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 b09 plr-133104-06 date date --------------------------- -------------------------------- ------- ------------------------- ------------------------- -------------------------- -------------------------------- ----------------------------- ------- -------------------- --------------------------------------------- ----------------------------------------- --------------------------------------- ------------------------ legend trustee trust year settlor son son daughter wife year trust company corporation bank bank bank dear ---------- this responds to a letter dated date submitted on behalf of trust in which rulings are requested on the estate gift and generation-skipping_transfer_tax consequences of the proposed modification to trust and the anticipated exercise of a limited testamentary_power_of_appointment provided under trust facts the facts and representations submitted are summarized as follows in year settlor established trust an irrevocable_trust for the benefit of his wife and descendants plr-133104-06 son son and daughter are the children of settlor and wife settlor and wife are currently deceased and son son and daughter are over the age of trust was created before date according to the provisions of paragraphs b c and d of article of trust upon the death of wife in year the trust corpus was divided into three shares one for each child of settlor and wife according to paragraph d of article the trustee of trust may distribute to each child from his or her respective separate share so much of the net_income as the trustee deems wise and prudent in the trustee’s absolute discretion for each child over the age of the trustee may distribute from his or her respective share so much of the principal and accumulated income of trust as such child shall from time to time request in writing paragraph d of article further provides that upon the death of a child of settlor and wife the trustee shall distribute the entire remaining principal and accumulated income of the child’s separate share of trust to or for the benefit of such of the descendants of the child as such child shall direct in his or her will son son and daughter anticipate exercising their respective limited testamentary power to appoint the principal and income of their respective trust as provided in trust the rules governing the appointment of successor trustees are provided in article of trust paragraph b provides that if after the death of settlor any trustee shall for any reason fail or cease to act as trustee the power to appoint a successor trustee may be exercised by the following persons in the following order by a majority of trustees of trust company if trust company shall cease to exist and no business_enterprise shall acquire the property comprising the trust estate of trust company by the board_of directors of corporation the board or any successor organization which shall acquire substantially_all of the assets and business of corporation and in the event of the nonexistence of all of the foregoing by a majority in interest in the income beneficiaries who shall be under no disability trust company has ceased to exist and the board currently has the power to appoint successor trustees in a meeting of the board after the death of wife the board resolved to appoint successor trustees of the trusts established under trust as follows if the current trustee or any successor trustee appointed hereunder ceases to act as trustee of any trust the board appoints as trustee of such trust such qualified bank or trust company as the beneficiary of such trust may appoint by signed written instrument delivered to the board no later than thirty days after such cessation to act if such beneficiary does not make an appointment the board appoints as trustee of such trust the first of the following that is then in existence is then a qualified bank or trust company and is then willing to act as trustee of such trust a bank b bank and c bank plr-133104-06 the board’s resolution defines qualified bank or trust company as a bank or trust company that is qualified to accept trusts that is not related or subordinate to any beneficiary of a_trust within the meaning of sec_672 of the code that has engaged in the trust business for at least ten years immediately prior to its appointment as trustee by the board and that has assets under management of at least one billion dollars the board further resolved that a bank or trust company ceases to act as trustee of a_trust upon the first to occur of its resignation its removal as trustee by thirty days written notice signed by the beneficiary of the trust and delivered to it and to the board and its cessation to exist or to be qualified to accept trusts the board’s resolution is only effective upon the receipt of a favorable ruling issued by the service confirming that the implementation of the resolution will not cause any trust to be subject_to the generation-skipping_transfer gst tax and will not cause any trust to be taxed in the estate of the beneficiary of that trust you request the following rulings a beneficiary’s power to appoint and remove a qualified bank or trust company as successor trustee of his or her respective trust will not be considered the creation of a general_power_of_appointment under sec_2041 or sec_2514 and the exercise of this power will not cause the assets of a beneficiary’s trust to be includible in his or her estate nor will the exercise of the power be considered a transfer for federal gift_tax purposes the exercise of a beneficiary’s testamentary special_power_of_appointment will not be considered an exercise of the beneficiary’s lifetime general_power_of_appointment the implementation and operation of the board’s resolution will not cause trust or the beneficiaries’ trusts created thereunder to lose their exempt status under b a of the tax_reform_act_of_1986 and sec_26_2601-1 of the generation-skipping_transfer_tax regulations and will not subject distributions from any of the trusts to the gst tax law and analysis ruling sec_1 and sec_2041 of the internal_revenue_code of provides that the value of the gross_estate shall include the value of all property with respect to which a general_power_of_appointment created on or before date is exercised by the decedent by will or by certain lifetime disposition the failure to exercise such a power or the complete release of such a power shall not be deemed an exercise thereof a general_power_of_appointment is defined by sec_2041 as a power exercisable in favor of the decedent his estate his creditors or the creditors of his estate plr-133104-06 sec_20_2041-1 of the estate_tax regulations provides in part that a donee may have a power_of_appointment if he has the power to remove or discharge a trustee and appoint himself for example if under the terms of the instrument the trustee or his successor has the power to appoint the principal of the trust for the benefit of individuals including himself and the decedent has the unrestricted power to remove or discharge the trustee at any time and appoint any other person including himself the decedent is considered as having a power_of_appointment however the mere power of management investment custody of assets or the power to allocate receipts and disbursements as between income and principal exercisable in a fiduciary capacity whereby the holder has no power to enlarge or shift any of the beneficial interests therein except as an incidental consequence of the discharge of the fiduciary duties is not a power_of_appointment sec_20_2041-1 provides that a decedent may have two powers under the same instrument one of which is a general_power_of_appointment and the other of which is not for example a beneficiary may have a power to withdraw trust corpus during his life and a testamentary power to appoint the corpus among his descendants the testamentary power is not a general_power_of_appointment sec_20_2041-2 provides that if a general_power_of_appointment created on or before date is exercised only as to a portion of the property subject_to the power sec_2041 is applicable only to the value of that portion sec_2514 provides that an exercise of a general_power_of_appointment created on or before date shall be deemed a transfer of property by the individual possessing such power but the failure to exercise such a power or the complete release of such a power shall not be deemed an exercise thereof sec_2514 provides that a general_power_of_appointment is a power that is exercisable in favor of the individual possessing the power the possessor his estate his creditors or the creditors of his estate sec_25_2514-1 of the gift_tax regulations provides in part that a donee may have a power_of_appointment if he has the power to remove or discharge a trustee and appoint himself for example if under the terms of the instrument the trustee or his successor has the power to appoint the principal of the trust for the benefit of individuals including himself and a another person has the unrestricted power to remove or discharge the trustee at any time and appoint any other person including himself a is considered as having a power_of_appointment however the mere power of management investment custody of assets or the power to allocate receipts and disbursements as between income and principal exercisable in a fiduciary capacity whereby the holder has no power to enlarge or shift any of the beneficial interests plr-133104-06 therein except as an incidental consequence of the discharge of the fiduciary duties is not a power_of_appointment sec_25_2514-1 provides that a beneficiary may have two powers under the same instrument one of which is a general_power_of_appointment and the other of which is not for example a beneficiary may have a general power to withdraw a limited portion of trust corpus during his life and a further power exercisable during his lifetime to appoint the corpus among his children the latter power is not a general_power_of_appointment sec_25_2514-2 provides that if a general_power_of_appointment created on or before date is exercised only as to a portion of the property subject_to the power the exercise is considered to be a transfer only as to the value of that portion revrul_95_58 1995_2_cb_191 holds that a decedent grantor's reservation of an unqualified power to remove a trustee and to appoint an individual or corporate successor trustee that is not related or subordinate to the decedent within the meaning of sec_672 is not considered a reservation of the trustee's discretionary powers of distribution over the property transferred by the decedent grantor to the trust accordingly the trust corpus is not included in the decedent's gross_estate under sec_2036 or sec_2038 the ruling notes that the eighth circuit in 973_f2d_1409 8th cir concluded that the decedent had not retained dominion and control_over assets transferred to a_trust by reason of his power to remove and replace the trustee with a party that was not related or subordinate to the decedent accordingly the court held that under sec_25 c the decedent made a completed_gift when he created the trust and transferred assets to it sec_672 defines the term related_or_subordinate_party to mean any nonadverse_party who is the grantor’s spouse if living with the grantor or any one of the following the grantor’s father mother issue brother or sister an employee of the grantor a corporation or any employee of a corporation in which the stock holdings of the grantor and the trust are significant from the viewpoint of voting control a subordinate employee of a corporation in which the grantor is an executive in regard to the first ruling requested upon the resignation of the current trustee a bank or trust company that is appointed as successor trustee will have the sole discretionary authority to make distributions of income from each trust after the resignation of the current trustee son son and daughter will have an unqualified power to remove a trustee and to appoint a successor trustee the board’s resolution however restricts any appointment of a successor trustee to a qualified bank or trust company which is defined therein as a bank or trust company that is qualified to accept trusts that is not related or subordinate to any beneficiary of a_trust within the meaning of sec_672 of the code that has engaged in the trust business for at least ten years immediately prior to its appointment as trustee by the board and that has assets under management of at plr-133104-06 least one billion dollars the removal and appointment powers given to son son and daughter are not the equivalent of the power referred to in the examples in sec_20_2041-1 and sec_25_2514-1 where an individual may remove a trustee and appoint himself instead the proposed power given to son son and daughter is the equivalent of the power referenced in revrul_95_58 where a replacement trustee may not be a_related_or_subordinate_party within the meaning of sec_672 accordingly based on the facts submitted and the representations made we conclude that the board’s resolution will not cause son son or daughter to have a general_power_of_appointment under sec_2041 or sec_2514 thus the exercise of this power will not cause the assets of a beneficiary’s trust to be includible in his or her estate nor will the exercise of the power be considered a transfer for federal gift_tax purposes in regard to the second ruling requested we note that son son and daughter anticipate exercising their respective limited testamentary powers of appointment to appoint property of his or her respective trust to his or her descendants son son and daughter also have an inter_vivos general power to appoint as much principal and accumulated income from his or her respective trust as he or she requests in writing to the trustee as provided in sec_20_2041-1 and sec_25_2514-1 the same trust instrument as in this case may give a beneficiary two separate powers one of which is a general_power_of_appointment and one of which is not the exercise of a limited testamentary_power_of_appointment is not considered as an exercise of a lifetime general_power_of_appointment even though both powers are over the same trust assets if son son or daughter exercise only his or her respective limited testamentary_power_of_appointment and not his or her general_power_of_appointment the assets from each trust will not be included in his or her gross_estate under sec_2041 if son son or daughter exercises his or her lifetime general_power_of_appointment the exercise will be considered to be a transfer under sec_2514 to the extent of the value of property with respect to which the general_power_of_appointment is exercised ruling sec_2601 of the internal_revenue_code imposes a tax on every generation-skipping_transfer gst which is defined under sec_2611 as a taxable_distribution a taxable_termination or a direct_skip under of the tax_reform_act_of_1986 the act gst tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26 b i of the generation-skipping_transfer_tax regulations the tax does not apply to a transfer under a_trust that was irrevocable on date except to the extent the transfer is made out of corpus added to the trust by an actual or constructive_addition after date plr-133104-06 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 will not cause the trust to lose its exempt status these rules are applicable only for purposes of determining whether an exempt trust retains exempt status for gst tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a modification of the governing instrument by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the gst tax 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 a 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 sec_26_2601-1 example provides as follows in grantor executed an irrevocable_trust for the benefit of grantor’s issue naming a bank and five other individuals as trustees in the appropriate local court approves a modification of the trust that decreases the number of trustees which results in lower administrative costs the modification pertains to the administration of the trust and 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 in addition 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 therefore the trust will not be subject_to the provisions of chapter in the present case trust was irrevocable on date it is represented that no additions actual or constructive have been made to trust after that date the change in the process for appointing and removing successor trustees as set forth in the board’s resolution is similar to the change described in sec_26_2601-1 example the board’s resolution will not result in a shift of any beneficial_interest to any beneficiary who occupies a generation lower than the persons holding the beneficial interests in the trusts prior to the board’s resolution and the board’s resolution will not extend the time for vesting of any beneficial_interest in trust beyond the period provided for in trust accordingly based on the facts submitted and the representations made we conclude that the implementation and operation of the board’s resolution will not cause trust to plr-133104-06 lose its status under of the tax_reform_act_of_1986 as a_trust exempt from the application of the gst tax under chapter 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 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 representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely melissa c liquerman branch chief branch passthroughs special industries-


criminal tax bulletin department of treasury internal_revenue_service number release date office_of_chief_counsel criminal tax_division december this bulletin is for informational purposes it is not a directive title_26 and title_26 related cases earnings_and_profits in 156_f3d_157 2d cir bok was the sole shareholder of a corporation who diverted certain funds or assets from the corporation for the purchase of an apartment and a bond these appropriations were not reflected as income on his personal income_tax return or the corporate return at trial neither bok nor the government produced any evidence to suggest the corporation lacked earnings_and_profits for the year in question relying on 145_f3d_69 2d cir bok sought a jury instruction on the nontaxability of a shareholder’s return_of_capital but the district_court declined to give bok the instruction bok was convicted by a jury for filing a false income_tax return in violation of sec_7206 on appeal bok contended inter alia the court erred by refusing to instruct the jury on the nontaxability of a shareholder’s return_of_capital the second circuit rejected bok’s argument that the trial_court erred in not instructing the jury that a distribution of money he received from a corporation in which he was the sole shareholder may have constituted a nontaxable return_of_capital the court explained in prosecutions for income_tax violations production of a rather slight amount of evidence by the government may transfer the burden of going forward to the defendant since the court found bok failed to satisfy his burden of going forward on the nonexistence of corporate earnings_and_profits it concluded thre was not an adequate basis in the record to justify the proposed instruction see also 153_f3d_445 7th cir and criminal tax bulletin october government liable for attorney’s fees for failure to turn over brady material indicted for in united_states v ranger electronic communications inc no 96-cr-211 u s dist lexis w d mich date the defendant was importing federally banned radio equipment the government agreed to dismiss the case with prejudice after trial had begun due to problems that developed in the government’s case four months after dismissal the defendant moved for attorney’s fees pursuant to the hyde amendment which was enacted as part of a appropriations bill and is found as a statutory note to u s c 3006a the hyde amendment allows federal courts to award attorney’s fees to prevailing criminal defendants where the government’s litigating position is found to be vexatious frivolous or in bad faith the defendant’s motion was based upon the contention that the government acted in bad faith by concealing brady material which included e-mail communications with the federal communications commission regarding public confusion about federal regulations concerning the importation of electronic equipment and the need for public notices to clarify those regulations the government’s failure to disclose this information until after the case was dismissed the defendant did not discover under the hyde amendment requests for attorney’s fees are subject_to the procedures and limitations used by civil litigants under the equal_access_to_justice_act eaja the eaja requires applications for attorney’s fees be made within days of final judgment notwithstanding eaja limitations the court found there was no judicial precedent as to how the temporal bar should apply to cases where the government’s bad faith in concealing exculpatory evidence was not revealed until after the expiration of the day period the court refused to apply a strict reading of the limitation period finding such a reading to be diametrically opposed to the purposes of the hyde amendment which would convert the law into an empty legislative promise the court therefore concluded that in order to give effect to congress’ purpose and words a further reasonable_time period beyond days after judgment should be permitted for the filing of an application_for attorney’s fees the court then ordered briefing from the parties as to the exact amount of the award see also united_states v gardner no 97-cr-34- h u s dist lexis n d okla date but see 16_fsupp2d_759 s d tx tax_evasion - jury must decide all elements in 156_f3d_833 8th cir silkman was convicted on five counts of tax_evasion in regard to establishing the element of a tax due and owing in this tax_evasion case the government relied on a notice_of_deficiency and five certificates of assessment silkman sought to introduce evidence to dispute the certificates of assessment however the district_court ruled he could not present his evidence and instructed the jury as a matter of law that the tax_assessment for each year established the tax due and owing thus satisfying one of the elements of tax_evasion the remaining elements of willfulness and an affirmative act constituting evasion or attempted evasion were left for determination by the jury silkman appealed his conviction the eighth circuit agreed with silkman and held although an assessment is prima facie proof of a tax_deficiency this evidence unless unchallenged is not in and of itself completely dispositive of the issue of a tax due and owing in an evasion case accordingly silkman had a constitutional right to present his rebuttal evidence and to have the jury decide his guilt beyond a reasonable doubt on every element of the crime once the district_court removed from the jury’s consideration proof of an essential element of the offense silkman’s constitutional rights were violated thus mandating reversal and a new trial misworded question will not preclude perjury prosecution in 157_f3d_1042 6th cir dezarn planned and attended a preakness party fundraising event for a gubernatorial candidate during an investigation concerning the event an investigator mistakenly asked dezarn whether the preakness party was a political fund raiser and whether he observed anyone making campaign contributions dezarn answered negatively to both questions a subsequent investigation revealed that dezarn had planned the preakness party as a political fund raiser and had personally accepted campaign contributions dezarm was indicted and convicted of perjury in violation of u s c on appeal dezarn relied on 409_us_352 and argued inter alia that the indictment was insufficient because his answers to the investigator’s questions were literally true the sixth circuit distinguished bronston pointing out that the witness’s answers in bronston were technically nonresponsive whereas dezarn’s answers were unequivocal and directly and fully responsive to the investigator’s questions the court noted that context and circumstances evidenced dezarn knew the investigator’s question related to the preakness party since there existed no preakness party the court concluded that dezarn’s answers were not nonresponsive but were instead answers to questions with a partially mistaken premise or presupposition relying upon 997_f2d_390 the court held when questions and answers proceed on a false premise of which the defendant is aware he may not evade the true intent of the line of questioning by stacking literally true answers on top of the false premise accordingly the court affirmed the conviction concealment of bank fraud proceeds is insufficient evidence of klein_conspiracy in 135_f3d_1363 11th cir adkinson i and 158_f3d_1147 11th cir adkinson ii the court vacated and then reversed the convictions of adkinson and four other defendants for inter alia conspiring to impede the lawful functions of the internal_revenue_service in violation of u s c sec_371 the convictions stemmed from a land development project in the florida panhandle where false statements and misrepresentations were made to two private banks to procure large loan amounts which were then allegedly diverted by the defendants for their personal_use the government contended that through the concealment of income from the fraudulently obtained bank loans and by failing to file tax returns or filing false income_tax returns a conspiracy to impede the irs had transpired on appeal the court examined the record for evidence of an agreement between the defendants to impede the irs the government argued that the corporate records of the various real_estate enterprises demonstrated that certain payments had been made to the defendants which had not been reported to the irs furthermore the defendants’ individual tax returns failed to show this alleged income in rejecting the government’s argument the court stated t his evidence at most implies separate purposes to evade taxes it does not support the inference that each alleged tax evader even knew of the other’s tax_evasion much less that they agreed to do so the court specifically noted that the government at trial and in its appellate briefs had alleged the purpose of the conspiracy was to commit bank fraud any_tax related activities of the defendants were referred to in the context of their efforts to conceal the money they had defrauded the banks out of and to conceal the diversion of this money in the form of loans the false tax returns furthered the concealment of this diversion the court opined that without independent evidence of a tax purpose the tax related activities of these defendants did not give rise to a klein_conspiracy finally the court considered the question as to whether a tax conspiracy to impede the irs can be inferred strictly from efforts to conceal illegally obtained income the court found that the scheme itself did not support an inference of an intent to impede the irs the only tax related activities of the defendants filing false income_tax returns and reporting certain illegal payments as loans occurred in concealing the diversion of the bank fraud proceeds absent substantial evidence of both an agreement and intent to impede the irs a conspiracy to conceal the source of illegally obtained money is not automatically a klein_conspiracy even if it collaterally impedes the irs in the collection_of_taxes see 910_f2d_1184 4th cir accordingly the defendants’ convictions were reversed evidence defendant to plead guilty after a hearing the trial_court allowed burch to withdraw his plea pursuant to rule e of the federal rules of criminal procedure the trial_court however held burch to the waiver of his rights under rule sec_11 and sec_410 and ruled that statements made by burch during the plea hearing and law enforcement debriefings could be used as evidence for impeachment rebuttal or the case-in-chief in any future trial an act that belies any view that the plea or the waiver were coerced subsequently a jury convicted burch of possession burch appealed on appeal the d c circuit examined among other things whether a defendant can waive his rights under the rules for purposes of the prosecution’s case-in-chief in resolving the waiver issue the d c circuit cited 513_us_196 which held that a defendant can waive his rights under the rules for purposes of impeachment and rebuttal based on the following principles voluntary agreements to waive protections under the rules are presumptively enforceable absent an affirmative congressional limitation the rules and accompanying advisory notes do not express a congressional disfavor towards waivability and a court should consider public policy in deciding whether to override a presumption of waivability applying these three principles the d c circuit refused to draw a distinction between permitting waivers for purposes of impeachment or rebuttal and the prosecution’s case-in-chief finally the court noted that the extensive colloquy conducted by the trial_court clearly supported the determination that burch knowingly and voluntarily waived his rights under the rules accordingly the d c circuit affirmed the conviction forfeiture waiver of federal rules as part of plea knowledge requirement agreement in 156_f3d_1315 d c cir burch pled guilty to one count of drug possession with the intent to distribute as part of the plea agreement burch waived his rights under federal rule_of criminal procedure e and federal rule_of evidence rules and also agreed to assist law enforcement authorities in other matters although he later proved uncooperative in assisting authorities the rules waived by burch preclude the admissibility of evidence of a withdrawn guilty plea and statements made during the course of plea negotiations burch subsequently filed a motion to withdraw his guilty plea alleging he was innocent of the narcotics offense and he had been coerced by a co- in united_states v dollar_figure in u s currency no 84-cv-661c u s dist lexis w d n y date the government brought a civil_action pursuant to u s c a and b seeking the forfeiture of the subject currency because the claimant failed to file a cmir in violation of u s c sec_5311 when he crossed a bridge heading from buffalo new york to ontario canada on date this case originally went to trial on date on date the district_court denied the government’s petition for forfeiture finding that actual knowledge of the currency reporting requirements is required for a civil forfeiture and that there was insufficient evidence to support such a finding on date the second circuit held that although actual knowledge of the reporting requirements is not required for civil forfeiture under the fifth amendment’s due process clause a claimant must have constructive knowledge of the requirements 828_f2d_930 2d cir the second circuit remanded the case for a determination of whether the claimant had constructive knowledge however since the claimant was being investigated for income_tax evasion by a grand jury the district_court granted the government’s motion to stay the proceeding until the multiple civil and criminal actions against the claimant were concluded finally in may of the district_court held a trial as to whether the claimant had constructive notice of the currency reporting requirements the district_court held that the record failed to support a finding that the claimant should reasonably have been aware of the likelihood of having to report the currency he was carrying when going from the u s to canada the three previous times he left the u s he was not required to provide any information with respect to currency there were no signs indicating currency reporting requirements for people leaving the country the court distinguished this case from other second circuit cases because those cases all involved travelers who went by airplane and who were asked before leaving the u s about their currency amounts in this case the claimant was not asked about the currency until he left the u s and was told to turn around by canadian officials the fact that the claimant obtained the currency through illegal gambling did not support a finding that he should have had reason to believe he had to report the currency he was carrying out of the country the district_court also concluded the claimant had no constructive notice of the reporting requirement the government argued unsuccessfully that publication of the currency reporting requirement statute in the federal_register constituted constructive notice of the contents so as to satisfy due process given the circumstances of the case and the complete failure of the customs service to take any affirmative steps to inform the casual traveler of the currency reporting requirements it would be unfair to deprive the claimant of his property based on publication of the statute finally the supreme court’s recent decision in united_states v bajakajian 118_sct_2028 is instructive in bajakajian the supreme court adopted a new standard that makes punitive forfeitures excessive if they are grossly disproportional to the gravity of the defendant’s offense in addition to its finding above the district_court rejected the government’s contention that bajakajian only relates to punitive criminal forfeitures and held that the forfeiture of the claimant’s dollar_figure was improper racketeer’s nonforfeitable individual_retirement_annuity subject_to criminal forfeiture in 159_f3d_300 7th cir infelise was convicted of racketeering and his primary residence and dollar_figure million from his racketeering activity were forfeited the government sought to collect the dollar_figure million pursuant to the substitute assets provision of u s c m which allows the government to take other_property belonging to a defendant when the illegally obtained property cannot be located one of the substitute assets the government sought to obtain which the district_court refused to forfeit was infelise’s individual_retirement_annuity in the amount of dollar_figure the government appealed this decision in response to the government’s appeal infelise argued the annuity was a nonforfeitable asset immune from criminal forfeiture infelise based his reliance upon sec_408 which was enacted as part of the employee retirement income security act erisa sec_408 in pertinent part defines individual_retirement_annuity and specifies that t he entire_interest of the owner is nonforfeitable to in response infelise’s argument that nonforfeitable means nonforfeitable the court stated w hile we must respect the plain language of a statute we also must read the words of a statute in context and held nonforfeitable as used in sec_408 refers to a requirement that an individual_retirement_annuity must be vested in the owner emphasizing that the provisions of u s c are to be liberally construed the court remarked that sec_408 says nothing as to whether the government pursuant to a criminal forfeiture proceeding can obtain the forfeiture of an individual_retirement_annuity thus in the context of erisa and the internal_revenue_code an individual_retirement_annuity may enjoy a nonforfeitable status however this protection vanishes in the context of seizure by the government after a racketeering conviction accordingly the seventh circuit reversed the district court’s order denying the forfeiture of the individual_retirement_annuity forfeitures not deductible for tax purposes in 152_f3d_1200 9th cir the ninth circuit affirmed the judgment which held that illegally obtained narcotics proceeds were taxable as income but that no business deduction or credit was allowable when the money was forfeited king pled guilty to narcotics charges and agreed to forfeit dollar_figure in drug proceeds as part of a plea bargain the fbi seized the full amount forfeited king filed an amended tax_return including the amount forfeited as income and claimed a deduction for an uncompensated loss in a trade_or_business there is no dispute as to the taxability of illegal income king argued however that without being able to deduct the forfeiture the tax due will have been paid twice the court unpersuaded followed existing precedent which holds that amounts forfeited regardless of the circumstances are not deductible for tax purposes res_judicata in 156_f3d_110 1st cir the first circuit affirmed dismissal of a criminal forfeiture action under res_judicata principles prior to commencement of the criminal case the government pursued civil forfeiture actions against cunan as provided by u s c sec_881 and u s c sec_981 at the government’s request the civil forfeiture actions were dismissed with prejudice primarily for judicial economy as the government also sought forfeiture in the criminal case and to prevent disclosure of evidence gathered for the criminal trial a jury convicted cunan of conspiracy and money laundering and as part of his conviction a criminal forfeiture order was issued cunan filed motions to dismiss the criminal forfeiture orders asserting res_judicata which were granted criteria for res_judicata which were met included a final judgment on the merits which a dismissal with prejudice satisfied and that sufficient identity existed between the parties and causes of action in the cases u s c sec_881 and u s c sec_981 specifically provide mechanisms to stay civil proceedings pending resolution of criminal matters the government in this case failed to avail itself of this option even after it was aware that res_judicata would apply to any dismissals with prejudice as the government did not use the available mechanisms to preserve its right to forfeit cunan’s properties res_judicata was applicable even though it resulted in an unfair windfall for cunan excessive fines clause in one toyota pick-up truck v district of columbia a 2d d c c a the defendant plead guilty to solicitation and was fined dollar_figure as a first time offender the maximum statutory fine for this offense is dollar_figure in the district of columbia passed the safe streets forfeiture act of d c code authorizing the city to forfeit any instrumentality used to commit a prostitution crime the act uses virtually identical language as the federal drug forfeiture statute when under the act the city brought a forfeiture action against the defendant’s truck worth dollar_figure he challenged the forfeiture claiming it violated the eighth amendment’s excessive fines clause because the forfeiture constituted a penalty times the authorized fine and times the fine imposed under the solicitation charge a statutory forfeiture is a fine for eighth amendment purposes if it constitutes punishment even in part austin v united_states 113_sct_2801 the court concluded the forfeiture statute here had punitive aspects and thus the fine was excessive when it applied the grossly disproportional standard recently adopted by the supreme court in united_states v bajakajian 118_sct_2028 the grossly disproportional standard is a pure proportionality test applied to determine if the fine is constitutionally excessive when compared to the gravity of a defendant’s offense accordingly having determined the fine to be excessive the court overturned the forfeiture money laundering valueless checks obtained by fraud are proceeds in 159_f3d_401 9th cir the defendants used stolen credit cards to make purchases and draw cash advances until available credit limits were exhausted then using the stolen credit cards and illegally obtained credit information on the cardholders the defendants opened checking accounts the cardholders’ names and subsequently withdrew the money from the checking accounts leaving zero balances finally the defendants used blank starter checks to pay down the balances on the original stolen credit cards before the credit card companies became aware that the checks were written on accounts with insufficient funds the defendants were once again able to deplete the available credit through cash advances in in a multi-count indictment the defendants were charged inter alia with money laundering in violation of u s c a a i the defendants filed a motion to dismiss the money laundering charge claiming that the starter checks used to pay down the credit card balances were worthless and therefore could not represent proceeds of illegal activity as required by the statute the district_court denied the motion and the defendants entered conditional guilty pleas reserving their right to appeal the money laundering issue on appeal the ninth circuit rejected the defendants’ argument and held that fraudulently obtained checks can be proceeds under u s c a a i and submission of these checks to credit card companies in order to pay down illegally obtained credit card accounts constituted money laundering turning to the definition of proceeds which is not defined by statute the court determined that while the term proceeds may refer to something of value the term has the broader meaning of that which is obtained by any transaction the court reasoned that blank starter checks which were obtained through bank fraud ie opening an account in an assumed name are the proceeds of the crime of bank fraud subsequently when these checks or proceeds were then sent by the defendants to the credit card companies in order to pay down the credit card balances they were involved in a financial transaction the goal of which was to promote a specified unlawful activity ie credit card fraud proceeds involved in the offense in 152_f3d_715 7th cir trost was an elected official county clerk and recorder as part of an embezzlement scheme trost created a special bank account and deposited approximately dollar_figure of county payments into the account he transferred dollar_figure of the dollar_figure to a personal bank account which he held jointly with his wife trost was convicted of laundering the dollar_figure in violation of u s c and subsequently ordered to forfeit the entire dollar_figure pursuant to u s c sec_982 on appeal trost argued that the appropriate forfeiture sum should have been dollar_figure which represented the amount he was specifically convicted of laundering the seventh circuit disagreed with trost citing its decision in 969_f2d_474 7th cir where the court held that funds which remain in an account after the laundering offense can be forfeited if involved in the crime the court agreed with the lower court’s assessment that significantly more than dollar_figure was funneled through the account to conceal or disguise the true nature of trost’s activities and there was no evidence that the use of the funds was bona_fide or justified furthermore the court noted that sometimes legal source funds are used to disguise illegal funds in examining the funds left behind in the first bank account and funds transferred to the second bank account the court found no legitimacy for any portion of the dollar_figure the court concluded the forfeited sum of dollar_figure represented the full amount of money involved in the money laundering offense under accordingly the lower court’s forfeiture action was affirmed investigative techniques recording of voicemail constitutes illegal intercept of wire communication under wiretap act in 155_f3d_1051 9th cir smith was an executive of a computer_software corporation convicted of insider trading an sec investigation into smith’s insider trading was initiated after an employee of the corporation went to authorities with a tape recorded viocemail message in which smith discussed his plans to sell a large block of his stock in the corporation based on insider information that the company’s profits were going to be less than projected upon indictment on eleven counts of insider trading smith moved to dismiss the indictment on the grounds that all the evidence was derived from an illegal wire recording the district_court suppressed the voicemail recording but refused to suppress the remainder of the government’s evidence smith was convicted on all counts smith appealed the court’s refusal to suppress the government’s evidence contending that it was derived from an illegal wiretap in violation of u s c sec_2515 preliminary to a determination of whether suppression of the government’s evidence was warranted the ninth circuit carefully dissected the wiretap act u s c and the stored electronic communications act seca u s c to determine which statute applied to the act of tape recording an electronically stored voice message the wiretap act provides for an exclusionary remedy to illegally intercepted wire communications whereas the seca has no exclusionary provision under the wiretap act the term interception is defined as the acquisition of the contents of any wire communication or any electronic storage of such communication through the use of any device acquisition of the voicemail message in this case plainly fit within the language of the exclusionary provision of the wiretap act the message itself left in the voicemail system via telephone was a wire communication since it was an aural transfer made using a wire facility the telephone line and was subsequently electronically stored within the voicemail system the act of recording the message on a handheld audiotape recording device constituted aural or other acquisition of the contents of the communication and hence an interception of the message the government argued for a narrow definition of the term interception contending that it pertained only to acquisition of a wire communication contemporaneous with its transmission thus the government contended accessing stored wire communications was not a violation of the wiretap act but rather a violation of the seca the ninth circuit rejected this argument reconciling the statutory overlap of these acts as covering different crimes and different levels of culpability the court explained the word intercept as used in the wiretap act entails actual acquisition of the contents of a communication whereas the word access as used in the seca merely involves being in a position to acquire the contents of a communication in other words access is for all intents and purposes a lesser included offense of interception based on this analysis the court upheld the suppression of the viocemail message as a violation of the wiretap act and determined that the remainder of the government’s evidence in this case was not derived from the illegally intercepted voicemail the court concluded that the recording only amounted to an investigative lead in the case judicial sealing of wiretap tape recording not prerequisite to admission of compilation recording from duplicate tapes in 153_f3d_809 7th cir dea agents used wiretaps of cellular phones to investigate a cocaine distribution conspiracy the dea’s equipment simultaneously made three tape recordings of each telephone call immediately upon expiration of the period of the wiretap order one set of the tapes was judicially sealed in compliance with u s c sec_2518 a second set was given to the prosecutor’s office and the third set was retained by the dea in preparation for trial the dea created a compilation of the most relevant telephone calls essentially reducing many hours of recordings to less than two hours the compilation tape was played to the jury over rivera’s objections and he was convicted on cocaine conspiracy charges on appeal the seventh circuit rivera challenged the admissibility of the wiretap audiotapes his argument turned on the fact that whereas the wiretap act to expressly authorizes the use of duplicate tapes for investigative purposes it does not mention use of such tapes for evidentiary purposes rivera relied on the cannon of construction that inclusion of one implies exclusion of all others the court observed this cannon of construction does not have uniform application and found that in the context of sec_2518 it does not apply sec_2518 delimits procedures for preserving wiretap tapes the provision does not contemplate preventing disclosure of their contents the language of the provision places no restrictions on the form in which the contents of the recordings may be disclosed in court proceedings neither the statute nor the legislative_history indicates an intent to impose the same requirements on duplicate tapes as on originals thus the court was hesitant to find an implied restriction in context the language concerning duplicate tapes serves to make clear that sealing is not intended to prevent law enforcement officers from having duplicates and disclosing them to other law enforcement officers also use of duplicates is judicially efficient and allows the original tapes to remain sealed thus preserving their authenticity there was no authenticity challenge in this case concluding the government adequately established the chain of custody the court noted that the dea’s set was as original as the sealed tapes either set of tapes could have been chosen to be sealed and the government was not required to compare the two sets of tapes to determine that the tapes were the same the court affirmed rivera’s conviction sentencing grouping money laundering and mail fraud in 155_f3d_969 8th cir o’kane a manager of a grocery store devised a scheme to order large volumes of baseball cards on the store account when the cards arrived o’kane retained a portion of the shipments for his personal collection and sold the remainder the scheme enabled o’kane to defraud his employer of over dollar_figure worth of baseball cards o’kane pled guilty to one count of mail fraud and one count of money laundering applying u s s g sec_3d1 b the district_court grouped the two counts together into a single group involving a single victim on appeal the government argued that the district_court erred in grouping the mail fraud and money laundering counts and in the alternative if grouping was correct sec_3d1 d was the appropriate guideline the eighth circuit agreed with the government’s assertion that the district_court did not properly group the two counts under sec_3d1 b reasoning that each count harmed different victims the court however rejected the applicability of sec_3d1 d because in this case the offense level for money laundering was not determined largely on the basis of the total amount of harm or loss since o’kane laundered less than dollar_figure the eighth circuit concluded that none of the grouping rules properly applied to o’kane’s two counts of conviction and therefore those counts must remain separate counts for sentencing purposes the court then concluded that sec_3d1 should be applied and instructed the sentencing court to count the most serious offense money laundering as one unit and add an additional unit for the less serious count mail fraud accordingly the eighth circuit vacated the sentence and remanded the case for re-sentencing downward departure in campaign debt money laundering scheme in 157_f3d_347 5th cir hemmingson an attorney and president ceo of a crop insurance_business was solicited by ferrouillet who was also an attorney to assist in paying off campaign debts of an unsuccessful congressional candidate espy espy asked hemmingson and other fund raisers to pledge funds to retire his congressional campaign debt as part of a campaign laundering scheme hemmingson drew a dollar_figure check on the crop business account he then gave ferrouillet the dollar_figure check as a retainer for purported services to be rendered on behalf of the crop business in order to avoid campaign reporting requirements ferrouillet cashed the dollar_figure check and promptly deposited the funds into a newly opened espy for congress bank account the cash deposit was eventually applied to espy’s campaign debt hemmingson and ferrouillet were convicted inter alia on multiple counts of money laundering in violation of u s c and the district_court sentenced the defendants pursuant to u s s g sec_2s1 the money laundering guideline hemmingson and ferrouillet requested a downward departure on grounds that their conduct did not fall within the heartland of sec_2s1 the district_court agreed sentencing the defendants pursuant to sec_2f1 a more lenient fraud guideline on appeal the fifth circuit citing 518_us_81 held the election campaign scheme was sufficiently unusual to fall outside the heartland of conduct for money laundering under the sentencing guidelines the court emphasized that sec_2s1 primarily targets large scale money laundering which often involves the proceeds of drug trafficking or other types of organized crime the court agreed with the district court’s reasoning that hemmingson’s and ferrouillet’s scheme when viewed alongside the conduct that is usually prosecuted under the money laundering statutes was atypical see also united_states v woods no 1884wm u s app lexis 8th cir date accordingly the court found no abuse_of_discretion by the district_court in its downward departure restitution in 156_f3d_157 2d cir as factually set forth on page one of this bulletin the court rejected bok's argument that the imposition of restitution as a condition of supervised release violated u s c section limits a court's authority to order restitution to certain enumerated offenses or pursuant to the terms of a plea agreement since tax crimes are not among those offenses plea agreements have been the mechanism for obtaining restitution in tax cases there was no plea agreement in this case nevertheless the court found a plain reading of the provisions in u s c conditions of probation and terms of supervised release after imprisonment permit a court to award restitution as a condition of supervised release without regard to the limitations in additional support for this conclusion is found in sec_5e1 a of the sentencing guidelines of which specifically authorize a sentencing court to order restitution as a condition of supervised release in all cases without reference to the limitations in accordingly the court upheld the restitution order see also united_states v bugai no u s app lexis 6th cir date and criminal tax bulletin october no grouping for wire fraud and tax_evasion in united_states v vitale no u s app lexis 3d cir date vitale a corporate vice president pled guilty pursuant to a plea agreement to one count of wire fraud and one count of tax_evasion the two counts stemmed from vitale’s embezzlement of approximately dollar_figure million from his employer vitale argued the district_court erred in denying his request to group the two counts because u s s g sec_3d1 requires grouping when the counts involve substantially the same harm in addition he argued grouping is required because the government stipulated in the plea agreement that the conduct underlying the wire fraud offense was embezzlement and case law supports grouping an underlying embezzlement offense with a tax_evasion offense relying on 923_f2d_1052 3d cir the court rejected both of vitale’s arguments and held that grouping under the guidelines was not appropriate because vitale was charged with wire fraud not embezzlement and wire fraud and tax_evasion are not closely related offenses moreover if grouping were allowed here the purpose of deterring and punishing tax evaders would be lost because there would be no accounting in the sentence for the fact that vitale evaded taxes thus vitale’s sentence was affirmed criminal tax bulletin table of cases december title_26 and title_26 related cases 156_f3d_157 2d cir united_states v ranger electronic communications inc no 96-cr-211 u s dist lexis w d mich date 156_f3d_833 8th cir 157_f3d_1042 6th cir 158_f3d_1147 11th cir evidence 156_f3d_1315 d c cir forfeiture united_states v dollar_figure in u s currency no 84-cv-661c u s dist lexis w d n y date 159_f3d_300 7th cir 152_f3d_1200 9th cir u s v cunan 156_f3d_110 1st cir one toyota pickup truck v district of columbia a 2d d c c a money laundering 159_f3d_401 9th cir 152_f3d_715 7th cir investigative techniques 155_f3d_1051 9th cir 153_f3d_809 7th cir sentencing 155_f3d_969 8th cir 157_f3d_347 5th cir 156_f3d_157 2d cir united_states v vitale no u s app lexis 3d cir date department of the treasury internal_revenue_service document rev catalog number 24304b


internal_revenue_service number release date index number ------------------------ ---------------------- ------------------------------------------- --------------------------------------- ------------------------------ department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ----------------------- ----------------- telephone number --------------------- refer reply to cc tege eoeg eo1 plr-127663-16 date march ---------------------- ---------------------- --------------------------- foundation founder first llc revocable_trust ------------------------------ irrevocable_trust ----------------------------------------------- new llc ----------------------- dear ------------- this letter responds to a letter from foundation’s authorized representative dated date requesting rulings on behalf of foundation that founder’s proposed gift by means of a distribution from revocable_trust upon founder’s death to foundation of the nonvoting interests in new llc the only asset of which is a promissory note from a disqualified_person described in sec_4946 of the internal_revenue_code will not violate the prohibition against self- dealing under sec_4941 and foundation’s retention of the nonvoting interests in new llc will not violate the restrictions on excess_business_holdings under sec_4943 facts foundation which was created by founder and her late husband is a nonprofit corporation recognized as an organization described in sec_501 that is a sec_4946 of the internal_revenue_code_of_1986 as amended to which all subsequent section references are made unless otherwise stated plr-127663-16 private_foundation under sec_509 foundation has four directors of which three are founder and her two sons the fourth director is an outside independent director founder sold membership interests in first llc to irrevocable_trust in exchange for a promissory note founder’s descendants are beneficiaries of irrevocable_trust founder desires that following her death any part of the principal and interest on the promissory note which remains then unpaid be used to benefit foundation to that end founder contributed and transferred the promissory note to new llc in exchange for voting and nonvoting interests which subsequently were transferred to revocable_trust founder is the settlor and sole trustee of revocable_trust and holds a revocation power in the form of a power to direct the trustee to distribute the assets of the trust to her during her lifetime founder’s descendants are beneficiaries of revocable_trust new llc will hold and administer the promissory note and receive payments of interest and principal on the promissory note new llc’s sole asset and source_of_income is and will be the promissory note new llc will not engage directly or indirectly in any trade_or_business activity that would constitute a business_enterprise within the meaning of sec_4943 and sec_53_4943-10 power to manage the affairs of new llc is vested in the manager who is selected and may be removed by the members holding voting interests in new llc one of founder’s sons who is also a director of foundation is the sole manager of new llc the members holding nonvoting interests possess no management rights or rights to vote on the manager of new llc new llc may only be dissolved with written approval of all members whether holding voting or nonvoting interests founder proposes that at the time of her death revocable_trust which will become irrevocable at that time will distribute to foundation all of the nonvoting interests in new llc which have a profit-sharing ratio of percent revocable_trust will retain its voting interests in new llc which have a profit-sharing ratio of one percent law sec_4941 imposes an excise_tax on each act of self-dealing between a disqualified_person and a private_foundation and on the participation of any foundation_manager knowing that it is such an act sec_4941 defines self-dealing in part as including any direct or indirect lending of money or other extension of credit between a private_foundation and a disqualified_person plr-127663-16 sec_4943 imposes a tax on the excess_business_holdings of any private_foundation in a business_enterprise in any taxable_year that ends during the taxable_period sec_4943 provides that the term excess_business_holdings means with respect to the holdings of any private_foundation in any business_enterprise the amount of stock or other interest in the enterprise which the foundation would have to dispose_of to a person other than a disqualified_person in order for the remaining holdings of the foundation in such enterprise to be permitted holdings sec_4943 provides in part that the term business_enterprise does not include a trade_or_business at least percent of the gross_income of which is derived from passive sources it also provides that for this purpose gross_income from passive sources includes certain items that are excluded from unrelated_business_income among those items is interest that is excluded from unrelated_business_income by sec_512 see also sec_53_4943-10 and sec_4946 provides in part that the term disqualified_person means with respect to a private_foundation a person who is - a a substantial_contributor to the foundation b a foundation_manager within the meaning of sec_4946 c an owner of more than percent of - i the total combined voting power of a corporation ii the profits interest of a partnership or iii the beneficial_interest of a_trust or unincorporated enterprise which is a substantial_contributor to the foundation d a member_of_the_family as defined in sec_4946 of any individual described in subparagraph a b or c e a corporation of which persons described in subparagraph a b c or d own more than percent of the total combined voting power f a partnership in which persons described in subparagraph a b c or d own more than percent of the profits interest and g a_trust or estate in which persons described in subparagraph a b c or d hold more than percent of the beneficial_interest sec_4946 defines the term foundation_manager to include an officer director or trustee of a foundation sec_53_4941_d_-1 provides in part that an organization is controlled by a private_foundation if the foundation or one or more of its foundation managers acting only in such capacity may only by aggregating their votes or positions of authority require the organization to engage in a transaction which if engaged in with the private_foundation would constitute self-dealing for these purposes an organization will be plr-127663-16 considered to be controlled by a private_foundation if the private_foundation has the right to exercise veto power over the actions of such organization relevant to any potential acts of self-dealing in sec_53_4941_d_-1 example private_foundation p owns the controlling_interest of the voting_stock of corporation x and as a result of such interest elects a majority of the board_of directors of x two of the foundation managers a and b who are also directors of corporation x form corporation y for the purpose of building and managing a country club a and b receive a total of percent of y's stock making y a disqualified_person with respect to p under sec_4946 in order to finance the construction and operation of the country club y requested and received a loan in the amount of dollar_figure million from x the making of the loan by x to y shall constitute an indirect act of self-dealing between p and y sec_53_4941_d_-2 provides generally that the lending of money or other extension of credit between a private_foundation and a disqualified_person shall constitute an act of self-dealing thus for example an act of self-dealing occurs where a note the obligor of which is a disqualified_person is transferred by a third party to a private_foundation which becomes the creditor under the note analysis requested ruling irrevocable_trust and revocable_trust are disqualified persons under sec_4946 with respect to foundation because they are trusts in which founder’s descendants who are disqualified persons under sec_4946 with respect to foundation hold more than a 35-percent beneficial_interest irrevocable_trust is the obligor of a promissory note that was held by founder founder desires that following her death any unpaid principal and interest on the promissory note be used to benefit foundation an act of self-dealing would occur if founder transferred the promissory note to foundation which would become creditor under the note see sec_53_4941_d_-2 instead founder contributed and transferred her ownership of the promissory note to new llc at founder’s death foundation will acquire the nonvoting interests in new llc which have a profit-sharing ratio of percent by gift through a distribution from revocable_trust rather than through a self-dealing transaction if foundation will control new llc within the meaning of sec_53_4941_d_-1 then foundation will be indirectly serving as the creditor under the note by reason of its ownership_interest see sec_53_4941_d_-1 example however foundation will not control new llc within the meaning of sec_53 d - b due to lack of voting power plr-127663-16 as holder of the nonvoting interests foundation will have no management rights or right to vote on the manager of new llc revocable_trust which will have become irrevocable at founder’s death will own all of the voting interests giving revocable_trust the right to select and remove the manager of new llc as a holder of nonvoting interests foundation will have a right to receive distributions only if new llc dissolves or chooses to make current distributions but the timing and amount of such distributions will be uncertain and could not be compelled by foundation only revocable_trust as the holder of the voting interests may elect or remove the manager of new llc and such manager will have the sole power to manage the affairs of new llc and determine the timing and amount of distributions thus foundation and foundation’s managers acting only in such capacity will not have sufficient votes or positions of authority to cause new llc to engage in a transaction additionally foundation will not have the power to compel dissolution of new llc since new llc may only be dissolved with written approval of all members including revocable_trust the power associated with the nonvoting interests of new llc as a necessary party to vote on the liquidation of the llc is not considered equivalent to a veto power within the meaning of sec_53_4941_d_-1 because the power cannot be exercised over an action relevant to any potential act of self-dealing accordingly foundation’s receipt from revocable_trust upon founder’s death of nonvoting interests in new llc will not constitute a loan or extension of credit between a private_foundation and a disqualified_person within the meaning of sec_4941 and sec_53_4941_d_-2 because foundation will not acquire an interest in the promissory note instead foundation will acquire nonvoting interests in new llc with respect to which it will not have any management rights or control_over distributions thus founder’s proposed transfer of nonvoting interests in new llc to foundation will not constitute an act of self-dealing described in sec_4941 requested ruling new llc’s sole asset will be the promissory note which will generate passive_income in the form of interest as described in sec_4943 and sec_512 as such new llc will not be considered a business_enterprise for purposes of sec_4943 because at least percent of its gross_income will derive from passive sources see also sec_53_4943-10 because new llc will not be considered a business_enterprise the restrictions on excess_business_holdings under sec_4943 will not apply thus foundation’s nonvoting interests in new llc will not constitute excess_business_holdings under sec_4943 plr-127663-16 conclusion based solely on the facts and representations submitted we rule that founder’s proposed gift to foundation by means of a transfer by revocable_trust of nonvoting interests in new llc the sole asset of which is a promissory note from a disqualified_person with respect to foundation will not constitute an act of direct or indirect self- dealing under sec_4941 in addition we rule that the nonvoting interests of new llc to be held by foundation will not constitute excess_business_holdings under sec_4943 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 as specified in revproc_2017_1 2017_1_irb_1 b we have not verified any of the material submitted in support of the request for rulings and such material is subject_to verification on examination the associate office will revoke or modify a letter_ruling and apply the revocation retroactively if there has been a misstatement or omission of controlling facts the facts at the time of the transaction are materially different from the controlling facts on which the ruling is based or the transaction involves a continuing action or series of actions and the controlling facts change during the course of the transaction see revproc_2017_1 sec_11 no ruling is granted as to whether foundation qualifies as an organization described in sec_501 or sec_509 no opinion is expressed regarding the value of the voting or nonvoting interests for estate_tax purposes see 674_f2d_761 9th cir except as expressly provided above no opinion is expressed or implied concerning the federal income or foundation excise_tax consequences of any other aspects of any transaction or item_of_income described in this letter_ruling this ruling will be made available for public inspection under sec_6110 after certain deletions of identifying information are made for details see enclosed notice notice of intent to disclose a copy of this ruling showing the deletions that we intend to make on the version that will be made available to the public is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice this letter_ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-127663-16 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 _______________________________ amy f giuliano senior technician reviewer exempt_organizations branch associate chief_counsel tax exempt and government entities cc