department of the treasury internal_revenue_service washington d c date cc dom fs corp tl-n-8369-98 number release date uilc internal_revenue_service national_office field_service_advice memorandum for district_counsel from subject deborah a butler assistant chief_counsel field service cc dom fs extraordinary_dividend 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 cited as precedent legend taxpayer assets product x sub distributing buyer sub1 buyer1 year year year year year year date date date date date a b c d e f g h i j k l m n o p q r issue whether the dividend paid to taxpayer by distributing in the amount of dollar_figureo or in conjunction with any other dividends that should be aggregated under ' c concurrent with a series of transactions is an extraordinary_dividend within the meaning of ' thus serving to reduce taxpayer's adjusted_basis in distributing stock in an amount equal to the portion of the dividend excluded from gross_income under ' conclusion the dividend paid to taxpayer by distributing in the amount of dollar_figureo or in conjunction with any other dividends that should be agregated under ' c concurrent with a series of transactions is not an extraordinary_dividend within the meaning of ' because taxpayer appears to have met the two year holding_period under ' a thus taxpayer's adjusted_basis in distributing stock is not reduced by an amount equal to the portion of the dividend excluded from gross_income under ' in any event taxpayer may still make an election under ' c providing that taxpayer can establish the fair_market_value of its distributing stock to the satisfaction of the secretary to substitute the fair_market_value of the stock for the adjusted_basis in determining the threshold_percentage under ' c notwithstanding that taxpayer did not comply with revproc_87_33 1987_2_cb_402 facts from year to date taxpayer owned and controlled certain assets as one of its operating divisions during that time and continuing to the present the assets manufactured product x on date taxpayer incorporated the assets as a wholly owned subsidiary sub on date taxpayer sold a of its stock in sub to buyer for dollar_figureb on its year form_1120 taxpayer reported a gain on this transaction of dollar_figurec representing the difference between the amount_realized and its adjusted_basis of dollar_figured taxpayer's reported basis in the stock was accepted at the time by the service and is the starting point for all future basis calculations involving its sub stock on date taxpayer and buyer formed distributing a domestic_corporation in a non-recognition transfer under ' at that time taxpayer and buyer each contributed stock of various foreign subsidiaries and their respective stock interests in sub in exchange for all of the stock of distributing this arrangement permitted their foreign subsidiaries to become subsidiaries of distributing rather than its sister subsidiaries the facts are unclear whether sub subsequently merged into distributing during year through year distributing paid dividends to taxpayer and buyer totaling dollar_figuree in year dollar_figuref each dollar_figureg in year dollar_figureh each and dollar_figurei in year dollar_figurej each on date which occurs in year distributing was recapitalized through the following series of transactions sub1 a wholly owned subsidiary of distributing borrowed dollar_figurek from a commercial lender sub1 issued dollar_figure l senior subordinated notes due in year it appears that only common_stock was issued in connection with this transaction distributing repaid approximately dollar_figurem of its then existing debt distributing redeemed and canceled all of the common equity held by buyer for dollar_figuren as discussed below following this redemption taxpayer became the owner of distributing distributing distributed dollar_figureo to taxpayer as a purported dividend distributing then sold p newly issued shares of its common_stock to buyer1for dollar_figureq following this sale buyer1 owned r of distributing less than two years elapsed from the time taxpayer acquired its stock in distributing until it received the distribution in step above on date on date which occurs in year taxpayer sold its remaining stock interest in distributing on its year form_1120 taxpayer reported the dividends received in year as normal cash dividends from a or more owned corporation resulting in an dividend_exclusion under ' introduction sec_1059 was added to the code by ' of the deficit_reduction_act_of_1984 pub_l_no 98_stat_565 congress was concerned about certain tax_motivated_transactions where a corporation acquired stock in another corporation before the dividend declaration date that would be eligible for the dividends received distributing the facts are unclear how the money raised by sub1 was transfered to for purposes of this fsa taxpayer's series of transactions will be respected ie taxpayer is in fact receiving a dividend at a time when taxpayer is the only shareholder even though taxpayer is the sole shareholder under its structure at the time of the distribution taxpayer would still not qualify under ' c for the dividends received deduction because the dividend is still not a qualifying_dividend as defined in ' b it is unclear whether buyer1 actually purchased distributing stock on date or at a later date if buyer1 actually purchased distributing stock on date taxpayer and distributing were not members of the same affiliated_group at the close of the day if buyer1 purchased the stock at a later date then taxpayer may be entitled to the larger dividends received deduction under ' a providing all the other requirements of that section are met however such dividends would not necessarily be qualifying dividends as defined by ' e because the e_p was earned from a time taxpayer and distributing were not affiliated sec_1059 see also ' b deduction under ' and would reduce the value of the stock after receipt of the dividend after receiving the dividend the corporation would then sell the stock and claim the loss resulting from the decline in value of the stock as a short term capital_loss and the short-term_capital_loss could offset short-term_capital_gain accordingly congress enacted ' to prevent a corporation from receiving the loss described above by requiring it to reduce its basis in the stock of the distributing_corporation stock by the non-taxed portion of the dividend h_r rep no 98th cong 2d sess pt at p and s prt no 98th cong 2d sess vol i pincite law sec_243 provides in the case of a corporation there shall be allowed as a deduction an amount equal to the following percentages of the amount received as dividends percent in the case of dividends other than dividends described in paragraph or and percent in the case of qualifying dividends as defined in subsection b sec_243 provides for purposes of this section the term 'qualifying dividend' means any dividend received by a corporation-- a if at the close of the day on which such dividend is received such corporation is a member of the same affiliated_group as the corporation distributing such dividend sec_243 provides in the case of any dividend received from a 20-percent_owned_corporation subsection a of this section shall be applied by substituting '80 percent' for '70 percent ' sec_246 c provides for purposes of this subsection in determining the period for which the taxpayer has held any share of stock b there shall not be taken into account any day which is more than days after the date on which such share becomes ex-dividend and c paragraph of sec_1223 shall not apply sec_1059 provides if any corporation receives any extraordinary_dividend with respect to any share of stock and such corporation has not held such stock for more than years before the dividend announcement date-- the basis of such corporation in such stock shall be reduced but not below zero by the nontaxed_portion of such dividends in addition to any gain recognized under this chapter there shall be treated as gain from the sale_or_exchange of any stock for the taxable_year in which the sale or disposition of such indicated all code sections cited are the law as in effect for year unless otherwise stock occurs an amount equal to the aggregate nontaxed portions of any extraordinary dividends with respect to such stock which did not reduce the basis of such stock by reason of the limitation on reducing basis below zero sec_1059 provides for purposes of this section-- the nontaxed_portion of any dividend is the excess if any of-- a the amount of such dividend over b the taxable_portion of such dividend the taxable_portion of any dividend is-- a the portion of such dividend includible in gross_income reduced by b the amount of any deduction allowable with respect to such dividend under sec_243 sec_244 or sec_245 sec_1059 c provides the term 'extraordinary dividend' means any dividend with respect to a share of stock if the amount of such dividend equals or exceeds the threshold_percentage of the taxpayer's adjusted_basis in such share of stock sec_1059 provides the term 'threshold percentage' means a percent in the case of stock which is preferred as to dividends and b percent in the case of any other stock sec_1059 provides all dividends-- i which are received by the taxpayer or a person described in subparagraph c with respect to any share of stock and ii which have ex-dividend dates within the same period of consecutive days shall be treated a sec_1 dividend sec_1059 provides all dividends-- i which are received by the taxpayer or a person described in subparagraph c with respect to any share of stock and ii which have ex-dividend dates during the same period of consecutive days shall be treated as extraordinary dividends if the aggregate of such dividends exceeds percent of the taxpayer's adjusted_basis in such stock determined without regard to this section sec_1059 provides in the case of any stock a person is described in this subparagraph if-- i the basis of such stock in the hands of such person is determined in whole or in part by reference to the basis of such stock in the hands of the taxpayer or ii the basis of such stock in the hands of the taxpayer is determined in whole or in part by reference to the basis of such stock in the hands of such person sec_1059 provides if the taxpayer establishes to the satisfaction of the secretary the fair_market_value of any share of stock as of the day before the ex-dividend_date the taxpayer may elect to apply paragraphs and by substituting such value for the taxpayer's adjusted_basis sec_1059 provides for purposes of determining the holding_period of stock under subsection a rules similar to the rules of paragraphs and of sec_246 shall apply except that years shall be substituted for the number of days specified in subparagraph b of sec_246 sec_1059 provides subsection a shall not apply to any extraordinary_dividend with respect to any share of stock of a corporation if-- i such stock was held by the taxpayer during the entire period such corporation was in existence and ii except as provided in regulations no earnings_and_profits of such corporation were attributable to transfers of property from or earnings_and_profits of a corporation which is not a qualified_corporation sec_1059 provides for purposes of subparagraph a the term 'qualified corporation' means any corporation including a predecessor_corporation -- i with respect to which the taxpayer holds directly or indirectly during the entire period of such corporation's existence at least the same ownership_interest as the taxpayer holds in the corporation distributing the extraordinary_dividend and ii which has no earnings and profits-- i which were earned by or ii which are attributable to gain on property which accrued during a period the corporation holding the property was a corporation not described in clause i sec_1059 provides this paragraph shall not apply to any extraordinary_dividend to the extent such application is inconsistent with the purposes of this section sec_1059 provides except as provided in regulations the term 'extraordinary dividend' does not include any qualifying_dividend within the meaning of sec_243 sec_1059 provides subparagraph a shall not apply to any portion of a dividend which is attributable to earnings_and_profits which-- i were earned by a corporation during a period it was not a member of the affiliated_group or ii are attributable to gain on property which accrued during a period the corporation holding the property was not a member of the affiliated_group sec_1223 provides in determining the period for which the taxpayer has held property received in an exchange there shall be included the period for which he held the property exchanged if under this chapter the property has for the purpose of determining gain_or_loss from a sale_or_exchange the same basis in whole or in part in his hands as the property exchanged and in the case of such exchanges after date the property exchanged at the time of such exchange was a capital_asset as defined in sec_1221 or property described in sec_1231 analysis taxpayer could raise three possible arguments as to why the dividend or dividends_paid to it by distributing is not an extraordinary_dividend within the meaning of ' these arguments could focus on whether taxpayer can pursuant to ' c substitute the fair_market_value fmv of the stock for its adjusted_basis in determining the threshold_percentage under ' c whether taxpayer has met the requirements of holding the stock of distributing for distributing's entire existence under ' d and whether sub is a predecessor_corporation of distributing we set forth our analysis of each of these items substitution of fmv for adjusted_basis taxpayer may argue that it can make an election under ' c to substitute the fmv of the stock for the adjusted_basis in determining the threshold_percentage under ' c as such the dividend may not qualify as an extraordinary_dividend notwithstanding that taxpayer has not complied with revproc_87_33 1987_2_cb_402 it may still be able to make the election under ' c providing it can establish the fmv of the distributing stock compliance with revproc_87_33 an extraordinary_dividend is a dividend where the amount of such dividend equals or exceeds a certain threshold_percentage of the taxpayer's adjusted_basis in the stock of the distributing_corporation sec_1059 when applying ' c if the taxpayer establishes the fair_market_value of any share of stock as of the day before the ex-dividend_date it may use that value in place of the adjusted_basis sec_1059 no regulations have been issued establishing guidelines for making elections under ' c nor does the legislative_history provide any guidance see s rep no 99th cong 2d sess pincite however procedures for electing to use the fair_market_value are set forth in revproc_87_33 sec_4 and of revproc_87_33 provide that in order to make an election under ' c a taxpayer must request a written_determination of the stock s fmv and attach a statement to the tax_return for the year containing the ex-dividend_date stating that it is making an election under ' c the statement filed with the return must contain a number of specific items taxpayer did not comply with the revenue_procedure nor has it yet indicated that it wants to make the election under ' c whether a taxpayer must comply with the commissioner's exact procedures for making an election turns upon whether the regulatory requirements relate to the substance or essence of a statute or are procedural in nature 81_tc_709 determining whether taxpayer must comply with revproc_87_33 is determining whether the election process relates to the essence or substance of the statute or is procedural to determine whether election mechanics relate to the essence of the statute it is necessary to examine its purpose its relationship with other provisions the terms of the underlying statute and the consequences of failure to comply with the provision in question 60_tc_910 here the purpose of the provision in question is to allow taxpayers owning appreciated stock to use the fair_market_value rather than adjusted_basis when calculating an extraordinary_dividend it relates to no code provisions other than ' and the terms of the statute provide no guidance as to what is necessary to claim the benefit of the election the consequences of failure to elect is being required to use adjusted_basis in determining whether there is an extraordinary_dividend examined in light of these factors the election procedures under revproc_87_33 do not relate to the essence or substance of the statute elections that relate to the essence of the statute are those that require the taxpayer to forgo some benefit or take some specific action in order to claim entitlement to a preferential code provision thus in valdes the court held that because valdes' imperfect election did not reflect his unequivocal agreement to take the benefits and burdens of sec_172 he was not entitled to the extended carryback provisions under that code provision valdes t c pincite similarly in 69_tc_837 the court held that an election to rapidly amortize pollution_control_facilities was ineffective when the taxpayer failed to apply for certification of the facilities as required in the election here unlike in valdes and penn-dixie there are no specific actions other than getting an appraisal showing the fair_market_value of the stock that need to be taken to comply with election under ' c nor is there any benefit that taxpayer needs to forgo to make the election therefore the election under ' c does not go to the essence of the statute when the requirements for making an election are procedural and the essential statutory purposes have been fulfilled substantial compliance with the election provision is sufficient american air filter t c pincite whether the taxpayer's compliance with election requirements is substantial depends upon several factors whether the commissioner has been prejudiced by the failure to literally comply with the election requirements 42_tc_308 whether the statute the election requirements in this case are not set by regulation nonetheless cases addressing the regulatory framework for various elections provide the best guidance on this issue or regulation provides specific instructions on how to make an election beaver v commissioner 42_tc_72 acq 1965_2_cb_6 whether the sanction imposed upon the taxpayer for failure to make the election is out of proportion to the default 61_tc_5 acq 1979_2_cb_2 and whether giving effect to the imperfect election would allow the taxpayer to gain the advantage of examining the issue in hindsight 74_tc_458 acq 1982_2_cb_2 see american air filter t c pincite here taxpayer has not only not complied with rev_proc 87-33's rules for making an election - it has done nothing but this failure to act must be considered in light of taxpayer's likely argument that the disposition in question does not qualify as an extraordinary_dividend thus the issue here is slightly different than the usual ineffective election case the question here is whether the election in these circumstances is required at all examining substantial compliance in this case must begin with the standards set forth above here the commissioner is not necessarily prejudiced by taxpayer's failure to make an election if taxpayer claims entitlement to the benefits of ' c it must establish the fmv of the stock delaying this process may not necessarily prejudice the commissioner see sperapani t c pincite noting that even had certain facts concerning an election been included in the election statement the commissioner would still have to verify those facts there is no specific language in the statute covering the election under ' c the taxpayer need only establish to the satisfaction of the secretary the fair market of any share of stock as in beaver the only requirement specifically in the statute is a general one beaver t c pincite the penalty here for failure to elect presumably inability to use the provisions of ' c is as in columbia iron steel out of proportion to any harm caused to the commissioner columbia iron steel t c pincite lastly in this case taxpayer if it elects to use fmv is not benefitting from the advantages of hindsight see valdes finding that congress required an election under ' b d to be unambiguous to ensure that a taxpayer did not take a wait-and-see attitude toward the election the election procedure set forth in revproc_87_33 is clearly procedural the contrary argument that an election under ' c must be made in accordance with this procedure is apparently based upon administrative convenience this argument was rejected in sperapani and tipps taxpayer's failure to make an election under revproc_87_33 does not invalidate its claim to the benefits of ' c timing of election even if taxpayer does not need to use the election procedures set forth in revproc_87_33 the issue of the proper time for claiming entitlement to ' c is still important the time for making an election depends upon the nature and circumstances of the election if the essential requirements of the underlying statute have been met and the information required for the election is provided to the commissioner when requested the specific election procedures need not be complied with columbia iron metal co t c pincite in columbia iron metal the taxpayer sought to deduct a charitable deduction that was authorized but not paid under ' a it did not attach the documents required under the applicable regulation to its tax_return the court found that the failure to include the required documents did not invalidate the deduction because the required information had since been given to the commissioner in a case similar to this one 60_tc_917 the court concluded that i t is also significant to note that the instant case does not involve the kinds of difficulties inherent in other situations where the granting of a right of a late election permits the taxpayer in effect to play both ends against the middle as the result of hindsight there at the time he filed his return dougherty was not aware that he would have foreign-sourced passive_income for in when he discovered that he did have such income he notified the commissioner that he wanted such amounts taxed at corporate rates as provided for in ' the commissioner rejected the request because dougherty failed to comply with the applicable election procedures the court concluded that consistent action by the taxpayer was the key factor in determining whether untimely elections were valid we distill from the decided cases that the critical question involved in determining the timeliness of a delayed election is whether 'the original action or the failure to act on the part of the taxpayer did not amount to an election against and was not inconsistent with the position which the taxpayer ultimately did adopt ' id citation omitted doughterty did not take any actions in indicating that he did not seek the benefits of ' rather until he believed that he had no foreign-sourced income thus because it was 'sufficient for the taxpayer to indicate its election when it appears that a tax is due and when therefore an election first has significance ' the court allowed the tardy election id pincite citation omitted here taxpayer has not taken any actions inconsistent with the provisions of ' c and assuming that taxpayer can provide information establishing the fmv of the distributing stock to the commissioner it is entitled to use ' c therefore taxpayer need not follow the election procedures set forth in revproc_87_33 to claim the benefits of ' c if taxpayer can establish the fmv of the distributing stock it may use that value for the purposes of ' exception where stock held during entire existence of corporation taxpayer may argue that it has met the requirements of holding the stock of distributing for distributing's entire existence under ' d and therefore the distribution is not an extraordinary_dividend sec_1059 provides an exception to the year holding_period of ' a where the distributing corporation's stock was held by the taxpayer during the entire period such corporation was in existence if no earnings_and_profits of such corporation were attributable to transfers of property from or earnings_and_profits of a corporation which is not a qualified_corporation nevertheless taxpayer may not satisfy this exception if distributing has earnings_and_profits of a corporation which is not a qualified_corporation since there is conflicting information as to whether sub merged into distributing some time after the transactions occurring on date we have insufficient information at this point to determine whether taxpayer actually qualifies under ' d however an analysis of this issue is set forth below based on whether sub was or was not merged into distributing under ' d b a qualified_corporation means any corporation including a predecessor_corporation -- i with respect to which the taxpayer holds directly or indirectly during the entire period of such corporation's existence at least the same ownership_interest as the taxpayer holds in the corporation distributing the extraordinary_dividend and attributable to gain on property which accrued during a period the corporation holding the property was a corporation not described in clause i the legislative_history further explains this provision as follows ii which has no earnings and profits-- i which were earned by or ii which are also we have insufficient information to determine whether there were transactions between distributing and its subsidiaries other than sub that would disqualify distributing from the exception in ' d ie distributing may have received earnings_and_profits from one or more of such subsidiaries which may not be a qualified_corporation the bill also clarifies the application of the special exception for dividends on stock that has been held during the entire existence of a corporation this relief provision was intended to permit distributions without basis_reduction even though the distributions exceed the threshold_percentage and are declared announced or agreed to within the two-year holding_period only in those cases in which the earnings_and_profits of the corporation paying the dividend could not have been attributable directly or indirectly to any person other than the original shareholder receiving the distribution for this purpose earnings_and_profits are not considered attributable solely to such shareholder if any more than a de_minimis part of such earnings_and_profits is derived directly or indirectly from any other entity in which the shareholder was not an original shareholder with an interest at least as great as such shareholder's original and continuing interest in the distributing_corporation at the time of the distribution thus for example the relief provision does not apply if more than a de_minimis part of the earnings_and_profits of the corporation paying the dividend were derived directly or indirectly from another corporation eg through a dividend distribution a transaction described in sec_381 a sale of assets received in a sec_332 liquidation or other carryover_basis transaction or in which the original shareholder did not at all times hold at least as great an interest as such shareholder's interest in the distributing_corporation at the time of the distribution emphasis added s rep no 100th cong 2d sess pincite pincite h_r rep no 100th cong 2d sess pincite general explanation of the tax_reform_act_of_1986 staff of joint_committee on taxation 100th cong 1st sess pincite if sub merged into distributing or otherwise liquidated under ' after the transaction occurring on date ' d does not apply because a portion of distributing's earnings_and_profits are attributable to sub sec_381 see also the legislative_history quoted above as of date taxpayer only had only an a interest in sub on date at the time the dividend was paid taxpayer had a interest in distributing therefore taxpayer did not hold directly or indirectly during the entire period of sub's existence at least the same ownership_interest taxpayer holds in distributing furthermore if there was no merger of sub into distributing or any other merger of a non-qualified corporation ' d would not apply if distributing received a distribution from or otherwise had earnings_and_profits that were attributable to transfers of property from or earnings_and_profits of a corporation which is not a qualified_corporation predecessor_corporation taxpayer could argue that ' does not apply in this case because it held the stock of distributing for more than the year period prescribed in ' a on the theory that sub and distributing its successor_in_interest should be treated as the same corporation for purposes of applying that section arguably this approach is inconsistent with the express provisions of ' a under ' a the basis of stock must be reduced if a corporation i receives a dividend with respect to any share of stock and ii has not held the stock for more than two years in the absence of congressional intent to exempt from the reach of ' a distributions from successor corporations successor corporations are not exempt from the reach of ' a however while ' a does not specifically exempt from the reach of ' a distributions from successor corporations it does exempt some distributions from successor corporations indirectly through ' d sec_1059 specifically provides f or purposes of determining the holding_period of stock under subsection a rules similar to the rules of paragraphs and of sec_246 shall apply as mentioned in footnote above the facts are unclear how the money raised by sub1 was transferred to distributing it should be determined whether the money was transferred by way of a distribution it could be argued that the holding_period rules of ' d do not apply here because the specific reference to ' a applying to recognition of gain upon the disposition of stock in certain cases does not literally refer to the operative year holding_period for the required reduction in basis however this reference appears to be a drafting glitch in the code sec_1059 read substantially as specified above since the enactment of ' however at the time of enactment ' a read as follows if any corporation -- receives an extraordinary_dividend with respect to any share of stock and sells or otherwise disposes of such stock before such stock has been held for more than year deficit_reduction_act_of_1984 pub_l_no 98_stat_565 sec_1059's reference to ' a at that time made perfect sense by referring to the year holding_period requirement sec_614 of the tax_reform_act_of_1986 publaw_99_514 the act amended ' a to require that the dividend receiving corporation hold the stock of a distributing_corporation more than years before the dividend_announcement_date rather than holding the stock for year after receiving the dividend the language in all of ' except that '2 years' shall be substituted for the number of days specified in subparagraph b of sec_246 sec_246 provides f or purposes of this subsection in determining the period for which the taxpayer has held any share of stock c paragraph of sec_1223 shall not apply this suggests that paragraph of ' does apply sec_1223 which generally provides that the holding_period for exchanged_basis_property received in ' and ' transactions includes the period for which the taxpayer held the property exchanged applies to all of subtitle a including ' therefore it appears that taxpayer may not be subject_to ' or at least a large part of the distribution may not be subject_to ' because taxpayer's holding_period in all or most all of the distributing stock appears to exceed the two year requirement under ' a taxpayer received its distributing stock on date in a ' transaction under ' a taxpayer receives an exchange basis in the stock of distributing that is taxpayer's basis in the stock of distributing generally equals its basis in the assets taxpayer contributed to distributing in the ' transaction consequently taxpayer's holding_period in such stock is determined under ' provided the assets contributed in the ' transaction are capital assets it appears that all the stock of the subsidiaries contributed to distributing as part of the ' transaction were held by taxpayer in excess of years absent transfers of any other assets taxpayer would not be subject_to ' a because it is deemed to have held the stock of distributing in excess of two years pursuant to d c and cf ' e a was thus substantially changed sec_614 of the act amended ' d by striking out '1 year' and inserting in lieu thereof '2 years ' however such amendment neglected to conform ' d 's reference to ' a which should refer to all of ' a furthermore ' d is currently identical to ' a of the act except that the reference to subsection a has been changed to just subsection a by ' d of the taxpayer_relief_act_of_1997 publaw_105_34 111_stat_1098 as a technical amendment however this particular amendment does not appear to have a retroactive date to the act since the technical correction ' d now harmonizes with ' a in any event we think that it is appropriate to interpret the cross reference to a which does not mention any holding_period as a reference to the whole of paragraph a it appears congress actually looked at certain holding_period implications under ' while enacting ' h_r rep no 98th cong 2d sess pt at p and s prt no 98th cong 2d sess vol i pincite case development hazards and other considerations 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questions please call by arturo estrada acting chief corporate field service division


internal_revenue_service number release date index number --------------------------------------------------- ------------------------------------- ----------------------------------- ----------------------------------------- legend department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------- id no ---------------- telephone number -------------------- refer reply to cc psi b01 plr-145875-13 date may x --------------------------------------------------- ------------------------------------- a --------------------------- trust --------------------------------------------------- --------------------------------------------------- trust a --------------------------------------------------- -------------------------------------------------- trust b --------------------------------------------------- ----------------------------------------------------- date date date date date year year state ------------------------ ------------------------ ------------------ ------------------------ ----------------- ------ ------ --------- plr-145875-13 dear ----------------- this responds to a letter dated date and subsequent correspondence submitted on x’s behalf by x’s authorized representative requesting relief under sec_1362 of the internal_revenue_code facts according to the information submitted x was incorporated under the laws of state on date and elected to be treated as an s_corporation effective date a established a revocable_trust trust trust was a shareholder of x as of date on date a died and trust continued to qualify as an eligible s_corporation shareholder under sec_1361 pursuant to the terms of trust shares of x were transferred to trust a and trust b on date x represents that trust a was eligible to be a qualified_subchapter_s_trust qsst within the meaning of sec_1361 however the beneficiary of trust a did not make an election under sec_1361 to treat the trust as a qsst in addition x represents that trust b was eligible to be an electing_small_business_trust esbt within the meaning of sec_1361 however the trustee of trust b did not make an election under sec_1361 to treat the trust as an esbt therefore trust a and trust b were not permissible shareholders and x’s s_corporation_election terminated on date x represents that the circumstances resulting in a failure_to_file qsst and esbt elections for trust a and trust b respectively were inadvertent and were not motivated by tax_avoidance or retroactive tax planning x further represents that since date x trust a and trust b have filed returns consistent with x having a valid s election x represents that trust a has at all times met the requirements of a qsst x represents that trust b has at all times met the requirements of an esbt and that no additional tax is due for year and year if trust b filed its return consistently with it having a valid esbt election lastly x and its shareholders have agreed to make adjustments consistent with the treatment of x as an s_corporation as may be required by the service law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year plr-145875-13 sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than class of stock sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be an s_corporation shareholder sec_1361 and sec_1_1361-1 provide that for purposes of sec_1361 a_trust that is described in sec_1361 immediately before the death of the deemed owner and that continues in existence after such death is a permitted s_corporation shareholder but only for the two-year period beginning on the day of the deemed owner's death sec_1361 provides that a qsst whose beneficiary makes an election under sec_1361 will be treated as a_trust described in sec_1361 and the qsst‘s beneficiary will be treated as the owner for purposes of sec_678 of that portion of the trust which consists of stock in an s_corporation with respect to which the election under sec_1361 applies under sec_1361 a beneficiary of a qsst may elect to have sec_1361 apply sec_1_1361-1 provides that if s_corporation stock is transferred to a_trust the qsst election must be made within the 16-day-and-2-month period beginning on the day that the stock is transferred to the trust sec_1361 provides that for purposes of sec_1361 an esbt may be a shareholder sec_1361 provides that an election under sec_1361 shall be made by the trustee any such election shall apply to the taxable_year of the trust for which made and all subsequent taxable years of such trust unless revoked with the consent of the secretary sec_1_1361-1 provides that the trustee of an esbt must file the esbt election within the time requirements prescribed in sec_1 j iii sec_1362 provides that if an election under sec_1362 by any corporation was terminated under sec_1362 or the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such termination steps were taken so that the corporation for which the termination occurred is a small_business_corporation and the corporation for which the termination plr-145875-13 occurred and each person who was a shareholder in such corporation at any time during the period specified pursuant to f agrees to make such adjustments consistent with the treatment of such corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such termination such corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and the representations made we conclude that x’s s_corporation_election was terminated on date because the beneficiary of trust a failed to make a timely qsst election and the trustee of trust b failed to make a timely esbt election we further conclude that the termination of x’s s_corporation_election was inadvertent within the meaning of sec_1362 therefore x will be treated as continuing to be an s_corporation on and after date provided that x’s s_corporation_election was otherwise valid and was not otherwise terminated under sec_1362 this ruling is contingent on the beneficiary of trust a filing a qsst election for trust a and the trustee of trust b filing an esbt election for trust b effective date with the appropriate service_center within days of the date of this letter a copy of this letter should be attached to the elections accordingly x’s shareholders in determining their respective income_tax liabilities must include their pro_rata share of the separately_stated and nonseparately computed items of x as provided in sec_1366 make any adjustments to stock basis as provided in sec_1367 and take into account distributions made by x as provided by sec_1368 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied on whether x was or is otherwise eligible to be treated as an s_corporation or whether trust a meets the requirements of a qsst or whether trust b meets the requirements of an esbt this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-145875-13 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 joy c spies joy c spies senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy of this letter for sec_6110 purposes cc


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc corp b04 - plr-100284-02 date date legend distributing controlled sub sub sub sub target shareholder a plr-100284-02 shareholder b business a business b business c distributing class a stock distributing class b stock controlled class a stock controlled class b stock controlled class c stock target class a stock target class b stock individual a date a date b date c state a state b a b c d e plr-100284-02 f g dear this letter responds to your date request for rulings regarding certain federal_income_tax consequences of a proposed transaction the information submitted in that request and in later correspondence is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process summary of facts distributing is the common parent of an affiliated_group_of_corporations that files a consolidated federal_income_tax return distributing is engaged directly and indirectly in business a business b and business c distributing has two classes of voting common_stock outstanding distributing class a stock and distributing class b stock both of which are publicly traded shareholder b owns more than five percent of distributing class a stock on date a shareholder b announced an offering of notes that are exchangeable for shareholder b’s distributing class a stock the shareholder b notes before date b distributing had a single class of nonvoting preference stock the preference stock outstanding all of which was owned by shareholder a on date b the preference stock automatically converted into approximately a percent of the outstanding distributing class b stock distributing wholly owns controlled sub and sub sub wholly owns sub sub wholly owns sub distributing conducts business a directly and through controlled entities sub conducts business b directly and through controlled entities including sub and sub sub conducts business c directly financial information has been received indicating that business a and business b each have had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years plr-100284-02 target is the common parent of an affiliated_group_of_corporations that files a consolidated federal_income_tax return target has two classes of common_stock outstanding target class a stock which is publicly traded and target class b stock which is owned indirectly by individual a in response to the consolidation that has occurred in business b in recent years the managements of sub and target have concluded that a combination of sub and target will allow the combined entity to compete more effectively in the business b industry target has agreed to merge into controlled provided that controlled is separated from distributing and holds the business b operations currently conducted by sub proposed transaction to accomplish the separation of business b from distributing that will facilitate the merger of target into controlled distributing has partially completed and proposed the following transaction the proposed transaction i ii iii iv v vi on date c distributing formed controlled as a wholly owned subsidiary to effect the proposed transaction controlled currently has a single class of common_stock outstanding and conducts no operations other than those necessary to effect the proposed transaction before steps v and vi sub and sub will convert into limited_liability companies under state a and state b law respectively before steps v and vi sub or sub will borrow up to dollar_figureb from third party lenders the pre-closing loan before steps v and vi sub will use the proceeds of the pre-closing loan together with other funds available to sub to make a cash distribution of up to dollar_figurec to distributing immediately following step iv and for valid business reasons distributing will contribute all of the stock of sub to controlled in exchange for controlled class c stock the contribution following the contribution distributing will distribute all of its controlled class c stock to holders of distributing class b stock in exchange for all of their distributing class b stock outstanding the distribution with the exception of i up to approximately d shares of controlled class c stock representing approximately e percent of the controlled class c stock outstanding for use in the debt-for-equity exchanges described below the exchange shares and ii approximately f shares of controlled plr-100284-02 class c stock representing approximately g percent of the controlled class c stock outstanding the retained shares the exact number and percentages of the exchange shares and the retained shares held by distributing immediately after the distribution will depend on certain factors that will not be known until the time of the distribution but in no event will distributing hold more than percent of the outstanding controlled class c stock immediately following the distribution distributing has been advised by its investment banker that retaining controlled class c stock will provide distributing with a source of liquidity necessary to prevent the deterioration of the credit ratings of distributing and sub distributing will dispose_of any retained controlled class c stock as soon as disposition is warranted consistent with the business_purpose for the retention but in any event not later than five years after the date of the distribution during the period in which distributing retains any controlled class c stock none of distributing’s directors or officers will serve as directors or officers of controlled and distributing will vote any retained controlled class c stock in proportion to the votes cast by the other holders of the controlled class c stock vii following the distribution target will merge into controlled in a transaction the taxpayer represents will qualify as a reorganization under sec_368 the merger immediately following the merger controlled will have three classes of common_stock outstanding controlled class a stock controlled class b stock and controlled class c stock in the merger holders of target class a stock will receive controlled class a stock and holders of target class b stock will receive controlled class b stock the pre-merger holders of controlled class c stock will retain their stock the controlled class c stock excluding any exchange shares will represent more than percent of the value of the outstanding controlled stock immediately following the merger the controlled class a stock will be entitled to one vote per share the number of votes per share to which the controlled class c stock is entitled will be determined at the time of the merger such that the controlled class c stock held by distributing other than the exchange shares and certain of distributing’s historic shareholders will possess more than percent of the voting power of controlled immediately following the merger the controlled class b stock initially will have ten votes per share but that number will be reduced during the two-year period following the distribution and in certain cases thereafter for subsequent equity issuances redemptions sales and other events to plr-100284-02 prevent the voting power of stock deemed to be acquired as part of a plan that includes the distribution under sec_355 from equaling or exceeding percent all three classes of controlled stock will vote together as a single class in the election of directors and for all other matters the approval of the controlled class b stock voting separately as a class however will be necessary to approve certain enumerated matters submitted to a shareholder vote not including the election of directors viii following the merger sub will repay the pre-closing loan and other obligations using funds then available to controlled and its subsidiaries ix either before or within six months after the distribution distributing intends to satisfy certain of its outstanding debt by issuing or distributing equity to creditors in one or more transactions the debt-for-equity exchanges any debt-for-equity exchanges completed before the distribution will be effected by distributing using distributing class b stock after the distribution distributing will effect any debt-for-equity exchanges using the exchange shares to the extent distributing does not use the exchange shares in the debt-for-equity exchanges distributing intends to either sell such shares for cash within six months after the distribution or retain these shares for the purpose described in step vi representations the taxpayer has made the following representations concerning the contribution and the distribution a b c to the extent any indebtedness is owed by controlled to distributing after the distribution such indebtedness will not constitute stock_or_securities the fair_market_value of the controlled class c stock and other consideration to be received by each holder of distributing class b stock will be approximately equal to the fair_market_value of the distributing class b stock surrendered by the shareholder in the exchange except with respect to the distributing shareholders who also hold distributing indebtedness and surrender such indebtedness for controlled class c stock pursuant to the debt-for-equity exchanges no part of the consideration to be distributed by distributing to the distributing shareholders will be received by a shareholder as a creditor employee or in any capacity other than that of a distributing shareholder plr-100284-02 d e f g h i j k except with respect to security holders of distributing who also hold distributing class b stock no part of the consideration to be distributed by distributing will be received by a distributing security holder as an employee or in any capacity other than that of a distributing security holder the five years of financial information submitted on behalf of business a is representative of business a’s present operations and with regard to business a there have been no substantial operational changes since the date of the last financial statements submitted the five years of financial information submitted on behalf of business b is representative of business b's present operations and with regard to business b there have been no substantial operational changes since the date of the last financial statements submitted immediately after the distribution at least percent of the fair_market_value of the gross assets of controlled will consist of the stock and securities of controlled corporations that are engaged in the active_conduct_of_a_trade_or_business as defined in sec_355 immediately after the distribution the gross assets of the active businesses conducted directly by each of distributing and sub will have a fair_market_value of at least five percent of the total fair_market_value of each corporation’s gross assets including the stock of subsidiaries following the proposed transaction each of distributing and controlled will continue the active_conduct of its business independently and with its separate employees the distribution is being carried out to facilitate the merger of target into controlled the distribution is motivated in whole or substantial part by this corporate business_purpose other than the disposition by distributing of the exchange shares and the retained shares the potential disposition by shareholder a of its distributing class b stock or controlled class c stock and the potential exchange of the shareholder b notes for shareholder b’s distributing class a stock there is no plan or intention by any shareholder who owns five percent or more of any class of distributing stock and the distributing management to its best knowledge is not aware of any plan or intention on the part of any particular remaining shareholder or security holder of distributing to sell exchange transfer by gift or otherwise dispose_of any plr-100284-02 l m n o p stock in or securities of either distributing or controlled after the distribution and the merger there is no plan or intention by either distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the proposed transaction other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 1996_1_cb_696 there is no plan or intention to liquidate either distributing or controlled to merge either corporation with any other corporation except pursuant to the merger or to sell or otherwise dispose_of the assets of either corporation after the proposed transaction except in the ordinary course of business for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either i acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution or ii attributable to distributions on distributing stock that was acquired by purchase as defined in sec_355 and during the five- year period determined after applying sec_355 ending on the date of the distribution the distribution is not part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the total combined voting power of all classes of stock entitled to vote of either distributing or controlled or stock possessing percent or more of the total value of all classes of stock of either distributing or controlled plr-100284-02 q r s t u v w except for a secured loan existing between sub and sub which is intended to reflect arm’s length terms and which will be repaid immediately after the merger no intercorporate debt will exist between distributing and controlled at the time of or after the distribution other than payables and receivables that arise in the ordinary course of business immediately before the distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 of the income_tax regulations as in effect before the publication of t d 1995_2_cb_147 and as currently in effect sec_1_1502-13 as published by t d further distributing’s excess_loss_account if any with respect to the controlled stock will be included in income immediately before the distribution see sec_1_1502-19 other than royalty-free licenses for unidentified incidental intellectual_property covered by an intellectual_property agreement between distributing and sub payments made in connection with all continuing transactions if any between distributing and controlled will be made for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length no two parties to the proposed transaction are investment companies as defined in sec_368 and iv the distributing class b stock is stock of distributing for federal_income_tax purposes none of distributing sub controlled target or any controlling shareholder of such corporations within the meaning of sec_1_355-7t h of the income_tax regulations will have entered into at any time during the two-year period ending on the date of the distribution an agreement understanding arrangement or substantial negotiations within the meaning of sec_1_355-7t h of the income_tax regulations regarding an acquisition of controlled stock from shareholder a following the merger none of distributing sub controlled target or any controlling shareholder of such corporations within the meaning of sec_1_355-7t h of the income_tax regulations has discussed or will discuss before the distribution the distribution with shareholder a a potential buyer of distributing stock owned by shareholder a or any controlling shareholder within the meaning of sec_1_355-7t h of the income_tax regulations of plr-100284-02 x y z such a potential buyer other than the provision of information generally made available to the investing public the distribution is not motivated by a business_purpose to facilitate an acquisition of distributing stock from shareholder a the distribution will occur at approximately the same time and in similar form regardless of an acquisition of distributing stock from shareholder a at the time of the distribution no agreement understanding or arrangement within the meaning of sec_1_355-7t h of the income_tax regulations will exist regarding any acquisition of the retained shares and no agreement understanding arrangement or substantial negotiations within the meaning of sec_1_355-7t h of the income_tax regulations regarding any such acquisition will occur or exist at any time during the one-year period following the distribution rulings based solely on the information submitted and the representations set forth above we rule as follows the contribution followed by the distribution will be a reorganization under sec_368 distributing and controlled each will be a_party_to_a_reorganization under sec_368 no gain_or_loss will be recognized by distributing on the contribution sec_361 no gain_or_loss will be recognized by controlled on the contribution sec_1032 no gain_or_loss will be recognized by distributing on the distribution sec_361 no gain_or_loss will be recognized by and no amount will otherwise be included in the income of the holders of distributing class b stock on the receipt of controlled class c stock in exchange for distributing class b stock sec_355 a shareholder who receives controlled class c stock in the distribution will have an aggregate adjusted_basis in the controlled class c stock plr-100284-02 immediately after the distribution equal to the aggregate adjusted_basis of the distributing class b stock surrendered in the distribution sec_358 the holding_period of the controlled class c stock received by a shareholder in the distribution will include the holding_period of the distributing class b stock surrendered in exchange therefor provided the distributing class b stock is held as a capital_asset on the date of the distribution sec_1223 earnings_and_profits will be allocated between distributing and controlled in accordance with sec_312 and sec_1_312-10 distributing’s retention of the retained shares and the exchange shares to the extent not distributed in the debt-for-equity exchanges will not be in pursuance of a plan having as one of its principal purposes the avoidance of federal_income_tax within the meaning of sec_355 an acquisition from distributing of any retained shares will not be treated as part of a plan described in sec_355 that includes the distribution an acquisition of distributing class b stock or controlled class c stock from shareholder a will not be treated as part of a plan described in sec_355 that includes the distribution no gain_or_loss will be recognized by distributing on the debt-for-equity exchanges to the extent distributing uses distributing class b stock to satisfy outstanding distributing debt sec_1032 no gain_or_loss will be recognized by distributing on the debt-for-equity exchanges to the extent distributing uses controlled class c stock to satisfy outstanding distributing debt sec_361 caveats no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings in particular no opinion is expressed on i ii the tax treatment of the royalty-free licensing agreement referred to above in representation s whether the distributing class b stock is stock of distributing for federal_income_tax purposes plr-100284-02 iii iv v whether distributing’s acquisition of its own debt results in income_from_discharge_of_indebtedness under sec_61 or any other provisions the tax treatment of any sales of the exchange shares for cash and the merger described in step vii above procedural statements this ruling letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent each taxpayer involved in this transaction should attach a copy of this ruling letter to the taxpayer’s federal_income_tax return for the taxable_year in which the transaction covered by this letter is completed under a power_of_attorney on file in this office a copy of this letter is being sent to your authorized representatives sincerely lewis k brickates acting chief branch office of associate chief_counsel corporate


department of the treasury eax exewrt and government entities division uniform issue list washington d c nov legend taxpayer a taxpayer b individual c individual d ira r ira s ira t ira u ira v ira w ira x ira y page ira z company m company n trustee o dear this is in response to the date letter submitted by your authorized representative in which you request relief under sec_301_9100-3 of the procedure and administration regulations the following facts and representations support your ruling_request taxpayer a maintained ira r an individual_retirement_arrangement described in sec_408 of the internal_revenue_code during calendar_year taxpayer a employed the services of individual c with company m in order to convert ira r to a roth_ira ira w taxpayer a also maintained ira s an individual_retirement_arrangement described in code sec_408 during calendar_year taxpayer a employed the services of individual c with company m in order to convert ira s to a roth_ira ira x taxpayer b taxpayer a’s spouse maintained ira t a sep ira and ira u an individual_retirement_arrangement described in code sec_408 during calendar_year taxpayer b employed the services of individual c with company m in order to convert ira t and ira u into one roth_ira ira y taxpayer b also maintained ira v an individual_retirement_arrangement described in code sec_408 during calendar_year taxpayer b employed the services of individual c with company m in order to convert ira v to a roth_ira ira z at the time of the conversions and throughout calendar_year taxpayers a and b believed that they were qualified to make all of the conversions described above under code sec_408a page in date while gathering financial information to send to their tax preparer taxpayers a and b realized that their adjusted_gross_income for exceeded the limit found at sec_408a of the code soon thereafter in date taxpayers a and b contacted individual c their registered_representative and requested that all five of the ira conversions be recharacterized taxpayers a and b believed that they had met the requirements for a timely recharacterization under code sec_408a and sec_1_408a-5 of the income_tax regulations however due to a clerical_error at the office of their registered_representative the request to recharacterize the roth_ira conversions was never transmitted to the trustee of their roth iras trustee o taxpayers a and b employed the tax preparation firm company n to prepare their income_tax return the president of company n is individual c who is also the registered_representative of taxpayers a and b as well as the owner of company m individual d an employee of company n prepared and timely filed taxpayers’ income_tax return taxpayers a and b as well as individual d believed a complete and accurate return had been filed in date taxpayers a and b received from the internal_revenue_service notice cp-2000 for tax_year proposing a change to the tax_return increasing the amount reported as taxable pension distributions to include the amounts distributed from the five ira accounts that had been converted to roth ira's the notice cp-2000 did not indicate that taxpayers were ineligible to convert their traditional iras to roth iras after receiving notice cp-2000 taxpayers a and b contacted company n and it was only then that taxpayers a and b company n and company m realized that the recharacterization request made in date had not been undertaken as of the date of this ruling_request taxpayers a and b had not recharacterized their roth iras as traditional iras based on the above you through your authorized representative request the following letter_ruling that pursuant to sec_301_9100-3 of the regulations taxpayers a and b are granted a period not to exceed six months from the date of this ruling letter to recharacterize their roth iras ira w ira x ira y and ira z to traditional iras with respect to your request for relief under sec_301_9100-3 of the regulations sec_408a of the internal_revenue_code and sec_1_408a-5 of the income_tax regulations provide that except as otherwise provided by the secretary a taxpayer may elect to recharacterize an ira contribution made to one type of ira as having been made to another type of ira by making a trustee-to-trustee transfer of the ira contribution plus earnings to the other type of ira in a recharacterization the ira page contribution is treated as having been made to the transferee ira and not the transferor ira under sec_408a and sec_1 408a- this recharacterization election generally must occur on or before the date prescribed by law including extensions for filing the taxpayer's federal_income_tax returns for the year of contributions sec_1_408a-4 of the regulations question and answer-4 provides that amounts standing in a sep ira can be converted to a roth_ira on the same terms as an amount in any other traditional_ira sec_1_408a-5 question and answer-6 describes how a taxpayer makes the election to recharacterize the ira contribution to recharacterize an amount that has been converted from a traditional_ira to a roth_ira the taxpayer must notify the roth_ira trustee of the taxpayer's intent to recharacterize the amount the taxpayer must provide the trustee and the transferee trustee if different from the transferor trustee with specified information that is sufficient to effect the recharacterization and the trustee must make the transfer code sec_408a provides in relevant part that an individual with adjusted_gross_income in excess of dollar_figure big_number for a taxable_year is not permitted to make a qualified_rollover_contribution to a roth_ira from an individual retirement pian other than a roth_ira during that taxable_year sec_1_408a-4 q a-2 provides in summary that an individual with modified_adjusted_gross_income in excess of dollar_figure big_number for a taxable_year is not permitted to convert an amount to a roth_ira during that taxable_year sec_1_408a-4 q8 a-2 further provides in summary that an individual and his spouse must file a joint federal tax_return to convert a traditional_ira to a roth_ira and that the modified_adjusted_gross_income subject_to the dollar_figure limit for a taxable_year is the modified agi derived from the joint_return using the couple’s combined income sec_301_9100-1 sec_301_9100-2 and sec_301_9100-3 of the procedure and administration reguiations in general provide guidance concerning requests for relief submitted to the service on or after date sec_301_9100-1 of the regulations provides that the commissioner of the internal_revenue_service in his discretion may grant a reasonable extension of the time fixed by a regulation a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin for the making of an election or application_for relief in respect of tax under among others subtitle a of the code sec_301_9100-2 lists certain elections for which automatic extensions of time to file are granted sec_301_9100-3 of the regulations generally provides guidance with respect to the granting of relief with respect to those elections not referenced in sec_301_9100-2 the relief requested in this case is not referenced in sec_301_9100-2 page sec_301_9100-3 of the regulations provides that applications for relief that fall within sec_301_9100-3 will be granted when the taxpayer provides sufficient evidence including affidavits described in sec_301_9100-3 to establish that the taxpayer acted reasonably and in good_faith and granting relief would not prejudice the interests of the government sec_301_9100-3 of the regulations provides that a taxpayer will be deemed to have acted reasonably and in good_faith i if its request for sec_301_9100-1 relief is filed before the failure to make a timely election is discovered by the service ii if the taxpayer inadvertently failed to make the election because of intervening events beyond the taxpayer's control iii if the taxpayer failed to make the election because after exercising reasonable diligence the taxpayer was unaware of the necessity for the election iv the taxpayer reasonably relied upon the written advice of the service or v the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election sec_301_9100-3 ii of the regulations provides that ordinarily the interests of the government will be treated as prejudiced and that ordinarily the service will not grant relief when tax years that would have been affected by the election had it been timely made are closed by the statute_of_limitations before the taxpayer's receipt of a ruling granting relief under this section taxpayers a and b timely filed their federal_income_tax return however as a result of a clerical_error taxpayers a and b did not recharacterize their roth iras as traditional iras in a timely manner so as not to violate sec_408a of the code therefore it is necessary to determine if they are eligible for relief under the provisions of sec_301_9100-3 of the regulations in this case taxpayers a and b were ineligible to convert their traditional iras ira r ira ira t ira u and ira v to roth iras ira w ira x ira y and ira z respectively since their adjusted_gross_income exceeded dollar_figure big_number however until they discovered otherwise taxpayers a and b believed that they were eligible to convert their iras r s t u and v to roth iras upon discovering their error taxpayers a and b contacted their registered_representative and requested that their five roth iras be recharacterized this request was submitted several months before the due_date of their tax_return and but for the failure of the taxpayers’ registered_representative to transmit such request to the trustee such recharacterization would have been timely under code sec_408a taxpayers a and b filed this request for sec_301 relief shortly after discovering that the aforementioned recharacterization request had not been submitted although the notice cp-2000 from the internal_revenue_service alerted taxpayers to this clerical_error the purpose of the notice was merely to collect taxes owed on the ira_distributions the internal_revenue_service irs had yet to discover that the ira conversions were not allowable under page sec_408a of the code thus prior to this request for relief the irs was unaware of the taxpayers’ failure to make a timely election under 408a d to remedy the situation calendar_year is not a closed tax_year with respect to your request for relief we believe that based on the information submitted and the representations contained herein the requirements of sec_301_9100-1 and sec_301_9100-3 of the regulations have been met and that you have acted reasonably and in good_faith with respect to making the election to recharacterize your roth iras as traditional iras specifically the service has concluded that you have met the requirements of clauses i ii and v of sec_301_9100-3 of the regulations therefore you are granted an extension of six months from the date of the issuance of this letter_ruling to so recharacterize no opinion is expressed as to the tax treatment of the transaction described herein - under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it section j of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this ruling letter is being sent to your authorized representative if you wish to inquire about this ruling please contact please address all correspondence to t -ep ra t4 at sincerely yours alan c pipkin manager technical group employee_plans te_ge division


internal_revenue_service department of the treasury no third party contact sec_11 washington dc contact person q q qo telephone number inr ference to _ ope-e0' tey jan date ein key district legend m n - - dear sir this is in response to your request dated november for a ruling on whether the proposed merger between you and m would adversely affect your tax-exempt status under sec_501 issued concerning specific activities of the internal_revenue_code and the rulings previously you and m are exempt from federal_income_tax under section of the internal_revenue_code and classified as a non- 50i c private_foundations within the meaning of sec_509 both share the same mission to provide visionary leadership to state school boards and to support through risk management services their mutual pursuit of enhancing public school after the merger you will be the surviving education corporation and m’s status as an entity would disappear you you were formed for the purpose of administering the various risk management programs created for the state public schools you achieve cost savings by pooling together resources and avoiding duplication of efforts in the areas of risk management and loss control respecting public school resources utilizing workshops newsletters consulting contract supervision financial management services etc board as m members is formulated and policy is articulated while you are the mechanism for actually delivering the services and programs to the members is considered the mechanism whereby governance of you are governed by the same m n your you are compensated for providing administrative services to you also offer programs and workshops largely attendant to role as administrator of n designed to teach school to aie vutore hooy a suf or lyvy district employees cost containment methods and ways to reduce financial losses associated with risks attendant to the various programs you administer activities of administering the self-funding programs were in furtherance of your exempt_purpose of lessening the burdens of government unrelated_trade_or_business because they reduced a governmental burden the service held the management activities were not the service ruled that your in m is a voluntary unincorporated nonprofit organziaton established to serve the public school districts in your state m‘s membership is composed of public school districts county school boards junior colleges appraisal boards cooperatives and education service centers through the state active members are instrumentalities or political subdivisions of the state every geographical area of the state member board_of trustees representing all of m’s m has a m‘s activities include attainment of adequate and equitable the state public schools sponsorship of financial support of seminars conferences research and other projects in the various aspects of public education promotion of efficient and effective managements and governance of the public schools providing a forum for solutions to problems in public education providing current information regarding public education including changes in schools law and developments in educational programs and the provision of services to enhance sound management and fiscal responsibility for the school districts m licenses its name and logo to n in the service did not contribute importantly to m's exempt_function thus ruled that four comparable licensees created in accordance with state law to discharge necessary governmental functions for or on behalf of participating local governments to use m‘s name and logo earnings from such licenses constituted unrelated_business_income under the agreements were attributable to royalties as described in sec_512 controlled the licensee entities sec_512 applicable and are now known as n in three of the entities merged into a fourth the service further determined the amounts received the service also held that because m was n is an administrative agency of cooperating state local governments created in accordance with state law to discharge necessary governmental functions for or on behalf of participating local governments governmental functions and expend public funds in providing a number of similar services it identifies risk exposures for school districts in the areas of workers’ compensation n acts to discharge employee_benefits unemployment benefits and property casualty yeesi5sovel and liability develops plans for reducing and or minimizing those exposures provides for efficient and effective claims administration for losses which have occurred develops a plan for financing and funding of those losses and or exposures invests those funds for the most effective return to meet their intended purpose secures appropriate financial protection for catastrophic or higher or more frequent than expected losses educates school districts on methods to prevent future claims and or losses and negotiates with various vendors for preferred services and pricing to its members sec_501 of the code provides for the exemption of organizations from federal_income_tax under sec_501 that are organized and operated exclusively and charitable purposes for educational sec_1 c -1 c of the income_tax regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if primarily in activities which accomplish one or such exempt purposes specified in sec_501 not be activities is not in furtherance of so regarded if more than an insubstantial part of its an exempt_purpose an organization will it engages sec_501 described in sec_501 c tax under sec_501 no substantial part of its activities consists of providing commercial-type_insurance only if of the code provides that an organization or c will be exempt from sec_501 of the code provides several exceptions to the definition of commercial-type_insurance m insurance provided at substantially below cost to charitable recipients a commercial-type_insurance does not include under section a class of sec_511 of the code imposes for each taxable_year a tax on the unrelated_business_taxable_income as defined in sec_512 of every organization described in sec_501 sec_512 of the code defines unrelated_business_taxable_income as the gross_income derived by an organization from any unrelated_trade_or_business as defined in sec_513 regularly carried on by it connected with the carrying on the trade_or_business with certain modifications less the deductions which are directly sec_512 of the code provides that royalties and all deductions directly connected with such income shall be excluded from unrelated_business_income_tax 19sgisvte6l sec_513 of the code defines unrelated_trade_or_business for any organization subject_to tax under sec_511 as any trade_or_business the conduct of which is not substantially related aside from the need of the organization for income or funds or the use it made of the profits derived to the exercise or performance by such organization of its charitable educational or other purpose or function constituting the basis for its exemption under sec_501 sec_1_513-1 of the regulations states that a trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has causal relationship to the achievement of exempt purposes other than through the production_of_income and it is substantially related for purposes of sec_513 only if the causal relationship is a substantial one revrul_81_178 1981_2_cb_135 held that income derived from an agreement for_the_use_of an organization’s trademarks trade names service marks copyrights and members’ names in connection with the promotion of merchandise and services provided by the businesses where the organization maintained quality control rights constituted tax free royalties within the definition of sec_512 of the code rul rev 1985_1_cb_178 and rev_rul c b set forth the criteria for determining whether an organization’s activities lessen the burdens of government relevant inquiry is whether the governmental_unit considers the organization’s activities to be its burden and whether the activities actually lessen the burden of the governmental_unit an activity is manifestation by the governmental_unit that it considers the activities of the organization to be its burden interrelationship between the governmental_unit and the organization may provide evidence that the governmental_unit considers the activity to be its burden a burden of government if there is an objective the the in national water well association v commissioner t c the tax_court heid that where an organization provided a licensee an insurance_company with membership lists wrote articles on safety and its effect on insurance provided exhibit space at conventions and meetings employed someone to answer inquiries regarding the insurance and place advertisements for the insurance in its journals to contact the organization directly income derived from such activity on behalf of licensee lost its character as passive royalty income taxable and was the in our memorandum dated date we held that amounts received from m’s agreement with the predecessors of is royalty income under sec_512 included in its unrelated_business_taxable_income because it derived from controlled entities and the taxability of such income is determined in accordance with sec_512 b extent of m's activities were a one-page advertisement in its membership directory containing a statement that the program is supported by m organization performs in relation to the royalties and various administrative duties that the of the code and must be the n is the law has not changed since our memorandum was issued and you have stated the licensing agreement will essentially remain the same with only one change - that being your substitution for m after completion of the merger the fact that you are now the licensor is not a material fact justifying any modification of the ruling or its precedential value supra and we also ruled that the in our memorandum dated date we stated that the administrative services provided by you to the predecessors of n lessened the burdens of government according to the criteria set forth in rev ruls administrative services are related to your exempt_function and are a related trade_or_business within the meaning of section your state statute authorizing d of the regulations political subdivisions to enter into interlocal contracts for the provision of governmental services to increase efficiency and effectiveness of local governments provided an objective manifestation that the state considered risk management and the associated administrative and management services to be part of its burden and an obligation to be borne by all school districts we found that your administrative services enabled the school districts to perform their essential governmental functions in a more cost-efficient manner and held that merely providing administrative services on behalf of governmental units would not be providing insurance within the meaning of sec_501 you stated that you will continue to operate in the same manner with respect to the provision of administrative services and educational programs as you did when our memorandum dated date to the ruling therefore there is no modification was issued based upon the information provided after the merger you will continue to carry forward your programs and those of is an organization recognized as tax-exempt under sec_501l c will no longer be been no change in facts previously provided for exemption and the previous rulings the merger of you and m will not adversely a sec_509 organization in existence after the merger and classified as as there has m m m for affect your tax-exempt status under sec_501 status under sec_509 and your based on the information furnished we rule that the proposed merger will not adversely affect your tax- exempt status under sec_501 foundation status under sec_509 of the code or your upon effectuation of the proposed merger you may treat the revenues derived as successor licensor with respect to the royalty payments received from n in sec_512 memorandum dated september sec_512 of the code consistent with our as amounts described are still applicable the provisions of upon effectuation of the proposed merger the performance of claims services by you on behalf of n will be considered in furtherance of contrary to section s01 m consistent with our memorandum dated june a charitable purpose and not we are informing your key district_director of this ruling if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter please keep a copy of the ruling in your permanent records this ruling is directed only to the organization that requested it may not be used or cited as precedent sec_6110 of the code provides that it sincerely bereta v sok gerald v sack chief exempt_organizations technical 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 plr-151445-13 date date legend x --------------------------------------------------------------------------------------------- ------------- state ------------- date -------------------- y --------------------- year ------- dear ---- ---------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_754 of the internal_revenue_code code facts x was formed as a limited_liability_company under state law on date and is treated as a partnership for federal tax purposes y a partner in x died in year x’s advisor did not inform x as to the availability of an election under sec_754 therefore x failed to make an election under sec_754 for year law and analysis plr-151445-13 sec_754 provides that if a partnership files an election in accordance with the regulations prescribed by the secretary the basis of partnership property is adjusted in the case of a distribution_of_property in the manner provided in sec_734 and in the case of a transfer of a partnership_interest in the manner provided in sec_743 such an election shall apply with respect to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable_year with respect to which the election was filed and all subsequent taxable years sec_1_754-1 of the income_tax regulations provides that an election under sec_754 to adjust the basis of partnership property under sec_734 and sec_743 with respect to a distribution_of_property to a partner or a transfer of an interest in a partnership is made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed not later than the time prescribed by sec_1_6031_a_-1 including extensions thereof for filing the return for that taxable_year under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 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 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 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 including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make an election under sec_754 effective for its year taxable_year and thereafter the election plr-151445-13 should be made in a written_statement filed with the appropriate service_center for association with x’s year tax_return a copy of this letter should be attached to the sec_754 election except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion as to whether x is a partnership for federal tax purposes pursuant to a power_of_attorney on file with this office we are sending a copy of this letter to x’s authorized representative 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 the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination sincerely associate chief_counsel passthroughs special industries by ___________________________________ mary beth carchia senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes