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 fip b03 plr-123202-09 date date legend trust ----------------------------------------------------------- --------------------------------------- partnership --------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------- company a company b accounting firm state x date date date year year dear ---------------- ---------------------------------------- -------------------------------------------- ---------------------------------------- ------------------ ------------------- ---------------- -------------------------- ------- ------- this responds to your letter dated date submitted on behalf of trust trust requests under sec_301 and of the procedure and plr-123202-09 administration regulations an extension of time to elect under sec_856 of the internal_revenue_code code to be treated as a real_estate_investment_trust reit and under sec_565 to make a consent_dividend election for the taxable_year ending date facts trust a state x llc was formed date and elected to be classified as a corporation effective date by timely filing form_8832 entity classification election during year trust’s sole owner was partnership which was owned by various institutional investors and managed by company a a subsidiary of company b_trust represents that for its taxable_year ending date trust intended to make an election under sec_856 of the code and sec_1_856-2 of the income_tax regulations regulations to be treated as a reit accounting firm was engaged in year to provide advice and assist in the preparation of trust’s year form 1120-reit u s income_tax return for real_estate_investment_trusts including the preparation of a form_7004 application_for automatic_extension of time to file certain business income_tax information and other returns during the course of year company a experienced a significant increase in work and the loss of many staff members including its internal tax director trust represents that these events contributed to less oversight of filing deadlines and an increased reliance on external advisors to monitor return deadlines although accounting firm held responsibility for tracking trust’s filing deadlines and for assisting in the preparation of trust’s returns and extensions trust missed the deadline to file its form_7004 for its form 1120-reit for its taxable_year ending date the senior associate at accounting firm assigned to trust changed in early year and the new senior associate and the associate’s overseer missed the filing deadline trust represents that it intended to make and partnership intended to consent to a consent_dividend election under sec_565 of the code and sec_1_565-1 of the regulations on trust’s timely filed year form 1120-reit consistent with that intention in the third month of the first quarter of year partnership distributed year schedules k-1 to its investors which included a non-qualified dividend equal to trust’s year net taxable_income upon discovering form_7004 for its year form 1120-reit was not filed timely trust requested this extension of time to elect to be treated as a reit and to make a consent_dividend election for its taxable_year ending date as of the date of its ruling_request trust had not yet filed its form 1120-reit for its taxable_year ending date subsequently trust filed said return as if the relief requested therein had been granted plr-123202-09 trust makes the following additional representations as to each request the request for relief was filed by trust before the failure to make the regulatory election was discovered by the service granting the relief will not result in trust having a lower tax_liability in the aggregate for all tax years to which the regulatory election applies than that trust would have had it the election had been timely made taking into account the time_value_of_money trust did not seek to alter a return position for which an accuracy related penalty has been or could have been imposed under sec_6662 of the code at the time trust requested relief and the new position requires or permits a regulatory election for which relief is requested being fully informed of the required regulatory election and related tax consequences trust did not choose to not file the election applicable law sec_856 provides that a corporation trust or association shall not be considered a reit for any taxable_year unless it files with its return for the taxable_year an election to be a reit or has made such election for a previous taxable_year and such election has not be terminated or revoked pursuant to sec_1_856-2 of the regulations the election shall be made by computing taxable_income as a reit in its return for the first taxable_year for which it desires the election to apply sec_565 provides that if any person owns consent_stock as defined in sec_565 in a corporation on the last day of the taxable_year of such corporation and such person agrees in a consent filed with the return of such corporation in accordance with the regulations to treat as a dividend the amount specified in such consent the amount so specified shall except as provided in sec_565 constitute a dividend for purposes of sec_561 relating to the deduction for dividends_paid sec_1_565-1 provides that the dividends_paid deduction as defined in sec_561 includes the consent dividends for the taxable_year a consent_dividend is a hypothetical distribution as distinguished from an actual distribution made by certain corporations to any person who owns consent_stock on the last day of the taxable_year of such corporation and who agrees to treat the hypothetical distribution as an actual dividend subject_to specified limitations by filing a consent at the time and in the manner specified in sec_1_565-1 sec_1_565-1 sec_1_565-1 plr-123202-09 provides that a consent may be filed no later than the due_date of the corporation’s income_tax return for the taxable_year for which the dividends_paid deduction is claimed under revrul_78_296 1978_2_cb_183 the due_date for purposes of sec_1 b includes the extended due_date of a return filed pursuant to an extension of the time to file sec_301_9100-1 of the regulations provides that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election defined in sec_301_9100-1 as an election whose due_date is prescribed by regulations or by a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 through c i sets forth rules that the internal_revenue_service generally will use to determine whether under the particular facts and circumstances of each situation the commissioner will grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that subject_to paragraphs b i through iii of sec_301_9100-3 when a taxpayer applies for relief under this section before the failure to make the regulatory election is discovered by the service the taxpayer will be deemed to have acted reasonably and in good_faith and sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money conclusion based on the information submitted and representations made we conclude trust has satisfied the requirements for granting a reasonable extension of time to make an election under sec_856 of the code and sec_1_856-2 of the regulations to be treated as a reit and to make a consent_dividend election under sec_565 of the code and sec_1_565-1 of the regulations for its taxable_year ending date accordingly the election to be treated as a reit and the consent_dividend election made on trust’s year form 1120-reit for its taxable_year ending date which return was filed after the date of its ruling_request as if the relief requested therein had been granted and before the date of this ruling will be considered as timely made this ruling is limited to the timeliness of the reit election and consent_dividend election trust made for its taxable_year ending date this ruling's application is limited to the facts representations code sections and regulations cited herein plr-123202-09 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular no opinion is expressed with regard to whether trust qualifies as a reit under subchapter_m of the code moreover no opinion is expressed with regard to whether the tax_liability of trust is not lower in the aggregate for all years to which the election applies than such tax_liability would have been if the election had been timely made taking into account the time_value_of_money upon audit of the federal_income_tax returns involved the director's office will determine such tax_liability for the years involved if the director's office determines that such tax_liability is lower that office will determine the federal_income_tax effect the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination 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 alice m bennett alice m bennett branch chief branch associate chief_counsel financial institutions products enclosures copy of the letter copy of sec_6110 purposes


internal_revenue_service number release date index number ---------------------------------- -------------------------- ------------------------------------------- -------------------------------- in re --------------------------------------------------- ---------------------------------- ---------------------------- ----------------------------- department of the treasury washington dc person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b04 - plr-150937-02 date june legend settlor spouse child a_trust trust a - - - - - ------------------------------ -------------------------------- ------------------------------ ---------------------------------------------------------------------- ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ---------------------------------------------- ---------------------------------------------------------------------------- ----------------------------- --------------------------- ---------------- -------------------------- ----------------------- ------------------- ------------------- --------- ---------------------------------------------------- trust b trustee date date date date date date state x citation a dear --------------------- skipping transfer_tax consequences of the proposed severance and modification of trust a this letter is in reply to your request for a ruling regarding the generation- - - - - - - - - - - plr-150937-02 facts on date settlor created trust a revocable_trust that settlor subsequently amended on date and again on date all prior to date settlor died on date after date but before date at which time trust became irrevocable settlor was survived by spouse and five children including child a spouse died on date trustee an independent corporation is the trustee of trust and each trust created under the terms of trust trust is governed by the law of state x article fifth of trust provides in part a upon the death of settlor if the settlor s wife spouse survives him the trustees shall hold the balance of the trust principal in further trust as follows during the life of settlor s wife spouse a the trustees shall pay spouse the income of the trust at least quarterly b the trustees shall pay spouse as much principal of the trust even to the extent of all or none i as spouse may request from time to time or ii as the trustees shall determine in their discretion from time to time upon spouse s death the principal was to be distributed pursuant to the terms of article sixth paragraphs a and b of article sixth as amended provide as follows a at the death of the survivor of settlor and his wife spouse the trust principal to be disposed of as directed in this article shall be divided and set apart in equal shares for those of the settlor s children child a and the other four children who are then living except that if a child of the settlor is then deceased and leaves issue then living the share that would have been set apart for the deceased child if he or she were then living shall be distributed to his or her then living issue per stirpes b each share so set apart for a child of the settlor shall constitute and be administered as a separate trust identified by that child s name and shall be disposed of as follows plr-150937-02 the trust shall terminate upon the death of the settlor s child whose name identifies the trust during the term of the trust the trustees shall pay as much income and principal of the trust even to the extent of all or none at any time or from time to time to any one or more persons including persons born at any time after the date of this agreement within a group consisting of the settlor s child whose name identifies the trust that child s spouse and that child s children and grandchildren and their spouses as the trustees shall determine in their discretion the trustees shall accumulate and add to principal income not paid to the beneficiaries upon termination of the trust the trustees shall distribute the principal of the trust to the then living issue per stirpes of the child of the settlor whose name identifies the trust or if no such issue is then living to the settlor s then living issue per stirpes except that principal that becomes distributable to a child of the settlor or to a person for whose current benefit a_trust under paragraph c of this article then subsists shall not be distributed to that child or other person and shall instead be added to his or her trust paragraph c of article sixth provides generally that notwithstanding previous dispositive provisions principal that becomes distributable at the death of settlor or spouse or at the termination of a_trust established for the benefit of settlor and spouse s child to a beneficiary under the age of years shall be held in trust with one-half of the principal to be distributed when the beneficiary attains age and the balance payable when the beneficiary attains age during this period income will be payable to the beneficiary at the discretion of the trustee if the beneficiary dies before attaining age the principal will be distributed to or in trust for the benefit of the beneficiary s living issue or if none to the living issue of the beneficiary s nearest ancestor who was an issue of settlor or if none to the settlor s then living issue article seventh paragraph b as amended on date addresses the trustees discretionary distribution powers and provides b in exercising their discretionary power to pay principal to the settlor s wife the trustees may consider or ignore as the trustees deem advisable other resources of the settlor s wife in exercising their discretionary power to pay principal to any child or other issue of the settlor or the spouse of any child or issue of the settlor the trustees shall take into account other resources of such person but shall not pay principal to any person so long as any trust subsists under an agreement plr-150937-02 trust b from which discretionary payments of principal may be made to such person on date within months of settlor s death spouse executed a disclaimer renouncing her power under paragraph a b i of article fifth to withdraw trust corpus during her life it is represented that on the federal estate_tax_return filed for settlor s estate the estate s executor elected to treat the marital trust created under article fifth as qualified_terminable_interest_property under ' b of the code upon the death of spouse and pursuant to the terms of trust trust was divided into five separate trusts one trust for each of settlor s five children including trust a for the benefit of child a trustee proposes to reform trust by amending paragraph b of article sixth inserting a new paragraph c of article sixth modifying the existing paragraph c of article sixth by redesignating it as paragraph d and amending paragraph b of article seventh amended paragraph b of article sixth will read as follows b the share so set apart for child a shall be disposed of as directed in paragraph c of this article each share so set apart for a child of the settlor other than child a shall constitute and be administered as a separate trust identified by that child s name and shall be disposed of as follows the trust shall terminate upon the death of the settlor s child whose name identifies the trust during the term of the trust the trustees shall pay as much income and principal of the trust even to the extent of all or none at any time or from time to time to any one or more persons including persons born at any time after the date of this agreement within a group consisting of the settlor s child whose name identifies the trust that child s spouse and that child s children and grandchildren and their spouses as the trustees shall determine in their discretion the trustees shall accumulate and add to principal income not paid to the beneficiaries upon termination of the trust the trustees shall distribute the principal of the trust to the then living issue per stirpes of the child of the settlor whose name identifies the trust or if no such issue is then living to the settlor s then living issue per stirpes except that principal that becomes distributable to a child of the settlor or to a person for whose current plr-150937-02 benefit a_trust under paragraph c or paragraph d of this article then subsists shall not be distributed to that child or other person and shall instead be added to his or her trust new paragraph c of article sixth will read as follows c the share set apart for child a to be disposed of as directed in this paragraph shall be divided and set apart in equal shares for the settlor s grandchildren who are the children of child a namely the named grandchildren each share so set apart for a grandchild of the settlor shall constitute and be administered as a separate trust identified by that grandchild s name and shall be disposed of as follows the trust shall terminate upon the death of child a during the term of the trust the trustees shall pay as much income and principal of the trust even to the extent of all or none at any time or from time to time to any one or more persons including persons born at any time after the date of this agreement within a group consisting of the settlor s grandchild whose name identifies the trust that grandchild s spouse and that grandchild s children and their spouses child a and child a s spouse as the trustees shall determine in their discretion the trustees shall accumulate and add to principal income not paid to the beneficiaries upon termination of the trust the trustees shall distribute the principal of the trust to the grandchild whose name identifies the trust or if such grandchild is not then living to the then living issue per stirpes of such grandchild or if no such issue is then living to the then living issue per stirpes of child a or if no such issue is then living to the settlor s then living issue per stirpes except that i principal that becomes distributable to a person for whose current benefit a_trust then subsists under paragraph b or paragraph d of this article or under this paragraph shall not be distributed to that person and shall instead be added to his or her trust and ii principal that becomes distributable to a beneficiary who has not then attained the age of years and for whose current benefit a_trust under paragraph d of this article does not then subsist shall not be distributed to that beneficiary and shall instead be held by the trustees as a separate trust for his or her benefit and administered pursuant to the terms of paragraph d redesignated paragraph d of article sixth will be identical to the original paragraph c of article sixth in trust as amended and will read as follows plr-150937-02 d notwithstanding the foregoing provisions principal that becomes distributable at the death of the survivor of the settlor and his wife spouse or at the termination of a_trust identified by a name of a child or grandchild of the settlor to a beneficiary who has not then attained the age of years shall not be distributed to that beneficiary and shall instead be held separately in trust until the beneficiary attains the age of years the trustees shall pay him or her as much income and principal of the trust even to the extent of all or none at any time or from time to time as the trustees shall determine in their discretion the trustees shall accumulate and add to principal income not paid to the beneficiary when the beneficiary attains the age of years the trustees shall distribute to him or her one-half of whatever principal then remains in the trust or if the beneficiary has already attained that age when the trust is created the trustees shall distribute to him or her one-half of the original principal of the trust upon the creation thereof when the beneficiary attains the age of years the trustees shall distribute to him or her whatever principal then remains in the trust if the beneficiary dies before attaining the age of years the trustees shall distribute whatever principal remains in the trust at the beneficiary s death to the beneficiary s then living children in equal shares or if no such child is then living to the then living issue per stirpes of the beneficiary s nearest ancestor who was an issue of the settlor or if no such issue is then living to the settlor s then living issue per stirpes except that principal that becomes distributable to a child of the settlor or a person for whose current benefit a_trust under this paragraph d then subsists shall not be distributed to that child or other person and shall instead be added to his or her trust hereunder notwithstanding the foregoing provisions if a_trust is created under this paragraph d for the current benefit of a person who was not alive on the date when the settlor s power_to_revoke this trust terminates and if that trust does not terminate pursuant to the foregoing provisions prior to the expiration of years after the death of the last to die of the settlor s children and grandchildren who were alive on that date the trust shall terminate upon the expiration of that years period and whatever principal then remains in that trust shall be distributed to the person for whose current benefit the trust was created plr-150937-02 amended paragraph b of article seventh will read as follows b in exercising their discretionary power to pay principal to the settlor s wife the trustees may consider or ignore as the trustees deem advisable other resources of the settlor s wife in exercising their discretionary power to pay principal to any child or other issue of the settlor or the spouse of any child or other issue of the settlor the trustees shall take into account other resources of such person except that the trustees may but shall not be required to take into account the existence of any trust under trust b from which discretionary payments of principal may be made to such person thus under the proposed division and reformation trust a for the benefit of child a and her descendants would be divided into four separate subtrusts one for the benefit of each of the children of child a and their descendants each separate subtrust will also include child a and child a s spouse as discretionary beneficiaries as stated above redesignated paragraph d of article sixth of trust is identical to the original paragraph c of article sixth amended paragraph b of article seventh will authorize the trustees to make discretionary distributions of principal to current beneficiaries of the trust a subtrusts even if these beneficiaries are discretionary beneficiaries of trusts created under trust b you have represented that no additions actual or constructive have been made to either trust or trust a since date the date of settlor s death otherwise provided in the trust instrument the trustee has the power the law of state x at citation a provides in pertinent part that unless to sever any trust on a fractional basis into two or more separate and identical trusts for any reason or to segregate by allocation to a separate_account or trust a specific amount from a portion of or specific assets included in the trust property of any trust unless expressly provided to the contrary in the trust instrument income earned on a segregated amount portion or specific asset after the segregation is effective passes with the amount portion or asset segregated each separate trust must be held and administered upon the identical terms and conditions of the trust from which it was severed specifically you request a ruling that the proposed division and modification of trust will not constitute a generation-skipping_transfer subject_to the generation-skipping_transfer gst tax under sec_2601 of the internal_revenue_code and the proposed division will not cause the resulting trusts to be subject_to the gst tax law and analysis plr-150937-02 sec_2601 imposes tax on every generation-skipping_transfer which is defined under ' as a taxable_distribution a taxable_termination or a direct_skip under ' a of the tax_reform_act_of_1986 the act the gst tax is generally applicable to generation-skipping transfers made after date however under ' b a of the act and ' b i of the generation-skipping_transfer_tax regulations the gst tax does not apply to any generation-skipping_transfer under a_trust that was irrevocable on date except to the extent the transfer is not made out of actual or constructive additions to the trust after date sec_26_2601-1 provides that except as provided in ' b ii b or c any trust as defined in ' b in existence on date is considered an irrevocable_trust under ' b b of the act and ' b i the gst tax does not apply to any generation-skipping_transfer under a will or revocable_trust executed before date provided that a the document in existence on date is not amended at any time after date in any respect which results in the creation of or increase in the amount of a generation-skipping_transfer b in the case of a revocable_trust no addition is made to the revocable_trust after date and c the decedent dies before date sec_26 b v a provides that except as provided under ' b v b where any portion of a_trust remains in the trust after the post date release exercise or lapse of a power_of_appointment over that portion of the trust and the release exercise or lapse is treated to any extent as a taxable transfer under chapter or chapter the value of the entire portion of the trust subject_to the power that was released exercised or lapsed is treated as if that portion had been withdrawn and immediately retransferred to the trust at the time of the release exercise or lapse the creator of the power will be considered the transferor of the addition except to the extent that the release exercise or lapse of the power is treated as a taxable transfer under chapter or chapter 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 will not cause the trust to lose its exempt status the regulation provides that these rules only apply for generation-skipping_transfer_tax purposes the rules do not apply in determining whether the transaction results in a gift subject_to the gift_tax or may cause the trust to be included in the gross_estate or may result in the realization of capital_gains for purposes of ' sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the plr-150937-02 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 ' than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer sec_26_2601-1 example describes a situation where in the grantor established an irrevocable_trust for the benefit of his two children a and b and their issue the trustee had the discretion to distribute income and principal to the beneficiaries the trust would terminate upon the death of the last to die of a and b and the principal would be distributed to the living issue of a and b per stirpes in a court order divided the trust into two equal trusts one for the primary benefit of a and a s issue and the other for the primary benefit of b and b s issue with trustee discretionary distributions of income and principal along each family line each trust would terminate upon the death of the primary beneficiary a or b and the principal would be distributed to the issue per stirpes of each primary beneficiary if there are no living descendants of the primary beneficiary the principal of that trust would be added to the trust for the benefit of the other primary beneficiary and his or her issue the example concludes that the division of the trust into two trusts does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation than the person or persons who held the beneficial_interest prior to the division the example also concludes that the division does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust in this case trust was revocable on date and was not amended after that date the settlor died after date but before date you have represented that no additions constructive or actual have been made to trust or trust a after date the date that trust a became irrevocable in addition see ' b iii and sec_26_2601-1 regarding a special rule for trusts subject_to an election under ' b plr-150937-02 accordingly assuming spouse s disclaimer was a qualified_disclaimer under ' trust and the trusts created under its terms including trust a are exempt from the gst tax and transfers from trust and the trusts created under its terms are not subject_to the generation-skipping_transfer_tax the parties propose to divide trust a into equal and separate subtrusts one subtrust each for the benefit of the four children of child a and their descendants each resulting subtrust will have dispositive provisions identical to those of trust a with the exception that each trust will be established for the benefit of the named grandchild his or her spouse and descendants and child a and child a s spouse as noted above paragraph b of article seventh will be modified to authorize the trustees to make discretionary principal distributions to a_trust beneficiary notwithstanding that the beneficiary is also a beneficiary of any trust created under trust b in this case the beneficiaries of trust a and the trust a subtrusts are also beneficiaries of trust b thus this modification may result in the acceleration of principal distributions to the trust a beneficiaries but will not shift a beneficial_interest in trust a to lower generation beneficiaries or delay vesting of the trust a corpus we conclude that the proposed reformation and division of trust a into separate subtrusts as described above will not shift a beneficial_interest in the subtrusts to any beneficiary who occupies a lower generation than the persons who held the beneficial_interest prior to the division the proposed division will not extend the time for vesting of any beneficial_interest in the subtrusts beyond the time provided for in trust a see ' b i e example accordingly assuming spouse s disclaimer was a qualified_disclaimer under ' based on the facts submitted and the representations made we conclude that after the reformation and division the resulting subtrusts will be exempt from the gst tax imposed under ' further the proposed reformation and division will not constitute an addition to trust a or the resulting trusts accordingly future distributions from the resulting subtrusts will be exempt from gst tax 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 we are not ruling on whether the transaction may result in the realization of capital_gain to the beneficiaries of the subtrusts of trust a for purposes of ' this ruling is directed only to the taxpayer s requesting it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to any_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer representations submitted by the taxpayer and accompanied by a penalty of perjury the rulings contained in this letter are based upon information and plr-150937-02 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 enclosure copy for ' purposes cc george masnik chief branch office of associate chief_counsel passthroughs and special industries


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 2-plr-128030-02 date april legend x trust date date n group p dollar_figurea dear this responds to your letter dated date submitted on behalf of x and trust requesting rulings on several issues arising from the establishment funding and potential termination of trust under sec_646 of the internal_revenue_code and other provisions in the alaska native claims settlement act of ancsa u s c et seq settled the alaska natives' claims to land and resources ancsa implements the settlement of native alaskans’ aboriginal land claims by providing for the conveyance of certain lands and money alaska native fund or anf to alaska native corporations anc established by qualified alaska natives as compensation plr-128030-02 the ancsa provided that all united_states citizens with or more of alaska indian eskimo or aleut blood who were living on date were qualified to participate in the settlement the natives who qualified to participate in the settlement were allowed to enroll as stockholders and receive stock settlement_common_stock in one of the twelve regional corporations and in one local village corporation created under the act to receive assets the ancsa as originally enacted provided that for a period of years after date the stock inchoate rights thereto and any dividends_paid or distributions made with respect thereto may not be sold pledged subjected to a lien or judgment execution assigned in present or future or otherwise alienated this limitation however did not apply to transfers of stock pursuant to a court decree of separation divorce or child_support by a stockholder who is a member of a professional organization association or board which limits the ability of that stockholder to practice his profession because of holding such stock or by intervivos gift to certain family members the ancsa also provided that upon the death of any stockholder ownership of such stock shall be transferred to any person in accordance with his last will and testament or under the applicable laws of intestacy except that during the 20-year period after date such stock shall carry voting rights only if the holder thereof through inheritance is also an alaska native subsequent amendments to the ancsa generally extend beyond date the alienability restrictions on the settlement_common_stock of an anc unless and until the shareholders of the corporation decide to terminate them u s c 1629c if the shareholders vote to terminate the alienation restrictions on the stock all settlement_common_stock is canceled as a matter of law and is replaced with unrestricted replacement common_stock u s c h thereupon the special character of the corporation as an anc created under ancsa ceases and the corporation becomes a regular domestic_corporation subject_to regulation under securities laws to accommodate the desire of certain ancs to transfer a portion of their assets out of the corporate form the alaska native claims settlement act amendment of authorizes the conveyance of certain assets of an anc to a state-chartered settlement_trust u s c 1629e the general purpose of a settlement_trust is to preserve native heritage and culture and to promote the health education and economic welfare of its beneficiaries the shareholders of the transferor anc and their lawful successors the trust is to be used to insulate permanently land as well as other assets transferred to it from the business risks undertaken by the corporation such trusts may not operate as a business nor may they make a subsequent transfer of land or interests therein except for a reconveyance to the transferor_corporation if such reconveyance is authorized in the trust instrument u s c 1629e if the board_of directors of an anc adopts a resolution to establish a settlement_trust the resolution to establish the trust must be submitted to a vote of the corporation's shareholders for approval u s c 1629b a and 1629b b the shareholders however are not required to approve the conveyance of any assets by plr-128030-02 the corporation to the trust unless all or substantially_all of the assets of the corporation are to be conveyed u s c 1629e a b sec_646 was enacted as part of the economic_growth_and_tax_relief_reconciliation_act_of_2001 egtrra sec_646 addresses several aspects concerning the tax treatment of alaska native settlement trusts the information submitted states that x was incorporated in date as an anc pursuant to the ancsa and alaska state law x has approximately n shareholders predominantly of native alaskan group descent on date x’s board_of directors approved a plan to begin the process of establishing the trust the objective of the trust is to provide long-term pro_rata distributions to x’s shareholders who are the trust’s beneficiaries to promote the health education and welfare of the beneficiaries and preserve the heritage and culture of alaska natives x will fund the trust with approximately dollar_figurea of cash and assets the trust may not be altered amended or terminated except as provided in the trust document the trust provides for modification and termination if x is merged dissolved or consolidated or if in accordance with sec_37 u s c 1629c of the ancsa the restrictions on alienation of x stock are lifted modification and termination are contingent upon a majority vote of beneficiaries holding voting_trust units upon termination the trust provides that all principal and undistributed_income of the trust after allowing for claims of creditors of the trust the fees of the trustees claims by the trustees for expenses_incurred on behalf of the trust or any other liabilities of the trust so terminated shall be distributed to the beneficiaries of the trust in the proportions in which they are at the time of termination entitled to receive the income additionally the trust provides that the trust may be modified or terminated if an event occurs that will have a material adverse effect on the trust the trustees are required to petition a local state court to approve any modification or termination under those circumstances the beneficiaries of the trust will be the holders of x’s settlement_common_stock the beneficiaries will hold the same number of trust units in the trust as they have shares of x’s settlement_common_stock however if x’s shareholders vote to issue additional x settlement_common_stock additional corresponding trust units will not be issued the trust units are divided into voting and non-voting trust units corresponding to voting and non-voting x stock each trust unit is entitled to the same benefits except a voting unit is also entitled to vote in limited circumstances such as trust termination a beneficiary will be issued voting_trust units or non-voting trust units depending upon whether the beneficiary holds voting or non-voting x settlement_common_stock in accordance with x’s articles of incorporation the trust provides that the trust units may not be transferred separately from x’s settlement_common_stock this is referred to as stapled together certificates will not be issued for the trust units if x is merged dissolved or consolidated or if x’s shareholders vote to terminate the ancsa restrictions applicable to transferring the stock the trust units will be unstapled from x’s settlement_common_stock however the ancsa restrictions will still apply to transferability of the trust units additionally a plr-128030-02 beneficiary may not assign a_trust unit to a creditor or create a security_interest in a_trust unit underlying trust assets or present or future trust distributions the trust provides that there will be p trustees all of whom will be natural persons as required by ancsa and at least one of whom will be an alaska resident at all times a majority plus one of the p trustees may not be employees of x or x’s affiliates x’s board_of directors will appoint the trustees and have the power to remove any trustee for cause in the event x is merged dissolved or consolidated or x’s shareholders vote to terminate the alienation restrictions on the x settlement_common_stock but the trust does not terminate the trustees will appoint their own successors if federal or local law does not permit the trustees to appoint their successors x’s board_of directors will continue to appoint the trustees unless x no longer exists if x no longer exists but there is a successor anc corporation the successor anc will appoint the trustees if there is no such successor anc the trustees will hold office indefinitely the trust authorizes the trustees to act as owners of the trust and are granted the sole and absolute discretion to make trust distributions to the beneficiaries as well as the discretion to determine the amount of the distribution if any however the trustees are prohibited from exercising any power primarily for the benefit of x or its affiliates rather than for the benefit of the beneficiaries sec_301_7701-4 of the procedure and administration regulations provides that in general an arrangement will be treated as a_trust under the code if the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and therefore are not associates in a joint enterprise for the conduct of business for profit based on the facts and circumstances of this case and in light of the congressional purpose expressed in the governing federal statute concerning settlement trusts the trust is properly classified as a_trust described in sec_301_7701-4 sec_646 provides that if a sec_646 election is in effect with respect to any settlement_trust the provisions of sec_646 shall apply in determining the income_tax treatment of the settlement_trust and its beneficiaries with respect to the settlement_trust provided that the trust meets all the requirements to be a settlement_trust including making the necessary election under sec_646 we conclude that sec_646 governs the income_tax treatment of the trust accordingly subpart e of part i of subchapter_j of chapter of the code grantor_trust provisions will not govern the income_tax treatment of the trust during any period that the sec_646 election is in effect for the trust additionally x requests a ruling that the trust is not a grantor_trust under subpart e for any period during which the sec_646 election is not in effect for the trust sec_646 will sunset on date thus it is necessary to determine whether the trust would be a grantor_trust under subpart e after the sunset of sec_646 the following analysis and conclusions are based on current provisions of the code which provisions plr-128030-02 may or may not be applicable after the sunset of sec_646 sec_671 provides in general that if the grantor of a_trust or another person is treated as the owner of any portion of the trust that person's taxable_income and credits shall include the income deductions and credits of the trust attributable to that portion of the trust to the extent that such items would be considered in computing the taxable_income or credits of an individual sec_673 through specify the circumstances under which the grantor or another person will be regarded as the owner of a portion of a_trust our examination of the trust reveals none of the circumstances that would cause the grantor or any other person to be treated as the owner of any portion of the trust under sec_673 sec_676 or sec_678 sec_674 provides that the grantor shall be treated as the owner of any portion of a_trust in respect of which the beneficial_enjoyment of the trust corpus or income is subject_to a power of disposition exercisable by the grantor or a nonadverse_party without the approval or consent of any adverse_party sec_674 provides that sec_674 shall not apply to a power solely exercisable without the approval or consent of any other person by a trustee or trustees none of whom is the grantor and no more than half of whom are related or subordinate parties who are subservient to the wishes of the grantor to distribute apportion or accumulate income to or for a beneficiary or beneficiaries or to for or within a class of beneficiaries or to pay out corpus to or for a beneficiary or beneficiaries or to or for a class of beneficiaries whether or not income beneficiaries sec_1_674_d_-2 provides limitations on the sec_674 exception to sec_674 the sec_674 exceptions to sec_674 will not apply if a the grantor has the power to remove substitute or add trustees except upon certain limited conditions or b if any person has the power to add to the beneficiary or beneficiaries or class of beneficiaries designated to receive the income or corpus except where the action is to provide for after-born or after-adopted children x as the grantor does not hold any power to affect the beneficial_enjoyment of any portion of the trust the trust authorizes the trustees to act as owners of the trust and are granted the sole and absolute discretion to make trust distributions to the beneficiaries as well as the discretion to determine the amount of the distribution if any however the trustees are prohibited from exercising any powers vested in the trustees primarily for the benefit of x or its affiliates rather than for the benefit of the beneficiaries x does not have the power to remove add or substitute trustees without cause and no person has the authority to add beneficiaries within the meaning of sec_1_674_d_-2 thus no more than half of the trustees are related or subordinate parties who are subservient to the wishes of x accordingly x is not treated as the owner under sec_674 furthermore the powers held by the trustees fall within the exception provided in sec_674 based on the facts and circumstances of this case we conclude that the powers held by the trustees are excluded from the general_rule of sec_674 plr-128030-02 under sec_675 and applicable regulations the grantor is treated as the owner of any portion of a_trust if under the terms of the trust agreement or circumstances attendant on its operation administrative control is exercised primarily for the benefit of the grantor rather than the beneficiary of the trust our examination of the trust reveals none of the circumstances that cause administrative controls to be considered exercisable primarily for the benefit of the grantor under sec_675 of the code thus the circumstances attendant on the operation of the trust will determine whether the grantor will be treated as the owner of any portion of the trust under sec_675 this is a question of fact the determination of which must be made by the director field operations with which the parties file their tax returns sec_677 provides that the grantor shall be treated as the owner of any portion of a_trust whether or not the grantor is treated as the owner under sec_674 the income of which is or in the discretion of the grantor or a nonadverse_party or both may be distributed to the grantor or held or accumulated for future distribution to the grantor without the approval or consent of any adverse_party sec_1_677_a_-1 of the income_tax regulations provides that a grantor shall be treated as the owner of a portion of a_trust whose income is or in the discretion of the grantor or a nonadverse_party or both may be applied in discharge of a legal_obligation of the grantor assets held by a settlement_trust may not be used to satisfy the debts of an anc unless those assets were encumbered before their conveyance to the settlement_trust or their conveyance rendered the corporation insolvent or occurred when the corporation was insolvent u s c 1629e c the trust provides that for those liabilities of x existing at the time x transfers assets to the trust creditors can reach the trust assets only if the assets remaining in x are inadequate to satisfy such liabilities furthermore the trust assets may not be used to satisfy any other liability of x x represents that retained corporate assets after the transfer of assets to the trust will be more than adequate to meet x's obligations based on all the facts and circumstances including x's representations x will not be treated as the owner of any portion of the trust under sec_677 sec_301 provides in general that except as otherwise provided a distribution_of_property made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in sec_301 under sec_301 and sec_316 the distribution shall be taxable as a dividend to the extent of the earnings_and_profits of the distributing_corporation sec_301 provides that the basis_of_property received in a distribution to which sec_301 applies shall be the fair_market_value of such property plr-128030-02 sec_311 provides that if a corporation distributes property other than an obligation of the corporation to a shareholder in a distribution to which subpart a applies and the fair_market_value of the property exceeds its adjusted_basis in the hands of the distributing_corporation then gain shall be recognized to the distributing_corporation as if such property were sold to the distributee for its fair_market_value sec_646 provides that in the case of an electing_settlement_trust no amount shall be includible in the gross_income of a beneficiary of such trust by reason of a contribution to such trust sec_646 provides that the earnings_and_profits of the sponsoring_native_corporation shall not be reduced on account of any contribution to such settlement_trust sec_646 provides that the taxable_income of an electing_settlement_trust shall be determined under sec_641 without regard to any deduction under sec_651 or sec_661 sec_1015 provides that if property was acquired after date by a transfer in trust other than by a transfer in trust by a gift bequest or devise the basis shall be the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on such transfer under the law applicable to the year in which the transfer was made sec_1_1015-2 provides that in the case of property acquired after date by transfer in trust other than by transfer in trust by gift bequest or devise the basis_of_property so acquired is the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on the transfer under the law applicable to the year in which the transfer was made if the taxpayer acquired the property by transfer in trust this basis applies whether the property be in the hands of the trustee or the beneficiary and whether acquired prior to termination of the trust and distribution of the property or thereafter sec_1223 provides that in determining the period for which the taxpayer has held property however acquired there shall be included the period for which the property was held by any other person if under chapter of the code such property has for the purpose of determining gain_or_loss from a sale_or_exchange the same basis in whole or in part in his hands as it would have in the hands of such other person provided that the trust meets all the requirements to be a settlement_trust including making the necessary election under sec_646 we conclude that no amount shall be included in the gross_income of x’s shareholders or trust beneficiaries when x contributes property including cash to the trust sec_646 x’s contributions to the trust do not constitute gross_income to the trust plr-128030-02 x must recognize gain on any property including ancsa land contributed to the trust that has a fair_market_value in excess of its basis in an amount equal to the excess of its fair_market_value over its adjusted_basis sec_311 the basis of such property in the hands of the trust shall be equal to its fair_market_value on the day it is contributed to the trust sec_301 the trust’s holding_period for this property begins on the day the trust receives the property cf sec_1223 property that is contributed to the trust that is not subject_to sec_311 as provided above must be treated as property transferred to the trust subject_to sec_1015 so that x’s basis in such property carries over to the trust section sec_1015 additionally the trust’s holding_period shall include the period for which x held those assets sec_1223 sec_646 provides that any loss that would otherwise be recognized by a shareholder upon a disposition of a share of stock of a sponsoring_native_corporation shall be reduced but not below zero by the per share loss adjustment factor the per share loss adjustment factor shall be the aggregate of all contributions to all electing settlement trusts sponsored by such native_corporation made on or after the first day each trust is treated as an electing_settlement_trust expressed on a per share basis and determined as of the day of each such contribution since any loss allowed on the disposition of anc stock must be reduced by the aggregate of all contributions expressed on a per share basis a reduction of basis in x stock at the time x makes contributions to the trust is not appropriate therefore an x shareholder’s basis in x stock will not be reduced by reason of contributions made to the trust sec_646 sec_901 of egtrra provides a sunset provision that all provisions of and amendments made by egtrra shall not apply to taxable plan or limitation years beginning after date or in the case of title v to estates of decedents dying gifts made or generation skipping transfers after date the legislative_history states that for such taxable years beginning after date the tax consequences of any election previously made under sec_646 and any right to make a future election shall be terminated furthermore any electing trust then in existence its beneficiaries and the sponsoring anc shall be taxed under the provisions of law in effect immediately prior to the enactment of sec_646 h_r conf_rep no pincite therefore we conclude that the sunset of sec_646 will not be treated as causing a taxable_distribution from x to the trust or its beneficiaries or to x’s shareholders with respect to any contributions made by x to the trust during any years for which the trust has a sec_646 election in effect sec_646 provides that there is imposed on the taxable_income of an electing_settlement_trust other than its net_capital_gain a tax at the lowest rate specified in sec_1 sec_646 provides that in the case of an electing_settlement_trust with a net_capital_gain for the taxable_year a tax is imposed on such gain at the rate_of_tax that would apply to such gain if the taxpayer were subject_to a tax on its other taxable_income at only the lowest rate specified in sec_1 plr-128030-02 sec_1 provides that there is imposed on the taxable_income of every individual who is not a married individual a tax of of taxable_income if the taxable_income is not over dollar_figure sec_1 provides that in the case of taxable years beginning after date i the rate_of_tax under sec_1 on taxable_income not over the initial bracket amount shall be and ii the rate_of_tax shall apply only to taxable_income over the initial bracket amount as defined in sec_1 but not over the maximum dollar amount of the rate bracket sec_1 provides rules concerning the maximum capital_gains_rate the legislative_history of sec_646 states that a n electing trust will pay tax on its income at the lowest rate specified for ordinary_income of an individual or corresponding lower capital_gains_rate h_r conf_rep no pincite accordingly we interpret the provisions of sec_646 to provide that the aggregate tax imposed by that subsection on the taxable_income of an electing_settlement_trust including its net_capital_gain is no greater than an amount equal to the lowest rate specified in sec_1 taking into account all relevant provisions of the code including sec_1 applied to such taxable_income moreover when there is a net_capital_gain the effect of the provisions of sec_1 could result in a lesser tax on the net_capital_gain such as where there is qualified 5-year gain provided that an election under sec_646 is properly made with respect to the trust and such election has not ceased to apply we conclude that the tax_rate imposed upon the trust other than net capital_gains will be the lowest rate under sec_1 taking into account all relevant provisions of the code including sec_1 additionally we conclude that the tax imposed on the net_capital_gain of the trust taking into account the provisions of sec_1 is at the rate_of_tax that would apply to such gain if the trust were subject_to a tax on its other taxable_income at only the lowest rate specified in sec_1 taking into account all relevant provisions of the code including sec_1 accordingly based solely on the facts presented and representations made in this ruling_request and viewed in light of the applicable law and regulations we rule as follows the trust is classified as a_trust for federal tax purposes and not as an association or a partnership and is a separate_entity for federal tax purposes sec_301_7701-4 the income_tax treatment of the trust shall be governed by sec_646 for any years for which the trust has a sec_646 election in effect sec_646 neither x nor any other person shall be treated for federal_income_tax purposes as the owner of the trust or any portion of the trust under current sec_673 - for any years for which the trust does not have a sec_646 election in effect eg after the sunset of sec_646 plr-128030-02 no amount shall be included in the gross_income of x’s shareholders or trust beneficiaries when x contributes property including cash to the trust sec_646 x's contributions to the trust do not constitute gross_income to the trust x must recognize gain on any property including ancsa land contributed to the trust that has a fair_market_value in excess of its basis in an amount equal to the excess of its fair_market_value over its adjusted_basis sec_311 the basis of such property in the hands of the trust shall be equal to its fair_market_value on the day it is contributed to the trust sec_301 the trust’s holding_period for this property begins on the day the trust receives the property cf sec_1223 except as provided in ruling property transferred to the trust must be treated as property transferred to the trust subject_to sec_1015 so that x’s basis in such property carries over to the trust sec_1015 additionally the trust’s holding_period shall include the period for which x held those assets sec_1223 an x shareholder’s basis in x stock shall not be reduced by reason of contributions made to the trust sec_646 the sunset of sec_646 will not be treated as causing a taxable_distribution from x to the trust or its beneficiaries or to x’s shareholders with respect to any contributions made by x to the trust during any years for which the trust has a valid sec_646 election in effect the tax_rate imposed upon the trust other than net capital_gains will be the lowest rate under sec_1 taking into account all relevant provisions of the code including sec_1 the tax imposed on the net_capital_gain of the trust taking into account the provisions of sec_1 is at the rate_of_tax that would apply to such gain if the trust were subject_to a tax on its other taxable_income at only the lowest rate specified in sec_1 taking into account all relevant provisions of the code including sec_1 except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transaction described above under any other provision of the code additionally with the exception of ruling sec_1 and the above rulings are conditioned upon an election under sec_646 having been properly made with respect to the trust and such election remaining in effect and having not ceased to apply plr-128030-02 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 x and x’s second representative sincerely j thomas hines chief branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service p o box irs cincinnati oh release number release date uil code date date employer id number contact person id number contact telephone number form you must file tax years dear this letter is our final_determination that you don’t qualify for tax-exempt status under sec_501 of the internal_revenue_code the code recently we sent you a proposed adverse determination in response to your application the proposed adverse determination explained the facts law and basis for our conclusion and it gave you days to file a protest because we didn’t receive a protest within the required days the proposed determination is now final you must file federal_income_tax returns for the tax years listed at the top of this letter using the required form also listed at the top of this letter within days of this letter unless you request an extension of time to file we’ll make this final adverse determination_letter and the proposed adverse determination_letter available for public inspection as required under sec_6110 of the code after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in the notice on how to notify us if you agree with our deletions you don’t need to take any further action if you have questions about this letter you can contact the person listed at the top of this letter if you have questions about your federal_income_tax status and responsibilities call our customer service number pincite-829-1040 tty for deaf or hard of hearing or customer service for businesses pincite-829-4933 letter rev catalog number sincerely director exempt_organizations enclosures notice redacted letter proposed adverse determination under sec_501 other than c redacted letter final adverse determination under sec_501 other than c - no protest letter rev catalog number department of the treasury internal_revenue_service rs p o box i cincinnati oh business legend b date c d area e individual f individual g business x y z dollar amount number number dear date date employer id number contact person id number contact telephone number contact fax number uil we considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code the code based on the information provided we determined that you don’t qualify for exemption under sec_501 of the code this letter explains the basis for our conclusion please keep it for your records issue s are you organized and operated for pleasure recreation and other non-profit purposes as defined in sec_501 of the code no for the reasons given below facts you were incorporated as a mutual benefit corporation with members on b you are a restaurant that will provide social interaction through dining drinking indoor recreational activities and musical entertainment among visitors to c individuals enjoying water activities on d and the local community as members and guests of members you provide food beverages and social interactions to the visitors to the campground furthermore you state that activities will be done at the location of the restaurant you you have only two directors e and f who will conduct the activities both directors will be paid a reasonable salary for managerial duties e and f share the same last name and address but no relation was documented you refer to being connected to g g operates the campground connected to the restaurant g is a for-profit entity owned in part and managed by e and f you rent a building and equipment from g share office space with g and have common employees and officers with g you submitted three contracts - a commercial real_estate lease an equipment rental agreement and a management agreement the facility lease describes the property as a restaurant building and use as a private club restaurant the equipment agreement states all equipment remains the property of g and you will cover half of an additional shoreline lease applicable to g and the management agreement states fees may be billed hourly for the following services bookkeeping payroll quarterly and sales_tax filing maintenance all three agreements were between you and g and all three were signed by e as lessor and f as lessee the agreements stipulated terms and fees you submitted no documentation as to how you arrived negotiated or agreed upon these terms or fees your bylaws state you shall be composed of resident and non-resident members the board_of directors in its sole discretion may grant honorary membership members must pay an initiation fee and annual dues resident members are limited to z and non-resident members are limited to y guests are limited to those persons who accompany a member or persons for whom a member has made prior arrangements with management your bylaws further stipulate the board_of directors shall have the general management and control of the affairs of the club and it’s property membership is open to all individuals over years of age members are then entitled to purchase food and beverages and or participate in social activities membership fees and dues are x dollars annually you did not submit a breakdown of resident and non-resident members however per total fees and dues submitted you have between members you have stated you will receive no non-member income you have not provided nor indicated any regular schedule of events during which members meet co- mingle associate or socialize you have only stated you are for the private benefit use by members and guests you list one annual meeting at the end of the year and require only members be present for any meeting to meet quorum all of your revenue is listed as food and or beverage sales however you state that you are supported by members who pay a fee to belong entitling them to purchase food and beverages and or partake in social activities you later clarified that on your income statements membership fees were actually included in the food and beverage sales major expenses include advertising outside services payroll rent and utilities you also break down cost_of_goods_sold for beer and food purchases merchant account fees and restaurant supplies payments for services include live bands waitress and cook staff wages law sec_501 of the code provides for the exemption from federal_income_tax of clubs organized for pleasure recreation and other non-profitable purposes substantially_all of the activities of which are for such purposes and no part of the net_earnings of which inures to the benefit of any private shareholder sec_1_501_c_7_-1 provides as follows a the exemption provided by sec_501 applies only to clubs which are organized and operated exclusively for pleasure recreation and other nonprofitable purposes but does not apply to any club if any part of its net_earnings inures to the benefit of any private shareholder in general this exemption extends to social and recreation clubs which are supported solely by membership fees dues and assessments however a club otherwise entitled to exemption will not be disqualified because it raises revenue from members through the use of club facilities or in connection with club activities b a club which engages in business such as making its social and recreational facilities available to the general_public or by selling real_estate timber or other products is not organized and operated exclusively for pleasure recreation and other nonprofitable purposes and is not exempt under sec_501 uscs sec_501 solicitation by advertisement or otherwise for public patronage of its facilities is prima facie evidence that the club is engaging in business and is not being operated exclusively for pleasure recreation or social purposes however an incidental sale of property will not deprive a club of its exemption revrul_58_588 1958_2_cb_265 held that a social_club that sells an unlimited number of memberships to so-called members who have no voice in the management of the club and whose only rights are to use the club’s facilities upon payment of specified fees is not a tax-exempt social_club within the meaning of sec_501 of the code income from the members was in reality income from the general_public ‘ the organization had two classes of membership namely active and associate members the active members controlled all business decisions of the organization and some of the active members were employees of the organization the ruling held that the organization was operated in the personal_interest of a few individuals that social features are not a material purpose of the club but are subordinate and merely incidental to the active furtherance of a predominant purpose to engage in the business of selling services for profit to an unlimited number of individuals termed associate members that associate membership is not a true membership but is merely a guise under which virtually unlimited numbers of individuals may utilize the club facilities and that income from associate members is in reality income from transactions with the general_public revrul_58_589 1958_2_cb_266 sets forth the criteria for determining whether an organization qualifies for tax-exempt status per internal_revenue_code sec_501 this revenue_ruling clearly states that an organization that makes its social and recreational facilities available for use by the general_public is engaged in a business and is not exempt under internal_revenue_code sec_501 further solicitation by advertisement of public patronage of a social in addition this ruling provides club’s facilities will have an adverse effect on its tax exempt status that a commingling of the members must play a material part in the life of the organization revrul_66_225 1966_2_cb_227 held that a nonprofit organization which provides entertainment for its members does not qualify for exemption under sec_501 where it is controlled by a taxable corporation and operated as an integral part of such corporation's business the club's articles of incorporation state that its purpose is to operate a private club for its members and to provide entertainment food and refreshment for them the clubhouse with all fixtures and equipment is leased by the organization a related motel for a nominal fee but the motel retains the exclusive right to serve food and other beverages to the club's members the club has no net_worth its income is received from membership dues and fees about one-fourth of which is realized from temporary members practically all of the organization's income is spent for entertainment revrul_69_635 c b held that an organization was not exempt under sec_501 of the internal_revenue_code because the organization was designed to provide services to its members and there was no significant commingling of members application of law an organization cannot be recognized as exempt under sec_501 unless it shows that it is both organized and operated substantially for pleasure recreation or other nonprofit purposes you are formed primarily to operate a restaurant you offer a nominal membership fee allowing anyone who pays the opportunity to dine at your restaurant and purchase food drink this primarily includes visitors to a campground and their guests regulation c -1 b provides that a club which engages in business is not organized and operated exclusively for pleasure recreation and other nonprofitable purposes and is not exempt one evident fact is solicitation by advertisement one of your larger expenses is advertisement and promotion which is questionable for an entity describing itself as a private club you have stated your activities are to provide food beverages and social interactions to the visitors of the campground and d for these reasons you do not meet the operational_test under c sec_1_501_c_7_-1 states exemption provided by sec_501 does not apply to any club if any part of its net_earnings inure to the benefit of any private shareholder your restaurant is run by your only two board members e and f has contracts with a for-profit company partially owned by e and f and pays fees to those same individuals through not only those contracts but also for management services funds generated from the club restaurant are flowing directly to e and f through these arrangements resulting in inurement disqualifying you from exemption under c you are similar to the organization described in revenue ruing although you have capped the total number of members you may have these far exceed the amount of people that could be present in your restaurant at any one time further the membership fee itself is nominal and there are few barriers to membership outside of paying the fee you are also similar in that you have two classes of members and that you are operated for the personal_interest of a few individuals - here e and f while you have stated your activities are to provide social interaction this can only occur for those members present in the restaurant at that time you have no other planned social functions - your social features are not a material purpose of your club but are subordinate and incidental to the purpose of engaging in a business of selling services for profit to members here selling food and drinks at a restaurant additionally membership is not a true membership but is merely a guise under which virtually unlimited numbers of individuals may utilize your facilities your board consisting of e and f has the general management and control of the affairs of the club and it's property realistically only a fraction of your members could actively participate in your social activities the only rights accorded members are the rights to purchase food in the dining room and to participate in the few social activities you conduct any income generated therefrom is in reality income from transactions with the general_public you are similar to the organization described in revrul_66_225 you have a three part agreement in place with g a for-profit entity owned by e and f in which you lease not only the restaurant facility but also equipment and services - which include routine daily business functions of the restaurant and staff you also share office space employees and officers with g you are controlled by and operated as an integral part of a for-profit entity g similar to revenue rulings and you do not qualify under c as you have no evidence of regular commingling of members comingling is a material part in the life of a sec_501 social_club and is present if such things as meetings gatherings and regular facilities are present lack of commingling indicates a basic purpose of providing personal services and goods to the membership in a manner similar to commercial counterparts you operate a restaurant bar that is effectively open to the general_public for a de-minimus fee your membership primarily consists of individuals who happen to visit the campground or lake and pay your fee you provided no evidence of regular membership meetings and gatherings and e and f are running the daily operations of the club through their for-profit entity g conclusion you are not organized and operated for pleasure recreation and other non-profitable purposes as defined in sec_501 of the code further your activities are structured to allow your earnings to inure to insiders for these reasons you do not qualify under c if you don’t agree you have a right to file a protest if you don’t agree with our proposed adverse determination to do so you must send a statement to us within days of the date of this letter the statement must include e e e e e e your name address employer_identification_number ein and a daytime phone number acopy of this letter highlighting the findings you disagree with an explanation of why you disagree including any supporting documents the law or authority if any you are relying on the signature of an officer director trustee or other official who is authorized to sign for the organization or your authorized representative one of the following declarations for an officer director trustee or other official who is authorized to sign for the organization under penalties of perjury declare that examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete for authorized representatives under penalties of perjury declare that prepared this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete your representative attorney certified_public_accountant or other individual enrolled to practice_before_the_irs must file a form_2848 power_of_attorney and declaration of representative with us if he or she hasn’t already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney we'll review your protest statement and decide if you provided a basis for us to reconsider our determination if so we'll continue to process your case considering the information you provided if you haven't provided a basis for reconsideration we'll forward your case to the office of appeals and notify you you can find more information about the role of the appeals_office in publication how to appeal an irs decision on tax-exempt status where to send your protest please send your protest statement form_2848 if needed and any supporting documents to the applicable address u s mail street address for delivery service internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you can also fax your statement and supporting documents to the fax number listed at the top of this letter if you fax your statement please contact the person listed at the top of this letter to confirm that he or she received it if you agree if you agree with our proposed adverse determination you don’t need to do anything if we don’t hear from you within days we'll issue a final adverse determination_letter that letter will provide information on your income_tax filing_requirements you can find all forms and publications mentioned in this letter on our website at www irs gov formspubs if you have questions you can contact the person listed at the top of this letter sincerely enclosure publication director exempt_organizations


internal_revenue_service number info release date uil cc psi cor-104075-01 date this responds to your correspondence requesting late s_corporation relief under sec_1362 of the internal_revenue_code seeking an effective date of date in revproc_97_48 copy attached the internal_revenue_service provides special procedures that permit taxpayers in certain situations to obtain automatic late s_corporation relief instead of applying for a private_letter_ruling the facts presented in your situation appear to be covered by section dollar_figure of revproc_97_48 in order to receive relief under the provisions of this revenue_procedure you must follow the steps set forth in sec_4 please forward the material to the memphis service_center via facsimile at addressed to the attention of mr byron stout and follow up by calling to be certain that mr stout receives your transmission we hope that the above information proves helpful sincerely yours s dianna k miosi dianna k miosi chief branch office of the assistant chief_counsel passthroughs and special industries attachment revproc_97_48 form_2553


acknowledged significant advice may be disseminated office_of_chief_counsel internal_revenue_service memorandum sca released tl-n-2616-98 cc dom fs p si rlbuch date date to district_counsel brooklyn from assistant chief_counsel field service cc ner brk cc dom fs subject limitation on assessment of tefra partnership adjustments against nonfiler this responds to your request for significant advice dated date in connection with a question posed by the brookhaven service_center disclosure statement unless specifically marked acknowledged significant advice may be disseminated above this memorandum is not to be circulated or disseminated except as provided in ccdm d and e this document may contain confidential information subject_to the attorney-client and deliberative_process privileges therefore this document shall not be disclosed beyond the office or individual s who originated the question discussed herein and are working the matter with the requisite need to know in no event shall it be disclosed to taxpayers or their representatives issue whether adjustments resulting from a settlement of partnership items may be assessed against a partner that did not file its income_tax return more than one year after the date of settlement of the partnership items conclusion adjustments to the tax_liability of a nonfiler may be assessed at any time without regard to the source of the adjustments facts taxpayer holds an interest in a partnership that is subject_to the tefra unified_audit and litigation procedures following the examination of the partnership’s return a settlement agreement was executed in accordance with the settlement agreement tax was assessed against most partners however more than one year has lapsed since the settlement was reached and tax has not been assessed against taxpayer taxpayer is a corporation that is required to file a corporate_income_tax return no such return was filed for the tax_year at issue discussion in congress enacted the tefra unified_audit and litigation procedures to simplify and streamline the partnership audit litigation and assessment process the underlying principle of tefra is that the tax treatment of items of partnership income loss deductions and credits will be determined at the partnership level in a unified partnership proceeding rather than separate proceedings with the partners conf_rep no partners are generally required to report items in a manner consistent with partnership treatment and the service may examine the partnership as an entity rather than conduct separate examination as to each of the partners where applicable the tefra provisions either supplant or augment the general administrative provisions limitation on assessment because tax is only assessed against the partners and not the partnership the partner’s limitation on assessment controls the timeliness of any assessment as to that partner the limitation on assessment is generally set forth in sec_6501 and provides that taxes must generally be assessed within three years from the later of the date of filing the taxpayer's return or the due_date for filing the taxpayer's return sec_6501 b in the case of partnership items sec_6501 provides for an extension of the period in the case of partnership items and refers to i r c the tefra provisions set forth a minimum period within which the service is able to conduct an examination of a partnership return and flow any adjustments through to the partners section a provides that the period for assessment of any_tax resulting from partnership items shall not expire before the date which i sec_3 years after the later of the filing of the partnership return or the due_date for filing the partnership return in essence i r c on occasion the i r c minimum assessment_period does not have an impact on the limitation on assessment take the example when a partnership return was due and was filed on date and a partner's return was due and was filed on date in this case the i r c minimum assessment_period does not impact the partner's limitation on assessment the sec_6501 limitation on assessment would generally expire on date three years from the due filing_date of the partner's return the minimum assessment_period under i r c would have prevented the statute from expiring before date three years from the due filing_date of the partnership’s return accordingly since the sec_6501 assessment_period remains open without regard to i r c assessments attributable to both partnership and nonpartnership_items may be made at any time on or before date unlike in the previous example i r c may have an impact on the assessment_period if the i r c period remains open beyond the period of limitation on assessment of sec_6501 take the example when a partner's return was due and was filed on date and the partnership return was due and was filed on date in this case the i r c minimum assessment_period extends the partner's limitation on assessment as to partnership items the sec_6501 limitation on assessment would generally expire on date three years from the due filing_date of the partner's return however under the express language of i r c the period for assessing any_tax which is attributable to any partnership_item or affected_item for a partnership taxable_year shall not expire before three years from the filing due_date of the partnership return accordingly the minimum assessment_period under i r c would have prevented the statute from expiring before date three years from the due filing_date of the partnership's return accordingly the i r c minimum assessment_period for partnership items holds sec_6501 open for assessments attributable to partnership items while the period for assessing tax attributable to nonpartnership_items would have closed limitations in the event of settlement a settlement agreement causes of conversion of partnership items to nonpartnership_items as of the date of the settlement agreement sec_6231 when partnership items become nonpartnership_items by reason of settlement the period for assessing tax attributable to such items shall not expire before the date which i sec_1 year after the date on which the items become nonpartnership_items i r c f as with the general extension under i r c a this provision sets forth a minimum period within which adjustments attributable to converted items generally may be assessed against a partner who enters into a settlement without regard to the partner's limitation period under sec_6501 see 99_tc_121 limitations for a nonfiler generally the limitation on assessment of tax against a corporation is three years from the later of the date of filing or the due_date for filing the corporation’s return sec_6501 b in the event that no return is filed tax may be assessed at any time sec_6501 analysis applying the above to the facts submitted the adjustments that are attributable to the converted partnership items may be assessed at any time the general statute_of_limitations as to the taxpayer's return remains open pursuant to sec_6501 without regard to the extension in the event of partnership items referred to by sec_6501 accordingly one need not look to i r c to determine whether the limitation on assessment is extended for partnership items or in the case of i r c f converted partnership items this analysis is bolstered by the language of i r c f itself which states that the time for assessing tax shall not expire before one year from the date of conversion such language indicates that the limitation on assessment cannot expire during such time but does not cause the limitation on assessment to expire at the conclusion of such period of time accordingly since the taxpayer did not file a return the adjustments that are attributable to the converted partnership items may be assessed at any time in accordance with sec_6501 if you have any questions or need assistance please contact ronald l buch jr pincite-7329 deborah a butler assistant chief_counsel by __ s _______________________ patrick putzi special counsel natural_resources passthroughs special industries branch