t c memo united_states tax_court norma l slone transferee et al petitioners v commissioner of internal revenue respondent docket nos filed date stephen edward silver derek kaczmarek and jason m silver for petitioners john wayne duncan for respondent cases of the following petitioners are consolidated herewith slone family gst_trust ua dated date transferee d jack roberts trustee docket no james c slone transferee docket no and slone revocable_trust ua dated date transferee james c slone and norma l slone trustees docket no this opinion supplements our previously filed opinion slone v commissioner tcmemo_2012_57 supplemental memorandum opinion haines judge these cases are before us on remand from the u s court_of_appeals for the ninth circuit in accordance with its opinion in 810_f3d_599 9th cir vacating and remanding tcmemo_2012_57 slone i at our request the parties filed supplemental briefs in which they were to address the issues raised by the court_of_appeals the parties have agreed that these cases may be decided on remand on the basis of the evidence submitted at the original trial unless otherwise indicated all section references are to the internal_revenue_code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure background we incorporate herein by this reference the facts that we found in slone i set forth under the heading findings_of_fact in that opinion these facts are based upon the stipulations of fact and this court’s credibility findings as to each witness appearing before it we summarize pertinent facts and portions of our opinion in slone i for the benefit of the reader slone broadcasting operated several radio stations in tucson in and slone broadcasting was a c_corporation with a tax_year ending june slone broadcasting had two shareholders the slone revocable_trust and the slone family gst_trust slone gst_trust both trusts were formed pursuant to the laws of arizona james c slone and norma l slone were the trustees of the slone revocable_trust and the grantors of the slone gst_trust an irrevocable_trust john barkley was the sole trustee of the slone gst_trust from its inception he is a licensed fiduciary in the state of arizona he hires accountants lawyers stockbrokers and other professionals to aid him in carrying out his duties which are defined in these cases by the documents that established the slone gst_trust he exercises his authority independently from mr and mrs slone on date slone broadcasting sold its assets to citadel broadcasting co citadel for dollar_figure million which resulted in an estimated combined federal and state_income_tax liability of approximately dollar_figure million mr slone’s accountant d jack roberts a certified_public_accountant with over years of experience advised on the accounting aspects of the transaction and tom chandler slone broadcasting’s attorney advised on the legal aspects of the transaction neither of the advisers proposed tax strategies to reduce the federal and state income taxes resulting from the sale after the closing of the asset sale slone broadcasting did not conduct any business there were no plans to liquidate the corporation at any time nor were there any plans to make distributions to its shareholders on date slone broadcasting made its first estimated federal_income_tax payment of dollar_figure to the internal_revenue_service irs for its tax_year ended tye date fortrend international llc fortrend sent an unsolicited letter and brochure to mr roberts on date the letter described fortrend as a private investment merchant-banking group seeking opportunities to acquire corporations in situations where the assets of the target_corporation can be profitably sold and or leased to one or more purchasers lessees the letter also stated that fortrend was able to structure transactions that help manage or resolve liabilities at the corporate level mr roberts did not review the letter and company brochure until after the closing of the asset sale on date fortrend sent mr roberts a second letter expressing fortrend’s continued interest in purchasing slone broadcasting’s stock it described fortrend’s relationship with midcoast credit corp midcoast a corporation engaged in the business of collecting delinquent credit card debt acquired from banks after receiving the second letter mr roberts informed mr slone in general about fortrend and midcoast and the proposal to buy slone broadcasting’s stock mr slone gave mr roberts permission to investigate further and to proceed if the transaction looked viable on date fortrend sent a third letter to mr roberts attaching the fortrend midcoast business plan together with financial projections mr roberts hired steven phillips a tax attorney as counsel to advise mr and mrs slone and the slone revocable_trust on any fortrend proposals mr phillips was not involved in and did not provide any legal advice with respect to the asset sale on date mr phillips met with mr slone to discuss the proposed transaction this meeting was mr slone’s only contact with mr phillips mr roberts represented mr slone in all other communications with mr phillips mr roberts provided the fortrend midcoast business plan to mr phillips for review mr phillips contacted a broker in the asset recovery business to inquire about midcoast’s reputation the broker informed mr phillips that midcoast played an active role in the asset recovery industry and had a reputation as an aggressive but legitimate collector mr phillips reviewed the projections in the fortrend midcoast business plan and concluded that they were reasonable the reputations of fortrend and midcoast together with those of their attorneys and accountant advisers were good there was no reason for mr roberts or mr phillips to suspect any impropriety mr roberts and mr phillips knew that fortrend had a strategy to reduce the income_tax due as a result of the asset sale when they asked fortrend what actions would be taken to achieve the tax savings they were told that fortrend’s methods could not be disclosed because they were proprietary however fortrend represented that berlinetta inc berlinetta an entity created by fortrend that would acquire the shares had not engaged in any transaction that would be deemed a listed_transaction pursuant to notice_2001_51 2001_2_cb_190 mr phillips negotiated an increase in the purchase_price for the stock based upon what he described as a premium payment resulting from the tax savings that berlinetta anticipated when negotiations concluded the parties agreed to a purchase_price of dollar_figure plus berlinetta’s assumption of slone broadcasting’s federal and state income taxes owed as of the closing date as trustee of the slone gst_trust mr barkley hired greg gadarian another tax attorney independent from mr phillips to advise the slone gst_trust with respect to any fortrend proposals on date mr phillips wrote a memorandum describing fortrend’s plan to offset the gains from the asset sale by contributing high basis low value assets to berlinetta in a sec_351 transaction and selling those assets at a loss before the end of the memorandum also provided a legal analysis of the transferee_liability considerations facing slone broadcasting’s shareholders and concluded that they would not be exposed to such liability mr gadarian reviewed mr phillips’ memorandum and performed his own research mr gadarian agreed with mr phillips’ conclusions mr gadarian had no reason to think that the stock sale transaction was other than a legitimate sale he therefore orally advised mr barkley that there were no material legal obstacles to the proposed transaction soon after mr barkley approved the transaction on behalf of the slone gst_trust both mr phillips and mr gadarian were aware of notice_2001_16 2001_1_cb_730 and both concluded that it did not apply on date mr phillips informed mr roberts that there were no legal obstacles to proceeding mr roberts advised mr slone that both mr phillips and mr gadarian had analyzed the legal implications of the transaction and concluded that it could proceed on date slone broadcasting entered into the stock sale agreement with berlinetta slone broadcasting had no involvement in the financing the stock sale agreement restricted the use of funds held in slone broadcasting’s bank account until days after the closing date at the stock sale closing the slone revocable_trust and the slone gst_trust received dollar_figure and dollar_figure in cash respectively mr slone and his children resigned as the officers and directors of slone broadcasting slone broadcasting did not make any distributions to its shareholders between the closing date of the asset sale and the closing date of the stock sale after the stock sale was closed petitioners had no knowledge or say in the operation of slone broadcasting two days after the closing of the stock sale on date slone broadcasting merged with berlinetta with slone broadcasting as the surviving corporation because the right to use the name slone broadcasting was not part of the sale on date slone broadcasting changed its name to arizona media the irs began its examination of arizona media’s tye date in date on date arizona media submitted form 870-ad offer to waive restrictions on assessment and collection of tax_deficiency and to accept overassessment to the irs accepting a deficiency for its tye date arizona media failed to pay the assessed tax penalty and interest no moneys were ever collected from arizona media on date arizona media was administratively dissolved for failure_to_file its annual report with the state of arizona on date respondent issued transferee_liability notices to the slone revocable_trust and the slone gst_trust determining that the trusts were liable for dollar_figure and dollar_figure respectively plus interest as transferees of assets for the unpaid liability of arizona media for its tye date additionally respondent issued separate transferee_liability notices to mr and mrs slone individually determining each liable under a transferee_liability theory for dollar_figure plus interest for the unpaid liability of arizona media petitioners timely filed their petitions in slone i we determined that the stock sale was a legitimate transaction and that the form of the transaction must be respected such that petitioners were not transferees under sec_6901 for federal tax purposes therefore we determined that petitioners were not liable for the income_tax_liability accepted by arizona media on date discussion the court_of_appeals remanded these cases to us in order for us to make necessary findings to apply the test set forth in 357_us_39 stern requires the satisfaction of a two-pronged test in order for a tax liability to be imposed on a transferee pursuant to sec_6901 id pincite- the first prong is satisfied if the party is a transferee under sec_6901 and federal tax law the second prong is satisfied if the party is substantively liable for the transferor’s unpaid taxes under state law 776_f3d_1010 9th cir rev’g and remanding tcmemo_2012_61 both prongs must be satisfied in order for liability to be imposed on a transferee see commissioner v stern u s pincite respondent has the burden of proving that petitioners are liable as transferees but he does not have the burden of proving that the taxpayer is liable for the tax see sec_6902 rule d on remand the court_of_appeals instructed this court to apply the tests set out in stern stating under the first prong of this test the tax_court should apply the relevant subjective and objective factors to determine whether the commissioner erred in disregarding the form of the transaction in order to impose tax_liability on the shareholders as transferees under sec_6901 under the second prong of the stern test the tax_court should analyze whether the shareholders are liable under state law for sloan broadcasting arizona media’s unpaid tax_liability see salus mundi f 3d pincite the tax_court may begin its analysis with either prong the commissioner may hold the shareholders liable as transferees under sec_6901 only if both prongs of the stern test are satisfied see id slone v commissioner f 3d pincite fn ref omitted the prongs are separate and independent inquiries id pincite quoting salus mundi found v commissioner f 3d pincite as instructed by the court_of_appeals we may begin our analysis with either prong therefore we will address the second prong to determine whether petitioners are substantively liable for the transferor’s unpaid taxes under state law see salus mundi found v commissioner f 3d pincite i state law prong we must apply arizona law because that is the state where the transfer occurred 42_tc_593 arizona enacted the uniform fraudulent transfer act ufta in and it outlines when a transfer is fraudulent for state law purposes hullet v cousin p 3d ariz the ufta is codified at ariz rev stat ann secs to and is based upon the uniform act promulgated by the national conference of commissioners on uniform state laws in the ufta replaced arizona’s uniform fraudulent conveyance act ‘ufca’ like the ufca the ufta’s purpose is to protect creditors hullet p 3d pincite a the form of the stock sale respondent argues that the form of the stock sale should be disregarded and treated as a liquidating_distribution for purposes of applying the ufta petitioners however argue that the form of the stock sale should be respected where a decision involves state law we must apply state law in the manner that the highest court of the state has indicated that it would apply the law 142_tc_317 if the state’s highest court has not weighed in on the matter we must predict how the highest state court would decide the issue using intermediate appellate court decisions decisions from other jurisdictions statutes treatises and restatements as guidance 249_f3d_958 9th cir quoting 87_f3d_1537 9th cir arizona has not provided a specific test to determine when the doctrine_of substance over form will be used to recast a transaction for purposes of the ufta however unless specifically displaced by its provisions the principles of law and equity supplement the ufta ariz rev stat ann sec accordingly we must look to other cases that have applied the substance_over_form_doctrine in similar situations see alterman trust v commissioner tcmemo_2015_231 in order for the stock sale to be recast as a liquidating_distribution respondent must prove that petitioners had actual or constructive knowledge of the entire scheme see id at i n order to ‘render the initial transferee’s exchange with a debtor fraudulent that transferee must have had either actual or constructive knowledge of the entire scheme ’ quoting starnes v commissioner tcmemo_2011_63 slip op pincite we find that respondent did not sustain his burden_of_proof as to either actual or constructive knowledge actual knowledge mrs slone was not involved in the business and was simply a signatory to the sale documents we hold that she did not have actual knowledge mr roberts advised mr slone of fortrend and midcoast’s proposal to purchase slone broadcasting’s stock and mr slone authorized mr roberts to investigate the transaction mr roberts hired mr phillips to advise mr slone on proposals from fortrend and mr slone met with mr phillips to discuss the stock sale on one occasion mr slone relied on his advisers’ expertise and had no involvement in vetting the legitimacy of the transaction or negotiating its terms we hold that mr slone did not have actual knowledge of the scheme that fortrend berlinetta planned to use to avoid paying slone broadcasting’s tax_liability mr roberts and mr phillips knew that fortrend planned to take steps to reduce the amount of income_tax due as a result of the asset sale but were stonewalled when they asked about the strategy berlinetta planned to use they were told that these methods were proprietary and could not be revealed we hold that like mr and mrs slone that mr roberts and mr phillips did not have actual knowledge of the scheme that fortrend berlinetta planned to employ in order to avoid payment of slone broadcasting’s income_tax_liability mr barkley and mr gadarian similarly lacked actual knowledge of fortrend berlinetta’s scheme mr gadarian reviewed a memorandum prepared by mr phillips performed his own research and advised mr barkley that there were no material legal issues in proceeding with the stock sale we hold that mr gadarian and mr barkley had no actual knowledge of fortrend berlinetta’s tax_avoidance scheme constructive knowledge constructive knowledge exists when on the basis of the circumstances the transferee should have known about the entire scheme 736_f3d_172 2d cir vacating and remanding salus mundi found v commissioner tcmemo_2012_61 48_f3d_623 2d cir it also exists in situations where transferees were aware of circumstances that should have led them to inquire further into the circumstances of the transaction but they failed to make such inquiry diebold found inc v commissioner f 3d pincite quoting hbe leasing f 3d pincite as noted above mrs slone had no involvement in the stock sale other than signing documents mr slone relied on mr roberts and mr phillips to advise him regarding the transaction’s propriety mr slone credibly testified at trial that because he lacked the knowledge to determine whether it would be all right to sell the slone broadcasting stock he hired individuals with the requisite expertise to advise him he had no ownership_interest and had resigned all positions in the corporation at the time the stock sale closed we hold that mr and mrs slone did not have constructive knowledge of fortrend’s tax_avoidance scheme mr roberts and mr phillips were aware that fortrend had a strategy to reduce the income_tax that would be due as a result of the asset sale they made a reasonable inquiry as to the actions berlinetta would take to achieve the tax savings and were told that fortrend’s methods were proprietary and could not be disclosed but fortrend did represent that berlinetta had not engaged in any transactions that would be deemed a listed_transaction pursuant to notice_2001_51 supra petitioners’ advisers similarly lacked constructive knowledge of fortrend berlinetta’s scheme mr gadarian another independent tax attorney was hired to advise the slone gst_trust with respect to any fortrend proposals mr gadarian concluded that there was no reason to think that fortrend was involved in any impropriety petitioners’ advisers’ due diligence confirmed that midcoast was a legitimate player in the debt recovery business known for its hardball collection tactics midcoast and fortrend were represented by reputable law and accounting firms mr phillips’ memorandum to mr gadarian dated date explains fortrend’s plan to offset the gains from the asset sale by contributing high basis low value assets to berlinetta in a sec_351 transaction and selling those assets at a loss before the end of this information was insufficient to give petitioners’ advisers knowledge of fortrend’s scheme as we have acknowledged in other cases t here are legitimate tax planning strategies involving built-in gains and losses and it was not unreasonable in the absence of contradictory information for the representatives to believe that the buyer had a legitimate tax planning method alterman trust v commissioner at quoting swords trust v commissioner t c pincite petitioners and their advisers had no reason to believe that fortrend’s strategies were other than legitimate tax planning methods we hold that the form of the stock sale must be respected because petitioners and their advisers did not have actual or constructive knowledge of fortrend’s tax strategies before or after the closing of the stock sale transaction b application of the ufta to the stock sale now that we have determined that the form of the stock sale must be respected we will apply the ufta to the transaction to determine whether petitioners may be held substantively liable for slone broadcasting’s unpaid taxes under arizona law respondent asserts that petitioners are liable under the constructive fraud provisions found in ariz rev stat ann secs a and and for actual fraud under ariz rev stat ann sec a we will address each in turn for purposes of the ufta a creditor is defined as a person who has a right to payment and a debtor is a person who is liable for making the payment id sec a transfer is broadly defined as every mode direct or indirect absolute or conditional voluntary or involuntary of disposing of or parting with an asset or an interest in an asset and includes payment of money release lease and creation of a lien or other encumbrance id sec ariz rev stat ann sec a ariz rev stat ann sec a provides that a transfer made by a debtor is fraudulent as to a creditor if the debtor made the transfer without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor either a was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction b intended to incur or believed or reasonably should have believed that he would incur debts beyond his ability to pay as they became due this is true regardless of whether the creditor’s claim arose before or after the transfer was made id in these cases the irs was the creditor and slone broadcasting was the debtor when petitioners sold their slone broadcasting shares the consideration they received was from berlinetta not from slone broadcasting in fact no consideration was received from slone broadcasting because the form of the stock sale transaction must be respected because no transfer was made by slone broadcasting--the debtor--as a result of the stock sale we hold there was no constructive fraud pursuant to ariz rev stat ann sec a see alterman trust v commissioner at the irs is a creditor of ac but the ac shareholders did not receive transfers from ac when they sold their stock to the midcoast acquisition vehicles ariz rev stat ann sec the ufta includes another constructive fraud provision a transfer by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the debtor made the transfer without receiving reasonably equivalent value in exchange and was insolvent at that time or became insolvent as a result of the transfer ariz rev stat ann sec as noted above the stock sale resulted in berlinetta’s making transfers to petitioners not slone broadcasting’s because there were no transfers made by slone broadcasting the debtor we hold that ariz rev stat ann sec cannot be applied to the stock sale see alterman trust v commissioner at ac did not make any transfers to petitioners in the stock sale to the midcoast acquisition vehicles ariz rev stat ann sec a the ufta also has an actual fraud provision a transfer by a debtor is fraudulent as to a creditor regardless of whether the creditor’s claim arose before or after the transfer was made if the debtor made the transfer w ith actual intent to hinder delay or defraud any creditor of the debtor ariz rev stat ann sec a ariz rev stat ann sec b sets forth the following factors that may be considered when determining whether actual intent exists the transfer or obligation was to an insider the debtor retained possession or control of the property transferred after the transfer the transfer or obligation was disclosed or concealed before the transfer was made or obligation was incurred the debtor had been sued or threatened with suit the transfer was of substantially_all of the debtor's assets the debtor absconded the debtor removed or concealed assets the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred the transfer occurred shortly before or shortly after a substantial debt was incurred the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor there is no dispute that of the factors are not present in these cases we hold that the debtor slone broadcasting did not retain possession or control of the transferred property after the stock sale did not conceal the stock sale had not been sued or threatened with suit before the stock sale did not abscond and did not transfer the essential assets of the business to a lienor who transferred the assets to one of its insiders respondent argues however factor sec_1 and do apply to these cases we will address each in turn a factor transfer to an insider respondent argues that slone broadcasting’s assets were transferred to insiders this argument fails because we have held that the form of the stock sale must be respected petitioners sold their stock in slone broadcasting to berlinetta in exchange for cash and there was no transfer of slone broadcasting’s assets to petitioners this factor does not weigh in favor of finding actual fraud under the ufta b factor transfer of substantially_all assets respondent alleges that the cash petitioners received in exchange for their shares constituted a liquidating_distribution of substantially_all of slone broadcasting’s assets we disagree because the form of the stock sale must be respected petitioners received cash from berlinetta in exchange for their slone broadcasting shares they did not receive a transfer of substantially_all of slone broadcasting’s assets this factor does not weigh in favor of finding actual fraud under the ufta c factor debtor removed or concealed assets respondent asserts that petitioners removed slone broadcasting’s assets because they received in substance a liquidating_distribution in exchange for their stock in a de_facto_liquidation because we have held that the form of the stock sale must be respected we disagree the transfer at issue in these cases the stock sale did not result in a removal of slone broadcasting’s assets petitioners are not responsible for berlinetta’s actions that occurred after the closing of the stock sale this factor does not weigh in favor of finding actual fraud under the ufta d factor value of consideration debtor received reasonably equivalent to value of asset transferred respondent alleges that slone broadcasting did not receive consideration in exchange for the transfer of its assets because we have held that the form of the stock sale must be respected we disagree petitioners received cash from berlinetta in exchange for their slone broadcasting shares slone broadcasting did not surrender any assets or receive any consideration in connection with the stock sale this factor does not weigh in favor of finding actual fraud under the ufta e factor debtor insolvent or became insolvent shortly after transfer was made for purposes of the ufta a debtor is insolvent if the sum of the debtor’s debts is greater than all of the debtor’s assets at a fair valuation ariz rev stat ann sec a debtors that are not generally paying their debts as they come due are presumed to be insolvent id sec b slone broadcasting’s assets exceeded its debts at the closing date of the stock sale slone broadcasting paid dollar_figure million as an estimated payment towards its federal_income_tax liability before the closing of the stock sale respondent did not prove that the sum of slone broadcasting arizona media’s debts was greater than all of slone broadcasting arizona media’s assets at a fair valuation nor did he prove that slone broadcasting arizona media was not paying its debts as they came due arizona media’s federal_income_tax liability was in dispute until it became fixed on date when it submitted a form 870-ad offer to waive restrictions on assessment and collection of tax_deficiency and to accept overassessment accepting a deficiency for its tye date accordingly respondent has not met his burden_of_proof to show that at the time of the stock sale or shortly thereafter slone broadcasting arizona media was insolvent this factor does not weigh in favor of finding actual fraud under the ufta f factor transfer occurred shortly before or shortly after substantial debt was incurred respondent argues that the stock sale occurred shortly after the sale of slone broadcasting’s assets which gave rise to substantial debt--its tax_liabilities the ufta defines debt as a liability on a claim and the term claim is broadly defined to mean a right to payment even if contingent unmatured and unsecured id sec the sale of slone broadcasting’s assets to citadel on date resulted in an estimated combined federal and state_income_tax liability of approximately dollar_figure million approximately five months later at the time of the stock sale slone broadcasting had a debt for the presumed tax due from the asset sale this factor does not persuade us to hold that there was actual fraud under the ufta our evaluation of the factors set forth in the ufta leads us to conclude that there was no actual fraud and we so hold ii conclusion on the basis of the above analysis we hold that the state law prong of the stern test has not been satisfied satisfaction of both prongs of the stern test is necessary in order for respondent to prevail in these cases see slone v commissioner f 3d pincite the commissioner may hold the shareholders liable as ‘transferees’ under sec_6901 only if both prongs of the stern test are satisfied because we have held that the state law prong of the stern test has not been satisfied it is not necessary for us to analyze the federal_law prong of the test in reaching our decision we have considered all arguments and to the extent not mentioned above we conclude they are moot irrelevant or without merit to reflect the foregoing decisions will be entered for petitioners


department of the treasury internal_revenue_service washington d c sovernment entities division sep uil a j - eer legend taxpayer a taxpayer d court c case d county v state w state y date date date date date trust t company u ira x ‘amount dear this is in response to the date correspondence submitted by your authorized representative on your behalf as supplemented by correspondence dated date date date date and june in which your authorized representative requests a series of letter rulings under sec_401 and sec_408 of the internal_revenue_code code the following facts and representations support your ruling_request taxpayer a whose date of birth was date died on date at age not having attained his required_beginning_date as that term is defined in code sec_401 at his death taxpayer a owned an individual_retirement_account ira x with company u from which he had not commenced taking minimum required distributions taxpayer a was a resident of state w at the time of his death on date taxpayer a executed both his last will and testament and trust t also dated the same date is an ira x account application executed by taxpayer a under section of that application entitled ira beneficiary designation taxpayer a designated as his primary beneficiary the following as stated in wills no contingent or other beneficiaries are listed on the form article li of taxpayer a’s last will and testament provides that the will is intended to direct the disposition of property over which taxpayer a has the power of testamentary_disposition at his death article iv of the will states that taxpayer a may leave a memorandum identifying individual bequests of automobiles jewelry or other personal_property and further states that the executor will beneficiaries and heirs shall be bound by the provisions of any such letter as if the provisions thereof were set out in this will article v of the will states that all remaining property the residuary_estate is bequeathed to the trustee of trust t article 1i d of trust t provides that trust t is irrevocable after the death of taxpayer a article vil of trust t describes the division of trust assets after taxpayer a’s death under article vii a the trustee of trust t is directed to distribute certain state y real_estate including the contents of the home to another beneficiary under article vii b the trustee is directed to distribute to another beneficiary the proceeds of the sale of certain state w real_estate article vii c provides for distribution of the remainder of the trust assets to eight named individuals in specified percentages taxpayer d is one of eight residuary beneficiaries listed under trust t taxpayer d was alive as of the date of this ruling_request on date taxpayer a’s personal representative initiated case d in which she petitioned court c county v state w which is represented to be a court of competent jurisdiction to issue an order that the phrase as stated in wills in the above-referenced ira x beneficiary designation is a specification of trust t as beneficiary of ira x and specifically that the eight named beneficiaries of the residual assets under trust t be treated as the designated beneficiaries of ira x on date court c issued an order adopting the although the petition and order issued by court c in case d provide request that the rules regarding designation of beneficiaries under iras and distributions from those iras are principally governed by the code and income_tax regulations regulations court c’s order is made solely under the laws of state w ira x’s value as of taxpayer a’s death was amount based on the above facts and representations you through your authorized representative request the following letter rulings because the ira x beneficiary designation as interpreted under state law by court c resulted in the eight individuals named in trust t being treated as directly-named beneficiaries under ira x’s beneficiary designation taxpayer d qualifies as a designated_beneficiary pursuant to code sec_401 and sec_1_401_a_9_-4 question and answer-3 of the regulations that pursuant to code sec_401 the eight individuals named in trust t are the designated beneficiaries of ira x that the separate_account rules under sec_1_401_a_9_-8 q a-2 of the regulations are applicable for purposes of determining minimum required distributions from taxpayer a’s ira x that as a designated_beneficiary taxpayer d is entitled to take minimum required distributions from her respective share of the inherited ira x under the life_expectancy_rule of code sec_401 based on her life expectancy without regard to the life expectancies of the other individuals mentioned in article vii c of trust t with respect to your letter_ruling requests code sec_408 provides that under regulations prescribed by the secretary rules ‘similar to the rules of sec_401 and the incidental death_benefit requirements of sec_401 shall apply to the distribution of the entire_interest of an individual for whose benefit the trust is maintained code sec_401 provides in general that a_trust will not be considered qualified unless the plan provides that the entire_interest of each employee-- i ii will be distributed to such employee not later than the required_beginning_date or will be distributed beginning not later than the required_beginning_date over the life of such employee or over the lives of such employee and a designated_beneficiary or over a period not extending beyond the life expectancy of such employee or the life expectancy of such employee and a designated_beneficiary code sec_401 defines designated_beneficiary as any individual designated as a beneficiary by the employee ira holder sec_1_401_a_9_-4 of the regulations q a-1 provides in relevant part that a designated_beneficiary is an individual who is designated as a beneficiary under the plan an individual may be designated as a beneficiary under the plan either by the terms of the plan or if the plan so provides by an affirmative election by the employee or the employee's surviving_spouse specifying the beneficiary under these regulations a designated_beneficiary need not be specified by name in the plan or by the employee to the plan in order to be a designated_beneficiary so long as the individual who is to be the beneficiary is identifiable under the plan the members of a class of beneficiaries capable of expansion or it is possible to identify the class contraction will be treated as being identifiable if member with the shortest life expectancy q a-1 further provides that the passing of an employee’s interest to an individual under a will or otherwise under applicable state law will not make that individual a designated_beneficiary under section-401 a e of the code unless that individual is designated as a beneficiary under the plan sec_1_401_a_9_-4 of the regulations q a-3 provides in relevant part that only individuals may be designated beneficiaries for purposes of sec_401 of the code a person who is not an individual such as the employee’s estate may not be a designated_beneficiary under q a-3 of sec_1_401_a_9_-4 of the regulations if a person other than an individual is designated as a beneficiary the employee will be treated as having no designated_beneficiary for purposes of sec_401 of the code however under sec_1_401_a_9_-4 q a-5 if a_trust is named as beneficiary of an employee or ira owner the beneficiaries of the trust will be treated as having been designated as beneficiaries provided certain requirements are satisfied that are outlined in sec_1_401_a_9_-4 q a-5 b those requirements are met if - the trust is a valid trust under state law or would be but for the fact that there is no corpus the trust is irrevocable or will by its terms become irrevocable upon the death of the employee the beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee’s benefit are identifiable within the meaning of sec_1_401_a_9_-4 q a-1 from the trust instrument and the trust documentation is provided to the plan_administrator as provided in sec_1_401_a_9_-4 q a-6 if those requirements are met the beneficiaries of the trust with respect to the trust's interest in the ira may be considered designated beneficiaries for purposes of determining the distribution period for payment of benefits from the ira under sec_401 sec_1_401_a_9_-4 of the regulations q a-4 a provides in relevant part that in order to be a designated_beneficiary an individual must be a beneficiary as of the date of the employee’s death generally an employee’s designated_beneficiary will be determined based on the beneficiaries designated as of the date of death who remain beneficiaries as of september of the calendar_year - following the calendar_year of death with respect to your ruling requests taxpayer d seeks a ruling that the language as stated in wills in the ira beneficiary designation form should be treated as a designation of trust t as the beneficiary of ira x and the beneficiaries of the residual assets under trust t should be treated as the designated beneficiaries for purposes of sec_401 sec_1_401_a_9_-4 q a-1 of the regulations provides that a designated_beneficiary is an individual who is designated as a beneficiary under the plan an individual may be designated as a beneficiary under the plan either by the terms of the plan or if the plan so provides by an affirmative election by the employee or the employee’s surviving_spouse specifying the beneficiary under these regulations a designated_beneficiary need not be specified by name in the plan or by the employee to the plan in order to be a designated_beneficiary so long as the individual who is to be the beneficiary is identifiable under the plan thus the beneficiary designation need not identify a beneficiary by name as was the case here as long as the beneficiary is identifiable under the plan ’ do not believe that the beneficiaries of the ira are identifiable from the language on the form as stated in wills this language names no one and otherwise provides insufficient information to identify the ira beneficiaries from the face of the form in this case we taxpayer d argues that the language as stated in wills should be read as a designation of trust t as beneficiary and under sec_1_401_a_9_-4 q a-5 that the beneficiaries of trust t are designated beneficiaries for purposes of sec_401 however we believe this argument fails under the facts of this case the beneficiary designation form makes no mention of trust t thus we note that the regulations do not provide that the beneficiary be reasonably identifiable or identifiable with reasonable certainty’ or other qualifying language rather the person who is beneficiary must be identifiable without qualification do not believe that trust t can be said to be named as a beneficiary of the employee as required by sec_1_401_a_9_-4 q a-5 as ira x had no designated_beneficiary at taxpayer a’s death on date taxpayer a’s estate was the beneficiary of taxpayer a’s ira x at the time of his death except for certain exceptions not applicable here sec_1_401_a_9_-4 q a-3 of the regulations provides that where an estate is designated_beneficiary the decedent will be treated as having no designated_beneficiary for purposes of sec_401 of the code and the regulations thereunder providing the language as stated in wills on an ira beneficiary designation form is substantively equivalent to specifying the estate as the beneficiary pursuant to sec_1_401_a_9_-4 q a-1 the fact that an employee's interest under the plan passes to a certain individual under a will or otherwise under applicable law does not make that individual a designated_beneficiary under sec_401 unless the individual is designated as a beneficiary under the plan accordingly -under the foregoing rules taxpayer a must be treated as having no designated_beneficiary as of his death for purposes of determining distributions in accordance with sec_401 and the underlying regulations as discussed above we do not believe that there was a designated_beneficiary of ira x for sec_401 purposes at the time of taxpayer a’s death however to fully address the issues raised in the first ruling_request it is also necessary to address the court c order referenced herein taxpayer d through her authorized representative asserts that the court c order referenced above naming her as a beneficiary of ira x should be given effect for purposes of allowing her to qualify as a designated_beneficiary within the meaning of sec_401 of the code we believe that the code and regulations are clear as to the requirements of naming a designated_beneficiary and the timing of the beneficiary designation and do not permit the exception sought here sec_1_401_a_9_-4 q a-1 of the regulations provides that a designated_beneficiary is an individual designated as a beneficiary under the terms of the ira or by an affirmative election of the ira owner under q a-4 of sec_1_401_a_9_-4 of the regulations only individuals who are beneficiaries under the ira on the ira owner's death and who remain beneficiaries as of september of the following calendar_year can be treated as designated beneficiaries for purposes of sec_401 as described in the preamble to these regulations t he period between death and the beneficiary determination_date is a period during which beneficiaries can be eliminated but not replaced with a beneficiary not designated under the ira as of the date of death’ preamble to sec_1 a of the regulations t d ‘determination of the designated beneficiary’ ’ the court c order provides that under state w law the phrase as stated in wills in the ira beneficiary designation is a specification of trust t as designated_beneficiary of ira x and that the eight individuals who are beneficiaries of the residue of trust t including taxpayer d are the designated beneficiaries of taxpayer a’s ira x however to accept the court c order for purposes of sec_401 would in effect create or add designated beneficiaries by treating these individuals including taxpayer d as designated beneficiaries even though they were not designated as such by taxpayer a at his death to give such order retroactive effect for purposes of sec_401 would be inconsistent with the requirements of sec_401 and the final regulations promulgated thereunder as a result the court c order cannot be given effect for purposes of code sec_401 and irrespective of said order we will not treat taxpayer a as having named or designated taxpayer d as a beneficiary of his ira x thus with respect to your first ruling_request the internal_revenue_service concludes that the language as stated in wills did not result in the eight individuals named in article vii c of trust t being treated as directly-named beneficiaries under ira x’s beneficiary designation therefore pursuant to sec_401 of the code and sec_1_401_a_9_-4 q a-3 of the regulations taxpayer d does not qualify as a designated_beneficiary of said ira x this conclusion is not changed by the court c order referenced above our conclusion with respect to your first ruling_request is dispositive of the remaining three ruling requests this ruling letter is based on the assumption that ira x either has met is meeting or will meet the requirements of code sec_408 at all times relevant thereto no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter 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 ‘a copy of this letter_ruling has been sent to your authorized representative in accordance with a power_of_attorney on file in this office po - if you wish to inquire about this ruling please contact at either phone or address all correspondence to se t ep ra t fax ‘please sincerely yours j som ances v sloan manager employee_plans technical group enclosures deleted copy of ruling letter - notice of intention to disclose


department of the treasury internal_revenue_service washington d c 2qoo3 date flo s i n s i n n no third party contact xxxxxxxxxxxxxxxxkkxxkkxxxk xxxxxxxxxxxxxkxxk xxxxxxxxxxxxkxkxxxxxxkxxxkxxkxkxxxkxx contact person 1d number go p-e evt telephone number employer_identification_number xxxxxxxxxx legend p i n i i a h xxxxxxxxxxxxxxxxxxxxkxxxx xxxxxxxxxxxxx xxxxxkxkxxxxxxxxxxk dear applicant this refers to a letter dated date and earlier correspondence submitted on behalf of x which requested certain rulings concerning a proposed transaction under sec_501 and of the internal_revenue_code specifically x requests us to rule with respect to the tax consequences attendant to its proposed sale of burial caskets x is an organization exempt from federal_income_tax under sec_501 of the code as an organization described in sec_501 c x which is a monastery founded by members of the religious_order is included in the group ruling issued to the z church in the united_states members of x follow the y monastic values that are practiced by x traditionally members of x are buried in plain wooden caskets in a manner consistent with the y monastic values x proposes to seil burial caskets which will be designed and manufactured to reflect the style of the burial caskets made for x‘s members and which will be modeled after the traditional casket designed for x’s monastic community the caskets are intended to portray and convey the monastic values practiced by x and its members each casket sale will be accompanied by written materials explaining and translating for the purchaser the particular y monastic values regarding the end of life funeral rites and burial the caskets will be hand crafted and made of solid wood a removable wooden cross may be placed in the lid of the casket x will contract with local manufacturers to perform the principal manufacturing steps including the application of any stain or varnish to the outside of the casket and placement of a cloth lining in the casket’s interior although x’s members will have no significant involvement in the manufacturing of the caskets x will have complete authority over design markings and style x proposes to offer the caskets for sale to its practicing members and their relatives and to the atumni of the religious schools currently and formerly operated by x in addition x plans to make the caskets available to every religious community of the z church in the united_states x states that it will directly market the caskets to those who visit its facility and will place xxxxxxxxxxxxxxxxxxxxxxx advertisements about the caskets in local z church publications with regard to sales to the public x may engage in direct mailings and will develop a website where individuals may either obtain information or purchase a casket x will ensure that caskets are availabie and accessible to individuals who are not associated with x or the z church but who may be receptive to the values and traditions portrayed and conveyed by the caskets none of the caskets will be sold through funeral directors and funeral homes at the time of each casket sale x will obtain information from the purchaser to determine whether the casket will be used in a burial ceremony of the z church or at a burial service at which one of the z church’s ordained clergy or those under vows will preside or participate moreover under certain circumstances x will provide caskets to the needy at below cost while the caskets will have a base price of dollar_figure some members of z church’s clergy will receive a discount price of approximately half that amount it is expected that the average price of a casket will be approximately lower than the national average cost for caskets sec_501 of the code provides in part for the exemption from federal_income_tax of organizations organized and operated exclusively for charitable religious educational and other stated purposes sec_511 of the code imposes a tax on the unrelated_business_taxable_income of organizations exempt from federal_income_tax under sec_501 c sec_512 a of the code defines unrelated_business_taxable_income as the gross_income derived by any organization from any unrelated_trade_or_business as defined in sec_513 regularly carried on by it less the allowable deductions which are directly connected with the carrying on of such trade_or_business sec_513 a of the code defines the term unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its charitable educational or other purpose or function constituting the basis for its exemption under sec_501 sec_513 of the code provides that the term trade_or_business includes any activity which is carried on for the production_of_income from the sale_of_goods or the performance of services sec_1_511-2 a ii of the income_tax regulations provides in part that the term church includes a religious_order or a religious_organization if such order or organization a is an integral part of a church and b is engaged in carrying out the functions of a church whether as a civil law corporation or otherwise in determining whether a religious_order or organization is an integral part of a church consideration will be given to the degree to which it is connected with and controlled by such church a religious_order or organization shall be considered to be engaged in carrying out the functions of a church if its duties include the ministration of sacerdotal functions and the conduct of religious worship sec_1_511-2 a iii of the regulations provides that for taxable years beginning after date churches and conventions or associations of churches are subject_to the taxes se7 20003304y xxxxxxxxxxxxxxxxxxaxxxxxk imposed by sec_511 unless otherwise entitled to the benefit of the transitional rules of sections sec_12 and sec_1_512_b_-1 sec_1_512_b_-1 of the regulations provides in part that in the case of a trade_or_business carried on before date by a church_or_convention_or_association_of_churches all gross_income derived from such trade_or_business will be excluded from the determination of unrelated_business_taxable_income for all taxable years beginning before date sec_1_513-1 of the regulations in part provides that unless one of the specific exceptions of sec_512 or sec_513 applies the gross_income of an exempt_organization subject_to the sec_511 tax is includable in the computation of unrelated_business_taxable_income if it is income from a trade_or_business such trade_or_business is regularly carried on by the organization and the conduct of such trade_or_business is not substantially related other than through the production of funds to the organization’s performance of its exempt functions sec_1_513-1 of the regulations provides that for purposes of sec_513 the term trade_or_business has the same meaning it has in sec_162 and generally includes any activity carried on for the production_of_income from the sale_of_goods or performance of services sec_1_513-1 of the regulations provides that in determining whether trade_or_business from which a particular amount of gross_income derives is regularly carried on within the meaning of sec_512 regard must be had to the frequency and continuity with which the activities productive of the income are conducted and the manner in which they are pursued sec_1_513-1 of the regulations provides that for the conduct of trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes in s rep no 91st cong ist sess 1969_3_cb_469 the committee on finance stated that i n the case of churches the term unrelated_business_income does not include the operation and maintenance of cemeteries the conduct of charitable institutions the sale of religious articles and the printing distribution and sale of religious pamphlets tracts calendars papers books and magazines with a substantial religious content even though the document might contain a small amount of advertising as long as these activities are carried on in connection’with the church revrul_79_359 1979_2_cb_226 provides that an organization which provides traditional religious burial services qualifies for recognition of exemption under sec_501 of the code the rev_rul states that through the provision of burial services to members of a religion in compliance with the detailed requirements of religious laws the organization is preserving and perpetuating traditional religious customs and obligations and is contributing to the advancement of religion the rev_rul concludes by stating that it does not purport to consider whether or under what circumstances a religious burial organization of the kind described herein may be subject_to the unrelated_business_income_tax imposed by sec_511 beginning in together with a transition rule covering taxable years beginning before date churches have been subject_to the tax on unrelated_business_income under sos xxxxxxxxxxxkxxxxxxxxxkxxxk in order for income to be included in the computation of unrelated business taxable sec_511 of the code as a monastery of a religious_order affiliated with the z church x is subject_to the tax on unrelated_business_income under sec_511 see sec_1_511-2 of the regulations income under sec_512 a such income must be from a regularly carried on trade_or_business that is unrelated to the organization’s exempt_purpose or function see sec_1_513-1 in the case of x the proposed marketing and sale of burial caskets appears to be a trade_or_business that is regutarly carried on within the meaning of sec_1_513-1 and c thus the central question in this case is whether such marketing and sales activity is substantially related to x’s exempt purposes as required by sec_513 a generally the production and sale of religious articles by a church or a religious_order would not result in unrelated_business_income as long as such activities are carried on in connection with the church see s rep supra more specifically such articles must have some special religious significance to the church that produced them however for purposes of sec_513 of the code the requisite substantial causal connection is not automatically established merely because articles such as for example church vestments are somehow religious in nature the production and sale of vestments by a church or religious_order for use by members of its own denomination would be substantially related to an organization's exempt religious purpose however a church or religious order’s production and sale of such vestments for use by other church denominations would not contribute importantly to the organization’s exempt_function see sec_1_513-1 d of the regulations in the case of burial caskets the manufacture and sale of such items by a church or religious_order is not in and of itself an exempt activity under sec_501 c of the code unless it is shown that the sale of burial caskets furthers a sec_501 purpose such sales would constitute unrelated_trade_or_business within the meaning of sec_513 although the legislative_history cited above indicates that a church’s operation and maintenance of a cemetery is not unrelated_trade_or_business the treatment of burial caskets was not discussed similarly revrul_79_359 supra does not address the unrelated_business_income_tax implications with respect to a religious burial organization here x proposes to sell burial caskets which are modeled after the traditional casket designed for x’s members and which will convey the monastic values practiced by x and its members along with the casket the purchaser will receive material explaining and translating for the purchaser the particular y values regarding end of life funeral rites and burial such sales will be made to a variety of purchasers including x’s practicing members and their relatives to alumni of religious schools currently and formerly operated by x to religious communities of the z church to those who visit x's facility and to members of the public of particular significance at the time of sale x will obtain information to determine whether the caskets will be used in a burial ceremony of the z church or at a burial service at which one of the z church’s ordained clergy or those under vows will preside or participate by selling caskets that will be used in connection with the z church’s burial ceremonies or burial services under the circumstances described above x will further an exempt religious purpose under sec_501 of the code thus the sales of caskets to be used in connection with such ceremonies and services of the z church will be substantially related to x’s exempt_purpose or function and will not constitute unrelated_trade_or_business under sec_513 however sales of caskets to members of the general_public that will not be used in connection with ceremonies or services of the z church as described above will not be substantially related to x‘s exernpt xxxxxxxxxxxxxxxxxxxxkxxxk -s- purpose or function and thus amounts derived from such sales will constitute unrelated_business_taxable_income under sec_512 and will be subject_to tax under sec_511 accordingly based upon the information provided we rule that x‘s sale of caskets to be used in burial ceremonies of the z church or at burial services at which one of the z church’s ordained clergy or those under vows will preside or participate will be substantially related to x’s religious and charitable purposes under sec_501 of the code and will not be an unrelated_trade_or_business under sec_513 that income from the sale of such caskets will not be treated as unrelated_business_income under sec_512 and thus income generated by the sale of such caskets will not be subject_to tax under sec_511 x's sale of caskets that will not be used in ceremonies or services of the z church as described above will not be substantially related to x’s religious and charitable purposes under sec_501 of the code and will be an unrelated_trade_or_business under sec_513 income from the sale of such caskets will be treated as unrelated_business_income under sec_512 and thus income generated by the sale of such caskets will be subject_to tax under sec_511 except as specifically ruled upon above no opinion is expressed concerning the federal_income_tax consequences of the transactions described above under any other provision of the code pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to x‘s authorized representative we are providing the area manager - ruling you should keep a copy of this letter in your permanent records with a copy of this this ruling letter is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as precedent if you have any questions please contact the person whose name and telephone number appear in the heading of this letter sincerely signed rovert c hapa o robert c harper jr manager exempt_organizations technical group sinc


id office uilc cca-106115-09 ------------- number release date from ---------------- sent tue am to ------------------ cc --------------------------------------------------------- subject re joint_committee expedited refund question ---------- ------- here are my thoughts regarding both of your questions below first i don't see any reason why a t p would be prohibited from requesting a refund before an audit is opened indeed i think that the fair inference from the irm part that you cited is that a t p may do so see irm part a discussing cases with unagreed issues being reported to the jct notwithstanding that they are cic t ps second as to your business decision question i would not think that a general fear of a computational mistake alone otherwise would prevent the examiner from concluding that a substantial part of claimed refund would be allowed besides being a fair reading of the manual i think that the provision requiring the posting of security would trump this concern see irm part d instead i would imagine that the examiner and manager should consider the substance of the claim ie the existence of ftcs and then decide whether such claim reasonably would lead to a substantial part of the claimed refund ie is the t p entitled to the ftcs may they be applied in the year in question were sufficient payments posted to the account to sustain the refund etc feel free to call me directly if you want to discuss this matter further also please let me know once you have a number for this matter regards ------------------- -------------------------- --------------------------


department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-140939-08 date date internal_revenue_service number release date index number --------------------------------- -------------------------- ---------------------------------- ---------------------------- legend x ------------------------------------------- ----------------------------- d1 d2 --------------------------- ---------------------- dear ----------------- this responds to the letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts x was incorporated on d1 the shareholders of x intended that x be treated as an s_corporation effective on d2 but the election to be treated as an s_corporation was not timely filed accordingly x requests a ruling that it will be treated as an s_corporation effective d2 law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one-half months of plr-140939-08 a corporation's taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed sec_1362 provides that if 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 x did not timely file an election to be treated as an s_corporation under sec_1362 x has however established reasonable_cause for not making a timely s election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective d2 within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the appropriate service_center except as specifically set forth above no opinion is expressed or implied as to the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter will be sent to x’s authorized representative sincerely dianna k miosi dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index number ------------------------------ ----------------------------------- ---------------------------------------------- ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------- id no ------------------ telephone number -------------------- refer reply to cc psi b01 plr-112169-18 date date legend x ----------------------------------------------------- ------------------------------------ ------------------------ --------------------------- ------- ------- date date year state dear ------------ this is in response to a letter dated date submitted on behalf of x by x’s authorized representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_754 of the internal_revenue_code facts according to the information submitted x was formed as a limited_liability_company under the laws of state on date and that x was treated as a partnership for federal tax purposes during year interests in x were transferred x intended to file an election under sec_754 to adjust the basis of partnership property with its return for its taxable_year ending on date however x inadvertently failed to file a properly executed sec_754 election plr-112169-18 x represents that it has filed returns for its taxable_year ended on date and subsequent years consistent with the election having been made and that all affected partners have also filed their returns consistent with the election having been made further x represents that it has acted reasonably and in good_faith that granting relief will not prejudice the interests of the government and that it is not using hindsight in making the election law and analysis sec_754 provides that a partnership may elect to adjust the basis of partnership property when there is a distribution_of_property or a transfer of a partnership_interest an election under sec_754 applies with respect to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable_year with respect to which the election was filed and all subsequent taxable years sec_1_754-1 of the income_tax regulations provides that an election under sec_754 to adjust the basis of partnership property under sec_734 and sec_743 with respect to a distribution_of_property to a partner or a transfer of an interest in a partnership must be made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed not later than the time prescribed by sec_1 e including extensions for filing the return for such taxable_year 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 internal_revenue_code except subtitles e g h and i section b defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that 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 rules for requesting extensions of time for regulatory 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 section a plr-112169-18 conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of one hundred twenty days from the date of this letter to make a sec_754 election for year the election should be made in a written_statement filed with the applicable service_center for association with x’s tax_return for its taxable_year ending date a copy of this letter should be attached to the statements filed 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 provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely holly porter associate chief_counsel passthroughs special industries david r haglund by _____________________________ david r haglund branch chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


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 corp b05 plr-153330-04 date december internal_revenue_service number release date index number ----------------------------- ---------------------------------- ---------------------------------- -------------- ------------------------ in re ------------------------------ -------------------------------------- -------------- ------------------------ distributing controlled individual contributor business a business b sub sub ------------------------------- -------------------------------- ---------------------------- ------------------------ ------------------------------- ----------------- - ----------------------------------------- - ------------------------- ------------------------------------------------ ----------------------- - ---------------------------------------------- - ------------------------------------------------------------ ------------------------------------------------------ - -------------------------------- ------------------------------- ------------------------ - ---------------------------------------- ------------------------------- ------------------------ plr-153330-04 sub sub sub building owners llc llc llc llc llc llc - ------------------------------------------ ------------------------------- ------------------------ - -------------------------------------- ------------------------------- ------------------------ - ----------------------------------- ------------------------------- ------------------------ - ---------------------------------- ------------------------------------- - ------------------------------------ ----------------------------------- ------------------------------- ------------------------------------------ ------------------------------------ --------------------------- ------------------------------ ------------------------------------------ - ------------------------ ------------------------- ---------------------- ------------------------ - --------------------------- ------------------------- ----------------------- ------------------------ - -------------------------------- ---------------------------------- ----------------- - ---------------------------------------- ---------------------------------- ----------------- - ------------------------------------------ ---------------------------------- --------------------- -------------------------------------- ---------------------------------- plr-153330-04 llc a b c d e ----------------- - ----------------------------------- ---------------------------------- ----------------- - ---- - -------------------------------- - ---------------------- - ------------------------- - ------------------------ - dear ------------------- this letter responds to your date request for rulings on certain federal_income_tax consequences of the proposed transactions defined below the information provided in that request and later correspondence is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process moreover no information provided by the taxpayer has been reviewed and no determination has been made regarding whether the proposed distribution defined below i satisfies the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii is used principally as a device for the distribution of the earnings_and_profits of the distributing or controlled_corporation or both see sec_355 of the internal_revenue_code and sec_1_355-2 or iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly plr-153330-04 stock representing a 50-percent_or_greater_interest in the distributing or controlled_corporation see sec_355 and sec_1_355-7t summary of facts distributing is the common parent of an affiliated_group whose includible distributing is also the sole member of llc a disregarded_entity that is corporations join in filing a consolidated federal_income_tax return the distributing group distributing has one class of common_stock outstanding more than a percent of which is held by domestic and foreign trusts for the benefit of various lineal_descendants of individual distributing conducts all of its business operations through subsidiaries including llc a limited_liability_company of which distributing is the sole member llc is an entity that is disregarded as separate from its owner for federal tax purposes under sec_301_7701-3 of the procedure and administrative regulations a disregarded_entity llc is engaged directly and indirectly in the conduct of business a engaged in the conduct of business b through its direct and indirect subsidiaries llc wholly owns sub sub and sub sub wholly owns sub and sub wholly owns sub llc leases building for use as its corporate headquarters from owners who own building as tenants in common each owner is treated as a disregarded_entity or partnership for federal tax purposes before step i of the proposed transactions contributor a limited_liability_company will acquire all of the equity interests in each owner in exchange for membership interests in contributor following these exchanges for federal tax purposes contributor will be treated as a partnership each owner will be treated as a disregarded_entity and contributor will be treated as the direct owner of building conducted by distributing through llc and business b as conducted by sub sub sub sub and sub each has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years skilled employees are actively recruited with lucrative compensation packages that generally except in the case of business a include an equity component the distributing board_of directors has been advised that business a will be unable to attract and retain the highly skilled employees it needs without offering them a meaningful equity stake in the business and that such a stake could best be achieved if business a were separated from the distributing group the distributing board_of directors has also been advised that the value of business a would be enhanced by its separation from the distributing group this enhanced value would enable the management of business a to more efficiently pursue the growth plans that are critical to its continued success based on this advice and other information the distributing board has decided to separate business a from the distributing group the separation business a operates in a highly competitive industry in which a limited number of financial information submitted by distributing indicates that business a as plr-153330-04 proposed transactions i distributing will contribute to newly formed controlled a all of the to effect the separation distributing has proposed the following series of ii sub will convert under applicable state law into a limited_liability_company transactions the proposed transactions membership interests in llc b b dollars in cash and c a short-term promissory note having a principal_amount of c dollars and bearing a market rate of interest the contributed note solely in exchange for controlled stock the incorporation the cash and contributed note will be used to fund working_capital and general corporate needs pursuant to the same plan contributor will transfer all of the membership interests in each of the owners to controlled solely in exchange for controlled stock the contribution for federal tax purposes the contribution by distributing of the membership interests in llc will be treated as a contribution of the assets held by llc and the contribution will be treated as a transfer by contributor of the building following step i controlled will be owned d more than percent by distributing and e percent by contributor llc whose sole member is llc llc whose sole member is llc llc whose sole member is llc llc whose sole member is llc llc whose sole member is llc stockholders pro_rata the distribution disregarded_entity for federal tax purposes distributing and controlled will enter into a tax separation agreement in connection with the proposed transactions iv sub will convert under applicable state law into a limited_liability_company vi sub will convert under applicable state law into a limited_liability_company iii sub will convert under applicable state law into a limited_liability_company v sub will convert under applicable state law into a limited_liability_company each of llc llc llc llc llc and llc will be treated as a vii distributing will distribute all of the controlled stock that it owns to its representations the contribution described above in step i contributor makes the following representations regarding the contribution a no stock_or_securities will be issued to contributor for services rendered to or e the liabilities of contributor assumed as determined under sec_357 by d the adjusted_basis and the fair_market_value of the assets transferred by b the transfer of the building by contributor to controlled is not the result of f there is no indebtedness between controlled and contributor and there will c contributor will not retain any rights in the property transferred to controlled plr-153330-04 for the benefit of controlled in connection with the proposed transaction no stock_or_securities will be issued to contributor for indebtedness of controlled that is not evidenced by a security or for interest on indebtedness of controlled that accrued on or after the beginning of the holding_period of contributor for the debt the solicitation by a promoter broker or investment house contributor to controlled will in each instance equal or exceed the sum of the liabilities assumed as determined under sec_357 by controlled controlled will have been incurred in the ordinary course of business and will be associated with the transferred assets be no indebtedness created in favor of contributor as a result of the transaction transaction in which the rights of the parties are defined i there is no plan or intention on the part of controlled to redeem or otherwise reacquire any stock or indebtedness issued to contributor in the proposed transaction issuance of stock for services the exercise of any controlled stock_rights warrants or subscriptions a public offering of controlled stock and the sale exchange transfer by gift or other_disposition of any of the controlled stock received in the exchange contributor and distributing will be in control of controlled within the meaning of sec_368 property approximately equal to the fair_market_value of the property transferred to controlled to it in a trade_or_business property other than in the normal course of business operations g the transfers and exchanges will occur under a plan agreed upon before the k each of contributor and distributing will receive stock securities or other m there is no plan or intention by controlled to dispose_of the transferred l controlled will remain in existence and retain and use the property transferred j taking into account any issuance of additional shares of controlled stock any h all exchanges will occur on approximately the same date n each party to the contribution will pay its or his her own expenses if any o controlled will not be an investment_company within the meaning of plr-153330-04 incurred in connection with the contribution sec_351 and sec_1_351-1 within the meaning of sec_368 and the stock_or_securities received in the exchange will not be used to satisfy the indebtedness of such debtor sec_269a q controlled will not be a personal_service_corporation within the meaning of p contributor is not under the jurisdiction of a court in a title_11_or_similar_case the incorporation and distribution r no part of the consideration distributed by distributing will be received by a t following the distribution distributing and controlled will each continue the distributing makes the following representations regarding the incorporation and distribution described in steps i and vii above shareholder of distributing as a creditor employee or in any capacity other than that of a shareholder of distributing s the five years of financial information submitted on behalf of business a as directly conducted by llc and business b as directly conducted by each of sub sub sub sub and sub represents the present operation of each and regarding each business there have been no substantial operational changes since the date of the last financial statements submitted active_conduct of its business independently and with its separate employees use in compensating key employees and funding growth the distribution is motivated in whole or substantial part by one or both of these corporate business purposes earnings_and_profits of distributing or controlled or both w 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 x the total adjusted_basis and the fair_market_value of the assets transferred to controlled by distributing each equals or exceeds the sum of the liabilities assumed as determined under sec_357 by controlled and the liabilities assumed as determined under sec_357 in the transaction were incurred in the ordinary course of business and are associated with the assets being transferred v the distribution is not used principally as a device for the distribution of the u the distribution is carried out to enhance the value of controlled stock for z immediately before the distribution items of income gain loss deduction plr-153330-04 y except for the contributed note and the final settlement of intercompany accounts no intercorporate debt will exist between distributing and controlled at the time of or after the distribution and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_2_cb_147 and as currently in effect sec_1_1502-13 as published by t d at the time of the distribution distributing will not have an excess_loss_account in the controlled stock see sec_1_1502-19 distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length sec_368 and iv aa payments made in connection with any continuing transactions between bb neither distributing nor controlled is an investment_company as defined in cc distributing will not have been a united_states real_property holding ee for purposes of sec_355 immediately after the distribution no person corporation as defined in sec_897 at any time during the five-year period ending on the date of the distribution dd the distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7t pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote 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 determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either a 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 b 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 ff for purposes of sec_355 immediately after the distribution no person plr-153330-04 rulings the contribution no gain_or_loss will be recognized by contributor on the contribution the basis of controlled in building will equal the basis of building in the no gain_or_loss will be recognized by controlled on the contribution sec_1032 sec_351 cf revrul_76_123 1976_1_cb_94 revrul_68_357 c b hands of contributor immediately before the contribution sec_362 which building was held by contributor sec_1223 the basis of the controlled stock received by contributor will equal contributor's basis in building immediately before the contribution sec_358 include the holding_period of contributor in building immediately before the contribution provided that building was either a capital_asset as defined in sec_1221 or property described in sec_1231 sec_1223 the holding_period of controlled in building will include the period during the holding_period of the controlled stock received by contributor will the incorporation and distribution the incorporation followed by the distribution will be a reorganization under no gain_or_loss will be recognized by controlled on the incorporation no gain_or_loss will be recognized by distributing on the incorporation sec_368 distributing and controlled will each be a party to the reorganization under sec_368 sec_361 and sec_357 sec_1032 equal the basis of that asset in the hands of distributing immediately before the incorporation sec_362 incorporation will include the period during which that asset was held by distributing sec_1223 income of distributing or the stockholders of distributing on the distribution sec_361 sec_355 and sec_1_367_e_-1 the basis of controlled in each asset received in the incorporation will the holding_period of controlled for each asset received in the no gain_or_loss will be recognized by and no amount will be included in the the aggregate basis of the common_stock of distributing and controlled the holding_period of the controlled stock received by each stockholder of plr-153330-04 held by each stockholder of distributing immediately after the distribution will equal the aggregate basis of the distributing common_stock held by such stockholder immediately before the distribution allocated between the distributing stock and the controlled stock in proportion to the fair_market_value of each in accordance with sec_1_358-2 sec_358 b and c distributing will include the holding_period of the distributing common_stock on which the distribution is made provided the stockholder held the distributing stock as a capital_asset on the date of the distribution sec_1223 controlled in accordance with sec_312 sec_1_312-10 and sec_1_1502-33 payments made between any of distributing controlled or their respective subsidiaries under the tax separation agreement to be entered into by distributing and controlled in connection with the distribution regarding tax_liabilities i that have arisen or will arise for a taxable_period ending on or before the date of the distribution or for a taxable_period beginning before and ending after the distribution and ii that will not become fixed or ascertainable until after the distribution will be treated as occurring immediately before the distribution earnings_and_profits if any will be allocated between distributing and caveats no opinion is expressed about the treatment of the proposed transactions under i whether the distribution satisfies the business_purpose requirement of other provisions of the code and regulations or the tax treatment of any conditions existing at the time of or effects resulting from such proposed transactions that are not specifically covered by the above rulings in particular no opinion is expressed regarding sec_1_355-2 the earnings_and_profits of distributing or controlled or both see sec_355 and sec_1_355-2 or series of related transactions under sec_355 or described above in steps ii through vi iv treatment of the conversions of sub sub sub sub and sub ii whether the distribution is used principally as a device for the distribution of iii whether the distribution and an acquisition or acquisitions are part of a plan procedural statement sec_6110 provides that it may not be used or cited as precedent this ruling letter is directed only to the taxpayers who requested it section plr-153330-04 a copy of this ruling letter must be attached to the federal_income_tax return of each taxpayer involved in the proposed transactions for the taxable_year in which the proposed transactions are completed is being sent to each of distributing and contributor in accordance with the power_of_attorney on file in this office a copy of this letter sincerely yours associate chief_counsel corporate by wayne t murray wayne t murray special counsel to the associate chief_counsel ----------------------- ---------------------------------------------------- --------------------------------------------------------------------------------------- ----------------------------------------------- ------------------------ ---------------------------------- -------------------------------------------------------------------------------- -------------------------- ------------------------------------------------------ --------------------------------