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 b05 plr-146163-08 date date ty ------- ty ------- legend grantor spouse grandchild grandchild grandchild date first trust ---------------------------------------------------- ------------------------ --------------------------- ------------------------ ---------------------------- ------------------------- ------------------------------------------------------------------------------------------- ----------------------------------------- ------------------- ----------------- --------------------------------------------------------------------------------------- ----------------------------- daughter -------------------------------------------------------------------------------------- first trust --------------------------------------------------------------------------- first trust first trust ---------------------------------------------------------------------------- second trust ---------------------------------------------------------------------------- date date second trust second trust second trust date date date state statute court --------------------- ------------------ ----------------------- ----------------------------------------- ---------------------------------------------------------- ----------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ plr-146163-08 date ------------------ dear ---------------- this is in response to your request for private_letter_ruling dated date for each of first trust first trust first trust second trust second trust and second trust in your capacity as trustee of each of these six trusts you have asked for two rulings for each of these trusts first you have requested a ruling for each trust that the proposed trust consolidations of first trust and second trust will not result in recognition of gain_or_loss under sec_1001 of the internal_revenue_code with respect to any trust assets second you have requested a ruling that the proposed consolidations of the first trusts and the second trusts will not result in any loss of current protection from the generation-skipping_transfer gst tax this private_letter_ruling pertains specifically to second trust facts the facts submitted and representations made are as follows grantor and spouse created an irrevocable_trust first trust on date a date before date for the benefit of their grandchildren first trust was immediately divided into two equal shares one for the benefit of their son’s children and one for the benefit of daughter’s children this ruling concerns the trusts established for the benefit of daughter’s children under the terms of first trust no distributions were to be made from the trust established for daughter’s children until daughter had children by birth or adoption subsequently daughter had children grandchild grandchild and grandchild on the birth of each grandchild the trust established for daughter’s children was subdivided into separate trusts one trust for the benefit of each grandchild as follows first trust for the benefit of grandchild first trust for the benefit of grandchild and first trust for the benefit of grandchild there have been no additions to first trust or first trust first trust or first trust since date on date grantor and spouse created a joint revocable_trust second trust second trust was amended and restated on date grantor died on date a date after date under the terms of second trust upon grantor’s death a portion of the second trust attributable to grantor’s property passed to a separate trust for the benefit of daughter and her descendants as a consequence of daughter’s disclaimer this portion passed to separate trusts second trust for the benefit of grandchild second trust for the benefit of grandchild and second trust for the benefit of grandchild it is represented that daughter’s disclaimer constituted a qualified_disclaimer that satisfied the requirements of sec_2518 further it is represented that a form_706 united_states estate and generation-skipping tax_return was filed for grantor’s estate and that on the return a portion of grantor’s gst_exemption was plr-146163-08 allocated with respect to the transfers to second trust second trust and second trust in sufficient amount such that each trust then had an inclusion_ratio of zero for purposes of sec_2642 spouse died on date under the terms of second trust on spouse’s death a portion of the remaining second trust corpus attributable to spouse’s property passed to a separate trust for the benefit of daughter and her descendants as a consequence of daughter’s disclaimer this portion passed in equal shares to second trust second trust and second trust it is represented that daughter’s disclaimer constituted a qualified_disclaimer that satisfied the requirements of sec_2518 further it is represented that a form_706 united_states estate and generation-skipping tax_return was filed for spouse’s estate and that on the return a portion of spouse’s gst_exemption was allocated with respect to the additional transfers to second trust second trust and second trust in sufficient amount such that the inclusion_ratio with respect to each trust continued to be zero for purposes of sec_2642 see sec_26_2642-4 under the terms of first trust first trust and first trust the child of daughter who is the primary beneficiary of the trust is entitled to distributions of principle and income in the trustee’s discretion to provide for the beneficiary’s health maintenance support and education the primary beneficiary is also entitled to of the remaining trust principle at age of the then remaining principal at age of the then remaining principal at age and the balance of the trust estate at age if the primary beneficiary fails to survive to age the balance of the trust passes per stirpes to the primary beneficiary’s then living descendants or if there are no living descendants then to the primary beneficiary’s then living siblings or per stirpes to the descendants of a predeceased sibling or if there are no such persons then living then to the living grandchildren of daughter’s parents grantor and spouse under the terms of first trust first trust and first trust unless a_trust is sooner terminated under the terms of the trust each trust must terminate no later than years after the death of the last survivor of grantor and spouse’s descendants who were living on date further subject_to this provision all interests in the three trusts will necessarily vest no later than date when the youngest primary beneficiary attains the age of under the terms of second trust second trust and second trust the child of daughter who is the primary beneficiary of the trust is entitled to receive all trust income at least quarterly in addition to the extent income is insufficient the trustee has the discretion to distribute sufficient principle to provide for the beneficiary’s health maintenance support and education the primary beneficiary is also entitled to of the remaining trust principle at age of the then remaining principal at age of the then remaining principal at age and the balance of the trust estate at age plr-146163-08 if the primary beneficiary fails to survive to age then subject_to the limitations described below the balance of the trust passes per stirpes to the primary beneficiary’s then living descendants or if there are no living descendants then to the primary beneficiary’s then living siblings or per stirpes to the descendants of a predeceased sibling or if there are no such persons then living then to the descendants of grantor and spouse by right of representation however the trust contains several additional provisions impacting on this distribution scheme under the terms of the trusts if any property passes to anyone under the age of other than a grandchild who is a primary beneficiary a new trust is established for that person that will continue until that person attains age further property passing to a person who already has a_trust operating under the document will be added to that trust in the event that all descendants of grantor and spouse die prior to having attained age and within the applicable perpetuities period then specified amounts are to be distributed to named individuals or their issue with the balance distributed to certain educational institutions finally unless a_trust is sooner terminated under the provisions of the trust each of second trust second trust and second trust must terminate no later than years after the death of the last survivor of those of grantor and spouse’s descendants who were living on the date of death of the first spouse to die that is the date of grantor’s death on date court pursuant to daughter’s petition issued an order contingent on receipt of a favorable private_letter_ruling from the irs consolidating the trusts under the order first trust is to be consolidated with second trust first trust is to be consolidated with second trust and first trust is to be consolidated with second trust the court decree provides in relevant part that the contemplated consolidation shall not alter or amend the beneficial interests of any present or future beneficiaries of the trust vested or contingent because there are differences in the distribution provisions of first trust first trust and first trust as compared to second trust second trust and second trust each consolidated trust will have two trust shares a first trust share and a second trust share the first trust share will remain subject_to the distribution provisions of first trust and the second trust share will remain subject_to the distribution provisions of second trust under the order a distribution provision is defined as any provision that could impact the rights and remedies of any beneficiaries including distribution rights rights to accounts and rights to seek redress for breach of trust further the term includes the perpetuity savings clauses contained in each respective trust the second trust provisions governing the appointment of trustees will apply to each consolidated trust the court order also provides a comprehensive statement and accompanying exhibit describing the methodology to be used to determine each share on a continuing basis and the methodology to be used in accounting for trust distributions and expenses state statute provides that if the terms of two or more trusts are substantially_similar on petition by a trustee or beneficiary the court for good cause shown may combine the plr-146163-08 trusts if the court determines that administration as a