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 ----------------------- ---------- ------------- telephone number --------------------- refer reply to cc pa apjp b01 plr-110895-06 date october sec_3406 -- backup withholding backup withholding sec_6041 -- information_at_source fixed or determinable gains profits or income payments specifically included sec_6045 -- returns of broker sec_6045 returns of brokers sec_6049 -- returns regarding payments of interest reportable interest legend taxpayer ---------------------------------------------- fund ----------------------------------------------- x ----------------------------- years -------------- year ------- dollar_figurea ----------------- dear ------------------ this letter responds to the letter dated date submitted on behalf of the fund requesting the following rulings plr-110895-06 settlement payments from the fund to mutual_fund investors are not subject_to information reporting under sec_6041 of the internal_revenue_code except in the case of payments made directly to participants in tax-qualified retirement plans settlement payments from the fund to mutual_fund investors are not subject_to information reporting under sec_6045 settlement payments from the fund to mutual_fund investors are not subject_to information reporting under sec_6049 for purposes of meeting any obligations it may have under sec_3406 as a payor of reportable payments the fund need not solicit taxpayer identification numbers tins from the individuals to whom it will make distributions the fund may obtain the tins from the mutual funds or tax-qualified plans in which such individuals held accounts or from transfer agents performing services for the funds or plans facts based upon the facts and the representations made the fund is a qualified_settlement_fund qsf as described in sec_468b and the regulations thereunder the fund was created in year to resolve an administrative_proceeding brought by the securities_and_exchange_commission commission against x relating to investment advice provided to certain mutual funds the proceeding related to the inadequate or nonexistent disclosure of x’s policies allowing market timing trading of mutual_fund units units and to the oversight monitoring or management of trades of such units trades from at least year sec_1 through in an order instituting proceedings oip directed at x the commission alleged that x made various material omissions and misrepresentations regarding market timing of funds and committed certain other wrongful acts relating to trades in the units improper market timing impairs the value of mutual_fund shares by depressing their net asset value improper market timing also generates excess trading volume and thus increases the advisory fees mutual funds must pay to investment advisors such as x thus x’s conduct resulted in damage to the investors and a loss of capital the commission based on the improper conduct described above and the resulting damage to mutual_fund investors sought profit disgorgement and civil penalties after investigation and negotiations x agreed to pay dollar_figurea to settle the commission’s claims pursuant to section a of the sarbanes-oxley_act of u s c the oip authorized a fair fund for the disgorgement and penalty components of the settlement thus permitting both components to be paid to injured investors those investors holding units of the mutual funds during any portion of the time period specified in the oip will be eligible to receive distributions from the fund the distributions will be based on the commission’s oip the amount available for plr-110895-06 distribution is the net settlement pool which includes the sum of dollar_figurea the amount transferred by x into the fund and the amount of net_income earned by the fund law and analysis ruling sec_1_468b-2 of the treasury regulations provides that in general distributions by a qsf are subject_to certain information reporting and withholding requirements sec_1_468b-2 provides that a qsf must make a return for or must withhold tax on a distribution to a claimant if one or more transferors would have been required to make a return or withhold tax had that transferor made the distribution directly to the claimant the regulations further provide that for purposes of sec_6041 and sec_6041a if a qsf makes a distribution on behalf of a transferor or a claimant the fund is deemed to make the distribution to the recipient of that payment or distribution in the course of a trade_or_business in such a situation the qsf is also deemed to have made the distribution to the transferor or claimant see sec_1_468b-2 c - d sec_6041 requires all persons engaged in a trade_or_business and making payment in the course of such trade_or_business to another person of rent salaries wages premiums annuities compensations remunerations emoluments or other fixed or determinable gains profits and income of dollar_figure or more in any taxable_year to file an information_return with the service and to furnish an information statement to the payee sec_1_6041-1 provides that payments are fixed when they are paid in amounts definitely predetermined income is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained sec_1 a requires a payor to report sec_6041 amounts on form_1099 thus payments that are not fixed or determinable are not subject_to information reporting under sec_6041 amounts a taxpayer receives to restore a loss of capital are not income except to the extent that the payment exceeds the taxpayer’s basis in the injured property that is the subject of the payment 144_f2d_110 1st cir fund payments to investors for losses the mutual funds suffered from market timing appear to constitute compensation_for a loss of capital market timing permitted by x depressed the net asset value of mutual_fund shares compensation from the fund will compensate at least partially for this damage because the fund has no access to the investors’ tax basis in their mutual_fund accounts and has no need or occasion to collect information on tax basis the fund is unable to calculate how much of this compensation_for mutual_fund losses constitutes fixed or determinable income accordingly the fund has no information reporting obligations under sec_6041 for such compensation plr-110895-06 although fund payments may constitute gross_income to investors versus compensation_for loss of capital the fund lacks the data collection authority necessary to calculate such gross_income that income therefore is not fixed or determinable within the meaning of the regulations under sec_6041 accordingly subject_to the exception noted below pertaining to distributions to qualified_retirement_plan participants the fund has no information reporting obligations under sec_6041 the fund states that it may make a certain number of distributions directly to participants in tax-qualified retirement plans sec_72 of the code controls the taxation of such distributions and the distributions must be reported on form 1099-r pursuant to sec_6041 subject_to the dollar_figure reporting threshold set forth in sec_6041 and sec_1_6041-1 ruling sec_1_468b-2 provides that a qsf must make a return for a distribution to a claimant if one or more transferors would have been required to make a return had that transferor made the distribution directly to the claimant sec_6045 provides generally that every person doing business as a broker shall when required by the secretary make a return in accordance with such regulations as the secretary may prescribe sec_6045 defines the term broker to include a dealer a barter_exchange and any other person who for a consideration regularly acts as a middleman with respect to property or services the regulations further define the term broker to mean a person that in the ordinary course of a trade_or_business during the calendar_year stands ready to effect sales to be made by others see sec_1_6045-1 sec_1_6045-1 provides generally that a broker shall make an information_return for each sale effected by the broker in the ordinary course of the broker’s trade_or_business sec_1_6045-1 defines a sale as any disposition of securities commodities regulated_futures_contracts or forward contracts for cash and as including redemptions of stock retirements of indebtedness and entering into short_sales the fund’s payments to investors do not result from a sale as that term is defined above the fund therefore has no information reporting obligations under sec_6045 with respect to these payments ruling sec_6049 provides that every person who makes payments of interest aggregating dollar_figure or more to any other person during any calendar_year or receives payments of interest as a nominee and who makes payments aggregating dollar_figure or more during any calendar_year to any other person with respect to the interest so received shall make a return according to the forms or regulations prescribed by the secretary plr-110895-06 sec_6049 b provides that the term_interest includes interest on any obligation issued in_registered_form or of a type offered to the public other than any obligation with a maturity at issue of a year or less which is held by a corporation pursuant to sec_6049 interest also includes interest on deposits with brokers as defined in sec_6045 the fund distributions in the present case do not relate to deposits with brokers or obligations issued in_registered_form and do not otherwise qualify as interest within the meaning of sec_6049 this is so even though interest earnings have accrued on the funds to be paid to investors from the time x paid such funds to the fund the fund distributions to investors relate to violations of securities law and compensation_for financial harm not to obligations issued in_registered_form or other instruments that generate interest as sec_6049 defines that term accordingly the fund has no information reporting obligations under sec_6049 regarding its distributions to the investors ruling sec_3406 generally provides that in the case of any reportable_payment if a the payee fails to furnish his or her tin to the payor in the manner required b the secretary notifies the payor that the tin furnished by the payee is incorrect c there has been a notified_payee_underreporting of interest and dividends or d there has been a certification failure collectively referred to as payee failures then the payor shall deduct and withhold from such reportable_payment a backup withholding amount totaling of such payment sec_3406 provides that the term reportable_payment means any reportable_interest_or_dividend_payment and any other_reportable_payment sec_3406 provides that the term other_reportable_payment includes any payment of a kind and to a payee required to be shown on a return under sec_6041 or sec_6045 in light of rulings one through three above only direct payments by the fund to participants in tax-qualified plans will be reportable payments subject_to backup withholding under sec_3406 in order to meet its obligations under sec_3406 and to include tins on information returns it must provide for these reportable payments the fund plans to obtain those tins from one of the following sources the plan_administrator the mutual funds in which the participants invested or the transfer agents that provide services to the administrator or mutual funds obtaining the tins in this manner should prove more reliable and less burdensome and costly to the fund than soliciting the tins from the plan participants in light of the authority it has been granted by the commission the fund will be able to obtain the tins of plan participants from the plan administrators mutual funds or transfer agents the fund will not be required to solicit tins from the participants for purposes of applying the backup withholding rules of sec_3406 plr-110895-06 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 furthermore this letter expresses no opinion about information reporting requirements for fund distributions that are not made directly to the injured investors this letter also expresses no opinion about the income_tax consequences to investors of fund distributions this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative 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 enclosure carol p nachman acting senior technician reviewer office of associate chief_counsel procedure and administration administrative provisions and judicial practice sincerely


internal_revenue_service index numbers number release date cc dom corp plr-104794-98 re date distributing controlled father mother brother a brother b state c business a business b dear this is in response to a letter dated date requesting a ruling as to the federal_income_tax consequences of a proposed transaction additional information was submitted in a letter dated date date date and date the information submitted for consideration is substantially as set forth below distributing is a state c_corporation it currently has a shares of voting_stock outstanding and b shares of nonvoting_stock outstanding distributing is an s_corporation father is the principal_shareholder of distributing owning dollar_figure percent of the outstanding voting and nonvoting_stock mother owns dollar_figure percent of the voting and nonvoting_stock of distributing brother a owns dollar_figure percent of the voting and nonvoting distributing stock while brother b owns dollar_figure percent of the distributing voting and nonvoting_stock the children of brother b also own small amounts of distributing nonvoting_stock distributing has been engaged continuously in business a for more than five years additionally for more than five years distributing has had a separate division which has continually engaged in business b financial information has been received that reflects that business a and business b each have had gross_receipts and operating_expenses representative of the active_conduct_of_a_trade_or_business for each of the past five years originally brother a and brother b were both involved in both businesses however brother a has become the primary operator and manager of business a and brother b has become the primary operator and manager of business b gradually the interaction between the businesses has gotten smaller recently business b has relocated to its own premises in a building which it rents from a third party the board_of directors is very concerned that the lack of interaction between the brothers will force either one or both to leave with negative consequences to the corporation consequently a decision has been made to permit brother b to go his separate way the transaction will be effected as follows i distributing will form controlled ii distributing will transfer property to controlled consisting of the assets of business b controlled will also assume certain distributing liabilities associated with the transferred assets iii distributing will distribute pro_rata all of the stock voting and nonvoting of controlled to brother b and the other brother b family shareholders in exchange for all of their voting and nonvoting_stock in distributing in connection with the proposed transaction the following representations are made a the fair_market_value of the controlled_corporation stock to be received by each exchanging shareholder of the distributing_corporation will be approximately equal to the fair_market_value of the distributing_corporation stock surrendered by the shareholder in the exchange b no part of the consideration to be distributed by the distributing_corporation will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of the corporation c the five years of financial information submitted on behalf of the distributing_corporation is representative of the corporation’s present operations and with regard to such corporation there have been no substantial operational changes since the date of the last financial statements submitted d following the transaction the distributing and controlled corporations will each continue the active_conduct of its business independently and with its separate employees e the distribution of the stock of the controlled_corporation is carried out for the following corporate business_purpose to avoid conflict in the management of the business of the corporation and to resolve management systemic or other problems that arise or are exacerbated by the operation of different businesses this will enable a significant shareholder group to concentrate on a particular business the distribution of the stock of the controlled_corporation is motivated in whole or substantial part by this corporate business_purpose f there is no plan or intention by the shareholders of the distributing_corporation to sell exchange or otherwise dispose_of any of their stock in either distributing or controlled after the transaction except as noted first transfers of stock may continue to be made to brother a and family for estate_planning purposes second father and mother are discussing with brother a the possibility of entering into an option agreement giving brother a the right to purchase the shares of the two shareholders after at least three years from the date of the option g there is no plan or intention by either distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the transaction other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 h there is no plan or intention to liquidate either distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the transaction except in the ordinary course of business i the income_tax_liability for the taxable_year in which investment_credit_property including any building to which sec_47 applies is transferred will be adjusted pursuant to sec_50 or a or sec_47 as in effect before amendment by public law title stat if applicable to reflect an early disposition of the property j distributing neither accumulated its receivables nor made extraordinary payment of its payables in anticipation of the transaction k no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution of the controlled stock l payments made in connection with all continuing transactions if any between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length m no two parties to the transaction are investment companies as defined in sec_368 and iv of the internal_revenue_code n distributing is an s_corporation within the meaning of sec_1361 controlled will elect to be an s_corporation pursuant to sec_1362 on the first available date after the distribution and there is no plan or intent to revoke or otherwise terminate the s_corporation_election of either distributing or controlled o the total adjusted bases and the fair_market_value of the assets transferred to controlled each equals or exceeds the sum of the liabilities assumed by controlled plus any liabilities to which the transferred assets are subject p the liabilities assumed in the transaction and the liabilities to which the transferred assets are subject were incurred in the ordinary course of business and are associated with the assets being transferred based solely on the information submitted and on the representations set forth above it is held as follows the transfer of assets by distributing to controlled solely in exchange for all of the stock of controlled followed by the distribution of the stock of controlled to brother b and the brother b family shareholders in exchange for all of their stock in distributing will be a reorganization within the meaning of sec_368 distributing and controlled will each be a_party_to_a_reorganization within the meaning of sec_368 no gain_or_loss will be recognized to distributing upon the transfer of assets subject_to liabilities to controlled in exchange for controlled stock as described above sec_361 and sec_357 no gain_or_loss will be recognized to controlled on the receipt of the assets in exchange for controlled stock sec_1032 the basis of the assets received by controlled will be the same as the basis of such assets in the hands of distributing immediately prior to the transaction sec_362 the holding_period of the distributing assets received by controlled will include the period during which such assets were held by distributing sec_1223 no gain_or_loss will be recognized to distributing upon the distribution of all of the controlled stock as described above sec_361 no gain_or_loss will be recognized to and no amount will be included in the income of brother b and the brother b family shareholders upon the receipt of controlled stock in exchange for their distributing stock sec_355 the basis of the controlled stock in the hands of brother b and the brother b family shareholders will be the same as the respective bases of their distributing stock surrendered in exchange therefor sec_358 the holding_period of the controlled stock received by brother and the brother b family shareholders will include the holding_period of the distributing stock surrendered in the exchange provided that such stock is held as a capital_asset on the date of the exchange sec_1223 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made under sec_1_312-10 no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings this ruling is directed only to the taxpayer who requested it section j provides that it may not be used or cited as precedent a copy of this letter should be attached to the federal_income_tax returns of the taxpayers involved for the taxpayer year in which the transaction covered by this ruling is consummated as requested in the power_of_attorney a copy of this letter is being sent to the taxpayer sincerely yours assistant chief_counsel corporate by howard staiman assistant to the chief branch


t c memo united_states tax_court john l roth and deanne m roth petitioners v commissioner of internal revenue respondent docket no filed date ps overstated by more than the value of a conservation_easement donated during the taxable_year r’s examiner determined that ps were liable for the gross_valuation_misstatement penalty under sec_6662 and obtained written approval from her immediate supervisor the notice_of_deficiency ultimately issued to ps was based on r’s appeals officer’s closing memorandum for which he obtained written approval from his immediate supervisor the notice_of_deficiency omitted the sec_6662 penalty but r asserted the penalty in his answer which was signed by r’s trial counsel and her immediate supervisor ps contend that r failed to comply with the requirements of sec_6751 and that assessment of the sec_6662 penalty is barred ps also received colorado state_income_tax credits for the charitable donation of a separate conservation_easement for the taxable_year petitioners included in gross_income amounts received from the sale of some of those tax_credits as a result of litigation ps repaid some of those proceeds in subsequent tax years ps contend they are entitled to a taxable_year deduction under sec_1341 for repayment of the credit proceeds held r complied with the requirements of sec_6751 held further the accuracy-related_penalty for a gross_valuation_misstatement is sustained for tax years and held further ps are not entitled to a deduction for the taxable_year under sec_1341 justin d cumming and james r walker for petitioners sara j barkley and miles b fuller for respondent memorandum opinion wherry judge in petitioners granted a conservation_easement to a qualified charitable_organization they claimed a charitable_contribution_deduction for tax_year and a carryover deduction for tax_year together totaling dollar_figure respondent disallowed the deductions and determined federal_income_tax deficiencies of dollar_figure and dollar_figure for tax years and respectively in the notice_of_deficiency respondent determined sec_6662 accuracy-related_penalties of dollar_figure and dollar_figure for tax years and respectively in his answer to the petition however respondent affirmatively asserted sec_6662 gross_valuation_misstatement penalties of dollar_figure and dollar_figure for tax years and respectively petitioners timely petitioned the court to redetermine the deficiencies and penalties and before trial the parties filed a stipulation of settled issues resolving the charitable_contribution_deduction and substantial_valuation_misstatement penalty issues in the case the remaining issues for decision are whether petitioners are liable for each year for a gross_valuation_misstatement penalty and whether petitioners are entitled to a deduction for tax_year for the repayment during tax_year sec_2013 and sec_2014 of proceeds they had previously received from the sale of colorado state_income_tax credits we resolve both issues in respondent’s favor background this case was submitted fully stipulated pursuant to rule the parties’ stipulation of facts with accompanying exhibits is incorporated herein by this reference at the time their petition was filed petitioners resided in colorado 1all section references are to the internal_revenue_code_of_1986 as amended and in effect at all relevant times all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated during tax_year petitioners donated a conservation_easement encumbering acres of land in prowers county colorado on their federal_income_tax return petitioners valued the conservation_easement at dollar_figure and claimed a charitable_contribution_deduction based on that amount because of the adjusted_gross_income limitations in sec_170 petitioners were unable to deduct the entire value of the conservation_easement on their tax_return petitioners deducted on their tax_return a carryover contribution from derived from the unused portion of the claimed easement value of dollar_figure on examination respondent determined that petitioners improperly valued the conservation_easement donation and that the correct value was zero the examiner also determined that petitioners were liable for a penalty under sec_6662 b e and h the recommendation that the penalty be imposed was approved in writing by the examiner’s immediate supervisor the examiner determined in the alternative that petitioners were liable for a accuracy-related_penalty under sec_6662 petitioners submitted a protest letter to the internal_revenue_service office of appeals appeals_office seeking administrative review of the examiner’s proposed report petitioners and the appeals_office did not reach an agreement and the appeals_office ultimately issued the notice_of_deficiency upon which this case is based in a closing memorandum the appeals_office informed petitioners that t he proposed penalties are fully sustained for the government the closing memorandum was approved and signed by the appeals officer’s immediate supervisor the notice_of_deficiency issued by the appeals_office omitted the penalty and included only the sec_6662 accuracy-related_penalty petitioners timely petitioned this court for redetermination of the deficiencies and penalties respondent affirmatively asserted in his answer that the sec_6662 penalty should be calculated at a rate of under sec_6662 resulting in penalties of dollar_figure and dollar_figure for tax years and respectively the answer was signed both by senior counsel for respondent and her immediate supervisor the parties reached a settlement under which they agreed that petitioners are entitled to a charitable_contribution_deduction of dollar_figure for tax_year the parties also agreed that petitioners had reasonable_cause for the value of the charitable_contribution that they reported on their return accordingly respondent concedes that petitioners are not liable for a sec_6662 accuracy-related_penalty the difference in the agreed value of dollar_figure and the claimed value of dollar_figure also meets the test for a gross_valuation_misstatement as defined in sec_6662 unlike with the sec_6662 accuracy-related_penalty petitioners may not claim reasonable_cause to avoid liability for the gross_valuation_misstatement penalty however they assert that imposition of the penalty is inappropriate because respondent failed to comply with the procedural requirements of sec_6751 furthermore as a result of their claimed donation of an earlier separate conservation_easement during tax_year petitioners received colorado state_income_tax credits during petitioners sold for dollar_figure a portion of these credits to another colorado taxpayer as a result of litigation in colorado state court petitioners repaid dollar_figure of that sum in and a further dollar_figure in they contend that they are entitled to a deduction for tax_year for the amounts they repaid in tax_year sec_2013 and sec_2014 discussion as a general_rule the commissioner’s determinations in the notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving by a preponderance_of_the_evidence that the determinations are improper see rule a 290_us_111 the burden of proving a factual issue relating to a tax_liability shifts to the commissioner under certain circumstances sec_7491 the burden_of_proof likewise falls upon the commissioner with respect to any new_matter increases in deficiency and affirmative defenses pleaded in the answer rule a because the standard of proof in this case is the preponderance_of_the_evidence and the preponderance_of_the_evidence favors respondent we decide the case on the weight of the evidence and not on an allocation of the burden_of_proof see sec_7491 138_tc_306 sec_6662 imposes a penalty on an underpayment_of_tax attributable to any of the reasons listed in sec_6662 these include a ny substantial_valuation_misstatement under chapter sec_6662 as relevant to this case a substantial_valuation_misstatement exists where the value of any property claimed on a return for income_tax i sec_150 or more of the correct value for that property sec_6662 where the claimed value is or more of the actual value a gross_valuation_misstatement the penalty rate provided for in sec_6662 is increased to sec_6662 and a i in the case of any underpayment attributable to a gross_valuation_misstatement with respect to charitable_contribution_deduction property the sec_6664 reasonable_cause exception for underpayments does not apply sec_6664 now sec_6664 the parties have stipulated that the easement petitioners donated in had an actual value of dollar_figure petitioners claimed charitable_contribution deductions for an easement with a claimed value of dollar_figure which is more than of dollar_figure absent some other consideration a penalty of will apply to the resulting underpayments in tax i sec_6751 petitioners assert that respondent’s noncompliance with sec_6751 invalidates the proposed penalties sec_6751 provides no penalty under this title shall be assessed unless the initial determination of such assessment is personally approved in writing by the immediate supervisor of the individual making such determination or such higher level official as the secretary may designate compliance with sec_6751 is appropriately considered in this deficiency proceeding and showing such compliance is part of respondent’s burden of production under sec_7491 see graev v commissioner t c __ date supplementing t c __ date sec_6751 exempts from the application of sec_6751 additions to tax under sec_6651 sec_6654 and sec_6655 along with any other penalty automatically calculated through electronic means respondent has not asserted that these exceptions apply in this case petitioners contend that the initial determination referenced by sec_6751 is the issuance of the notice_of_deficiency while written approval for the gross_valuation_misstatement penalty was obtained before the issuance of the notice_of_deficiency in this case petitioners assert that it was the appeals officer who handled their case not the examiner who made the initial determination with respect to the gross_valuation_misstatement penalty according to petitioners because the appeals officer failed to get approval from his immediate supervisor for the gross_valuation_misstatement penalty before issuing the notice_of_deficiency respondent failed to comply with the requirements of sec_6751 and may not assess the penalty against them petitioners also contend that respondent failed to comply with sec_6751 with respect to the gross_valuation_misstatement penalty and thus he should be estopped from seeking to assert it later at trial the resolution of these disputes is controlled by our decision in graev and 851_f3d_190 2d cir vacating and remanding in part aff’g in part and rev’g in part tcmemo_2015_42 in all three of the instances in which respondent sought to assert penalties in this case the individual proposing the penalties received personal approval from his or her immediate supervisor the examiner who proposed the gross_valuation_misstatement penalty the first time and the accuracy-related_penalty in the alternative received personal written approval from her group manager likewise the appeals officer received personal written approval from his team manager for the gross_valuation_misstatement penalty and for the penalty that was shown on the notice_of_deficiency and the senior counsel who pleaded affirmatively in respondent’s answer to the petition that petitioners are liable for the gross_valuation_misstatement penalty received her associate area counsel’s personal written approval as evidenced by the latter’s signature on the answer filed in this court in sum no matter which of these three instances was the initial determination of the penalty sec_6751 was satisfied because each instance was approved in writing by an immediate supervisor respondent in his answer affirmatively asserted the gross_valuation_misstatement penalty and included a computation of that penalty see sec_6751 this answer was signed by both respondent’s senior counsel and her supervisor the associate area_counsel see sec_6751 there was nothing improper in this for the commissioner routinely asserts sec_6662 penalties in answers and the court has jurisdiction over them pursuant to sec_6214 chai v commissioner f 3d pincite n the court concludes petitioners’ argument that the chief_counsel for the internal_revenue_service is not empowered to make such a determination is without merit under sec_6214 and both chai and graev the commissioner may assert additional penalties in his answer since the chief_counsel functions as an agent of the internal_revenue_service sec_7803 and the chief_counsel or_his_delegate is its sole representative in this court sec_7452 it follows that if the commissioner is allowed to assert additional penalties in his answer--as indeed he is--then the chief counsel’s delegate who represents the commissioner in this case is a proper individual to do so in this court see rule a 101_tc_412 therefore to the extent that the chief_counsel for the internal revenue service’s delegate is the individual whose immediate supervisor under sec_6751 must personally approve in writing the assertion of a penalty that is first raised in the answer that is what occurred here as evidenced by the signature of respondent’s associate area_counsel on the pleading respondent thu sec_2when respondent first raises an additional penalty in his answer rather than in the statutory notice he has the burden_of_proof as well as the burden of production pursuant to sec_7491 complied with sec_6751 and met any burden of production under sec_7491 accordingly we find that petitioners are liable for the gross_valuation_misstatement penalty for tax years and ii sec_1341 during tax_year petitioners received colorado state_income_tax credits in connection with a claimed charitable_contribution_deduction during tax_year they sold some of these tax_credits and recognized proceeds of dollar_figure as a result of litigation in colorado state court petitioners were required to repay a portion of the proceeds during tax_year sec_2013 and sec_2014 they claim that they are entitled to a deduction for tax_year for those amounts sec_1341 provides relief to taxpayers who include amounts received under a claim of right in their taxable_income but then repay some of those amounts in a future tax_year the provision has three basic requirements the item must have been included in gross_income for a prior taxable_year or years because it appeared that the taxpayer had an unrestricted right to it a deduction is allowable for the taxable_year at issue because it was established after the close of such prior taxable_year or years that the taxpayer did not have an unrestricted right to it and the amount of such deduction exceeds dollar_figure sec_1341 if all of these requirements are satisfied the taxpayer may deduct the item for the year in which the repayment is made 114_tc_570 aff’d 271_f3d_740 8th cir udeobong v commissioner tcmemo_2016_109 at farahani v commissioner tcmemo_2014_111 at uscinski v commissioner tcmemo_2006_200 92_tcm_285 petitioners may not deduct for payments they made in and we need not decide whether they are entitled to a deduction for the year in which they actually repaid the proceeds from the sale of tax_credits see udeobong v commissioner at it is clear that they are not entitled to such a deduction for tax_year to reflect the foregoing decision will be entered under rule


department of the treasury internal_revenue_service tax exempt and government entities oivision date lil 72s redaction legend x organization s state xx taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail -- return receipt requested we have enclosed a copy of our report of examination explaining why we believe an adjustment of your organization's exempt status is necessary if you do not agree with our position you may appeal your case the enclosed publication the examination process explains how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process if you request a conference we will forward your written_statement of protest to the appeals_office and they will contact you enclosed for your convenience an envelope is if you and appeals do not agree on some or all of the issues after your appeals_conference or if you do not request an appeals_conference you may file suit in united_states tax_court the united_states court of federal claims or united_states district_court after satisfying procedural and jurisdictional requirements as described in publication letter catalog number 34801v you may also request that we refer this matter for technical_advice as explained in publication exempt_organization appeal procedures for unagreed issues ifa determination_letter is issued to you based on technical_advice no further administrative appeal is available to you within the irs on the issue that was the subject of the technical_advice if you accept our findings please sign and return the enclosed form_6018 consent to proposed adverse action we will then send you a final letter modifying or revoking exempt status if we do not hear from you within days from the date of this letter we will process your case on the basis of the recommendations shown in the report of examination and this letter will become final in that event you will be required to file federal_income_tax returns for the tax period s shown above file these returns with the ogden service_center within days from the date of this letter unless a request for an extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and letter catalog number 34801v thank you for your cooperation sincerely r c johnson director eo examinations enclosures publication publication form_6018 report of examination envelope letter catalog number 34801v


internal_revenue_service department index number washington d c person to contact telephone number refer reply to cc intl br2 -plr-116450-98 date date taxpayer u sec_1 f1 f2 country a country b l1 l2 date a date b date c fi date d yeara year b x y amounta amountb amountc amountd amounte amountf amountg producta productb this is in response to your letter dated date requesting a ruling as to whether payments made pursuant to the terms of a bankruptcy plan are subject_to_withholding the information you submitted for under sec_1442 of the internal_revenue_code consideration is summarized below this letter is predicated upon the facts and representations the ruling contained in submitted and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the ruling_request verification of the factual information representations and other data may be dold required as part of the audit process facts a domestic_corporation agreed to purchase all the issued and on date a u sec_1 a wholly owned outstanding_stock of taxpayer is subsidiary of f2 a corporation organized under the laws of country a in turn f2 was and still is a wholly owned subsidiary of f1 a limited_liability corporation organized under the laws of country b the acquisition was financed through a syndicate of banks and finance companies including l1 as both lender and agent and l2 under the terms of two agreements dated date b this syndicate is collectively referred to as lenders at the time u sec_1 was and still from to the mid-1990s f1 sold product a to taxpayer for conversion into product b in the united_states the sales were made pursuant to a supply agreement dated date a the supply agreement the lenders were contractual third party beneficiaries of the agreement with regard to payment terms the supply agreement provided for payment at sight though the parties could mutually agree on credit terms of up to days when financial circumstances rendered it difficult for taxpayer to remit at sight f1 made it a practice to grant the day term taxpayer did not execute promissory notes when f1 extended credit and instead reflected it on its books as open account indebtedness the supply agreement did not provide for nor did taxpayer pay any stated_interest on the indebtedness bill typically a u s company buying goods from a foreign vendor must post an irrevocable letter_of_credit lc as payment however taxpayer's financial situation left it difficult or consequently f1 generally arranged for payment by impossible to obtain an lc of exchange which taxpayer would accept trade presenting taxpayer with a acceptance --thereby agreeing to pay the stated amount within the stipulated term in effect taxpayer's acceptance made the bill of exchange the equivalent of a promissory note at times f1 would sell the trade acceptances at a discount and generally with recourse to f1 to various banks located in country b the trade acceptances did not bear interest and initially carried a thirty day term however as taxpayer's financial condition and liquidity deteriorated f1 gradually extended the trade acceptance terms to one hundred and eighty days in light of taxpayer's fiscal problems the lenders and taxpayer amended and restated the original loan documents specifically on date c an amended agreement was executed whereby the lenders agreed to refrain from filing an involuntary bankruptcy petition against taxpayer in exchange for heightened restrictions on the types of payments that taxpayer could make however the amended agreement generally permitted payment to f1 for goods purchased in the ordinary course of business additionally f1 gave a guaranty to the lenders which obligated it to make capital contributions to taxpayer upon demand by l1 in the event taxpayer could not make loan payments as they matured over the course of the next several years the parties amended the loan documents two additional times in the final amendment the lenders found it necessary to place restrictions on the payments from taxpayer to f1 for example f1 agreed unconditionally that taxpayer would continue to remit no more than x of the total of all new invoiced purchases for payment on outstanding payables until such time that f1 had provided taxpayer with amount a of new product to be purchased by taxpayer f1 and taxpayer agreed to diligently pursue the refinancing of certain loans and f1 agreed to permit taxpayer to maintain aggregate trade credit ranging from amount b to amount c further if the loans weren't repaid by a certain date f1 agreed to allow an aggregate trade credit of no less than amount c eventually taxpayer became unable to make all its payments on the outstanding trade acceptances at first f1 advised the taxpayer the order in which to pay the outstanding acceptances f1 as guarantor also paid some of the trade acceptances that were now held by the banks it engaged an taxpayer's financial condition continued to deteriorate and in year a in year b taxpayer began investment banker to arrange the sale of the company negotiating the sale of substantially_all its and its subsidiaries operating_assets taxpayer also owned of the capital stock of three major subsidiaries the parties executed a formal asset purchase agreement on date d the agreement was negotiated with the understanding that taxpayer would promptly file a chapter bankruptcy petition the following day taxpayer and its subsidiaries each filed a chapter bankruptcy petition taxpayer then changed its corporate name for the purpose of managing the liquidation subsequently taxpayer's principal creditors f1 u sec_1 and the lenders entered into an intercreditor agreement whereby all parties agreed to among others support the following actions i l1 providing debtor in possession financing ii f1 having an allowed claim of amount d iii l2 being paid amount e and iv l1 being paid in full the bankruptcy court approved the terms of the asset purchase agreement thereafter taxpayer and its subsidiaries filed a joint plan which the bankruptcy court confirmed the subsidiaries were then merged or liquidated into taxpayer who in turn sold substantially_all its assets including the right to its tradename of claim alleging that in connection with taxpayer's bankruptcy proceeding f taxpayer owed amount f relating to the extensions of credit including i amounts owed to f1 from sales to taxpayer on open account ii amounts owed to f1 under trade acceptances fi reacquired as guarantor and iii amounts owed directly to banks located in country b though the details are admittedly unclear to taxpayer it appears that f1 acted on behalf of certain banks located in country b in submitting the amount f claim filed a proof taxpayer objected to the claim on the ground that it failed to account for indebtedness of f1 to taxpayer f1 did not oppose taxpayer's objection and accordingly the bankruptcy for purposes of this ruling court entered an order that reduced f1’s claim to amount d request we assume that f1 will receive a distribution of amount g under the plan which further we assume that the bankruptcy claim by f1 represents y cents on the dollar consists of on account credit trade acceptances it reacquired and trade acceptances held by the banks in country b ll ruling requested taxpayer requests a ruling that the amount_paid to f1 pursuant to the bankruptcy plan is not subject_to_withholding under sec_1442 of the internal_revenue_code the code ill law and analysis in general sec_881 of the code imposes a tax of on amounts received by a foreign_corporation from sources within the united_states as interest dividends rents salaries wages premiums annuities compensations remunerations emoluments and other fixed or determinable annual or periodic_payments sec_1442 requires the payor to deduct and withhold the imposed by sec_881 at the source the issue here is whether any portion of the bankruptcy claim that taxpayer will pay to f1 is subject_to tax under sec_881 i whether any portion of the bankruptcy claim is original_issue_discount oid or imputed_interest under sec_1274 sec_483 or sec_7872 of the code for to make that determination the relevant debt_instrument must first be identified purposes of the oid rules sec_1275 defines a debt_instrument as a bond debenture note or certificate or other evidence_of_indebtedness regulation sec_1 d further defines a debt_instrument as any instrument or contractual arrangement that constitutes indebtedness under genera principles of federal_income_tax laws f1’s bankruptcy claim consists in part of various amounts owed to f1 from sales on open account credit or under negotiated and discounted trade acceptances reacquired by f1 as guarantor the sales arose from an arrangement between f1 and taxpayer by which f1 sold product a to taxpayer in return for deferred payment thus each indebtedness constituting the ultimate claim represents an indebtedness issued for nonpublicly traded property given the facts the relevant debt_instrument could be viewed as either the entire contractual arrangement between f1 and taxpayer ie the supply agreement or a series of individual arrangements between f1 and taxpayer ie the trade acceptances regulation sec_1_1275-2 which is generally effective for debt instruments issued after date requires the aggregation of debt instruments for purposes of the oid rules where the debt instruments are issued in connection with the same transaction or series of related transactions determined based on all the facts and circumstances although most of the trade acceptances and open account indebtedness were issued prior to this date we believe that a general facts_and_circumstances_test would be applied to determine whether each trade acceptance constitutes a separate debt_instrument under the terms of the supply agreement payment was either due at sight or in therefore the supply accordance with the credit terms agreed upon by the parties agreement permitted the extension of credit but did not itself evidence the extension of moreover each trade acceptance was separately negotiated and contained credit varying credit terms depending on taxpayer's financial condition at the time of negotiation accordingly the trade acceptances should not be aggregated for purposes of determining whether the debts include an oid or imputed_interest component a oid under sec_1274 or imputed_interest under sec_483 sec_1274 of the code imputes oid on certain debt instruments issued in consideration for the sale_or_exchange of property where some or all of the payments under the debt_instrument are due more than six months after the date of the sale_or_exchange sec_1274 while the regulations under sec_1274 generaily do not provide rules for calculating payment due dates the regulations under sec_1272 which pertain to short term debt obligations are helpful in determining the payment due dates for the trade acceptances and open account indebtedness at issue specifically sec_1_1272-1 provides that the maturity_date of a debt_instrument is the last possible date that the instrument could be outstanding under its terms based on information provided by the taxpayer none of the trade acceptances were extended beyond days further the terms of the trade acceptances indicate that the due dates were within six months of the sale_or_exchange because all the payments are due within six months the trade acceptances and open account indebtedness are not debt instruments to which sec_1274 applies similarly the trade acceptances are not debt instruments to which sec_483 applies the code limits the application of sec_483 to payments that are due more than six months after the date of the sale_or_exchange to which they relate under a contract- i under which some or all of the payments are due more than year after the date of the sale_or_exchange and ii under which there is total_unstated_interest again given the information provided by the taxpayer no payment is due more than one year from the sale_or_exchange accordingly the trade acceptances and open account indebtedness are not subject_to sec_483 b imputed_interest under sec_7872 sec_7872 imputes interest on certain below-market loans such as gift_loans corporate- shareholder loans compensation-related loans and other tax_avoidance loans sec_7872 a below_market_loan is defined under sec_7872 as any loan if a in the case of a demand_loan interest is payable on the loan at a rate less than the applicable_federal_rate or b in the case of a term_loan the amount_loaned exceeds the present_value of all payments due under the loan in the instant case the trade acceptances and open account indebtedness do not provide for any stated_interest therefore unless otherwise excepted the trade acceptances and open account indebtedness constitute below-market loans sec_1_7872-5t of the temporary regulations contains a list of below-market loans that are exempt from sec_7872 because the interest arrangements do not have a significant tax effect on the federal tax_liability of the borrower or the lender specifically under 7872-5t b a below-market_loan made to or from a foreign_person is exempt from sec_7872 provided that the requirements of paragraph c are met sec_1 5t c provides that not apply to a below-market_loan a sec_7872 shail compensation-related_loan or a shareholder-corporation loan where the borrower is a shareholder that is not a c_corporation as defined in sec_1361 if the lender is a foreign_person and the borrower is a u_s_person unless the interest_income imputed to the foreign_person without regard to this paragraph would be effectively connected with the conduct of a u s trade_or_business within the meaning of sec_864 and the regulations thereunder and not exempt from u s taxation under a treaty other than thus to the extent the interest component to the debt if any is not effectively connected with the conduct of a u s trade_or_business sec_7872 does not apply bas c amounts paid to f1 on behalf of banks in country b the facts indicate that taxpayer will remit a portion of the bankruptcy claim to f1 on behalf of the banks in country b that portion represents amounts owed to banks in country b for the trade acceptances negotiated by f1 to the banks at the time of negotiation f1 discounted each trade acceptance given the facts the acquisition_discount created is not subject_to_withholding under chapter_3 of the code cf sec_1276 iv conclusion based on the taxpayer's representations the terms of the on account credit and trade acceptances and the subsequent negotiation of certain trade acceptances to the banks in country b we have determined that a there is no oid or interest imputed under sec_1274 or sec_483 because no payment is due more than six months from the sale_or_exchange b the on account credit and trade acceptances are considered below_market_loans however they are specifically exempted from sec_7872 provided that the interest component if any is not effectively connected to a u s trade_or_business and the discount created in this case on the subsequent negotiation of the trade c acceptances by f1 to the banks in country b is not subject_to chapter_3_withholding accordingly we conclude that because there is no u s source interest or oid component to the payment from taxpayer to f1 and the discount created by f1's subsequent negotiation of certain trade acceptances to the banks in country b is not subject_to chapter_3_withholding the entire amount_paid to f1 pursuant to the bankruptcy plan is not subject_to_withholding under sec_1442 of the code no opinion is expressed as to the income_tax consequences of the transaction described above under sec_482 of the code or the regulations thereunder this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that this ruling may not be used or cited as precedent pl ae a philip é garlett senior technical reviewer branch associate chief_counsel internationa 32lp


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 b01 plr-110383-06 date date ------------------------------------------- ------------------------ ------------------------ --------- -------------------------- ---------------------- -------------------------- -------------------------- -------------- -------------------------------------------------- ------------------------ ----------------------------------------- ------------------------ ----------------------------------------------- legend x state date date date date month trust trust trust a b dear -------------- this responds to a letter dated date submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts according to the information submitted x was incorporated on date under the laws of state x elected to be treated as an s_corporation effective date beginning on date a transferred shares of stock in x to trust and trust beginning on date b transferred shares of stock in x to trust in approximately month x’s counsel discovered that no qsst elections had been filed for trust trust or trust ------------------------ ----------------------- plr-110383-06 x represents that trust trust and trust were all qualified to elect to be qualified subchapter_s trusts qssts within the meaning of sec_1361 and that the income beneficiaries of the trusts all intended to file elections to be treated as qssts under sec_1362 however the income beneficiaries of the trusts inadvertently failed to timely file the appropriate elections under sec_1362 as a result of the failure_to_file these elections x’s s_corporation_election terminated x represents that the failure_to_file the qsst elections for the trusts was not motivated by tax_avoidance or retroactive tax planning x further represents that x and all of its shareholders have consistently treated x as an s_corporation at all times since date and that x’s shareholders including the trusts have consistently included their distributive shares of x’s income on their respective federal_income_tax returns finally x and its shareholders agree to make any adjustments required by the secretary consistent with the treatment of x as an s_corporation law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 defines a small_business_corporation as a domestic_corporation that is not an ineligible_corporation and that does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1361 provides that a qsst whose beneficiary makes an election under sec_1362 will be treated as a_trust described in sec_1361 and the qsst’s beneficiary will be treated as the owner for purposes of sec_678 of that portion of the qsst’s s_corporation stock to which the election under sec_1362 applies under sec_1361 a beneficiary of a qsst may elect to have sec_1361 apply under sec_1361 this election will be effective up to days and two months before the date of the election sec_1361 defines a qsst as a_trust a the terms of which require that i during the life of the current income_beneficiary there shall be only one income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current beneficiary in the trust shall terminate on the earlier of the beneficiary’s death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to that beneficiary plr-110383-06 and b all of the income with the meaning of sec_643 of which is distributed or required to be distributed currently to one individual who is a citizen or resident_of_the_united_states sec_1362 provides in relevant part that if an election under sec_1362 by any corporation was terminated under paragraph or of sec_1362 the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in termination steps were taken so that the corporation is once more a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make any adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to the period then notwithstanding the circumstances resulting in the termination the corporation will be treated as continuing to be an s_corporation during the period specified by the secretary conclusion based solely on the information submitted and the representations made we conclude that x’s s election terminated because qsst elections were not filed for trust or trust in addition we conclude that the termination was inadvertent within the meaning of sec_1362 therefore x will be treated as continuing to be an s_corporation from date and thereafter provided that the beneficiaries for trust trust and trust each file a qsst election with the appropriate service_center effective date for trust and trust and effective date for trust within days of the date of this letter a copy of this letter should be attached to the qsst elections 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 specifically no opinion is expressed concerning whether x is otherwise eligible to be treated as an s_corporation or whether trust trust and trust are eligible to be treated as qssts this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-110383-06 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely david r haglund senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes cc


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 b02 plr-116234-11 date date legend fund --------------------------------------------------- -------------------------------------------------------------------- trust -------------------------------- subsidiary ------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------ type a company state country ------------------------------------ ------------- ---------------------- dear ---------------- this responds to your request dated date submitted by your authorized representative on behalf of fund fund requests that the internal_revenue_service rule that income earned by fund from its investment in its wholly-owned subsidiary a controlled_foreign_corporation cfc will constitute qualifying_income to fund under sec_851 of the code facts fund is a series of trust an open-end management investment_company organized under the laws of state and registered as an investment_company under the investment_company act of u s c 80a-1 et seq as amended the plr-116234-11 act fund has elected or will elect to be taxed as a regulated_investment_company ric under subchapter_m of the code fund uses an accrual_method of accounting and a fiscal_year ending march fund has formed subsidiary a wholly-owned subsidiary incorporated as a type a company under the laws of country under the laws of country a type a company provides limited_liability for all holders of shares a shareholder’s liability is limited to the amount if any unpaid with respect to the shares acquired by the shareholder subsidiary will file an election on form_8832 entity classification election to ensure that subsidiary will be treated as a corporation for federal_income_tax purposes fund represents that although subsidiary will not be registered as an investment_company under the act subsidiary will comply with the requirements of section f of the act investment_company act release no and related sec guidance pertaining to asset coverage with respect to investments to which this authority would apply if subsidiary were registered under the act fund will invest a portion of its assets in subsidiary subject_to the limitations set forth in sec_851 of the code subsidiary invests in commodity-related investments which may include commodity-linked derivatives commodity-linked debt and trusts or other investment vehicles that invest primarily or exclusively in commodities subsidiary may also invest in short-term high quality securities law and analysis sec_851 of the code provides that a corporation shall not be considered a ric for any taxable_year unless it meets an income test under this test at least percent of its gross_income must be derived from certain enumerated sources sec_851 defines qualifying_income in relevant part as - dividends interest payments_with_respect_to_securities_loans as defined in sec_512 and gains from the sale_or_other_disposition of stock_or_securities as defined in sec_2 of the act or foreign_currencies or other income including but not limited to gains from options futures or forward contracts derived with respect to the ric’s business of investing in such stock securities or currencies in addition the flush language of sec_851 of the code provides that for purposes of sec_851 there shall be treated as dividends amounts included in gross_income under sec_951 or sec_1293 for the taxable_year to the extent that under sec_959 or sec_1293 as the case may be there are distributions out of the earnings_and_profits of the taxable_year which are attributable to the amounts so included plr-116234-11 sec_957 of the code defines a cfc as any foreign_corporation in which more than percent of the total combined voting power of all classes of stock entitled to vote or the total value of the stock is owned by united_states_shareholders on any day during the corporation’s taxable_year a united_states_shareholder is defined in sec_951 as a united_states_person who owns percent or more of the total combined voting power of all classes of voting_stock of a foreign_corporation fund represents that subsidiary will be wholly owned by fund fund is a united_states_person fund therefore represents that subsidiary will qualify as a cfc under these provisions sec_951 of the code provides that if a foreign_corporation is a cfc for an uninterrupted period of days or more during any taxable_year every person who is a united_states_shareholder of such corporation and who owns stock in such corporation on the last day of the taxable_year in which the corporation is a cfc shall include in gross_income the shareholder’s pro_rata share of the cfc’s subpart_f_income for the taxable_year sec_952 of the code defines subpart_f_income to include foreign_base_company_income determined under sec_954 under sec_954 foreign_base_company_income includes foreign_personal_holding_company_income determined under sec_954 under sec_954 foreign_personal_holding_company_income includes among other things dividends interest royalties rents and annuities gains in excess of losses from transactions in commodities including futures forwards and similar transactions but excluding certain hedging_transactions and certain active business gains and losses and subject_to certain exceptions net_income from notional_principal_contracts subsidiary’s investments may generate foreign_personal_holding_company_income under sec_954 which is subpart_f_income fund therefore will include in its income the subpart_f_income of subsidiary in accordance with sec_951 conclusion based on the facts as represented we rule that subpart_f_income of subsidiary attributable to fund is income derived with respect to fund’s business of investing in the stock of subsidiary and thus constitutes qualifying_income under sec_851 of the code except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular no opinion is expressed with regard to whether fund qualifies as a ric under subchapter_m of the code plr-116234-11 this ruling is directed only to the taxpayer who requested it and is limited to the facts as represented by the taxpayer sec_6110 provides that this letter 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 sincerely david b silver_______________ david b silber branch chief branch office of associate chief_counsel financial institutions products