internal_revenue_service number release date index number 468b ------------------------ ------------------------------------- ------------------------------- -------------------------------- in re ---------------------------------------------------- --------------------------------- ---------------------------------- ------------------------------ -------------------------------- department of the treasury washington dc person to contact ----------------------- id no ------------ telephone number -------------------- refer reply to cc ita b07 plr-130980-04 date date legend fund life_insurance co department --------------------------------------------------- ---------------------------------------------------------- --------------------------------------------------------------------------------- citation ------------------------------ --------------------------------------------------------------------------------- ---------------------------------------------------------------------------- ------------------------------------- ------- ---------------------- --------------------------- ----------------------- --------------------------- court year date date date date dear ------------------ this is in reply to your letter dated date as supplemented with additional information provided on date date and date submitted on behalf of the fund requesting the following rulings income_tax regulations regulations that the fund is a qualified_settlement_fund qsf under sec_1_468b-1 of the that the fund is not a transferor for purposes of code sec_6041 that the released alleged tortfeasors insured parties are the transferors for that the distributions from the qsf received by claimants will be characterized that the primary carriers of the alleged tortfeasors’ insurance policies insurers that the fund must backup withhold under code sec_3406 on any particular plr-130980-04 as long term capital_gain under sec_1222 of the internal_revenue_code code purposes of code sec_6041 are not the transferors for purposes of code sec_6041 that the payments made by the fund to claimants on behalf of the transferors are payments made in the course of a trade_or_business to which code sec_6041 applies that the fund is subject_to reporting on any payment to a claimant in any taxable_year only to the extent the aggregate pro-rata payments made by each insured party to any one claimant during that taxable_year are dollar_figure or more distribution to any one claimant only if the claimant has not previously provided a certified tin to life_insurance co acting on behalf of fund another settlement fund and itself and the aggregate pro-rata payment to such claimant for the taxable_year is dollar_figure or more withholding under code sec_3406 on any amounts held in the qsf for missing claimants unless and until such amounts are actually distributed to a claimant that the fund is not required to report or backup withhold with respect to claimants for the attorneys’ fees paid_by the fund from the assets in the qsf facts 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 the material information submitted is summarized below in year a liquidity crisis forced life_insurance co a mutual holding_company to seek protection from state x‘s department of insurance which resulted in life_insurance co being placed in receivership and subsequently in liquidation under the laws of state x once an insurance_company is placed in liquidation status the state appoints a liquidator as provided under the citation the liquidator is granted the authority to that the fund is not subject_to reporting under code sec_6041 or backup plr-130980-04 prosecute any_action which may exist on behalf of the creditors members policyholders or shareholders of life_insurance co against any officer of the company or any other person and exercise and enforce all rights remedies and power of any creditor shareholder policyholder or member pursuant to the authority granted under the laws of state x the state appointed liquidator sent demand letters stating that the liquidator intended to file suit alleging malfeasance and misfeasance by some of the persons whose wrongdoing and or misfeasance resulted in the liquidity crisis or hindered discovery of the causes or preliminary indications of the liquidity crisis the alleged tortfeasors on date prior to the filing of such a suit some of the alleged tortfeasors and their insurers entered into a settlement agreement with the liquidator on or about date the liquidator deposited the amounts received pursuant to the settlement agreement into a separate_account belonging to a_trust formed under the laws of state x on date the court issued an order approving the establishment of a qualified_settlement_fund qsf subject_to the court’s continuing jurisdiction for the purpose of resolving or satisfying the claims of the victims of the alleged wrongdoing committed by the alleged tortfeasors who were released from liability as set forth under the terms contained in said settlement agreement on or about date utilizing a portion of the assets held in the fund the liquidator paid attorneys’ fees related to the settlement the liquidator paid the attorney fees to counsel as part of the liquidator’s statutory duties to acquire and preserve the assets available to claimants and none of the claimants personally agreed to compensate counsel chosen by the liquidator the fund anticipates distributing a portion of the settlement amount less operating_expenses and attorneys’ fees to each claimant in one payment notwithstanding the efforts of the liquidator life_insurance co and the fund a large number of claimants have not been located the fund will maintain records and will distribute amounts owed to these missing claimants as they are located however it is likely that some of the assets held by the fund will escheat and be paid over to and held by department pursuant to state x’s unclaimed property laws law and analysis qualified_settlement_fund transferors issues sec_468b provides that n othing in any provision of law shall be construed as providing that an escrow account settlement fund or similar fund is not subject_to current income_tax the secretary shall prescribe regulations providing for taxation of any such account or fund whether as a grantor_trust or otherwise pursuant to such authority the secretary has published sec_1_468b-1 through 468b-5 of the regulations regarding qsfs plr-130980-04 under sec_1_468b-1 a and c a fund account or trust is a qsf if it is established pursuant to an order of or is approved by the united_states any state including the district of columbia territory possession or political_subdivision thereof or any agency_or_instrumentality including a court of law of any of the foregoing and is subject_to the continuing jurisdiction of that governmental authority it is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event or related series of events that has occurred and that has given rise to at least one claim arising out of a tort breach of contract or violation of law and the fund account or trust is a_trust under applicable state law or its assets are otherwise segregated from other assets of the transferor and related_persons under sec_1_468b-1 of the regulations a transferor is a person that transfers or on behalf of whom an insurer or other person transfers money or property to a qsf to resolve or satisfy the claim or liability on date the fund met the first and second requirements of sec_1_468b-1 on that date the court issued an order approving the establishment of the qsf subject_to the court’s continuing jurisdiction for the purpose of resolving or satisfying the claims of the victims of the alleged malfeasance and misfeasance of some of the former officers and directors of life_insurance co and its former subsidiaries the alleged tortfeasors on or about date the fund a_trust formed under the laws of state x met the third requirement of sec_1_468b-1 when the liquidator deposited into the fund’s separate_account the amounts received pursuant to the settlement agreement executed on date therefore as was asked in issue the fund is a qsf since under sec_1_468b-1 the assets of a qsf must be segregated from the assets of a transferor a qsf cannot be a transferor to itself further although the insurers of some of the alleged tortfeasors transferred monies to the fund in order to secure the release of these alleged tortfeasors pursuant to the settlement agreement the released alleged tortfeasors and not the insurers are the transferors by definition under sec_1_468b-1 since the monies were transferred on their behalf therefore as was asked in issues and respectively the fund is not the transferor the insured parties are the transferors and the insurers are not the transferors distributions or payments to claimants characterization issue sec_1_468b-4 of the regulations provides that whether a distribution is includible in the income of a recipient is generally determined by reference to the claim in respect of plr-130980-04 which the distribution is made and as if the distribution were made directly by the transferor section dollar_figure of revproc_2005_1 2005_1_irb_1 provides that the service generally does not issue letter rulings where the request does not address the tax status liability or reporting obligations of the requester under this provision we decline to rule on whether the distributions received by claimants will be characterized as long term capital_gain under sec_1222 of the code issue because the requester the fund is not a claimant information reporting issues sec_1_468b-2 provides that in general p ayments and distributions by a qualified_settlement_fund are subject_to the information reporting requirements of part iii of subchapter_a of chapter of the internal_revenue_code code and the withholding requirements of subchapter_a of chapter_3 of subtitle a and subtitle c of the code sec_1_468b-2 of the regulations provides that for purposes of sec_6041 and sec_6041a if a qsf makes a distribution or payment on behalf of a transferor or a claimant the qsf is deemed to make the distribution or payment in the course of a trade_or_business sec_6041 of the code requires all persons engaged in a trade_or_business and making payment in the course of such trade_or_business the payor to another person of rent salaries wages premiums annuities compensations remunerations emoluments or other fixed or determinable gains profits and income of dollar_figure or more in any taxable_year the reporting threshold to file an information_return with the service and to furnish an information statement to the payee sec_1_6041-1 of the regulations provides that payments are fixed when they are paid in amounts definitely predetermined income is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained sec_1_6041-1 of the regulations requires a payor to report sec_6041 amounts on form_1099 sec_1_6041-1 of the regulations provides when payment deemed made for purposes of a return of information an amount is deemed to have been paid when it is credited or set apart to a person without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made and is made available to him so that it may be drawn at any time and its receipt brought within his own control and disposition therefore because the fund is a qsf for the reasons set forth hereinabove with respect to issue the distributions or payments it makes on behalf of a transferor or plr-130980-04 claimant are deemed made in the course of its trade_or_business as was asked in issue sec_1_468b-2 of the regulations provides that in general payments and distributions by a qsf are subject_to the information reporting requirements as more fully described in the preamble to the final regulations this rule was not intended to impose a greater burden with respect to information reporting than existed before the enactment of sec_468b see t d f_r as corrected by f_r date and reprinted pincite_1_cb_69 during the notice and comment period preceding finalization of the rule the service was asked to clarify the extent of a qsf’s reporting obligation if some but not all of its multiple transferors would have a reporting obligation had each transferor made a payment directly to the claimant id in response and intended to simplify the administrability of the rule sec_1_468b-2 of the final regulations provides that if even one of the transferors would have been subject_to the information reporting requirements had that transferor been the payor instead of the qsf then the qsf is subject_to the information reporting requirements