single trust will not defeat or substantially impair the accomplishment of the trust purposes of the interests of the beneficiaries law and analysis issue you have requested a ruling for each trust that the proposed trust consolidations of first trust and second trust will not result in recognition of gain_or_loss under sec_1001 of the internal_revenue_code code with respect to any trust assets sec_1001 provides that the gain from the sale_or_other_disposition of property is the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss is the excess of the adjusted_basis provided in sec_1011 over the amount_realized sec_1001 defines the amount_realized from the sale or disposition of property as the sum of any money received plus the fair_market_value of any property received sec_1001 provides that except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides as a general_rule that except as otherwise provided in subtitle a the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained for purposes of sec_1001 in an exchange of property each party to the exchange gives up a property interest in return for a new or additional property interest such an exchange of property is a disposition under sec_1001 sec_1_1001-1 an exchange of property results is the realization of gain under sec_1001 if the properties exchanged are materially different 499_us_554 there is a material difference when the exchanged properties embody legal entitlements different in_kind or extent or if they confer different rights and powers u s pincite in 419_f2d_999 7th cir aff'g 293_fsupp_1106 n d ill cert_denied 397_us_1041 the court held that a nonrealization event occurs when despite the form of the transaction in substance the taxpayer holds the same property interest after a transaction as before is as secure with respect to the interest after the transaction as before and there is no realistic difference in the value of the property interest held as a result of the transaction plr-146163-08 based on the information submitted and the representations made the beneficiaries of second trust will possess the same interests before and after the consolidation of first trust and second trust and the proposed consolidation will merely be a merging of the assets for administrative convenience accordingly we conclude that with respect to second trust no sale_or_exchange under sec_1001 will occur as a result of the proposed merger and consolidation of first trust and second trust in addition no gain_or_loss will be realized by first trust or second trust on any trust assets or by any beneficiaries as a result of the proposed merger and consolidation issue you have also requested a ruling that the proposed consolidation of trusts will not result in any loss of current protection from the gst tax sec_2601 imposes a tax on each generation skipping transfer sec_2602 provides that the amount of the gst tax is determined by multiplying the taxable_amount by the applicable_rate sec_2641 provides that the term applicable_rate means with respect to any gst transfer the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer under sec_2642 the inclusion_ratio with any property transferred in a generation- skipping transfer is generally defined as the excess of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of gst_exemption under sec_2631 allocated to the trust or to property transferred in a direct_skip and the denominator is the value of the property transferred to the trust or involved in the direct_skip sec_2631 provides generally that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption amount which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor under b a of the tax_reform_act_of_1986 act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the generation-skipping_transfer_tax shall not apply to any generation-skipping_transfer under a_trust that was irrevocable on date but only to the extent that the transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added sec_26_2601-1 provides that any trust in existence on date will be considered an irrevocable_trust except as provided in sec_26_2601-1 or c relating to property includible in the grantor’s gross_estate under sec_2038 and sec_2042 sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is plr-146163-08 exempt from the generation-skipping_transfer_tax under sec_26_2601-1 or will not cause the trust to lose its exempt status the regulation provides that the rules contained in the paragraph are applicable only for purposes of determining whether an exempt trust retains its exempt status for generation-skipping_transfer_tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy b i a b or c by judicial reformation or no judicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust furthermore a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered a shift in a beneficial_interest in a_trust sec_26_2601-1 example considers a situation where the grantor in establishes an irrevocable_trust for grantor's child and the child's issue in grantor's spouse also established a separate irrevocable_trust for the benefit of the same child and issue the terms of the spouse's trust and grantor's trust are identical in the appropriate local court approved the merger of the two trusts into one trust to save administrative costs and enhance the management of the investments the merger of the two trusts does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the merger in addition the merger does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust therefore the example concludes that the trust that resulted from the merger will not be subject_to the provisions of chapter of the internal_revenue_code in the present case first trust first trust and first trust were irrevocable prior to date and as such are not subject_to the gst tax by reason of sec_26_2601-1 second trust second trust and second trust are exempt from the gst tax because it is represented that the executor of grantor’s estate and the executor of spouse’s estate allocated a sufficient amount of gst_exemption to grantor’s and spouse’s respective transfers to these trusts such that these trusts have an inclusion_ratio of zero as noted above the rules in sec_26_2601-1 apply in the case of trusts that are exempt from gst tax because the trusts were in existence and irrevocable prior to plr-146163-08 date no guidance has been issued concerning modifications that may affect the status of trusts that are exempt from gst tax because sufficient gst_exemption was allocated to the trusts to result in an inclusion_ratio of zero at a minimum a modification that would not affect the gst status of a grandfathered trust should similarly not affect the exempt status of such a_trust based on the facts presented and representations made we conclude that the judicial consolidation of first trust and second trust first trust and second trust and first trust and second trust as described above will not shift any beneficial_interest in the trusts to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification in addition the consolidation of trusts will not extend the time for vesting of any beneficial_interest in the trusts beyond the period provided for in first trust and second trust further the modification subjecting the consolidated trusts to the second trust provisions governing the appointment of trustees is administrative in nature conclusion sec_1 based on the information submitted and the representations made we conclude that no sale_or_exchange under sec_1001 will occur as a result of the proposed merger and consolidation with respect to second trust in addition no gain_or_loss will be realized by first trust or second trust on any trust assets or by any beneficiaries as a result of the proposed merger and consolidation based on the facts submitted and the representations made we also conclude that the court order providing for the consolidation of first trust and second trust first trust and second trust and first trust and second trust will not cause the first trust share of each consolidated trust to be subject_to the generation-skipping_transfer_tax imposed by chapter of the internal_revenue_code further the consolidation pursuant to the court order will not cause the second trust share of each consolidated trust to have an inclusion_ratio in excess of zero except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative plr-146163-08 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 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 george f wright senior technician reviewer branch office_of_chief_counsel income_tax accounting enclosure cc


department of the treasury int ernal revenue service washington d c date of f i c e of c h i e f c ou n s e l number release date cc fip tl-n-426-00 uilc internal_revenue_service national_office field_service_advice memorandum for from lon b smith acting associate chief_counsel financial institutions and products cc fip subject disaffiliation of captive 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 disclosure statement field_service_advice is chief_counsel_advice and is open to public inspection pursuant to the provisions of sec_6110 the provisions of sec_6110 require the service to remove taxpayer identifying information and provide the taxpayer with notice of intention to disclose before it is made available for public inspection sec_6110 and i sec_6110 also authorizes the service to delete information from field_service_advice that is protected from disclosure under u s c sec_552 b and c before the document is provided to the taxpayer with notice of intention to disclose only the national_office function issuing the field_service_advice is authorized to make such deletions and to make the redacted document available for public inspection accordingly the examination appeals or counsel recipient of this document may not provide a copy of this unredacted document to the taxpayer or their representative the recipient of this document may share this unredacted document only with those persons whose official tax_administration duties with respect to the case and the issues discussed in the document require inspection or disclosure of the field_service_advice legend corp c corp d corp e individual a date a y-1 y-8 y-10 y-13 y-14 y-21 ic ic2 ic3 ic4 s t x issue whether the former parent or its successor_in_interest corp e is entitled to a deduction under sec_165 of the internal_revenue_code for post-affiliation loss payments made by its former related insurer subsidiaries conclusion corp c corp e must continue to deduct losses on amounts paid with respect to insurance policies contracts within the scope of revrul_77_316 1977_2_cb_53 entered into prior to disaffiliation in accordance with the scheme outlined in that revenue_ruling ie under the paid loss deduction method described therein facts corp c is engaged in business of s operations prior to date a corp c was a member_of_an_affiliated_group that was owned equally by two shareholders corp e and individual a the affiliated_group included companies claiming to be insurance_companies viz ic for the tax years y-1 through y-10 amounts were paid as insurance premiums by corp c to ic for coverage of its workers’ compensation liabilities attributable to the t act ic only insured the risks of its affiliated_group and did not insure any unrelated third party business in later years other affiliates of corp c were paid amounts for coverage of corp c workers’ compensation risks under the t act the additional companies claiming to be insurance_companies named in the incoming request for field_service_advice fsa were ic2 ic3 and ic4 during the tax years y-1 through y-10 corp c and its affiliates claimed insurance premium deductions for payments made to ic the service disallowed these premium deductions because ic and corp c were all members of the same affiliated_group the service’s disallowance of corp c’s claimed deduction was based in part upon revrul_77_316 ultimately the service and corp c entered into settlements for some of the tax years for example for the y-10 tax_year the service disallowed of the payments made to ic the service however allowed in subsequent years up to and including the tax_year y-13 deductions to corp c for losses_and_expenses paid_by ic that otherwise satisfied the accounting requirements of the internal_revenue_code on date a to resolve a dispute between corp e and individual a the corp d entities were splitup in a sec_355 nonrecognition_transaction in the transaction corp e exchanged it sec_50 stock interest in the corp d stock for all of the stock of corp c individual a received the corp d stock which directly or indirectly owned the stock of all the related insurance_companies while after the splitup corp c was disaffiliated from its affiliated captive insurance subsidiaries ic and the other related insurance_companies remained liable for the t act workers’ compensation risks entered into by the parties prior to the disaffiliation we also understand that as part of the disaffiliation transaction the former related_party insurance_companies would continue to receive additional premiums from corp c and its affiliates for coverage for a period of approximately and ½ years we are assuming that these companies claiming to be insurance_companies are related however the incoming fsa request did not describe the nature of the ownership relationship with respect to ic3 and ic4 additional deductions were claimed for amounts paid as premiums to ic2 during y-8 through y-10 at the time of the date a disaffiliation the remaining capitalized contribution amounts in ic for which corp c had yet to receive a deduction was approximately dollar_figurex for its fiscal tax years y-14 through y-21 corp e the parent of corp c has filed claims for refunds actual or protective claiming deductions for workers’ compensation claims purportedly paid_by ic during these years for claims apparently arising prior to the date a disaffiliation of corp c corp e from ic in other words corp c corp e are seeking to continue the tax treatment provided for by revrul_77_316 ie allowing a sec_165 loss for a claim payment made by the former captive ic to be deductible by its former affiliate corp c in tax years subsequent to the disaffiliation law and analysis sec_162 generally allows a deduction for ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business under sec_165 a deduction is also generally allowed for any loss sustained during the taxable_year that is not_compensated_for_by_insurance_or_otherwise in revrul_77_316 the service concluded that an insurer could not insure its parent_corporation or the parent’s operating subsidiaries because such arrangements did not involve the requisite transfer of risk to be deemed insurance thus no immediate deduction under sec_162 was allowed for the payments of the parent or its operating subsidiaries instead revrul_77_316 treated the parent’s payments made to the insurer as nontaxable sec_118 capital contributions and the payments made by the operating subsidiaries to the insurer as a sec_301 dividend to the parent followed by nontaxable sec_118 capital contributions by the parent to the insurer further the ruling provides that when the insurer makes loss payments on behalf of the parent such payments are treated as sec_301 distributions from the insurer to the parent followed by deductible sec_165 loss payments by the parent and the operating subsidiaries such payments are treated as sec_301 distributions from the insurer to the parent capital contributions by the parent to the operating subsidiaries and deductible sec_165 loss payments by the operating subsidiaries insurance contracts entered into prior to disaffiliation do not constitute insurance transactions and must be addressed and accounted for consistent with the rationale outlined in revrul_77_316 those contracts covered loss events arising under the terms of the subject contracts policies whether or not occurring before or after disaffiliation the disaffiliation event is immaterial to the continued consistent tax treatment of the non-insurance scheme outlined in the revenue_ruling whether viewed as a method_of_accounting or a mere consistent characterization issue disaffiliation does not produce a change in accounting but a change in facts circumstances which will require a new method for a post-disaffiliation insurance_contract the taxpayer is entitled to continue its treatment of existing transactions case development hazards and other considerations we have restricted our comments to the post-disaffiliation claim payments that have been paid_by ic to the corp c corp e affiliated_group ic2's position is not as clear as the situation involving ic because for a number of years under a settlement agreement with the service the former affiliated parties eg corp c were allowed to take of their premium deduction for amounts paid to ic2 in contrast with respect to premiums_paid to ic the former affiliated parties such as corp c were not allowed a current sec_162 deduction for premiums as they paid them prior to disaffiliation a catch-up premium upon disaffiliation or a stock basis increase in the sec_355 transaction as a result of following the dividend-up contribution-down approach of revrul_77_316 on this later point involving stock basis in the sec_355 split up transaction corp d distributed all of the stock of its subsidiary corp c to corp e in exchange for all of the corp d stock held by corp e accordingly under sec_358 the basis of the corp c stock in the hands of corp e was the same as the basis of the corp d stock surrendered by corp e in exchange therefor in sum the way that the sec_358 basis rules operate is that generally the tax benefits of an increase in basis resulting from the contribution portion of revrul_77_316 dividend-up contribution-down approach did not benefit the corp c corp e group rather the primary benefit of increased basis ended in stock of the side of the splitup transaction that received the insurance_companies in spite of the fact that the affiliated related payers of insurance premiums to ic2 received the tax_benefit of a sec_162 deduction for premiums_paid for certain tax years this event is somewhat fortuitous and we are reluctant to suggest that it should be the reason for departing from following the recharacterization provided in revrul_77_316 please call if you have any further questions lon b smith acting associate chief_counsel financial institutions and products by s donald j drees jr senior technician reviewer branch


internal_revenue_service number release date index numbers ----------------------------------------- ---------------------------------------- ------------------------------------------------------- ---------------------------- 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 b2 plr-101124-10 date july legend x d country ---------------------- ---------------------- ---------------------- dear ---------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x was formed under the laws of country x intended to be treated as a disregarded_entity for federal tax purposes effective d however x inadvertently failed to timely file form_8832 entity classification election to be treated as a disregarded_entity for federal tax purposes law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner plr-101124-10 sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single owner having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i section b defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make an election to be treated as a disregarded_entity for federal tax purposes effective d x should make the election by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form this ruling is contingent on the owner of x filing within days of this letter all required returns and amended income_tax returns consistent with the requested relief being effective d to the extent appropriate these returns must include but are not limited to the following forms i forms information_return of u s persons with respect to certain foreign_corporations ii forms return of u s persons with respect to certain foreign_partnerships and iii forms information_return of u s plr-101124-10 persons with respect to disregarded entities such that these forms reflect the consequences of the relief granted in this letter except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representatives sincerely associate chief_counsel passthroughs and special industries by __________________ richard probst branch reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes plr-101124-10 list of entities receiving ruling x name ein plr no d effective date of election plr number ----------------------------------------------------------------- ---------------------- plr-101124-10 ----------------------------------------------------------------- ---------------------- plr-101125-10 ---------------------------------------------------------------- ---------------------- plr-101126-10 ------------------------------------------------------------------ ---------------------- plr-101127-10 cc


acknowledged significant advice may be disseminated internal_revenue_service memorandum cc el gl br2 campbell tl-n-5968-97 date dec released sca to rocky mountain associate district_counsel cc wr rmd slc from senior technician reviewer branch general litigation cc el gl br2 subject significant service_center advice - erroneous direct deposits this responds to your request for significant advice dated date and received in this office on date in connection with a question posed by the ogden service_center disclosure statement unless specifically marked acknowledged significant advice may be disseminated above this memorandum is not to be circulated or disseminated except as provided in paragraphs iii d and iv a of notice n this document may contain confidential information subject_to the attorney-client and deliberative_process privileges therefore this document shall not be disclosed beyond the office or individual s who originated the question discussed herein and are working the matter with the requisite need to know in no event shall it be disclosed to taxpayers or their representatives issue when a refund direct deposit is made to the wrong bank account through no error on the part of the taxpayer what means are available to the service to recover the incorrectly deposited sums and to insure that the taxpayer receives the refund to which he she is entitled conclusion where the bank improperly deposits sums into the account of a third party through no fault of the service the service is not obligated to pay the bank the bank must recover from the owners of the account to which the sums were erroneously deposited see generally u c c sec_4a-303 c where the service erred in providing the correct information to the bank a refund check must still be issued to the proper taxpayer the service must pursue collection from the third party that benefitted from the service’s error facts the ogden service_center has discovered that in some instances where taxpayers have requested the direct deposit of refund amounts into their bank accounts the refund amount was not deposited into the taxpayer’s account but was erroneously deposited into the account of some third party the service_center has attempted to correct deposit errors by contacting the bank and requesting sufficient information to have the erroneously deposited sums moved to the correct account banks have refused to provide the service_center with the name and account number of the third party who actually received the funds we assume that this problem occurs because payment information is transferred electronically the service or the treasury issues an electronic order to a bank designated by the taxpayer to pay a taxpayer identified only by numbered account where the taxpayer is the cause of the erroneous deposit the taxpayer is advised that he she must contact the bank to work out the problem however where the error is made by the bank or the service there are apparently no procedures in place to insure the taxpayer receives his her refund or that the service recoups the improperly deposited funds to get the erroneously deposited funds into the hands of the correct taxpayer district_counsel has suggested that the service either get the bank to move the funds to the account of the correct taxpayer or that the service recover the funds by initiating an erroneous refund_suit against the party in receipt of the funds the service would like to develop procedures to resolve these problems without violating the disclosure provisions of sec_6103 the issues and the applicable law are aptly outlined in the date memorandum of district_counsel discussion where the service properly directs a taxpayer's refund to the bank and the account designated by the taxpayer and the taxpayer does not receive the refund because of an error committed by the bank the service has no obligation to pay the bank ie the bank is not entitled to payment from the service treasury and the service is freed from the obligations undertaken in issuing the payment order to the bank the service's payment transaction to the bank can be reversed and the bank will have to recover the amount it erroneously issued from the third party benefiting from the error see u c c sec_4a-303 c generally 49_f3d_280 7th cir if the payment order to the bank is reversed the service treasury has not actually issued a refund to the appropriate taxpayer and the treasury has expended no public funds allowing for the issuance of a refund to the appropriate taxpayer however reversal of the service's payment order may not actually be necessary once the taxpayer's financial_institution is apprised of the error since a bank receiving the right payment information is obligated to credit the amount of payment to the designated account of the appropriate recipient see generally c f_r d and e once the credit is made to the account of the taxpayer the government has no further obligation for the amount of the payment see generally u s c h and c f_r where an error is made by the service in transmitting the appropriate information to the bank with respect to the taxpayer's direct deposit refund request the matter is a little more complicated and the law far from clear if the bank is promptly notified of the error usually within days of the transaction pursuant to the automated clearinghouse rules the bank may transfer the payment amount to the appropriate account or credit the service's account for the payment amount see generally u c c sec_4a-207 general electric capital corp v central bank f 3d pincite 7th cir such a transfer would not require that the service be provided any information regarding the bank's customer however where the bank is unable to recover the deposited amounts or notification of the error is not timely and it will probably be the extremely rare case where the service discovers its error within day sec_1 section of title of the united_states_code only applies to payments that are required to be made by direct deposit tax refunds are not required to be made by direct deposit accordingly tax_payments are specifically excluded by section j however where tax refunds are made pursuant to direct deposit requests by the taxpayer we see no reason why the provisions of this section would not be applicable see c f_r of the issuance of the payment instruction for the refund the bank has no further obligation to assist in the recovery_of the wrongfully deposited funds the risk of loss with respect to the error made by the service with regard to a direct deposit payment instruction for the taxpayer’s refund is on the service thus the responsibility rests with the service to ensure that the taxpayer receives the refund he she is entitled to and that every effort is made to recover the amounts that were erroneously issued although it is clear that the service has an inherent right to recover the misdirected funds see 371_f2d_21 5th cir whether our recovery is based on a general right of restitution or a statutory one the issue is complicated by the fact the recipient of the misdirected amounts in these cases is unknown to the service the normally recognized mechanism for the service’s recovery_of an erroneous disbursement not involving the recomputation of a tax_liability nonrebate is the filing of an erroneous refund_suit pursuant to the authority provided by sec_7405 within the time limitations specified by sec_6532 sec_6532 requires that the service initiate suit within two years of making an erroneous payment as it is unlikely that fraud can be established on the part of the recipient of the refund in these cases the five year limitation period for fraud has no applicability information regarding the automated clearinghouse rules was obtained from the office_of_chief_counsel financial management service the automated clearinghouse rules are private industry rules achieved through multilateral contracts among the participants copies of the rules are available through the national automated clearinghouse association the supreme court recognized very early on that the government can recover money paid out of the public treasury by mistake fenemore v united_states 3_us_357 although it may be arguable whether the recovery_of funds in the hands of a party who has done nothing to cause the deposit of the funds in his her account can be regarded as an erroneous refund it has consistently been the position of this office that the term erroneous refund is broadly defined thus an erroneous refund includes any receipt of money from the service to which the recipient is not entitled regardless of whether the recipient is the person the service intended to pay see generally 7_f3d_976 11th cir however as indicated above and in your memorandum recovery_of these sums will prove to be difficult in light of the fact that the identity of the third party actually receiving the payment will be known only to the bank not the service as has been the experience of the odgen service_center because banks have an obligation to protect the privacy of their customers pursuant to the right to financial privacy_act u s c sec_3401 et seq it is unlikely that attempts to secure identifying information with respect to the bank's customers will be voluntarily forthcoming it continues to be the position of this office that where the internal_revenue_code provides procedures for disclosing financial records such procedures are excepted from the right to financial privacy_act but see 922_f2d_573 10th cir however neece is not the hurdle that has to be overcome in these cases it is not clear that the service's procedures for securing information with or without a summons are sufficient to reach unnamed taxpayers whose tax_return is not being examined or whose tax_liability is not being determined or collected or where there is no basis for believing that the unnamed taxpayer failed or may have failed to comply with the tax laws see sec_7602 f 65_f3d_963 1st cir if the internal_revenue_code does not provide a procedure for securing this information the right to financial privacy_act will prohibit disclosure of any information regarding the bank's customer to the service without the identity of the recipient of the erroneous refund the service cannot utilize its authority pursuant to sec_7405 accordingly the service may have to file suit pursuant to sec_7402 which gives the district courts the power to fashion any order necessary for the administration or enforcement of the internal revenue laws lastly the service may have to rely on federal common_law to effect a recovery in these cases since the service has a since there are a number of cases supporting the conclusion that a nonrebate erroneous refund is not a tax_liability the issue of whether the service can utilize it’s summons authority is likely to become an additional issue in litigation see 49_f3d_340 7th cir schipper v united_states u s t c big_number e d n y the term taxpayer is used here for expedience as it is entirely possible that the recipient of the misdirected funds is a party to whom the internal revenue laws are not currently applicable recognized right to recover money mistakenly paid out of the public treasury see city of new orleans v united_states supra however if suit is filed based on either sec_7402 or federal common_law we recommend that such suits be initiated within the two year limitations_period for erroneous refunds provided by sec_6532 conclusion there is no case law addressing the issue of the recovery_of tax refunds erroneously deposited through electronic means where the error is made by the bank and not the service recovery_of the refund amounts or proper application to the right account should cause little difficulty for the service or the taxpayer but in the case where the error was made by the service the risk of loss rests with the service and not the bank although the service has a legal right to recover amounts paid in error where the service has direct deposited a taxpayer’s refund in the account of some unknown third party there is no clear legal path to effect that recovery the statutory authority provided under sec_7405 to file suit to recover erroneous refunds is of little value if the service cannot identify the recipient of the misdirected payments as noted herein it is very unlikely that banks will voluntarily supply the service with information regarding customers receiving misapplied funds for fear of violating the right to financial privacy_act the exception provided for the service in the right to financial privacy_act may be of little use as the internal_revenue_code has no procedures which would require the disclosure of information unrelated to the determination or collection of a tax_liability and there is no basis for believing that the unnamed taxpayer may have failed to comply with the tax laws although the service may rely on the district courts to fashion a remedy pursuant to sec_7402 or based on a federal common_law theory of restitution these remedies are untested thus we recommend the following as your memorandum does not address any specific taxpayer or tax_return information that the service would need to disclose to the bank in correcting an erroneous transaction that the bank is not already privy to or that the taxpayer has not authorized by virtue of the direct deposit request this issue is not addressed in this memorandum if you have a more specific question please advise and a response will be provided the service develop some type of cross check system that will limit the number of errors made when inputing information relative to direct deposit accounts when the service receives notification that the transfer has been completed the notification be cross checked against the account as soon as reasonably possible so that any error can be detected readily if the bank is notified in a timely fashion sometimes it may be possible to have an erroneous transaction reversed where it is too late to reverse a transaction and the bank will not voluntarily provide information which would identify the refund recipient the service should develop a form letter to supply to the bank that can be forwarded to the bank’s customer instructing the customer to contact the service the letter should include some identifying number so that when the customer contacts the service the service will be able to associate the contact with the appropriate refund case in cases where the service receives no response from the customer and in cases currently pending where there is six months or less remaining on the two year limitations_period these cases should be evaluated for litigation potential and referred to district_counsel if you have questions or need additional information please contact me or carol a campbell of my staff at s joseph w clark cc executive office of service_center operations t e attn dan azzato new carrollton stop c4 - executive office of customer service operations t c attn ron watson headquarters room this document is not be relied upon or otherwise cited as precednet by taxpayers


t c memo united_states tax_court charles g and daphne c m hall petitioners v commissioner of internal revenue respondent docket no 2906-o2l filed date charles g and daphne c m hall pro sese alan j tomsic and karen lynne baker for respondent memorandum opinion panuthos chief special_trial_judge this matter is before the court on respondent’s motion for summary_judgment filed pursuant to rule respondent contends that there is no dispute as to any material fact with respect to this lien action unless otherwise indicated all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure - - and that respondent’s notice_of_determination dated date should be sustained as a matter of law summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials fla peach corp v commissioner 90_tc_678 summary_judgment may be granted with respect to all or any part of the legal issues in controversy if the pleadings answers to interrogatories depositions admissions and any other acceptable materials together with the affidavits if any show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law rule a and b see 98_tc_518 affd 17_f3d_965 7th cir 90_tc_753 85_tc_527 the moving party bears the burden of proving that there is no genuine issue of material fact and factual inferences will be read ina manner most favorable to the party opposing summary_judgment 85_tc_812 79_tc_340 as explained in detail below there is no genuine issue as to any material fact and a decision may be rendered as a matter of law we shall grant respondent’s motion for summary_judgment background a petitioners’ form_1040 for on or about date petitioners submitted to respondent a joint form_1040 u s individual_income_tax_return for the taxable_year on the form_1040 petitioners listed their filing_status as married filing joint_return petitioners entered zeros on applicable lines of the income portion of their form_1040 specifically including line for wages line for total income and line sec_33 and sec_34 for adjusted_gross_income petitioners also entered a zero on line for total_tax petitioners claimed an overpayment of dollar_figure related to federal_income_tax withholding petitioners attached to their form_1040 four forms w-2 wage and tax statement issued to petitioners by various employers b respondent’s deficiency_notice and petitioners’ response on date respondent issued to petitioners a joint notice_of_deficiency in the notice respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax for and an accuracy-related_penalty under sec_6662 for negligence or disregard of rules or regulations of dollar_figure the deficiency was based principally on respondent’s determination that petitioners failed to report the wage income as reported to respondent by third-party payors on forms w-2 - by letter dated date petitioners wrote to respondent’s district_director in las vegas nevada acknowledging receipt of the notice_of_deficiency dated date and requesting that the notice be withdrawn or that petitioners be granted an appeals_office hearing petitioners did not file a petition with the court challenging the notice_of_deficiency accordingly on date respondent assessed the determined deficiency and accuracy-related_penalty as well as statutory interest on that same day respondent sent petitioners a notice of balance due informing petitioners that they had a liability for and requesting that they pay it petitioners failed to do so c respondent’s final notice and petitioners’ response on date respondent sent petitioners a notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 lien notice the lien notice was issued in respect of petitioners’ outstanding tax_liability for on date petitioners submitted to respondent a form request for a collection_due_process_hearing petitioners’ request stated that they were challenging the validity of the assessments for on the grounds there is no statute imposing tax_liability upon them and they were not served with a valid notice_and_demand for payment --- - d the appeals_office hearing on date appeals officer julie peterson conducted an appeals_office hearing that petitioners attended during the hearing the appeals officer provided petitioners with a form_4340 certificate of assessments payments and other specified matters regarding their account for the taxable_year according to a purported transcript of the hearing prepared by petitioners petitioners declined to discuss collection alternatives rather petitioners stated that they wished to challenge their underlying tax_liability br respondent’s notice_of_determination on date respondent sent petitioners a notice_of_determination concerning collection action s under sec_6320 and or the notice stated that the appeals_office had determined that the lien filing was appropriate f petitioners’ petition on date petitioners filed with the court a petition for lien or levy action seeking review of respondent’s notice_of_determination the petition includes allegations that the appeals officer failed to obtain verification from the secretary that the requirements of any applicable law or at the time that the petition was filed petitioners resided in las vegas nevada the envelope bearing the petition contains a timely u s postal service postmark dated date see sec_6330 -- - administrative procedure were met as required under sec_6330 petitioners never received a notice_and_demand for payment or valid notice_of_deficiency and petitioners were denied the opportunity to raise relevant issues g respondent’s motion for summary_judgment as indicated respondent filed a motion for summary_judgment asserting that there is no dispute as to a material fact and that respondent is entitled to judgment as a matter of law in particular respondent contends that because petitioners received the notice_of_deficiency dated date they cannot challenge the existence or amount of their underlying tax_liability for in this proceeding respondent further contends that the appeals officer’s review of form_4340 with regard to petitioners’ liability for satisfied the verification requirement imposed under sec_6330 and demonstrates that petitioners were issued a notice_and_demand for payment pursuant to notice respondent’s motion was called for hearing at the court’s motions session in washington d c counsel for respondent appeared at the hearing and offered argument in support of respondent’s motion although petitioners did not appear at the hearing they filed with the court a written_statement pursuant to rule c discussion a statutory framework sec_6321 imposes a lien in favor of the united_states on all property and rights to property of a person when a demand for the payment of the person’s taxes has been made and the person fails to pay those taxes such a lien arises when an assessment is made sec_6322 sec_6323 requires the secretary to file a notice_of_federal_tax_lien if the lien is to be valid against any purchaser holder of a security_interest mechanic’s_lienor or judgment lien creditor lindsay v commissioner tcmemo_2001_285 sec_6320 provides that the secretary shall furnish the person described in sec_6321 with written notice of the filing of a notice of lien under sec_6323 the notice required by sec_6320 must be provided not more than business days after the day of the filing of the notice of lien sec_6320 sec_6320 further provides that the person may request administrative review of the matter in the form of an appeals_office hearing within days beginning on the day after the 5-day period sec_6320 provides that the appeals_office hearing generally shall be conducted consistent with the procedures set forth in sec_6330 d and e sec_6330 prescribes the matters that a person may raise at an appeals_office hearing in sum sec_6330 c --- - provides that a person may raise collection issues such as spousal defenses the appropriateness of the commissioner's intended collection action and possible alternative means of collection sec_6330 b provides that the existence and amount of the underlying tax_liability can be contested at an appeals_office hearing if the person did not receive a notice_of_deficiency for the taxes in question or did not otherwise have an earlier opportunity to dispute the tax_liability see 114_tc_604 114_tc_176 sec_6330 provides for judicial review of the administrative determination in the tax_court or a federal district_court as may be appropriate b summary_judgment petitioners challenge the assessments made against them on the ground that the notice_of_deficiency dated date is invalid however the record shows that petitioners received the notice_of_deficiency and disregarded the opportunity to file a petition for redetermination with this court see sec_6213 it follows that sec_6330 b generally bars petitioners from challenging the existence or amount of their underlying tax_liability in this collection review proceeding even if petitioners were permitted to challenge the validity of the notice_of_deficiency petitioners’ arguments have no merit see 118_tc_162 --- - goza v commissioner supra as the court_of_appeals for the fifth circuit has remarked we perceive no need to refute these arguments with somber reasoning and copious citation of precedent to do so might suggest that these arguments have some colorable merit 737_f2d_1417 5th cir suffice it to say that petitioners are taxpayers subject_to the federal_income_tax see sec_1 a and that compensation_for labor or services rendered constitutes income subject_to the federal_income_tax sec_61 640_f2d_1014 9th cir we likewise reject petitioners’ argument that the appeals officer failed to obtain verification from the secretary that the requirements of all applicable laws and administrative procedures were met as required by sec_6330 the record shows that the appeals officer obtained and reviewed a form_4340 with regard to petitioners’ taxable_year federal tax assessments are formally recorded on a record of assessment sec_6203 the summary record through supporting records shall provide identification of the taxpayer the character of the liability assessed the taxable_period if applicable and the amount of the assessment sec_301_6203-1 proced admin regs -- - sec_6330 does not require the commissioner to rely on a particular document to satisfy the verification requirement imposed therein 118_tc_365 ndollar_figure weishan v commissioner tcmemo_2002_88 lindsey v commissioner tcmemo_2002_87 tolotti v commissioner tcmemo_2002_86 duffield v commissioner tcmemo_2002_53 kuglin v commissioner tcmemo_2002_51 in this regard we observe that a form_4340 such as the one relied upon by the appeals officer in this case contains all the information prescribed in sec_301_6203-1 proced admin regs see weishan v commissioner supra lindsey v commissioner supra tolotti v commissioner supra duffield v commissioner supra kuglin v commissioner supra petitioners have not alleged any irregularity in the assessment procedure that would raise a question about the validity of the assessments or the information contained in the form_4340 see 115_tc_35 mann v commissioner tcmemo_2002_48 accordingly we hold that the appeals officer satisfied the verification requirement of sec_6330 see eg 117_tc_117 petitioners also contend that they never received a notice_and_demand for payment for the requirement that the secretary issue a notice_and_demand for payment is set forth in sec_6303 which provides in pertinent part sec a general_rule ---where it is not otherwise provided by this title the secretary shall as soon as practicable and within days after the making of an assessment of a tax pursuant to sec_6203 give notice to each person liable for the unpaid tax stating the amount and demanding payment thereof xk k the form_4340 that the appeals officer relied on during the administrative process shows that respondent sent petitioners a notice of balance due on the same date that respondent made assessments against petitioners for the tax and accuracy-related_penalty determined in the notice_of_deficiency a notice of balance due constitutes a notice_and_demand for payment within the meaning of sec_6303 see eg 953_f2d_531 9th cir weishan v commissioner supra see also 7_f3d_137 9th cir petitioners have failed to raise a spousal defense make a valid challenge to the appropriateness of respondent’s intended collection action or offer alternative means of collection these issues are now deemed conceded rule b under the circumstances we conclude that respondent is entitled to judgment as a matter of law sustaining the notice determination dated date in order to give effect to the foregoing an appropriate respondent’ s motion for respondent will of order granting and decision be entered


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 b02 plr-110366-15 date date ty ------ legend taxpayer acquisition assistant country1 country2 corp1 corp2 cpa1 cpa2 cpa3 date1 date2 date3 date4 date5 date6 year1 year2 year3 taxable_year ---------- -------------- dollar_figurea dollar_figureb ---------- -------------- dollar_figurec ---------- -------------- dear ------------ ---------------------------------------------------------------------- ------------------------------------ ------------------ ---------- ------------------------------ ------------------------------- --------------------------------------- ---------------------------------- ---------------------------------------- ------------------- ------------- ------------- -------------------------- ------------------ --------------------------- ------ ------ ------ ------ plr-110366-15 this is in response to your letter dated date1 taxpayer requests an extension of time be granted for the purpose of allowing taxpayer to select the safe_harbor treatment under revproc_2011_29 2011_18_irb_746 by amending taxpayer’s original taxable_year return and including the mandatory statement regarding the election to use the safe_harbor method of allocating success-based fees this request is made in accordance with sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations taxpayer represents the following facts taxpayer is a c-corporation and parent of a country1 consolidated_return group taxpayer is engaged in the exploration exploitation acquisition development and production of crude_oil natural_gas and natural_gas liquids in numerous states the transactions on date2 taxpayer acquired corp1 a publicly traded exploration and production company in a stock-for-stock_exchange this transaction was intended to qualify as a reorganization under sec_368 of the internal_revenue_code on date3 taxpayer acquired corp2 including its wholly-owned country1 subsidiary a publicly traded country2 oil_and_gas company in a stock-for-stock_exchange to assist taxpayer in the two acquisition transactions taxpayer engaged acquisition assistant to act as financial advisor to taxpayer the fee for the assistant’s services for both corp1 and corp2’s acquisition was equal to1 and respectively of the fair value of consideration paid for each acquisition but in no event less than dollar_figurea plus reimbursement of our-of-pocket expenses these fees were payable to acquisition assistant on consummation of each acquisition therefore when taxpayer closed on corp1 on date2 and corp2 on date3 taxpayer paid the acquisition assistant dollar_figureb and dollar_figurec respectively circumstances of late election taxpayer did not have an internal tax department or a tax director accordingly taxpayer engaged cpa1 to assist in the preparation and filing of its federal_income_tax return for the taxable_year cpa1 reported the acquisition fees consistent with taxpayer’s method_of_accounting adopted for financial statement purposes and treated these fees as a deductible expense cpa1 did not consider the requirements or documentation as set forth under sec_1_263_a_-5 of the income_tax regulations to establish that a portion of either fee paid to the acquisition assistant was allocable to activities that did not facilitate either transaction nor did cpa1 mention a safe_harbor election under revproc_2011_29 plr-110366-15 relying on cpa1’s expertise taxpayer deducted the entire amount it paid to its acquisition assistant for the taxable_year ended date4 taxpayer then engaged cpa2 to provide an independent examination of taxpayer’s financial statements from year1 through the second quarter of year2 during that period cpa2 provided an unqualified opinion including assertions that no material weaknesses existed for failing to disclose uncertain tax positions including for example uncertainty associated with treating the acquisition fees as a deductible expense without satisfying the documentation requirements under the sec_1_263_a_-5 of the regulations both cpa1 and cpa2 believed the deduction treatment to have been correct taxpayer relied on their expertise unaware of both cpas’ incompetence and oversight at the end of year2 taxpayer hired a new firm cpa3 as an independent auditor during part of its initial audit cpa3 found and immediately informed taxpayer of the improper tax treatment of the acquisition fees paid to the acquisition assistant taxpayer had deducted all the fees as instructed by cpa1 and reassured by cpa2 cpa3 explained to taxpayer that the acquisition fees should have only been partially deducted under the substantiation requirements of sec_1_263_a_-5 of the regulations or in lieu of this requirement taxpayer’s former cpas should have advised taxpayer to use the safe-harbor election available under revproc_2011_29 the oversight was not yet uncovered by the internal_revenue_service therefore cpa3 advised taxpayer to file a letter_ruling requesting additional time to amend taxpayer’s original federal_income_tax return for taxable_year although advised by cpa3 to file for a letter_ruling in late year2 extenuating circumstances precluded taxpayer from requesting relief to elect the safe_harbor as proper treatment until year3 the late filing was due to taxpayer’s internal changes such as creating a tax department and hiring a new tax director and external changes of tax advisors this created competing priorities and limited resources to rectify a number of material weaknesses including the tax treatments of the fees finally we note that when this letter_ruling was filed with the service on date1 the taxable_year at issue was open however during the processing of the request the taxpayer’s taxable_year closed on date6 law sec_263 and sec_1_263_a_-2 provide that no deduction shall be allowed for any amount_paid out for property having a useful_life substantially beyond the taxable_year in the case of an acquisition or reorganization of a business_entity costs that are incurred in the process of acquisition and that produce significant long-term benefits must be capitalized 503_us_79 397_us_572 plr-110366-15 under sec_1_263_a_-5 of the regulations a taxpayer must capitalize an amount_paid to facilitate a business acquisition or reorganization transaction described in sec_1 a - a an amount is paid to facilitate a transaction described in sec_1_263_a_-5 if the amount is paid in the process of investigating or otherwise pursuing the transaction sec_1_263_a_-5 provides that an amount that is contingent on the successful closing of a transaction described in sec_1_263_a_-5 success-based_fee is presumed to facilitate the transaction and thus must be capitalized a taxpayer may rebut the presumption by maintaining sufficient documentation to establish that a portion of the fee is allocable to activities that do not facilitate the transaction and thus may be deductible a taxpayer’s method for determining the portion of a success-based_fee that facilitates a transaction and the portion that does not facilitate the transaction is a method_of_accounting under sec_446 because the treatment of success-based fees was a continuing subject of controversy between taxpayers and the service the service published revproc_2011_29 revproc_2011_29 provides a safe_harbor method_of_accounting for allocating success- based fees paid in business_acquisitions or reorganizations described in regulations sec_1_263_a_-5 in lieu of maintaining the documentation required by sec_1_263_a_-5 this safe_harbor permits electing taxpayers to treat percent of the success-based_fee as an amount that does not facilitate the transaction that is amounts that can be deducted the remaining portion of the fee must be capitalized as an amount that facilitates the transaction section dollar_figure of revproc_2011_29 allows the taxpayer to make a safe_harbor election with respect to success-based fees section dollar_figure provides that the service will not challenge the taxpayer’s allocation of success-based fees between activities that facilitate a transaction described in sec_1_263_a_-5 cost that must be capitalized and activities that do not facilitate the transaction cost that may be deductible if the taxpayer does three things first the taxpayer must treat percent of the amount of the success-based_fee as an amount that does not facilitate the transaction and thus may be deductible second the taxpayer must capitalize the remaining amount of the success-based_fee as an amount which does facilitate the transaction finally the taxpayer must attach a statement to its original federal_income_tax return for the taxable_year the success-based_fee is paid_or_incurred stating that the taxpayer is electing the safe_harbor identifying the transaction and stating the success-based_fee amounts that are deducted treated as not facilitating the transaction and capitalized treated as facilitating the transaction sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 plr-110366-15 to make certain regulatory elections sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government in the instant case taxpayer did not have an internal tax department or expertise to determine the proper treatment of the acquisition assistant’s fee following the reorganization and stock acquisition transactions in taxable_year thus taxpayer hired tax experts to properly advise him and correctly file the taxable_year return cpa1 advised taxpayer to deduct the entire cost of the acquisition fee taxpayer relied on cpa1’s expertise and followed his instructions then taxpayer hired cpa2 to double check his reliance on cpa1 cpa2 found no error in cpa1’s advice to taxpayer the improper tax treatment was discovered by cpa3 in year2 cpa3 informed taxpayer of the improper treatment of the acquisition fees and in turn the safe_harbor under revproc_2011_29 taxpayer made a good_faith effort to file his taxes correctly by hiring several cpas cpa1 and cpa2 however failed to properly advise taxpayer only cpa3 was familiar with the law including whether to elect the safe_harbor treatment under revproc_2011_29 and informed taxpayer to file a ruling_request for relief taxpayer acted in good_faith and reasonably relied on the tax professionals but his reliance on the first two cpas was detrimental sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment in taxpayer’s case granting relief will not result in taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the safe_harbor election than it would have had if this election had been timely made taxpayer filed its federal tax_return on date5 for tax_year ended taxable_year moreover taxpayer reported a net operating plr-110366-15 loss that exceeded the amount of the deduction for the transaction fees and for each tax_year succeeding tax_year ended in taxable_year taxpayer reported a net_operating_loss thus the interests of the government will not be prejudiced by granting the request for relief conclusion based upon our analysis of the facts as represented taxpayers acted reasonably and in good_faith and granting relief will not prejudice the interests of the government and therefore the requirements of sec_301_9100-1 and sec_301_9100-3 have been met furthermore granting relief will not result in taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than taxpayer would have had if the election had been timely made nor is taxpayer seeking to alter a return position or using hindsight taxpayer is not seeking to alter a return position or using hindsight as the relief requested benefits the service and not taxpayer as it requires an unfavorable adjustment to taxpayer’s net_operating_loss nol therefore the interests of the government will not be prejudiced by granting the request for relief moreover now that taxable_year is a closed_year we believe the interests of the government are not prejudiced as the request results in an adjustment to taxpayer’s nol carry forward and such adjustment would be in an open_year finally granting relief will not prejudice the interests of the government associated with the special rules for accounting_method regulatory elections in this case the safe_harbor election for success-based fees the election provided by revproc_2011_29 for allocating the success-based fees is granted on an automatic basis if all proper procedures including the attaching the mandatory statement are followed does not require a sec_481 adjustment is not an issue under consideration and does not provide a more favorable method_of_accounting if the election is made by a certain date or taxable_year 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 in particular no opinion is expressed as to whether taxpayer properly included the correct costs as its success-based fees subject_to the retroactive election or whether taxpayer’s transactions were within the scope of revproc_2011_29 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively a taxpayer filing its return electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling plr-110366-15 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely _____________________________ thomas d moffitt chief branch associate chief_counsel income_tax accounting cc


internal_revenue_service number release date index number ------------------------------------------------------- ------------------------------------------------------------ ------------------------------------------ ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------------- id no ------------- ----------------- telephone number ---------------------- refer reply to cc tege eb qp3 plr-121335-17 date date legend entity a church official b ------------------------------------------------------- ---------------------------------------------------------------------------------- --------------- church jurisdiction c ---------------------------------------- church d church directory e prior name f prior name g prior name h committee i entity m plan x -------------------------------------- ---------------------------------------- ---------------------------------------------------------------------------------- -------------------------------------------------------------------- ----------------------------------------------------------- --------------------------- ------------------------------------------------------------------- ---------------------------------------------------------------------------------- -------- dear -------------- this letter is in response to entity a’s request submitted on its behalf by its authorized representative regarding the status of plan x as a church_plan within the meaning of sec_414 of the internal_revenue_code code the following facts and representations have been submitted under penalty of perjury on entity a’s behalf entity a was originally established by church official b and has been incorporated as a non-profit entity entity a is a ministry of church jurisdiction c and is listed in church directory e entity a’s purpose includes furthering the general welfare and common good of the public by establishing organizing and maintaining a church d agency which makes available social services to residents of a particular geographic area plr-121335-17 entity a has been known by several names over the years specifically prior name f prior name g and prior name h the sole member of entity a is ex-officio church official b or his canonical successor as determined by specified authority in church d as the sole member church official b elects all of the members of the board_of directors of entity a the board in church official b’s sole and absolute discretion upon entity a’s dissolution entity a’s property is to be transferred to a sec_501 organization listed in church directory e for the purpose of assisting the poor church jurisdiction c is a principal provider of funds that support entity a programs in church jurisdiction c provided more than ---- million of financial support to entity a the chief_executive_officer of entity a serves as the --------------------------------- --------------------------- for church jurisdiction c entity a is exempt from federal_income_tax under sec_501 as a subordinate organization under entity m’s sec_501 group tax exemption_letter which applies to organizations listed in church directory e entity a established plan x a defined_benefit_plan qualified under sec_401 effective in in order to provide retirement benefits to entity a employees plan x was frozen several years ago and entity a employees subsequently began participating in the sec_401 plan of church jurisdiction c entity a employees have always participated in church jurisdiction c’s health plan committee i has been established by entity a to be responsible for administering the employee benefit plans maintained by entity a including plan x committee i has overall responsibility and authority to manage and control the operation and administration of plan x however entity a remains responsible for determining whether an individual is eligible to participate in plan x the members of committee i are appointed by church official b committee i is comprised of three members the chair of the entity a board’s finance_committee the vice chair of the board_of entity a and the chief financial officer of entity a none of the eligible participants in plan x are or can be considered employed in connection with a for-profit entity or one or more unrelated trades_or_businesses of entity a within the meaning of sec_513 all eligible participants of plan x are employed directly by entity a and there are no other participating employers in plan x the plan_administrator of plan x never made an election under sec_1_410_d_-1 of the federal_income_tax regulations with regard to plan x plr-121335-17 a notice to interested persons regarding plan x was provided in accordance with revproc_2011_44 2011_39_irb_446 this notice explained the consequences of church_plan status based on the foregoing entity a requests a ruling that plan x is a church_plan within the meaning of sec_414 of the code sec_414 generally defines a church_plan as a plan established and maintained for its employees or their beneficiaries by a church or a convention or association of churches which is exempt from taxation under sec_501 sec_414 provides in part that the term church_plan does not include a plan that is established and maintained primarily for the benefit of employees or their beneficiaries of such church_or_convention_or_association_of_churches who are employed in connection with one or more unrelated trades_or_businesses within the meaning of sec_513 or if less than substantially_all of the individuals included in the plan are individuals described in sec_414 or sec_414 or their beneficiaries sec_414 provides that a plan established and maintained for its employees or their beneficiaries by a church or a convention or association of churches includes a plan maintained by an organization whether a civil law corporation or otherwise the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits or both for the employees of a church or a convention or association of churches if such organization is controlled by or associated with a church or a convention or association of churches see advocate health care network v stapleton u s ___ holding that a plan that is maintained by an organization described in sec_414 may be a church_plan under sec_414 even if it was not established by a church or a convention or association of churches sec_414 generally defines employee of a church or a convention or association of churches to include a duly ordained commissioned or licensed minister of a church in the exercise of his or her ministry regardless of the source of his or her compensation and an employee of an organization whether a civil law corporation or otherwise which is exempt from tax under sec_501 and which is controlled by or associated with a church or a convention or association of churches sec_414 provides that a church or a convention or association of churches which is exempt from tax under sec_501 shall be deemed the employer of any individual included as an employee under subparagraph b sec_414 provides that an organization whether a civil law corporation or otherwise is associated with a church or a convention or association of churches if it plr-121335-17 shares common religious bonds and convictions with that church_or_convention_or_association_of_churches revproc_2011_44 2011_39_irb_446 supplements the procedures for requesting a letter_ruling under sec_414 relating to church plans the revenue_procedure requires that plan participants and other interested persons receive a notice in connection with a letter_ruling request under sec_414 for a qualified_plan requires that a copy of the notice be submitted to the irs as part of the ruling_request and provides procedures for the irs to receive and consider comments relating to the ruling_request from interested persons in order for an organization that is not itself a church or a convention or association of churches to have a qualified church_plan it must establish that its employees are employees or deemed employees of a church or a convention or association of churches under sec_414 by virtue of the organization’s control by or association with the church_or_convention_or_association_of_churches employees of any organization maintaining a plan are considered to be church employees if the organization is exempt from tax under sec_501 and is controlled by or associated with a church or a convention or association of churches in addition in order to be a church_plan the administration or funding or both of the plan must be by an organization described in sec_414 to be described in sec_414 an organization must have as its principal purpose the administration or funding of the plan and must also be controlled by or associated with a church or a convention or association of churches with respect to the ruling_request under the facts you have represented entity a is a ministry of church jurisdiction c the sole member of entity a is church official b ex officio and church official b elects the members of the board_of entity a entity a is listed in church directory e and is exempt from tax under sec_501 pursuant to a group tax exemption that covers entities listed in church directory e upon entity a’s dissolution its residual assets are to be distributed to another entity listed in church directory e church jurisdiction c is a principal provider of funds that support entity a programs in church jurisdiction c provided more than ---- million of financial support to entity a the chief_executive_officer of entity a serves as the --------------------------------- --------------------------- for church jurisdiction c the employees of entity a participate in certain employee benefit plans of church jurisdiction c you represent that none of entity a’s employees are employed in connection with one or more unrelated trades_or_businesses within the meaning of sec_513 and no plan participants are employed by for-profit entities based on these facts we conclude that entity a is controlled by or associated with church d for purposes of sec_414 we further conclude that the employees of entity a are deemed to be employees of a church or a convention or association of churches by plr-121335-17 virtue of being employees of an organization which is exempt from tax under sec_501 and which is controlled by or associated with a church or a convention or association of churches committee i is the plan_administrator of plan x and its sole purpose is to administer plan x and certain other benefit plans for employees of entity a the members of committee i are appointed by church official b we thus conclude that committee i is controlled by or associated with church d accordingly plan x is maintained by an organization that is associated with a church or a convention or association of churches the principal purpose or function of which is the administration of plan x for the provision of retirement benefits for the deemed employees of a church or a convention or association of churches based on the foregoing facts and representations we conclude that plan x is a church_plan as defined in sec_414 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent 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 as specified in revproc_2017_1 2017_1_irb_1 b this office has not verified any of the material submitted in support of the request_for_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 was based or in the case of a transaction involving a continuing action or series of actions the controlling facts change during the course of the transaction see revproc_2017_1 sec_11 plr-121335-17 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely john t ricotta branch chief qualified_plans branch office of associate chief_counsel tax exempt and government entities cc