office_of_chief_counsel internal_revenue_service memorandum --------------------------------------------------------- number release date cc tege eoeg et2 ------------ postu-140193-05 uilc third party communication none date of communication not applicable_date to date ------------------------------------------------------------------------------------------------- --------------------------------------------------------------- from john b richards senior technician reviewer employment_tax branch employment_tax exempt_organizations government entities tax exempt and government entities --------------------------------------------------------- ------------------------ ------------------------------------ subject this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend corporation x -------------------------------------------------------------- corporation x plan ---------------------------------------------------------------------------------------- ------------------------------------------------------------------------- issues whether retired insurance agents’ rights to renewal_commissions under the corporation x plan constitute nonqualified_deferred_compensation_plans for purposes of sec_3121 if issue is answered in the affirmative whether agents’ rights to renewal_commissions for sales of insurance policies were subject_to a substantial_risk_of_forfeiture until the customer renewed the policies and paid the renewal premiums on the policies postu-140193-05 whether the internal_revenue_service irs should approve corporation x’s refund claims for fica_taxes paid with respect to renewal_commissions paid to retired agents conclusions based on the information submitted the insurance agents’ rights to renewal_commissions under the corporation x plan constitute nonqualified_deferred_compensation_plans for purposes of sec_3121 based on all of the facts and circumstances in this case because corporation x pays renewal_commissions on an insurance_policy only if the customer renews the underlying insurance_policy and pays the renewal premiums a particular renewal commission on an insurance_policy was subject_to a substantial_risk_of_forfeiture until the policy was renewed and the customer paid the related renewal premium s on that insurance_policy the renewal of the policy and the payment of the renewal premium on the insurance_policy are a condition related to the compensatory purpose of the transfer of the right to the renewal commission by corporation x and the agent forfeits the right to any renewal commission if the customer does not renew the policy or does not pay the renewal premium because the renewal_commissions were subject_to a substantial_risk_of_forfeiture as of the dates the agents retired corporation x could not take the nonqualified_deferred_compensation into account for purposes of sec_3121 on such dates accordingly the irs should deny corporation x’s refund claims facts corporation x is engaged in the insurance_business in the united_states_corporation x sells individual life_insurance including variable life term life and traditional whole life policies corporation x has represented that full-time life_insurance sales agents who sell these insurance policies to individuals for corporation x are statutory employees for purposes of the fica under sec_3121 under the corporation x plan corporation x pays its sales agents primarily through commissions for the sale of insurance policies and annuities its agents sign contracts agent’s agreement with corporation x that govern their performance of service and provide for the payment of commissions and other compensation to the agents corporation x bases the amount of commissions on the type of policy sold the initial premium payment amount and the number of years a particular policy is renewed if any commission and compensation schedules that are referenced in the agent’s agreement provide for the commissions to be paid to the agent when an agent has sold an insurance_policy and corporation x puts the policy into force corporation x pays an agent an initial first-year commission payment based on the premiums for the first year of the policy if the policy remains in force in a subsequent year corporation x pays the agent a renewal commission usually equal to a percentage of the renewal premiums to be paid during the subsequent year the employee may receive a renewal commission under the terms of the plan only if two conditions are satisfied a the agent is either an active sales agent of corporation x or b his or her services have been terminated because of retirement disability or death and the insurance_policy postu-140193-05 is in force on the anniversary date of the policy and the customer pays the renewal premiums corporation x generally pays the agent renewal_commissions on a policy for a certain number of years the period during which an agent receives renewal_commissions is usually from four to ten years from the effective date of the policy and may vary depending on the type of policy the agent’s agreement provides that no compensation is payable to the agent until the premiums upon which it is based are received by corporation x the agent’s agreement further provides that no compensation shall be paid to the agent on account of any policy or contract after it has lapsed or after the discontinuance for any reason of premium payments in addition where specified in the applicable commission and compensation schedules compensation previously paid relating to such a policy shall be repaid by the agent to corporation x upon demand and corporation x has the right to recover all or part of such compensation from any compensation due and thereafter payable to the agent the agent’s agreement provides that corporation x reserves the right to alter or modify in its discretion with respect to business thereafter paid-for any of the applicable commission or compensation schedules corporation x has represented that when an agent has sold a policy for which premiums have been paid corporation x may not change the commission percentage rate for any renewal_commissions on the policy corporation x furnishes its agents a handbook the corporation x plan describing the payment of commissions and the payment of renewal_commissions to an agent when an agent has sold a policy that reaches its first policy anniversary corporation x credits the agent with commissions for all the second policy year premiums on that policy corporation x repeats this procedure except for any necessary change in commission rates or premiums on each succeeding policy anniversary within the renewal commission period if a policy lapses with some premiums unpaid in a renewal commission year and if corporation x has credited the agent with commission credit on those unpaid premiums it will debit the agent’s account for the commission credit allowed with respect to the unpaid premiums if corporation x credits an agent with the reinstatement of a policy it will add commission credit for the premiums scheduled to be paid to the end of the current policy year to the agent’s accumulated credits the corporation x plan relating to the payment of commissions provides that the agent begins receiving commissions beginning with the week the agent’s agreement becomes effective for a retired agent corporation x pays renewal_commissions on ordinary life and health_insurance_policies reaching policy anniversaries within the renewal commission period typically corporation x pays a retired agent a large amount of renewal_commissions in the first year of his or her retirement and the amount decreases as each year passes there are two primary reasons for the decrease in subsequent years because corporation x credits renewal_commissions to the agent based on the policy’s origination date rather than an agent’s retirement date and because corporation x limits the number of years an agent may receive renewal_commissions the number of postu-140193-05 policies on which renewal_commissions will be paid generally decreases each year after retirement and corporation x pays each renewal commission payment only if the customer renews the underlying insurance_policy and each year some customers do not renew insurance policies a policy is not renewed or lapses if either the insured dies or if the insured fails to pay the premiums necessary to continue coverage under the policy corporation x does not maintain separate trust accounts or other separate_accounts holding financial_assets for the commissions credited to its agents including renewal_commissions of agents corporation x pays the agents from its general corporate cash account generally in the insurance industry most agents’ contracts with insurance_companies provide for the vesting of renewal_commissions on policies sold by agents under certain conditions vesting of an insurance agent’s rights to renewal_commissions in insurance industry terminology means that provided the policy is renewed and renewal premiums_paid the insurance_company will pay the agent renewal_commissions on the policy regardless of whether the services of the agent have been terminated contracts with agents may provide for the vesting of renewal_commissions if the agent’s total sales exceed certain levels or if the agent has completed a minimum period_of_service see black and skipper life_insurance 12th ed page corporation x has indicated that the renewal_commissions paid to its agents vest only if the agent’s services are terminated by death retirement or disability when an agent retires corporation x does not require that the retired agent perform any further services to receive renewal_commissions with respect to policies that he or she sold for corporation x otherwise corporation x maintains that it pays the renewal_commissions to an agent only if the agent is continuing to perform services as a full-time life_insurance salesperson with corporation x when it credits the renewal commission corporation x like other life_insurance_companies has a vital interest in having its agents sell insurance policies that customers will renew because of the administrative costs associated with putting a life_insurance_policy into force a typical insurance_policy must remain in force for a number of years before an insurance_company makes any profit on the policy if a policy lapses is not renewed during the first few years the policy is in force then the insurer incurs a loss on the policy thus in order for a life_insurance_company to be profitable with respect to the insurance that it sells it generally needs the sale of policies that policyholders will renew for many years id pincite in insurance terminology the rate at which customers renew insurance policies is referred to as the persistency rate the persistency rate is the ratio of the number of policies that continue coverage on a particular date it may be computed with respect to the anniversary date of the policy the premium-due date of the policy or some other date to the number of policies that were in force as of the comparable date in the there are certain products sold by insurance_companies that are single premium products and such products may be priced such that the product would be profitable without the requirement of renewal by the customer with respect to such products renewal_commissions may not be paid because there are no renewal premiums postu-140193-05 preceding year id pincite with respect to a life_insurance_policy the insurance coverage will not continue if either the policyholder has decided to discontinue coverage and quits paying premiums or the insured dies because of the effect on profits discussed in the previous paragraph insurance_companies strive to increase persistency rates in order to encourage persistency some insurance policies provide special benefits to a policy holder if the insurance_policy remains in force for a certain period of years id pincite one of the principal methods used by insurance_companies to encourage their agents to sell policies with high persistency rates is to pay portions of agents’ commissions as renewal_commissions insurance_companies provide the renewal commission portion of an agent’s compensation_for the sale of an insurance_policy to an agent only when and if the customer renews the policy rather than providing the entire amount of the agent’s commission upon the sale of the policy thus with renewal_commissions insurance_companies have designed their compensation schemes to reward an agent selling insurance that will remain in force for many years by directly tying a portion of the agent’s compensation to the renewal of the insurance_policy renewal_commissions paid to an active agent have two component compensatory purposes they provide compensation to the agent for providing ongoing service to the customer in connection with the insurance_policy and they provide compensation to the agent for the initial sale of the insurance_policy both of these purposes promote the insurance company’s goal of having policies that customers renew and that remain in force when an agent retires the renewal_commissions received after retirement compensate the retiree for the initial sale of the insurance_policy and any services provided by the agent prior to retirement in connection with maintaining the insurance_policy id pincite the agent plays an important role in selling insurance that will have a high persistency rate and that will thus increase the quality of the insurance company’s book of insurance although insurance_companies review insurance applications to determine whether the applicant qualifies for the insurance the agent is usually able to determine the suitability of the insurance for the applicant based on discussions with the applicant if an agent has appropriately evaluated the needs of the purchaser in selling the insurance and has sold to a more financially stable consumer it is more likely that the policy will be renewed and become profitable for the insurance_company despite the incentives provided to encourage persistency many consumers do not renew insurance policies there are a number of reasons why a policyholder may decide not to renew an insurance_policy the policyholder may lose the financial ability to pay or decide he or she does not need or want the insurance for personal or financial reasons the policyholder may become estranged from the original beneficiary of the policy and have no other desired beneficiary there may be a change in financial circumstances such that life_insurance is not needed the policyholder may decide to the taxpayer’s awareness of the importance of the individual agent in achieving a high persistency rate is shown in the -------------------------------------------------------------in which the ------------------------------------------ --------------------credits strong policy persistency rates to the caliber of agents and the quality sales they make postu-140193-05 spend money formerly used to pay insurance premiums on other consumer products or services the policyholder’s employer may have insurance that becomes available at a cheaper cost to the policyholder the policyholder may decide to buy comparable insurance from another agent at another company because of better price or better service refund claims corporation x filed refund claims relating to all four quarters of tax years ------- through - ------- totaling dollar_figure--------------- plus interest in its claims for refund corporation x asserts that it should not have withheld and paid fica tax on the renewal_commissions at the time it paid the renewal_commissions to its retired agents based on the claims and information provided by corporation x in response to requests during the examination we understand corporation x to be claiming that the corporation x plan gives the agent the right to future renewal_commissions because all required services have been performed as of the date of retirement therefore corporation x asserts that under sec_3121 it may treat the renewal_commissions that it may eventually pay a retired agent as subject_to fica tax on the retirement date of the agent although the amount of renewal_commissions is not reasonably ascertainable at the time of retirement the taxpayer relies on sec_31_3121_v_2_-2 of the employment_tax regulations which permits a taxpayer to take into account for fica purposes an amount deferred under a nonaccount balance plan that is not reasonably ascertainable provided that such amount is no longer subject_to a substantial_risk_of_forfeiture based upon this provision corporation x contends that it may retroactively aggregate the renewal_commissions from all insurance policies sold by a retired agent and assign a fair_market_value at the date of retirement based upon the discounted value of the entire stream of renewal commission payments the agent is expected to receive subject_to true up at the resolution date for the years at issue corporation x has apparently used the actual renewal commission payment data to retroactively determine the value of renewal_commissions as of the date of the agent’s retirement rather than applying a methodology in order to estimate the fair_market_value on the date of retirement law and analysis sec_3101 and sec_3111 impose fica_taxes on wages as that term is defined in sec_3121 fica_taxes consist of the old-age_survivors_and_disability_insurance_tax social_security_tax and the hospital_insurance_tax medicare_tax these taxes are imposed both on the employer under sec_3111 and b and on the employee under sec_3101 and b sec_3102 provides that the employer must collect the employee portion of fica tax by deducting the amount of the tax from the wages as and when paid sec_3121 defines wages for fica purposes as all remuneration for employment including the cash_value of all remuneration including benefits paid in any medium other than cash with certain specific exceptions sec_31_3121_a_-1 provides that remuneration for employment unless such remuneration is specifically excepted constitutes wages even though at the time paid the relationship of employer and employee no longer exists between the person in whose employ the services were performed and the individual who performed the services postu-140193-05 sec_3121 defines employment for fica purposes as any service of whatever nature performed by an employee for the person employing him with certain specific exceptions the definition of employee for purposes of the fica includes officers of corporations employees under the usual common_law rules applicable in determining the employer-employee relationship and statutory employees under sec_3121 statutory employees for purposes of the fica generally include full-time life_insurance salespersons other than common_law employees and officers of a corporation if the contract_of_service contemplates that substantially_all of such services are to be performed personally by such individual sec_3121 provides for the maximum wage limitation on the_amount_of_wages paid to any one employee by an employer during a calendar_year that are subject_to the social_security_tax portion of fica tax the term wages for social_security_tax purposes does not include that part of the remuneration paid_by an employer to an employee within any calendar_year which exceeds the applicable wage_base generally wages are subject_to fica tax when they are actually or constructively paid sec_31_3121_a_-2 of the regulations however sec_3121 provides a special timing rule for nonqualified_deferred_compensation sec_3121 provides that any amount deferred under a nonqualified_deferred_compensation_plan must be taken into account as wages for fica purposes as of the later of when the services are performed or when there is no substantial_risk_of_forfeiture of the rights to such amount sec_3121 states that once nonqualified_deferred_compensation is taken into account as wages under the special timing rule then neither that amount nor the income attributable to that amount will be again treated as fica wages sec_3121 provides that the term nonqualified_deferred_compensation_plan means any plan or other arrangement for deferral of compensation other than a plan described in sec_3121 sec_31_3121_v_2_-1 provides that the term nonqualified_deferred_compensation_plan means any plan or other arrangement other than a plan described in sec_3121 that is established within the meaning of paragraph b of this section by an employer for one or more of its employees and that provides for the deferral of compensation within the meaning of paragraph b of this section sec_31_3121_v_2_-1 states that a plan provides for the deferral of compensation with respect to an employee only if under the terms of the plan and the relevant facts and circumstances the employee has a legally binding right during a calendar_year to compensation that has not been actually or constructively received and that pursuant to the term of the plan is payable in a later year an employee does not have a legally binding right to compensation if that compensation may be unilaterally reduced or eliminated by the employer after the services creating the right to the compensation have been performed for this purpose compensation is not considered subject_to unilateral reduction or elimination merely because it may be reduced or eliminated by operation of the objective terms of the plan such as the application of an objective provision creating a substantial_risk_of_forfeiture within the meaning of sec_83 similarly an employee does not fail to have a legally binding right to compensation postu-140193-05 merely because the amount of compensation is determined under a formula that provides for benefits to be offset by benefits provided under a plan that is qualified under sec_401 or because benefits are reduced due to investment losses or in a final_average_pay_plan subsequent decreases in compensation sec_31_3121_v_2_-1 defines an account_balance_plan as a nonqualified_deferred_compensation_plan under the terms of which a principal_amount or amounts is credited to an individual_account for an employee the income attributable to each principal_amount is credited or debited to the individual_account and the benefits payable to the employee are based solely on the balance credited to the individual_account sec_31_3121_v_2_-1 provides that if benefits for an employee are provided under a nonqualified_deferred_compensation_plan that is not an account_balance_plan a nonaccount balance plan the amount deferred for a period equals the present_value of the additional future payment or payments to which the employee has obtained a legally binding right during that period sec_31_3121_v_2_-1 provides that for purposes of sec_31_3121_v_2_-1 the term present_value means the value as of a specified date of an amount or series of amounts due thereafter where each amount is multiplied by the probability that the condition or conditions on which payment of the amount is contingent will be satisfied and is discounted according to the assumed rate of interest to reflect the time_value_of_money for purposes of this section the present_value must be determined as of the date the amount deferred is required to be taken into account as wages under paragraph a of this section using actuarial assumptions and methods that are reasonable as of that date sec_31_3121_v_2_-1 provides that except as otherwise provided in this paragraph e an amount deferred under a nonqualified_deferred_compensation_plan must be taken into account as wages for fica tax purposes as of the later of the date on which services creating the right to the amount deferred are performed within the meaning of paragraph e of this section or the date on which the right to the amount deferred is no longer subject_to a substantial_risk_of_forfeiture sec_31_3121_v_2_-1 provides that for purposes of this section services creating the right to an amount deferred under a nonqualified_deferred_compensation_plan are considered to be performed as of the date on which under the terms of the plan and all the facts and circumstances the employee has performed all of the services necessary to obtain a legally binding right as described in paragraph b i of this section to the amount deferred sec_31_3121_v_2_-1 provides that for purposes of this section the determination of whether a substantial_risk_of_forfeiture exists must be made in accordance with the principles of sec_83 and the regulations thereunder sec_1_83-3 of the income_tax regulations provides that for purposes of sec_83 and the regulations thereunder whether a risk of forfeiture is substantial or not depends upon the facts and circumstances a substantial_risk_of_forfeiture exists where rights in postu-140193-05 property that are transferred are conditioned directly or indirectly upon the future performance or refraining from performance of substantial services by any person or the occurrence of a condition related to a purpose of the transfer and the possibility of forfeiture is substantial if such condition is not satisfied the risk that the value of property will decline during a certain period of time does not constitute a substantial_risk_of_forfeiture sec_1_83-3 provides that the regularity of the performance of services and the time spent in performing such services tend to indicate whether services required by a condition are substantial sec_31_3121_v_2_-1 provides that notwithstanding any other provision of this paragraph e an amount deferred under a nonaccount balance plan is not required to be taken into account as wages under the special timing rule_of sec_31 v - a until the first date on which all of the amount deferred is reasonably ascertainable the resolution date in this case the amount required to be taken into account as of the resolution date is determined in accordance with sec_31 v - c sec_31_3121_v_2_-1 provides that for purposes of paragraph e an amount deferred is considered reasonably ascertainable on the first date on which the amount form and commencement_date of the benefit payments attributable to the amount deferred are known and the only actuarial or other assumptions regarding future events or circumstances needed to determine the amount deferred are interest and mortality for this purpose the form and commencement_date of the benefit payments attributable to the amount deferred are treated as known if the requirements of paragraph c iii b of this section under which payments are treated as being made in the normal form of benefit commencing at normal commencement_date are satisfied sec_31_3121_v_2_-1 provides that for an amount deferred that is not reasonably ascertainable an employer may choose to take an amount into account at any date or dates an early inclusion date or dates before the resolution date but not before the date described in paragraph e of this section with respect to the amount deferred an employer that chooses to take an amount into account at an early inclusion date under this paragraph e ii for an employee under a plan is not required until the resolution date to identify the period to which the amount taken into account relates sec_31_3121_v_2_-1 provides that if an employer chooses to take a deferred_amount into account as of an early inclusion date in accordance with this paragraph e ii and the benefit payments attributable to the amount deferred exceed the benefit payments that are actuarially equivalent to the amount taken into account at the early inclusion date payable in the same form and using the same commencement_date as the benefit payments attributable to the amount deferred then the present_value of the difference in the benefits determined in accordance with paragraph c of this section must be taken into account as of the resolution date postu-140193-05 issue whether agents’ rights to renewal_commissions are nonqualified_deferred_compensation_plans for purposes of sec_3121 each agent is covered by the corporation x plan for the payment of renewal_commissions this plan sets forth the renewal_commissions that a retiree is entitled to receive from the insurance policies that are in force on and after the retiree’s retirement date as a general_rule renewal_commissions are considered to be remuneration for services performed in the year the sale of the insurance is consummated revrul_54_312 1954_2_cb_327 provides that in general commissions received by a life_insurance salesman including deferred or renewal_commissions for the sale of life_insurance annuities or accident_or_health_insurance are deemed to be remuneration for services performed at the time of the consummation of the sales of the contracts of insurance to which they are attributable the information submitted establishes that the right to the renewal_commissions provided by corporation x to its employees constitutes a nonqualified_deferred_compensation_plan under the plan it appears the agent has a legally binding right during the calendar_year of the sale of the insurance_policy to the renewal_commissions that have not been actually or constructively received and pursuant to the terms of the plan the renewal_commissions are payable to the employee in a later year the employee may receive a renewal commission under the terms of the plan only if two conditions are satisfied a the agent is either an active sales agent of corporation x or b his or her services have been terminated because of retirement disability or death and the insurance_policy is in force on the anniversary date of the policy and the customer pays the renewal premiums although the employee will not receive a renewal commission if either the employee is terminated for some reason other than death retirement or disability or the insurance is not in force these factors eliminating the payment of the renewal commission operate by the objective terms of the plan although the agent’s agreement provides that corporation x reserves the right to alter or modify in its discretion with respect to business thereafter paid-for any of the applicable commission or compensation schedules corporation x represents that notwithstanding this language renewal commission rates may not be reduced after the sale of the policy under the regulations therefore the compensation of an agent is not subject_to unilateral reduction or elimination by corporation x and therefore agents’ rights to renewal_commissions upon the sales of insurance policies constitute nonqualified_deferred_compensation_plans for purposes of sec_3121 issue whether the renewal_commissions were subject_to a substantial_risk_of_forfeiture until the customer renewed the policy and paid the renewal premiums on the policy sec_31_3121_v_2_-1 provides that an account_balance_plan is a nonqualified_deferred_compensation_plan under the terms of which a principal_amount or amounts is credited to an individual_account for an employee the income attributable to such principal_amount is credited or debited to the individual_account and the benefits payable are based solely on the balance credited to the individual_account there is no postu-140193-05 crediting of the renewal_commissions to an account when the policy is sold there is no crediting or debiting of interest and the benefits are not based on such a balance therefore the nonqualified_deferred_compensation_plans consisting of the agents’ rights to renewal_commissions are nonaccount balance plans corporation x stakes its claims for refund on the position that it is eligible to take into account the renewal_commissions under the early inclusion rule described in sec_31_3121_v_2_-1 set forth above which applies in the case of nonaccount balance plans the early inclusion rule provides that the amounts may be taken into account before the resolution date although in no event may the amounts be included in wages before the date described in paragraph e of this section with respect to the amount deferred the date described in paragraph e is the later of the date on which services creating he right to the amount deferred are performed or the date on which the right to the amount deferred is no longer subject_to a substantial_risk_of_forfeiture because the employees in this case have ceased to perform services for corporation x after termination of their working relationship with corporation x the date of the services creating the right to the amount deferred has passed and the remaining issue for purposes of determining the timing of the fica taxation of the amounts deferred is the time at which the amounts deferred were no longer subject_to a substantial_risk_of_forfeiture sec_31_3121_v_2_-1 of the regulations provides that the determination of whether a substantial_risk_of_forfeiture exists for purposes of sec_3121 and the fica taxation of nonqualified_deferred_compensation is made in accordance with the principles of sec_83 and the sec_83 regulations sec_1 c -3 c provides that whether a risk of forfeiture is substantial depends upon all the facts and circumstances moreover it further provides that a substantial_risk_of_forfeiture can exist in either of two possible circumstances a substantial_risk_of_forfeiture can exist where rights in property are conditioned upon the future performance or refraining from performance of substantial services by any person in this case upon the retirement of the agent the agent has performed all the services that he or she will perform in connection with the life_insurance policies to which the renewal_commissions relate thus the rights of the retired agent to the renewal_commissions are not conditioned upon the future performance of services by the retired agent in addition the legal rights of the retired agent to renewal_commissions do not appear to be affected by the services performed by the agent to whom the policy is transferred upon the agent’s retirement and in any event the additional services that are necessary to service the policy are insubstantial under sec_1_83-3 a substantial_risk_of_forfeiture can also exist if the rights to the property are conditioned directly or indirectly upon the occurrence of a condition related to the purpose of the transfer and the possibility of forfeiture is substantial if such condition is not satisfied that part of the definition of substantial_risk_of_forfeiture is relevant to the specific facts present in this case each renewal commission is conditioned on the continued existence in force or renewal of the underlying insurance_policy on the date the renewal commission is scheduled to be credited to the agent the policy anniversary date and the payment of postu-140193-05 the related renewal premiums there are a number of reasons why a policy may not be renewed for example the policy holder may lose the financial ability to pay the policyholder may decide that changed financial or personal circumstances make termination of the policy appropriate or the policyholder may decide to buy other insurance from another company or may have a new employer that provides insurance if the policy is not renewed through payment of the related renewal premium the agent loses the renewal commission he would otherwise have received on that policy this condition for the payment of the renewal premium is related to the purpose of the transfer of the renewal_commissions to the agent which is to provide an incentive for the agent to sell insurance policies that customers will renew because insurance policies are generally profitable to corporation x only if they continue in force for a number of years corporation x has a vital interest in providing agents with incentives for the sale of policies that are more likely to be renewed and thus become profitable in your request for assistance you provided documentation indicating that corporation x specifically recognizes the importance of agents in increasing the persistency rate the renewal_commissions provide an incentive for agents to sell insurance that meets the needs of the policyholder and to sell to more financially stable purchasers such insurance is more likely to be renewed and to increase the profitability of corporation x two examples in the sec_83 regulations illustrate circumstances where there is a substantial_risk_of_forfeiture in circumstances analogous to this case sec_1 c provides that when stock is transferred to an underwriter prior to a public offering and the full enjoyment of such stock is expressly or impliedly conditioned upon the successful completion of the underwriting the stock is subject_to a substantial_risk_of_forfeiture this example is analogous to the facts and circumstances in this case in that just as the transferred stock is intended to reward the underwriter only if the offering occurs so too corporation x intends that the agent be rewarded through payment of a renewal commission only if the customer renews the insurance_policy and pays the renewal premium the current factual situation is also analogous to example of sec_1_83-3 of the sec_83 regulations in this example an employer funded an educational trust for its employees the payment of annual grants from the trust to the employee’s child on behalf of the employee was conditioned on the employee’s child completing an academic year as a student in good standing at an accredited educational_institution as a degree_candidate if the student does not complete the year in good academic standing the cash grant is forfeited the example concludes that the benefit to the employee is subject_to a substantial_risk_of_forfeiture to the extent the employee’s child has not met the condition to become entitled to a grant in this case if the policy is not renewed with the renewal premium paid the renewal commission is forfeited as we understand from what you have submitted to us the taxpayer maintains that based on company-wide persistency rates for life_insurance policies the value of the renewal_commissions that an agent will receive when all the policies are aggregated is generally predictable therefore the argument concludes the commissions are not subject_to a substantial_risk_of_forfeiture allowing the taxpayer postu-140193-05 to apply sec_31_3121_v_2_-2 to include the value of the aggregate projected renewal_commissions at the time the agent retires rather than waiting until each policy is renewed and each commission is actually paid under the policies as we understand them the legal right to deferred_compensation accrues with respect to each individual policy each commission has a separate date on which the conditions related to the purpose of the transfer of the renewal_commissions will have been satisfied because any amount deferred under the nonqualified_deferred_compensation_plan has its genesis in the sale of a particular insurance_policy the substantial_risk_of_forfeiture of the rights to that amount deferred is determined with respect to the renewal of that particular policy rather than whether the agent may be entitled to other deferred amounts arising from other insurance policies although an actuary may be able to estimate a present_value for an agent’s right to the bundle of renewal_commissions he or she is eligible to receive at retirement the regulations look to when the condition that relates to the purpose of the transfer - in this case the transfer of the right to the renewal commission on the policy - is satisfied and to whether the risk of forfeiture is substantial the determination of when the condition is satisfied must be made separately for each policy as we understand from your submission and the taxpayer’s response to an information_document_request the taxpayer cites examples and under sec_31 v - e of the regulations as support for its position that the risk that each policy will not be renewed merely affects the value of the amount deferred and does not constitute a substantial_risk_of_forfeiture examples and are primarily intended to illustrate principles other than whether there existed a substantial_risk_of_forfeiture in certain conditional transfers and thus do not provide the best guidance on determining whether there exists a substantial_risk_of_forfeiture under sec_83 principles example illustrates the timing of inclusion in wages for fica purposes for an amount of deferred_compensation that is not initially reasonably ascertainable and example illustrates how amounts of deferred_compensation may be allocated to deferral years examples and make implicit assumptions that no substantial_risk_of_forfeiture exists but do not provide sufficient facts to explain why no substantial_risk_of_forfeiture exists unlike the facts of the examples in the sec_83 regulations which are intended to illustrate when a substantial_risk_of_forfeiture exists the facts of examples and do not align with the facts of this case in the case of these renewal_commissions the condition related to the purpose of the transfer renewal of the policy is very closely tied to the purpose of the transfer whereas the connection between the condition profitability and the purpose of the transfer is unclear in examples and as noted above the company has also indicated that there is a close correlation between the condition and the individual employee’s efforts the company depends on the agent’s judgment and initiative to sell policies to policyholders who are likely to renew in examples and the degree to which there is a connection between the condition profitability and the efforts of the employee is unclear based on the facts presented in the examples the purpose of the transfer could be to provide compensation from profits that will not be available until some point in the future for services that may or may not correlate strongly to the existence of profits by comparison the examples in the sec_83 regulations postu-140193-05 illustrate circumstances where there is an apparent correlation between the forfeiture condition and the purpose of the transfer based on the information furnished we conclude that the retired agents’ rights to the renewal_commissions constitute nonqualified_deferred_compensation_plans under the specific facts and circumstances here and taking into consideration the examples under both the sec_83 regulations and the sec_3121 regulations we further conclude that the agent’s right to each renewal commission is subject_to a substantial_risk_of_forfeiture until the underlying policy is renewed and the renewal premium is paid which is approximately when the renewal_commissions are paid to the retired agent issue whether the irs should approve corporation x’s refund claims for fica_taxes paid with respect to renewal_commissions paid to retired agents following from the analysis of issue sec_1 and the irs should deny in full corporation x’s claims for refund of fica_taxes case development hazards and other considerations --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- 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--------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call --------------------- if you have any further questions


internal_revenue_service number info release date date uilc cc dom p si 1-cor-106531-00 we are responding to your correspondence requesting relief in order to establish s_corporation status for the taxable_year subsequent correspondence explains that you wish to withdraw your request for information about obtaining late s_corporation relief this letter provides information relating to your request in the event you decide to pursue your initial objective please refer to announcement copy enclosed which provides guidance on seeking relief for late s_corporation elections and inadvertent invalid s_corporation elections generally to request relief for a late or invalid s_corporation_election you must request a private_letter_ruling from the national_office the procedures for requesting a private_letter_ruling are set out in revproc_2000_1 copy enclosed in addition revproc_2000_1 requires taxpayers to submit a user_fee along with their ruling_request the standard user_fee for a private_letter_ruling is dollar_figure however taxpayers with gross_income of less than dollar_figure million on their last-filed tax_return qualify for a reduced user_fee in the amount of dollar_figure if you are eligible to use the reduced fee provision you must include the statement described in b b of appendix a with your request please review appendix b for a sample format for requesting a private_letter_ruling if you decide to submit a formal request for a private_letter_ruling please explain why your form_2553 was filed late provide documents supporting your intention to be an s_corporation from inception and include the proper user_fee please refer your request to our office by adding the following to the address attn cc dom corp t p o box ben franklin station washington dc direct to cc dom p si br room please keep this letter with your tax records and feel free to provide a copy of it to your authorized representative we hope that the above information proves helpful sincerely yours signed dianna k miosi dianna k miosi chief branch office of the assistant chief_counsel passthroughs and special industries enclosures ann revproc_2000_1


cca_2018121413244544 id uilc number release date from sent friday date pm to cc bcc subject re amendments to tax_court rules_of_practice and procedure yes if you have that information for the signatory signed ----------------------- ----------------------- ------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------- ---------------------------------------------


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 ita b01 plr-107043-14 date date legend taxpayer foundation state member member facility facility facility certificate commissioner services condition condition condition a b c d e f g h -------------------------------------------------------------------- --------------------------------------------- ----------- ------------------------------------- ---------------------------------------------------- ------------------------------------------- ---------------------------------------- ---------------------------------------------------------- ----------------------------------- -------------------------------------- ---------------------------------------------------- -------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- ---------------- ------------------ -------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- ------------------------------------------------------------------ ---- ---- ---- ---- ---- ------------ ------------ ------------ plr-107043-14 dear --------------- this responds to your letter dated date requesting rulings on behalf of taxpayer taxpayer requests a ruling on the proper treatment of certain payments made to charitable organizations under sec_162 and sec_170 of the internal_revenue_code rulings requested taxpayer’s payments which are required_by_law to be made to charitable organizations including payments made to foundation are not deductible under sec_170 these payments are deductible ordinary and necessary business_expenses under sec_162 facts taxpayer is a state limited_liability_company treated as a partnership for federal_income_tax purposes taxpayer began operating in as a joint_venture between member and member member is a nonprofit corporation exempt from taxation under sec_501 and owns a of taxpayer member is a professional_corporation that owns the remaining b taxpayer offers services at three facilities facility facility and facility in state owners and sponsors of identified facilities like that of taxpayer are required to obtain a certificate from the commissioner the commissioner is authorized to impose three conditions on the recipient of a certificate in order for the recipient to continue to operate condition condition and condition when a service provider’s certificate is subject_to condition the provider may satisfy its conditions with direct payments to organizations approved by department to receive and distribute contributions satisfying certificate conditions taxpayer is subject_to condition and condition together the combined value of satisfying both conditions for facility must equal at least c of gross revenue derived from operating specific equipment at that facility covered by the certificate for facility the combined value must equal at least d and for facility the combined value must equal at least e taxpayer’s annual shortfall between the required_percentage and its actual services provided to satisfy the conditions varies from year to year to make up for the shortfall and satisfy the conditions placed on its certificate taxpayer makes cash contributions to qualified sec_501 organizations for taxpayer paid dollar_figuref in qualifying cash contributions for it paid dollar_figureg and for it paid dollar_figureh the plr-107043-14 majority of these cash contributions were paid to foundation a non-stock not-for-profit corporation that is also the parent of member law and analysis sec_170 of the code provides subject_to certain limitations a deduction for contributions and gifts to or for_the_use_of organizations described in sec_170 payment of which is made within the taxable_year a contribution for purposes of sec_170 of the code is a voluntary transfer of money or property that is made without receipt or expectation of financial or economic benefit commensurate with the amount of the transfer transfers of property that bear a direct relationship to the taxpayer’s trade_or_business and that are made with a reasonable expectation of financial return commensurate with the amount of the transfer may constitute allowable deductions under sec_162 as trade_or_business_expenses see sec_1_170a-1 of the income_tax regulations and h_r rep no cong 2d sess a44 sec_162 of the code allows a deduction for all the ordinary and necessary expenses of carrying_on_a_trade_or_business see also sec_1_162-1 of the income_tax regulations sec_162 provides that a deduction will not be permitted under sec_162 for a contribution or gift that would be allowed as a charitable deduction were it not for the limitations of sec_170 sec_1_162-15 of the regulations states that the limitation provided in sec_162 of the code applies to payments which are in fact contributions or gifts to organizations described in sec_170 of the code revrul_72_314 1972_1_cb_44 provides that whether payments to a charitable_organization are deductible pursuant to sec_170 or pursuant to sec_162 depends upon whether the payments are completely gratuitous or whether they bear a direct relationship to the taxpayer's business and are made with a reasonable expectation of a financial return commensurate with the amount of the payment see also revrul_77_124 1977_1_cb_39 and revrul_63_73 1963_1_cb_35 taxpayer’s contributions which it makes to satisfy the conditions of its certificate under the law of state are not deductible under sec_170 the payments are not voluntary nor are they completely gratuitous as a provider of services in state taxpayer is subject_to the regulatory authority of the commissioner and must satisfy the conditions of its certificate to continue to operate the payments are no more than c of taxpayer’s gross revenue and are made annually in order to comply with rules of the governmental entity regulating taxpayer’s right to conduct its business operations in state failure to make those payments could jeopardize taxpayer’s continued business operations in state the payments therefore bear a direct relationship to the taxpayer’s plr-107043-14 business and are made with a reasonable expectation of financial return commensurate with the amount spent accordingly we conclude that the contributions are ordinary and necessary business_expenses that are deductible under sec_162 conclusions taxpayer’s payments which are required_by_law to be made to charitable organizations including payments made to foundation are not deductible under sec_170 these payments are deductible ordinary and necessary business_expenses under sec_162 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling plr-107043-14 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely lewis k brickates chief branch office of associate chief_counsel income_tax accounting


t c no united_states tax_court ivan a jasko and judith l jasko petitioners v commissioner of internal revenue respondent docket no filed date ps' principal_residence was destroyed by fire they recovered insurance proceeds based on replacement cost resulting in a gain ps incurred legal fees in obtaining recovery_of those proceeds and claimed a deduction for the amount of those fees paid during the taxable_year ps assert that the insurance_policy was held_for_the_production_of_income so that the deduction is allowable under sec_212 i r c held under the origin of claim doctrine ps' residence was the source of their gain and the legal fees represented capital expenditures constituting a reduction in their gain and not currently deductible under sec_212 i r c l randolph harris for petitioners allan d hill for respondent opinion tannenwald judge respondent determined a deficiency in petitioners' federal_income_tax in the amount of dollar_figure the issue is whether petitioners may deduct legal fees paid during and incurred as a result of a dispute with their insurance carrier over the replacement cost of their residence which had been destroyed by fire all section references are to the internal_revenue_code in effect for the year in issue all the facts have been stipulated the stipulation of facts and attached exhibits are incorporated herein by this reference at the time their petition was filed petitioners resided in piedmont california on date petitioners' then principal_residence in oakland california the oakland hills residence was destroyed by a firestorm petitioners had lived in that residence continuously from the time they purchased it in until its destruction the residence was not held either for rental or sale during at the time of its destruction the residence and its contents were insured against fire loss by republic insurance_company republic the insurance_policy provided that in the event of a loss petitioners were to receive the replacement cost of the residence on date republic made an interim payment to petitioners in an amount based on its adjuster's determination that the actual cash_value of the home was dollar_figure per square foot during petitioners engaged the services of mcinerney dillon p c attorneys at law mcinerney dillon to resolve a conflict with republic as to replacement cost during petitioners also hired a firm to draw plans for their home and to estimate the replacement cost of the oakland hills residence such replacement cost was estimated to be dollar_figure on date republic increased its estimate of replacement cost to dollar_figure per square foot and made a further payment to petitioners based on this estimate the terms of the republic policy provided for a form of arbitration in the event of a dispute over the replacement cost of insured property pursuant to that procedure petitioners and republic each chose an appraiser and the two appraisers chose an umpire an appraisal hearing ensued over replacement cost and a decision was reached that the replacement cost of the home was dollar_figure during date republic issued its check in full satisfaction of the remaining balance due upon petitioners' insurance claim in pursuing their claim with republic petitioners incurred legal fees with mcinerney dillon of dollar_figure during and petitioners paid dollar_figure of that amount during which they claimed as a miscellaneous deduction on their return at the outset we note that we have no direct evidence that petitioners realized taxable gain ie an excess of the insurance proceeds over cost from their receipt of replacement cost under the insurance_policy sec_1033 see 417_us_673 40_tc_84 however neither party has suggested that a gain is not involved herein and we think that the existence of a gain is a permissible premise upon which to base our analysis and decision herein the issue before us is whether petitioners are entitled to deduct the dollar_figure legal fees under sec_212 which provides in pertinent part in the case of an individual there shall be allowed as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable year-- for the production_or_collection_of_income respondent contends that petitioners' home was not held_for_the_production_of_income and thus the legal fees incurred by petitioners were incurred to recover a loss not for the production_of_income and are therefore not deductible no gain was reported on petitioners' return based on the payment received in that year it appears that petitioners were waiting until the expiration of the applicable_period in which to replace the residence without current recognition of gain see sec_1033 petitioners concede that their residence was not held_for_the_production_of_income but contend that the insurance_policy should be separated from the ownership of the residence and that in this context their expenses to recover full replacement cost of their residence fall within the purview of sec_212 the initial element in determining deductibility is the application of the origin of the claim doctrine articulated by the supreme court in 372_us_39 and applied in 397_us_572 and 397_us_580 we are not prepared to accept petitioners' argument that we separate the insurance_policy and the dispute thereunder from petitioners' ownership of the residence which was concededly a capital_asset not held_for_the_production_of_income the policy was designed to reimburse petitioners against economic loss arising from the occurrence of defined contingencies represented by the amount necessary to replace the residence see eg 66_tc_1068 affd 572_f2d_1190 7th cir but for the residence and the fire the insurance_policy would be meaningless under such circumstances the residence is the origin of the situation that caused petitioners to incur the legal fees compare 78_tc_910 where we refused to separate a lawsuit seeking adjustment of the purchase_price of stock from the earlier sale of the stock see also 86_tc_190 cf 85_tc_934 that the insurance proceeds produced a gain in and of itself is insufficient to require a different conclusion the existence of that gain however raises the question of how the legal fees should be treated it is well established that expenses that are incurred in either the acquisition or disposition of a capital_asset are nondeductible capital expenditures sec_263 see wagner v commissioner supra pincite the destruction of petitioners' residence by the firestorm in effect constituted a disposition of the residence in return for payment of the proceeds of the insurance in this context the treatment of the legal fees in condemnation cases provides a useful analogy a property owner's expenses_incurred to increase a condemnation_award are nondeductible capital expenditures under sec_263 that serve to reduce the amount of the taxable gain mosby v commissioner supra pincite 60_tc_694 affd per curiam 511_f2d_1162 4th cir we think that petitioners' legal expenses should be accorded the same treatment since destruction is in a very real sense the equivalent of an involuntary_conversion in either case the taxpayer loses the property we note that our treatment of the see also myers v commissioner tcmemo_1988_160 destruction of petitioners' residence as a disposition finds support in the involuntary_conversion provisions of sec_1033 which treat casualties in the same manner as condemnations and in the provisions dealing with the limitation of the deduction for casualty losses under sec_165 which specify that personal casualty gains in excess of losses shall be treated as gains from the sale of the property we also note that no part of the gain from such disposition of petitioners' residence appears on their return and indeed may never be includable in income if petitioners take advantage of the replacement provisions of sec_1033 eg if petitioners die before disposing of the replacement home see supra note this being the case the disallowance of the deduction of the legal fees herein is comparable to the situation involved in 180_fsupp_373 where legal expenses of collecting insurance proceeds on a building destroyed by fire during a sec_337 liquidation were denied petitioners rely heavily on 20_tc_272 affd per curiam 213_f2d_318 2d cir in that case the taxpayer was allowed to deduct legal and adjusters' fees expended to collect insurance when the taxpayer's building was partially destroyed by fire the building was used in the taxpayer's business and the court observed that the expenditures arose in the ordinary course of that business furthermore a loss was involved a point which the court emphasized by observing that the expenses reduced the amount of the loss and consequently the deduction indeed the court suggested that a gain might involve different treatment see ticket office equipment co v commissioner t c pincite n finally it is not without significance that ticket office equipment long antedated the articulation by the supreme court of the origin of the claim doctrine see supra p thus ticket office equipment is clearly distinguishable as is 254_f2d_480 10th cir which also involved business property we hold that the legal expenses represent capital expenditures nondeductible under sec_263 and an offset against the gain represented by the insurance proceeds none of which petitioners recognized in the taxable_year before us decision will be entered for respondent


internal_revenue_service number release date index number 468a -------------------------- --------------------------------------------------- ----------------------------------- ----------------------------- ------------------------------------------------ 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 b6 plr-117450-06 date april legend taxpayer plant parent director location commission a commission b method fund order dear ------------------ --------------------------------------------------------------------------------- ------------------------------------- ----------------------------------------------------------- ---------------------------------- -------------------------------- -------------------------------- ---------------------------------------------------------------------------------- ----------------------------------- ------------------------------------------------- ----------------------------------------------------- ---------------------- ------------------------------------------- ----------------------------------------------------------- this letter responds to your request dated date for a schedule of deduction amounts and a revised schedule of ruling amounts pursuant to sec_468a of the internal_revenue_code and sec_1_468a-8t of temporary income_tax regulations you also provided additional information by letter dated date taxpayer was previously granted schedules of ruling amounts most recently on date information was submitted pursuant to sec_1_468a-3t e by letter dated date taxpayer withdrew the request for a revised schedule of ruling amounts taxpayer represents the facts and information as follows plr-117450-06 the taxpayer a subsidiary of the parent is included in a consolidated_return filed by the parent the taxpayer is the operator and owner of ----- percent interest of the plant the plant is situated at the location the plant’s amended operating license is scheduled to expire on ------------------- the estimated base cost for decommissioning the plant is based on an independent study and the proposed method of decommissioning the plant is the method the taxpayer is subject_to the jurisdiction of commission a -------- and commission b ------ in the order commission a decreased the decommissioning costs collected for the plant to dollar_figure-- effective ----------------------because of the impact of the extended operating license on continued earnings on the assets of the fund and the associated nonqualified_fund commission a determined that based upon the estimates used in the proceeding the amounts presently held in the fund and the associated nonqualified_fund are anticipated to grow to adequately satisfy the liability for decommissioning the plant at this time the taxpayer does not seek ruling amounts with respect to commission b’s jurisdiction based upon the assumptions adopted by commission a in the order it is estimated that the fund assets will earn an after-tax rate of return of -- percent the total cost of decommissioning the plant is estimated to be dollar_figure------------------in ------- dollars this base cost of decommissioning the plant is escalated at a -----percent yearly rate resulting in a total future cost to the taxpayer of decommissioning the plant of dollar_figure--------------------in ------- dollars under ratemaking assumptions used during the first proceeding before commission a the plant would no longer be included in rate base in ------- in the prior schedule of ruling amounts issued under sec_468a of the code as in effect prior to the estimated_useful_life of the plant is ---- years ------------- and the estimated period for which the fund is to be in effect is ---- years ------------- thus the percentage of the total estimated costs qualifying for deduction in the schedule of ruling amounts under prior_law was --------percent sec_468a as amended by the energy tax incentives act of the act publaw_109_58 119_stat_594 allows an electing taxpayer to deduct payments made to a nuclear decommissioning reserve fund sec_468a limits the amount that may be paid into the nuclear decommissioning fund in any year to the ruling_amount applicable to that year prior to the changes made by the act the deduction was limited to the lesser_of the amount included in the utility’s cost of service for ratemaking purposes or the ruling_amount generally as a result only regulated utilities could take advantage of sec_468a plr-117450-06 the act amendment of sec_468a eliminated the cost-of-service limitation accordingly decommissioning costs of an unregulated nuclear power plant may now be funded by deductible contributions to a qualified nuclear decommissioning fund sec_468a provides that no deduction shall be allowed for any payment to the nuclear decommissioning fund unless the taxpayer requests and receives from the secretary a schedule of ruling amounts the ruling_amount for any_tax year is defined under ' 468a d as the amount which the secretary determines to be necessary to fund the total nuclear decommissioning cost of that nuclear power plant over the estimated_useful_life of the plant this term is further defined to include the amount necessary to prevent excessive funding of nuclear decommissioning costs or funding of these costs at a rate more rapid than level_funding taking into account such discount rates as the secretary deems appropriate prior to the changes made by the act deductible contributions were limited to the amount necessary for an electing taxpayer to fund the plant’s post-1983 nuclear decommissioning costs determined as if decommissioning costs accrued ratably over the estimated_useful_life of the plant provided that the taxpayer elected to establish a fund in prior_law also did not allow a taxpayer electing to establish a fund later than to contribute to that fund any amount in excess of that amount necessary to fund the ratable portion of the plant’s nuclear decommissioning costs beginning in the year the fund is established sec_468a now allows a taxpayer to contribute to a nuclear decommissioning fund the entire cost of decommissioning the plant including both the pre-1984 amount that was denied under the law prior to the act as well as any amount attributable to any year after in which a taxpayer had not established a fund under sec_468a sec_468a provides that the deduction for the contribution of the previously-excluded amount is allowed ratably over the remaining useful_life of the nuclear plant sec_468a provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of a taxable_year if the payment is made on account of such taxable_year and is made within months after the close of the tax_year this section applies to payments made pursuant to either a schedule of ruling amounts or a schedule of deduction amounts sec_1_468a-1t a provides that an eligible_taxpayer may elect to deduct nuclear decommissioning costs under sec_468a of the code an eligible_taxpayer as defined under ' 468a-1t b of the regulations is a taxpayer that has a qualifying interest in any portion of a nuclear power plant a qualifying interest is among other things a direct ownership_interest plr-117450-06 sec_1_468a-2t b provides that the maximum amount of cash payments made or deemed made to a nuclear decommissioning fund during any_tax year shall not exceed the ruling_amount applicable to the nuclear decommissioning fund for such taxable_year the limitation on the amount of cash payments for purposes of sec_1 468a- 2t b does not apply to any special transfer permitted under sec_1_468a-8t sec_1_468a-3t a provides that in general a schedule of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that over the tax years remaining in the funding_period as of the date the schedule first applies will result in a projected balance of the nuclear decommissioning fund as of the last day of the funding_period equal to and in no event more than the amount of decommissioning costs allocable to the fund sec_1_468a-3t a provides that to the extent consistent with the principles and provisions of this section each schedule of ruling amounts shall be based on reasonable assumptions concerning the after-tax rate of return to be earned by the amounts collected for decommissioning the total estimated cost of decommissioning the nuclear plant and the frequency of contributions to a nuclear decommissioning fund for a taxable_year under ' 468a-3t a the internal_revenue_service shall provide a schedule of ruling amounts identical to the schedule proposed by the taxpayer but no such schedule shall be provided by the service unless the taxpayer's proposed schedule is consistent with the principles and provisions of that section sec_1_468a-3t a provides that the taxpayer bears the burden of demonstrating that the proposed schedule of ruling amounts is consistent with the principles of the regulations and that it is based on reasonable assumptions that section also provides additional guidance regarding how the service will determine whether a proposed schedule of ruling amounts is based on reasonable assumptions for example if a public_utility commission established or approved the currently applicable rates for the furnishing or sale by the taxpayer of electricity from the plant the taxpayer can generally satisfy this burden_of_proof by demonstrating that the schedule of ruling amounts is calculated using the assumptions used by the public_utility commission in its most recent order in addition a taxpayer that owns an interest in a deregulated nuclear plant may submit assumptions used by a public_utility commission that formerly had regulatory jurisdiction over the plant as support for the assumptions used in calculating the taxpayer’s proposed schedule of ruling amounts with the understanding that the assumptions used by the public_utility commission may be given less weight if they are out of date or were developed in a proceeding for a different taxpayer the use of other industry standards such as the assumptions underlying the taxpayer's most recent financial assurance filing with the nrc are described by the temporary regulations as an alternative means of demonstrating that the taxpayer has calculated its proposed schedule of ruling amounts on a reasonable basis section plr-117450-06 468a-3t a further provides that consistency with financial_accounting statements is not sufficient in the absence of other supporting evidence to meet the taxpayer’s burden_of_proof sec_1_468a-3t b provides that in general the ruling_amount for any_tax year in the funding_period shall not be less than the ruling_amount for any earlier tax_year under ' 468a-3t c the funding_period begins on the first day of the first tax_year for which a deductible payment is made to the nuclear decommissioning fund and ends on the last day of the taxable_year that includes the last day of the estimated_useful_life of the nuclear power plant to which the fund relates sec_1_468a-3t c provides rules for determining the estimated_useful_life of a nuclear plant for purposes of sec_468a in general under sec_1_468a-3t c i a if the plant was included in rate base for ratemaking purposes for a period prior to date the date used in the first such ratemaking proceeding as the estimated date on which the nuclear plant will no longer be included in the taxpayer’s rate base is the end of the estimated_useful_life of the nuclear plant sec_1_468a-3t c i b provides that if the nuclear plant is not described in sec_1_468a-3t c i a the last day of the estimated_useful_life of the nuclear plant is determined as of the date the plant is placed_in_service under sec_1_468a-3t c i c any reasonable method may be used in determining the estimated_useful_life of a nuclear power plant that is not described in sec_1_468a-3t c i a sec_1_468a-3t d provides that the amount of decommissioning costs allocable to a nuclear decommissioning fund is the taxpayer's share of the total estimated cost of decommissioning the nuclear power plant sec_1_468a-3t d provides that a taxpayer's share of the total estimated cost of decommissioning a nuclear power plant equals the total estimated cost of decommissioning such plant multiplied by the taxpayer's qualifying interest in the plant sec_1_468a-3t e enumerates the information required to be contained in a request for a schedule of ruling amounts filed by a taxpayer in order to receive a ruling_amount for any taxable_year sec_1_468a-3t f provides that any taxpayer that has previously obtained a schedule of ruling amounts can request a revised schedule of ruling amounts such a request must be made in accordance with the rules of ' 468a-3t e the internal_revenue_service shall not provide a revised schedule of ruling amounts applicable to a taxable_year in response to a request for a schedule of ruling amounts that is filed after the deemed payment deadline date for such taxable_year plr-117450-06 sec_1_468a-3t f v provides in part that if a taxpayer is required to request a revised schedule of ruling amounts and each ruling in the revised schedule would equal zero the taxpayer may instead of requesting a revised schedule begin treating the ruling amounts under its most recent schedule as equal to zero dollars sec_1_468a-8t a provides that under the provisions of sec_468a as described above a taxpayer may make a special transfer of cash or property to the nuclear decommissioning fund this special transfer is not subject_to the sec_468a limitation the amount of the special transfer is the present_value of the pre-2005 nonqualifying percentage of the estimated future costs of decommissioning the nuclear plant that was disallowed under sec_468a prior to the act sec_1_468a-8t a defines the pre-2005 nonqualifying percentage as equal to percent reduced by the sum of the qualifying percentage used in determining the taxpayer’s last schedule of ruling amounts for the fund under sec_468a as it existed prior to the act and the percentage transferred in any previous special transfer sec_1_468a-8t a provides that the taxpayer is not required to transfer the entire amount eligible for the special transfer in one year but must take any prior special transfers into account in calculating the pre-2005 qualifying percentage further pursuant to sec_1_468a-8t c a taxpayer making a special transfer in more than one year must request a new schedule of deduction amounts in connection with each special transfer sec_1_468a-8t b provides that the deduction for the special transfer is allowed ratably over the remaining useful_life of the nuclear plant under sec_1 468a- 8t b iii the deduction for property contributed in a special transfer is limited to the lesser_of the fair_market_value of the property or the taxpayer’s basis in the property under sec_1_468a-8t b the taxpayer recognizes no gain_or_loss on the special transfer of property the taxpayer’s basis in the fund is not increased by reason of the special transfer of property and the fund’s basis in the property transferred in the special transfer is the same as the transferee’s basis in that property immediately prior to the special transfer sec_1_468a-8t c provides that taxpayer may not make a special transfer to a qualified nuclear decommissioning fund unless the taxpayer requests from the irs a schedule of deduction amounts in connection with such transfer a request for a schedule of deduction amounts may be made in connection with a request for a schedule of ruling amounts but in such case the calculations for both the schedule of ruling amounts and the schedule of deduction amounts must be separately_stated as stated above prior to the changes made by the act deductible contributions were limited to the lesser_of the amount necessary to fund the plant’s post-1983 nuclear decommissioning costs or the amount necessary to fund the plant’s plr-117450-06 decommissioning costs for that portion of the plant’s estimated_useful_life for which a fund had been established under that prior_law taxpayer was allowed to contribute --- --------percent of the amounts necessary to fully decommission its share of the plant sec_468a allows a taxpayer to contribute to the nuclear decommissioning fund the pre-1984 amount that was denied under the law prior to the act thus taxpayer is able to contribute the additional --------percent of the amounts necessary to decommission its ownership share of the plant taxpayer’s share of the total future decommissioning costs is dollar_figure-------------------- ------- dollars and the present_value of that amount is dollar_figure----------------- ------- dollars the --------percent of dollar_figure------------------is dollar_figure---------- ----------------- ------- dollars we have examined the representations and information submitted by the taxpayer in relation to the requirements set forth in ' 468a and the regulations thereunder based solely upon these representations of the facts we conclude that the taxpayer may make a special transfer of dollar_figure----------------in ------- and may ratably deduct the amount contributed from taxable_year ------- to ------- as set forth below schedule of deduction amounts year deduction amount -----------------each year dollar_figure--------------- the special transfer amount stated above is the maximum amount permitted to be transferred to the fund under sec_468a if taxpayer transfers a lesser amount to the fund the taxpayer may deduct that lesser amount ratably over the period of years described above further in the event that taxpayer transfers a lesser amount in ----- in order to make an additional special transfer in a later year including a special transfer of the difference between the special transfer amount stated above and the lesser amount transferred in ------- taxpayer must request a new schedule of deduction amounts and in that request must take the ------- transfer into account and recalculate the pre-2005 qualifying percentage in such request we note that if the taxpayer elects to make a special transfer of property for all or a portion of this special transfer the amount of the transfer is the lesser_of the fair_market_value of the property transferred or the basis of the property in the hands of the taxpayer immediately prior to the transfer in either event the deduction of the taxpayer with respect to the property is limited to the taxpayer’s basis in the property since the actions of commission a in reducing decommissioning collections to dollar_figure- --- results in a revised schedule of ruling amounts equal to dollar_figure-- in each year the plr-117450-06 taxpayer may pursuant to sec_1_468a-3t f v treat the ruling amounts in its most recent schedule as equal to ------ dollars effective in ------- and subsequent years except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described above this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer’s representative we are also sending a copy of this letter_ruling to the director pursuant to ' 468a-7t a a copy of this letter must be attached with the required election statement to the taxpayer's federal_income_tax return for each tax_year in which the taxpayer claims a deduction for payments made to the fund sincerely peter c friedman senior technician reviewer branch passthroughs special industries


internal_revenue_service number release date u i l department of the treasury washington dc person to contact telephone number refer reply to cc psi 5-plr-135689-02 date date legend taxpayer state a project city c authority d authority e agreement f agreement g partner partner partner partner a b c d e f g h i j k l m n o dear this letter responds to your authorized representative’s letter dated date submitted on behalf of taxpayer requesting a ruling that redemption of the project’s tax-exempt_financing at any time on or after the date on which the project is placed_in_service for purposes of sec_42 of the internal_revenue_code will not preclude a determination that the project was financed by tax-exempt_bonds for purposes of sec_42 taxpayer has provided the following representations facts taxpayer a state a limited_partnership was formed for the purpose of acquiring constructing owning and operating a multi-family rental housing development known as project located in city c and consisting of e affordable dwelling units the general partners of project are partner and partner the limited partners are partner and partner proceeds from the tax-exempt_bonds representing percent or more of the aggregate basis of project including the land on which it is located will be expended on the project costs on or before the date on which project will be placed_in_service further such expended amount will be equal to or exceed percent of the aggregate basis of the project as of the end of the first year of the credit_period the project costs include the following land construction cost aggregate basis dollar_figurea dollar_figureb dollar_figurec the tax-exempt_bonds will be redeemed on or after the date the project will be placed_in_service for all purposes under sec_42 furthermore all of the proceeds from the tax-exempt_bonds will be expended on project prior to redemption of the bonds project is expected to be place in service on or before d the taxpayer will submit a final cost certification to the appropriate state housing_credit_agency on or before d and will elect the tax_year ending d as the first year of the credit_period the tax-exempt_bonds were issued by authority d under the cap imposed by sec_146 to the project on f in the amount of dollar_figureg the proceeds from the tax-exempt_bonds will be used to fund a construction loan bearing interest at h percent a portion of the construction loan in the amount of dollar_figurei will convert to a permanent loan bearing interest of j percent for a term of k years other project financing includes a construction permanent loan in the amount of dollar_figurel bearing interest equal to the federal applicable_rate for a term of k years from authority e and a permanent loan in the amount of dollar_figurem bearing interest of n percent for a term of k years from authority d the permanent loan agreement f requires that the proceeds of the bond issuance be used to make a mortgage loan for the purpose of financing the construction and land acquisition of project furthermore agreement f requires the mandatory redemption in part in the amount necessary to reduce the principal_amount of the bonds to dollar_figurei or such lesser amount as necessary to satisfy the conditions set forth in agreement g pursuant to the terms of agreement g the taxpayer shall use all capital provided by the limited_partner to repay a portion of the bonds to ensure compliance under agreements f and g the taxpayer is compelled to redeem a portion of the bonds on or after the date project will be placed_in_service for purposes of sec_42 the permanent loan will be used to redeem a portion of the bonds upon admission into the taxpayer partner and partner acquired an o percent interest in the taxpayer which among other things will provide partner and partner with a proportionate share of the low-income_housing tax_credits provided to project under sec_42 discussion sec_42 provides a tax_credit for investment in low-income_housing buildings placed_in_service after date sec_42 provides that the amount of credit determined under sec_42 for any taxable_year with respect to any building shall not exceed the housing_credit_dollar_amount allocated to such building under sec_42 sec_42 provides that an allocation generally shall be taken into account under sec_42 only if it is made not later than the close of the calendar_year in which the building is placed_in_service sec_42 provides that the aggregate housing_credit_dollar_amount which a housing_credit_agency may allocate for any calendar_year is the portion of the state housing_credit ceiling allocated under sec_42 for such calendar_year to such agency sec_42 provides that sec_42 does not apply to any portion of the credit otherwise allowable under sec_42 which is attributable to eligible_basis financed by any obligation the interest on which is exempt from tax under sec_103 if - i such obligation is taken into account under sec_146 and ii principal payments on such financing are applied within a reasonable period to redeem obligations the proceeds of which were used to provide such financing sec_42 provides that if percent or more of the aggregate basis of any building and the land on which the building is located is financed by a tax-exempt_obligation described in sec_42 sec_42 does not apply to any portion of the low-income_housing_credit allowable under sec_42 with respect to such building in the present case taxpayer represents that the proceeds from the tax-exempt_bonds constituting percent or more of the aggregate basis of project including the land on which it is located will be expended on project costs on or before the date on which project will be placed_in_service furthermore such expended amount from the proceeds of the tax-exempt_bonds will be equal to or exceed percent of the aggregate basis of the project as of the end of the first year of the tax_credit period accordingly based solely on the representations and relevant law as set forth above we conclude that the redemption of the tax-exempt_bonds at any time on or after the date on which project is placed_in_service for purposes of sec_42 will not preclude a determination that project was financed with tax-exempt_bonds under sec_42 no opinion is expressed or implied regarding the application of any other provisions of the code or regulations including sec_103 and specifically we express no opinion on whether the project qualifies for the low-income_housing tax_credit under sec_42 the validity of costs included in the project’s basis whether and when the 50-percent aggregate basis requirement in sec_42 is met or whether any other requirement of sec_42 is met this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file a copy of this letter is being sent to taxpayer’s authorized legal_representative sincerely harold burghart senior adviser branch passthroughs and special industries enclosure copy of letter copy for purposes