however sec_1_468b-2 was not intended to and does not permit a qsf to avoid the information reporting requirements by first allocating the amount of the payment amongst the multiple transferors next deeming each of them to be a separate and distinct payor and then testing each deemed payor’s payment against the dollar_figure reporting threshold therefore for purposes of determining whether the dollar_figure reporting threshold has been met issue the fund is treated as the sole payor and the dollar_figure reporting threshold is measured at that the fund’s level with respect to issue the fund has no reporting obligation with regard to missing claimants until amounts are distributed to a missing claimant because until a missing claimant is located there remains a substantial limitation or restriction as to the time or manner of payment backup withholding issues sec_3406 of the code provides that in the case of any reportable_payment and where certain circumstances exist eg the payee fails to furnish the payor a taxpayer_identification_number tin in the required manner the payor shall deduct and withhold from such payment a tax equal to the product of the fourth lowest rate_of_tax applicable under sec_1 and such payment sec_3406 provides that the term reportable_payment means any reportable_interest_or_dividend_payment and any other_reportable_payment sec_3406 defines other reportable payments as any payment of a kind and to a payee required to be shown on a return required under code sec_6041 sec_6041a sec_6045 sec_6050a or sec_6050n sec_3406 provides other reportable payments include payments described in sec_6041 or sec_6041a only where aggregate for calendar_year is dollar_figure or more --any payment plr-130980-04 of a kind required to be shown on a return required under sec_6041 or sec_6041a which is made during any calendar_year shall be treated as a reportable_payment only if - a the aggregate amount of such payment and all previous payments described in such sections by the payor to the payee during such calendar_year equals or exceeds dollar_figure b the payor was required under sec_6041 or sec_6041 to file a return for the preceding calendar_year with respect to payments to the payee or c during the preceding calendar_year the payor made reportable payments to the payee with respect to which amounts were required to be deducted and withheld under subsection a the backup withholding rules of sec_3406 apply to distributions to the claimants if they are reportable under any one of the subsections listed in sec_3406 as discussed above the fund may be required to report the payments it will make to claimants however the fund will not have either a filing requirement or a backup withholding obligation for the preceding year so neither sec_3406 nor c is applicable thus as asked in issue only to the extent that payments to a claimant are reportable under sec_6041 and the claimant fails to furnish a tin to the fund the fund will be required to backup withhold pursuant to sec_3406 further as asked in issue and as discussed above the fund has no reporting obligation with regard to a missing claimant until amounts are distributed to a missing claimant a fortiori the backup withholding rules of sec_3406 do not apply to missing claimants unless and until such claimants receive a payment payment of attorneys’ fees issue sec_61 of the code provides generally that except as otherwise provided by law gross_income includes all income from whatever source derived the concept of gross_income encompasses accessions to wealth clearly realized over which taxpayers have complete dominion 348_us_426 1955_1_cb_207 when a payment is made to satisfy the obligation of a taxpayer to a third party the amount of the payment is generally includible in the taxpayer’s gross_income 279_us_716 even though the taxpayer never actually receives such payment he receives the benefit of the payment and the amount is therefore gross_income to him or her under the rationale of old colony trust a prevailing litigant must generally recognize gross_income when another party pays attorneys’ fees for which the litigant is liable plr-130980-04 where a taxpayer may receive a benefit of litigation but is not liable for payment of attorneys’ fees incurred in connection with such litigation a different result may obtain eg certain opt-out class action lawsuits where no contractual liability for a fee exists between the class member and litigating counsel in revrul_80_364 1980_2_cb_294 situation a union filed claims on behalf of its members against a company due to a breach of a collective bargaining agreement subsequently the union and the company entered into a settlement agreement later approved by a federal district_court that provided that the company would pay the union 40x dollars in full settlement of all claims the union paid 6x dollars of the settlement for attorney’s fees and returned 34x dollars to the employees for back pay owed to them the ruling concluded that the portion of the settlement paid_by the union for attorney’s fees was a reimbursement for expenses_incurred by the union and was not includible in the gross_income of the union members the expenses_incurred in the instant case by the state appointed liquidator were incurred as part of that official’s statutory duties to prosecute actions on behalf of the creditors members shareholders and policyholders of life_insurance co and to marshal acquire preserve and liquidate assets on behalf of such members etc the state appointed liquidator has the exclusive power to exercise rights of the insurance company’s members including assertions of any causes of action that would otherwise have belonged to such members the liquidator incurred the liability for such fees and none of the member claimants personally agreed to compensate counsel chosen by the liquidator therefore payments for attorneys’ fees made by the fund to counsel retained by the state appointed liquidator in the settlement of the subject litigation are not income to the member claimants on whose behalf the action was prosecuted the retention and payment of counsel by chosen by the liquidator in analogous to situation in revrul_80_364 our conclusion that the attorneys’ fees paid_by the fund are not income to the claimants is specific to the facts of this case see cf sinyard v commissioner tcmemo_1998_24 aff’d 268_f3d_756 9th cir cert_denied sub nom sinyard v rosotti 122_sct_2357 and fredrickson v commissioner t c memo aff’d in unpub opinion 9th cir therefore as to issue because the payment for attorneys’ fees is not income to the claimants the fund has no reporting obligation under sec_6041 and no backup withholding obligation under sec_3406 with respect to these payments conclusion accordingly based strictly on the information submitted and representations made we conclude the fund is a qualified_settlement_fund under sec_1_468b-1 the insurers are not the transferors under sec_1 for purposes of code section the fund is not eligible to receive a ruling on the characterization of the the fund is not the transferor under sec_1 for purposes of code section the fund is the payor subject_to reporting as provided in sec_6041 on any the payments made by the fund to claimants on behalf of the transferors are the released alleged tortfeasors are the transferors under sec_1 for purposes plr-130980-04 distribution s in the hands of the claimants of code sec_6041 payment or distribution to a claimant payments made in the course of a trade_or_business to which code sec_6041 applies the fund must backup withhold under code sec_3406 on any payment or distribution to a claimant if that claimant has not previously provided a certified tin the fund is not subject_to either reporting under code sec_6041 or backup withholding under code sec_3406 on any amounts held by it for missing claimants unless and until such amounts are actually distributed to the claimant the fund is not required to report or backup withhold with respect to claimants for the attorney’s fees paid_by the fund from the assets in the qsf except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer sincerely plr-130980-04 cc george baker branch chief branch income_tax accounting


internal_revenue_service index no date number info release date the honorable fred thompson united_states senate washington d c dear senator thompson i am responding to your letter of date on behalf of your constituent mr who has a flexible spending arrangement fsa from which he receives reimbursements for medical_expenses although he apparently received reimbursement from his fsa for the cost of natural vitamins obtained by prescription mr believes fsas are incorrectly declining to make reimbursements for vitamins and natural medicines the congress amended sec_213 of the internal_revenue_code by limiting the deduction for medicines and drugs in b of the tax equity and fiscal responsibility act of act 1982_2_cb_470 to provide that an amount_paid for a medicine or drug is a medical expense only if the medicine or drug is a prescribed_drug or insulin the term prescribed_drug means a drug or biological which requires a prescription of a physician for its use by an individual this means that the expense of a medicine that is prescribed by a physician but which does not require a physician’s prescription such as aspirin does not qualify as a medical expense since only medical_expenses as defined in sec_213 qualify for reimbursement by a fsa a medicine or drug not requiring a prescription other than insulin does not meet the standard for reimbursement the relevant committee reports for the act do not explain the reason for the congress’ action in so limiting the medical_expense_deduction for drugs and medicines however the general explanation of the revenue provisions of the act prepared by the staff of the joint_committee on taxation states at pages that the congress decided to eliminate the deduction for non-prescription drugs other than insulin to simplify the deduction conform its coverage more closely to the coverage of private health_insurance_policies and because expenses for non-prescription drugs are more likely to represent expenses for ordinary consumption than extraordinary medical costs that should be deductible irs publications like publication medical and dental expenses to which mr referred provide general guidance to assist taxpayers in understanding and meeting their tax responsibilities publication reflects the law as enacted by the congress you can include in medical_expenses amounts you pay for prescribed medicines and drugs a prescribed_drug is one that requires a prescription for its use by an individual emphasis added you can also include amounts you pay for insulin except for insulin you cannot include in medical_expenses amounts you pay for a drug that is not prescribed i hope this information is helpful in explaining why only drugs or medicines requiring a physician’s prescription qualify as medical_expenses and for reimbursement under a fsa if you have any questions please call me at or call john sapienza at sincerely heather c maloy deputy associate chief_counsel domestic technical


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc ebeo 4-plr-105847-99 date date legend x y dear this is in response to your request for certain rulings on behalf of x concerning the application of sec_162 of the internal_revenue_code and the regulations thereunder to certain compensation plans of x and y x intends to spin off its subsidiary y in a two-step transaction first x has sold some but less than percent of the stock of y to the public in an ipo and has listed y’s stock on one of the stock exchanges as a result y became a publicly traded corporation second the distribution of the remaining stock of y to x’s shareholders as a dividend or in exchange for shares of x stock may take place at some future date to be decided upon by the board_of directors of x one day prior to the ipo y’s stock_option and executive compensation plans the plans were approved by x its parent because the respective administration committees for the plans have retained the right to change the performance targets x and y understand that the plans like any other shareholder-approved plans authorizing amendments of performance targets will have to be resubmitted to shareholders for approval at least once every five years three of the plans will be administered by y’s compensation committee which will include as members certain officers and directors of x the fourth plan will be administered by the y strategy board whose members currently are y management employees it is not contemplated that any performance awards will be made under the fourth plan to any of the top executives of y sec_162 of the code provides that there will be allowed as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business including a reasonable allowance for salaries or other compensation_for_personal_services actually rendered sec_162 of the code provides that in the case of any publicly_held_corporation no deduction shall be allowed under this chapter for applicable_employee_remuneration with respect to any covered_employee to the extent that the amount of such remuneration for the taxable_year with respect to such employee exceeds dollar_figure sec_1_162-27 of the income_tax regulations provides that a publicly_held_corporation includes an affiliated_group_of_corporations as defined in sec_1504 determined without regard to sec_1504 for purposes of this section however an affiliated_group_of_corporations does not include any subsidiary that is itself a publicly_held_corporation such a publicly held subsidiary and its subsidiaries if any are separately subject_to this section according to sec_1_162-27 of the regulations for purposes of the shareholder approval requirements the shareholders of the publicly held member of the affiliated_group are treated as the shareholders of all members of the affiliated_group sec_1_162-27 of the regulations defines a covered_employee as any individual who on the last day of the taxable_year is a the chief_executive_officer of the corporation or is an individual acting in such capacity or b among the four highest compensated officers other than the chief_executive_officer sec_1_162-27 of the regulations provides that whether an individual is the chief_executive_officer described in sec_1_162-27 or an officer described in sec_1_162-27 is determined pursuant to the executive compensation disclosure rules under the exchange act sec_1_162-27 of the regulations provides that qualified performance- based compensation must be paid solely on account of the attainment of one or more preestablished objective performance goals a performance_goal is considered preestablished if it is established in writing by the compensation committee not later than days after the commencement of the period_of_service to which the performance_goal relates provided that the outcome is substantially uncertain at the time the compensation committee actually established the goal however in no event will a performance_goal be considered to be preestablished if it is established after percent of the period_of_service as scheduled in good_faith at the time the goal is established has elapsed sec_1_162-27 of the regulations defines an outside director in relevant part as one who does not receive remuneration from the publicly_held_corporation either directly or indirectly in any capacity other than as director for this purpose remuneration includes any payment in exchange for goods or services according to sec_1_162-27 of the regulations if remuneration other than de_minimis remuneration was paid_by the publicly_held_corporation in its preceding_taxable_year to an entity by which the director is employed or self-employed other than as a director the remuneration is considered directly or indirectly received by the director sec_1_162-27 of the regulations provides that for purposes of sec_1_162-27 and c remuneration that was paid_by the publicly_held_corporation in its preceding_taxable_year to an entity is de_minimis if payments to the entity did not exceed percent of the gross revenue of the entity for its taxable_year ending with or within the preceding_taxable_year of the publicly_held_corporation according to sec_1_162-27 of the regulations in the case of a corporation that was not a publicly_held_corporation and then becomes a publicly_held_corporation the deduction limit of sec_1_162-27 does not apply to any remuneration paid pursuant to a compensation plan or agreement that existed during the period in which the corporation was not publicly held in accordance with sec_1_162-27 a corporation that is a member_of_an_affiliated_group that includes a publicly_held_corporation is considered publicly held and therefore cannot rely on sec_1_162-27 also see sec_1_162-27 sec_1_162-27 of the regulations provides that if a subsidiary that is a member of the affiliated_group described in sec_1_162-27 becomes a separate publicly_held_corporation whether by spinoff or otherwise any remuneration paid to covered employees of the new publicly_held_corporation will satisfy the exception for performance-based compensation described in sec_1_162-27 if the conditions in either sec_1_162-27 or iii are satisfied sec_1_162-27 of the regulations provides that remuneration satisfies the requirements of sec_1_162-27 if the remuneration satisfies the requirements for performance-based compensation as set forth in sec_1 e and by application of sec_1_162-27 and e viii before the corporation becomes a separate publicly_held_corporation and the certification required by sec_1_162-27 is made by the compensation committee of the new publicly_held_corporation sec_1_162-27 does not apply here because the shareholders of x did not vote to approve the plans before y became publicly held sec_1_162-27 of the regulations provides that remuneration satisfies the requirements of sec_1_162-27 if the remuneration satisfies all of the requirements of sec_1_162-27 and the outside directors within the meaning of sec_1_162-27 of the corporation before it becomes a separate publicly_held_corporation or the outside directors of the new publicly_held_corporation may establish and administer the performance goals for the covered employees of the new publicly_held_corporation for purposes of satisfying the requirements of sec_1_162-27 and the certification required by sec_1_162-27 must be made by the compensation committee of the new publicly_held_corporation however a taxpayer may rely on sec_1_162-27 to satisfy the requirements of sec_1_162-27 only for compensation paid or stock_options stock appreciation rights or restricted_property granted prior to the first regularly scheduled meeting of the shareholders of the new publicly_held_corporation that occurs more than months after the date the corporation becomes a separate publicly_held_corporation accordingly we rule that because according to sec_1_162-27 of the regulations the shareholders of x are treated as the shareholders of all members of the affiliated_group the approval of the plans by x on the day before the ipo did not serve as satisfactory shareholder approval of the plans compensation paid or options granted under the plans approved only by x’s board will be considered performance-based only for the compensation or grants paid or awarded prior to the first regularly scheduled meeting occurring more than months after y became a separate public corporation sec_1_162-27 of the regulations y may obtain satisfactory shareholder approval of the plans and of any additional performance plans that are established by y after the ipo at any shareholder meeting up to and including the first regularly scheduled meeting occurring more than months after the ipo in the case of any shareholder votes obtained after the ipo and before the spinoff of the remaining shares of y stock held by x to x’s shareholders the shares of y stock held by x can be voted by an officer of x on behalf of x after y’s shareholders have approved y’s performance-based plans such plans need not be resubmitted to shareholders until the latest to occur of a the expiration of such plan b the material modification of such plan or c if and only if y’s compensation committee has authority to change the targets under the plan’s performance goals the first shareholder meeting that occurs in the fifth year following the year in which the plan was approved by y’s shareholders the deduction limit of sec_162 of the code will not apply to any remuneration paid to y employees pursuant to any of the performance-based plans maintained by x prior to the ipo provided that the conditions of sec_162 were satisfied when those awards were made and the awards are not materially amended after their grant employees and officers of x may serve as outside directors on the y compensation committee so long as the remuneration paid_by y to x does not exceed more than five percent of x’s gross revenues the performance period and related service period established by the y compensation committee for performance awards under the plans may be as short as a single calendar_quarter or the period between the ipo and the spinoff so long as the performance goals are established prior to or during the first percent of the period_of_service to which the performance_goal relates the compensation paid and deducted by y after the ipo to any of its covered employees other than performance-based compensation is deductible to the extent it does not exceed dollar_figure per taxable_year in applying the dollar_figure limit the compensation paid to executives by x y or any other entity within the x affiliated_group that was deductible prior to the ipo is disregarded a new taxable_year for purposes of applying the dollar_figure deduction limit on non- performance-based compensation will begin for y on the date that y is spun off from the x controlled_group this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent except as specifically ruled above no opinion is expressed as to the federal tax consequences of the transaction described above under any other provisions of the code sincerely yours robert misner assistant chief branch office of the associate chief_counsel employee_benefits and exempt_organizations enclosure copy for sec_6110 purposes


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-147249-08 date date legend x y ----------------------------------------------------------------------------------------------------- ----------------------- --------------------------------------------------- state ------------- date -------------------------- dear ------------- we received your letter dated date submitted on behalf of x requesting a ruling under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations that x be granted an extension of time to file an election to be treated as an association_taxable_as_a_corporation under sec_301_7701-3 this letter responds to your request facts x was formed on date as a state limited_liability_company x is wholly-owned by y y intended that x be treated as an association_taxable_as_a_corporation for federal tax purposes effective date however x inadvertently failed to timely file a form_8832 entity classification election law and analysis plr-147249-08 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 as provided in sec_301_7701-3 an eligible_entity with a single owner can elect to be classified as an association and thus a corporation under sec_301_7701-2 or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301_7701-3 unless the entity elects otherwise 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 sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed if an election specifies an effective date more than days prior to the date on which the election is filed it will be effective days prior to the date it was filed 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 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 a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register 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 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion plr-147249-08 based solely on the facts submitted and the representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 accordingly x is granted an extension of time of sixty days from the date of this letter to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date the election should be made by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives 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 s curtis g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc corp b06-plr-166465-02 date date distributing dsub controlled csub ip1 ip2 a b x dollar_figurey dear this letter responds to your letter dated date submitted on your behalf by your authorized representative requesting rulings under sec_368 and sec_355 additional information was received in a letter dated date the information submitted in your letters is summarized below plr-166465-02 distributing is an s_corporation that owns dsub a qualified_subchapter_s_subsidiary a and b are equal owners of distributing prior to the transactions described below distributing directly and through dsub owned all the intellectual_property related to ip1 and ip2 it also engaged in licensing activities related to both ip1 and ip2 busine sec_1 and busine sec_2 respectively the taxpayer has supplied financial information that indicates that each of busine sec_1 and busine sec_2 had gross_receipts and operating_expenses representative of the active_conduct_of_a_trade_or_business for each of the past five years a and b have divergent views as to the current operations and future direction of busine sec_1 which have adversely affected the business operations of distributing to address this problem and to allow each shareholder to concentrate on the business that that shareholder is interested in the parties have devised the following plan distributing has established a subsidiary controlled a qualified_subchapter_s_subsidiary controlled has established a subsidiary csub a qualified_subchapter_s_subsidiary dsub has transferred busine sec_1 to distributing distributing has transferred busine sec_1 to controlled ip1 and a nominal amount of cash the contribution controlled has transferred busine sec_1 to csub distributing will distribute all of the controlled stock to a in exchange for a’s distributing stock the distribution distributing and controlled have agreed that distributing will make additional contingent payments to controlled over a period of x years the aggregate amount of these payments will not exceed dollar_figurey and the amounts to be paid will be determined by reference to certain increases in the net equity of distributing over a specified floor amount each of the parties has agreed that the assets initially contributed to controlled and the conditional payments in the aggregate have a fair_market_value that equal sec_50 of the fair_market_value of distributing the following representations have been made in connection with the proposed transaction a the total adjusted bases and the fair_market_value of the assets transferred to controlled by distributing each equals or exceeds the sum of the liabilities assumed by controlled and any liabilities to which the transferred assets are subject as determined under sec_357 plr-166465-02 b c d e f g h i j k l the liabilities assumed by controlled in the transaction and the liabilities to which the assets transferred from distributing to controlled are subject as determined under sec_357 were incurred in the ordinary course of business and are associated with the assets being transferred no investment_credit determined under sec_46 has been or will be claimed with respect to any property transferred between distributing and controlled distributing neither accumulated its receivables nor made extraordinary payments of its payables in anticipation of the distribution except for the contingent payments described elsewhere no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution except for indebtedness incurred in the ordinary course of business payments made in connection with such transaction if any between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s-length no two parties to the transaction are investment companies as defined in sec_368 and iv no part of the consideration to be distributed by distributing will be received by a shareholder of distributing as a creditor employee or in any capacity other than that of a shareholder of distributing the fair_market_value of controlled stock to be received by a will be approximately equal to the fair_market_value of distributing stock surrendered by a in the exchange the five years of financial information submitted on behalf of distributing is representative of its present operations and with regard to such corporation there have been no substantial operational changes since the date of the last financial statements submitted the gross assets of the trades_or_businesses that will be relied upon by distributing and controlled to satisfy the active_trade_or_business_requirement of sec_355 will in the aggregate have a fair_market_value that is not less than five percent of the total fair_market_value of the gross assets of the company directly operating such trades_or_businesses following the distribution distributing and controlled will each continue the active_conduct of its business independently and with its separate employees additionally following the distribution distributing and controlled will not share the services of any employees m the distribution of controlled is primarily carried out for the following corporate business_purpose fit and focus the distribution is motivated in whole by this corporate business_purpose plr-166465-02 n o p q r s t there is no plan or intention by a and b to sell exchange transfer by gift or otherwise dispose_of any of their stock in distributing or controlled after the distribution there is no plan or intention by either distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the distribution there is no plan or intention to liquidate either distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the distribution except in the ordinary course of business for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five year period determined after applying sec_355 ending on the date of the distribution for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power or percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five year period determined after applying sec_355 ending on the date of the distribution or ii attributable to distributions on distributing stock that was acquired by purchase as defined in sec_355 and during the five year period determined after applying sec_355 ending on the date of the distribution the distribution is not a part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the total combined voting power of all classes of stock of either distributing or controlled or stock possessing percent or more of the total value of all classes of stock of either distributing or controlled distributing is an s_corporation within the meaning of sec_1361 controlled will elect to be treated as an s_corporation pursuant to sec_1362 effective on the first available date after the distribution controlled will elect to treat csub as a qsub of controlled effective on the same date and there is no plan or intent to revoke or otherwise terminate the s_corporation_election of either distributing or controlled based solely on the information submitted and the representations made we have concluded that plr-166465-02 the distribution will cause the termination of the qsub election of controlled because controlled will cease to be a percent subsidiary of distributing as a result controlled will be treated as a new corporation acquiring all of its assets and assuming all of its liabilities immediately before the distribution from distributing in exchange for stock of controlled sec_1_1361-5 because csub is a qsub of distributing before the distribution and controlled will elect to treat csub as a qsub of controlled effective on the first available date after the distribution csub will not be treated as a separate corporation before or after the distribution sec_1_1361-5 example the transfer by distributing of busine sec_1 including ip1 to controlled in exchange for all of the controlled voting common_stock and the assumption by controlled of the associated liabilities followed by the non-pro rata distribution by distributing of all of the controlled stock to a will constitute a reorganization within the meaning of sec_368 of the internal_revenue_code distributing and controlled will each be a party to the reorganization within the meaning of sec_368 sec_1_1361-5 example no gain_or_loss will be recognized by distributing upon its receipt of controlled stock in exchange for the transfer of assets to and the assumption_of_liabilities by controlled sec_361 and b and sec_357 no gain_or_loss will be recognized by controlled upon its receipt of assets in exchange for its issuance of shares of controlled stock sec_1032 controlled's basis in the assets received from distributing will equal the basis of such assets in the hands of distributing immediately prior to the transfer sec_362 the holding_period of each asset received by controlled from distributing will include the period during which distributing held such asset sec_1223 distributing will not recognize gain_or_loss upon the distribution of the stock in controlled to a sec_361 no gain_or_loss will be recognized to and no amounts will be included in the income of a upon its receipt of controlled stock sec_355 the basis of the controlled stock in the hands of a will be the same as the basis of the distributing stock surrendered in exchange therefor sec_358 the holding_period of the controlled stock received by a will include the holding_period of the distributing stock surrendered in exchange therefor provided that the distributing stock is held as a capital_asset on the day of the distribution sec_1223 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made in accordance with sec_1_312-10 plr-166465-02 contingent payments made by distributing to controlled after the distribution as described above will be treated as occurring immediately before the distribution see 344_us_6 tax character of later transaction will derive from earlier related transaction and revrul_83_73 1983_1_cb_84 thus any such payments will be considered part of the contribution and treated under sec_368 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant 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 reginald mombrun assistant to the branch chief branch office of associate chief_counsel corporate


number release date internal_revenue_service index numbers - ---------------------------------------- ----------------------------------------- ------------------------- ------------------------ --------------------- department of the treasury washington dc person to contact ----------------------------------------------------- -------- telephone number --------------------- refer reply to cc psi - plr-100382-06 date date legend x ----------------------------------------- -------- -------------- ---------- ------------------ d1 country dear -------------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to file an election to be treated as a disregarded_entity under the laws of country was acquired by a single owner with limited_liability on d1 x intended to be treated as a disregarded_entity for federal tax purposes effective d1 however x did not timely file a form_8832 entity classification election according to the information submitted all of the interest in x an entity formed 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 as provided in sec_301_7701-3 sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes under sec_301_7701-3 except as provided in sec_301 b unless it elects otherwise a foreign eligible_entity is classified as an association if all members have limited_liability sec_301_7701-3 provides that for purposes of sec_301_7701-3 a sec_301_7701-3 provides that an election under sec_301_7701-3 member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member will be effective on the date specified on form_8832 or on the date filed if no such date is specified on the form the effective date specified on form_8832 cannot be more than days prior to the date the form is filed and cannot be more than months after the date on which the form is filed 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 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 a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 sets forth 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 granting relief will not prejudice the interests of the government requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file form_8832 and elect to be treated as a disregarded_entity for federal tax purposes effective d1 a copy of this letter should be attached to the form_8832 except as specifically set forth above no opinion is expressed or implied as to based on the facts submitted and representations made we conclude that the the federal tax consequences of the transaction described above under any other provision of the code sec_6110 provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer on whose behalf it was requested in accordance with the power_of_attorney on file with this office a copy of this sincerely letter is being sent to x’s authorized representative enclosures copy of this letter copy for sec_6110 purpose heather c maloy associate chief_counsel passthroughs and special industries