internal_revenue_service number release date index number ------------------------------ ------------------------------------- ------------------------------------ -------------------------------------------- --------------------- --------------------------------------- in re --------------------------------------------- ------------------ department of the treasury washington dc third party communication date of communication month dd yyyy person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b09 plr-140209-04 date date legend legend child grantor spouse college trust --------------------------- ------------------------------ ---------------------------------- ----------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ----------------------- ---------------- ------------- -------------------------------------- ------------------------------------------ ------------------------------------------ --------------------------- -------------------------- ------- state state partnership statute statute date date year dear ---------- this is in response to your letter dated date requesting rulings on the income gift and generation-skipping_transfer gst tax consequences of certain proposed modifications to a_trust the facts submitted and the representations made are as follows during his life grantor created nine trusts trust is one of the nine trusts and is the subject of this ruling_request trust was created on date for the benefit of grantor’s spouse plr-140209-04 spouse grantor’s son child and grantor’s issue currently child is the sole income_beneficiary of trust article third subparagraph a of trust provides that after date all of trust’s net_income is to be paid to child upon child’s death the net_income is to be paid to child’s issue per stirpes if any if none the net_income is to be paid to spouse if she is living if not the net_income is to be paid to grantor’s issue per stirpes upon the termination of trust the trust estate is to be distributed to child’s issue per stirpes if living if not to grantor’s issue per stirpes if living if not to the issue other than grantor of grantor’s parents per stirpes if living if not to the trustee of a named trust if in existence if not to college article third subparagraph c provides that after date the trustees have the discretion to distribute trust principal to the income_beneficiary of trust to provide for the beneficiary’s support maintenance and education article third subparagraph f provides that trust will terminate at the earlier of the following events the death of the last survivor of certain named persons and the death of the last survivor of spouse and all of grantor’s issue including child and his issue article seventh provides that trust is to be governed under the laws of state article eighth provides that the governing law of trust may be changed to another state in year the nine trusts entered into a partnership partnership with three other trusts to coordinate investment activities under the partnership_agreement partnership is required to distribute annually to the partner trusts an amount equal to the net accounting_income determined by applying the broadest definition of net_income under the laws of the states whose laws govern the administration of each of the trusts respectively currently the laws of five different states govern the nine different trusts due to the administrative complexity and high costs involved in determining the proper distribution amount under the respective state laws of each separate trust it was suggested that each of the partner trusts be amended to change governing local law to state the trustees of trust intend to change the governing law of trust to state effective as of date state amended its laws governing the administration of trusts by enacting legislation that adopts a new uniform principal and income act statute it also enacted statute which permits a trustee of a_trust that is subject_to state’s prudent investor rule to make adjustments between income and principal under specified circumstances statute plr-140209-04 statute provides in part that a trustee has a duty to invest and manage property held in a fiduciary capacity in accordance with the prudent investor standard defined therein statute also provides that where statute applies to a_trust and the terms of the trust describe the amount that may or must be distributed to a beneficiary by referring to the trust's income the prudent investor standard also authorizes the trustee to adjust between principal and income to the extent the trustee considers it advisable to enable the trustee to make appropriate present and future distributions if the trustee determines after applying the rules in statute that such an adjustment would be fair and reasonable to all of the beneficiaries so that current beneficiaries may be given the use of the trust property as is consistent with preservation of its value the trustee has represented that trust was irrevocable on date and there were no additions to trust after date trustee is requesting the following three rulings the proposed amendment of trust to change its governing law and the administration of trust under the new governing law will not result in trust or any beneficiary of trust being treated as having made a taxable_exchange for federal_income_tax purposes the proposed amendment of trust to change its governing law and the administration of trust under the new governing law will not be treated as a modification of trust within the meaning of sec_26_2601-1 of the generation-skipping_transfer_tax regulations that will cause trust to lose its exemption from the application of chapter of the internal_revenue_code and that after the proposed amendment distributions from trust and terminations with respect to trust will continue to be exempt from chapter pursuant to sec_26_2601-1 the proposed amendment of trust to change its governing law and the administration of trust under the new governing law will not result in any beneficiary of trust being treated as having made a taxable gift_for federal gift_tax purposes law and analysis ruling sec_61 of the code provides that gross_income includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized plr-140209-04 sec_1001 states that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained the supreme court of the united_states in 499_us_554 concluded that sec_1_1001-1 reasonably interprets sec_1001 and stated that an exchange of property gives rise to a realization event under sec_1001 if the properties exchanged are materially different in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent cottage savings u s pincite the court held that mortgage loans made to different obligors and secured_by different homes did embody distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans cottage savings u s pincite in the present case it is consistent with the supreme court's opinion in cottage savings to find that the interests of the beneficiaries in trust after the modification will not differ materially from their current interests under the proposed modification trust will be amended to change governing local law however trust possesses the authority to make this change see article eighth of trust therefore the proposed modification will not result in a material difference in_kind or extent of the legal entitlements enjoyed by the beneficiaries accordingly based upon the facts submitted and the representations made a change in governing local law will not cause trust or trust beneficiaries to be treated as having a taxable_exchange and no gain_or_loss is recognized for purposes of sec_1001 ruling sec_2 and sec_2501 imposes a tax on the transfer of property by gift by an individual sec_2511 provides that the tax imposed by ' applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2512 provides that if a gift is made in property the value thereof at the date of the gift shall be considered the amount_of_the_gift plr-140209-04 sec_2601 imposes a tax on every gst made after date a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2612 provides that the term taxable_termination means a termination by death lapse of time release of a power or otherwise of an interest_in_property_held_in_trust where the property passes to a skip_person with respect to the transferor of the property sec_2612 provides that the term taxable_distribution means any distribution from a_trust to a skip_person other than a taxable_termination or a direct_skip under sec_2612 a direct_skip is a transfer subject_to federal estate or gift_tax made by a transferor to a skip_person under a of the tax_reform_act_of_1986 act and sec_26_2601-1 the gst is generally applicable to gsts made after date however under b a of the act and sec_26_2601-1 the gst does not apply to a transfer under a_trust that was irrevocable on date but only to the extent that such transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added under sec_26_2601-1 any trust in existence on date will be considered irrevocable unless the settlor had a power that would have caused inclusion of the trust in his or her gross_estate under sec_2038 or sec_2042 if the settlor had died on date sec_26_2601-1 provides that in general this paragraph b 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 paragraph b or of this section hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status in general unless specifically provided otherwise the rules contained in this paragraph are applicable only for purposes of determining whether an exempt trust retains its exempt status for gst tax purposes thus unless specifically noted the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of gain for purposes of sec_1001 sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy paragraph b i a b or c of this section by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust sec_26_2601-1 provides that for purposes of this section a plr-140209-04 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 transfer or the creation of a new gst transfer to determine whether a modification of an irrevocable_trust will shift a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification if the effect of the modification cannot be immediately determined it is deemed to shift a beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification 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 in addition administration of a_trust in conformance with applicable local law that defines the term income as a unitrust_amount or permits a right to income to be satisfied by such an amount or that permits the trustee to adjust between principal and income to fulfill the trustee's duty_of impartiality between income and principal beneficiaries will not be considered to shift a beneficial_interest in the trust if applicable local law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust and meets the requirements of sec_1_643_b_-1 of this chapter sec_26_2601-1 example provides as follows in grantor who was domiciled in state x executed an irrevocable_trust for the benefit of grantor's issue naming a state x bank as trustee under the terms of the trust the trust is to terminate in all events no later than years after the death of the last to die of certain designated individuals living at the time the trust was executed the provisions of the trust do not specify that any particular state law is to govern the administration and construction of the trust in state x the common_law rule_against_perpetuities applies to trusts in a state y bank is named as sole trustee the effect of changing trustees is that the situs of the trust changes to state y and the laws of state y govern the administration and construction of the trust state y law contains no rule_against_perpetuities in this case however in view of the terms of the trust instrument the trust will terminate at the same time before and after the change in situs accordingly the change in situs does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the transfer furthermore the change in situs does not extend the time for vesting of any beneficial_interest in the trust beyond that provided for in the original trust therefore the trust will not be subject_to the provisions of chapter if in this example as a result of the change in situs state y law governed such that the time for vesting was extended beyond the period prescribed under the terms of the original trust instrument the trust would not retain exempt status sec_26_2601-1 example provides as follows in grantor a resident of state x established an irrevocable_trust for the benefit of grantor's child a and a's issue the trust provides that trust income is payable to a for life and upon a's plr-140209-04 death the remainder is to pass to a's issue per stirpes in state x amends its income and principal statute to define income as a unitrust_amount of percent of the fair_market_value of the trust assets valued annually for a_trust established prior to the statute provides that the new definition of income will apply only if all the beneficiaries who have an interest in the trust consent to the change within two years after the effective date of the statute the statute provides specific procedures to establish the consent of the beneficiaries a and a's issue consent to the change in the definition of income within the time period and in accordance with the procedures prescribed by the state statute the administration of the trust in accordance with the state statute defining income to be a percent unitrust_amount will not be considered to shift any beneficial_interest in the trust therefore the trust will not be subject_to the provisions of chapter further under these facts no trust_beneficiary will be treated as having made a gift_for federal gift_tax purposes and neither the trust nor any trust_beneficiary will be treated as having made a taxable_exchange for federal_income_tax purposes similarly the conclusions in this example would be the same if the beneficiaries' consent was not required or if the change in administration of the trust occurred because the situs of the trust was changed to state x from a state whose statute does not define income as a unitrust_amount or if the situs was changed to such a state from state x sec_26_2601-1 example provides as follows the facts are the same as in example except that in state x amends its income and principal statute to permit the trustee to make adjustments between income and principal when the trustee invests and manages the trust assets under the state's prudent investor standard the trust describes the amount that shall or must be distributed to a beneficiary by referring to the trust's income and the trustee after applying the state statutory rules regarding allocation of receipts between income and principal is unable to administer the trust impartially the provision permitting the trustees to make these adjustments is effective in for trusts created at any time the trustee invests and manages the trust assets under the state's prudent investor standard and pursuant to authorization in the state statute the trustee allocates receipts between the income and principal accounts in a manner to ensure the impartial administration of the trust the administration of the trust in accordance with the state statute will not be considered to shift any beneficial_interest in the trust therefore the trust will not be subject_to the provisions of chapter further under these facts no trust_beneficiary will be treated as having made a gift_for federal gift_tax purposes and neither the trust nor any trust_beneficiary will be treated as having made a taxable_exchange for federal_income_tax purposes similarly the conclusions in this example would be the same if the change in administration of the trust occurred because the situs of the trust was changed to state x from a state whose statute does not authorize the trustee to make adjustments between income and principal or if the situs was changed to such a state from state x in this case trust was irrevocable on date and there were no additions to trust after date pursuant to the terms of article eighth of trust trust will be amended to change governing law from state to state the law plr-140209-04 governing trusts in state permits a trustee of a_trust to make adjustments between income and principal to enable the trustee to make appropriate present and future distributions that are fair and reasonable to all of the beneficiaries of the trust this situation is similar to the situation set forth in example in sec_26_2601-1 which concludes that a change similar to the one that the trustees propose to make to the trust will not be considered to shift any beneficial_interest in a_trust and therefore will not be subject_to the provisions of chapter in addition under article third subparagraph f of the trust agreement trust will terminate at the earlier of the following events the death of the last survivor of certain named persons and the death of the last survivor of spouse and all of grantor’s issue including child and his issue because the termination_date is specifically provided for in the trust instrument the change in governing law from state to state will not change the termination_date of trust this situation is similar to the situation set forth in sec_26_2601-1 example in this case the date the trust will terminate before and after the change in governing law will be the same and therefore the change will not extend the time for vesting of any beneficial_interest in the trust finally as noted above the facts in this case are similar to those set forth in example in sec_26_2601-1 in addition to the conclusions relating to chapter example concludes that no trust_beneficiary will be treated as having made a gift_for federal gift_tax purposes and neither the trust nor any trust_beneficiary will be treated as having made a taxable_exchange for federal_income_tax purposes accordingly based upon the facts submitted and the representation made we conclude that the change in the trust’s governing law from state to state and the administration of trust under the new governing law will not be treated as a modification of trust within the meaning of sec_26_2601-1 that will cause trust to lose its exemption from the application of chapter and that the change will not cause distributions from trust and terminations with respect to trust to not be exempt from chapter pursuant to sec_26_2601-1 we also conclude that the change in governing law and the administration of trust under the new governing law will not result in any beneficiary of trust being treated as having made a taxable gift_for federal gift_tax purposes except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 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 plr-140209-04 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely james f hogan senior technician reviewer branch passthroughs special industries enclosures copy for ' purposes


internal_revenue_service department of the treasury number release date index number 280g washington dc person to contact telephone number refer reply to cc tege eb ec-plr-149737-02 date date legend corporation corporation corporation corporation corporation corporation corporation amount amount amount amount amount amount amount amount amount date date percentage percentage percentage dear this letter is in response to your request made through a duly authorize representative and dated date for rulings under sec_280g and sec_4999 of the internal_revenue_code specifically the letter concerns whether the split-off spin-off transaction and merger transaction both of which are described below cause a change in ownership or effective_control of or a change in a substantial portion of assets of corporation in the case of the split-off spin-off transaction or of corporation in the case of the merger transaction plr-149737-02 the split-off spin-off between corporation and corporation will occur first the merger will take place between corporation corporation and corporation corporation was incorporated on date in order to effectuate transaction the split off spin off transaction this transaction some of which has occurred consists generally of a spin-off of subsidiary_corporation sec_2 and from an affiliated_group of which corporation is the parent_corporation has capitalized corporation with certain assets and liabilities in exchange for corporation stock cash and the assumption of certain liabilities additionally corporation will exchange a separate class of voting common_stock of corporation in redemption of all outstanding shares of a special class of corporation stock that immediately prior to the spin off will be held solely by those subsidiaries of corporation that will be transferred to corporation one of the business purposes for this transaction is to facilitate a subsequent tax-free acquisition by corporation in the merger described below with corporation which was incorporated on date a supplemental request for rulings pursuant to sec_355 and sec_368 was filed with another office of the service concerning this merger transaction also as part of this split off spin off transaction corporation expects to distribute corporation common_stock to corporation in exchange for debt security of corporation this common_stock of corporation will be converted in the merger described below into shares of corporation pursuant to the merger agreement corporation will receive shares of nonvoting corporation stock to the extent that the aggregate voting power of corporation stock held by corporation and its affiliates immediately after the merger would exceed percentage the merger transaction this transaction with certain intermediary steps will result in the merger of corporation sec_2 and to form corporation after the merger corporation sec_2 and will each be a wholly owned subsidiary of corporation at the time of the transactions corporation will have outstanding shares of common_stock equal to amount as well as outstanding options for a further amount shares corporation will have outstanding shares of common_stock equal to amount as well as outstanding options for a further amount shares of common_stock once the merger is completed corporation shareholders will hold approximately amount shares of common_stock in corporation with a further amount options a greater than percent interest in corporation corporation shareholders will hold approximately amount shares in corporation with a further amount options a less than percent interest in corporation after the completion of the merger the board_of directors of corporation will consist of plr-149737-02 amount members corporation and corporation will each designate an equal number of directors and the remaining directors will be designated by the two companies jointly sec_280g of the code provides that no deduction will be allowed for any excess_parachute_payment sec_280g defines excess_parachute_payment as an amount equal to the excess of any parachute_payment over the portion of the base_amount allocated to such payment sec_280g of the code defines parachute_payment as any payment in the nature of compensation to or for the benefit of a disqualified_individual if i such payment is contingent on a change in the ownership or effective_control of the corporation or in the ownership of a substantial portion of the assets of the corporation and ii the aggregate present_value of the payments in the nature of compensation to or for the benefit of such individual which are contingent on such change equals or exceeds an amount equal to three times the base_amount sec_280g of the code provides that all members of the same affiliated_group as defined in sec_1504 determined without regard to sec_1504 should be treated as one corporation for purposes of sec_280g sec_4999 of the code imposes on any person who receives an excess_parachute_payment a tax equal to percent of the amount of the payment sec_1_280g-1 of the proposed income_tax regulations q a sec_27 sec_28 and sec_29 published in the federal_register on date fed reg big_number and again on date fed reg big_number which may be relied upon for changes of ownership or control occurring prior to date provides guidance concerning when a corporation will be considered to have undergone a change in ownership or effective_control or a change in the ownership of a substantial portion of its assets hereinafter a reference to these q a’s will be to both the q a’s published in and to those in q a a provides that a change in the ownership or control of a corporation occurs on the date that any one person or more than one person acting as a group acquires ownership of stock of the corporation that together with stock held by such person or group possesses more than percent of the total fair_market_value or total voting power of the stock of such corporation q a b provides that persons will not be considered to be acting as a group merely because they happen to purchase or own stock of the same corporation at the same time or as a result of the same public offering however persons will be considered to be acting as a group if they are owners of an entity that enters into a merger consolidation purchase or acquisition of stock or similar_business transaction with the corporation q a c provides that sec_318 shall apply in determining stock ownership example of q a deals with a corporate merger there corporation p merged into corporation o and the shareholders of p received o stock in exchange for their p plr-149737-02 stock the example concludes that because p shareholders received a greater than percent interest in o o experienced a change in ownership by implication the example concludes that p did not experience such a change q a a provides in part that a change_of effective_control of a corporation is presumed to occur on the date that either any one person or more than one person acting as a group acquires or has acquired during the 12-month_period ending on the date of the most recent acquisition by such person or persons ownership of stock of the corporation possessing percent or more of the total voting power of the stock of such corporation or a majority of the members of the corporation's board_of directors is replaced during any 12-month_period by directors whose appointment or election is not endorsed by a majority of the members of the corporation's board_of directors the presumption of q a a and may be rebutted by establishing that the acquisition or acquisitions of the corporation's stock or the replacement of the majority of the members of the corporation's board_of directors does not transfer the power to control directly or indirectly the management and policies of the corporation from any one person or more than one person acting as a group to another person or group q a c contains the same language as q a b concerning when persons will be considered to be acting as a group q a d contains the same language as q a c concerning the application of sec_318 q a provides that a change in the ownership of a substantial portion of a corporation's assets occurs on the date that any one person or more than one person acting as a group acquires or has acquired during the 12-month_period ending on the date of the most recent acquisition by such person or persons assets from the corporation that have a total fair_market_value equal to or more than one third of the total fair_market_value of all of the assets of the corporation immediately prior to such acquisition or acquisitions for this purpose a transfer of assets by a corporation is not treated as a change in the ownership of the assets if the corporation transfers the assets to an entity in which immediately_after_the_transfer the shareholders of the corporation own a greater than percent interest by value or voting power see q a b and example of q a d q a c contains the same language as q a c concerning the application of sec_318 viewing the split-off spin-off and the merger as two separate transactions after the split-off spin-off corporation will have transferred to corporation certain assets these assets are assumed to have a value greater than one-third of the value of corporation 1's assets including subsidiary corporations that are part of its affiliated_group corporation will therefore have surrendered ownership of a substantial portion of its assets as described in q a a however corporation shareholders will own over of the stock of the entity to which ownership of those assets has passed corporation thus according to q a b and and example of q a d this transfer will not be considered a change in ownership of a substantial portion of the assets of corporation for purposes of sec_280g q a’ sec_27 and sec_28 will not apply to this transaction because corporation will not have departed with any of its stock plr-149737-02 and because there will be not be a change in the composition of corporation 1's board_of directors as a result of the transaction q a’ sec_27 and sec_28 do not apply to the corporation stock transferred to corporation because that stock comprises less than percent and less than percent of corporation 1‘s outstanding_stock by voting power and value in the case of q a and by voting power in the case of q a after the merger corporation will have surrendered its stock in exchange for corporation stock according to q a this would result in a change_of_ownership of corporation however the former shareholders of corporation will own after the merger greater than of the stock of corporation according to example in q a this would imply that corporation does not undergo a change_of control corporation however will experience such a change after the merger the former shareholders of corporation will hold approximately percentage of corporation the former shareholders of corporation will hold approximately percentage of the shares of corporation an amount less than but greater than for purposes of determining the percentage of corporation that after the exchange will be held by corporation sec_2 and the corporation stock owned by shareholders of corporation and the corporation stock held by shareholders of corporation prior to the transactions is ignored the merger will result constructively in an acquisition of greater than of corporation 2's stock by more than one person acting as a group as described by q a under this q a this creates a presumption that there is an effective change_of control however this presumption may be rebutted by factors which show that the merger will not cause a transfer of the power to control the management of corporation directly or indirectly to another person or group after the merger former shareholders of corporation will hold greater than of the shares of corporation the board_of directors for corporation will be chosen jointly by corporation whose shareholders are also the shareholders of company and corporation therefore the merger will not cause a transfer of the power to control the management of corporation directly or indirectly to another person or group and corporation will not undergo a change in effective_control pursuant to the merger between corporation and corporation none of the assets of corporation will have changed hands thus there will be no change in the ownership of a substantial portion of the assets as described in q a based on the foregoing facts and representations we rule as follows the split-off spin-off will not cause a change in ownership a change in effective_control or a change in the ownership of a substantial portion of the assets of corporation the provisions of sec_280g and sec_4999 will not apply to any payments plr-149737-02 made contingent upon the split-off spin-off from corporation or corporation to or for the benefit of the employees former employees or service providers of corporation corporation or their respective subsidiaries the merger will not cause a change in ownership a change in effective_control or a change in the ownership of a substantial portion of the assets of corporation corporation however will undergo a change in control the provisions of sec_280g and sec_4999 will not apply to any payments made contingent upon the merger by corporation or corporation to or for the benefit of the employees former employees or service providers of corporation corporation or their respective subsidiaries except as specifically ruled on above no opinion is expressed or implied concerning the tax consequences of any item of any transaction or item discussed above this ruling is provided only to the taxpayers who requested it sec_6110 provides that it may not be cited as precedent the taxpayer should attach a copy of this ruling to any income_tax return to which it is relevant sincerely robert b misner senior technician reviewer executive compensation branch office of the division counsel associate chief_counsel tax exempt and government entities enclosure copy for purposes cc


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom fi p 2-plr-117689-99 date date legend corporation state a date date date x dear this is in response to a letter dated date requesting a ruling on behalf of corporation corporation requests a ruling that its cold storage warehouses and central refrigeration systems described below constitute real_property for purposes of sec_856 of the internal_revenue_code facts corporation is a state a corporation that was formed on date to operate various cold storage warehouses in date corporation sold the portion of its business operations that generated income from services typically provided in the cold storage industry following the sale corporation’s only remaining directly and indirectly held assets are cold storage warehouses and central refrigeration systems corporation intends to elect to be taxed as a real_estate_investment_trust reit under subchapter_m of chapter of the code for the tax_year beginning on date corporation directly and indirectly owns and leases over x refrigerated warehouses that are constructed in substantially the same manner as other refrigerated warehouses in the industry the interior clearance for each warehouse is approximately feet and each warehouse generally encompasses big_number to big_number square feet the warehouses are not designed nor intended to be dismantled or relocated plr-117689-99 the foundations of the warehouses are reinforced concrete slabs approximately six inches thick installed over a gravel base with galvanized steel framing the foundations are designed to maintain cold temperatures within the warehouse to prevent the ground beneath the floors from freezing and cracking the warehouse floors an underground heating system is generally installed comprised of piping originating from the roof that keeps the floor at approximately degrees fahrenheit the exterior freezer walls are poured concrete tilt-up insulated with six inches of pink fiberglass insulation over wood paneling the dock walls are corrugated steel construction the warehouse roofs generally consist of a heavy-duty tar product covering inches of pink fiberglass insulation the construction of the warehouses is designed to maintain cold temperatures the warehouses include tilt-up concrete construction with either wood or steel trussed roofs insulated interior walls and ceilings and built-up composition roofing the warehouses generally include a large central room maintained at zero degrees fahrenheit one or more smaller rooms for long-term storage maintained at a temperature well below zero degrees fahrenheit docking stations a small office a small machine shop and an engine room the engine room is either within the main warehouse or attached to the warehouse the interiors of the freezer sections are large open areas used to store food each section contains steel or wood shelving used for stacking customer products several mechanically operated doors with fiberglass exteriors over insulation connect the cold storage areas with the docking areas floors of the freezer sections are treated concrete with vapor barriers approximately percent of the space in the warehouses is temperature- controlled freezer space maintained at zero degrees fahrenheit and below the remaining space is cooler and or dry storage space docking space for loading and unloading represents only a minimal portion of each location human activity in the refrigerated and freezer sections of the warehouse is restricted to unloading deliveries storing the packaged goods maintaining inventory and loading shipments occasionally minor repairs or maintenance are performed in the cold sections each of corporation’s central refrigeration systems systems was installed as part of the original construction of the warehouse none of the systems have ever been moved in their entirety to another location these systems are either ammonia or freon systems and include compressors boosters condensers pumps evaporators vessels motors storage tanks and insulated piping that connect the components of the systems although every component can be identified as a separate_unit each component works in conjunction with the other components to form a complete closed refrigeration system the components function as a unit so that no component by itself is useful nor is the system functional without all the components plr-117689-99 the compressors and boosters lower the temperature of the ammonia or freon the cooled refrigerant is pumped through insulated pipes to the evaporators within the freezer or refrigerated areas evaporators attached to the ceilings of the refrigeration and freezer storage areas within the warehouses cool the storage area by forcing air provided from the condensers past the refrigerant into the storage area the condensers are set on structural steel stands on the warehouse roof each stand is supported by beams that run from the roof through the facility to the concrete floor of the warehouse the condensers generally weigh between big_number to big_number pounds and require a crane to be installed or dismantled as a result a condenser is only dismantled when it is no longer functional the compressors and evaporators also weigh several thousand pounds and must be transported by forklifts for installation or disassembly the compressors are anchored to concrete stands by securing each foot of the compressor over an anchor stud in poured concrete the evaporators are bolted to the roof of the warehouse as a result the compressors and evaporators are difficult and expensive to dismantle and thus are infrequently dismantled or replaced the refrigerant pumps are connected to the storage vessels and pump the refrigerant either ammonia or freon throughout the system both the vessels and pumps are anchored in concrete the refrigerant flows from the storage vessel through the compressor to the condenser into the evaporator and back to the storage vessels although the pumps storage vessels and boosters are somewhat more portable than the other components they are rarely ever moved pursuant to an audit by the service for the tax years ended corporation treats the cold storage warehouses as real_property and currently treats the central refrigeration systems as personal_property depreciable over seven years corporation represents that it will file a form_3115 and treat the central refrigeration systems as nonresidential_real_property for depreciation purposes law and analysis sec_856 provides that at least percent of a reit’s gross_income must be derived from among other sources rents_from_real_property sec_856 provides that at least percent of a reit’s gross_income must be derived from among other sources rents_from_real_property sec_856 provides that at the close of each quarter of its tax_year at least percent of the value of a reit’s total assets must be represented by real_estate_assets cash and cash items including receivables and government securities sec_856 defines the term real_estate_assets in part to mean real_property including interests_in_real_property and interests in mortgages on real_property and shares or transferable certificates of beneficial_interest in other reits section plr-117689-99 c c provides that the terms interests_in_real_property includes fee ownership and co-ownership of land or improvements thereon leaseholds of land or improvements thereon options to acquire land or improvements thereon and options to acquire leaseholds of land or improvements thereon but does not include mineral oil or gas royalty interests sec_1_856-3 of the income_tax regulations provides in part that the term real_estate_assets means real_property sec_1_856-3 provides that real_property includes land or improvements thereon such as buildings or other inherently permanent structures thereon including items which are structural_components of such buildings or structures local law definitions will not be controlling for purposes of determining the meaning of real_property for purposes of sec_856 and the regulations thereunder under this regulation real_property includes for example the wiring in a building plumbing systems central heating or central air-conditioning machinery pipes or ducts elevators or escalators installed in a building or other items which are structural_components of a building or other permanent structure the term does not include assets accessory to the operation of a business such as machinery printing press transportation equipment which is not a structural_component of the building office equipment refrigerators individual air-conditioning units grocery counters furnishings of a motel hotel or office building etc even though such items may be termed fixtures under local law sec_856 provides that rents_from_real_property include subject_to exclusions provided in sec_856 a rents from interests_in_real_property b charges for services customarily furnished or rendered in connection with the rental of real_property whether or not such charges are separately_stated and c rent attributable to personal_property leased under or in connection with a lease of real_property but only if the rent attributable to such personal_property for the taxable_year does not exceed percent of the total rent for the taxable_year attributable to both the real and personal_property leased under or in connection with such lease revrul_71_220 1971_1_cb_210 considers whether mobile home units installed in a planned community are real_property for purposes of sec_856 the units were delivered to a site where they were set on foundations consisting of pre- engineered blocks the wheels and axles were removed from the units and the units were affixed to the ground by six or more steel straps a carport or screened porch was attached to each unit and the unit was connected to utilities the revenue_ruling holds that the units are real_property within the meaning of sec_856 revrul_73_425 1973_2_cb_222 considers whether a mortgage secured_by a shopping center and its total energy system is an obligation secured_by real_property a total energy system is a self-contained facility for the production of all the electricity steam or hot water and refrigeration needs of associated commercial or industrial buildings building complexes shopping centers apartment complexes and community developments the system may be permanently installed in the building attached to the building or it may be a separate structure nearby the principal components consist of electric generators powered by turbines or reciprocating engines waste heat plr-117689-99 boilers heat exchangers gas-fired boilers and cooling units in addition each facility includes fuel storage tanks control and sensor equipment electrical substations and air handling equipment for heat hot water and ventilation it also includes ducts pipes conduits wiring and other associated parts machinery and equipment the revenue_ruling holds in part that a mortgage secured_by the building and the system is a real_estate asset regardless of whether the system is housed in the building it serves or is housed in a separate structure apart from the building it serves this is because the interest in a structural_component is included with an interest held in a building or inherently_permanent_structure to which the structural_component is functionally related revrul_75_424 1975_2_cb_270 concerns whether various components of a microwave transmission system are real_estate_assets for purposes of sec_856 the system consists of transmitting and receiving towers built upon pilings or foundations transmitting and receiving antennae affixed to the towers a building equipment within the building and waveguides the waveguides are transmission lines from the receivers or transmitters to the antennae and are metal pipes permanently bolted or welded to the tower and never removed or replaced unless blown off by weather the transmitting multiplex and receiving equipment is housed in the building prewired modular racks are installed in the building to support the equipment that is installed upon them the racks are completely wired in the factory and then bolted to the floor and ceiling they are self-supporting and do not depend upon the exterior walls for support the equipment provides for transmission of audio or video signals through the waveguides to the antennae also installed in the building is a permanent heating and air conditioning system the transmission site is surrounded by chain link fencing the revenue_ruling holds that the building the heating and air conditioning system the transmitting and receiving towers and the fence are real_estate_assets the ruling holds further that the antennae waveguides transmitting receiving and multiplex equipment and the prewired modular racks are assets accessory to the operation of a business and therefore not real_estate_assets corporation’s cold storage warehouses are constructed to remain permanently in place cannot be readily moved are unlikely to be moved and are not intended to be moved therefore they are inherently permanent structures see revrul_71_220 inherently permanent structures are real_property and the term real_estate_assets means real_property sec_1_856-3 the systems are designed and intended to be permanent although comprised of components that individually can be removed the components are rarely if ever removed because they are part of a system the systems are permanently affixed and functionally related to their associated warehouses moving all or part of the systems would be extremely difficult and would likely affect the function of the warehouse therefore the systems are structural_components of the warehouses which are inherently permanent structures see revrul_73_425 under sec_1_856-3 real_property includes items that are structural_components of a permanent structure accordingly based on the information submitted and representations made we conclude that corporation’s cold storage warehouses and central refrigeration systems as described above constitute real_property for purposes of sec_856 and plr-117689-99 c a in addition because the warehouses and systems are real_property they constitute real_estate_assets for purposes of sec_856 and sec_856 no opinion is expressed concerning whether corporation otherwise qualifies as a reit under subchapter_m part ii of chapter of the code no opinion is expressed or implied as to the federal tax consequences of this transaction under any provision not specifically addressed herein no opinion is expressed whether cold storage warehouses and central refrigeration systems constitute real_property under any section other than sec_856 for example no opinion is expressed whether cold storage warehouses and central refrigeration systems constitute sec_1245 or sec_1250 property for purposes of sec_167 and sec_168 additionally no opinion is expressed concerning the treatment of any shelving in corporation’s cold storage warehouses for purposes of sec_856 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 the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely assistant chief_counsel financial institutions products by william e coppersmith chief branch enclosures copy of this letter 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 int b02 plr-138495-09 date february ty ------------------------------------------------------ ty ------------------------------------------------------ legend taxpayer subsidiary fc company e country b state c date year year year year year year ---------------------------- ---------------- --------------------- ------------------------------ ---------------------------- --------------------------- ------------- ------------------- ------- ------- ------- ------- ------- ------- accounting firm p accounting firm q -------------------------------------- ----------------------------------------- cfo x --------------------------------------------------- dear ------------ plr-138495-09 this is in response to a letter dated date 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 and sec_1_1295-3 with respect to taxpayer’s investment in fc the ruling contained in this letter is based upon information and representations submitted on behalf of taxpayer by its authorized representatives 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 u s subchapter_c_corporation organized under the laws of state c fc a country b company was formed in year by taxpayer and an unrelated foreign company company e from year to year taxpayer owned more than percent of the voting_stock of fc and company e owned the remaining percentage during this period fc was considered a controlled_foreign_corporation cfc for taxpayer within the meaning of sec_957 in year company e acquired additional shares of fc’s voting_stock and as a result fc ceased to be considered a cfc because not more than percent of its stock was owned within the meaning of sec_958 by u s shareholders within the meaning of sec_951 fc owns intellectual_property which is still in the developmental stage fc does not and has not since its formation held any other assets other than cash and the intellectual_property fc has not had any revenues since its formation and it does not have employees of its own the intellectual_property is being developed through fc’s wholly-owned u s subsidiary subsidiary subsidiary is strictly a research_and_development contractor for fc once the intellectual_property is fully developed and ready to be exploited fc plans to license its intellectual_property to both a related_party and to unrelated third parties fc ceased to be a cfc within the meaning of sec_957 and met the asset test for pfic classification under sec_1297 in year and thus qualified as a pfic for the year taxable_year taxpayer engaged accounting firm p a certified public accounting firm that employs experienced tax professionals to prepare its corporate_income_tax returns and advise taxpayer with regard to all u s federal_income_tax matters regarding its operations and investments including its ownership in fc taxpayer relied on accounting firm p to provide advice with respect to filing and reporting requirements in general as well as elections and or statements that would be necessary to elect a specific tax treatment plr-138495-09 accounting firm p did not identify fc as a pfic and therefore did not inform taxpayer of fc’s pfic status and the option of making a timely qualified qef election under sec_1295 had accounting firm p identified the potential pfic status of fc taxpayer would have relied on accounting firm p to advise it as to the implications of fc’s status as a pfic and recommended course of action related thereto a qef election for the year taxable_year for taxpayer would have been due on date of year taxpayer did not make such an election for the year taxable_year in year the legal advisor of a potential new investor for fc raised the possibility that based on due diligence regarding fc fc could be a pfic based on the potential pfic issue raised by the potential new investor’s legal adviser taxpayer retained accounting firm q to evaluate the pfic status of fc in year upon review of the financial data of fc and subsidiary accounting firm q determined that fc could be a pfic taxpayer has submitted an affidavit under penalties of perjury describing the events that led to the failure to make the qef elections by the election due dates including the roles of accounting firm p and accounting firm q taxpayer represents that it provided information regarding the ownership and financial data of fc to accounting firm p and accounting 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 in addition taxpayer submitted an affidavit from cfo x corroborating these representations made by taxpayer further taxpayer submitted an affidavit from accounting firm p corroborating the representations made by taxpayer with respect to the discovery of fc’s pfic status 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 and effective for all subsequent years 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 plr-138495-09 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 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 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 plr-138495-09 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 representative sincerely jeffery g mitchell special counsel international


department of the treasury internal_revenue_service washington d c tar exempt and government entities division aug uniform issue code tep ra legend taxpayer a insurance_company m bank n ira x account y amount s date date dear this is in response to your letter dated march as supplemented by letters dated date and date in which you request a waiver of the gay rollover requirement contained in sec_408 of the internal_revenue_code ‘code the following facts and representations have been submitted under penatty of perjury in support of the ruling_request page taxpayer a age represents that she received a distribution from ira x taxpayer a asserts that her failure to accomplish a rollover within the 60-day period prescribed by sec_408 of the code was due to the failure of bank n employees to follow her instructions on date taxpayer a received a distribution of amount dollar_figure from ira x which was maintained by insurance_company m taxpayer a also maintained a non-ira annuity with insurance_company m from which she received a distribution taxpayer a had been dissatisfied with the customer service she received from insurance_company m whose representatives were located on the premises of bank n following the advice of a financial advisor at bank n taxpayer a decided to surrender the annuities held by company m and reinvest them at bank n taxpayer a further represents that she contacted the company m agent but was met with delays including preparation of incorrect forms and failure to send in the paperwork as promised after several weeks the distributions were finally made on date taxpayer went to bank n to complete the rollover of amount s taxpayer a states that the financial advisors at bank n had initiated the original discussion of her financial investments and she depended upon them to complete the ira rollover portion of the transaction as originally discussed instead account y a non-ira cd was established and both amount s and the funds distributed from the non-ira annuity were deposited in account y less the amount of taxes withheld by company m taxpayer a represents that amount s remains in account y and has not been used for any other purpose based on the above facts and representations you request that the internal_revenue_service waive the 60-day rollover requirement contained in sec_408 of the cade with respect to the distribution of amount s from ira x sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distribute as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the account is maintained if i i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which he receives the payment or distribution or the entire amount reesived including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the page payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion if the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 a i received by an individual from an ira if at any time during the one-year period ending on the day of such receipt such individual received any other amount described in sec_408 a i from an ira which was not includibie in gross_income because of the apptication of sec_408 sec_408 of the code provides a similar 60-day rollover pericd for partial rollovers sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 r b date provides that in determining whether to grant a waiver of the 60-day roilover requirement pursuant to sec_408 of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information and documentation presented by taxpayer a is consistent with her assertion that her failure to accomplish a timely rollover was caused by the failure of bank n to follow her original instructions to compiete a rollover of amount therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount s from ira x taxpayer a is granted a period of days from the issuance of this ruling etter to contribute amount dollar_figure sec_408 of the code except the 60-day requirement are met with respect to such contribution amount s will be considered a rollover_contribution within the meaning of sec_408 of the code into an individual rollover ira provided all other requirements of ' no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto page this ruling is directed solely to the taxpayers who requested it sec_6110 of the code provides that it may not be used or cited by others as precedent if you wish to inquire about this ruling please contact no sat c yo se t ep ra t4 id sincerely yours dmz fy the donzefh-ittlejohn manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b02 - plr-103874-02 date date x a b c d1 year e f year dear this responds to a letter dated date and subsequent correspondence written on behalf of x by x’s authorized representative requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x’s first taxable_year began on d1 of year a b and c x’s shareholders represent that they intended for x to be treated as an s_corporation for federal tax purposes as of year a who is also x’s president instructed x’s attorney e to prepare and file a form_2553 election by a small_business_corporation for x for year however a form_2553 was not filed for x for year x filed a form 1120-a u s_corporation short-form income_tax return for its year taxable_year x and its shareholders were unaware that relief for x’s late s_corporation_election may be available until discussing the issue with f x’s new certified public plr-103874-02 accountant in year x and its shareholders agree to make any adjustments that may be required to treat x as an s_corporation from its taxable_year beginning on d1 or year sec_1362 provides that if a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation for x's first taxable_year accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x’s year taxable_year a copy of this letter should be attached to the form_2553 this ruling is conditioned on x a b and c filing within days following the date of this letter amended returns to report consistent with x being an s_corporation and a b and c paying any_tax due with interest for all taxable years from x’s year taxable_year a copy of this letter should be attached to each of the amended returns except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x's authorized representative sincerely yours matthew lay senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter 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 psi plr-157325-04 date date legend x ----------------------- ------------------------- state --------- ------------------------------------------------------------------------------------------------------ a ------------------------------------------------------------------------------------------------------ ------------------- d1 dear --------------- this letter responds to your letter dated date and subsequent correspondence written on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts according to the information submitted x was incorporated under state law on sec_1362 provides that a small_business_corporation may elect to be an plr-157325-04 d1 x’s sole shareholder a intended for x to be an s_corporation beginning d1 however x’s form_2553 election by a small_business_corporation was not filed timely law and analysis s_corporation sec_1362 provides when an s election will be effective generally if an s election is made within the first two and one-half months of a corporation’s taxable_year then that corporation will be treated as an s_corporation for the year in which the election is made section sec_1362 provides that if an s election is made after the first two and one-half months of a corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year following the year in which the s election is made taxable_year after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election the secretary may treat the election as timely made for the taxable_year and sec_1362 shall not apply conclusion based on the facts submitted and representations made we conclude that x has established reasonable_cause for its failing to make a timely s_corporation_election and that x is eligible for relief under sec_1362 accordingly if x makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 effective d1 within days following the date of this letter the election will be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether x is otherwise eligible to be an s_corporation for federal tax purposes except as expressly provided herein we express or imply no opinion concerning sec_1362 provides that if an election under sec_1362 is made for any this ruling is directed only to the taxpayer who requested it sec_6110 plr-157325-04 provides that it may not be used or cited as precedent enclosures copy of this letter copy for sec_6110 purposes cc s sincerely yours mary beth collins senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries


index vil no tam-107546-99 cc intl br2 internal_revenue_service aug national_office technical_advice_memorandum taxpayer's name taxpayer's address taxpayer's identification no years involved date of conference legend taxpayer fc1 year date date date dollar_figurex issue whether a payment by taxpayer to a swiss entity pursuant to a non-compete agreement is subject_to the percent tax on fixed_or_determinable_annual_or_periodical_gains_profits_and_income under sec_881 of the internal_revenue_code and therefore subject_to_withholding under sec_1442 facts taxpayer is a domestic_corporation that manufactures product in the united_states taxpayer is currently owned percent each by two united_states citizens prior to year taxpayer was a c_corporation owned one third each by the two current shareholders and fc1 a swiss entity tam-107546-99 on date pursuant to a non-compete agreement agreement between taxpayer and fc1 executed on date taxpayer paid fc1 dollar_figurex the payment was in consideration for fc1's covenant_not_to_compete with taxpayer’s business within north america for a period ending on date during year fc1 did not have a permanent_establishment within the united_states prior to year other than its investment in taxpayer fc1 did not have an investment in any united_states operations taxpayer contends that its payment to fc1 is industrial_and_commercial_profits exempt from u s tax under article lll of the income_tax treaty between switzerland and the united_states signed on date convention taxpayer contends that the payment is in lieu of the industrial_and_commercial_profits that fc1 otherwise could have earned by engaging in commercial activity in the united_states citing 1_tc_1180 340_f2d_97 6th cir and ltr date in addition taxpayer argues that because fc1 received a payment from a business competitor in return for fc1's agreement not to move into the geographic area of and compete in taxpayer's business the payment is a commercial settlement arising from the business of fc1 and therefore must be industrial_or_commercial_profits to fc1 therefore under the convention there would be no income subject_to united_states tax because fc1 does not have a permanent_establishment within the united_states in the alternative taxpayer argues that its payment to fc1 is a royalty under article viii of the convention taxpayer points to the language in article viii of the convention that refers to other like property and rights and argues that because a payment for a non-compete agreement is not specifically excluded from the treaty definition of a royalty it should be included under the above language article viii of the convention reserves taxation of royalty payments to a swiss entity that does not have a permanent_establishment in the united_states to switzerland therefore under the convention there would be no income subject_to united_states tax because fc1 does not have a permanent_establishment within the united_states law and analysis sec_881 imposes for each taxable_year a tax except as provided in subsection c of percent of the amount received from sources within the united_states by a foreign_corporation as interest dividends rents salaries wages premiums annuities compensations remunerations emoluments and other fixed_or_determinable_annual_or_periodical_gains_profits_and_income tam-107546-99 sec_1442 provides that in the case of foreign_corporations subject_to taxation under this subtitle there shall be deducted and withheld at the source in the same manner and on the same items of income as provided in sec_1441 a tax equal to percent thereof sec_1441 provides that except as otherwise provided in sec_1441 all persons in whatever capacity acting having control or payment of any of the items of income specified in sec_1441 to the extent that any of such items constitute gross_income from sources within the united_states of nonresident_aliens shall deduct and withhoid from such items a tax equal to the items of income described in sec_1441 include wages compensation and other fixed or determinable annual or periodical income sec_1_1441-2 of the income_tax regulations provides in part income is fixed when it is to be paid in amounts definitively predetermined income is determinable whenever there is a basis for calculation by which the amount to be paid may be ascertained sec_1461 provides in part that every person required to deduct and withhold tax under sec_1442 is liable for such tax sec_894 states the provisions of this title shall be applied to any taxpayer with due regard to any treaty obligation of the united_states which applies to such taxpayer consequenily the determination of the applicability of united_states income_tax and withholding obligations depends upon the application of the provisions of the convention the key question is whether the income from the agreement is characterized as industrial_or_commercial_profits under article iii as royalties under article viii or as neither and thus taxed under sec_881 if the income from the agreement is characterized as industrial_or_commercial_profits governed by article ill or as royalties governed by article viii there would be no income subject_to united_states tax because fc1 does not have a permanent_establishment within the united_states income is neither industrial_or_commercial_profits nor royalties under the convention then it is taxable under sec_881 and subject_to_withholding under sec_1442 if the income from the non-compete agreement is not industrial_or_commercial_profits under article ill of the income_tax treaty between switzerland and the united_states article lil a of the treaty entitled permanent establishments provides l d tam-107546-99 a swiss_enterprise shall not be subject_to taxation by the united_states in respect of its industrial_and_commercial_profits unless it is engaged ina trade_or_business in the united_states through a permanent_establishment situated therein on the entire income of such enterprise from sources within the united_states if it is so engaged the united_states may impose its tax article i h of the treaty entitled treaty terms defined provides as used in this treaty the term industrial_or_commercial_profits includes manufacturing mercantile mining financial and insurance profits but does not include income in the form of dividends interest rents or royalties or remuneration for personal services provided however that such excepted items of income shall subject_to the provisions of this treaty be taxed separately or together with industrial_or_commercial_profits in accordance with the laws of the contracting states the language of the convention does not explicitly address income derived from non-compete agreements article ii h provides a noninclusive list of types of profits that are industrial_and_commercial_profits because they are derived from the active_conduct of a business by contrast the essence of a non-compete agreement is an agreement to refrain from engaging in business it follows that consideration for an agreement not to engage in an active business cannot be characterized as business profits this conclusion is supported by 1_tc_1180 in korfund the tax_court examined the source_of_income paid to a nonresident_alien_individual and a nonresident foreign_corporation pursuant to a noncompetition agreement outside the treaty context it focused in particular on the source issue because there would have been no basis under domestic law to tax the income if it was foreign source however in order to determine the source the court had to determine the character of the income the tax_court held that the source_of_income was in the united_states and in the course of its opinion characterized the income from noncompetition agreements as income from interests in property in this country and did not characterize the income as from the performance of business activity emphasis added by reasoning that the nonresident_aliens might have received amounts here for services or information but were willing to forego that right and possibility for a limited period for consideration id the court in its analysis concludes that income received was not for services the court reasoned that t c the nonresident foreign_corporation had the right to compete with petitioner in the united_states and canada and for that purpose to form a 'g2- tam-107546-99 competitive company or to assist others in forming one likewise the nonresident_alien_individual had the right to serve other corporations or individuals in the united_states engaged in a business similar to petitioner's as a consultant and to furnish them information of value to their business they were willing to and did give up rights in this country for a limited time for a consideration payable in the united_states the circuit_court in 98_f2d_753 2d cir calls the exclusive right to publish an interest in property in the united_states so here in our opinion the rights of fhe nonresident_aliens were interests in property in this country they might have received amounts here for services or information but were willing to forego that right and possibility for a limited period for consideration what they received was in lieu of what they might have received the situs of the right was in the united_states not elsewhere and the income that flowed from the privileges was necessarily earned and produced here these rights were property of value and the income in question was derived from the use thereof in the united_states id emphasis added the court's conclusion that the noncompetition income is from interests in property in this country runs counter to taxpayer's assertion that the income is from the conduct of business activity ' consequently since income from a non-compete agreement does not derive from an actual income producing activity but rather from inaction or forbearance of income producing activity which is a property right of value such income is not industrial_or_commercial_profits within the meaning of article iii of the convention income from the non-compete agreement is not a royalty under article viii of the income_tax treaty between switzerland and the united_states article viii of the convention entitled royalties provides royalties and other_amounts derived as consideration for the right to use copyrights artistic and scientific works patents designs plans secret processes and formulae trademarks and other like property and rights including rentals and like payments in respect of motion picture films or ‘taxpayer cites ltr date however the letter_ruling was issued to a different taxpayer and does not constitute precedent sec_6110 96_tc_675 beck v commissioner t c memo barnes v commissioner tcmemo_1994_95 tam-107546-99 for_the_use_of industrial commercial or scientific equipment from sources within one of the contracting states by a resident or corporation or other entity of the other contracting state not having a permanent_establishment in the former state shall be exempt from taxation in such former state the letter of submittal from the department of state to the president dated date on the convention between the united_states and switzerland for the avoidance of double_taxation with respect to income taxes letter further elaborates on article viii of the convention the letter’s discussion of article viii provides in part articles vi vil and viii deal with moveable capital items such as dividends interest and certain types of royalties emphasis added income from non-compete agreements is not explicitly mentioned in the definition of royalties however all of the examples constitute income from the use or disposition of intellectual_property in addition the letter contemplates that not all types of royalties are included in the definition in article viii after the list of examples the treaty language provides that royalty income includes payments from other like property or rights under the doctrine_of ejusdem generis where general words follow specific words the general words are construed to embrace only objects similar in nature to those objects enumerated by the preceding specific words since the examples only include royalties from the use of intellectual_property under application of the doctrine_of ejusdem generis other like property or rights should not include payments for rights that are not similar in nature such as from non-compete agreements which involve inaction or forbearance of income producing activity since income from the agreement is not industrial_or_commercial_profits within the meaning of article ii and is not a royalty payment under article vii it is taxable under sec_881 and subject_to_withholding under sec_1442 as described above the tax_court in korfund has held that income from non- compete agreements in which parties agree to forebear from competition in the united_states are from sources within the united_states under the agreement fc1 agreed to refrain from competition with taxpayer within north america therefore under the rationale of korfund the portion of the payment that is attributable to fc1's forbearance from competition in the united_states will be from sources within the united_states we express no opinion regarding the allocation of the payment to forbearance by fc from competition with taxpayer within the united_states to the extent any portion of the sutherland stat const sth ed tam-107546-99 payment is allocable to portions of north america outside the united_states such portion of the payment would be foreign source in this case the amount_paid pursuant to the non-compete agreement was fixed at dollar_figurex and falls within the definition of fixed or determinable annual or periodical payments accordingly since the source of at least some of the income is the united_states petitioner had an obligation to withhold on at least a portion of the payment to fc1 pursuant to the agreement conclusion as set forth above the payment made under the non-compete agreement is a fixed and determinable annual or periodical payment not covered by the convention and is taxable by the united_states at least in part since the source of at least a portion of the income is from within the united_states accordingly since the source of at least a portion of the income is the united_states petitioner had an obligation to withhold at a percent rate on the portion of the payment which reflects the portion of the non- compete agreement attributable to the united_states 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 - end -