internal_revenue_service number release date index number -------------------------- ---------------------- -------------------------------- re ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-123160-14 date december legend -------------------- ----------------------------------------------------------------------- testator trust ----------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------- corporate trustee a corporate trustee b corporate trustee c corporate trustee d child a child b child c grandchild c grandchild a-1 grandchild a-2 individual trust a -------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------- trust b ---------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------ ---------------------------------------------------- ------------------------------------------------------------------------ ----------------------------------------------------------- ----------------------------- -------------------------------------------- ---------------------- ---------------------- --------------------------------- ------------------------------------------------------------------------ -------------------------- --------------------- ------------------------ ----------------------------------------------------------------------- ----------------------------------------------------------------------- plr-123160-14 -------------------------------------------------------- ------------------------------------------------------------------------ share ------------------------------------------------------------------------------------ share --------------------------------------------------------------------------------------------------- date date date year year year year state court state act ------------------------------------------------------ ---------------------------------------------------------------------------------------------------------------- cite cite cite cite ------------------ ------------------- ------------------ ------ ------ ------ ------ -------- --------------------------------------------------------- ------------------------------------------------------------------- ----------------------------------------------------- ------------------------------------------------------------------------ ------------------------------------------------- ------------------------------------------------------------------------ dear ---------------- this responds to your authorized representatives’ letter dated date and subsequent correspondence requesting rulings concerning the income gift estate and generation-skipping gst tax consequences of a settlement agreement facts testator died testate on date prior to date a resident of state he was survived by two children child a and child b a third child child c predeceased testator child c was survived by her child grandchild c testator’s last will and testament will established a_trust trust for the benefit of his lineal_descendants article first paragraph a of trust provides that the trustees are to pay the net_income quarterly in equal shares to child a child b and grandchild c if any of them is not living on an income payment_date the trustees are to pay over his or her share of the income by right of representation to his or her issue then living article first paragraph b provides that trust is to end upon the death of the survivor of child a child b and grandchild c at which time the trustees are to distribute the trust principal by right of representation to testator’s then living issue article second provides in relevant part that corporate trustee a child a child b and grandchild c are to be the trustees plr-123160-14 child a died in year survived by two children grandchild a-1 and grandchild a-2 child b is living grandchild c is living_trust will terminate when the survivor of child b and grandchild c has died corporate trustee a and its successor_corporation served as a co-trustee until year at present one-third of the trust income is paid to grandchild a-1 and grandchild a-2 as successors to child a’s income_interest another third of the income is paid to child b the last third of the income is paid to grandchild c the current presumptive remainder beneficiaries are i grandchild a-1 and grandchild a-2 ii child b’s three children and iii grandchild c’s four children the trust assets consist primarily of investment_assets it is represented that no actual or constructive additions have been made to trust since its inception in year child b and grandchild c as co-trustees petitioned the court to appoint an institutional co-trustee to restore the trustee structure as originally constituted under the will by court order of date corporate trustee b was appointed co-trustee of trust corporate trustee b was subsequently acquired by corporate trustee c accordingly the current co-trustees are child b and grandchild c and corporate trustee c following the year court proceedings the trustees modified the written investment policy of trust to invest and manage the trust assets in accordance with the state act under the modification in part an independent fiduciary as a trustee may equitably adjust between principal and income by allocating an amount of income to principal or an amount of principal to income to the extent the independent fiduciary considers appropriate if the terms of the trust describe the amount that may or must be distributed to a beneficiary by referring to the trust’s income in deciding whether and to what extent to exercise this power the independent fiduciary is to consider certain factors such as the assets held in the trust the extent to which they consist of financial_assets interests in closely held enterprises tangible and intangible personal_property or real_property the extent to which an asset is used by a beneficiary and whether an asset was purchased by the trustee or received from the settlor pursuant to the modification corporate trustee c exercised its authority to equitably adjust trust receipts between income and principal thereafter child b expressed concern and objected to corporate trustee c’s actions in exercising its adjustment powers the disagreements over these actions have resulted in a rift in the family and a desire by some family members to have different trustees and separate trusts for some of the beneficiaries in year child b filed a petition with the court to divide trust and administer the divided trusts as separate trusts child b’s stated reasons for the division were that it would facilitate investment management and administrative decisions regarding the plr-123160-14 share for child b and his family that would be consistent with their investment philosophy child b’s petition was met with opposition from the other beneficiaries and corporate trustee c they were concerned that among other things the division of trust violated the testamentary intent of testator and violated a material purpose of trust they were also concerned that the division of trust into new smaller trusts would result in the loss of economic efficiencies enjoyed by the existing trust child b’s petition was answered by the other beneficiaries who raised a counterclaim they requested that the court construe the words by right of representation in the context of