department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date jul contact person number release date uil number eo identification_number contact number employer_identification_number form required to be filed tax years dear h this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_521 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file file the returns in accordance with their instructions and do not send them to this office failure_to_file the returns timely may result in a penalty we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice if you agree with our deletions you do not need to take any further action if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses if you have any questions about your the irs customer service number for people with hearing impairments is sincerely robert choi director exempt_organizations rulings agreements enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division contact person identification_number contact number fax number employer_identification_number u l number date legend m applicant n state o date p large saltwater lake q percentage r state registration certificate dear we have considered your application_for recognition of exemption from federal_income_tax under sec_521 of the internal_revenue_code based on the information provided we have concluded that you do not qualify for exemption under sec_521 the basis for our conclusion is set forth below issue does the organization hereinafter m’ meet the requirements for exemption under sec_521 of the code as a farmers’ cooperative facts m was incorporated under the provisions of the non-profit cooperative code in the state of n on o date article iii sec_1 of m’s articles of incorporation state the following purposes the purposes of this cooperative shall be to receive harvest handle process and market brine shrimp cysts and other products of its members and other purposes engaged in the fishery industry to purchase handle and distribute supplies and equipment to its members and other patrons to perform any and all related_services for its members and other patrons and to engage in any other lawful purpose this cooperative shall be operated on a cooperative basis for the mutual benefit of its members and patrons article iv of m’s articles state for the purposes of these articles the holders of certificates of registration cor’s for the harvest of artemia cysts from the p are considered persons engaged in the fishery industry article sec_1 subsection f of m's bylaws states that one of the requirements for membership in m is the holding one or more certificates of registration cor to harvest artemia cysts from the p in m’s form_1028 application part ill item it states that the activity in which m will engage is harvesting processing and marketing of brine shrimp eggs law sec_521 of the code provides in part that a farmers’ cooperative organization described in sec_521 of the code shall be exempt from taxation under subtitle a except as otherwise provided in article of subchapter_t of the code sec_521 of the code states that the type of farmers’ cooperative exempt from taxation are farmers fruit growers or like associations organized and operated on a cooperative basis a for the purpose of marketing the products of members or other producers and turning back to them the proceeds of sales less the necessary marketing expenses on the basis of either the quantity or the value of the products furnished by them or b for the purpose of purchasing supplies and equipment for_the_use_of members or other persons and turning over such supplies and equipment to them at actual cost plus necessary expenses sec_464 of the code defines the term farming as the cultivation of land or the raising or harvesting of any agricultural or horticultural commodity including the raising shearing feeding caring for training and management of animals for purposes of the preceding sentence trees other than trees bearing fruit or nuts shall not be treated as an agricultural or horticultural commodity sec_1_521-1 of the income_tax regulations states that a cooperative association engaged in the marketing of farm products for farmers fruit growers livestock growers dairymen etc and turning back to producers the proceeds of the sales of their products less the necessary operating_expenses on the basis of either the quantity or the value of the products furnished by them are exempt from income_tax sec_1_521-1 of the regulations states that cooperative associations engaged in the purchasing of supplies and equipment for farmers fruit growers livestock growers dairymen etc and turning over such supplies and equipment to them at actual cost plus necessary operating_expenses are exempt from income_tax sec_1_521-1 of the regulations provides that cooperative organizations engaged in occupations dissimilar from those of farmers fruit grower and the like are not exempt sec_1_175-3 of the regulations states that term farm is to be used in its ordinary accepted sense and includes stock dairy poultry fish fruit and truck farms and also plantations ranches ranges and orchards a fish_farm is an area where fish are grown or raised as opposed to merely caught or harvested in 84_f2d_453 cir the commissioner determined the petitioner was not exempt from sec_103 of the code which was a predecessor to sec_521 of the internal_revenue_code_of_1986 the court agreed saying in part we believe as the commissioner contends that under the principle of ejusdem generis the words like associations are limited by the words farmers and fruit growers and as thus limited mean only such associations as market agricultural products or purchase supplies and equipment for those who are engaged in producing agricultural products see garden homes co v commissioner c c a f 2d under such construction petitioner is not one of the associations exempt from taxation in revrul_55_611 1955_2_cb_270 the service held that an association which purchases supplies and equipment for its members who are fishermen is not an association of farmers or fruit growers or a like association within the meaning of sec_521 of the internal_revenue_code because it was not a like association the association had contended that under state law agricultural products included fish and salt water sea food and that state law had recognized it as an agricultural association the service stated that the provisions of any state law are not controlling in determining status for federal_income_tax purposes and cited munro l 305_us_188 in support of its contention in revrul_64_246 1964_2_cb_154 an organization was engaged in the business of harvesting processing buying selling storing and otherwise handling fish and fish products for its members and other patrons its membership was restricted to persons engaged in the production of agricultural commodities including fish of commercial value produced in privately-owned waters the service held that because the association was engaged in cooperatively marketing fish in privately-owned waters it was considered to be an organization composed of producers of farm-raised fish which are in other words farm products the service held that the organization was exempt under sec_521 as a farmers’ cooperative application of law we consider m's activities of harvesting processing and marketing of brine shrimp as not being engaged in a farming activity sec_464 of the code does not include in the definition of farming the harvesting of brine shrimp per sec_1_521-1 of the regulations cooperative organizations engaged in occupations dissimilar from those of farmers fruit grower and the like are not exempt under sec_521 of the code sec_1_175-3 of the regulations a fish_farm is an area where fish are grown or raised as opposed to merely caught or harvested per m is not similar to the organization described in revrul_64_246 because the organization in that ruling raised fish in privately-owned waters whereas m harvests processes and markets brine shrimp from the p which is not privately owned by m therefore m is not engaged in a farming activity and cannot be considered a like association under sec_521 of the code applicant's position in m’s letter dated date it stated among other things that the members of m do not have their own private fish shrimp farms the letter also states that brine shrimp are used as food for other fish producers when the brine shrimp are processed the brine shrimp are marketed to fish producers ie not markets or restaurants m's letter of date requested a formal denial letter from the service m states that in many respects the the harvesting of brine shrimp cysts from the p is regulated by the state of n members of the cooperative hold approximately q percent of the r issued by the state of n with respect to harvesting brine shrimp from the lake harvesting of brine shrimp cysts by the cooperative from the p is similar to harvesting fish from a private fish_farm facility government's position m states that the harvesting of brine shrimp cysts is regulated by the state of n as stated in munro l lyeth v hoey the provisions of any state law are not controlling in determining status for federal income taxes m also states that the harvesting of brine shrimp cysts is similar to harvesting fish from a private fish_farm facility however sec_1_175-3 of the regulations states a fish_farm is an area where fish are grown or raised as opposed to merely caught or harvested emphasis added in revrul_64_246 the service emphasized that fish and fish products could be considered as farm products if raised in privately-owned waters which differs from m in that it harvests brine shrimp cysts in a publicly-owned salt water lake based on sec_464 of the code and sec_1_175-3 of the regulations the service contends the harvesting of brine shrimp cysts is not a farming activity sec_1_521-1 of the regulations states that cooperative associations engaged in occupations dissimilar from those of farmers fruit grower and the like are not exempt under sec_521 of the code since m is not a like association it cannot be described as a farmers’ cooperative under sec_521 of the code conclusion based on the information submitted it is the position of the internal_revenue_service that you do not qualify for exemption under sec_521 as a farmers’ cooperative you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if that information affects our determination if your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process to be represented during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so for more information about representation see publication practice_before_the_irs and power_of_attorney ail forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter to you that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to the applicable address mail to deliver to internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you may also fax your statement using the fax number shown in the heading of this letter letter to confirm that he or she received your fax if you fax your statement please call the person identified in the heading of this if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely robert choi director exempt_organizations rulings agreements enclosure


office_of_chief_counsel internal_revenue_service memorandum number release date cc intl postn-150683-04 uilc date date third party communication n a date of communication n a to ---------------------- team manager lmsb hmt ------- from christopher j bello assistant to the branch chief cc intl subject ------------------------------ this chief_counsel_advice responds to your request for advice dated date this advice may not be used or cited as precedent legend uscorp fsc1 countryz division1 division2 product1 ------------------------------------------------- --------------------------------- product2 calendar year1 issue --------------------------------------- --------------------------------------------- ------------------------- --------------------------------------- -------------------------------------------------- ---------------------------------------------- ------------------------------------------------ ------- whether income from long-term sales entered into before date that is taken into account under the sec_460 percentage-of-completion method_of_accounting poc method after date may qualify for the extraterritorial income eti exclusion under sec_114 conclusion no income from sales entered into before date - including income postn-150683-04 from long-term sales entered into before date that is taken into account under the poc method after date - does not qualify for the eti exclusion thus in the case of the sec_460 long-term_contracts entered into before date at issue here income from sales entered into pursuant to those contracts qualifie sec_1 for the eti exclusion only if the sales were entered into after date the determination of when a sale is entered into requires an analysis of the surrounding facts and circumstances on a case-by-case basis accordingly as discussed in detail below in this case some sales were entered into at or around the time the underlying contract was signed and therefore were entered into before date and do not qualify for eti exclusion treatment other sales were entered into at or around the time a post-date option under the contract was exercised and therefore were entered into after date and qualify2 for eti exclusion treatment facts i taxpayer’s business uscorp and its u s subsidiaries hereinafter taxpayer is a domestic defense contractor engaged in providing products and service sec_3 under long-term_contracts within the meaning of sec_460 with the united_states government u s government and with foreign governments taxpayer entered into a significant number of such long-term_contracts prior to and during taxable_year at all relevant times taxpayer wholly owned fsc1 a foreign_corporation organized in countryz that elected under sec_922 and sec_927 to be treated as a fsc for federal_income_tax purposes at issue in this case are attributable to taxpayer’s division1 and division2 business segments division1 is engaged in the design development and production of product1 division2 is engaged in the design development and integration of product2 ii taxpayer’s long-term_contracts of the contracts mentioned above those that generate over of the income the long-term_contracts under consideration relate to sales of military_property as defined in sec_923 and sec_995 that also constitute sec_927 export solely for purposes of addressing the narrow legal issue regarding the eti effective date discussed in detail below we assume that taxpayer’s sales satisfied all of the fsc or eti exclusion requirements as the case may be see footnote above this memorandum assumes solely for the purpose of addressing the narrow legal issue that all of the income at issue is sales income therefore the memorandum does not address whether any of such income is properly characterized as services income and if so whether such services income constitutes income from related_and_subsidiary_services as defined in sec_924 or sec_942 c i postn-150683-04 property under the fsc provisions or sec_943 qualifying foreign trade property under the eti exclusion provisions they are generally fixed-price contracts with fixed payment schedules such that both taxpayer and its customer know the final price or at least the formula to derive the final price at the time of contract signature because the particular configuration of military_property for a sale is specified in the contract and varies from contract to contract taxpayer does not manufacture products in anticipation of contracts and generally does not maintain a product inventory we understand that this is standard practice among similarly situated defense contractors in the case of some of its sales to foreign governments taxpayer sells directly to those governments but in the case of most of taxpayer’s sales to foreign governments the u s government acts as an intermediary between taxpayer and the foreign government consequently most of taxpayer’s sales to foreign governments involve a two-step process in which the foreign government first enters into an agreement with the u s government which in turn contracts with taxpayer in such cases the foreign government enters into a letter of offer and acceptance loa with the u s government and the u s government later finalizes the purchase order reflected in the loa by making a contract with taxpayer that typically mirrors the loa pursuant to the contract provisions the customer generally takes title to or a security_interest in products as the customer makes advance or progress payments the u s government issues a dd form_250 with respect to a sale when the seller has satisfied the contractual specifications and is entitled to retain the purchase_price thus taxpayer asserts that delivery and acceptance of product sec_1 and is generally evidenced by the u s government’s issuance of a dd form_250 iii income_tax reporting for taxpayer’s long-term_contracts with respect to the long-term_contracts at issue taxpayer uses the poc method to report income and loss under the poc method a percentage of the total contract revenue is included in taxable_income during each year of the contract taxpayer elected to apply the 10-percent method pursuant to sec_460 under which no income is included until the first taxable_year as of the close of which percent of the estimated total contract costs have been incurred beginning in calendar year1 taxpayer paid commissions to fsc1 with respect to sales of sec_927 export_property including some or all of the sales of military_property at issue here each fsc commission corresponded to an inclusion of income by taxpayer under the poc method after the fsc repeal and extraterritorial_income_exclusion act of pub_l_no 114_stat_2423 eti act was enacted taxpayer ceased paying fsc commissions on income from such sales and instead claimed eti exclusions with respect to sales of sec_943 qualified foreign trade property each eti exclusion corresponded to an inclusion of income by taxpayer under the poc method see footnote above postn-150683-04 beginning with its taxable_year taxpayer prepared forms extraterritorial_income_exclusion and purportedly elected to apply the eti exclusion provisions in lieu of the fsc provisions under sec_5 of the eti act for the sales at issue in each instance taxpayer made the election by checking the box on line of each form_8873 in the first year but in no case before date that taxpayer claimed an eti exclusion with respect to the sale or a later year if the percent method delayed recognition until such year iv contract sample taxpayer asserts that all income it reported pursuant to long-term_contracts entered into before date qualifies for eti exclusions to evaluate taxpayer’s claims the examination team reviewed a representative group of such long- term contracts below we provide a generic example contractx of taxpayer’s contracts that reflects the terms of the sample of contracts reviewed by examination we use contractx later in this memorandum for illustrative purposes contractx in date the government of countryx signed an loa with the u s department of defense dod to purchase a specified number of productx original sale with an option to purchase an additional specified number of productx second sale the option met the requirements of sec_5 of the eti act in date taxpayer executed contractx with the dod whereby the dod would purchase productx in accordance with the loa on behalf of countryx actual deliveries of productx purchased in the original sale occurred during and taxpayer recognized income under the poc method from through in the dod issued a dd form_250 evidencing delivery and acceptance with respect to the original sale contract deliveries of the additional productx began in and will continue for several more years taxpayer recognized income under the poc method in and will continue to do so for several more years the dod has not issued a dd form_250 with respect to the second sale benefits for income recognized during fsc benefits for income recognized during the first nine months of and eti exclusions for income recognized during in countryx exercised its option to purchase additional productx under the with respect to its income from the two sales taxpayer claimed fsc as discussed in more detail below we believe the elections are invalid because such elections cannot be made with respect to sales entered into before the eti effective date taxpayer did not recognize income during because of the 10-percent method postn-150683-04 the last three months of and eti exclusions for income recognized during through law both the fsc and eti exclusion provisions provide tax benefits with respect to foreign_trading_gross_receipts see generally i r c and a major difference between the fsc and eti exclusion provisions is with respect to military_property under the fsc provisions only of the partial exemption from u s income_tax provided by sec_923 and sec_921 applies to the sale of military_property sec_923 in other words sales of export_property that constitutes military_property usually generate only one-half of the fsc benefit generated by sales of export_property that does not constitute military_property this rule commonly known as the military_property haircut is not present in the eti exclusion provisions consequently reporting its military_property sales under the eti exclusion provisions generally would double a taxpayer’s tax_benefit in comparison with the benefit available under the fsc provisions provisions see sec_2 and eti act sec_5 of the eti act provides that the eti exclusion provisions generally apply to transactions after date the eti effective date the legislative_history further clarifies that the eti exclusion provisions are effective for transactions entered into after date emphasis added s rep no p eti report see also revproc_2001_37 2001_1_cb_1327 dollar_figure and for purposes of the eti exclusion provisions transaction means any sale exchange or other_disposition lease or rental and furnishing of services sec_943 sec_5 of the eti act contains transition_rules that delay the application of the eti exclusion provisions to certain transactions notwithstanding the eti effective date sec_5 of the eti act provides the eti act repealed the fsc provisions and enacted the eti exclusion in the case of a fsc as so defined in existence on date and at all times thereafter the amendments made by this act shall not apply to any transaction in the ordinary course of trade_or_business involving a fsc which occurs- a before date or b after date pursuant to a binding contract- aside from certain discrete deviations such as the military_property haircut the fsc and eti exclusion provisions generally provide quantitatively similar tax benefits postn-150683-04 i which is between the fsc or any related_person and any person which is not a related_person and ii which is in effect on date and all times thereafter sec_5 allows a taxpayer to elect to apply the eti exclusion provisions to for purposes of this paragraph a binding contract shall include a purchase option renewal option or replacement option which is included in such contract and which is enforceable against the seller or lessor we refer to the sec_5 transition rule involving binding contracts as the binding contract rule the fsc provisions rather than the eti exclusion provisions apply to transactions to which the binding contract rule applies however under sec_5 of the eti act a taxpayer may elect out of the binding contract rule any transaction that would have been subject_to the fsc provisions by reason of sec_5 of the eti act the sec_5 election applies on a transaction-by- transaction basis and is effective for the taxable_year for which made and all subsequent taxable years see also revproc_2001_37 at analysis i interpreting the eti effective date whether the eti exclusion provisions apply to the income from certain long-term sales of military_property by taxpayer pursuant to certain long-term_contracts under the poc method resolution of this dispute turns on the interpretation and application of the eti effective date provision in sec_5 of the eti act this case involves a disagreement between the service and taxpayer regarding a service position the service interprets the eti effective date to encompass transactions entered into after date this entered into interpretation is explicitly supported by the legislative_history to the eti act eti report p the determination of when a sale is entered into within the meaning of sec_5 of the eti act requires an analysis of the surrounding facts and circumstances on a case-by-case basis for example in a particular case a sale might be entered into when the underlying contract is signed when the purchaser and seller make an loa or memorandum of understanding when an export license8 for military_property is obtained from the department of state or when an option is exercised pursuant to the underlying see for example the rules under the arms export control act u s c et seq pub_l_no 82_stat_1321 c f_r sec_121 et seq postn-150683-04 contract under the service’s interpretation of the eti effective date and as determined under the facts and circumstances contractx gives rise to two sales - the original sale of productx entered into in and the second sale of productx entered into in upon the exercise of the purchase option the income arising from the original sale would not qualify for the eti exclusion provisions because such sale was entered into before date however the income arising from the second sale could qualify for the eti exclusion provisions because the sale was entered into after date accordingly the discussion section below addresses sales entered into before the eti effective date such as the original sale not sales entered into after the eti effective date such as the second sale b taxpayer position taxpayer originally asserted that each inclusion of income under its poc method corresponds to a separate transaction entered into at the time of such inclusion taxpayer now agrees with the service that its original poc method theory is without merit thus taxpayer has abandoned that position in favor of a new position described below taxpayer now interprets the eti effective date to encompass transactions completed after date more specifically taxpayer believes that a transaction is after date within the meaning of sec_5 of the eti act if delivery and acceptance occur after that date taxpayer asserts that such time of delivery and acceptance is evidenced by the issuance of dd form sec_250 by the dod under taxpayer’s interpretation of the eti effective date the eti exclusion provisions would apply both to the original sale of productx and the second sale of productx pursuant to contractx because the relevant point in time is the issuance of the dd form_250 with respect to product x because both dd form sec_250 will have been issued after date all income attributable to the sales of productx both the original sale and the second sale including income that was recognized before the eti effective date would qualify for the eti exclusion provisions taxpayer also claims that its delivery and acceptance position is supported by general tax principles and the language of sec_5 and of the eti act ii discussion the distinction between completion of a sale and entering into a sale may be irrelevant even non-existent in many contexts for example if all events associated with a sale - from negotiations to agreement to delivery and acceptance - occur within a single day then the distinction may be immaterial nonetheless in other situations this distinction may be quite relevant this is true in the case of the long-term sales at issue in taxpayer’s case because prices are fixed at the outset products are made-to- order over a span of years and income is taken into account under the poc method postn-150683-04 throughout that span of years in the defense contractor context generally and the taxpayer context specifically the service’s entered into interpretation of the eti effective date appropriately reflects the critical significance of exactly when a sales agreement is reached in contrast taxpayer’s position would result in the inappropriate situation in which eti exclusions - keyed off delivery and acceptance - are available years before an eti exclusion regime was even contemplated this approach simply is not a realistic outcome of the statutory scheme in short we believe the proper interpretation should ensure similar treatment tax benefits both to a taxpayer that is able to complete a sale immediately because the taxpayer has available inventory and to a taxpayer that must make the product to order over a period of time a taxpayer’s delivery and acceptance theory of the eti effective date is not persuasive taxpayer’s position is based on the concept of completing or consummating a nonetheless taxpayer argues that traditional benefits and burdens analyses sale to this end taxpayer argues that completion of a sale is equivalent to final delivery and acceptance of the finished products evidenced by the issuance of a dd form_250 to our knowledge neither case law nor general tax principles support taxpayer’s position even under rules that embody a completion of sale concept neither delivery nor acceptance by itself is dispositive moreover taxpayer’s approach is particularly unsatisfactory in the context of long-term sales completed pursuant to contracts entered into before an eti regime was even created embodied in case law and regulations support its delivery and acceptance interpretation of the eti effective date in support of this position taxpayer cites sec_1_861-7 77_tc_1221 and 97_tc_308 aff’d 21_f3d_427 6th cir the authorities cited by taxpayer involve facts and legal questions that are materially different from the facts of the present case for example grodt mckay involved a determination as to whether for federal_income_tax purposes a sale has even occurred in the first place - clearly not a question here in a different area of tax law sec_1_861-7 involves a determination of the source of inventory sales income - again not an issue here taxpayer seems to rely primarily on guardian which involved a determination of whether a by-product from a chemical process constitutes a capital_asset in the hands of the processor 97_tc_308 to make that determination the tax_court considered among other issues whether sales of the by-product were frequent and regular id pincite the taxpayer argued that the underlying contract gave rise to a single aggregate sale of the by-product spread over time the commissioner argued that the contract was merely an executory_contract that gave rise to many individual sales over time as the by-product was regularly collected and sold in holding that multiple sales occurred the tax_court relied both on a grodt mckay-style benefits and burdens postn-150683-04 analysis and on commercial sales law principles id pincite the court observed that because most or all of the by-product was not identified or even in existence at the time the contract was signed the contract did not correspond to a single aggregate sale the court also noted that under the contract purchasers of the by-product were not obligated to pay for the by-product until shipment and the taxpayer was permitted to and in fact did sell by-product purportedly covered by the contract to other customers the sixth circuit_court of appeals affirmed the tax court’s decision without discussing the sale contract issue 21_f3d_427 aside from the most superficial similarities between the two cases - the presence of contracts and sales - we do not see the relevance of guardian to the present case guardian involves a situation where the parties do not agree on the number of sales that arose from non-binding executory contracts the number of sales is not at issue in this case now that taxpayer has abandoned its original poc method position described above moreover this case involves binding contracts taxpayer also cites 90_tc_26 involving income inclusion under the all_events_test and segall v 114_f2d_706 6th cir cert_denied 313_us_561 determining when sales are consummated as supporting its delivery and acceptance position taxpayer’s reliance on hallmark and segall is similarly misplaced the authorities cited and relied upon by taxpayer are inapposite the authorities address issues such as whether a sale occurred in the first place grodt mckay whether an activity comprises a single sale or multiple sales guardian when a sale is consummated sec_1_861-7 and segall and income inclusion under the all_events_test hallmark in other words the authorities cited by taxpayer do not address the issue at hand - determining when long-term sales are entered into for purposes of a statutory transaction-based effective date furthermore none of those authorities support taxpayer’s claim that a sale is entered into at the time delivery and acceptance are completed the authorities involve determinations based on traditional benefits and burdens analyses commercial sales law principles and the all_events_test thus those authorities are focused on concepts such as legal_title beneficial_ownership risk of loss right to receive payment and right of withdrawal none of those authorities stand for the proposition that a sale is either entered into or completed at the time of delivery and acceptance as evidenced by a dd form_250 b taxpayer’s position would render the eti act inadministrable taxpayer’s theory amounts to a wait-and-see approach that is taxpayer typically would not know if the fsc provisions the eti exclusion provisions or a successor regime applies to income until long after the income has been recognized - ie when the dd form_250 is eventually issued then once delivery and acceptance occur taxpayer would have to amend its returns for open taxable years and claim the postn-150683-04 appropriate tax benefits depending on what tax regime ultimately is in effect at the time of delivery and acceptance in some instances taxpayer presumably would have to file protective claims for refund for taxable years that close before delivery and acceptance occur in other instances taxpayer would be able to claim eti exclusions on income that it recognized even before the eti effective date because the product was delivered and accepted after the eti effective date in short if followed to its logical conclusion taxpayer’s interpretation of the eti effective date would in some instances delay or deny eti exclusion benefits where we believe congress intended they be available in other instances taxpayer’s interpretation would permit eti exclusion benefits retroactively ie before the eti effective date in fact this interpretation could permit eti exclusion benefits even for income recognized before the eti regime was contemplated for example under taxpayer’s delivery and acceptance interpretation a taxpayer that entered into a long-term sale in with delivery and acceptance in could qualify for eti exclusions for the income earned from such sale beginning in ie even before the predecessor fsc provisions were in effect conversely under taxpayer’s theory the same taxpayer would be unable to claim domestic_international_sales_corporation disc or fsc benefits for such income we are not aware of any congressional intent favoring such unusual resultsdollar_figure for the reasons discussed above taxpayer’s interpretation of the eti effective date is inherently inadministrable that inadministrability is further exacerbated by the fact that neither taxpayer nor any other taxpayer of which we are aware has ever applied the wait-and-see approach dictated by taxpayer’s interpretation in short taxpayer’s long-standing return position dating back we believe at least until calendar year1 belies its current interpretation of the eti effective date presumably congress was aware that taxpayers may claim fsc and eti tax benefits with respect to inclusions of income under the poc method long before the sale is fully completed thus the eti report used the entered into formulation in restating the eti effective date long-standing business practices including those of taxpayer confirm the administrability of the service interpretation and underscore the inadministrability of taxpayer’s position we believe that when a taxpayer bids on a contract or otherwise negotiates a sales agreement while the fsc or eti exclusion provisions are in effect the taxpayer relies on the anticipated benefit under such provisions whichever are in effect at the time such reliance can occur in the long-term sale context only if the the disc provisions were the materially similar predecessor of the fsc provisions taxpayer’s interpretation places it in an awkward position especially considering the retroactivity aspect according to taxpayer’s vice president of tax taxpayer does not intend to claim eti exclusions before the eti effective date even though taxpayer claims it is permitted to do so under its interpretation of the eti effective date we believe taxpayer’s reluctance to follow its own argument to its logical conclusion and claim eti exclusions in pre-eti effective date years reveals taxpayer’s awareness that its position leads to absurd results postn-150683-04 service’s entered into interpretation is followed thus taxpayer’s interpretation of the eti effective date would have at least two unintended effects with respect to the long-standing business practices described above first a taxpayer situated similarly as taxpayer would not be able to rely on an anticipated fsc or eti benefit when bidding on a contract or otherwise negotiating the terms of long-term sales because the taxpayer would not know if the benefit would still be available at the time delivery and acceptance occur years later second in some circumstances such taxpayer might be able to claim a greater tax_benefit than it had anticipated at the time it entered into the sale that is in fact what taxpayer is attempting to do here taxpayer negotiated long-term sales anticipating fsc benefits and is now trying to avail itself of a twice-as-great benefit under the eti exclusion provisions the eti exclusion benefit if permitted would constitute a windfall to taxpayer that we believe was not intended by congress c taxpayer misconstrues sec_5 and of the eti act taxpayer asserts that because sec_5 of the eti act allows taxpayers to elect to apply the eti exclusion provisions instead of the fsc provisions where a binding contract is involved the service’s denial of eti exclusions in this case is contrary to the purpose of the eti transition_rules more specifically taxpayer seems to believe that all income from a binding contract described in sec_5 of the eti act automatically qualifies for eti exclusion treatment we discern no merit in this argument which seems to reflect taxpayer’s fundamental misunderstanding of the transition_rules in particular the binding contract rule in addition taxpayer does not appreciate that its interpretation of the eti effective date is inconsistent with the election provision under sec_5 of the eti act the binding contract rule and related election are discussed below the binding contract rule the purpose of sec_5 of the eti act is to allow fscs to continue to benefit from the fsc provisions for certain transactions entered into after the general repeal of the fsc provisions thus easing the transition from fsc to eti the purpose of sec_5 of the eti act is to allow fscs to choose between eti exclusions or fsc benefits for transactions described in sec_5 this rule may be particularly helpful for example to a buy-sell fsc that entered into a binding contract before the eti effective date for sales of military_property with purchase options exercisable after the eti effective date sec_5 would force such buy-sell fsc to remain under the fsc provisions subject_to the military_property haircut unless the contracts are novated but sec_5 would allow the fsc to claim the greater benefits under the eti exclusion provisions for the sales pursuant to the purchase options while leaving the contracts intact however these rules are not without limitations the sec_5 election applies only to transactions involving a fsc that were entered into after the eti effective date see sec_5 c and c eti act the binding contract rule logically does not lead to the conclusion that taxpayer may claim eti postn-150683-04 exclusions on sales entered into before the eti effective date to summarize the eti effective date is the general_rule ie the eti exclusion provisions apply to transactions entered into after date the binding contract rule is an exception to the general_rule ie the fsc provisions apply to certain transactions entered into after date involving a fsc and a binding contract the sec_5 election is the exception to the exception ie the general_rule is reinstated in no case can the eti exclusion provisions apply to a transaction entered into before date the sec_5 election taxpayer’s interpretation of the eti effective date is inconsistent with the sec_5 election in at least two respects a sec_5 election is effective for the taxable_year for which made and all subsequent taxable years election effective date the election effective date is premised on the notion that income_recognition from some transactions will span more than one taxable_year moreover the election effective date provides that the election will apply to all such years on a prospective basis thus the election effective date imposes a multi-year discipline - if a taxpayer earns income from a transaction during more than one taxable_year and makes a sec_5 election with respect to such transaction all the income including the income recognized in subsequent years must be subject_to the electiondollar_figure this multi- year discipline regarding the election effective date is consistent with the service’s interpretation of the eti effective date in contrast taxpayer’s interpretation of the eti effective date would render the election effective date meaningless and thus is inconsistent with sec_5 of the eti act because taxpayer considers a sale not to occur until ultimate delivery and acceptance taxpayer most likely will have recognized all the income from the sale by the time taxpayer is permitted to make the election consequently there would be no subsequent taxable years with respect to which a multi-year discipline could apply as we noted above taxpayer claims to have elected eti exclusion treatment under sec_5 of the eti act with respect to some or all of the sales at issue taxpayer’s purported elections are premised on the notion that taxpayer entered into each sale prior to delivery and acceptance that is the only way that taxpayer could know in the first year of a long-term sale or later year if the 10-percent method delays recognition that taxpayer should make the election at that time under taxpayer’s own theory however such elections could not have been possible until many years later when delivery and acceptance were completed for example assume that the eti exclusion provisions are in effect during year1 if taxpayer properly takes income into account in year1 under the poc method we note that a taxpayer that made an election under sec_5 of the eti act may revoke such election only with the consent of the secretary_of_the_treasury such revocations apply on a prospective basis revproc_2001_37 at postn-150683-04 with respect to a sale that will not be completed until year5 taxpayer does not know in year1 if the year1 income qualifies for the eti exclusion by year5 it is possible that the eti exclusion provisions would no longer be in effect in that case none of the income from the sale would qualify for the eti exclusion therefore under taxpayer’s own theory taxpayer cannot know if its year1 income qualifies for eti exclusion treatment until delivery and acceptance occur in year5 and taxpayer determines whether the eti exclusion provisions are still in effect at that time thus taxpayer’s attempt to make a sec_5 election upon entering into each sale is inconsistent with taxpayer’s position and aligns with the service position to summarize taxpayer’s purported sec_5 elections reflect an internal inconsistency of taxpayer’s argument on the one hand the sales are deemed to exist for the purpose of making the sec_5 election on the other hand the sales are deemed not to exist for purposes of the eti effective date taxpayer therefore directly contradicts its interpretation of the eti effective date by purportedly making sec_5 elections at the time it enters into each sale as a result taxpayer’s position actually underscores the practicality and functionality of the service position the ajca footnote taxpayer also argues that a footnote in recent legislative_history supports its reading of the eti act sec_101 of the american_jobs_creation_act_of_2004 pub_l_no ajca generally repealed the eti exclusion provisions for transactions after date subject_to certain transition rulesdollar_figure the legislative_history to the ajca provides in a footnote transition_rules delayed the repeal of the fsc rules and the effective date of eti for transactions before date an election was provided however under which taxpayers could adopt eti at an earlier date for transactions after date this election allowed the eti rules to apply to transactions after date including transactions occurring pursuant to pre-existing binding contracts h_r conf rept no n emphasis added ajca footnote taxpayer asserts that the ajca footnote supports taxpayer’s interpretation of the eti effective date and transition_rules the quoted language is a somewhat accurate paraphrasing of the rules in sec_5 and of the eti act however the language lends no support to taxpayer’s position to the extent that one may consider the language of the eti effective date or of sec_5 or of the eti act to be ambiguous as evidenced to the extent that the ajca contains provisions concepts that are analogous to the eti act provisions concepts addressed in this memorandum such eti act and ajca provisions concepts should be interpreted consistently postn-150683-04 by the competing interpretations in this case a similar ambiguity is present in the ajca footnote which merely repeats the disputed phrase transactions after without adding any clarification we see no basis for taxpayer’s reliance on the ajca footnote as supporting its position in this case d transaction-based effective dates the service’s entered into reading of the eti effective date is not novel the service’s interpretation draws support from the disc and fsc legislative precursors to the eti act the tax_reform_act_of_1984 which enacted the fsc provisions and repealed the disc provisions applied generally to transactions after date pub_l_no 98_stat_985 sec_805 this transaction-based effective date for the fsc provisions would have denied fsc benefits to taxpayers that entered into long-term sales before but reported income from such sales after because the sales were entered into before the effective date in addition taxpayers could no longer claim disc benefits after see temp sec_1 921t- a providing that the disc election of every disc was deemed to be revoked on date this is an important distinction between the disc fsc transition and the fsc eti transition in the disc fsc context denial of fsc benefits because the transaction was entered into under the disc provisions meant denial of all disc fsc tax benefits after for long-term sales because disc benefits were no longer available after in contrast in the fsc eti context denial of the eti exclusion because the transaction was entered into under the fsc provisions usually means that the taxpayer will qualify for a fsc benefit instead to prevent the denial of benefits for post-1984 income from long-term sales entered into under the disc provisions because taxpayers had relied on the expectation of disc benefits when entering into the sales congress provided a special rule to allow certain long-term_contracts to qualify for fsc benefits by deeming certain fsc requirements satisfied and by authorizing regulations id at sec_805 see temp sec_1_921-1t congress further indicated its intent to provide a special effective date for certain long-term_contract taxpayers by stating in the legislative_history that for such taxpayers s rep no 98th cong 2d sess date in the case of the long- term contract taxpayers that had post-1984 income from sales entered into before this special effective date essentially a taxable year-based effective date trumped the general transaction-based effective date thus congress enabled taxpayers that had relied on an anticipated disc benefit to claim a comparable fsc benefit instead respect to computer_software in amending sec_927 to include computer the income from the long-term_contract will be treated as fsc income when recognized provided the general fsc requirements are satisfied after date congress provided another special taxable year-based effective date with postn-150683-04 software in the definition of fsc export_property congress allowed gross_receipts attributable to periods after date in taxable years ending after such date to qualify for fsc benefits pub_l_no 111_stat_788 b the legislative_history explained that h_r conf_rep no 105th cong 1st sess date reprinted in 1997_4_cb_1457 thus as with long-term_contract sales that straddled the disc and fsc provisions congress provided a special taxable year-based effective date for software licenses that straddled pre- and post-amendment versions of sec_927 thereby trumping the general transaction-based effective date which would have denied fsc benefits in the case of a multi-year license the provision applies to gross_receipts attributable to the period of such license that is after date neither the eti exclusion provisions nor the accompanying legislative_history provide a similar special rule indicating that income from a sale entered into before the eti effective date should qualify for eti exclusions rather than fsc benefits on the contrary the eti exclusion legislative_history adopts an entered into formulation of the eti effective date consistent with the general transaction-based effective date of the fsc provisions as demonstrated above if congress wanted to grant eti benefits with respect to sales entered into before the eti effective date congress knew how to do so congress could have written a taxable year-based effective date for poc method taxpayers but it chose not to e transaction and contract are separate and distinct concepts taxpayer claims that the service’s position incorrectly treats transaction and contract as synonymous taxpayer’s claim is unwarranted we agree that transaction and contract have separate and distinct meanings at least in the context of the eti act see sec_5 eti act any transaction in the ordinary course of trade_or_business involving a fsc which occurs after date pursuant to a binding contract emphasis added our differentiation between transactions and contracts is illustrated by our analysis of contractx described above contractx gave rise to two sales as determined under the facts and circumstances taxpayer entered into the original sale before the eti effective date and entered into the second sale after the eti effective date therefore income from the original sale does not qualify for an eti exclusion but income from the second sale could qualify for eti exclusion treatment assuming all other eti exclusion requirements are satisfied our reading of the eti act clearly distinguishes between contracts and the sales to which such contracts give rise in summary we find taxpayer’s arguments unpersuasive and consider the better reading of sec_5 of the eti act to be consistent with the service position postn-150683-04 described herein accordingly we conclude that income from taxpayer’s sales entered into before date - including income from long-term sales entered into before date that is taken into account under the poc method after date - does not qualify for the eti exclusion thus in the case of a long-term_contract that taxpayer entered into before date income from a sale entered into pursuant to such contract may qualify for the eti exclusion only if taxpayer entered into the sale after date as in the case of the second sale pursuant to contractx this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call the branch at ---------------------if you have any further questions


department of the treasury internal_revenue_service washington d c t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n contact person telephone number identification_number employer_identification_number number release date se t eo ra t date april uniform issue list number legend f b c d e_p x y dear ------------------ this is in reference to your representative’s letter of date requesting advance approval of your scholarship grant procedures under sec_4945 of the internal_revenue_code the information submitted shows that the grants by you private_foundation p will be administered by f a publicly_supported_organization under its b program organizations operating under the b program may elect the c option and or the d option in the c option f selects individual scholarship recipients in the b program through a competition the initial phase of the competition is the x test which is given annually in participating high schools by high school officials after the test f identifies and honors students scoring in a group that represents the top two percent of graduating high school seniors nationwide and designates a number that represents less than one percent of the graduating high school seniors in each state as semifinalists the semifinalists then take a second y test to confirm their earlier performance those who repeat their prior performance who demonstrate high academic standing in high school and who meet other standard requirements are designated as finalists in the d option f's selection procedures generally parallel those applied in the c option however eligibility in the d option is limited to the top-scoring black students semifinalists in the d option are designated in at least four geographic regions each consisting of several states according to the distribution of the black population throughout the united_states you p have entered into an agreement with f whereby you have agreed to sponsor a specific number of scholarships each year to be awarded to children and or relatives of employees of e under the b program f may award scholarships only to students who are designated as finalists the actual number of b scholarships to be supported by you will not exceed the number of employees' children who qualify as finalists in their respective competitions after the list of finalists is obtained f reviews the finalist group to determine which students are eligible for grants under an employer-related scholarship program no application is required from the students to enter the b program therefore neither you nor f can determine the number of eligible applicants if there is an insufficient number of employees' children who qualify as finalists the total number of scholarships to be awarded in a particular year is automatically reduced or some foundations may permit scholarships to be offered to finalists who are not children of employees f monitors participating employers to ensure a sufficiently large base of employees' children from which at least one or more b finalists would ordinarily be expected to emerge this is necessary since fewer than one out of one hundred seventy-five students in a senior class achieves the b finalist level the selection of individual grant recipients is made by selection committees designated by f the members of the selection committee are totally independent and separate from you f confirms the individual scholarship recipient's enrollment at the educational_institution makes payment of the award through the appropriate financial aid office of the educational_institution and supervises and investigates the use of the grant funds by the recipients in their educational program the scholarships will not be used as a means of inducement to recruit employees nor will a grant be terminated if an employee parent leaves the company scholarships will only be awarded to students who plan to enroll in an institution that meets the requirements of sec_170 of the code and which may further be limited by f after the scholarship is awarded the recipient will not be restricted in his her course of study in rare cases sponsors may ask f to give preference in selection to individuals who propose to study in certain broad fields f will supply statistical information to you which will enable you to maintain the records required by revproc_76_47 1976_2_cb_670 sec_4945 of the code provides for the imposition of taxes on each taxable_expenditure of a private_foundation sec_4945 of the code provides that the term taxable_expenditure means any amount_paid or incurred by a private_foundation as a grant to an individual for travel study or other similar purposes by such individual unless such grant satisfies the requirements of sec_4945 sec_4945 of the code provides that sec_4945 shall not apply to an individual grant awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance by the secretary if it is demonstrated to the satisfaction of the secretary that the grant constitutes a scholarship or fellowship_grant which is subject_to the provisions of sec_117 and is to be used for study at an educational_organization described in sec_170 revproc_76_47 1976_2_cb_670 sets forth guidelines to be used in determining whether a grant made by a private_foundation under an employer-related program to a child of an employee of the particular employer to which the program relates is a scholarship grant subject_to the provisions of sec_117 if a private foundation's program satisfies the seven conditions set forth in sections dollar_figure through dollar_figure of revproc_76_47 and meets the percentage_test described in sec_4 the service will assume the grant will be subject_to the provisions of sec_117 section dollar_figure of revproc_76_47 provides a percentage_test guideline it states that in the case of a program that awards grants to children of employees of a particular employer the program meets the percentage_test if the number of grants awarded under that program in any year to such children does not exceed percent of the number of employees' children who i were eligible ii were applicants for such grants and iii were considered by the selection committee in selecting the recipients of grants in that year or percent of the number of employees' children who can be shown to be eligible for grants whether or not they submitted an application in that year as stated in sec_4 of revproc_76_47 if a sponsor's program satisfies the seven conditions set forth in sections dollar_figure through but does not meet the percentage_test of section dollar_figure applicable to grants to employees' children the question whether the grants are scholarship or fellowship grants subject_to the provisions of sec_117 of the code will be resolved on the basis of all the facts and circumstances in making this determination the service will consider as a substitute for the percentage_test of section dollar_figure all the relevant facts and circumstances to determine whether the primary purpose of the program is to provide extra compensation or other employment incentive or whether the primary purpose is to educate recipients in their individual capacities these facts and circumstances will be considered in the context of the probability that a grant will be available to any eligible applicant such relevant facts and circumstances could include the history of the program such as the source of the program's funding the courses of study for which the grants are available any eligibility requirements imposed by the program other than employment of the applicants or their parents and the age and grade level prerequisites for the studies for which the grants are available the publicity given the grant program the degree of independence of the selection committee the particular standards used for selection the specific means used to determine whether those standards have been met the precise nature of the employee limitation or preference the number of grants available the number of employees or their children who would be eligible for them the percentage of eligible employees or their children applying for grants who normally eg on an average basis receive grants under the program and whether and how many grants are awarded to individuals who do not qualify as employees or children of employees in your case the following facts and circumstances are considered relevant aside from the employment preference f a public charity operates its private_foundation sponsored b program in a substantially_similar manner to its nationwide college scholarship program for academically talented high school students no application is required individuals must achieve finalist status in their respective competitions recipients are chosen by selection involved totally the private the employer foundation or independent of committees no limitations are placed on the recipients' choice of course of study after the grant is awarded the number of actual grants made may not exceed the number of employees' children who qualify as finalists in f provided an average of one scholarship for every big_number employees children in its programs under the facts and circumstances as stated above there is only an insignificant probability that any particular employee's child will be selected and thus the grant's primary purpose is not one of providing extra compensation or other employment incentive and the facts_and_circumstances_test of revproc_76_47 sec_4 is met accordingly based upon the information presented and assuming your scholarship program will be conducted as proposed with a view to providing objectivity and non-discrimination in the awarding of scholarship grants we rule that your grants to f for the awarding of scholarship grants to children of employees of e comply with the requirements of sec_4945 of the code thus such expenditures made in accordance with those procedures will not constitute taxable_expenditures within the meaning of sec_4945 of the code the recipient of the scholarship is responsible for determining whether all or part of the scholarship is includible in gross_income under sec_117 of the code we understand that f will advise the recipient that amounts granted are taxable_income if the aggregate scholarship amounts received by the recipient exceed tuition and fees not including room and board required for enrollment or attendance at the educational_institution and fees books supplies and equipment required for courses of instruction this ruling will remain in effect as long as the procedures in awarding grants under your program remain in compliance with sections dollar_figure through dollar_figure of revproc_76_47 please note that this ruling is only applicable to grants awarded under the b program before you enter into any other scholarship or educational loan program you should submit a request for advance approval of that program your procedures for awarding grants under the b program are considered to satisfy the facts_and_circumstances_test of revproc_76_47 and therefore will not be counted in determining whether the percentage_test of revproc_76_47 is met with respect to any other such program for which prior approval has been granted we are informing the ohio te_ge office of this ruling please keep a copy of this ruling with your organization's permanent records this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice this ruling letter is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent if you have any questions about this ruling letter please contact the person whose name and telephone number are shown in the heading of this letter because this ruling letter could help to resolve any questions please keep it in your permanent records sincerely debra j kawecki manager exempt_organizations enclosure notice technical group


internal_revenue_service department of the treasury number release date index numbers re washington dc person to contact telephone number refer reply to cc psi b09-plr-135016-02 date date legend taxpayer spouse date trust trust trust trust company year year year x y z plr-135016-02 dollar_figurea dollar_figureb dollar_figurec dear this is in response to your letter dated date on behalf of taxpayer requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations and sec_2642 of the internal_revenue_code to make allocations of taxpayer’s generation-skipping_transfer gst_exemption the facts and representations submitted are summarized as follows on date taxpayer and spouse created trust trust trust and trust for the benefit of their children and their children’s descendants paragraph of each trust provides that initially the trust shall be held as a single trust for the child the child’s spouse and their issue in accordance with the provisions of paragraph after the death of the child the trust estate will be divided by right of representation into separate shares each of which shall be held as separate trusts for the then living issue of the deceased child each trust contribution received by the trustee shall be added pro_rata to the trusts then being administered under this instrument paragraph a i of each trust provides that following each contribution to the trust each beneficiary of the trust shall have a noncumulative right to withdraw from the trust an amount equal to ten thousand dollars or such higher amount as is then provided as the annual exclusion from gift_tax under sec_2503 paragraph b i of each trust provides that the trustee shall pay or apply for the benefit of the child as much of the net_income and principal of the trust as is necessary for the child’s proper health education or support or any combination of them after taking into consideration other income and resources available for those purposes in addition the trustee may pay to or apply for the benefit of the child’s spouse and issue as much of the net_income and principal of the trust as is necessary for such person’s proper health education or support or any combination of them after taking into consideration other income and resources available for those purposes any net_income not distributed shall be accumulated and added to principal paragraph b ii of each trust provides that upon the death of the child the trust estate shall be distributed in such manner and to such of the following persons as the child may have appointed in the child’s last will child’s spouse issue siblings or the issue of the child’s siblings in the absence of appointment the trust shall be divided plr-135016-02 into separate trusts by right of representation for the child’s then living issue and each trust shall be held administered and distributed in the manner described in subparagraph c if the child has no then living issue then the unappointed portion of the trust shall be divided by right of representation and held in trust pursuant to this subparagraph b for the other living children of taxpayer and spouse or pursuant to subparagraph c for the benefit of the then living issue of their deceased children paragraph c of each trust provides that each trust for the benefit of the issue of a deceased child shall be held administered and distributed as a separate trust as hereafter provided paragraph c i of each trust gives the trustee discretion to apply as much net_income and principal as the trustee deems necessary for the beneficiary’s health education or support or any combination of them after taking into consideration their other income and resources paragraph c ii of each trust provides that upon the death of the beneficiary the undistributed balance of the trust estate shall be distributed to or for the benefit of such of the following persons as the beneficiary may have appointed in his or her last will his or her spouse children and brothers and sisters or their issue in the absence of appointment the property shall be divided by right of representation and held in further trust pursuant to the terms of subparagraph sec_4 and this subparagraph c ii for the benefit of that beneficiary’s then living issue or if there are none for the benefit of then living issue of taxpayer and spouse all pursuant to the terms of the trusts which are then being administered under the trust agreement paragraph of each trust provides that unless sooner terminated in accordance with the provisions of this instrument each trust created under this instrument shall terminate twenty-one years after the death of the last survivor of the issue of taxpayer and spouse who are living on the date this instrument is executed all principal and undistributed_income of any trust so terminated shall be distributed to the then income_beneficiary of that trust paragraph of each trust provides that it is the trustor’s intention that this trust be completely exempt from the generation skipping transfer_tax under chapter of the internal_revenue_code paragraph further provides that the trustor or the trustor’s personal representative shall elect to allocate the trustor’s gst_exemption under sec_2631 of the code to the assets contributed to this trust on a timely filed gift_tax or estate return so the trust will at all times have a zero inclusion_ratio taxpayer and spouse each made gifts to their children’s trusts the gifts consisted of units in company plr-135016-02 during year taxpayer transferred x units of company to each of his four children’s trusts the reported value of the transfers from taxpayer to the trusts in year was dollar_figurea taxpayer filed a form_709 united_states gift and generation- skipping transfer_tax return for year the form_709 reflected dollar_figurea of gst_exemption allocated to the transfers the form_709 was prepared by taxpayer’s tax attorney in year taxpayer transferred y units of company to each of the four trusts the reported value of the transfers from taxpayer to the trusts in year was dollar_figureb in year taxpayer transferred z units of company to each of the four trusts the reported value of the transfers from taxpayer to the trusts in year was dollar_figurec in year and year taxpayer’s form sec_709 were prepared by taxpayer’s accountants the accountants inadvertently failed to allocate any gst_exemption on the form sec_709 for the year and year transfers to the trusts taxpayer represents that he relied upon his accountants to prepare the form sec_709 correctly taxpayer has requested the following rulings an extension of time under sec_2642 of the internal_revenue_code and sec_301_9100-1 and sec_301_9100-3 to make an allocation of taxpayer’s gst_exemption for the transfers to the trusts in year and year and taxpayer is allowed to make the gst_exemption allocations based on the value of the property transferred to the trusts as of the dates of the original transfers sec_2601 imposes a tax on every generation-skipping_transfer gst a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under sec_2631 that may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_2642 provides that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer or is deemed to be made under sec_2632 or c the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of plr-135016-02 sec_2001 or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period its value at the time of the close of the estate_tax_inclusion_period and such allocation shall be effective on and after the date of such transfer or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period on and after the close of such estate_tax_inclusion_period sec_2642 provides generally that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of sec_2642 which was enacted into law on date sec_2642 provides that in determining whether to grant relief under this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_34_irb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a generation-skipping_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a notice published in the internal_revenue_bulletin in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 plr-135016-02 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore taxpayer is granted an extension of time of days from the date of this letter to make an allocation of taxpayer’s available gst_exemption with respect to taxpayer’s transfers to the trusts in year and year the allocation will be effective as of the date of the transfers to the trusts and the gift_tax value of the transfers will be used in determining the amount of gst_exemption to be allocated to the trusts therefore the gst_exemption allocations will be based on the value of the property transferred to the trusts as of the dates of the original transfers the allocations should be made on supplemental form sec_709 united_states gift and generation-skipping_transfer_tax returns and filed with the internal_revenue_service center cincinnati oh a copy of this letter should be attached to the supplemental form sec_709 a copy is enclosed for this purpose the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code in addition we express or imply no opinion regarding the value of the property transferred to the trusts in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to taxpayer plr-135016-02 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely heather c maloy heather c maloy associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter