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 b02 plr-134655-13 date date ------------------------------------------------- ----------------------------------------------------------------------------- grantor distribution committee ------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- trust state trustees ------------------------------------------- ---------- ------------------------------------------------------ dear ----- ---------- this responds to a letter dated date and subsequent correspondence requesting rulings under sec_671 sec_2501 and sec_2514 of the internal_revenue_code the information submitted states that grantor proposes to create an irrevocable_trust trust for the benefit of grantor’s self grantor’s parents siblings and issue which grantor intends to execute upon receipt of a favorable private_letter_ruling from the internal_revenue_service two independent trustees are the trustees trustees of trust during grantor’s lifetime the beneficiaries of trust are grantor and grantor’s siblings however if grantor’s siblings are not living the class of permissible beneficiaries will include grantor’s parents trustees must make distributions of income and principal as directed by distribution committee and or grantor as follows at any time trustees pursuant to the direction of a majority of distribution committee with the written consent of grantor shall distribute to grantor or the beneficiaries such amounts of the net_income or principal as directed by distribution committee grantor’s consent power plr-134655-13 at any time trustees pursuant to the direction of all distribution committee members other than grantor shall distribute to the beneficiaries such amounts of the net_income or principal as directed by distribution committee unanimous member power and at any time grantor in a nonfiduciary capacity may but shall not be required to distribute to any one or more of the beneficiaries other than herself such amounts of the principal including the whole thereof as grantor deems advisable to provide for the health maintenance support and education of grantor’s issue grantor’s sole power the distribution committee may direct that distributions be made equally or unequally and to or for the benefit of any one or more of the beneficiaries of trust to the exclusion of others any net_income not distributed by trustee will be accumulated and added to principal distribution committee will be initially composed of grantor grantor’s son grantor’s siblings and grantor’s nephew and will cease to exist upon grantor’s death trust provides that at all times the distribution committee must consist of at least two adults other than grantor either who are members of the class of persons eligible to receive distributions of income or principal under trust or if there are not two adult members of such class who are willing and able to serve who are the parent or guardian of a member of such class of eligible distributes eligible individuals if at any time fewer than two eligible individuals are members the distribution committee shall be deemed not to exist a vacancy on distribution committee must be filled in the following order the oldest of the grantor’s adult issue who willing to serve and is not already serving as a member of distribution committee the oldest of the adult issue of grantor’s parents who is willing to serve and who is not already serving as a member of distribution committee the legal guardian if any or the parent of the oldest of the grantor’s minor issue who is not already serving as a member of distribution committee the legal guardian if any or the parent of the oldest minor issue of grantor’s parents who is willing to serve and is not already serving as a member of distribution committee grantor’s father or grantor’s mother if at any time distribution committee does not include at least two members distribution committee shall be deemed not to exist the distribution committee will cease to exist upon grantor’s death upon grantor’s death the trustee will dispose_of the then-remaining principal and undistributed_income of trust as grantor directs by a will specifically referring to this power_of_appointment the testamentary power provided that no such appointment may be made to grantor’s estate grantor’s creditors or the creditors of grantor’s estate grantor’s power includes the power to appoint outright or in trust and to create new powers in default of the exercise of grantor’s testamentary power the balance of plr-134655-13 trust will be distributed per stirpes to grantor’s then living issue in further trust if none of grantor’s issue is then living but any descendant of grantor’s parents is then living trustees are to allocate income and principal per stirpes among grantor’s parents issue in further trust if no descendant of grantor’s parents is then living trustees are to distribute the remaining income and principal pursuant to state law as if grantor had died intestate and unmarried you have requested the following rulings during the period distribution committee is serving no portion of the items of income deductions and credits against tax of the trust will be included in computing the taxable_income deductions and credits of the grantor under sec_671 the contribution of property to trust by grantor will not be a completed_gift subject_to federal gift_tax any distribution_of_property by the distribution committee from trust to grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee any distribution_of_property by distribution committee from trust to any beneficiary of trust other than grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee other than grantor ruling sec_671 provides that where it is specified in subpart e of part i of subchapter_j that the grantor or another person shall be treated as the owner of any portion of a_trust there shall then be included in computing the taxable_income and credits of the grantor or the other person those items of income deductions and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under chapter in computing taxable_income or credits against the tax of an individual sec_672 provides that for purposes of subpart e the term adverse_party means any person having a substantial_beneficial_interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust sec_673 through specify the circumstances under which the grantor is treated as the owner of a portion of a_trust sec_673 provides that the grantor shall be treated as the owner of any portion of a_trust in which the grantor has a reversionary_interest in either the corpus or plr-134655-13 the income therefrom if as of the inception of that portion of the trust the value of such interest exceed sec_5 percent of the value of such portion sec_674 provides in general that the grantor shall be treated as the owner of any portion of a_trust in respect of which the beneficial_enjoyment of the corpus or the income therefrom is subject_to a power of disposition exercisable by the grantor or a nonadverse_party or both without the approval or consent of any adverse_party sec_674 provides that sec_674 shall not apply to the power in sec_674 regardless of by whom held sec_674 describes a power to distribute corpus to or for a beneficiary provided that the power is limited by a reasonably_definite_standard which is set forth in the trust instrument sec_674 provides that sec_674 shall not apply to a power exercisable only by will other than a power in the grantor to appoint by will the income of the trust where the income is accumulated for such disposition by the grantor or may be so accumulated in the discretion of the grantor or a nonadverse_party or both without the approval or consent of any adverse_party 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 to its operation administrative control is exercisable primarily for the benefit of the grantor rather than the beneficiary of the trust sec_676 provides that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under any other provision of part i subchapter_j chapter where at any time the power to re-vest in the grantor title to such portion is exercisable by the grantor or a nonadverse_party or both sec_677 provides in general that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under sec_674 whose income without the approval or consent of any adverse_party is or in the discretion of the grantor or a nonadverse_party or both may be distributed to the grantor or the grantor’s spouse held or accumulated for future distribution to the grantor or the grantor’s spouse or applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor’s spouse sec_678 provides that a person other than the grantor shall be treated as the owner of any portion of a_trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself or such person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would within the principles of inclusive subject a grantor of a_trust to treatment as the owner thereof plr-134655-13 based solely on the facts submitted and representations made we conclude an examination of trust reveals none of the circumstances that would cause grantor to be treated as the owner of any portion of trust under sec_673 sec_674 sec_676 or sec_677 because none of the other distribution committee members has a power exercisable solely by himself to vest trust income or corpus in himself none shall be treated as the owner of any portion of the trust under sec_678 we further conclude that an examination of trust reveals none of the circumstances that would cause administrative controls to be considered exercisable primarily for the benefit of grantor under sec_675 thus the circumstances attendant on the operation of trust will determine whether grantor will be treated as the owner of any portion of trust under sec_675 this is a question of fact the determination of which must be deferred until the federal_income_tax returns of the parties involved have been examined by the office with responsibility for such examination ruling sec_2 and sec_2501 provides that a tax is imposed for each calendar_year on the transfer of property by gift during such calendar_year by any individual resident or nonresident sec_2511 provides that the tax imposed by sec_2501 applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-2 of the gift_tax regulations provides that a gift is complete as to any property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave in the donor no power to change its disposition whether for the donor’s own benefit or for the benefit of another but if upon a transfer of property whether in trust or otherwise the donor reserves any power over its disposition the gift may be wholly incomplete or may be partially complete and partially incomplete depending upon all the facts in the particular case accordingly in every case of a transfer of property subject_to a reserved power the terms of the power must be examined and its scope determined sec_25_2511-2 also provides an example where the donor transfers property to another in trust to pay the income to the donor or accumulate it in the discretion of the trustee and the donor retains a testamentary power to appoint the remainder among the donor’s descendants the regulation concludes that no portion of the transfer is a completed_gift however if the donor had not retained a testamentary_power_of_appointment but instead provided that the remainder should go to x or his heirs the entire transfer would be a completed_gift sec_25_2511-2 provides that a gift is incomplete in every instance in which a donor reserves the power to re-vest the beneficial title in himself or herself a gift is also incomplete if and to the extent that a reserved power gives the donor the power to name plr-134655-13 new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed_or_ascertainable_standard sec_25_2511-2 provides that a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial adverse_interest in the disposition of the transferred property or the income therefrom sec_25_2511-2 provides that the relinquishment or termination of a power to change the beneficiaries of transferred property occurring otherwise than by death of the donor is regarded as the event which completes the gift and causes the gift_tax to apply sec_25_2511-2 provides that if a donor transfers property to himself as trustee or to himself and some other person not possessing a substantial adverse_interest as trustees and retains no beneficial_interest in the trust property and no power over it except fiduciary powers the exercise or nonexercise of which is limited by a fixed_or_ascertainable_standard to change the beneficiaries of the transferred property the donor has made a completed_gift and the entire value of the transferred property is subject_to the gift_tax sec_25_2511-2 does not define substantial adverse_interest sec_25_2514-3 provides in part that a taker in default of appointment under a power has an interest that is adverse to an exercise of the power sec_25_2514-3 also provides that a coholder of a power is considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate in 308_us_39 the taxpayer created a_trust for the benefit of named beneficiaries and reserved the power_to_revoke the trust in whole or in part and to designate new beneficiaries other than himself six years later in the taxpayer relinquished the power_to_revoke the trust but retained the right to change the beneficiaries in the taxpayer relinquished the right to change the beneficiaries the court stated that the taxpayer’s gift is not complete for purposes of the gift_tax when the donor has reserved the power to determine those others who would ultimately receive the property accordingly the court held that the taxpayer’s gift was complete in when he relinquished his right to change the beneficiaries of the trust a grantor’s retention of a power to change the beneficial interests in a_trust causes the transfer to the trust to be incomplete for gift_tax purposes even though the power may be defeated by the actions of third parties 37_tc_897 see also 51_tc_352 in this case grantor retained the grantor’s consent power over the income and principal of trust under sec_25_2511-2 a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial plr-134655-13 adverse_interest in the disposition of the transferred property or the income therefrom the distribution committee members are not takers in default for purposes of sec_25_2514-3 they are merely co-holders of the power the distribution committee ceases to exist upon the death of grantor under sec_25_2514-3 a co- holder of a power is only considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate in this case the distribution committee ceases to exist upon grantor’s death accordingly the distribution committee members do not have interests adverse to grantor under sec_25_2514-3 and for purposes of sec_25_2511-2 therefore grantor is considered as possessing the power to distribute income and principal to any beneficiary herself because she retained the grantor’s consent power the retention of this power causes the transfer of property to trust to be wholly incomplete for federal gift_tax purposes grantor also retained the grantor’s sole power over the principal of trust under sec_25_2511-2 a gift is incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries in this case grantor’s sole power gives grantor the power to change the interests of the beneficiaries accordingly the retention of the grantor’s sole power causes the transfer of property to trust to be wholly incomplete for federal gift_tax purposes further grantor retained grantor’s testamentary power to appoint the property in trust to anyone including trusts other than grantor’s estate grantor’s creditors or the creditors of grantor’s estate under sec_25_2511-2 the retention of a testamentary power to appoint the remainder of a_trust is considered a retention of dominion and control_over the remainder accordingly the retention of this power causes the transfer of property to trust to be incomplete with respect to the remainder in trust for federal gift_tax purposes finally the distribution committee possesses the unanimous member power over income and principal this power is not a condition_precedent to grantor’s powers grantor’s powers over the income and principal are presently exercisable and not subject_to a condition_precedent grantor retains dominion and control_over the income and principal of trust until the distribution committee members exercise their unanimous member power accordingly this power does not cause the transfer of property to be complete for federal gift_tax purposes see 37_tc_897 51_tc_352 accordingly based on the facts submitted and the representations made we conclude that the contribution of property to trust by grantor is not a completed_gift subject_to federal gift_tax any distribution from trust to grantor is merely a return of grantor’s property therefore we conclude that any distribution_of_property by the distribution committee from trust to grantor will not be a completed_gift subject_to plr-134655-13 federal gift_tax by any member of the distribution committee further upon grantor’s death the fair_market_value of the property in trust is includible in grantor’s gross_estate for federal estate_tax purposes ruling sec_2514 provides that the exercise or release of a general_power_of_appointment created after date shall be deemed a transfer of property by the individual possessing such power sec_2514 provides that the term general_power_of_appointment means a power which is exercisable in favor of the individual possessing the power possessor the possessor’s estate the possessor’s creditors or the creditors of the individual’s estate sec_25_2514-1 provides in part that a power_of_appointment is not a general power if by its terms it is exercisable only in favor of one or more designated persons or classes other than the possessor or his creditors or the possessor’s estate or the creditors of the estate sec_2514 provides that in the case of a power_of_appointment created after date if the power is exercisable by the possessor only in conjunction with the creator of the power such power is not deemed a general_power_of_appointment sec_2514 provides that in the case of a power_of_appointment created after date if the power is not exercisable by the possessor except in conjunction with a person having a substantial interest in the property subject_to the power which is adverse to the exercise of the power in favor of the possessor such power shall not be deemed a general_power_of_appointment for purposes of sec_2514 a person who after the death of the possessor may be possessed of a power_of_appointment with respect to the property subject_to the possessor’s power which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the possessor’s power sec_25_2514-3 provides in part that a co-holder of a power has no adverse_interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power however a co-holder of a power is considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate thus for example if x y and z held a power jointly to appoint among a group of persons which includes themselves and if on the death of x the power will pass to y and z jointly then y and z are considered to have plr-134655-13 interests adverse to the exercise of the power in favor of x similarly if on y’s death the power will pass to z z is considered to have an interest adverse to the exercise of the power in favor of y the powers held by the distribution committee members under the grantor’s consent power are powers that are exercisable only in conjunction with the creator grantor accordingly under sec_2514 the distribution committee members do not possess general powers of appointment by virtue of possessing this power further the powers held by the distribution committee members under the unanimous member powers are not general powers of appointment as in the example in sec_25_2514-3 the distribution committee members have substantial adverse interests in the property subject_to this power accordingly any distribution made from trust to a beneficiary other than grantor pursuant to the exercise of these powers the grantor’s consent power and the unanimous member powers are not gifts by the distribution committee members instead such distributions are gifts by grantor based upon the facts submitted and representations made we conclude that any distribution_of_property by the distribution committee from trust to any beneficiary of trust other than grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee further we conclude that any distribution_of_property from trust to a beneficiary other than grantor will be a completed_gift by grantor except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code specifically we express no opinion on the trust provisions permitting trustee to distribute income or principal to trustees of other qualified trusts decanting plr-134655-13 this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file a copy of this letter is being sent to x’s authorized representative sincerely bradford r poston senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


id office uilc cca_2009112412401154 ---------------------------- number release date from ---------------------- sent tuesday date pm to ---------------------- cc ----------------------------------------------------------------------- subject re question regarding taxpayer's last know address - can we use latest irp doc or filed signed state return to change address -------- i distinctly remember that we discussed this on the phone after you had sent the e-mail we discussed that under sec_301_6212-2 b except in situations where the service learns of a taxpayer's change_of address through the ncoa information obtained from a third party specifically a payor or another government agency is not clear and concise notification of a different address for purposes of determining a taxpayer's last_known_address the regulation is very specific about this that is not to say that are you there letters could not be sent to that third party obtained address but for purposes of changing what is known as a taxpayer's last_known_address third party information cannot be used other than in the ncoa situation


