internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc dom corp-plr127294-00 date date distributing controlled state a shareholder y z dear this is in reply to a letter dated date in which rulings were requested as to the federal_income_tax consequences of a proposed transaction additional information was submitted in a letter dated date the facts submitted for consideration are substantially as set forth below distributing is a state a corporation that has elected to be treated as a subchapter_s_corporation under sec_1361 distributing is engaged in the y business shareholder owns z of distributing’s stock controlled is a newly formed corporation financial information has been received indicating that distributing has had gross_receipts and operating_expenses representative of the active_conduct_of_a_trade_or_business for each of the past five years disputes have arisen between shareholder and the other four shareholders of distributing regarding the direction of the y market and how to respond as a result plr127294-00 of these disputes shareholder was removed as an officer and director of distributing to resolve these management disputes the following transactions have been proposed i ii distributing will transfer z of its assets and liabilities the transferred property to controlled in exchange for all of controlled’s stock immediately_after_the_transfer of the transferred property to controlled distributing will distribute all of the controlled stock to shareholder in exchange for all of shareholder 1's distributing stock in connection with the proposed transaction it has been represented that a b c d e f the fair_market_value of controlled stock to be received by shareholder will be approximately equal to the fair_market_value of the distributing stock surrendered by him in the exchange no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing the gross assets of distributing used in the y business have a market_value which is in excess of five percent of its gross assets and after the proposed transaction the gross assets of distributing and controlled which are used in the y business will have a fair_market_value which is in excess of five percent of each of distributing’s and controlled’s gross assets the five years of financial information submitted on behalf of distributing is representative of the corporation’s present operation and with regard to such corporation there have been no substantial operational changes since the date of the last financial statements submitted following the proposed transaction distributing and controlled will each continue independently and with its separate employees the active_conduct of its share of all the integrated activities of the business conducted by distributing prior to the proposed transaction the distribution of the stock of controlled is carried out for the following corporate business_purpose to separately allocate the management functions of the y business among the shareholders of distributing to resolve management disputes the distribution of the stock of controlled plr127294-00 g h i j k l is motivated in whole or substantial part by this corporate business_purpose distributing is an s_corporation within the meaning of sec_1361 controlled will elect to be an s_corporation within the meaning of sec_1361 on the first available date after the proposed transaction and there is no intent to revoke or otherwise terminate the s_corporation_election of controlled there is no plan or intention by the shareholders or security holders of distributing to sell exchange transfer by gift or otherwise dispose_of any of their stock in or securities of distributing or controlled after the proposed transaction there is no plan or intention by distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the proposed transaction other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 distributing and controlled have no accumulated_earnings_and_profits at the beginning of their respective taxable years distributing and controlled will have no current_earnings_and_profits as of the date of the distribution no distribution_of_property by distributing immediately before the transaction would require recognition of gain resulting in current_earnings_and_profits for the taxable_year of the distribution and distributing is not aware of nor is distributing planning or intending an event that will result in distributing or controlled having positive current or accumulated_earnings_and_profits after the distribution there is no plan or intention to liquidate distributing or controlled or to merge any of those corporations with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the transaction except in the ordinary course of business i the total adjusted bases and the fair_market_value of the assets transferred to controlled by distributing each equals or exceeds the sum of the liabilities assumed by controlled plus any liabilities to which the transferred assets are subject and ii the liabilities assumed in the proposed transaction and the liabilities to which the transferred assets are subject were incurred in the ordinary course of business and are associated with the assets being transferred m the income_tax_liability for the taxable_year in which investment_credit plr127294-00 n o p q r property if any including any building to which sec_47 applies is transferred will be adjusted pursuant to sec_50 or a or sec_47 as in effect before amendment by public law title 104_stat_1388 if applicable to reflect an early disposition of the property distributing neither accumulated its receivables nor made extraordinary payment of its payables in anticipation of the proposed transaction no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the proposed transaction payments made in connection with all continuing transactions if any between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length no two parties to the proposed transaction are investment companies as defined in sec_368 and iv the distribution is not part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire except as allowed by sec_355 directly or indirectly stock possessing percent or more of the total combined voting power of all classes of stock of either distributing or controlled or stock possessing percent or more of the total value of all classes of stock of either distributing or controlled based solely on the information submitted and the representations set forth above we rule as follows the transfer by distributing to controlled of the transferred property to newly created controlled in exchange for controlled common_stock and the assumption by controlled of certain related liabilities followed by a distribution of the controlled common_stock by distributing as described above will be a reorganization within the meaning of sec_368 of the code and distributing and controlled will each be a party to the reorganization within the meaning of sec_368 no gain_or_loss will be recognized by distributing upon the transfer of the transferred property to controlled in exchange for controlled common_stock sec_361 and sec_357 of the code no gain_or_loss will be recognized by controlled upon receipt of the transferred property from distributing in exchange for controlled common_stock sec_1032 of the code plr127294-00 the basis of the transferred property received by controlled will be the same as the basis of such property in the hands of distributing immediately prior to the transfer sec_362 of the code the holding_period of the transferred property received by controlled will include the period during which such property was held by distributing sec_1223 of the code no gain_or_loss will be recognized to and no amount shall be includible in the income of shareholder upon receipt of the controlled stock in the distribution described above sec_355 of the code no gain_or_loss will be recognized by distributing upon the distribution of all of its stock of controlled as described above sec_361 of the code the basis of the controlled stock in the hands of shareholder immediately after the distribution of controlled stock to shareholder will be the same as shareholder 1’s basis in the distributing stock surrendered in exchange sec_358 of the code the holding_period of the controlled stock received by shareholder in the transaction will include his holding_period of the distributing stock provided that such stock is held as a capital_asset on the date of the distribution sec_1223 of the code as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made under sec_1_312-10 of the regulations 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 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 specifically we express no opinion as to whether distributing's s_corporation_election is valid or whether an election of s_corporation treatment by controlled will be valid this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr127294-00 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant sincerely jasper l cummings associate chief_counsel by charles m levy reviewer cc corp


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 ------------------------- ------------------ telephone number ---------------------- refer reply to cc tege eoeg eo1 plr-117315-18 date november trustor trust llc state llc daughter ---------------------------- ------------------------------ ----------------------------------------------------------------------------- -------------- -------------- ------------------ dear ----------------------- this letter responds to a letter from trustor’s authorized representative dated date and subsequent correspondence requesting a ruling that trustor’s proposed lifetime irrevocable transfer to trust of the nonvoting interests in llc the only assets of which are promissory notes from disqualified persons described in sec_4946 of the internal_revenue_code will not violate the prohibition against self- dealing under sec_4941 trust represents the facts as follows sec_4946 of the internal_revenue_code_of_1986 as amended to which all subsequent section references are made unless otherwise stated plr-117315-18 facts trustor transferred certain business interests to trusts established for the benefit of trustor’s descendants beneficiary trusts in exchange for promissory notes that pay interest only for a term of years with the total principal_amount due at the end of the term the sole beneficiary or all of the beneficiaries of each beneficiary trust are trustor’s descendants trustor assigned the promissory notes to llc a state limited_liability_company the members of llc are trustor who holds all of the nonvoting interests in llc and llc which holds all of the voting interests in llc the members of llc are trustor’s descendants and each holds interests as individuals llc will hold and administer the promissory notes and receive payments of interest and principal on the promissory notes aside from the cash initially contributed by llc for the voting interests in llc which will fund llc expenses llc’s sole assets and source_of_income will be the promissory notes power to manage the affairs of llc is vested in the manager who is selected and may be removed by a vote of the members holding at least a majority of the voting interests in llc currently llc which holds percent of such voting interests daughter who is also the trustee of trust is the initial manager of llc daughter holds interests in llc only in an individual capacity indirectly through her interests in llc not in her capacity as trustee of trust the members holding nonvoting interests currently trustor who holds percent of such nonvoting interests possess no management rights or rights to vote on who will be the manager of llc llc may be dissolved only with written approval of all members whether holding voting or nonvoting interests trust is a charitable_lead_annuity_trust clat within the meaning of revproc_2007_45 the charitable interest in which is a right to a guaranteed annuity distributed annually to a public charity that is described in sec_501 the remainder interests benefit trustor’s descendants trustor proposes to fund trust by transferring trustor’s nonvoting interests in llc to trust the annuity amount shall be paid from trust’s income including distributions from llc and to the extent income is insufficient from trust’s principal trustor represents that trust is subject_to sec_4941 under sec_4947 law sec_4941 imposes an excise_tax on each act of self-dealing between a disqualified_person and a private_foundation and on the participation of any foundation_manager knowing that it is such an act plr-117315-18 sec_4941 defines self-dealing in part as including any direct or indirect lending of money or other extension of credit between a private_foundation and a disqualified_person sec_4946 provides in part that the term disqualified_person means with respect to a private_foundation a person who is - a a substantial_contributor to the foundation b a foundation_manager within the meaning of sec_4946 c an owner of more than percent of - i the total combined voting power of a corporation ii the profits interest of a partnership or iii the beneficial_interest of a_trust or unincorporated enterprise which is a substantial_contributor to the foundation d a member_of_the_family as defined in sec_4946 of any individual described in subparagraph a b or c e a corporation of which persons described in subparagraph a b c or d own more than percent of the total combined voting power f a partnership in which persons described in subparagraph a b c or d own more than percent of the profits interest and g a_trust or estate in which persons described in subparagraph a b c or d hold more than percent of the beneficial_interest sec_4946 provides that the term substantial_contributor means a person who is described in sec_507 ie a person who contributed or bequeathed an aggregate amount of more than dollar_figure to the private_foundation if such amount is more than percent of the total contributions and bequests received by the foundation before the close of the taxable_year of the foundation in which the contribution or bequest is received by the foundation from such person and in the case of a_trust the creator of the trust sec_4946 defines the term foundation_manager to include an officer director or trustee of a private_foundation sec_4947 provides in part that in the case of a_trust which is not exempt from tax under sec_501 not all of the unexpired interests in which are devoted to one or more of the purposes described in sec_170 and which has amounts in trust for which a deduction was allowed under sec_170 sec_545 sec_652 sec_2055 sec_2106 or sec_2522 certain code provisions including sec_4941 shall apply as if such trust were a private_foundation sec_53_4941_d_-1 provides in part that an organization is controlled by a private_foundation if the foundation or one or more of its foundation managers acting plr-117315-18 only in such capacity may only by aggregating their votes or positions of authority require the organization to engage in a transaction which if engaged in with the private_foundation would constitute self-dealing for these purposes an organization will be considered to be controlled by a private_foundation if the private_foundation has the right to exercise veto power over the actions of such organization relevant to any potential acts of self-dealing in sec_53_4941_d_-1 example private_foundation p owns the controlling_interest of the voting_stock of corporation x and as a result of such interest elects a majority of the board_of directors of x two of p’s foundation managers a and b who are also directors of corporation x form corporation y for the purpose of building and managing a country club a and b receive a total of percent of y's stock making y a disqualified_person with respect to p under sec_4946 in order to finance the construction and operation of the country club y requested and received a loan in the amount of dollar_figure million from x the example concludes that the making of the loan by x to y shall constitute an indirect act of self-dealing between p and y sec_53_4941_d_-2 restates the general_rule under sec_4941 that generally the lending of money or other extension of credit between a private_foundation and a disqualified_person shall constitute an act of self-dealing it further states that generally an act of self-dealing occurs where a note the obligor of which is a disqualified_person is transferred by a third party to a private_foundation which becomes the creditor under the note analysis as a split-interest trust described in sec_4947 trust is subject_to the requirements of sec_4941 as if it were a private_foundation trustor is a disqualified_person under sec_4946 with respect to trust as a substantial_contributor because trustor is the creator of trust daughter is a disqualified_person under sec_4946 with respect to trust as a foundation_manager beneficiary trusts are disqualified persons under sec_4946 with respect to trust because they are trusts in which trustor’s descendants who are disqualified persons under sec_4946 with respect to trust hold more than a 35-percent beneficial_interest beneficiary trusts are the obligors of promissory notes given to trustor in exchange for certain business interests an act of self-dealing would occur if trustor transferred the promissory notes to trust which would become creditor under the notes see sec_53_4941_d_-2 instead trustor assigned the promissory notes to llc and proposes to transfer nonvoting interests in llc to trust trust will acquire the nonvoting interests in llc by gift rather than through a self-dealing transaction however if trust would be considered to control llc within the meaning of sec_53_4941_d_-1 then plr-117315-18 trust would be considered to be the creditor indirectly under the note by reason of its ownership_interest in llc see sec_53_4941_d_-1 example as holder of the nonvoting interests trust will have no management rights or right to vote on the manager of llc llc will own all of the voting interests giving llc the right to select and remove the manager llc as a holder of nonvoting interests trust will have a right to receive distributions only if llc dissolves or chooses to make current distributions but the timing and amount of such distributions will be uncertain and could not be compelled by trust only llc as the holder of the voting interests may elect or remove the manager of llc and such manager will have the sole power to manage the affairs of llc and determine the timing and amount of distributions thus trust and trust’s trustees acting only in such capacity will not have sufficient votes or positions of authority to cause llc to engage in a transaction additionally trust will not have the power to compel dissolution of llc since llc may only be dissolved with written approval of all members including llc the power associated with the nonvoting interests of llc as a necessary party to vote on the liquidation of llc is not considered equivalent to a veto power within the meaning of sec_53_4941_d_-1 because the power cannot be exercised over an action relevant to any potential act of self-dealing consequently trust will not control llc within the meaning of sec_53_4941_d_-1 accordingly trust’s receipt of nonvoting interests in llc from trustor will not constitute a loan or extension of credit between a private_foundation and a disqualified_person within the meaning of sec_4941 and sec_53_4941_d_-2 because trust will not acquire an interest in the promissory note instead trust will acquire nonvoting interests in llc with respect to which it will not have any management rights or control_over distributions thus trustor’s proposed transfer of nonvoting interests in llc to trust will not constitute an act of self-dealing described in sec_4941 conclusion based solely on the facts and representations submitted we rule that trustor’s proposed irrevocable transfer to trust of the nonvoting interests in llc the only assets of which are promissory notes from disqualified persons described in sec_4946 will not constitute an act of direct or indirect self-dealing under sec_4941 the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party as specified in revproc_2018_1 2018_1_irb_1 b we have not verified any of the material submitted in support of the plr-117315-18 request for a ruling and such material is subject_to verification on examination the associate office will revoke or modify a letter_ruling and apply the revocation retroactively if there has been a misstatement or omission of controlling facts the facts at the time of the transaction are materially different from the controlling facts on which the ruling is based or the transaction involves a continuing action or series of actions and the controlling facts change during the course of the transaction see revproc_2018_1 sec_11 no ruling is granted as to whether trust qualifies as an organization described in revrul_2007_45 no opinion is expressed regarding the valuation of any assets described in this ruling_request for estate or gift_tax purposes except as expressly provided above no opinion is expressed or implied concerning the federal income estate gift or foundation excise_tax consequences of any other aspects of any transaction or item_of_income described in this letter_ruling this ruling will be made available for public inspection under sec_6110 after certain deletions of identifying information are made this letter_ruling is directed only to the taxpayer requesting it sec_6110 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 sincerely _______________________________ theodore lieber senior tax law specialist exempt_organizations branch associate chief_counsel tax exempt and government entities cc


internal_revenue_service number info release date index number ------------------------------ ----------------------------------------------- ------------------------------------------ ------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc psi genin-113366-05 date date dear -------------- this letter responds to a submission dated date based on the information supplied it appears that your corporation is eligible for late s_corporation relief revproc_2003_43 pursuant to sec_4 a of revproc_2003_43 if the entity seeking the election has not filed a tax_return for the first taxable_year of the intended election under subchapter_s the entity may request relief by filing with the applicable service_center the properly completed election form the election form must be filed within months of the original due_date of the intended election but in no event later than months after the due_date of the tax_return excluding extensions of the entity and must state at the top of the document filed pursuant to revproc_2003_43 attached to the election must be a statement establishing reasonable_cause for the failure_to_file the election your submission should have been sent to the cincinnati service_center as directed by the revenue_procedure however we have intervened and faxed it on your behalf to cincinnati service_center at if you fail to receive an acceptance letter from the service_center within the next days your representative may contact the practitioner priority hotline pincite-860-4259 incidentally the irs has developed two compact discs cds to help educate small_business owners on their tax responsibilities publication introduction to federal taxes for small_business self-employed and publication small_business workshop these items are free and can be ordered by calling an online classroom is also available at www irs gov businesses small genin-113366-05 this letter has called your attention to certain general principles of the law it is intended for informational purposes only and does not constitute a ruling if you have any additional questions please contact our office at sincerely s dianna k miosi dianna k miosi branch chief branch office_of_chief_counsel passthroughs special industries enclosure revproc_2003_43


internal_revenue_service number release date index number ---------------------------- -------------------------------- ----------------------------------- -------------------------------------- legend parent sub sub sub sub sub date date year business a accounting firm date date department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number -------------------- refer reply to cc corp plr-117097-07 date date -------------------------------- ------------------------------------------------------------------------ ---------------------------------------- -------------------------------------------------------- ----------------------------- --------------------------------------------- ---------------------- -------------------------- ------- ------------------------------------ --------- --------------------------- -------------------- plr-117097-07 year date date date date date date date date date date date date year year year year year year year date date ------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- --------------------------- --------------------------- --------------------------- --------------------------- --------------------------- --------------------------- ------- ------- ------- ------- ------- ------- ------- --------------------------- --------------------------- plr-117097-07 date --------------------------- dear ---------------- this letter responds to your request for rulings dated date submitted by your authorized representative requesting that the commissioner make a determination under sec_1_1502-75 that sub sub sub sub and sub have joined in the making of an initial consolidated_return filed by parent for the year ending date summary of facts parent is a corporation incorporated in year that is engaged through its subsidiaries in business a until date sub was the parent entity of a group of consolidated corporations including sub sub sub and sub a final consolidated_return for this group was timely filed for the tax_year ending on date on date sub was acquired by an unrelated party and as part of this transaction parent was formed as a holding_company for sub and its four subsidiaries sub and its four subsidiaries are hereinafter referred to as the subsidiaries parent and its subsidiaries informed accounting firm that they intended to file a consolidated_return with parent as the common parent for the year ended date on date parent timely filed a return for the year ending date with a consolidated statement of income and a form_851 affiliations schedule identifying sub sub sub sub and sub on date accounting firm noticed that form_1122 subsidiary corporation's consent to be included in a consolidated_return was inadvertently not filed for any of the subsidiaries with the consolidated_return for the year ending date the statute_of_limitations under sec_6501 has expired for tax returns filed for the year ending date the taxpayer's have made the following representations representation sec_1 the income and deductions of each member sub sub sub sub and sub for the taxable years ended date and all taxable periods thereafter were included in the consolidated_returns filed by parent as the parent of the consolidated_group none of the subsidiaries filed separate returns for the taxable_year ended date and thereafter sub sub sub sub and sub were each included in parent’s affiliations schedule form_851 for the taxable_year ended date and thereafter plr-117097-07 except for the failure to timely file forms parent and its subsidiaries were eligible to file a consolidated u s_corporation income_tax return for the taxable_year ended date and all taxable periods thereafter as of the date of this request the internal_revenue_service has not contacted parent and its subsidiaries about the failure to timely file form_1122 with the consolidated u s_corporation income_tax return for the taxable_period ended date applicable law sec_1_1502-75 provides in part that an affiliated_group_of_corporations which did not file a consolidated_return for the immediately preceding_taxable_year may file a consolidated_return in lieu of separate returns for the taxable_year provided that each corporation which has been a member of the group during any part of the taxable_year for which the consolidated_return is to be filed consents in accordance with sec_1_1502-75 sec_1_1502-75 provides that a group which filed or was required to file a consolidated_return for the immediately preceding_taxable_year is required to file a consolidated_return for the taxable_year unless it has been granted permission by the commissioner to discontinue filing consolidated_returns with regard to the consent of a corporation for a group's first consolidated_year sec_1_1502-75 provides as a general_rule that the consent of a corporation shall be made by such corporation joining in the making of the consolidated_return for such year and that a corporation shall be deemed to have joined in the making of such return for such year if it files a form_1122 in the manner specified in sec_1_1502-75 sec_1_1502-75 provides that if under the provisions of sec_1_1502-75 a group wishes to file a consolidated_return for a taxable_year a form_1122 must be executed by each subsidiary this regulation provides rules for properly executing forms and attaching them to a consolidated_return and also provides that a form_1122 shall not be required for a taxable_year if a consolidated_return was filed or was required to be filed by the group for the immediately preceding_taxable_year sec_1_1502-75 of the regulations provides that if a member of the group fails to file the form_1122 the commissioner may under the facts and circumstances determine that such member has nevertheless joined in the making of a consolidated_return by such group factors among others that the commissioner will take into account in making this determination include the following i whether or not the income and deductions of each member for such taxable_year were included in the consolidated_return ii whether or not a separate_return was filed by any member for plr-117097-07 that taxable_year and iii whether or not the member of the group was included in the affiliations schedule form_851 for such taxable_year where the commissioner under the facts and circumstances determines that the member has joined in the making of a consolidated_return such member will be treated for purposes of sec_1_1502-75 as if it had filed a form_1122 for such year ruling based solely on the information submitted and the representations made this office rules that pursuant to sec_1_1502-75 sub sub sub sub and sub are treated under sec_1_1502-75 as if they had filed forms with the consolidated_return of the parent consolidated_group for the taxable_year ended date caveats we express no opinion about the tax treatment of the facts described above under other provisions of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from these facts that are not specifically covered by the above ruling the ruling contained in this letter is based on information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the taxpayer's ruling_request verification of this material may be required as part of the audit process procedural statements this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent plr-117097-07 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 sincerely _debra carlisle___________ debra carlisle chief branch office of associate chief_counsel corporate


internal_revenue_service number release date index number ----------------------------------- ----------------------------- -------------------------------- ----------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------- id no ---------------- ----------------- telephone number ---------------------- refer reply to cc psi b04 plr-101398-13 date june legend decedent lawyer accountant trust trust trust trust trust trust year date date date a dear -------------- ----------------------------------------------- ---------------- ---------------------------- ------------------------------------------- ------------------------------------------ ------------------------------------------- ------------------------------------------ ------------------------------------------- ------------------------------------------- ------- ------------------- ------------------- ------------------- ---- this letter responds to your authorized representative’s letter dated date requesting an extension of time under sec_2642 of the internal_revenue_code and sec_301_9100-3 of the procedure and administration regulations to allocate decedent’s gst_exemption to trusts the facts and representations submitted are summarized as follows plr-101398-13 on date decedent created trust trust trust trust and trust collectively the year trusts for the benefit of his descendants decedent contributed dollar_figurea each of the year trusts on date decedent created trust for the benefit of his descendants decedent contributed dollar_figurea to trust decedent hired lawyer to draft the trust agreement for the year trusts and trust he also hired accountant to prepare the form sec_1041 united_states income_tax return for estates and trusts for year and later years neither accountant nor lawyer advised decedent of the requirement to file form_709 united_states gift and generation-skipping_transfer_tax return for the initial transfers to the year trusts in year furthermore neither accountant nor lawyer advised decedent of the requirement to file form_709 for the initial transfer to trust in year as a result decedent did not allocate gst_exemption to the year trusts or to trust decedent died on date you have requested an extension of time under sec_2642 and sec_301_9100-3 to allocate decedent’s gst_exemption to the year transfers to the year trusts and to the year transfer to trust law and analysis sec_2601 imposes a tax on every generation-skipping_transfer a generation-skipping_transfer is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the tax imposed by sec_2601 is the taxable_amount multiplied by the applicable_rate sec_2641 defines applicable_rate as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer sec_2631 as in effect for the years at issue provides that for purposes of determining the gst tax every individual shall be allowed a gst_exemption of dollar_figure which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides that an allocation of gst_exemption to property transferred during the transferor’s lifetime other than in a direct_skip is made on form_709 sec_2642 provides that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or plr-101398-13 before the date prescribed by sec_6075 for such transfer or is deemed to be made under sec_2632 or c the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period its value at the time of the close of the estate_tax_inclusion_period sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of sec_2642 sec_2642 provides that in determining whether to grant relief under this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute see notice_2001_50 2001_2_cb_189 sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose date is prescribed by a regulation and not expressly provided by statute in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore the executor of decedent’s estate is granted an extension of time of days from the date of this letter to allocate decedent’s available gst_exemption to the year transfers to the year trusts and to the year transfer to trust the allocations will be effective as of the plr-101398-13 respective date of the transfers and the value of the transfers as determined for federal gift_tax purposes will be used in determining the amount of gst_exemption to be allocated to each trust these allocations should be made on supplemental form sec_709 for year and year the form sec_709 should be filed with the cincinnati service_center at the following address internal_revenue_service cincinnati service_center - stop cincinnati oh a copy of this letter should be attached to the supplemental form sec_709 a copy is enclosed for this purpose in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives 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 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely associate chief_counsel passthroughs special industries _________________________ by lorraine e gardner senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter cc


t c memo united_states tax_court daniel d mcbol aruai petitioner v commissioner of internal revenue respondent docket no filed date p filed a federal_income_tax return for claiming dependency_exemptions a child_tax_credit an additional_child_tax_credit and an earned_income_credit r disallowed additional dependency_exemptions child tax_credits and an earned_income_credit and subsequently determined a deficiency held p is liable for the deficiency determined by r daniel d mcbol aruai pro_se frederick j lockhart jr for respondent memorandum findings_of_fact and opinion wherry judge respondent determined a federal_income_tax deficiency for petitioner’s taxable_year in the amount of dollar_figure the issues for decision are whether petitioner is entitled to dependency_exemption deductions for kgt and or jtw whether petitioner is entitled to an earned_income_credit and whether petitioner is entitled to a child_tax_credit and an additional_child_tax_credit findings_of_fact some of the facts have been stipulated and are so found the stipulations of the parties with accompanying exhibits are incorporated herein by this reference at the time this petition was filed petitioner resided in denver colorado petitioner filed his federal tax_return for on date on his return petitioner claimed dependency_exemptions for kgt and jtw an earned_income_credit in the amount of dollar_figure a child_tax_credit in the amount of dollar_figure and an additional_child_tax_credit in the amount of dollar_figure respondent the court uses only the initials of the minor children the additional_child_tax_credit is for certain individuals who receive less than the full amount of the child_tax_credit see irs pub child_tax_credit issued petitioner a notice_of_deficiency on date petitioner timely filed a petition on date petitioner was born in southern sudan at trial petitioner explained marriage divorce and family relationships in southern sudan when a spouse desires to leave the marriage there is no formal divorce proceeding instead a divorce occurs simply when the spouse leaves the marriage which allows either spouse to remarry according to petitioner people from the same clan or tribe consider themselves related independent of any blood relationship petitioner and thuok c wuol a k a peter wuol peter wuol the father of kgt and jtw were members of the same clan or tribe in southern sudan petitioner’s mother3 was the second wife of his father bol bol was previously married to mydak during this marriage mydak gave birth to a son named deng bol bol and mydak later separated and mydak married gatkuoth during this marriage mydak gave birth to their son peter wuol thus petitioner and peter wuol are related by marriage to a common half brother deng bol neither petitioner nor peter wuol have any parents in the record does not indicate the name of petitioner’s mother deng bol who was born before the birth of either petitioner or peter wuol is now deceased mydak died sometime after peter wuol was born after mydak’s death bol married petitioner’s mother common nor has petitioner provided any evidence they are related by blood kgt and jtw are two of five children of peter wuol and his wife jakow r wuol a k a jekow wuol jekow wuol petitioner emigrated to the united_states in in peter wuol jekow wuol and kgt had emigrated to the united_states where the four other children of peter and jekow wuol were born petitioner and peter wuol’s family6 reunited in colorado springs colorado peter wuol his wife jekow wuol and their four children lived pincite e san miguel apt colorado springs colorado during petitioner maintained an apartment pincite north 18th street colorado springs colorado as his primary residence from approximately date until date when he moved to denver colorado however petitioner spent most of his free time at the wuol family apartment while at the wuol family apartment petitioner did not occupy a specific room rather petitioner would spend his time in the common living areas or occasionally spend the night in one of the children’s unoccupied beds petitioner testified that because of where we come from we don’t use money it is very hard for us to know how to use for taxable_year the wuol family consisted of peter wuol jekow wuol and their four children mw the youngest child is not included because he was not born until date money we don’t keep receipts of every little things sic we buy for buying food or buying clothes or anything or even you know we just give money we forget about it petitioner began providing financial support for peter wuol’s children when he obtained a job at the broadmoor hotel in colorado springs colorado which paid him approximately dollar_figure per year petitioner testified that he gave peter wuol approximately dollar_figure to help peter wuol raise his children this amount represented a partial refund from petitioner’s federal tax_return at trial petitioner acknowledged that the refund check was received in date and that he gave the check directly to the wuol family petitioner contends that during he thought he gave more than dollar_figure in food and other things and that he provided approximately dollar_figure in cash to peter wuol’s family for buying food paying for the phone bill or for anything peter wuol confirmed that petitioner bought gifts for the children in the form of shoes and clothes as well as taking them to restaurants for meals other than his and peter wuol’s testimony and the receipts discussed below petitioner did not present any petitioner’s federal tax_return showed a refund due of dollar_figure the earned_income_credit in the amount of dollar_figure was withheld pending an inquiry on petitioner’s return petitioner was refunded dollar_figure representing the sum of dollar_figure for withholding credits and dollar_figure for the additional_child_tax_credit of that amount h_r block petitioner’s tax preparer was paid a fee in the approximate amount of dollar_figure evidence detailing his cash contributions purchases and expenditures petitioner explained that he did not keep records of his monetary contributions to kgt or jtw because in his home_country no one claims dependents on tax returns and no one receives a refund of tax petitioner offered into evidence only three receipts for to prove payments for kgt and jtw none of them showed exactly which amounts represented expenditures_for either kgt or jtw petitioner produced a wells fargo bank transaction record dated date in the amount of dollar_figure a self-prepared receipt dated date numbered in the amount of dollar_figure and a self-prepared incomplete receipt dated date numbered in the amount of dollar_figure to substantiate his cash payments petitioner generally did not use the receipts in his receipt book in sequential order it’s a matter of opening it up and writing then tear it out petitioner did not use the receipt book solely to acknowledge his contributions or payment of money he also used it to acknowledge receipt of money petitioner explained that he recorded amounts contributed in his receipt book and dated the receipts the date on which he contends he gave money to peter the numbered receipts listed daniel deng on the received from line respondent stipulated that petitioner also goes by the name daniel deng daniel deng mcbol or daniel deng aruai wuol however petitioner commented that because he gave peter wuol the money in he could not remember if the money was expended for rent or to help peter wuol with his children at trial peter wuol also confirmed that petitioner gave him money to help the wuol family with the monthly rent petitioner did not file tax returns for either or petitioner filed hi sec_2001 tax_return claiming no dependency_exemption deductions earned_income_credit or child_tax_credit jekow wuol filing under head_of_household status listed her sons kgt and jtw as dependents when she filed her and tax returns and she claimed an earned_income_credit for kgt and jtw for those taxable years however jekow wuol did not file a tax_return for peter wuol filing under head_of_household status listed children other than kgt and jtw as his dependents when he filed his and tax returns i contentions of the parties opinion petitioner contends that he is entitled to dependency_exemption deductions a child_tax_credit an additional_child_tax_credit and an earned_income_credit because he provided some support for kgt and jtw he maintains that kgt and jtw are related to him as nephews because they are the children of the half brother of his now-deceased half brother petitioner further asserts that he is related to kgt and jtw because petitioner and the children’s father are essentially brothers by virtue of their relation to their mutual half brother deng bol and because people in southern sudan are considered related when they belong to the same tribe respondent claims that petitioner’s claimed dependents do not meet the definitional requirements of a dependent under sec_151 and sec_152 or the prerequisites to be considered a qualifying_child under sec_24 specifically respondent states that petitioner is not related to kgt or jtw under any of the relationships described in sec_152 that kgt and jtw did not live with petitioner during the year in issue and that petitioner has not established that he provided over half of the support for kgt or jtw for the year in issue ii burden_of_proof as a general_rule the commissioner’s determination of a taxpayer’s liability is presumed correct and the taxpayer bears the burden of proving that the determination is improper rule a 290_us_111 deductions are a matter of legislative grace and the taxpayer bears the burden of proving that he is entitled to any claimed deductions unless otherwise indicated all section references are to the internal_revenue_code code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure 292_us_435 this includes the burden of substantiation 65_tc_87 affd per curiam 540_f2d_821 5th cir although sec_7491 may shift the burden_of_proof to respondent in specified circumstances petitioner here has not established that he meets the requisites under sec_7491 and for such a shift iii dependency_exemptions an exemption is generally allowed for every dependent of a taxpayer sec_151 c since kgt and jtw are not petitioner’s children they are considered his dependents only if the definitional requirements of sec_151 are met and each of their gross incomes for the taxpayer’s taxable_year is less than the exemption_amount sec_152 defines a dependent as an individual for whom the taxpayer contributed over half of the support during the calendar_year and who has one of the following relationships to the taxpayer a son or daughter of the taxpayer or a descendent of either a stepson or stepdaughter of the taxpayer a brother sister stepbrother or stepsister of the taxpayer the father or mother of the taxpayer or an ancestor of either a stepfather or stepmother of the taxpayer a son or daughter of a brother or sister of the taxpayer a brother or sister of the father or mother of the taxpayer a son-in-law daughter-in-law father-in-law mother-in-law brother-in-law or sister-in-law of the taxpayer or an individual who for the taxable_year of the taxpayer has as his principal_place_of_abode the home of the taxpayer and is a member of the taxpayer’s household peter wuol testified that he and petitioner were not related by blood but peter wuol would refer to petitioner as my brother although peter wuol believed that he and petitioner were related as brothers because they were from the same family and thus peter wuol’s children were petitioner’s nephews peter wuol admitted that he and petitioner had neither the same father nor the same mother having a relative in common by marriage as in the instant case does not necessarily warrant a finding that petitioner and peter wuol are related within the meaning of sec_152 see 9_tc_1097 noting that congress chose only those relationships in sec_25 internal_revenue_code_of_1939 as amended as being sufficiently within the family orbit to warrant a dependency allowance dollar_figure petitioner and peter wuol are not considered half brothers the relationships described in sec_25 of the internal_revenue_code_of_1939 as amended and in effect for the taxable years and relevant in 9_tc_1097 are the same as those described in sec_152 - because they do not have a parent in commondollar_figure petitioner’s father and peter wuol’s mother’s marriage was dissolved before petitioner and peter wuol were conceived notwithstanding the fact that a taxpayer may not be related to an individual through one of the relationships specified in sec_152 - a taxpayer may be eligible under sec_152 for a dependency_exemption if the claimed dependent has the same principal_place_of_abode as the taxpayer and is a member of the taxpayer’s household for the taxable_year peter wuol admitted that his wife and all his children resided with him at the e san miguel apt colorado springs colorado address for all of petitioner maintained an apartment separate from the wuol family but failed to establish that either kgt or jtw resided with petitioner or were part of his household at petitioner’s north 18th street apartment see 268_f2d_208 9th cir affg 30_tc_879 douglas v commissioner tcmemo_1994_519 affd without published opinion 86_f3d_1161 9th cir petitioner’s contention that he spent considerable amounts of time in the children’s home and helped to pay for the rent on black’s law dictionary 8th ed defines a brother as a male who has one parent or both parents in common with another person specifically a half brother is defined as a brother who has the same father or the same mother but not both and a stepbrother is defined as the son of one’s stepparent the apartment does not demonstrate that he considered the wuol family apartment as opposed to his own apartment to be his principal_place_of_abode in after all petitioner paid rent for his apartment throughout and did not have specific living quarters in the wuol family home rather it appears that peter wuol merely welcomed petitioner frequently as a guest in his home because they were friends and from the same clan in southern sudan during peter wuol’s home not petitioner’s home was the principal_place_of_abode for kgt and jtw who were during that year members of peter wuol’s household thus petitioner did not bear a sec_152 relation to kgt or jtw support generally includes food shelter clothing medical and dental care education and the like sec_1_152-1 income_tax regs to meet the support_test of sec_152 a taxpayer must show the total amount received by the dependent from all sources the amounts actually applied for the dependent the sources which contributed to the total support costs expended for the dependent and that the taxpayer provided over half the expenditures_for the dependent’s support 50_tc_756 petitioner provided only questionable receipts for dollar_figure of the amounts he contended he gave to peter wuol as respondent points out on the basis of peter wuol’s tax_return and certified transcripts for peter wuol’s and jekow wuol’ sec_2002 tax refunds peter and jekow wuol had at least dollar_figure to contribute to their family of six in dollar_figure as petitioner tried to document only that he contributed dollar_figure to the entire wuol family petitioner failed to meet his burden_of_proof that he contributed more than half the support for either kgt or jtw for dollar_figure although the court agrees that petitioner provided some support for kgt and jtw we cannot infer from the evidence the amount of funds actually used to support kgt and jtw as opposed to other members of the wuol family both petitioner and peter wuol testified that the money petitioner gave to peter wuol was used for rent on the wuol family apartment clothing for the children and groceries for the family thus most of the funds given by petitioner were expended on the entire family not specifically on kgt or jtw furthermore petitioner did not substantiate the total support amounts received by kgt or jtw from all sources or which sources thus petitioner failed to prove that he provided over half the support for either kgt or for taxable_year peter wuol earned dollar_figure in wages in peter wuol received a federal tax_refund consisting of dollar_figure in withholding and dollar_figure in earned_income credits in jekow wuol received a federal tax_refund consisting of dollar_figure in withholding and dollar_figure in earned_income credits the sum of these amounts is dollar_figure the court does not view the three proffered receipts as reliable or sufficient jtw see 56_tc_512 46_tc_515 iv earned_income_credit sec_32 and c in relevant part provide that a taxpayer may be eligible for the earned_income_credit if that taxpayer has a qualifying_child a qualifying_child is a child who satisfies a relationship_test a residency test an age_test and an identification requirement sec_32 however a taxpayer may not be eligible for an earned_income_credit if the taxpayer’s qualifying_child is considered the qualifying_child of another taxpayer for the same taxable_year sec_32 the relationship_test requires that the qualifying_individual bear a relationship to the taxpayer as described in sec_32 thus kgt and jtw must be either the taxpayer’s son daughter stepson stepdaughter or descendent of such individual brother sister stepbrother stepsister or descendent of such individual whom the taxpayer cares for as the taxpayer’s own child or an eligible_foster_child of the taxpayer kgt and jtw’s parents were living during the year in issue and the children lived with their parents for all of moreover the record does not indicate that the children were petitioner’s foster children neither kgt nor jtw meets the relationship_test the residency test requires that the qualifying_child have the same principal_place_of_abode within the united_states as the taxpayer for more than one-half of the taxable_year sec_32 e petitioner did not have the same principal_place_of_abode as kgt or jtw thus neither is a qualifying_child nonetheless subject_to phaseout limitations an individual who does not have any qualifying children may be eligible for an earned_income_credit under sec_32 if the individual’s principal_place_of_abode is in the united_states the individual or his spouse has attained the age of but not the age of at the close of the taxable_year and the individual is not a dependent for whom a deduction is allowed under sec_151 sec_32 petitioner’s earned_income for was dollar_figure although petitioner satisfies the eligibility requirements the phaseout limitation prevents the receipt of any earned_income_credit the earned_income_credit for an individual without any qualifying children is completely phased out in tax_year when an individual’s earned_income exceeds dollar_figure revproc_2002_70 2002_2_cb_845 see irs pub earned_income_credit thus petitioner is not entitled to an earned_income_credit and respondent is sustained on this issuedollar_figure v child_tax_credit sec_24 allows a credit for each qualifying_child of the taxpayer a qualifying_child is defined by sec_24 as an individual who meets the relationship_test under sec_32 has not attained the age of by the close of the taxable_year and with respect to whom the taxpayer is entitled to a dependency_exemption deduction under sec_151 during the year in issue neither child had attained the age of kgt wa sec_12 years old and jtw was years old at the close of the taxable_year however as previously discussed the children do not meet the relationship_test and petitioner is not eligible to claim a dependency_exemption deduction for either child for thus petitioner is not allowed a child_tax_credit or an additional_child_tax_credit on brief respondent contended that petitioner’s arrangement with peter wuol whereby petitioner would remit the net amount of his withholdings and child tax_credits to peter wuol would produce the unintended result of allowing peter wuol to obtain earned_income credits in an amount in excess of the maximum amount allowed for those individuals filing joint returns a joint_return must be filed by a married individual in order for sec_32 to apply sec_32 thus peter wuol and jekow wuol should have filed joint income_tax returns rather than returns filed under head_of_household filing_status for their and taxable years as well as for peter wuol’s taxable_year vi conclusion the court found the testimony of petitioner and peter wuol to be sincere and credible although the court applauds petitioner’s efforts to support himself and help support peter wuol’s entire family the record does not indicate that he provided over half the support for either child equally as important petitioner did not establish that he was related to kgt or jtw within the meaning of sec_152 therefore petitioner is not entitled to dependency_exemptions for kgt or jtw an earned_income_credit a child_tax_credit or an additional_child_tax_credit and he is liable for the deficiency as determined by respondent to reflect the foregoing decision will be entered for respondent


department of the treasury internal_revenue_service washington d c number release date cc intl br6 uilc internal_revenue_service national_office field_service_advice date memorandum for district_counsel connecticut-rhode island district attn gerald a thorpe district_counsel cc ner ctr har from elizabeth g beck senior technical reviewer cc intl br6 subject this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be used or cited as precedent legend amount a amount b amount c amount d amount e amount f amount g amount h tl-n-6338-99 fsc1 partner a partner b partnership a taxable_year taxable_year issue sec_1 is a partnership with corporate partners treated as an entity or an aggregate for purposes of determining the fraction a fsc wholly-owned by the partnership should use in calculating the exempt portion or of its foreign_trade_income under the fsc administrative pricing rules of sec_925 are the corporate partners of a partnership that wholly owns a fsc entitled to a dividends-received_deduction pursuant to sec_245 in connection with their distributive shares of the dividends_paid by the fsc to the partnership that are attributable to the fsc’s foreign_trade_income conclusion sec_1 a partnership with corporate partners should be treated as an aggregate for purposes of determining the fraction a fsc wholly owned by the partnership should use in calculating the exempt portion of its foreign_trade_income under the fsc administrative pricing rules of sec_925 therefore in this case the proper fraction for the calculation of exempt_foreign_trade_income i sec_15 not as claimed by taxpayer yes the corporate partners of a partnership owning a fsc are entitled to a dividends-received_deduction pursuant to sec_245 in connection with their distributive shares of the dividends properly attributable to fsc foreign_trade_income determined under the administrative pricing rules and paid_by the fsc to the partnership facts tl-n-6338-99 fsc1 a foreign_sales_corporation fsc under sec_922 and sec_927 is wholly owned by partnership a a domestic_partnership equally owned by partner a and partner b which are unrelated domestic corporations partner a and partner b are both accrual basis taxpayers partnership a files its u s income_tax return form_1065 on a calendar_year basis partner a also files its u s income_tax return form_1120 on a calendar_year basis for the purposes of the present discussion we assume there are no special allocations partner a’s taxable_year and taxable_year which are at present under examination correspond to the second and third taxable years of fsc1 fsc1 is a commission fsc and is not a shared_fsc fsc1 and partner a compute their taxable_income from sales of export_property using the administrative pricing rules in sec_925 and we have not considered or addressed whether partner a constitutes a related_supplier within the meaning of sec_1_927_d_-2t ie whether partner a is eligible to use the administrative pricing rules and if so what the appropriate basis might be for computing taxable_income under the administrative pricing rules for taxable_year and taxable_year fsc1 determined that for purposes of calculating the exempt portion of its foreign_trade_income as defined in sec_923 the appropriate fraction was accordingly fsc1 reported the remaining amounts dollar_figureamount a and dollar_figureamount b for taxable_year and taxable_year respectively as nonexempt foreign_trade_income ie the remaining portion of its foreign_trade_income on its income_tax returns forms 1120-fsc for taxable_year and taxable_year fsc1 paid cash dividends to partnership a in the amounts of dollar_figureamount g and dollar_figureamount h respectively partner a claimed a dividends-received_deduction under sec_245 equal to its share of the dividends on its forms filed for taxable_year sec_1 and examination does not know whether partner b claimed similar tax treatment for its share of the dividends it appears that a portion if not all of the fsc income from sales of export_property may not be determined under the administrative pricing rules of sec_925 and because fsc1 was not acting as a commission agent for a related_supplier with regard to the sale see sec_925 temp sec_1 a - 1t b and d -2t a as stated above we have not considered or addressed this issue in this advice tl-n-6338-99 examination determined that for purposes of determining the appropriate fsc fraction the partners of partnership a should be considered fsc1's shareholders as a result examination concluded that the appropriate fraction used to determine fsc1’s exempt_foreign_trade_income in these years wa sec_15 instead of pursuant to sec_291 accordingly examination computed fsc1's nonexempt foreign_trade_income for taxable_year sec_1 and to be dollar_figureamount c and dollar_figureamount d respectively a difference from the amount reported on fsc1's forms 1120-fsc of dollar_figureamount e and dollar_figureamount f respectively additionally examination proposes to no change partner’s a claimed dividends- received deduction for taxable_year sec_1 and law and analysis issue a the issue where a foreign_corporation qualifies as a fsc its exempt_foreign_trade_income is treated as foreign_source_income that is not effectively connected with the conduct_of_a_trade_or_business within the united_states and thus is not subject_to u s income_tax sec_921 a fsc’s foreign_trade_income is its gross_income attributable to foreign_trading_gross_receipts and includes gross_income from the sale exchange or other_disposition of export_property and from the lease or rental of export_property for use by the lessee outside the united_states sec_923 sec_924 temp sec_1 923-1t a exempt_foreign_trade_income as defined in sec_923 is a specific_portion of overall foreign_trade_income determined with reference to the pricing method used to compute the fsc’s income from the export transaction or group of export transactions and ownership of fsc stock sec_291 sec_923 sec_923 temp sec_1 923-1t b where as in this case a fsc determines its income using the administrative pricing rules under sec_925 or either or of its foreign_trade_income may be treated as exempt sec_291 sec_923 and a temp sec_1 923-1t b i more specifically temp sec_1 923-1t b i provides tl-n-6338-99 if a fsc uses either of the two administrative pricing rules provided for by sec_925 and to determine its income from a transaction or group of transactions to which sec_925 applies see sec_1 a -1t b ii and iii of the foreign_trade_income that it earns from the transaction or group of transactions will be exempt_foreign_trade_income if a fsc has a non-corporate shareholder shareholders of its foreign_trade_income attributable to the noncorporate shareholder’s shareholders’ proportionate interest in the fsc will be exempt_foreign_trade_income see sec_291 thus the proper exemption percentage depends upon whether the fsc foreign_trade_income is attributable to noncorporate or corporate shareholders for the specific purposes of sec_923 the term shareholder is not defined in the code the fsc regulations or case law nor is the term defined under sec_291 which is referenced by sec_923 for the reduction in amount of exempt_foreign_trade_income additionally although the code does not specifically provide the consequences when fsc stock is held by a partnership that has corporate partners the legislative_history discussed below indicates that the aggregate approach is more appropriate for this determination b partnership tax_partnership taxation is a mixture of provisions that treat the partnership as an aggregate of its members or as a separate_entity under the aggregate approach each partner is treated as the owner of an undivided_interest in partnership assets and operations under the entity approach the partnership is treated as a separate_entity in which partners have no direct interest in partnership assets and operations the issue presented is whether a partnership with corporate partners that wholly owns a fsc should be treated as an aggregate so that its partners are a similar rule applies where a fsc does not use the administrative pricing rules see temp sec_1 923-1t b ii where a fsc does not use the administrative pricing rules of its foreign_trade_income will be exempt_foreign_trade_income if such a fsc has a non-corporate shareholder shareholders of its foreign_trade_income attributable to the non-corporate shareholder’s shareholders’ proportionate interest in the fsc will be exempt_foreign_trade_income tl-n-6338-99 considered to hold the fsc stock if the answer is yes then the fsc must take the corporate partners into consideration when determining the appropriate fraction to apply to its foreign_trade_income when congress enacted subchapter_k congress stated as follows with respect to when the aggregate or entity approach should govern no inference is intended however that a partnership is to be considered as a separate_entity for the purpose of applying other provisions of the internal revenue laws if the concept of the partnership as a collection of individuals is more appropriate for such provisions h_r conf_rep no 83d cong 2d sess in line with this flexible standard courts have recognized the appropriateness of the aggregate approach in certain circumstances see eg 79_tc_424 sec_1 b and which treats a partnership as an aggregate of individuals for purposes of sec_267 upheld as a valid regulation unger v commissioner tcmemo_1990_15 aff’d 936_f2d_1316 d c cir aggregate_theory applied to determine that canadian partner had a permanent_establishment in the united_states by virtue of his interest in a u s limited_partnership in 77_f3d_217 8th cir vacating and remanding 104_tc_105 the tax_court held that the partnership entity should be ignored in characterizing a partner’s earnings as taxable subpart_f_income brown group involved a u s parent_corporation usp with a cayman islands controlled_foreign_corporation cfc which was a partner in a cayman islands partnership cip during and cip earned commission income as a purchasing agent for usp the issue turned on whether under the related_person test of subpart_f usp was a related_person to the entity that earned the commission income ie cip the commissioner argued that the cfc’s distributive_share of cip’s commission income should be tested using an aggregate approach to determine whether it was subpart_f_income in a revised opinion reviewed by the full tax_court the tax_court agreed substantially with the commissioner stating that w e believe that a close reading of the regulations under subpart_f a consideration of the structure and language of subchapter_k the partnership provisions congress’ purpose in enacting subpart_f and certain language of sec_954 compel the result that the commissioner advocates on appeal the eighth circuit overruled the tax_court adopting an entity approach we disagree see notice_93_39 1996_2_cb_209 the service does not agree with tl-n-6338-99 brown group and intends to rely on principles and authorities under subpart_f and subchapter_k to apply an aggregate approach whereby subpart_f_income is generally is determined at the cfc partner level including sec_1 e and f for periods for which it is effective we believe the tax court’s reviewed opinion is the correct approach and supports our conclusion in the present case with respect to the instant case neither sec_291 nor sec_923 prescribe the treatment of a partnership as an entity for purposes of those sections to determine whether it is more appropriate to treat a partnership as an aggregate for purposes of these sections it is therefore necessary to examine the purpose of those sections and the fsc regime as a whole c fsc legislative_history and other relevant guidance as discussed below the legislative_history of sec_923 is intertwined with that of sec_291 which lists certain tax preference items upon which corporations pay a minimum amount of tax in addition to the corporation’s regular_tax prior to the tax wa sec_15 percent of the corporation’s tax_preferences in excess of the greater of the regular income_tax paid or dollar_figure the history of sec_923 is also linked to sec_245 which provides rules concerning the treatment of dividends received by a domestic_corporation from a foreign_corporation in congress enacted the fsc regime effective for tax years beginning in as part of the deficit_reduction_act_of_1984 in the same act congress in light of large budget deficits increased the tax on certain corporate_tax_preference items from percent to percent or percent and amended the list of tax_preferences see deficit_reduction_act_of_1984 pub_l_no sec_68 sec_801 h_r con res 98th cong div a at date staff of senate comm on finance 98th cong 2d sess explanation of provisions approved by the committee on date s prt vol i pincite hereinafter senate_finance_committee explanation the senate committee on finance explained that the bill will increase the 15-percent preference cutback to percent the benefits of the new fsc legislation in the bill will be reduced by in the case of a corporate fsc shareholder tl-n-6338-99 the provisions generally apply to taxable years beginning after date senate_finance_committee explanation supra pincite thus in enacting the fsc regime congress specifically coordinated the provisions of sec_923 with those of sec_291 in order to effectuate a cutback of fsc benefits to corporate shareholders in order to understand how the senate_finance_committee determined the cutback would affect the fsc treatment of corporate shareholders one must examine the overall fsc regime and in particular the treatment of dividends received from a foreign_corporation under sec_245 prior to the enactment of the fsc regime sec_245 provided that domestic corporations that received dividends from a foreign_corporation were entitled to a deduction equal to percent of the dividends received subject_to a cap provided the foreign_corporation was engaged in a trade_or_business in the united_states and earned percent or more of its income from sources effectively connected with the conduct_of_a_trade_or_business for the month period ending with the close of the foreign corporation’s tax_year in which the dividends were paid in contrast as part of the fsc regime sec_245 was amended to allow a percent dividends-received_deduction for earnings_and_profits from foreign_trade_income of a fsc where the administrative pricing rules were used sec_245 the general_rule continued to apply to other fsc income see staff of joint comm on taxation 98th cong general explanation of the revenue provisions of the deficit_reduction_act_of_1984 jcs-41-84 pincite j comm print date the final bill presented to the president for signature corrected the cut-back percentages in sec_291 to conform with the sec_923 exempt_foreign_trade_income percentages for corporate fsc shareholders see h_r con res 98th cong div a at date sec_68 of the deficit_reduction_act_of_1984 as agreed by the conference committee on date h_r conf_rep no pincite date misidentified a sec_34 and respectively the percentages applicable under sec_923 in determining exempt_foreign_trade_income under non-administrative pricing and administrative pricing in fact sec_923 provided that the exempt percentages were and respectively for non-administrative pricing and administrative pricing see h_r conf_rep no pincite date as a result of this oversight the intended substitution and thus the cutback would not have been achieved h_r con res remedied the error by substituting the correct sec_923 exempt percentages tl-n-6338-99 the staff of the joint_committee on taxation summarized the fsc tax regime as follows a domestic_corporation will generally be allowed a percent dividends-received_deduction for amounts distributed from a fsc out of earnings_and_profits attributable to foreign_trade_income thus there will be no corporate level tax on exempt_foreign_trade_income and only a single-level corporate tax at the fsc level on foreign_trade_income other than exempt_foreign_trade_income to the extent a corporate shareholder of a fsc distributes dividends attributable to foreign_trade_income to its individual shareholders the amounts will be taxed a dividends-received_deduction will not be allowed however for distributions attributable to other_earnings_and_profits these distributions will therefore be taxed currently to the shareholders corporate or noncorporate of the fsc id pincite0 see also id pincite although the legislative_history to the fsc regime does not address how the cutback is to operate when a fsc’s stock is partially or wholly owned by a partnership that has corporate partners the treatment of s_corporations owning fsc stock suggests that congress intended to treat a pass-through entity as an aggregate for this purpose the senate_finance_committee report relating to the technical amendments clarifying the corporate preference cutback provisions states as follows the act in extending this reduction of corporate preferences sought to reduce the exempt portion of the foreign_trade_income of a fsc by the general explanation also states that in the case of a fsc having corporate and noncorporate shareholders it is intended that principles similar to the current domestic_international_sales_corporation disc rules shall apply under the disc rules a disc is not subject_to income_tax but rather the shareholders of a disc are subject_to taxation on the earnings_and_profits of the disc in accordance with the provision of chapter income taxes--normal taxes and surtaxes of the code generally applicable to shareholders as modified by the disc provisions sec_991 and sec_995 sec_1_991-1 and sec_1_995-1 tl-n-6338-99 if the shareholder of the fsc is a corporation the statute indicates that the cutback applies with respect to the corporate shareholder of the fsc congress intended that the cutback apply at the fsc level which would reduce the portion of the fsc’s foreign_trade_income that is exempt from tax at that level staff of senate comm on finance 99th cong 2d sess tax_reform_act_of_1986 s rep no pincite date furthermore the portion of foreign_trade_income that is exempt will be adjusted under regulations to take into account any shareholders that are not c corporations for whom there is no preference cutback id pincite4 consequently the fsc corporate preference cutback would not apply when an s_corporation is the shareholder id accordingly congress intended the ratio to govern the calculation of the exempt portion of a fsc’s income determined under the administrative pricing rules only to the extent the fsc’s owners direct or indirect are not subject_to the preference cutback although nominally a corporation to which the cutback would apply an s_corporation generally does not face entity-level taxation but instead passes-through its tax items on a pro_rata basis to its shareholders who must be individuals or certain types of trusts or estates sec_1361 sec_1363 sec_1366 sec_1_1361-1 a corporation in which any shareholder is a corporation is not an s_corporation thus the cutback cannot apply to s_corporation shareholders because these shareholders are not corporations but individuals trusts or estates under the same rationale where a partnership is the sole shareholder of a fsc the cutback should only apply to the extent dividends from the fsc are passing through the partnership to its corporate partners who are subject_to the cutback therefore the aggregate approach should govern application of sec_291 and sec_923 for purposes of determining the appropriate fraction congress also made similar amendments to the fsc’s predecessor regime domestic international sales corporations discs the provisions of which were largely adopted in the fsc regime see staff of joint comm on taxation 98th cong general explanation of the revenue provisions of the deficit_reduction_act_of_1984 jcs-41-84 pincite j comm print date more specifically the deemed_dividend distribution by a domestic_international_sales_corporation disc to a corporate shareholder under sec_995 was increased by percent to 57½ percent of certain taxable_income this change had the effect of reducing the tax_benefit from a disc by percent id pincite tl-n-6338-99 further support for adopting the aggregate approach in this context is found in sec_1 f which defines shareholder for purposes of the limitation on the number of fsc shareholders under sec_922 and which adopts an aggregate approach sec_1 f q a-6 v provides a partnership is not counted as a shareholder a general or limited_partner is counted as a shareholder if it is a corporation an individual or an estate under the rules contained in subdivisions i through iii a general or limited_partner is not counted as a shareholder if it is a partnership or a_trust the rules contained in subdivision iv and this subdivision v apply to the determination of who is counted as a shareholder emphasis added additionally the aggregate approach is a more appropriate approach in the determination of a fsc’s shareholders for purposes of sec_291 and sec_923 where a fsc’s direct shareholder is a partnership because to conclude otherwise would allow the reduction of the corporate tax_preferences involved here sec_291 to be nullified by corporate taxpayers through the expedient of using a partnership as an ownership vehicle for a fsc furthermore the purposes of sec_291 and sec_923 would be undermined if corporate taxpayers could manipulate the preference cutback to reach the inconsistent result of achieving more favorable treatment for corporate beneficiaries of fsc dividends than that received by similarly situated non- corporate distributees in a scenario where partnership a is not considered an aggregate fsc1's exempt_foreign_trade_income as compared to a situation of direct ownership by partner a and partner b would be increased by then when the distributive_share in the form of a dividend is included in the income of partner a and partner b this increased portion of income would not be taxed to partner a and partner b who enjoy a dividends-received_deduction pursuant to sec_245 if this additional of exempt_foreign_trade_income is passed-through to non-corporate distributees for whom the dividends-received distribution is not available it would be taxed dollar-for-dollar such a result is inconsistent with a reduction in corporate tax_preferences and accordingly an aggregate approach is proper in this context thus in light of the purpose of sec_291 ie the cutback of corporate preference items and the fsc regime we conclude that partnership a a partnership under u s law should be treated as an aggregate of its members and tl-n-6338-99 its fsc1 stock considered to be owned directly by partner a and partner b in proportion to their respective interests in the partnership for purposes of determining the proper ratio to use when calculating fsc1’s exempt_foreign_trade_income issue the primary issue is the effect of the dividends_paid by fsc1 to partnership a on partner a’s income_tax_liability for taxable_year sec_1 and a domestic_corporation is entitled to a dividends-received_deduction for dividends from a fsc that are distributed out of earnings_and_profits attributable to foreign_trade_income determined under the fsc administrative pricing rules sec_245 in contrast there is no provision in the code that permits a dividends-received_deduction for non-corporate entities or partnerships when computing their taxable_income under the rules of subchapter_k each partner’s income_tax is determined taking into account separately that partner’s distributive_share of the items listed in sec_702 through subsection a includes dividends with respect to which there is a deduction under part viii of subchapter_b which is titled special_deductions for corporations see sec_1_702-1 subsection a includes other items of income gain loss deduction or credit as shall be prescribed by regulations by the secretary see sec_1 a sec_1_702-1 further specifies each partner must also take into account separately his distributive_share of any partnership_item which if separately taken into account by any partner would result in an income_tax_liability for that partner different from that which would result if that partner did not take the item into account separately the character of the items of income gain loss deduction or credit described in sec_702 through and included in a partner’s distributive_share is determined as if each item were realized directly from the source from with respect to foreign_trade_income where non-administrative pricing is used the dividend attributable to the exempt portion qualifies for the dividends- received deduction for corporate recipients under sec_245 for the nonexempt_portion see sec_245 tl-n-6338-99 which it was realized by the partnership or incurred in the same manner as incurred by the partnership sec_702 sec_1_702-1 the dividends-received_deduction under sec_245 is contained in part viii of subchapter_b accordingly dividends received by partnership a from fsc1 must be separately_stated by the partnership pursuant to sec_702 additionally under the aforementioned rules partner a’s tax_liability is determined by treating its distributive_share of fsc1 dividends as if partner a had received these dividends directly from fsc1 as a result partner a is entitled to a dividends-received_deduction in connection with its share of the fsc1 dividends received through partnership a support for this position is provided by revrul_86_138 1986_2_cb_84 which held that sec_703 requires a subsidiary partnership in a multi-level structure to state separately items of income gain loss deduction and credit which if separately taken into account by any partner of any partnership in the structure would result in an income_tax_liability for the partner different than that which would result without such accounting like the limited_partnership in revrul_86_138 partnership a is similarly required to state separately items of income gain loss deduction and credit which if separately taken into account by partner a or partner b would result in an income_tax_liability for the partner different from that which would result without such accounting in the present case such items would include fsc1 dividends qualifying for the sec_245 dividends-received_deduction as they affect the tax_liability of partner a and partner b the fact that fsc1 dividends flow through partnership a does not change their character eg as distributed out of earnings_and_profits attributable to foreign_trade_income for a period during which the other corporation was a fsc and thus does not affect their deductibility to partner a and partner b case development hazards and other considerations because we believe our discussion of issue resolves your question regarding the proper fraction to be used in the calculation of fsc1's exempt_foreign_trade_income this advice does not address your alternative approach of applying the partnership anti-abuse rule in sec_1_701-2 although private letter rulings have no precedential value this position is consistent with that taken in ltr date tl-n-6338-99 given that the appropriate fraction to be used in determining the exempt portion of fsc1's foreign_trade_income i sec_15 rather than a separate adjustment should be made to fsc1's income_tax returns for taxable_year sec_1 and if you have any further questions please call by elizabeth g beck senior technical reviewer branch office of associate chief_counsel international