testator’s will they asserted that construction of the term could affect future distributions from trust whether or not trust was divided that is depending on the order of deaths and whether or not there were future births in the family there were three possible constructions that could produce substantially different distributions of income and principal of trust see cite cite and cite see also cite after an adversarial process before the court and extensive settlement negotiations the trustees and beneficiaries of trust agreed to a settlement settlement agreement under which trust will terminate and its assets will be divided into two trusts trust a and trust b_trust a equal in value to one-third of the value of trust will be held as a separate trust for child b and his descendants trust b equal in value to two-thirds of the value of trust will be held as a separate trust for grandchild c and her descendants and child a’s descendants to the extent it is administratively feasible the division of assets will be pro_rata in addition the parties agreed that the term by right of representation will be construed to require a per stirpes distribution of trust assets among the descendants of testator with the first division to be made at the child level ie at the level of child a child b and child c even if that generation has no living descendants on date the court issued an order approving and adopting the terms of the settlement agreement the order provides in part that beginning on the date of division and continuing until termination trust a and trust b i shall be treated as completely separate and distinct trusts for all purposes and ii shall be governed by the existing provisions of trust except to the extent modified by certain provisions as described below trust a child b will receive the trust a income quarterly for his life after child b’s death his children will receive the income in equal shares if any child should die that child’s children will receive the child’s share of the income in equal shares if child b and all of his issue die before the termination of trust a the assets of trust a will be added to trust b on the death of the survivor of child b and grandchild c trust a will terminate plr-123160-14 and the trust a assets will be distributed to the then-living descendants of child b by right of representation child b and his three children will be the individual co-trustees of trust a corporate trustee d will be appointed as a co-trustee by a document signed prior to the effective date of the trust division and effective upon the creation of trust a a corporate trustee will remain in service until trust a terminates the corporate trustee will have all the powers under state law to exercise the trustee’s powers to adjust between income and principal pursuant to the provisions of the state act trust b grandchild a-1 grandchild a-2 grandchild c and individual will be the co-trustees of trust b corporate trustee c will serve as the corporate trustee trust b will consist of two shares share and share the income of share will be distributed quarterly to grandchild c the income of share will be distributed quarterly in equal shares to grandchild a-1 and grandchild a-2 if any of those persons should die during the term of the trust his or her income share will be paid to his or her descendants by right of representation on the death of the survivor of child b and grandchild c trust b will terminate share will be distributed to the then-living descendants of grandchild c by right of representation and share will be distributed to the then-living descendants of child a by right of representation you have asked for the following rulings the terms of the settlement agreement including the trust division and the construction of the phrase by right of representation will not cause a distribution from or the termination of any interest in trust trust a or trust b to be subject_to the generation-skipping_transfer_tax the terms of the settlement agreement including the trust division and the construction of the phrase by right of representation will not cause any person to make a gift to any beneficiary of trust trust a or trust b the terms of the settlement agreement including the trust division and the construction of the phrase by right of representation will not cause the assets held in trust trust a or trust b to be included in the gross_estate of a beneficiary who dies prior to the termination of such trust following the termination of trust and the resulting division of trust pursuant to the settlement agreement trust a and trust b will be treated as separate trusts plr-123160-14 the terms of the settlement agreement including the trust division and the construction of the phrase by right of representation will not cause any party to the settlement agreement to realize income from the sale_or_exchange of any trust assets or interests law and analysis ruling sec_2601 of the internal_revenue_code imposes a tax on every generation-skipping_transfer which is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip under of the tax_reform_act_of_1986 the act gst tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the tax does not apply to a transfer under a_trust that was irrevocable on date except to the extent the transfer is made out of corpus added to the trust by an actual or constructive_addition after date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax under sec_26_2601-1 will not cause the trust to lose its exempt status these rules are applicable only for purposes of determining whether an exempt trust retains exempt status for generation-skipping_transfer_tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a court-approved settlement of a bona_fide issue regarding the administration of the trust or the construction of terms of the governing instrument will not cause an exempt trust to be subject_to the provisions of chapter if the settlement is the product of arm’s length negotiations and the settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement a settlement that results in a compromise between the positions of the litigating parties and reflects the parties’ assessments of the relative strengths of their positions is a settlement that is within the range of reasonable outcomes sec_26_2601-1 provides that a judicial construction of a governing instrument to resolve an ambiguity in the terms of the instrument or to correct a scrivener’s error will not cause an exempt trust to be subject_to the provisions of chapter if the plr-123160-14 judicial action involves a bona_fide issue and the construction is consistent with applicable state law that would be applied by the highest court of the state sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy sec_26_2601-1 b or c by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust sec_26_2601-1 example describes a situation where in grantor established an irrevocable_trust for the benefit of his two children a and b and their issue under the terms of the trust the trustee has the discretion to distribute income and principal to a b and their issue in such amounts as the trustee deems appropriate on the death of the last to die of a and b the trust principal is to be distributed to the living issue of a and b per stirpes in the appropriate local court approved the division of the trust into two equal trusts one for the benefit of a and a’s issue and one for the benefit of b and b’s issue the trust for a and a’s issue provides that the trustee has the discretion to distribute trust income and principal to a and a’s issue in such amounts as the trustee deems appropriate on a’s death the trust principal is to be distributed equally to a’s issue per stirpes if a dies with no living descendants the principal will be added to the trust for b and b’s issue the trust for b and b’s issue is identical except for the beneficiaries and terminates at b’s death at which time the trust principal is to be distributed equally to b’s issue per stirpes if b dies with no living descendants principal will be added to the trust for a and a’s issue the example concludes that the division of the trust into two trusts does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the division in addition the division does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust therefore the two partitioned trusts resulting from the division will not be subject_to the provisions of chapter in this case trust was irrevocable on date it is represented that there have been no actual or constructive additions to the trust after date the settlement agreement and court order resolve bona_fide issues ie the construction of the words by right of representation as intended by testator and the administration of trust under the state act the settlement agreement is the product of arm’s length negotiations and is within the range of reasonable outcomes under trust and state law finally the settlement agreement and court order construing the term plr-123160-14 by right of representation and dividing trust will not shift a beneficial_interest in trust to a lower generation beneficiary and will not extend the time for vesting of any beneficial_interest in trust accordingly based on the facts submitted and representations made we conclude that the terms of the settlement agreement including the trust division and construction of the phrase by right of representation will not cause distributions from or the termination of any interest in trust trust a or trust b to be subject_to the gst tax imposed by sec_2601 ruling 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 will apply 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_2511-1 of the gift_tax regulations provides that any transaction in which an interest in property is gratuitously passed or conferred upon another regardless of the means or device employed constitutes a gift subject_to tax whether an agreement settling a dispute is effective for gift_tax purposes depends on whether the settlement is based on a valid enforceable claim asserted by the parties and to the extent feasible produces an economically fair result see 674_f2d_761 9th cir citing 387_us_456 thus state law must be examined to ascertain the legitimacy of each party’s claim if it is determined that each party has a valid claim the service must determine that the settlement reflects the result that would apply under state law if there is a difference it is necessary to consider whether the difference may be justified because of the uncertainty of the result if the question were litigated as discussed above the issues resolved by the settlement agreement and court order concerning the construction of trust and its administration are bona_fide issues based upon valid enforceable claims by the interested parties the settlement agreement resolves conflicts concerning distributions of income and principal and is reflective of the rights of the parties under applicable state law that would be applied by the highest court of state accordingly based on the facts submitted and representations made we conclude that the terms of the settlement agreement will not cause any person to make a gift to any beneficiary of trust trust a or trust b ruling plr-123160-14 sec_2001 provides that a tax is imposed on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2033 provides that the value of the gross_estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for adequate_and_full_consideration in money or money’s worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom sec_2037 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time after date made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money or money’s worth by trust or otherwise if possession or enjoyment of the property can through ownership of such interest be obtained only by surviving the decedent and the decedent has retained a reversionary_interest in the property but in the case of a transfer made before date only if such reversionary_interest arose by the express terms of the instrument of transfer and the value of such reversionary_interest immediately before the death of the decedent exceeds five percent of the value of such property sec_2038 provides that the value of the decedent’s gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for adequate_and_full_consideration in money or money’s worth by trust or otherwise where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power in whatever capacity exercisable by the decedent alone or by the decedent in conjunction with any other person without regard to when or from what source the decedent acquired such power to alter amend revoke or terminate or where any such power is relinquished during the three-year period on the date of the decedent’s death sec_2041 provides that the value of the gross_estate shall include the value of all property to the extent of any property with respect to which the decedent has at the time of his death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released a power_of_appointment by a disposition that is of such nature that if it were a transfer of property owned by the decedent the property would be includible in the decedent’s gross_estate under sec_2035 to plr-123160-14 sec_2041 provides that a general_power_of_appointment is a power that is exercisable in favor of the decedent the decedent’s estate the decedent’s creditors or the creditors of the decedent’s estate however a power to consume invade or appropriate property for the benefit of the decedent that is limited by an ascertainable_standard relating to the health education support or maintenance of the decedent shall not be deemed a general_power_of_appointment in this case no person made a transfer to trust other than testator at his death on date the income and terminating distributions from the divided trusts will follow the same pattern as they would have had trust not been divided the income beneficiaries will be entitled to distributions quarterly and the remaindermen will be entitled to receive the trust property only upon surviving termination of the respective trust the terms of the settlement agreement do not cause any transfers or create any general powers of appointment that would cause any of the trust property to be included in the estate of a beneficiary under sec_2036 sec_2038 or sec_2041 consequently the terms of the settlement agreement will not cause any beneficiary of trust trust a or trust b who dies prior to the termination of such trust to include trust assets in his or her taxable_estate other than i trust assets that have been distributed to him or her prior to death or ii such quarterly distributions of income that were past due and not paid in accordance with the trust terms during a beneficiary’s life and to which he or she has a legally enforceable claim at death ruling sec_643 provides that for purposes of subchapter_j of chapter of subtitle a under regulations prescribed by the secretary two or more trusts shall be treated as one trust if such trusts have substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries and a principal purpose of such trusts is the avoidance of the tax_imposed_by_chapter_1 section b of the tax_reform_act_of_1986 provides that sec_643 shall apply to taxable years beginning after date except that in the case of a_trust that was irrevocable on date it shall apply only to that portion of the trust that is attributable to contributions of corpus after date the taxpayers represent that in this case trust a and trust b will have different beneficiaries the taxpayers also represent that no actual or constructive additions have been made to trust since its inception prior to date based on the facts submitted and the representations made we conclude that as long as trust a and trust b are separately managed and administered they will be treated as separate trusts for federal tax purposes ruling plr-123160-14 sec_61 and provides that gross_income includes gains derived from dealings in property and income from an interest in a_trust sec_1001 provides that the gain from the sale_or_other_disposition of property is the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss is the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized under sec_1001 the amount_realized from the sale_or_other_disposition of property is the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a of the code the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property must be recognized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained a partition of jointly owned property is not a sale_or_other_disposition of property if the co-owners of the joint property sever their joint_interests but do not acquire a new or additional interest as a result thereof thus neither gain nor loss is realized on a partition see revrul_56_437 1956_2_cb_507 conversion of a joint_tenancy in stock to a tenancy_in_common in order to eliminate the survivorship feature and the partition of a joint_tenancy in stock are not sales or exchanges similarly divisions of trusts are also not sales or exchanges of trust interests if each asset is divided pro_rata among the new trusts see revrul_69_486 1969_2_cb_159 pro_rata distribution of trust assets not a sale_or_exchange here the division of trust into trust a and trust b will not result in any shift in beneficial_interest in the assets of trust accordingly the division of trust as described will not result in the realization of gain_or_loss under sec_61 and sec_1001 in addition the agreement regarding construction of the term by right of representation will not result in the realization of gain_or_loss under sec_61 and sec_1001 except as expressly provided 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 these rulings are directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives plr-123160-14 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely leslie h finlow senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosure copy of letter for sec_6110 purposes


internal_revenue_service department of the treasury index number washington dc number release date legend person to contact telephone number refer reply to cc dom p si plr-113550-99 date date country x y z a b d dear this letter responds to a letter dated date written on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 facts according to the information submitted x is an entity organized under the laws of country that is not required to be classified as a corporation under sec_301 b or x has two shareholders a and b each of whom has limited_liability accordingly absent a check-the-box election x is a foreign eligible_entity classified as an association under sec_301 b i b x’s shareholders also own interests in two other entities organized under the laws of country that are not required to be classified as corporations under sec_301 b or a owns the majority interest in entities y and z and b owns a minority interest in y both y and z have two or more shareholders and both have a shareholder that does not have limited_liability accordingly absent a check-the- plr-113550-99 box election y and z are foreign eligible entities classified as partnerships under sec_301 b i a x’s shareholders desired to have x as well as y and z classified as a partnership they intended to have x file an election under form_8832 entity classification election to elect partnership status as x’s classification effective d however the form_8832 was not timely filed x requests a ruling that it will be recognized as a partnership effective d x represents that it has not sold any assets since d and that it has no present plan to sell any assets x also represents that its classification was not relevant under sec_301 d during the sixty months prior to d law and analysis sec_301_7701-3 provides that an eligible_entity may elect to be classified as other than its default classification in sec_301_7701-3 by filing form_8832 with the appropriate service_center sec_301_7701-3 provides that unless the entity elects otherwise a foreign eligible_entity is classified as an association if all its members have limited_liability under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the 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_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion in the present situation good cause has been shown and the other requirements plr-113550-99 of sec_301_9100-1 and sec_301_9100-3 have been satisfied consequently x is granted an extension of time for making the sec_301_7701-3 election until days following the date of this letter the election should be made by following the procedure set forth in form_8832 a copy of this letter should be attached to the election one is enclosed for that purpose except as specifically set forth above no opinion is expressed or implied as to the federal tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed regarding the u s tax consequences of making the election including but not limited to the basis of the assets in the hands of the partnership this ruling is directed only to the taxpayer on whose behalf it was requested sec_6110 provides that it may not be used or cited as precedent under a power_of_attorney on file with this office a copy of this letter will be sent to x sincerely yours paul f kugler assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number legend washington dc person to contact telephone number refer reply to cc psi plr-126052-03 date date x state a d1 dear this letter responds to a letter dated date and subsequent correspondence requesting a ruling on behalf of x under sec_1362 of the internal_revenue_code the information submitted discloses that x was formed on d1 under the laws of state a x’s sole shareholder represents that he intended that x be an s_corporation beginning d1 however x’s s election was not timely filed x filed a form_1120s u s income_tax return for an s_corporation for its taxable_year beginning d1 sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides when an s election will be effective generally if an s election is made within the first two and one-half months of a corporation's taxable_year then that corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one-half months of a corporation's taxable_year then that corporation will not be treated as an s_corporation until the taxable_year following the year in which the s election is made plr-126052-03 sec_1362 provides that if an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply based on the facts submitted and representations made we conclude that x has established reasonable_cause for failing to make a timely s election for its taxable_year that began on d1 and is eligible for relief under sec_1362 accordingly if x makes an election to be an s_corporation by filing a form_2553 election by a small_business_corporation with an effective date of d1 with the appropriate service_center within days from the date of this letter then such election will be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center except as specifically set forth above we express or imply no opinion concerning the federal tax consequences of the foregoing facts specifically we express or imply no opinion on whether x otherwise qualifies as an s_corporation pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours james a quinn senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosure copy of this letter copy for sec_6110 purposes cc


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division number release date date date uil uil uil uil dear contact person lalalaialahalahl identification_number tea ’ contact number employer_identification_number isieialelelelaiaialel form required to be filed ialalelelelahelelel tax years this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final because you do not qualify for exemption as an organization described in sec_501 donors may not deduct contributions to you under sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file them to this office failure_to_file the returns timely may result in a penalty file the returns in accordance with their instructions and do not send we will make this letter and our proposed adverse determination_letter available for public inspection under sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice if you agree with our deletions you do not need to take any further action if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service at if you have any questions about your rekkreekeker or the irs customer service number for businesses the irs customer service number for people with hearing impairments is sincerely lois g lerner director exempt_organizations enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter department of the treasury internal_revenue_service washington d c contact person here identification_number kkrkkick ik contact number krekkkkrek fax number rekkkekkkk employer_identification_number rekkekekker tax_exempt_and_government_entities_division date date vil uil uil uil legend state president corporation llc medical program portal tech web address vice president dollar_figurex1 dear rkekekkkkke rrkkkkkeee rerekekkek krekkkererker rerkekkkkke kerkkkkkkk ruekekeerke rekkkrekrer krrekkeeekk kkk kkk we have considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code based on the information provided we have concluded that you do not qualify for exemption under sec_501 the basis for our conclusion is set forth below facts you were incorporated under the laws of state your articles of incorporation provide that you are organized for the national implementation project management organization for the medical program to solve the national health information exchange and adoption of electronic health records your articles do not contain a prohibition on inurement nor do they contain a clause disposing of your property and assets upon dissolution you were founded by president president is also president of corporation and the managing partner and chief_executive_officer of llc you described your primary activity as the national implementation of medical program medical program belongs to llc you included llc’s business plan to further explain your activities and purpose the llc ’s solutions for the healthcare medical sector are provided under the brand and program called medical program this program is llc ’s approach to help reactivate the us economy through the healthcare medical sector and to enhance such sector you stated that your activities consist of the following applying for federal and state grants to fund the initial implementation efforts of medical program until it becomes self-sustained managing the relationship with the states’ committees for health information exchange hie and adoption of electronic health records ehr and corresponding regional exchange centers from all states marketing and sales of the portal for all medical professionals marketing and sales of the advertisement program for funding generation purposes managing the relationship with vendors to properly enroll all ehr database holders and medical professionals into the medical group with the purpose of allowing hie and adoption of ehr you stated that your activities will generate economic development when implementing the medical program in the following ways generate technology jobs created by llc and each tech partner generate advertisement jobs created by the advertisement program hosting of the group cloud management system comprised of all portals will be under llc which will require llc to expand datacenter facilities leading to construction projects portal will be sold to medical professionals based on subscription access tech partners will develop mini-apps for portal to be purchased by medical professionals to access portal medical professionals will require a browser device llc is developing strategic partnership with hardware developers to provide these devices bundled with portal to medical professionals medical professionals and patients will access portal to participate in blogs and discussion forums these individuals will see the advertisements on each portal by the advertisement program these individuals will read these advertisements find out more about the products and services and ultimately purchase these products and services corporation is an investor and incubator of the cloud computing technology that lead to medical program president owns the intellectual_property of that technology you stated that through corporation you will have access to a worldwide network of enterprise resource planning implementation consulting companies that will help with the national implementation of medical program llc provides access to cloud management systems and group cloud management systems llc with host a group cloud management system comprised of all portals related to medical program llc has a partner for growth program under the brand tech which enrolls internet consultants value added reseller authorized consultants and referral partners you anticipate generating revenue solely from gifts grants and contributions you plan to engage in government grant solicitation you stated that as part of the process in applying for government grants you need to establish a c not-for-profit organization this is the reason of your creation and the reason of thi sec_501 c application submission you have in place the advertisement program which will allow corporations to advertise in each portal the revenue will be used to sustain medical program you also have in place a benefactor program which will allow any private company or individual to donate funding for the implementation of medical program in llc’s business plan it says llc needs the support of the us government and initial funding from the arra to promote the medical program in the entire nations you anticipate expenses will include those for the compensation of officers directors and trustees other salaries and wages and professional fees president and vice president are both compensated an estimated dollar_figurex1 per year for their services on the board llc is listed as an independent_contractor who will make more than dollar_figure per year in part v of your form_1023 you stated that llc’s compensation amount will by the arra grant obtained llc provides access to cloud management systems cms and group cloud management systems gcms llc will host medical group a gcms comprised by all portal related to the medical program llc has a partner for growth program under the brand tech in which it enrolls internet consultants value added resellers authorized consultants and referral partners president will own all intellectual_property on the patents applications submitted to the united_states patent and trademark office and medical program your web address is one page on llc’s website your bylaws provide that you shall be governed by a board_of directors consisting of three members together with the officers at least one of which shall be a resident of the state of florida and a citizen_of_the_united_states the bylaws further provide that no officer shall be entitled to receive any compensation_for services as an officer you have the following three board members and officers e e e president vice president corporation which is listed as your vice president you have not adopted a conflict of interest policy when asked what procedures you will follow to assure that persons who have a conflict of interest will not have influence over their own compensation you replied t here is not and there will be no conflict of interest additionally you gave the same response when asked what procedures you will follow to assure that persons who have a conflict of interest will not have influence over you regarding business deals with themselves you submitted with additional information t he reason why we need to be a 501c3 is because the company is applying for arra funds from the office of national coordinator from the department of health and human services federal government part of the requirements of the grant is to be a organization law sec_501 provides that an organization described in subsection c is exempt from income_taxation sec_501 provides for the exemption from federal_income_tax of organizations that are organized and operated exclusively for charitable scientific or educational_purposes or for the prevention of cruelty to children provided no part of the organization's net_earnings inures to the benefit of any private_shareholder_or_individual sec_509 provides that an organization shall be classified as a public charity and not a private_foundation if organizations that normally receive a substantial part of its support from publicly supported organizations from a governmental_unit or from direct or indirect_contributions from the general_public it is an organization described in sec_170 which includes sec_1_501_a_-1 of the income_tax regulations regulations defines private shareholder of individual as a person having a personal and private interest in the activities of the organization sec_1_501_c_3_-1 provides that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 provides that an organization is organized exclusively for one or more exempt purposes only if its articles of organization a limit the purposes of such organization to one or more exempt purposes and b do not expressly empower the organization to engage otherwise than as an insubstantial part of its activities in activities which in themselves are not in furtherance of one or more exempt purposes sec_1_501_c_3_-1 provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1_501_a_-1 defines the words private_shareholder_or_individual in sec_501 to refer to persons having a personal and private interest in the activities of the organization sec_1_501_c_3_-1 states that an organization is not organized or operated exclusively for one or more tax-exempt purposes unless it serves a public rather than a private interest to meet this requirement an organization must establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1_501_c_3_-1 provides that the term charitable is used in sec_501 in its generally accepted legal sense the promotion of health has long been recognized as a charitable purpose see restatement second of trusts sec_368 sec_372 4a scott and fratcher the law of trusts sec_368 sec_372 4th ed revrul_69_545 1969_2_cb_117 the service has recognized that the promotion of health includes other activities other than the direct provision of patient care furthermore charitable includes relief of the poor and distressed advancing education and lessening the burdens of government the service has held that poor and distressed beneficiaries must be needy in the sense that they cannot afford the necessities of life in 326_us_279 the supreme court held that the presence of a single non-exempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes the court found that a trade_association had an underlying commercial motive that distinguished its educational program from that carried out by a university and therefore the association did not qualify for exemption in 70_tc_352 the tax_court considered the qualification for exemption under sec_501 of an organization formed to provide consulting services for a fee to nonprofit and tax-exempt organizations in the areas of health and health delivery systems housing vocational skills and cooperative management in concluding that the organization did not qualify for exemption the court noted that whether petitioner’s primary purpose for engaging in its sole activity is an exempt_purpose or whether its primary purpose is the nonexempt one of operating a commercial business producing net profits for petitioner factors such as the particular manner in which an organization’s activities are conducted the commercial hue of those activities and the existence and amount of annual or accumulated_profits are relevant evidence of a forbidden predominant purpose the critical inquiry is in 72_tc_687 aff'd 625_f2d_804 8th cir the court held that while selling prescription pharmaceuticals to elderly persons at a discount promotes health the pharmacy did not qualify for recognition of exemption under sec_501 on that basis alone because the pharmacy operated for a substantial commercial purpose it did not qualify for exemption under sec_501 82_tc_196 held that an organization that raised money for college scholarships from the operation of bingo_games on the premises of a lounge was not exempt under sec_501 three of the organization’s five board members were the two owners and an accountant director of the lounge the court stated that more than an insubstantial purpose of the taxpayer's activities was to attract persons by way of the bingo_games onto the premises of the lounge expecting that they would purchase food and beverages while participating in the games in fact the court continued the taxpayer's activities were in substantial part designed to enhance the profitability of the lounge to ensure this result the articles of incorporation of the taxpayer named three of its five directors as owners or directors of the lounge with subsequent directors to be appointed by the board_of the lounge therefore the board was and always would be controlled by the directors of the lounge consequently all of petitioner's fundraising activities could be controlled by the owners of the lounge to provide them with maximum benefit even though the taxpayer and the lounge kept separate_accounts and no cash payments were made from the taxpayer to the lounge for rent or wages the activities of the two were so interrelated as to be functionally inseparable in 765_f2d_1387 9th cir affg t c memo the court in affirming the tax court’s finding that it was unnecessary to consider the reasonableness of payments made by the applicant to a business owned by its officer stated t he critical inquiry is not whether particular contractual payments to a related for-profit organization are reasonable or excessive but instead whether the entire enterprise is carried on in such a manner that the for-profit organization benefits substantially from the operation of the church 92_tc_1053 the court defined private benefit as nonincidental benefits conferred on disinterested persons that serve private interests international postgraduate medical foundation v commissioner 56_tcm_1140 an organization whose activity was to conduct continuing medical education tours abroad exclusively used one for-profit travel agency to arrange its travel tours the same individuals controlled both the organization and the for-profit travel agency and the organization did not solicit bids from any other travel agency furthermore both entities shared the same office as both entities were interrelated the court held that the organization was operated for the benefit of the for-profit travel agency rationale therefore we cannot recognize you as an exempt_organization under sec_501 we have concluded that you are not organized or operated exclusively to promote health or lessen the burdens of government under sec_501 or to further any other tax-exempt purpose within the meaning of sec_501 and sec_1_501_c_3_-1 rather you are operated primarily for a non-exempt purpose-to apply for and receive federal grant money for the benefit of llc a related for-profit entity any public purposes for which you may operate are only incidental to this primary nonexempt purpose in addition you are operated primarily to provide substantial private benefit to your board members which is prohibited by sec_1_501_c_3_-1 organizational_test sec_1_501_c_3_-1 provides that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt furthermore no part of the organization's net_earnings may inure to the benefit of any private_shareholder_or_individual you do not meet the organizational_test to qualify for recognition of tax exempt status under sec_501 your articles of incorporation do not limit your purposes to one or more exempt purposes as required in sec_1_501_c_3_-1 moreover you fail the organizational_test because your articles of incorporation do not dedicate your assets to an exempt_purpose under sec_501 as required in sec_1_501_c_3_-1 non-exempt purpose in addition to not meeting the requirements of the organizational_test we also hold that you do not satisfy the operational_test requirement to be recognized as exempt under sec_501 to satisfy the operational_test an organization must establish that it is operated exclusively for one or more exempt purposes an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in sec_501 see sec_1_501_c_3_-1 under the operational_test the purpose towards which an organization's activities are directed and not the nature of the activities themselves is ultimately dispositive of the organization’s right to be classified as a sec_501 organization b s w group t c pincite the administrative record demonstrates that you are operated to apply for and receive federal grant money for the benefit of llc rather than a charitable purpose which is in contravention of sec_501 and sec_1_501_c_3_-1 you stated that as part of the process in applying for government grants we need to establish a c not-for-profit organization this is the reason for our creation and the reason of thi sec_501 c application submission you stated elsewhere in your supporting documentation that you were established to apply for and receive government grants additionally you stated that you are organized and operated to implement medical program to help solve the national hie and adoption of ehrs medical program is the brand and program of llc when asked to describe your activities you described the services and products of llc medical program and the advertisement program are owned and operated by llc in llc’s business plan it says llc needs the support of the us government and initial funding from the arra to promote the medical program in the entire nation you were created by president to apply for and receive government grants that you then plan to distribute to llc to fund and operate the activities of llc applying for federal grants is not an exempt_purpose recognized under sec_501 or accompanying regulations therefore you are not primary operated for an exempt_purpose and cannot be recognized as exempt from taxation under sec_501 private benefit in addition to failing to be organized and operated within the requirements of sec_501 you also operate to primarily benefit llc in contravention of sec_501 and accompanying regulations an exempt_organization must be organized and operated exclusively for exempt purposes pursuant to sec_1_501_c_3_-1 an entity that is organized or operated to serve private rather than public interests cannot be recognized as operating exclusively for exempt purposes see sec_501 -1 d ii american campaign academy t c pincite as the supreme court heid the presence of private benefit if substantial in nature will destroy the exemption of an organization regardless of an organization’s other charitable purposes or activities see better business bureau u s pincite private benefit has been defined as nonincidental benefits conferred on disinterested persons that serve private interests american campaign academy t c pincite your business relationship with llc results in impermissible private benefit to llc therefore you fail to meet the requirements necessary to be recognized as a tax-exempt_organization under sec_501 in determining whether an organization’s activities confer an impermissible private benefit the court in american campaign academy looked to whether the beneficiaries of the organization's activities are also the parties who founded fund and direct the organization your activities are actually those of llc which is owned and operated by president furthermore the technology is owned by president in llc’s business plan it says llc needs the support of the us government and initial funding from the arra to promote the medical program in the entire nation it is well established that an impermissible private benefit results when for-profit organizations are functionally interrelated with exempt_organizations see p l l scholarship t c pincite international postgraduate medical foundation t c m here you and llc are functionally interrelated the record shows that both you and llc were established by the same person president president serves on the boards of both you and llc the fact that you operate primarily to benefit llc is further evident from the multiple benefits to llc you listed that will result from your activities you stated that your activities will generate jobs for llc and its programs these activities are a substantial non-exempt purposes that defeats exemption under sec_501 based on these facts we conclude that you are operated for the substantial non-exempt purpose of enhancing the private businesses of your founder further you operate in a manner that serves private purposes and is likely to result in inurement you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination your protest statement should be accompanied by the following declaration under penalties of perjury declare that have examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all the relevant facts and such facts are true correct and complete you also have a right to request a conference to discuss your protest this request should be made when you file your protest statement an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you want representation during the conference procedures you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so for more information about representation see publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the service will consider the failure to protest as a failure to exhaust available administrative remedies sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the service if if you do not intend to protest this determination you do not need to take any further action we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to this address rekkkkkkke rakkekkkkkk krekkkkkkke rerererkeker wheakkkekrerek you may also fax your statement using the fax number shown in the heading of this letter you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely lois g lerner director exempt_organizations


number release date id office uilc cca_2009092914043232 ----------------------------- from -------------------- sent tuesday date pm to -------------------- cc subject re et school board case -------- - i think that making the argument that the corporation is a sham is extremely factual it all depends on whether the common_law factors support finding an employment relationship with the service_recipient instead of the personal_service_corporation have you come across 104_tc_140 in that case the irs prevailed in arguing that a professional hockey player was an employee of his hockey team - not his personal_service_corporation that contracted with the team to provide the hockey player's services one contrary authority that i am aware of is 929_f2d_1252 i hope this is helpful --------


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si date date legend fund1 fund2 fund3 fund4 y pr sec_1 gp z a b c d1 cc dom p si state country1 country2 this responds to your letter dated date and prior correspondence submitted on behalf of y requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to file an election to be disregarded as an entity separate from its owner for federal tax purposes under sec_301_7701-3 facts fund2 is a limited_partnership formed under the laws of state fund2 is the sole owner of y an entity formed under the laws of country1 on d1 y represents that fund2 has limited_liability as to the debts of or claims against y pr sec_1 is a limited_partnership organized under the laws of country1 gp is a limited_partnership formed under the laws of country1 and owns an a general_partnership interest in pr sec_1 y owns a b limited_partnership_interest in pr sec_1 z is a publicly traded corporation formed under the laws of country2 pr sec_1 owns a c interest in z in addition to fund2 there are three other u s entities fund1 fund3 and fund4 the funds that hold interests through limited_partnerships in z both fund2 and y intended for y to make an election to be disregarded as an entity separate from its owner under sec_301_7701-3 however due to mistakes made by y’s outside tax counsel the election was not timely made y has represented that there is no current intention to sell its interest in pr sec_1 and pr sec_1 has no current intention to sell its interest in z further z has no current intention to liquidate y also represents that if the u s investors of gp and the funds were treated as one u s shareholder the aggregate ownership of z by all u s shareholders within the meaning of sec_951 would not be greater than percent of the total combined voting power of all classes of stock of z or the total value of z stock law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with a single owner can cc dom p si elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that unless the entity elects otherwise a foreign eligible_entity is an association if all members have limited_liability under sec_301_7701-3 a foreign eligible_entity with a single owner who has limited_liability can elect to be classified as a disregarded_entity by filing a form_8832 to be valid an election must generally be signed by the member of the electing entity or any officer manager or member of the electing entity who is authorized under local law or the entity’s organizational documents to make the election and who represents to having such authorization under penalties of perjury see sec_301_7701-3 the effective date specified on form_8832 can not be more than days prior nor more than months after the date on which the election is filed sec_301_7701-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election sec_301_9100-1 defines a 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_service bulletin sec_301_9100-1 through provide standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 conclusion based solely on the facts submitted and representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result y is granted an extension of time for making the election to be disregarded as an entity separate from its owner for federal tax purposes effective d1 until days following the date of this letter the election should be made by following the procedure set forth in form_8832 a copy of this letter should be attached to the election except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in cc dom p si this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer and the taxpayer’s second listed authorized representative sincerely signed paul f kugler paul f kugler assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes