except that where original trust refers to the issue of primary descendant each reference means solely the issue of a and the lineal_descendants of such issue the trustee of original trust received a ruling from the internal_revenue_service service concluding that the date division would not cause original trust or trust to lose its status as exempt from the generation-skipping_transfer_tax and that distributions from either trust would not be subject_to the generation-skipping_transfer_tax a has four children d e f and g and six grandchildren h i j k l and m trustors are deceased a is alive the pertinent terms of original trust and trust are as follows plr-128559-09 section ii requires the trustee to distribute trust income at least annually to the issue of the primary descendant provided however the trustee may accumulate trust income if it determines it is in the best interests of the beneficiaries after giving full consideration to the capital_gain throwback_rules contained in sec_669 of the internal_revenue_code as then in effect after the death of the primary descendant and all of his or her lineal_descendants the trustee must distribute income to trustors’ lineal_descendants in such proportions as determined by trustee in its sole discretion the trustee also has discretion to distribute principal to the primary decedent’s issue and upon the death of the primary descendant’s issue to the lineal_descendants of trustors pursuant to section iii trust unless terminated sooner will terminate immediately prior to the expiration of twenty-one years from and after the death of the last survivor of trustors and the issue of trustors’ parents living on date upon termination the trustee shall distribute the principal in equal proportions outright and free of trust to the persons then entitled to receive the net_income thereof or if no such persons exist then to trustor’s heirs section vi subsection b provides that trust is irrevocable and prohibits any portion of the trust principal or income to revert to trustors or trustors’ estates section vii subsection i provides that the corporate trustee may be removed by a majority vote of the individual trustees and the corporate trustee may resign by serving notice to a majority of the individual trustees if the corporate trustee ceases to be a trustee a successor corporate trustee must be named section vii subsection g states that trust is a contract under state law the assets of trust consist of cash marketable_securities a limited_partnership_interest and real_property when trust was created upon the division of original trust d e f and g requested trustee create four separate sub-accounts for each of the siblings and their respective descendants so that the assets other than the real_property could be separately managed accordingly since year except for the management of the real_property interests held by trust trustee has kept separate sub-accounts for each family line since trust’s inception in year a dispute arose among d e f and g regarding the administration of trust trustee petitioned court for instructions on whether state law authorizes trustee to divide trust to create a separate share for e and her lineal_descendants d f and g filed a complaint with court seeking to remove trustee as trustee of trust to end the litigation the parties entered into settlement agreement under the terms of settlement agreement trust will be divided into four separate trusts trust d a_trust for the benefit of d and her lineal_descendants trust e a_trust for the benefit of e and her lineal_descendants trust f a_trust for the benefit of f and her lineal_descendants and plr-128559-09 trust g a_trust for the benefit of g and his lineal_descendants collectively the separate trusts each separate trust has identical terms as trust except that where trust refers to the issue of the primary descendant and such issue’s lineal_descendants as beneficiaries such reference shall mean solely the particular family line for whom the separate trust is established each trust will receive a non-pro rata equal share of trust assets consisting of the assets held in that family member’s sub-account and one-fourth of all other assets except real_property not held in a sub-account trustee will partition the real_property pursuant to the parties’ agreement trust e will receive a fee simple interest that has an estimated value equal to one-fourth of the value of all of the real_property owned by trust and trusts d f and g will hold three-fourths of the value of all of the real_property owned by trust as tenants-in-common any outstanding line of credit from trustee’s institution will be satisfied by trust prior to the division any other debts of trust will be apportioned amongst separate trusts equally settlement agreement will be approved upon receipt of a favorable ruling from the service and the filing of an amended petition in court trustee will continue as trustee of trust e and successor trustee will serve as the corporate trustee and sole trustee of trusts d f and g state statute authorizes a trustee of a state trust to combine or divide a_trust provided that the trustee gives notice to the qualified beneficiaries and if the result does not impair rights of any beneficiary or adversely affect achievement of the purposes of the trust under state statute when distributing trust property or terminating or dividing a_trust a trustee has a power to make distributions in divided or undivided interests allocate particular assets in proportionate or disproportionate shares value the trust property for those purposes and adjust for resulting differences in valuation trustee represents that no additions have been made to the corpus of original trust or trust after date trustee successor trustee and the beneficiaries of trust d e f g h i j k l and m request the following rulings the proposed modification and division of trust into separate trusts constituting four separate and equal shares of trust the non-pro rata transfer of assets from trust to each such separate trust and the change_of trustees with respect to any such separate trust will not constitute an addition to or a modification of trust or any of the four separate trusts that would cause trust or any separate trust to lose wholly or partially its exempt status under sec_2601 and will not subject distributions from trust or any of the separate trusts to the generation-skipping_transfer_tax furthermore each plr-128559-09 separate trust will constitute a separate trust for purposes of determining the application of any generation-skipping_transfer_tax subsequent to the division of trust the proposed non-pro rata distribution of the assets of trust to the four separate trusts on an equal basis will not result in the realization of gain_or_loss to trust or to any separate trust or any beneficiary thereof under sec_61 or sec_1001 the proposed division of trust and non-pro rata distributions of assets to such separate trusts will not result in a transfer subject_to gift_tax under sec_2501 by trust or any of trust’s beneficiaries the basis of each asset received by each separate trust from trust will be the same as the basis which that asset maintained when held by the trust pursuant to sec_1015 the holding_period for each asset received by each separate trust from trust will include the same holding_period for that asset as held by trust according to sec_1223 each of the four separate trusts will constitute a separate trust for purposes of sec_643 ruling sec_2601 of the internal_revenue_code code imposes a tax on every generation- skipping transfer gst a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip under b a of the tax_reform_act_of_1986 and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the gst tax provisions do not apply to any gst_trust as defined in sec_2652 that was irrevocable on date but only to the extent that the transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under sec_26_2601-1 b or b will not cause the trust to lose its exempt status these rules are applicable only for purposes of determining whether an exempt trust retains its exempt status for gst tax purposes they 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 under sec_26_2601-1 a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy paragraph b i a b or c by judicial reformation or nonjudicial reformation that plr-128559-09 is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst or the creation of a new gst a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust see sec_26 b i e example in this case original trust was irrevocable on date the service ruled that the division of original trust did not cause original trust or trust or distributions from either to be subject_to gst tax it has been represented that there have been no additions made to either original trust or trust after date in the instant case trustee has authority under state law to divide trust into separate trusts trustee has discretion to make non-pro rata distributions to the beneficiaries and trust provides for the resignation of trustees and appointment of successor trustees to end litigation the parties executed settlement agreement in which trust will be divided into separate trusts trusts d e f and g and assets will be allocated equally in a non-pro rata fashion to each separate trust further successor trustee will serve as trustee of trusts d f and g the division of trust into separate trusts will not shift a beneficial_interest in the separate trusts to any beneficiary who occupies a lower generation as defined in sec_2651 than the person who held the beneficial_interest prior to the division it will also not postpone or suspend the vesting absolute ownership or power of alienation of an interest in property for a period measured from the date of creation of the trust extending beyond the life of any issue of trustors in being at the date of creation of original trust plus a period of years accordingly based on the facts submitted and representations made we rule that the proposed modification and division of trust into separate trusts and the non-pro rata transfer of assets from trust to each such separate trust will not constitute an addition to or a modification of trust or any of the four separate trusts that would cause trust or any separate trust to lose wholly or partially its exempt status under sec_2601 and will not subject distributions from trust or any of the separate trusts to the gst tax the change_of corporate trustee for trusts d f and g is administrative in nature and is not considered to shift a beneficial_interest in trust accordingly based upon the facts submitted and the representations made we rule that the change_of corporate trustee will not constitute an addition to or a modification of trust or any of the separate trusts that would cause trust or any separate trust to lose wholly or partially its exempt status under sec_2601 and will not plr-128559-09 subject distributions from trust or any of the separate trusts to the gst tax furthermore based on the facts provided and the representations made we rule that the four separate trusts will constitute a separate trust for the purposes of determining the application of any gst tax subsequent to the division of trust ruling sec_61 defines gross_income as all income from whatever source derived under sec_61 gross_income includes g ains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property is the excess of the amount_realized 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 entire amount of gain_or_loss must be recognized except as otherwise provided sec_1_1001-1 of the income_tax regulations provides that except as otherwise provided in subtitle a of the code the gain_or_loss realized from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or as loss sustained under sec_1_1001-1 the severance of a_trust occurring on or after date is not an exchange of property for other_property differing materially either in_kind or in extent if i an applicable_state_statute or the governing instrument authorizes or directs the trustee to sever the trust and ii any non-pro rata funding of the separate trusts resulting from the severance whether mandatory or in the discretion of the trustee is authorized by an applicable_state_statute or the governing instrument in the present case trust will be severed into four separate trusts on a non-pro rata basis the operating provisions of the separate trusts are the same as those of trust the proposed severance of trust is authorized under state law original trust and trust contain no provision contrary to the state law therefore the proposed severance is consistent with the criterion set forth in sec_1_1001-1 for an exchange of property for property not materially different in_kind or in extent under state law in terminating or dividing a_trust a trustee may make non-pro rata distributions in addition under the terms of original trust and trust the trustees are authorized to distribute trust principal or income on a non-pro rata basis the proposed non-pro rata severance of trust is authorized both under state law and under the terms of the trust accordingly the non-pro rata funding of separate trusts is consistent with the criterion set forth in sec_1_1001-1 for an exchange of property for property not materially different in_kind or in extent plr-128559-09 the severance of a_trust occurring on or after date is not an exchange of property for other_property differing materially in_kind or in extent if the severance satisfies the criteria set forth in sec_1_1001-1 the proposed severance of trust satisfies those criteria accordingly based on the facts provided and the representations made we rule that the severance does not constitute an exchange of property for other_property differing materially in_kind or in extent under sec_61 and sec_1001 ruling sec_2501 imposes a tax for each calendar_year on the transfer of property by gift during such calendar_year by an individual resident or nonresident sec_2511 provides that subject_to certain limitations the gift_tax applies whether the transfer is in trust or otherwise direct or indirect and whether the property transferred is real or personal tangible or intangible sec_2512 provides that if a gift is made in property the value thereof at the date of the gift will be considered the amount_of_the_gift sec_2512 states that where property is transferred for less than adequate_and_full_consideration in money or money’s worth the amount by which the value of the property exceeds the value of the consideration received shall be deemed a gift based on the facts submitted and the representations made the beneficial interests of the trust beneficiaries will not change as a result of the division of trust as described above accordingly based upon the facts provided and the representations made we rule that the division of trust into separate trusts will not cause trust or any beneficiary of trust to have made a taxable gift_for federal gift_tax purposes under sec_2501 ruling sec_1015 states that the basis in property acquired by a transfer in trust is the same as it would be in the hands of the grantor with adjustments for gain and loss recognized sec_1_1015-2 provides that in the case of property acquired after date by a transfer in trust other than a transfer in trust by gift bequest or devise the basis_of_property so acquired is the same as it would be in the hands of the grantor increased by the amount of gain or decreased in the amount of loss recognized to the grantor under the law applicable to the year in which the transfer was made sec_1_1015-2 applies the uniform basis principles in sec_1_1015-1 for determining basis_of_property where more than one person acquires an interest in property by transfer in trust plr-128559-09 under sec_1_1015-1 property acquired by gift has a single uniform basis although more than one person may acquire an interest in the property the uniform basis of the property remains fixed subject_to proper adjustment for items under sec_1016 and sec_1017 in this case neither sec_1001 nor sec_61 applies to the proposed transaction thus based upon the facts provided and the representations made we rule that the basis of each asset received by each separate trust will be the same as the basis of the assets in trust ruling under sec_1223 the taxpayer's holding_period for property however it is acquired includes the period for which the property was held by any other person if for the purpose of determining gain_or_loss from a sale_or_exchange the property has the same basis in whole or in part in his hands as it would have in the hands of the other person under sec_1015 the basis in each asset is the same in the hands of each separate trust as it is in the hands of trust accordingly based upon the facts provided and the representations made we rule that under sec_1223 the holding_period for each asset received by each separate trust from trust will include the period that the asset was held by trust ruling sec_643 provides that 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 the principal purpose of such trusts is the avoidance of the tax_imposed_by_chapter_1 of the code section b of the tax_reform_act_of_1986 provides that in the case of a_trust which was irrevocable on date sec_643 shall apply only to that portion of the trust which is attributable to a contribution to corpus after date sec_643 provides that in the case of any distribution_of_property other than cash to which an election under sec_643 applies i sec_643 does not apply ii gain_or_loss is recognized by the trust in the same manner as if such property has been sold to the distributee at its fair_market_value and iii the amount taken into account under sec_661 and sec_662 shall be the fair_market_value of such property sec_643 provides that an election under sec_643 applies to all distributions made by the trust during a taxable_year and is made on the return of the trust for such taxable_year plr-128559-09 sec_661 provides that in any taxable_year a deduction is allowed in computing the taxable_income of a_trust other than a_trust to which subpart b applies for the sum of the amount of income for such taxable_year required to be distributed currently and any other_amounts_properly_paid_or_credited_or_required_to_be_distributed for such taxable_year but such deduction shall not exceed the distributable_net_income dni of the estate_or_trust sec_1_661_a_-2 of the income_tax regulations provides that gain_or_loss is realized by the trust or estate or the other beneficiaries by reason of a distribution_of_property in_kind if the distribution is in satisfaction of a right to receive a distribution of a specific dollar amount of specific property other than that distributed or of income as defined under sec_643 and the applicable regulations if income is required to be distributed currently based on the facts and representations submitted we conclude that as long as the four resulting trusts created by the division of trust are each separately managed and administered they will be treated as separate trusts for federal_income_tax purposes based solely on the facts submitted and the representations made we conclude that the division will not be viewed as a distribution or termination under sec_661 nor as a distribution for purposes of sec_1_661_a_-2 and therefore will not result in the realization by trust or separate trusts or by any beneficiary of trust or separate trusts of any income gain_or_loss furthermore we conclude that trust’s distribution of assets to four separate trusts occurring as part of the proposed division will not cause trust or its beneficiaries to realize gain_or_loss provided that trust does not make an election under sec_643 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the 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 representative the rulings contained in this letter are based upon information and representations submitted by the taxpayers and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination plr-128559-09 sincerely lorraine e gardner senior counsel branch passthroughs special industries enclosures copy for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi br 1-plr-106605-03 date may legend x a estate a d1 d2 dear this letter responds to your representative’s letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to elect under sec_754 of the internal_revenue_code to adjust the basis of partnership property facts according to the information submitted a owned a a interest in x a general_partnership a died on d1 and a’s interest in x passed under will to estate x intended to file a sec_754 election with its tax_return for the taxable_year ending d2 however x inadvertently failed to file the sec_754 election with its return x seeks relief under sec_301_9100-1 and sec_301_9100-3 for the late election plr-106605-03 law and analysis under sec_754 a partnership may elect to adjust the basis of partnership property where there is a distribution_of_property or a transfer of a partnership_interest the election applies to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable_year that the election applies and all subsequent taxable years sec_1_754-1 of the income_tax regulations provides that an election under sec_754 is made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed no later than the time for filing for the taxable_year including extensions sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose deadline 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_9100-2 and sec_301_9100-3 provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interest of the government conclusion based on the information submitted and representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time for making the sec_754 election until days following the date of this letter x should make the election by filing an amended_return with the applicable service_center for the taxable_year ending d2 with a properly completed sec_754 election attached a copy of this letter should be attached to the statement filed except as specifically set forth above we express no opinion concerning the federal_income_tax consequences of the transactions described above under any other plr-106605-03 provision of the code specifically we express no opinion as to whether or not x is a partnership for tax purposes 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 the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer’s authorized representative sincerely heather c maloy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for purposes cc


t c memo united_states tax_court edward g smith and jan m smith petitioners v commissioner of internal revenue respondent docket no filed date larry d vince for petitioners timothy f salel for respondent memorandum findings_of_fact and opinion wells chief_judge respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax for unless otherwise indicated section references are to sections of the internal_revenue_code as amended and rule references are to the tax_court rules_of_practice and procedure the deficiency is attributable to an adjustment to the taxable_income reported by - - ejkc inc ebjkc an s_corporation of which petitioner edward g smith is the sole shareholder based on respondent’s determination that ejkc is required to account for inventories and use the accrual_method of accounting ’ after a concession by petitioners the issues for decision are whether ejkc’s contracts to purchase and install flooring materials constitute sales of merchandise and whether respondent abused his discretion in determining that ejkc’s use of the cash_method_of_accounting does not clearly reflect its income findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and attached exhibits are incorporated herein by this reference at the time the petition was filed petitioners resided in moreno valley california petitioner ha sec_25 years’ experience installing flooring materials such as carpeting vinyl and ceramic tile and hardwood flooring flooring materials in petitioner started his own flooring installation business in petitioner decided to operate the business as an s_corporation and filed articles of incorporation for ejkc with the california secretary of state kjkc conducts business under the fictitious business name of smith floors installations smith floors ' references to petitioner in the singular are to petitioner edward g smith initially smith floors’ operations were modest and limited to flooring installation services smith floors would dispatch its employees to a job site to install flooring materials that had been ordered by and delivered to the general contractor running its business in this fashion exposed smith floors to operational disruptions arising from errors by contractors in ordering flooring materials and scheduling installations to avoid these disruptions and to increase smith floors’ range of services petitioner decided to expand smith floors’ operations by obtaining warehouse space which would allow smith floors to acquire and hold the flooring materials that it would install pursuant to its flooring installation contracts smith floors operates its business out of an big_number square foot commercial building in riverside california smith floors uses big_number square feet of space as warehouse area and big_number square feet of space as showroom and office areas smith floors receives invitations to bid on jobs from architects contractors and developers prior to submitting a bid smith floors receives floor plans for the job and specifications identifying the flooring materials to be installed although petitioner makes product recommendations smith floors generally has no discretion as to manufacturer type grade or color of the flooring materials that it installs q4e- after being awarded a contract to install flooring materials for a particular job smith floors’ practice is to take delivery at its warehouse of the flooring materials specified under the contract inspect the flooring materials to ensure that they conform in both quality and quantity with the specifications for the particular job inspect the job site to verify that installation may proceed and deliver the flooring materials to the job site a few days in advance of the installation date to allow the materials to acclimate to the environment smith floors typically bills its customers a service charge ranging from to percent of the cost of the flooring materials to be installed the service charges cover smith floors’ cost of receiving storing inspecting and delivering the flooring materials to the job sites smith floors bills its customers for the flooring materials as soon as possible to avoid expenses associated with financing the purchase of the flooring materials however smith floors sometimes does not receive reimbursement for the cost of the flooring materials for several months smith floors does not charge interest when reimbursement for the cost of the flooring materials is delayed after a job is completed smith floors retains for approximately year scrap or excess flooring materials to ensure continuity in the dye lot for a particular job in the - event that a warranty claim or repair work request is made ’ scrap or excess flooring materials remaining after year are either returned to the client or thrown out smith floors uses its warehouse area to store padding and flooring installation materials including glue adhesives nails cap metal and cove stick smith floors purchases padding and glue adhesives in monthly allotments based on work projected for the month smith floors does not charge separately for flooring installation materials but includes such expenses in its labor charges smith floors does not store any flooring materials in its warehouse for resale to the general_public smith floors uses its showroom area to display samples of flooring materials smith floors encourages architects designers and contractors to visit its showroom to view its samples of flooring materials for particular projects smith floors through petitioner has developed an expertise regarding the proper installation of flooring material for particular applications for example petitioner has expertise regarding the proper installation of flooring material in hospital operating rooms which require antibacterial surfaces and in schools and kitchens which require slip-resistant surfaces petitioner is also known for his skill and smith floors warrants its work for year -- - craftsmanship in hand-cutting and incorporating custom designs such a corporate logos into flooring jobs smith floors enrolls its employees in annual training programs where the employees are instructed and certified in the installation of various flooring materials during smith floors had a total of jobs jobs required smith floors to purchase and install flooring materials and jobs reguired smith floors to provide installation-only services smith floors’ has provided flooring installation services for a number of large companies including albertson’s grocery stores marriott hotels walgreens drug stores pacific theaters and walt disney corporation as well as the u s general services administration smith floors frequently installs either proprietary or custom-designed flooring materials normally the companies contracting with smith floors negotiate the price of such flooring materials in advance directly with the manufacturer of the flooring materials smith floors has consistently used the cash_method_of_accounting to prepare its corporate_income_tax returns smith floors routinely assigns a value of dollar_figure to its inventory from year to year to account solely for flooring installation materials on hand such as glue adhesives nails cap metal and cove stick smith floors does not consider flooring materials and padding on hand at the end of the year to be inventory - because they were purchased and designated for installation for a specific job for the taxable_year smith floors reported gross_receipts of dollar_figure and cost_of_goods_sold of dollar_figure smith floors computed its cost_of_goods_sold as follows beginning_inventory dollar_figure purchases big_number cost of labor big_number other back charges dollar_figure contract labor big_number freight big_number payroll_taxes direct labor big_number small equipment supplies big_number worker’s compensation big_number total other big_number total big_number ending inventory big_number cost_of_goods_sold dollar_figure opinion sec_446 provides that if a taxpayer’s method_of_accounting does not clearly reflect income the taxpayer’s computation of income shall be made under such method as in the opinion of the secretary does clearly reflect income in connection with the foregoing sec_471 provides the general_rule that a taxpayer is required to take inventories on such basis as the secretary may prescribe in order to clearly determine the taxpayer’s income thus the commissioner is granted broad discretion to determine whether a taxpayer’s use of - - a method_of_accounting clearly reflects income and if not to direct the taxpayer to adopt an alternative method_of_accounting see sec_446 384_us_102 ndollar_figure 360_us_446 ndollar_figure sec_446 imposes a heavy burden on a taxpayer disputing the commissioner’s determination on accounting matters see 439_us_522 we review the commissioner’s exercise of authority under sec_446 for abuse_of_discretion see 102_tc_87 affd 71_f3d_209 6th cir the commissioner’s determination is entitled to more than the usual presumption of correctness see id and cases cited therein whether an abuse_of_discretion has occurred depends upon whether the commissioner’s determination is without sound basis in fact or law see 104_tc_367 to prevail a taxpayer must establish that the commissioner’s determination was clearly unlawful or plainly arbitrary id pincite sec_1_471-1 income_tax regs fed reg date provides that a taxpayer must use inventories in every case in which the production purchase or sale of merchandise is an income-producing factor sec_1 l c income_tax regs provides that a taxpayer using inventories generally must use the accrual_method of accounting --- - relying on the foregoing regulations respondent determined that the flooring materials that smith floors purchased and installed during were merchandise that such merchandise was an income-producing factor and that smith floors therefore must use the accrual_method of accounting to clearly reflect its income petitioners contend that smith floors is a service provider and that it purchases flooring materials solely as an accommodation to those contracting for its services therefore petitioners contend that smith floors’ use of the cash_method_of_accounting is proper whether smith floors must use the accrual_method of accounting instead of the cash_method depends on whether smith floors is in the business of selling merchandise within the meaning of sec_1_471-1 income_tax regs to customers in addition to providing flooring installation services or whether the flooring material provided by smith floors is a supply that is incidental to smith floors installation services the term merchandise is not defined in either the internal_revenue_code or the regulations see 114_tc_211 to resolve whether particular materials constitute merchandise we look to the context in which the materials are used see id the high cost of materials relative to labor costs is insufficient standing alone to transform the sale of a service to the sale of -- - merchandise and a service see 113_tc_376 we distinguish between materials held_for_sale and materials that are consumed by the taxpayer in performing a service see racmp enters inc v commissioner supra pincite in racmp enters inc v commissioner supra we were presented with the question whether the raw materials concrete mix sand and drain rock that a concrete contractor used in completing contracts for the construction of foundations driveways and walkways constituted merchandise within the meaning of sec_1_471-1 income_tax regs relying on osteopathic med oncology hematology p c v commissioner supra we concluded that construction materials generally will not be considered merchandise within the meaning of the regulation if the inherent nature of the taxpayer’s business is that of a service provider and the materials are an indispensable and inseparable part of the rendering of the services see racmp enters inc v commissioner supra pincite in racmp enters inc v commissioner supra we initially concluded that the taxpayer concrete contractor was a service provider see id in reaching that conclusion we noted that construction contracts involve primarily the furnishing of labor and contractual skills and in the context of that case the taxpayer did not hold concrete materials for sale but rather consumed the materials in performing a service see id we further concluded the ephemeral quality of liquid concrete precluded such material from being considered merchandise and the remaining materials used by the taxpayer including sand drain rock and hardware were incorporated into the particular project to such a degree that they lost their separate identity and likewise should not be considered merchandise within the meaning of the regulation id pincite consistent with our analysis in racmp enters inc v commissioner supra we hold that the flooring materials that smith floors purchases and installs in fulfilling its contracts do not constitute merchandise within the meaning of sec_1_471-1 income_tax regs like the concrete contractor in racmp enters inc v commissioner smith floors is inherently a service provider smith floors’ stock_in_trade is its expertise in installing flooring materials in a variety of unique applications and petitioner’s skill and craftsmanship in hand- cutting and incorporating specialized designs into flooring materials the companies contracting with smith floors are primarily interested in the firm’s labor and contractual skills smith floors purchases and takes delivery of the flooring materials required for a particular job to better manage the project and to provide additional services to the companies contracting for the installation of the flooring materials in particular smith floors takes delivery of flooring materials at its warehouse inspects the materials to ensure that they conform in both quality and quantity with the specifications for the particular job inspects the job site to verify that installation may proceed and delivers the flooring materials to the job site in advance of the installation date to allow the materials to acclimate to the environment smith floors charges its customers for those services as a percentage markup on the cost of the flooring materials smith floors frequently installs either proprietary or custom-designed flooring materials normally the companies contracting with smith floors negotiate the price of such flooring materials in advance directly with the manufacturer of the flooring materials smith floors is neither a manufacturer of merchandise nor a retail seller of flooring materials based on the foregoing we hold that smith floors does not produce purchase or sell merchandise within the meaning of sec_1_471-1 income_tax regs smith floors’ practice of purchasing the flooring materials for a particular job is incidental and secondary to smith floors’ provision of flooring installation services accordingly considering all of the facts and circumstances of the instant case we hold that respondent’s determination that smith floors is required to use the accrual_method of accounting was an abuse_of_discretion we recognize that the cash_method_of_accounting may result in mismatching for income_tax purposes when an expense is incurred in one taxable_period and the related_income is not realized until a later period see 98_tc_457 affd 58_f3d_413 9th cir nonetheless some mismatching of income and expense is tolerated under the law governing income_tax accounting if the taxpayer uses the cash_method_of_accounting consistently and makes no attempt to prepay expenses unreasonably or stockpile supplies at the end of the taxable_year see ansley-sheppard-- burgess co v commissioner supra pincite 71_tc_1083 affd 650_f2d_1046 9th cir in the instant case smith floors has consistently used the cash_method_of_accounting for tax purposes as permitted under sec_446 the cash_method_of_accounting for tax purposes is widely used throughout the contracting industry see racmp enters inc v commissioner supra pincite and cases cited therein furthermore there is no evidence that smith floors ever attempted to prepay expenses unreasonably or accumulate excess supplies at the end of its taxable_year see racmp enters inc v commissioner supra pincite ansley-sheppard- burgess co v commissioner supra pincite considering these factors we see no justification for respondent’s determination that smith floors must use the accrual_method of accounting to reflect the foregoing decision will be entered pursuant to rule because we have already concluded that smith floors was not required to use inventories smith floors is not obliged to satisfy the substantial-identity-of-results test in this case see ansley-sheppard-burgess co commissioner supra pincite