internal_revenue_service number release date index number -------------------------------- --------------------------------------------- ------------------------------- department of the treasury washington dc person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 - plr-133928-03 date may - - x a b partnership partnership llc llc trust trust trust trust --------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- --- --------------------------------------------------------------------------------------------- -------------------------- --------------------------------------------------------------------------------------------- -------------------------- --------------------------------------------- --------------------------------------------- ------------- ------------- -------------------------------------------------------------- -------------------------------------- -------------------------------------- -------------------------------------------------------------- dear ------------------ correspondence submitted by you as x’s authorized representative on behalf of x requesting a ruling under sec_1361 of the internal_revenue_code this letter responds to your letter dated date and subsequent trust and trust the irrevocable trusts have substantially identical terms the information submitted states that x is an s_corporation currently owned by plr-133928-03 individuals including a and b who hold shares as tenants_by_the_entirety pursuant to a series of proposed transactions a and b will sever the tenancy_by_the_entirety with each receiving half of the x stock the stock will be transferred to partnership and partnership partnership is owned by a_trust and llc llc is owned by a and trust a will be the grantor of trust sec_1 and partnership is owned by b_trust and llc llc is owned by b and trust b will be the grantor of trust sec_3 and none of partnership partnership llc or llc will elect to be treated as an association_taxable_as_a_corporation for federal_income_tax purposes except as described below a is the initial trustee of the irrevocable trusts the irrevocable trusts provide that during the grantor’s life the trustee shall pay or apply such sums from income and principal as in the trustee’s discretion are necessary or advisable for the health education support and maintenance of the grantor’s spouse and descendants in the case of trust or the grantor’s descendants in the case of trust upon the grantor’s death the remaining trust assets are to be distributed or held in trust for the benefit of the grantor’s spouse and descendants in the case of trust or the grantor’s descendants in the case of trust in the manner described in the trust instrument the trustee has the power to add the spouse of any current beneficiary under any trust created under the terms of the irrevocable trusts as an additional beneficiary of that trust described below the grats provide that from the date the grat is funded until the twentieth anniversary of such date the trustee shall pay the grantor or the grantor’s estate an annual annuity amount equal to of the initial fair_market_value of the assets of the grat the annuity amount is to be paid from income accumulated income and principal in that order any excess income is to be added to principal at the end of the annuity period the remaining trust assets are to be distributed or held in trust for the benefit of the grantor’s spouse and descendants in the case of trust or the grantor’s descendants in the case of trust in the manner described in the trust instrument the trustee has the power to add the spouse of any current beneficiary under any trust created under the terms of the grats as an additional beneficiary of that trust trust and trust the grats have substantially identical terms except as sec_671 provides that where it is specified in subpart e of part i of subchapter_j that the grantor or another person shall be treated as the owner of any portion of a_trust there shall then be included in computing the taxable_income and credits of the grantor or the other person those items of income deductions and credits against tax of the trust which are attributable to that portion of the trust to the extent that plr-133928-03 such items would be taken into account under chapter in computing taxable_income or credits against the tax of an individual 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 corpus or the income therefrom is subject_to a power of disposition exercisable by the grantor or a nonadverse_party or both without the approval or consent of any adverse_party sec_674 provides that sec_674 does not apply to a power to distribute corpus either a to or for a beneficiary or beneficiaries or to or for a class of beneficiaries whether or not income beneficiaries provided that the power is limited by a reasonably_definite_standard which is set forth in the trust instrument or b to or for any current income_beneficiary provided that the distribution of corpus must be chargeable against the proportionate share of corpus held in trust for the payment of income to the beneficiary as if the corpus constituted a separate trust a power does not fall within the powers described in sec_674 if any person has a power to add to the beneficiary or beneficiaries or to a class of beneficiaries designated to receive the income or corpus except where such action is to provide for after-born or after-adopted children sec_677 provides that the grantor shall be treated as the owner of any sec_1361 provides that for purposes of subchapter_s the term sec_1361 provides that for purposes of title_26 the term s_corporation portion of a_trust whether or not he is treated as such owner under sec_674 whose income without the approval or consent of any adverse_party is or in the discretion of the grantor or a nonadverse_party or both may be distributed to the grantor or the grantor’s spouse means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not 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 sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder of an s_corporation sec_1361 provides that in the case of a_trust described in sec_301_7701-3 of the procedure and administration regulations plr-133928-03 sec_1361 the deemed owner shall be treated as the shareholder provides in part that a business_entity that is not classified as a corporation under ' b or an eligible_entity can elect its classification for federal tax purposes as provided in ' an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner b a domestic eligible_entity is i a partnership if it has two or more members or ii disregarded as an entity separate from its owner if it has a single owner trust trust and trust will be grantor trusts each of which will be treated as owned by their respective grantors and that partnership sec_1 and and llc sec_1 and will be treated as owned by a or b respectively and will be disregarded as entities separate from their individual owners therefore a and b will continue to be treated as the owners of the x stock and the transactions described above will not cause the s_corporation_election of x to terminate because of an ineligible shareholder under sec_1361 based solely on the facts and representations submitted we conclude that trust sec_301_7701-3 provides that except as provided in sec_301 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code specifically we express no opinion as to the consequences of the proposed transactions under the estate and gift_tax provisions of chapter sec_11 and sec_12 of subtitle b including the proper valuation of any property or interest in property for federal estate and gift_tax purposes 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 plr-133928-03 pursuant to a power_of_attorney on file with this office a copy of this letter is being forwarded to x enclosures copy of this letter copy for sec_6110 purposes sincerely j thomas hines chief branch office of associate chief_counsel passthroughs and special industries


tcmemo_2007_198 united_states tax_court robert w sheid and elizabeth d coleman-sheid petitioners v commissioner of internal revenue respondent docket no filed date larry d harvey for petitioners randall l preheim for respondent memorandum opinion vasquez judge this case is before the court on respondent’s motion for summary_judgment pursuant to rule unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure and all section references are to the internal_revenue_code in effect for the year in issue after a concession the sole issue for decision is whether petitioners can exclude from income wages earned during from working in antarctica background at the time they filed the petition petitioners resided in lafayette colorado during petitioners performed services at mcmurdo station in ross island antarctica on their federal_income_tax return petitioners excluded wage income earned and received during for services performed in antarctica i summary_judgment discussion rule a provides that either party may move for summary_judgment upon all or any part of the legal issues in controversy full or partial summary_judgment may be granted only if it is demonstrated that no genuine issue exists as to any material fact and that the legal issues presented by the motion may be decided as a matter of law see rule b 98_tc_518 affd 17_f3d_965 7th cir we conclude that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law respondent concedes that no penalty pursuant to sec_6662 is due from petitioners for ii in general sec_61 provides that gross_income means all income from whatever source derived accordingly citizens of the united_states generally are taxed on income earned outside the geographical boundaries of the united_states unless the income is specifically excluded from gross_income 117_tc_95 affd sub nom 68_fedappx_44 9th cir affd sub nom 357_f3d_1108 10th cir exclusions from income are construed narrowly and taxpayers must bring themselves within the clear scope of the exclusion id iii sec_911 in 126_tc_89 473_f3d_790 7th cir arnett ii we addressed the arguments made by the parties herein regarding sec_911 the u s court_of_appeals for the seventh circuit agreed with our analysis of sec_911 and affirmed our conclusion that antarctica is not a foreign_country pursuant to sec_911 and the regulations thereunder arnett v commissioner f 3d pincite we shall not repeat our analysis from arnett i herein we follow our analysis and holding in arnett i and the analysis and holding of the court_of_appeals in arnett ii in 126_tc_89 affd 473_f3d_790 7th cir we concluded our opinion with a citation of sec_863 suggesting that sec_863 provided an continued iv conclusion accordingly for the reasons stated in arnett i arnett ii and herein we conclude that petitioners cannot exclude from gross_income wages earned during from working in antarctica to reflect the foregoing an appropriate order and decision will be entered continued additional reason to rule against the taxpayer id pincite see also sec_863 providing that income earned in antarctica by a u_s_person is sourced in the united_states in arnett v commissioner f 3d pincite the u s court_of_appeals for the seventh circuit addressed sec_863 in greater detail stating at the outset we think that it is important to note that considering antarctica not to be a foreign_country is compatible with the general statutory scheme notably sec_911 is found under subtitle a chapter subchapter_n of the irc which is designated tax based on income from sources within or without the united_states part i of this subchapter entitled source_rules and other general rules relating to foreign_income deems any activity in antarctica to be space_or_ocean_activity in turn the united_states is designated the source country of income from such activity when earned by a citizen_of_the_united_states sec_863 although this provision does not provide a definitive answer as to whether antarctica is a foreign_country it supports the conclusion that sec_911 is not intended to apply to income earned for services provided in antarctica we take this opportunity to state our agreement with the court of appeals’ conclusion set forth above see also 450_us_1


internal_revenue_service number release date index number ------------------------------------ --------------------------- ----------------------- ------------------------- - department of the treasury washington dc person to contact ---------------------- id no telephone number -------------------- refer reply to cc psi b02 - plr-126628-05 date october legend x state date dear ---------------- --------------------------- ein ---------------- --------------- ------------------------- this responds to a letter dated date submitted on behalf of x x was incorporated on date under the laws of state it was requesting a ruling under sec_1362 of the internal_revenue_code facts intended that x elect s_corporation treatment effective on date but x’s form_2553 election by a small_business_corporation was not timely filed accordingly x requests a ruling that it will be treated as an s_corporation effective date law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under b however if an s election is made after the first two and one-half months of a plr-126628-05 corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed sec_1362 of the code provides that if a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 effective date along with a copy of this letter with the appropriate service_center within days from the date of this letter then such election will be treated as timely made for date 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 specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes 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 pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative enclosures copy of this letter copy for sec_6110 purposes sincerely yours beverly katz senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries


department of the treasury internal_revenue_service washington d c date number release date cc intl tl-n-1829-99 uilc internal_revenue_service national_office field_service_advice memorandum for north texas district_counsel cc msr ntx dal from roger brown special counsel to the assistant chief_counsel international - technical cc intl subject this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be used or cited as precedent legend taxpayer b c d e f g h i corp j l m n o p q r appraiser period date date date date date date date year w year v amount amount amount amount amount amount amount amount amount amount amount amount amount amount amount amount amount amount percentage percentage percentage issue s whether sec_482 applies to taxpayer and other parties to the lease- stripping transaction at issue and if so what are the consequences of applying sec_482 conclusion from the facts provided we conclude that sec_482 may apply to taxpayer and the other parties to the transaction collectively the participants because the participants acted in concert pursuant to a common plan to arbitrarily shift income and deductions the participants will be treated as members of the same controlled_group for purposes of sec_482 sec_482 may be applied to reflect clearly the income and deductions arising from the transaction and or prevent the evasion of taxes under the following alternative theories economic_substance standards of sec_482 i disregard the multiple simultaneous sale-leaseback transactions entered into by both d and b so that taxpayer is treated as having acquired neither d’s equipment interest nor indirect ownership of b’s interest in certain leased equipment through its partnership_interest in b therefore taxpayer’s rental expenses and other deductions relating to the equipment interests would be disallowed and reallocated back to d a further consequence of disregarding b’s sale-leaseback transactions is ignoring the subsequent sale of the future rental stream by b because b would be viewed as never acquiring the right to the rents from the equipment or ii disregard the sec_351 transaction due to a lack of economic_substance so that taxpayer is treated as never having acquired d’s equipment interest or a limited_partnership_interest in b accordingly taxpayer’s deductions relating to these interests would be disallowed and reallocated to d clear_reflection_of_income and tax_evasion standards of sec_482 i allocate taxpayer’s deductions to d during the period d owned common_stock of taxpayer so that income and deductions attributable to d’s equipment interest as well as b’s sale-leaseback transactions and sale of the stream of future rents from the equipment are not artificially separated or ii allocate to taxpayer the proportionate amount of the gain from b’s sale of the future rental income as well as gain earned by d or b from any other aspect of the transaction for the period of taxpayer’s participation in the transaction application of sec_482 to nonrecognition transactions allocate taxpayer’s deductions to d on the basis that sec_482 may allocate income or deductions attributable to property acquired by a transferee corporation taxpayer in a sec_351 transaction back to the contributing shareholder d facts e participated in a lease-stripping transaction the transaction marketed by q that consisted of three separate transactions we did not receive a fully developed factual or legal analysis of the transaction from district_counsel as stated by the national_office in a prior memorandum dated date concerning other tax issues of this case additional facts need to be developed before a more complete analysis of the transaction’s facts and application of the relevant law to these facts can be provided nevertheless based on the limited information we have received this memorandum contains our initial conclusions a summary of what we understand to be the facts of one of the three transactions follows these facts also can be found in the date memorandum referenced above but we restate them here for your convenience where factual information is lacking or ambiguous we identify our assumptions and recommendations for factual development step formation of d and b on date d a limited_partnership was formed initially its sole general_partner was m which had a percentage interest in the profits and capital of d m was a wholly-owned subsidiary of q the transaction’s promoter subsequently m transferred its interest in d to o a partnership of which m was the sole general_partner d’s sole limited_partner which had a percentage interest in the profits and capital of d was n a limited_partnership percentage of the capital and profits interest of n a passthrough_entity that was in turn owned by a tax-exempt_entity also on date b a limited_partnership was formed like d b’s sole percentage general_partner was initially m which transferred its interest in b to o the next day b’s sole percentage limited_partner was d within seven months after their formation d and b engaged in three multi-step transactions involving the sale and leasing of computer equipment subject_to various liens and pre-existing user leases to unrelated third-party lessees the interests and obligations of the two partnerships resulting from these transactions were ultimately transferred to the taxpayer as noted previously this memorandum analyzes only one of these multi-step transactions step b’s first sale-leaseback of equipment on date f purchased computer equipment for an unknown sum and leased it to h under a user lease f financed the purchase by incurring dollar_figureamount of nonrecourse debt senior debt which was secured_by a senior lien on the equipment and an assignment of f’s lessor rights to the rental income under the user lease on or about date f sold the equipment subject_to the senior debt and user lease to i corp for an unknown sum i corp incurred dollar_figureamount of debt to f and j junior debt to purchase the equipment which was secured_by a junior lien and an assignment of i corp’s lessor rights under the h user lease subsequently presumably also on date i corp transferred its interest in the equipment to l for an unknown sum on date b purchased l’s equipment interest which was subject_to the user lease and senior and junior debt for dollar_figureamount it paid dollar_figureamount in cash and gave l a nonrecourse installment note for the remaining dollar_figureamount l note secured_by an interest in the equipment according to an appraisal of the equipment as of date the equipment had an estimated fair_market_value of dollar_figureamount and an economic life of period appraiser was hired by the promoter we do not know whether taxpayer sought an independent appraisal or whether appraiser’s appraisal presents a reasonable or inflated estimate of the equipment’s fair_market_value we also do not know whether the sum of the senior and junior notes and i corp’s security_interest exceeded the fair_market_value of the equipment on the same day of the date purchase b leased back the equipment to l from date through date under the lease agreement l’s rent payments were due in the same amounts and at the same times as b’s payments under the l note step b’s second sale-leaseback of equipment also on date b engaged in another sale-leaseback of its equipment interest it sold its equipment interest which was now subject_to the user lease senior and junior debt l lease and l security_interest to p for dollar_figureamount we do not know whether p was related to any of the participants p paid dollar_figureamount in cash and gave b a nonrecourse installment note for the remaining dollar_figureamount p note secured_by an interest in the equipment simultaneously p leased back the equipment to b from date through date because the equipment was subject_to a pre-existing user lease neither p nor b nor l actually used the equipment under the lease agreement b’s rent payments were due in the same amounts and at the same times as p’s payments under the p note b had an option of reacquiring the equipment for its fair_market_value or leasing substitute equipment of the same value as the equipment b could exercise this option at any time or if any third-party user lessee exercised its own purchase option if b exercised its option p was obligated to pay the partnership a buy-out fee that would effectively pay the lesser_of the equipment’s fair_market_value or the balance outstanding on the junior and senior debt on the equipment step sale of rental income from l on date two weeks after date b sold its right to receive rents from l in lump sum to c a lease factoring company l rent sale c purchased this right which was encumbered by the senior and junior debt and l’s security_interest for dollar_figureamount c paid dollar_figureamount in cash to b and assumed b’s obligation to pay off the l note for the term it received l rents which amounted to dollar_figureamount we understand that the amount of the l rents sold to c equaled the principal and interest that c was obligated to pay on the portion of the l note that c assumed c would receive rents from l directly and appears to have been solely responsible for demanding and collecting these payments b was under no obligation to take such action or pledge any collateral securing payment of l rents to c in addition to lacking a security_interest in the equipment and having apparently no recourse against b c was required to pay its installments of principal and interest on the l note regardless of whether it received rent payments from l thus c’s obligations to pay interest and principal to l were offset by c’s right to receive payments in the same amount from l we do not know whether b’s security_interest arising from the equipment sale to p was transferred to c step transfer of d’s interests in exchange for stock in taxpayer on date two weeks after date d and e which owned all of the stock of taxpayer engaged in a transaction intended to qualify as a sec_351 transaction e contributed to taxpayer dollar_figureamount cash in exchange for additional shares of common_stock of taxpayer d contributed its equipment interest and its partnership_interest in b in exchange for percentage of the common_stock of taxpayer taxpayer used the dollar_figureamount cash contribution from its parent to pay off two cash liens that encumbered the equipment interest and the partnership_interest in b q received dollar_figureamount in promoter fees we do not know whether this amount related only to this transaction or other transactions entered into by taxpayer and whether taxpayer or e paid these fees reported tax consequences taxpayer and its parent e file a consolidated_return for the year v taxable_year b reported dollar_figureamount of rental expenses on notional rental payments to p percentage of which was allocated to taxpayer for the year w taxable_year b reported dollar_figureamount of rental expenses on notional rental payments to p percentage of which was also allocated to taxpayer we do not know if in addition to the rental expenses taxpayer claimed any depreciation or interest_expense or any other deductions related to its equipment interests we also do not know if taxpayer reported any rental or interest_income in connection with the equipment although the sale of the right to receive rent from l was a recognition event for u s tax purposes it appears that no u s tax was imposed on most of the gain from the sale b’s percentage partner d reported the gain on its return for the year v taxable_year d in turn passed the majority of this gain to its percentage partner n a passthrough_entity owned by an entity not subject_to u s taxation moreover from taxpayer’s perspective it was not required to recognize this gain because it was not yet the legal owner of the equipment and lease when the gain was required to be taken into account for u s tax purposes thus apparently taxpayer would claim that it was not liable for any_tax on the gain on the l rent sale law and analysis generally in order for sec_482 to apply to a transaction the transaction must be between two or more entities owned or controlled by the same interests sec_482 to the extent that it can be shown that a transaction was carried out pursuant to a common design intended to effect an arbitrary shifting_of_income and deductions or to evade taxes the participants in the common design may be treated for purposes of the transaction as controlled by the same interests for purposes of sec_482 accordingly in the lease-stripping context sec_482 may be applied to prevent the evasion of taxes or the arbitrary separation of deductions steered to the entity subject_to the u s ’s taxing jurisdiction eg taxpayer from the income associated with those deductions steered to an entity exempt from the u s ’s taxing jurisdiction eg the tax-exempt owner of n a sec_482 -- generally sec_482 provides in relevant part in any case of two or more organizations trades_or_businesses owned or controlled directly or indirectly by the same interests the secretary may distribute apportion or allocate gross_income deductions between or among such organizations if he determines that such distribution apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations emphasis added thus in order for sec_482 to apply to a transaction the transaction must be between two or more entities owned or controlled by the same interests as there is no common ownership among the participants to the transaction other than e’s ownership of taxpayer the primary question under sec_482 becomes whether any of the participants particularly b and d are controlled by the same interests b legal standard for control the sec_482 regulations define control to include any kind of control direct or indirect whether legally enforceable and however exercisable or exercised sec_1_482-1 1968_1_cb_218 sec_1_482-1t 1993_1_cb_90 sec_1_482-1 1994_2_cb_93 see also 1_bta_624 acq 1925_1_cb_2 c ontrol not arising or flowing from legally enforceable means may be just as effective in evading taxation as if found on the most formal and readily enforceable legal instrument the regulations also state that i t is the reality of control that is decisive rather than a rigid focus on record ownership of the entities at issue id accord 42_tc_114 aff’d 358_f2d_342 6th cir cert_denied 385_us_899 17_tc_231 aff’d 202_f2d_873 5th cir cert_denied 346_us_819 acq in part and nonacq in part 1952_2_cb_2 revrul_65_142 1965_1_cb_223 372_f2d_415 4th cir aff’g tcmemo_1966_015 cert_denied 389_us_841 moreover the regulations provide that a presumption of control arises if income or deductions have been arbitrarily shifted sec_1_482-1 see 598_f2d_1382 5th cir rev’g a f t r 2d ria n d tex holding that based on sec_1_482-1 the service properly argued that proof of income_shifting between two corporations establishes a presumption of common_control accord 294_f2d_82 5th cir aff’g 32_tc_390 acq 1959_2_cb_4 referring to reg sec_29 the and regulations also contain this presumption and add that control may exist as a result of the actions of two or more taxpayers acting in concert with a common goal or purpose sec_1_482-1t sec_1_482-1 accord dhl corp v commissioner tcmemo_1998_461 in determining whether the control requirement is satisfied when the interests controlling one at issue are the year v and year w taxable years accordingly there are three sets of sec_482 regulations that potentially apply to the years at issue the regulations apply to taxable years beginning on or before date the regulations apply to taxable years beginning after date and the regulations apply to taxable years beginning after date unless an election is made to apply them to all prior open years sec_1_482-1 we are uncertain whether taxpayer made an election to apply the regulations retroactively and uncertain whether taxpayer is a calendar_year taxpayer consequently we will distinguish between the regulations by referring to their year of promulgation in parenthesis when each set of regulations is referred to entity and those controlling another have a common interest in shifting income from the former to the latter entities may be considered commonly controlled thus under the regulations joint legal ownership or overlapping ownership is not required for unrelated corporations to come within the purview of sec_482 if income_or_deduction shifting is present or if there is common goal to shift income or deductions but see 5_tc_558 acq c b acq withdrawn and substituted for nonacq revrul_65_142 1965_1_cb_223 54_tc_912 rev’d in relevant part 453_f2d_1144 2d cir cert_denied 407_us_934 reh’g denied 409_us_899 nonacq 1975_2_cb_3 nonacquiescence relates to the tax_court opinion only as the second circuit adopted an interpretation of control that is consistent with and sec_482 regulations we note that other countries who are members of the organization for economic cooperation and development oecd have adopted a similar approach to control in not requiring overlapping legal ownership before their sec_482 counterpart may be applied in some european countries for example two types of control -- de jure and de_facto - exist under the local law counterparts to sec_482 in france for example de jure control exists if the largest share of capital or voting power is owned by the same controlling person or entity on the other hand de_facto dependency can be deduced from contractual stipulations binding the parties or their financial and commercial relations such as purchase of the majority of production involvement in the management of a company or use of a valuable commercial trademark owned by another it is our understanding that countrie sec_2 see documentation administrative a no s a orore conseil d’etat date no see conseil d’etat date no rené bizac transfers of profits the new article of the belgian income_tax code and article of the french general tax code - siamese twins part two intertax date charles g g campbell availability and effects of host country transfer_pricing administrative rulings france tax mgm’t int’l forum vol no citing inter alia conseil d'etat date no droit fiscal no comm conseil d'etat date no dupont no see also s a sovemarco-europe conseil d’etat date no - french tax_administration sought to apply its transfer_pricing provisions to transactions between a french company and a swiss company where no legal control or affiliation existed between them french tax_administration asserted that factual control existed between the two entities due to the existence of a source-of-supply such as greece sweden denmark italy germany and france embrace notions of de_facto control in addition to de jure control where the service seeks to establish common_control due to the presence of an artificial shifting_of_income and deductions it is the service’s burden to prove the applicability of sec_482 by establishing a shifting_of_income and deductions dallas ceramic tile co f 2d pincite we believe that this burden is met by the stripping of income from the leases to an entity d whose percentage partner is itself a passthrough_entity percentage of which is owned by an entity exempt from u s tax and the reporting of the deductions relating to that income by taxpayer see notice_95_53 1995_2_cb_334 t he parties to a stripping transaction are controlled by the same interests because among other factors they act in concert with a common goal of arbitrarily shifting income and deductions between a transferor and a transferee relationship the taxation of companies in europe greece int’l bureau of fiscal documentation date supp bertil wiman swedish transfer_pricing rules bulletin for int’l fiscal documentation august date under danish law control not only includes shareholder relationships but also substantial lending or financing relationships unlike france however control is not based on market control or influence resulting from a monopolistic position or trademark dominance ulrik fleischer-michaelsen denmark's transfer_pricing system is attractive to foreign_corporations j int'l tax'n date victor uckmar federico maria giuliani interposition in italian taxation on income and international transactions intertax n date citing circular of the ministry of finance of date no in diritto e pratica tributaria i albert j radler friedhelm jacob german administrative principles concerning transfer_pricing c legal standard for same interests if control is found to exist the service may allocate income and deductions among members of the controlled_group sec_1_482-1 sec_1_482-1t sec_1_482-1 a controlled_group or controlled_taxpayer is defined to mean the entities owned or controlled by the same interests and includes the taxpayer that owns or controls other taxpayers sec_1_482-1 sec_1_482-1t sec_1_482-1 unlike the term control the phrase same interests is not defined in the sec_482 regulations case law as well as the legislative_history of sec_482 provide guidance however sec_482 was enacted to prevent the artificial shifting_of_income between controlled taxpayers to avoid federal taxes and thereby milk a taxable entity ie placing deductions in one entity and income related to those deductions in another entity 598_f2d_1375 5th cir citing h_rep_no 70th cong 1st sess c b part s rep no 70th cong 1st sess c b part see also h_rep_no and s rep no 67th cong 1st sess in using the term same interests congress intended to include more than the same persons or the same individuals brittingham f 2d pincite 366_f2d_890 5th cir aff’g 43_tc_540 cert_denied 386_us_1016 2_bta_229 see also lxi-part cong rec statement of sen king referring to the same forces controlling a number of corporations different persons with a common goal or purpose for artificially shifting income can constitute the same interests for the purposes of the statute south texas rice warehouse f 2d pincite see also brittingham f 2d pincite citing ach t c pincite the phrase same interests should not be narrowly construed to frustrate the intent of sec_482 rishell phonograph b t a pincite if the same interests’ was intended to mean only the same persons ’ it would have been easy for congress by using the latter term to have avoided all ambiguity accord grenada indus supra thus it is not necessary that the same person or persons own or control each controlled business before sec_482 can be applied however there must be a common design for the shifting_of_income in order for different entities to constitute the same interests indeed this definition of same interests is identical to the definition of control and the presumption relating thereto in the regulations and case law consequently if there is a common design for shifting income or deductions then the requirements for control and same interests will be met d control by the same interests in the transaction common plan theory further factual development may establish that the participants acted pursuant to a common plan to shift income and deductions in a manner that was beneficial to each participant e through its consolidated_return with taxpayer stood to receive deductions for the year w and year v taxable years of at least of dollar_figureamount and dollar_figureamount rental expenses allocated to taxpayer for year v and year w respectively which at a federal tax_rate resulted in dollar_figureamount of tax benefits while e made a dollar_figureamount investment in the transaction we understand that additional tax benefits were generated in later years from the transaction as well as the other two transactions that are not discussed in this fsa accordingly we believe that the tax benefits in the aggregate exceeded e’s transaction costs we recommend appropriate factual development these significant tax benefits could be realized only if all participants performed their pre-designed roles for which they may have received other forms of compensation which appears to have taken the form in some instances of the upfront payment accompanying the sale-leaseback transaction we ask that the district obtain more information on the amount and manner in which each participant expected to be compensated for participating in the transaction eg the owners of d and b l p and c and who paid such compensation in addition we do not know who hired and compensated appraiser to date we have information only on the promoter’s compensation and the amount of the upfront payments essential in satisfying the common plan requirement is a demonstration of how each participant benefitted from the transaction and whether these benefits hinged upon taxpayer’s willingness to pay cash for tax benefits that exceeded the amount of cash expended in addition to the cash compensation that awaited each participant if it cooperated in the transaction certain uneconomic acts may demonstrate the existence of a common plan for example the fact that the same equipment was sold for different amounts on the same day to parties b i l and p that likely knew of the other parties’ existence and their purchase sale transactions suggests that the parties acted pursuant to a common plan additionally the close proximity in time between certain other steps of the transaction suggest the existence of a common plan as does the apparent presence of circular cash flows between the participants in the last section of this memorandum we suggest types of information that should be developed in order to bolster the application of the common-plan theory alternative control theory -- ability to direct the actions the district may wish to establish control among the participants under an alternative theory that does not rely on evidence of a common plan specifically if it can be shown that certain participants had the ability to direct the actions of other participants control may be found to exist see hall t c pincite arbitrary shifting_of_income coupled with the ability to direct the actions of an entity establishes control for the purposes of sec_482 whether or not ownership exists dhl corp v commissioner tcmemo_1998_461 foreign investors’ potential ability to control the board_of directors did not translate to actual requisite control for sec_482 purposes and did not prevent applying sec_482 to taxpayer and its subsidiary where taxpayer actually controlled the day-to-day operations of the subsidiary various facts if they can be shown may aid the service in establishing control under such a theory such as the following a one or more key participants were shell entities b entities that engaged in the sale- leaseback transactions had little or no experience in the leasing business and relied on other participants to craft their role in the transaction c other participants could direct the actions of other participants either by legally enforceable means or by virtue of overlapping employees or officers and d certain participants’ involvement in the transaction did not make economic sense we ask that the district develop such facts accordingly e sec_482's application to the transaction -- in general generally we have considered applying sec_482 to lease-stripping transactions under three alternative analyses the application of these three analyses to a lease-stripping transaction however does not preclude the application of other theories such as the sham and step-transaction doctrines to the transaction the sec_482 analyses should be applied in conjunction with these other theories because sec_482 applies whether or not a transaction is a sham or otherwise colorable where a transaction is merely a device to shift income or deductions sec_1_482-1 sec_1_482-1t sec_1_482-1 88_tc_252 economic_substance sec_482 overlaps with the case law relating to economic_substance and sham doctrines by allowing the service in certain instances to disregard contractual terms and agreements and to recharacterize a transaction see sec_1_482-2t a ii b -2t a sec_1_482-1 - d ii c ex -1 f ii -2 a ii b -2 a -4 f ii a see also b forman f 2d pincite medieval attractions n v v commissioner tcmemo_1996_455 ria applying the sec_482 regulations to analyze the economic_substance of intercompany contracts however the sec_482 regulations expand upon case law principles and provide additional guidance in specific areas specifically the regulations provide the following the contractual terms including the consequent allocation of risks that are agreed to in writing before the transactions are entered into will be respected if such terms are consistent with the economic_substance of the underlying transactions in evaluating economic_substance great weight will be given to the actual conduct of the parties and the respective legal rights of the parties if the contractual terms are inconsistent with economic_substance of the underlying transaction the district_director may disregard such terms and impute terms that are consistent with the economic_substance of the transaction sec_1_482-1 sec_1_482-1t thus sec_482 provides an alternative approach to challenging the transaction by providing additional criteria under which to apply the economic_substance and sham inquiries to the parties’ conduct and not restricting the service’s allocation authority to instances of colorable or sham transactions see g d searle t c pincite we note that in the context of the transaction and similar tax-shelter transactions this allocation authority would exist only where there is a common tax_avoidance scheme among the participants to shift income and or deductions arbitrarily note that the prior sentence does not apply to the alternative theory discussed above for establishing control the ability to direct the actions of certain participants under the first sec_482 analysis the economic_substance of a transaction is analyzed by focusing on the parties’ actual conduct the economic risks purportedly transferred and whether from a business perspective the transaction makes objective business sense and would have been entered into by a hard-headed business person see sec_1_482-1 sec_1 1t d sec_1_482-1 where the economic_substance of a transaction is inconsistent with the parties’ purported characterization the service may disregard the contractual terms underlying the transaction and treat the transaction consistent with its economic_substance this b forman f 2d pincite sec_482 may overlap with sec_162 and result in the denial of deductions where a lack of arm’s length dealings results in payments between parties with a close relationship in an attempt to avoid taxes treatment may result in a denial of deductions arising from the transaction at issue see eg b forman f 2d pincite medieval attractions tcmemo_1996_455 ria pincite royalty payments lacked economic_substance under sec_482 because the foreign_payee was not the creator or developer of nor in substance had the ability to transfer intangibles considering whether the participants’ conduct was consistent with the transaction’s putative substance relevant factors include inter alia whether any gain realized by b on the l rent sale was actually paid to the tax- exempt owner of n if the equipment underlying taxpayer’s interest was subject_to security interests of third-party creditors whether for non-federal income_tax purposes eg state property taxes ucc filings and internal accounting_records that were provided to credit agencies the registrations of such creditors’ security interests were changed to reflect the multiple sale-leaseback transactions whether either partnership and or other entities claimed deductions eg for rent interest or depreciation expenses for the period they held title to the equipment whether the third parties were permitted to sublease or relocate the equipment without b’s or taxpayer’s consent whether the third-party lessees were informed of the multiple transfers of title whether they permitted the sale of the equipment without the prior consent of the lessees and whether such consent was obtained prior to the transaction to whom did the third-party lessees pay rent eg l or the holders of the junior and or senior debt and to whom did the third-party lessees pay rent after the transaction whether any third-party lessee defaulted on rental payments and if so how such defaults impacted the flow of cash between the participants regarding the terms of the common_stock issued by taxpayer to d whether the terms of the stock were respected if dividends were ever paid what rate would the dividends accrue what type of redemption rights did d have and whether d exercised this right and how much consideration was paid whether any uneconomic acts occurred eg liabilities secured_by equipment whose fair_market_value was less than the liabilities if this were the case the liabilities arguably would not constitute valid indebtedness see 64_tc_752 aff'd 544_f2d_1045 9th cir 748_f2d_908 4th cir cert_denied 471_us_1143 to compare further the consistency of the parties’ conduct to their characterization of the transaction we identify in the last section of this memorandum other facts that should be developed from a business perspective the transaction would not make objective business sense if for example the participants did not independently analyze the cash flows or the creditworthiness of the counterparty to the particular transactions or if the participants failed to obtain independent valuations of the equipment these would suggest that the economic considerations normally concomitant to bona-fide uncontrolled transactions were not present see 752_f2d_89 4th cir aff’g in relevant part 81_tc_184 87_tc_983 aff’d per curiam 860_f2d_1075 3rd cir cert_denied 490_us_1046 73_tc_1163 aff’d 673_f2d_1062 9th cir stacom v commissioner 61_tcm_2691 aff’d per curiam 987_f3d_774 11th cir accordingly if the l - b equipment sale is found to be devoid of economic_substance because the transaction would not have been entered into by a hard- headed businessperson the chain of transactions that gave rise to taxpayer’s deductions would be broken accordingly its deductions would have to be denied see sec_1_482-1t ex sec_1 1t d iii c ex see also medieval attractions supra b forman supra sec_482's role in nonrecognition transactions the second sec_482 analysis that may be applied to the transaction relates to sec_482's role in nonrecognition transactions such as sec_351 transactions specifically sec_482 may apply in nonrecognition transactions to prevent the avoidance of taxes or clearly reflect income for example sec_482 may allocate income and deductions arising from an entity’s disposition of built-in-loss and gain property which it acquired in a nonrecognition_transaction to the shareholder or partner that contributed it in the nonrecognition_transaction see sec_1_482-1 sec_1_482-1t sec_1_482-1 137_f2d_600 3rd cir aff’g 46_bta_562 cert_denied 320_us_794 643_f2d_747 cl_ct on remand cl_ct aff'd without opinion 732_f2d_168 fed cir 556_f2d_889 8th cir aff'g a f t r 2d d minn 811_f2d_543 10th cir aff'g 82_tc_830 80_tc_34 aff'd in relevant part 756_f2d_1430 9th cir cert_denied 474_us_1055 see also 84_tc_996 aff'd in part rev'd in part 856_f2d_855 7th cir restricting sec_482's application to nonrecognition transactions in cases of tax_avoidance concerning the rental deductions claimed by taxpayer the sec_482 built-in_loss analysis applies by likening the contribution in a nonrecognition_transaction of the obligation to pay rent after the income has been stripped off to a contribution of built-in-loss property this is because the stripping off of income by the sale of rent payments to c combined with the continuing obligation to pay rent to p creates continuing tax deductions losses this is in spite of the fact that the transferee in the nonrecognition_transaction will pay little if any out-of-pocket cash as the cash flows between b and p and b and l offset thus d’s transfer to taxpayer of its partnership_interest in b focusing on b’s interests in the h equipment from which the right to future taxable streams of rental income had been sold is in substance a contribution of built-in_loss_property by d to taxpayer if it can be established based on further factual development that there was a tax-avoidance purpose underlying the transaction including the sec_351 transaction between e taxpayer and d the rental deductions may be allocated to d because d is tax-exempt in effect these deductions appropriately disappear clear_reflection_of_income prevent the evasion of taxes the third theory under which a lease-stripping transaction may be analyzed under sec_482 also relates to the service’s ability to allocate income and deductions in order to clearly reflect income and or prevent the evasion of taxes sec_482 sec_1_482-1 sec_1_482-1t sec_1_482-1 this analysis and the case law affirming the service’s exercise of this allocation authority is not based upon an economic_substance analysis rather it focuses on the distortions in taxable_income caused by the separation of income from deductions and it is a simpler application of the preceding discussion relating to the application of sec_482 in nonrecognition transactions see 198_f2d_214 2d cir rev’g 16_tc_882 cert_denied 344_us_874 305_f2d_681 9th cir as stated in notice_95_53 the separation of income from deductions in lease- stripping transactions does not clearly reflect income particularly where they are achieved through a transaction structured to evade taxes lease-stripping transactions are often effected by a creating an artificial separation of the rental income from the associated deductions by accelerating the rental income in the hands of an entity not subject_to the u s ’s taxing jurisdiction and b by placing the deductions associated with the rental income in an entity subject_to u s tax see notice_95_53 in such an instance the service may prevent this artificial shifting_of_income and deductions by allocating the rental deductions from the u s taxpayer to the tax-exempt_entity or allocating the rental income from tax- exempt entity to the u s taxpayer see 372_f2d_415 4th cir aff’g tcmemo_1966_015 cert_denied 389_us_841 361_f2d_607 4th cir aff’g sub nom 240_fsupp_378 e d n c 198_f2d_214 2d cir rev’g 16_tc_882 cert_denied 344_us_874 305_f2d_681 9th cir 196_f2d_1006 2nd cir cert_denied 344_us_835 accordingly it may be appropriate to either allocate taxpayer’s deductions to d during the period d owned stock of taxpayer or allocate income ie a portion of the gain from the multiple sales of d’s interest in equipment leases and its partnership_interest in b to taxpayer in proportion to the period taxpayer owned such interests such an allocation would match the income and the deductions associated with the income and thereby constitute a clearer reflection of income than that which is represented by the transaction concomitantly the evasion of taxes would be prevented case development hazards and other considerations the following is a non-exclusive list of considerations that potentially have a significant impact on the application of sec_482 to the transaction and thus should be if they have not already been developed partnership v commissioner 56_tcm_153 tcmemo_1988_436 recourse loan made to undercapitalized obligor that is not likely to be paid may be disregarded as an economic sham see corbin west in addition where we have stated specifically throughout this memorandum that we do not know certain information we suggest that the information be developed due to its potential relevance to the analysis in the event insufficient formation is developed to establish control by the same interests under either the common plan theory see supra section d or the alternative theory that certain participants had the ability to direct the actions of other participants see supra section d then the prerequisites for applying sec_482 may not exist see bransford v commissioner 36_tcm_1262 tcmemo_1977_314 acq in result date moreover the district should ascertain which sec_482 regulations apply to the years at issue finally once an allocation of income and or deductions is made under sec_482 a secondary allocation must be made to account for the primary allocation see sec_1_482-1 sec_1_482-1t sec_1_482-1 a discussion of the appropriate secondary_adjustment s is beyond the scope of this memorandum and we will furnish the appropriate analysis upon request and after additional information has been developed if you have any questions please contact roger m brown special counsel to the assistant chief_counsel international - technical office of associate chief_counsel international


department of the treasury employer_identification_number contact person - id number contact telephone vil internal_revenue_service p o box cincinnati oh release number release date date date legend r dollar amount s dollar amount t state u state v state w state x scholarship y grant dear we have considered your request for advance approval of your grant-making program under sec_4945 of the internal_revenue_code dated date our records indicate that you are recognized as exempt from federal_income_tax under sec_501 of the code and that you are classified as a private_foundation as defined in sec_509 you will operate grant-making programs called x and y the purpose of your x program is to award funds to qualified students from the rural areas of t u v and w attending an accredited two or four-year college university trade school technical school or similar post-high school institution the purpose of your y program is to award funds to qualified educators from the rural areas of t u v and w working to complete a master’s or higher degree in education under your x program the amounts of the awards will vary and will be determined on a case- by-case basis the x program will primarily be publicized through notices to local high schools each year application forms are made available to the counselor s at each high school two letters of recommendation must accompany the completed application from members of the community who are not related to the applicant the application and two recommendation letters will be returned to a designated member_of_the_faculty who will complete a short questionnaire regarding the applicant and then return the package to your office the x recipient is chosen by your selection committee which is appointed annually by your chairman of the board the recipients of x will be selected no later than may 1st of each year the applicants of your x program must be involved in community service must demonstrate academic achievement financial need and a commitment to succeed the applicants may either be a senior graduating from high school or a student already enrolled in a two- or four-year college university trade school technical school or similar post-high school institution to be eligible the applicants must also be living in or have spent the majority of their lives in the area of each school system supported by t u v and w defined as an area within a fifty mile radius thereof the x is not to exceed the award amount for payment of the recipient’s tuition fees books dormitory and the x funds must be paid directly to the recipient's school campus dining expenses for one year at an accredited college university proprietary or trade school the recipients will be expected to maintain a minimum of gpa throughout their scholarship year and to make written reports of their progress to you at the end of each school term you monitor the use of the x funds by requiring each recipient to provide an official copy of the student's transcript to you prior to the next semester’s funding any student failing to maintain a grade point average gpa for two consecutive semesters is reported to your director and grant a student falls below a for two consecutive coordinator semesters without written explanation if the student's gpa does not improve to the required by the following semester such student's scholarship is suspended official school transcripts showing the students’ grades and grade point averages are required before you will fund your share of the next school term expenses you also request that the student’s school of choice bill you directly with any bills or fees charged to them the x will be in jeopardy if under the x program you intend on offering one r dollars and two s dollars scholarships per school year university proprietary or trade school each scholarship under your x program will be subject_to your annual review and approval of the recipients’ academic record and other relevant information to cover certain educational expenses at an accredited college the selection committee for x will have three unrelated members at no time will any relative of your x selection committee or any other members of the board_of directors be eligible for an x award the approximate number of individuals that are eligible to apply annually is between and students you award an average of ten scholarships each year the scholarship funds are paid directly to the recipient student's designated school of choice for authorized and documented bills or fees the recipients of x receive the scholarship and educator's grant terms of award sheet which such recipient signs and returns to you if there were an allegation of misuse of x and or y funds you would investigate and work with the designated school of choice to resolve the issue and seek recovery_of the misused funds additionally the recipient's school of choice is notified and must agree that all scholarship funds are to be used for the recipient’s tuition and related school expenses and that no money should be returned or refunded directly to the student under any circumstances the recipient's school of choice understands that unused funds should be refunded to you for placement back to the student's account you provide y awards to qualified persons working to complete a master's or higher degree in education each y award is subject_to your annual review and approval of the recipient's academic record and other relevant information you usually offer one r dollars grant annually to be used for the professional development of educators teachers who intend to further their studies in the profession in pursuit of a master's degree or higher degree in education your selection procedures under the y program parallel those applied in the x program however the eligibility in the y program is limited to those individuals working to complete a master’s or higher degree in education any teacher who would like to be considered may apply in writing the applicants for y must include a letter detailing why they are in need of financial support their goals and specific interests within the field of education and any other information they desire the y selection committee to know the applicants of y program must also include documentation that would help with your selection process such documents may consist of high school and college transcripts of reference etc the application deadline for y program is april of each year your y selection committee will select one educator from the area to be notified by june of each year a statement of current financial situation letters you signed a written_statement to acknowledge and agree to continue to maintain records that include information used to evaluate the qualifications of potential grantees ldentification of the grantees including any relationship of any grantee to you the amount and purpose of each grant and all grantee reports and other follow-up data obtained in administering the your x and y grant-making programs sec_4945 and b of the code impose certain excise_taxes on taxable_expenditures made by a private_foundation sec_4945 of the code provides that the term taxable_expenditure means any amount_paid or incurred by a private_foundation as a grant to an individual for travel study or other similar purposes by such individual unless such grant satisfies the requirements of subsection sec_4945 of the code provides that sec_4945 shall not apply to individual grants awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance if it is demonstrated that the grant constitutes a scholarship or fellowship_grant which is subject_to the provisions of sec_117 as in effect on the day before the date of the enactment of the tax_reform_act_of_1986 and is to be used for study at an educational_organization described in sec_170 the grant constitutes a prize or award which is subject_to the provisions of sec_74 if the recipient of such prize or award is selected from the general_public or the purpose of the grant is to achieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar capacity skill or talent of the grantee sec_53_4945-4 of the regulations provides that to secure approval a private_foundation must demonstrate that i its grant procedure includes an objective and nondiscriminatory selection process ii such procedure is reasonably calculated to result in performance by grantees of the activities that the grants are intended to finance and iii the foundation plans to obtain reports to determine whether the grantees performed activities that the grants are intended to finance based on the information submitted and assuming your award programs will be conducted as proposed with a view to providing objectivity and nondiscrimination in making the awards we have determined that your procedures for granting the awards comply with the requirements contained in sec_4945 of the code and that awards granted in accordance with such procedures will not constitute taxable_expenditures within the meaning of sec_4945 in addition we have determined that awards made under your procedures are ‘scholarship or fellowship’ grants within the meaning of sec_4945 and sec_117 of the code and are excludable from the gross_income of the recipients subject_to the limitations provided in sec_117 of the code including to the extent that such grants are used for qualified_tuition_and_related_expenses within the meaning of sec_117 of the code this determination is conditioned on the understanding that there will be no material_change in the facts upon which it is based it is further conditioned on the premise that no grants will be awarded to foundation managers or members of the selection committee or for a purpose that is inconsistent with the purpose described in sec_170 of the code the approval of your award program procedures herein constitutes a one-time approval of your system standards and procedures designed to result in awards which meet the requirements of sec_4945 and sec_4945 of the code this determination only covers the grant programs described above thus approval shall apply to subsequent award programs only as long as the standards and procedures under which they are conducted do not differ materially from those described in your request any funds you distribute to individuals must be made on a true charitable basis in furtherance of the purposes for which you are organized therefore you should maintain adequate_records and case histories so that any or all award distributions can be substantiated upon request by the internal_revenue_service this determination is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as a precedent you must report any future changes in your grant making procedures please keep a copy of this letter in your permanent records we have sent a copy of this letter to your representative as indicated in your power_of_attorney if you have any questions please contact the person whose name and telephone number are shown above sincerely yours lois g lerner director exempt_organizations enclosure


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 b03 plr-129826-14 date date legend x sub ----------------------------------------------------------------------------------------------------- ------------------------- ----------------------------------------------------------------------------------------------------- ------------------------- date1 -------------------- date2 --------------------- date3 --------------------- dear -------------- this responds to a letter dated date and additional information submitted on behalf of x by its authorized representative requesting relief pursuant to sec_301 a of the procedure and administration regulations for x to be granted an extension of time to elect to treat sub as a qualified_subchapter_s_subsidiary qsub under sec_1361 of the internal_revenue_code facts the information submitted states that sub was incorporated on date1 sub was a wholly owned subsidiary of x on date2 when x elected to be treated as an s_corporation x intended to elect to treat sub as a qsub effective as of date2 however due to inadvertence x did not file a form_8869 qualified_subchapter_s_subsidiary election on behalf of sub until date3 x represents that it and sub have filed tax returns for all the relevant tax years consistent with the tax treatment of sub as a qsub from date2 plr-129826-14 law sec_1362 generally provides that a small_business_corporation may elect to be an s_corporation sec_1361 defines a qualified_subchapter_s_subsidiary as a domestic_corporation which is not an ineligible_corporation if percent of the stock of the corporation is owned by the s_corporation and the s_corporation elects to treat the corporation as a qsub sec_1_1361-3 of the income_tax regulations prescribes the time and manner for making an election to be classified a qsub sec_1_1361-3 provides that an election to treat an eligible subsidiary as a qsub may be effective up to two months and days prior to the date the election is filed or not more than months after the election is filed the proper form for making the election is form_8869 qualified_subchapter_s_subsidiary sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than 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_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely upon the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied accordingly x is granted an extension of time of days from the date of this letter to file form_8869 qualified_subchapter_s_subsidiary election with the appropriate service plr-129826-14 center to elect to treat sub effective date2 as a qsub a copy of this letter should be attached to the form_8869 a copy is enclosed for that purpose except for the specific rulings above we express or imply no opinion concerning the federal_income_tax consequences of the facts of this case under any other provision of the internal_revenue_code specifically we express no opinion regarding whether x otherwise qualifies as a small_business_corporation under sec_1361 or whether sub otherwise meets the definition of a qsub under sec_1361 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 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’s authorized representative sincerely associate chief_counsel passthroughs special industries by ___________________________________ bradford r poston senior counsel branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc