internal_revenue_service number release date index number ------------------------------------------------------ ----------------------------------- ----------------------- ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi b04 plr-116608-09 date september in re ------------------------------------------------------------------------------------------------------ ------------------------------------ -------------------------------- legend trust a b child c child d child e date c group grandchild c-1 grandchild c-1’s spouse great-grandchild c-1a great-grandchild c-1b great-grandchild c-1c d-1 group grandchild d-1 grandchild d-1’s spouse great-grandchild d-1a great-grandchild d-1b d-2 group grandchild d-2 grandchild d-2’s spouse great-grandchild d-2a great-grandchild d-2b great-grandchild d-2c great-grandchild d-2d e-1 group grandchild e-1 grandchild e-1’s spouse ----------------------------------------------------------------- ----------------------------------------------------------------- ------------------------------- --------------------------------- ---------------------------------------------------- ----------------------------------- ------------------------------------------------------------ -------------------------- ---------------------------------------- -------------------- ------------------------------------------------ ------------------------- --------------------------------- ---------------------------------------------- -------------------------- ------------------------------- ----------------------------- ----------------------------------- ----------------------- ------------------------------------ -------------------------------- ----------------------------------- ---------------------------------- -------------------------------------- ------------------------- great-grandchild e-1 e-2 group grandchild e-2 corporate trustee f g state c trust d-1 trust d-2 trust e-1 trust e-2 trust state statute state statute dear --------------- ------------------------------- ----------------------------------- ---------------------------------- ------------------------------- --------------------- ------------ ---------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- ----------------------------------------------- --------------------------------------------- this is in response to your submission dated date concerning the income gift estate and generation-skipping_transfer gst tax consequences of a proposed division of the trust according to the facts submitted trust was created on date prior to date by the settlors a and b husband and wife for the primary benefit of their grandchildren and the grandchildren's issue a and b have three adult children child c child d and child e child c has one child grandchild c-1 grandchild c-1 grandchild c-1’s spouse and their three children great-grandchild c-1a great- grandchild c-1b and great-grandchild c-1c are referred to as the c group child d has two children grandchild d-1 and grandchild d-2 grandchild d-1 grandchild d-1’s spouse and their two children great-grandchild d-1a and great- grandchild d-1b are referred to as the d-1 group grandchild d-2 grandchild d-2’s spouse and their four children great-grandchild d-2a great-grandchild d-2b great- grandchild d-2c and great-grandchild d-2d are referred to as the d-2 group child e has two children grandchild e-1 and grandchild e-2 grandchild e-1 grandchild e-1’s spouse and their child great-grandchild e-1 are referred to as the e- group grandchild e-2 is referred to as the e-2 group a and b are both deceased child c child d and child e are still living the current trustees are corporate trustee and three individuals f g and grandchild c-1’s spouse collectively referred to as the trustee the trust principal has been managed and invested as a single trust and the distributions of income have been made in equal shares to the five family groups the pertinent terms of the trust are as follows section ii paragraph a provides that if any of child c child d or child e are living the trustee is to distribute the trust income at least annually to or among settlors’ grandchildren their spouses and their lineal_descendants in such proportions and amounts as the trustee in its sole discretion determines the trustee has the power to accumulate any portion or all of the income only if the trustee is satisfied that the accumulation of income will be in the best interests of settlors’ lineal_descendants section ii paragraph a further provides that with respect to the principal the trustee in its discretion may at any time or from time to time distribute any part or all of the principal to or among settlors’ grandchildren their spouses and their lineal_descendants all distributions of principal are to be at such times and in such proportions and amounts as the trustee determines section ii paragraph b provides that upon the death of the survivor of child c child d and child e the trustee is to divide the trust into a sufficient number of equal shares so that one share shall be set_aside for each then living grandchild of settlors and one share shall be set_aside for each deceased grandchild of settlors leaving lineal_descendants then living each grandchild for whom or for whose lineal_descendants a share is set_aside shall be referred to as the primary beneficiary of the trust in which that share is held the trustee is to hold that share as a separate trust under section ii paragraph b the trustee shall distribute the income of the separate trust at least annually to or among the primary beneficiary and his or her lineal_descendants and after the death of the primary beneficiary and all of his or her lineal_descendants to or among settlors’ lineal_descendants in such proportions as the trustee shall determine in its sole discretion in lieu of the distribution of income the trustee shall have the power to accumulate any portion or all of the income of the trust only if the trustee has satisfied itself that such accumulation of income will be in the best interests of the primary beneficiary his or her lineal_descendants and settlors’ lineal_descendants under section ii paragraph b with respect to the principal of the trust the trustee in its discretion may at any time or from time to time distribute any part or all of the principal of the trust to or among the primary beneficiary and his or her lineal_descendants and after the death of the primary beneficiary and his or her lineal_descendants to or among settlors’ lineal_descendants all distributions shall be at such times and in such proportions and amounts as the trustee shall determine section iii provides that unless sooner terminated each trust shall end immediately prior to the expiration of twenty-one years from and after the death of the last survivor of settlors and the issue of settlors’ parents living on the date of the trust agreement thereupon the trustee is to distribute the principal of each such trust outright in equal shares to the person or persons then entitled to receive the net_income thereof or if there is no person or persons then entitled to receive the net_income to the settlors’ heirs as defined in the trust agreement section iv paragraph a provides that if any of the income and or principal shall be distributable to any beneficiary who has not attained age twenty-one the trustee shall until the beneficiary has attained age twenty-one distribute the income to the beneficiary or the beneficiary’s guardian or apply it to the beneficiary’s and the beneficiary’s dependents’ support maintenance education benefit and or recreation as the trustee in its sole discretion deems to be to the best interest of the beneficiary and his or her dependents and postpone distribution of principal to the beneficiary section iv paragraph b provides that if at any time the trustee in its sole discretion considers that the funds payable to or for the benefit of a beneficiary together with the funds available to the beneficiary from other sources are insufficient to provide properly for the essential needs such as food clothing education shelter and illness expenses of the beneficiary and his or her dependents the trustee is authorized to pay or apply so much of the principal in such manner and to such extent as the trustee in its sole discretion deems to be necessary to meet the essential needs of the beneficiary and the beneficiary’s dependents section vi paragraph a provides that any person may add to the trust at any time section vi paragraph c provides that the number of individual trustees may be increased not to exceed three or decreased at any time by a majority of the trustees settlors’ lineal_descendants shall not be eligible to be individual trustees if at any time there is no individual trustee then the number of individual trustees of the size last authorized shall be selected by a majority vote of the competent adult members of the class then eligible to receive distributions or if none by a majority vote of such persons regardless of age or competency the trustee is to exercise its power to pay income in various proportions and or accumulate income and its discretionary power to pay principal only upon the majority vote of all trustees however if at any time during the administration of the trust or the shares there are no individual trustees the corporate trustee is authorized to take such action as it in its sole discretion deems to be in the best interests of the beneficiaries of the trust or the shares section vi paragraph c provides that an individual trustee may be removed by a majority vote of the other trustees serving or by a majority vote of the competent adult members of the class then eligible to receive distributions or if none by a majority vote of such persons regardless of age or competency section vii paragraph g provides that the trust is to be governed by the laws of state it is represented that no additions constructive or otherwise have been made to the trust since either date the effective date of sec_643 or date the trustees have executed an instrument of severance in accordance with state statute to divide the trust into five separate equal and identical trusts one trust for each family line described below each of the five trusts will be the same in form and terms as the original trust except that the beneficiaries of each separate trust will be solely the beneficiaries in the family line for which the separate trust is established so long as one of the settlors’ children child c child d and child e is surviving each separate trust is to be administered in accordance with section ii paragraph a of the trust upon the death of the survivor of child c child d and child e each separate trust will be administered in accordance with section ii paragraph b of the trust the c trust will be held for the benefit of the c group the d-1 trust will be held for the benefit of the d-1 group the d-2 trust will be held for the benefit of the d-2 group the e-1 trust will be held for the benefit of the e-1 group and the e-2 trust will be held for the benefit of the e-2 group it is represented that the division will permit the trustee to invest the principal in a manner more particularly suited to each living grandchild and his or her spouse and lineal_descendants the instrument of severance will be effective as of the last day of the month in which a favorable private_letter_ruling is received from the internal_revenue_service you have requested the following rulings the proposed modification and division of the trust into five separate and equal trusts the pro_rata transfer of assets from the original trust to each such separate trust and the possible change_of trustees with respect to any such separate trust will not constitute an addition to or a modification of the trust or any of the five separate trusts that would cause the trust or any separate trust to lose wholly or partially its exempt status under sec_2601 of the internal_revenue_code or b a of the tax_reform_act_of_1986 and will not subject distributions from any of the trusts to the generation-skipping_transfer_tax under chapter the proposed pro_rata distribution of the assets of the trust to five separate trusts on an equal basis as proposed will not result in the realization of gain_or_loss to the trust or to any separate trust or beneficiary thereof under sec_61 or sec_1001 the proposed division of the trust and pro_rata distribution of assets into five separate trusts will not result in a transfer subject_to gift_tax under sec_2501 by the trust or by any of the trust's beneficiaries the basis of each asset received by each separate trust from trust will be the same as the basis which that asset maintained when held by the original trust pursuant to sec_1015 the holding_period for each asset received by each separate trust from the original trust will include the same holding_period for that asset as held by the original trust according to sec_1223 each of the five separate trusts will constitute a separate trust for purposes of sec_643 and for purposes of determining the application of any generation-skipping_transfer_tax subsequent to the division of the trust ruling sec_2601 imposes a tax on every generation-skipping_transfer gst which is defined under sec_2611 as a taxable_distribution a taxable_termination or a direct_skip section b a of the tax_reform_act_of_1986 vol c b and sec_26_2601-1 of the generation-skipping_transfer_tax regulations provide that the generation-skipping_transfer_tax shall not apply to any generation-skipping_transfer under a_trust that was irrevocable on date but only to the extent that such transfer was not made out of corpus added to the trust after date or out of income attributable to corpus so added sec_26_2601-1 provides that if an addition is made after date to an irrevocable_trust which is excluded from the application of chapter by reason of sec_26_2601-1 a pro_rata portion of subsequent distributions from and terminations of interests in property held in the trust is subject_to the provisions of chapter sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax under sec_26_2601-1 b or b will not cause the trust to lose its exempt status the rules of sec_26_2601-1 are applicable only for purposes of determining whether an exempt trust retains its exempt status for generation-skipping_transfer_tax purposes they do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter but only if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in a beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a generation-skipping_transfer or the creation of a new generation-skipping_transfer sec_26_2601-1 example illustrates a situation where a_trust that is otherwise exempt from the gst tax is divided into two trusts under the facts presented in the example the division of the trust into five trusts does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial interests prior to the division and the division does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust under state law a fiduciary ie a trustee who is a beneficiary and trustee of a_trust that confers on the trustee a power to make discretionary distributions to or for the trustee’s personal benefit may exercise that power but shall be limited to distributions for the fiduciary’s health education support or maintenance state statute in this case the trust was irrevocable on date and it is represented that no additions to the trust have been made since date based on the facts presented and the representations made the division of the trust into the five separate trusts as described above will not result in a shift of any beneficial_interest in the trust to any beneficiary who occupies a generation lower than the persons holding the beneficial interests prior to the division further the proposed division will not extend the time for vesting of any beneficial_interest in the new trusts beyond the period provided for under the original trust we conclude that the proposed division of the trust into the c trust the d-1 trust the d-2 trust the e-1 trust and the e-2 trust will not cause the trust or any of the five divided trusts to lose exempt status under b a of the tax_reform_act_of_1986 accordingly the trust and the five divided trusts will not be subject_to the provisions of chapter ruling sec_61 provides that gross_income includes gains derived from dealings in property and under sec_61 from an interest in trust sec_1001 provides that the gain from the sale_or_other_disposition of property is the excess of the amount_realized over the adjusted_basis provided in sec_1011 for determining gain and the loss is the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized sec_1001 provides that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained a partition of jointly owned property is not a sale_or_other_disposition of property if the co-owners of the joint property sever their joint_interests but do not acquire a new or additional interest as a result of the transaction thus neither gain nor loss is realized on a partition revrul_56_437 1956_2_cb_507 499_us_554 considers the issue of when a sale_or_exchange has taken place that results in realization of gain_or_loss under sec_1001 in cottage savings a financial_institution exchanged its interests in one group of residential mortgage loans for another lender’s interests in a different group of residential mortgage loans the two groups of mortgages were considered substantially identical by the agency that regulated the financial_institution in cottage savings u s pincite the court concluded that sec_1_1001-1 reasonably interprets sec_1001 and stated that an exchange of property gives rise to a realization event under sec_1001 if the properties exchanged are materially different in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent cottage savings u s pincite the court held that mortgage loans made to different obligors and secured_by different homes did embody distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans cottage savings u s pincite under state law a trustee may divide a_trust into two or more separate trusts on a fractional basis see state statute it is consistent with the supreme court’s opinion in cottage savings to find that the interests of the beneficiaries of the five divided trusts will not differ materially from their interests in the trust in the proposed division the trust will be divided on a pro_rata basis in accordance with state law and under the trustee’s powers except for the changes described above the five divided trusts will be administered under the same provisions as the trust accordingly the proposed transaction will not result in a material difference in_kind or extent of the legal entitlements enjoyed by the beneficiaries and no gain_or_loss is realized by the beneficiaries of the trust on the division for purposes of sec_1001 ruling sec_2501 imposes a tax for each calendar_year on the transfer of property by gift during such calendar_year by any individual resident or nonresident sec_2511 provides that subject_to certain limitations the gift_tax applies whether the transfer is in trust or otherwise direct or indirect and whether the property transferred is real or personal tangible or intangible sec_2512 provides that if the gift is made in property the value thereof at the date of the gift is considered the amount_of_the_gift sec_2512 provides that where property is transferred for less than an adequate_consideration in money_or_money's_worth then the amount by which the value of the property exceeded the value of the consideration is deemed a gift that is included in computing the amount of gifts made during the calendar_year the division of the trust as described above will not result in any change in the beneficial interests of any of the trust beneficiaries accordingly based on the facts submitted and representations made the division of the trust into the c trust the d-1 trust the d-2 trust the e-1 trust and the e-2 trust will not cause any beneficiary of the trust or of the five separate trusts to have made a taxable gift_for federal gift_tax purposes under sec_2501 ruling sec_1015 provides that the basis in property acquired by a transfer in trust is the same as it would be in the hands of the grantor with adjustments for gain and loss recognized sec_1_1015-1 provides that property acquired by gift has a single uniform basis although more than one person may acquire an interest in the property the uniform basis of the property remains fixed subject_to proper adjustment for items under sec_1016 and sec_1017 sec_1_1015-2 provides that in the case of property acquired after date by a transfer in trust other than a transfer in trust by gift bequest or devise the basis_of_property so acquired is the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor under the law applicable to the year in which the transfer was made sec_1_1015-2 provides that the principles in sec_1_1015-1 concerning the uniform basis are applicable in determining basis_of_property where more than one person acquires an interest in property by transfer in trust in this case because neither sec_1001 nor sec_61 applies to the proposed transaction the basis of the assets for each of the c trust the d-1 trust the d-2 trust the e-1 trust and the e-2 trust will be the same as the basis of the assets in the trust ruling sec_1223 provides that in determining the period for which a taxpayer has held property however acquired there is included the period for which the property was held by any other person if under chapter of subtitle a such property has for the purpose of determining gain_or_loss from a sale_or_exchange the same basis in whole or in part in the taxpayer's hands as it would have in the hands of the other person see also sec_1_1223-1 we conclude that under sec_1223 the holding_period for each of the c trust the d-1 trust the d-2 trust the e-1 trust and the e-2 trust in each asset received from the trust will include the respective holding_period of the trust for each such asset ruling sec_643 provides that under regulations to be prescribed by the secretary two or more trusts shall be treated as one trust if such trusts have substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries and a principal purpose of such trusts is the avoidance of the tax_imposed_by_chapter_1 of the code based on the information submitted and representations made the five trusts created in accordance with the division of trust will have the same grantor but will have different primary beneficiaries and will be separately managed and administered thus the five trusts will be treated as separate trusts for federal_income_tax purposes except as specifically ruled upon above we express no opinion as to the tax consequences of the transaction described above under the cited provisions of the code or under any other provisions of the code the rulings contained in this letter are based upon information and representations submitted by the taxpayers and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination this ruling is directed only to the taxpayers requesting it sec_6110 provides that it may not be used or cited as precedent sincerely george masnik chief branch office of the associate chief_counsel passthroughs and special industries enclosures


internal_revenue_service number release date index number ---------------------------- ------------------------ ------------------------ ---------------------------- in re ----------------------------- --------------- --------------------------------- ------------------------------ department of the treasury washington dc person to contact --------------- id no ------------- telephone number --------------------- refer reply to cc psi b07 - plr-169203-03 date date ----------------------------- taxpayer date a b c d e site date date ----------------------- ----------------------- ------------------ ---------- ----------------------- --------------------------------- ----------------------- --------------------------------------- ----------------------- ---------------------------------- ----------------------- ---------------------------------- legend ----------------------------------------------------------------------------------------------------------- ------------------ ------------------- ----------------------- -------- ------- ------- --------------------------- --------------------------- -------------------------- -- --- -------- date date date x year year date date date a b c ------------------------------------------------------- ------------------------ --------------------------------------------------------------- f g h y d site ------ --------------------------------------------------------------- ----------------------------------------------- ----------------------------- ---------------------------------- -- plr-169203-03 --------------------------------------------------------------------------------------------------------------- dear ---- this letter is in response to your letter dated date and subsequent correspondence on behalf of taxpayer requesting rulings under sec_29 and sec_708 of the internal_revenue_code the facts as represented by taxpayer and taxpayer’s authorized representative are as follows taxpayer is a limited_partnership that is classified as a partnership for tax purposes taxpayer is an accrual_method taxpayer whose taxable_year ends on date a the general_partner of taxpayer is classified as a corporation for tax purposes the limited partners of taxpayer are b c d and e the facility at issue in this ruling_request was designed to produce a solid synthetic_fuel product from coal a originally constructed the facility at site a constructed the facility pursuant to four contracts for the procurement of equipment and for engineering and construction the contracts were entered into before date and are dated date date date and date taxpayer has produced an opinion of counsel that states that the primary construction_contract dated date constituted a binding written contract under the applicable state law prior to date which did not limit damages for breach to less than five percent of the total contract amount the contract further includes such features as a description of the facility to be constructed and a lump sum price the facility began operations in date and produced x tons of synthetic_fuel in year the facility continued to produce synthetic_fuel until year when its primary customer at site ceased operations the facility as constructed at site consisted of the following components directly necessary for the production of qualified_fuel chemical reagent hoppers feed conveyers a delumper which shredded and mixed dewatered pulp waste a gathering conveyer a feed bucket conveyer a mixer an agitated conditioner two metering screws two pellet mills a pellet cooler a pellet conveyer and a motor control center motor starters computer control cards and other process control and interface equipment in addition the facility is supported by equipment that is not directly necessary for the production of synthetic_fuel taxpayer has undertaken certain improvements of the facility at site though not to the equipment directly necessary for the production of synthetic_fuel plr-169203-03 taxpayer was founded by a b c and d on date to acquire the facility from a on date taxpayer entered into a purchase and sales agreement with a for the purchase of the facility on date taxpayer and a entered into an amended purchase and sales agreement governing the sale of the facility to taxpayer the amended purchase and sales agreement obligates taxpayer to make certain fixed and contingent payments to a taxpayer has provided evidence that the net present_value of the fixed payments exceed fifty percent of the total purchase_price also on date after a restructuring of taxpayer’s partnership interests a second series of partnership interests were sold to e by a and b the purchase and sales agreement concerning the second series of partnership interests requires e to make certain fixed and contingent cash payments the amounts of which are subject_to adjustment under certain circumstances taxpayer has provided evidence that the net present_value of the fixed payments exceed fifty percent of the total purchase_price of the partnership_interest in addition e made loans to taxpayer for the relocation of the facility and the refinancing of taxpayer’s debt obligations after the sale of the second series of partnership interests to e the general_partnership and first series interests were owned a b c and d by a b c and d respectively under the partnership_agreement e and c are obligated to make monthly capital contributions to taxpayer to pay its operating costs and other obligations a proforma attached to the ruling_request indicates that project expenses are projected to exceed revenues the failure by e or c to make its share of capital contributions will result in that partner being denied any distributions or allocations from the partnership and could result in their interest being redeemed by the partnership or bought by another partner taxpayer intends to relocate the facility to site which is owned by f and g taxpayer will place the facility at site pursuant to a lease agreement with f taxpayer will purchase coal feedstock from various third party suppliers f will provide certain coal and synthetic_fuel preparation and handling services to taxpayer and will also assist taxpayer in procuring coal supplies and transportation from third parties taxpayer will sell its synthetic_fuel to f for use in the power plant owned by f and g taxpayer represents that f and g are each an unrelated party to taxpayer in the event that f does not purchase all of the facility’s output taxpayer may sell excess synthetic_fuel to unrelated third parties in the event that taxpayer does not produce enough synthetic_fuel to meet f’s needs taxpayer will sell coal to f taxpayer will enter into an operation and maintenance agreement with h a wholly-owned subsidiary of a under which h will operate and maintain the facility on taxpayer’s behalf taxpayer will reimburse h for all reasonable costs incurred by h in operating and maintaining the facility and pay to h a service fee of y of all reimbursable costs as part of relocating the facility to site certain ancillary equipment will not be moved and will be replaced at site taxpayer has provided evidence that following the relocation the fair_market_value of the original property comprising the facility will be plr-169203-03 more than percent of the facility's total fair_market_value the cost of the new property plus the value of the original property taxpayer has supplied a detailed description of the process employed at the facility taxpayer has proposed that from time to time one of four alternative chemical reagents may be used in the process for the production of synthetic_fuel as described the facility and the process implemented in the facility including the chemical reagents meet the requirements of revproc_2001_34 2001_22_irb_1293 a recognized expert in combustion coal and chemical analysis has performed numerous tests on the coal used at the facility and the synthetic_fuel produced at the facility and has submitted reports in which the expert concludes that significant chemical changes take place with the application of the process to the coal including the alternative chemical reagents taxpayer with use of the process expects to maintain a level of chemical change in the production of synthetic_fuel that is determined through similar analysis by experts to be a significant chemical change you have requested the following rulings taxpayer with use of the enumerated process will produce a aqualified fuel within the meaning of sec_29 the construction_contract constitutes a abinding written contract in effect before date within the meaning of sec_29 production from the facility will be attributable solely to taxpayer within the meaning of sec_29 and taxpayer will be entitled to the sec_29 credit for qualified_fuel from the facility that is sold to an unrelated_person the sec_29 credit attributable to taxpayer may be allocated to the partners of taxpayer in accordance with the partners interests in taxpayer when the credit arises for the allocation of the sec_29 credit a partner s interest in taxpayer is determined based on a valid allocation of the receipts from the sale of the sec_29 qualified_fuel a termination of taxpayer under sec_708 will not preclude the reconstituted partnership from claiming the sec_29 credit on the production and sale of synthetic_fuel to unrelated persons provided the facility was aplaced in service prior to date within the meaning of sec_29 relocation of the facility to a different location after date or replacement of part of the facility after that date will not result in a new placed_in_service_date for the facility for purposes of sec_29 provided the fair_market_value of the original property is more than percent of the facility s total fair_market_value at the time of relocation or replacement ruling requests and plr-169203-03 sec_29 allows a credit for qualified_fuels sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer the credit for the taxable_year is an amount equal to dollar_figure adjusted for inflation multiplied by the barrel-of-oil_equivalent of qualified_fuels sold sec_29 defines qualified_fuels to include liquid gaseous or solid synthetic fuels produced from coal including lignite including such fuels when used as feedstocks in revrul_86_100 1986_2_cb_3 the internal_revenue_service ruled that the definition of the term synthetic_fuel under sec_48 and its regulations are relevant to the interpretation of the term under sec_29 former sec_48 provided a credit for the cost of equipment used for converting an alternate_substance into a synthetic liquid gaseous or solid fuel revrul_86_100 notes that both sec_29 and former sec_48 contain almost identical language and have the same overall congressional intent namely to encourage energy conservation and aid development of domestic energy production under sec_1_48-9 of the income_tax regulations a synthetic_fuel differs significantly in chemical composition as opposed to physical composition from the alternate_substance used to produce it coal is an alternate_substance under sec_1_48-9 consistent with its private_letter_ruling practice that began in the mid 1990’s the service in revproc_2001_30 provided that taxpayers must satisfy certain conditions in order to obtain a letter_ruling that a solid fuel other than coke produced from coal is a qualified_fuel under sec_29 revproc_2001_30 as modified by revproc_2001_34 2001_1_cb_1293 the revenue_procedure requires taxpayers to present evidence that all or substantially_all of the coal used as feedstock undergoes a significant chemical change to meet this requirement and obtain favorable private letter rulings taxpayer provided expert reports asserting that their processes resulted in a significant chemical change in announcement 2003_30_irb_222 the service announced that it was reviewing the scientific validity of test procedures and results presented of significant chemical change in expert reports in announcement i r b the service announced that it had determined that the test procedures and results used by taxpayers were scientifically valid if the procedures were applied in a consistent and unbiased manner however the service concluded that the processes approved under its long standing ruling practice and as set forth in revproc_2001_30 did not produce the level of chemical change required by sec_29 nevertheless the service announced that it recognized that many taxpayers and their investors have relied on its long standing ruling practice to make investments therefore the service announced that it would continue to issue rulings on significant chemical change but only under the guidelines set forth in revproc_2001_30 as modified by revproc_2001_34 this ruling is provided to taxpayer consistent with announcement and the service’s long standing ruling practice accordingly based on the expert test results plr-169203-03 submitted by taxpayer we conclude that the synthetic_fuel produced at the facility using the described process and specified chemical reagents is a solid synthetic_fuel produced from coal constituting a qualified_fuel within the meaning of sec_29 because taxpayer will own the facility and operate and maintain the facility through its agent we conclude that taxpayer will be entitled to the sec_29 credit for the production of the qualified_fuel from the facility that is sold to an unrelated_person ruling_request sec_29 and f provide that sec_29 applies with respect to qualified_fuels which are produced in a facility placed-in-service after date and before date and which are sold before date sec_29 modifies sec_29 in the case of a facility producing qualified_fuels described in sec_29 sec_29 provides that for purposes of sec_29 a facility shall be treated as placed-in-service before date if the facility is placed-in-service before date pursuant to a binding written contract in effect before date sec_29 provides that if the facility is originally placed-in-service after date sec_29 shall be applied by substituting date for date a contract is binding only if it is enforceable under local law against a taxpayer and does not limit damages to a specified amount eg by use of a liquidated_damages provision a contract provision limiting damages to an amount equal to at least five percent of the total_contract_price for example should be treated as not limiting damages the construction_contract executed prior to date includes such features as a description of the facility to be constructed and a lump sum price the contract does not limit damages for breach to less than five percent of the total contract amount taxpayer provided an opinion of counsel that the contract is binding under applicable law therefore the contract is a binding written contract for purposes of sec_29 ruling_request sec_29 allows a credit for qualified_fuels sold by the taxpayer to an unrelated_person during the taxable_year the production of which is attributable to the taxpayer sec_7701 provides that taxpayer means any person subject_to any internal revenue tax generally under sec_7701 the term person includes an individual a_trust estate partnership_association company or corporation sec_702 provides that each partner determines the partner's income_tax by taking into account separately the partner’s distributive_share of the partnership's other items of income gain loss deduction or credit to the extent provided by regulations plr-169203-03 prescribed by the secretary sec_1_702-1 provides that the distributive_share is determined as provided in sec_704 and sec_1_704-1 sec_704 provides that a partner's_distributive_share of income gain loss deduction or credit is except as otherwise provided in chapter of subtitle a of title_26 determined by the partnership_agreement sec_704 provides that a partner's_distributive_share of income gain loss deduction or credit or item thereof is determined in accordance with the partner’s interest in the partnership determined by taking into account all facts and circumstances if the partnership_agreement does not provide as to the partner’s distributive_share of income gain loss deduction or credit or item thereof or the allocation to a partner under the agreement of income gain loss deduction or credit or item thereof does not have substantial economic_effect sec_1_704-1 provides that allocations of tax_credits and tax_credit recapture except for sec_38 property are not reflected by adjustments to the partners' capital accounts thus these allocations cannot have economic_effect under sec_1_704-1 and the tax_credits and tax_credit recapture must be allocated in accordance with the partners' interests in the partnership as of the time the tax_credit or credit recapture arises if a partnership expenditure whether or not deductible that gives rise to a tax_credit in a partnership_tax_year also gives rise to valid allocations of partnership loss or deduction or other downward capital_account adjustments for the year then the partners' interests in the partnership with respect to such credit or the cost giving rise to it are in the same proportion as the partners' respective distributive shares of the loss or deduction and adjustments see sec_1_704-1 example identical principles apply in determining the partners' interests in the partnership with respect to tax_credits that arise from receipts of the partnership whether or not taxable based on the information submitted and the representations made we conclude that the sec_29 credit attributable to taxpayer may be allocated to the partners of taxpayer in accordance with the partners' interests in taxpayer when the credit arises for the allocation of the sec_29 credit a partner's interest in taxpayer is determined based on a valid allocation of the receipts from the sale of the sec_29 qualified_fuel ruling_request sec_708 provides that a partnership shall be considered as terminated if within a twelve-month period there is a sale_or_exchange of percent or more of the total interest in partnership capital and profits sec_1_708-1 provides that if a partnership is terminated by a sale_or_exchange of an interest the following is deemed to occur the partnership contributes all of its assets and liabilities to a new partnership in exchange for an interest in the new partnership and immediately thereafter the terminated partnership distributes interests plr-169203-03 in the new partnership to the purchasing partner and the other remaining partners in proportion to their respective interests in the terminated partnership in liquidation of the terminated partnership either for the continuation of the business by the new partnership or for its dissolution and winding up sec_1_708-1 applies to terminations of partnerships under sec_708 occurring on or after date as discussed above the placed-in-service deadline in sec_29 and sec_29 must be read as applying to when the facility is first placed_in_service within the applicable dates the placed-in-service deadlines contained in sec_29 and sec_29 focus on the facility and not the taxpayer owning the facility accordingly the determination of whether a facility has satisfied the placed-in-service deadline under sec_29 and sec_29 is made by reference to when the facility is first placed_in_service not when the facility is placed_in_service by a transferee taxpayer therefore we conclude that a termination of taxpayer under sec_708 will not preclude the reconstituted partnership from claiming the sec_29 credit on the production and sale of synthetic_fuel to unrelated persons ruling_request to qualify for the sec_29 credit taxpayer's facility must be placed-in-service before date pursuant to a binding written contract in effect before date while sec_29 does not define placed-in-service the term has been defined for purposes of the deduction for depreciation and the investment_tax_credit property is placed-in-service in the taxable_year the property is placed in a condition or state of readiness and availability for a specifically assigned function sec_1_167_a_-11 and sec_1_46-3 of the income_tax regulations placed_in_service has consistently been construed as having the same meaning for purposes of the deduction for depreciation and the investment_tax_credit see revrul_76_256 1976_2_cb_46 revrul_94_31 1994_1_cb_16 concerns sec_45 which provides a credit for electricity produced from certain renewable resources including wind the credit is based on the amount of electricity produced_by_the_taxpayer at a qualified_facility during the 10-year period beginning on the date the facility was originally placed_in_service and sold by the taxpayer to an unrelated_person during the taxable_year revrul_94_31 holds that for purposes of sec_45 a facility qualifies as originally placed_in_service even though it contains some used_property provided the fair_market_value of the used_property is not more than percent of the facility's total value the cost of the new property included in the facility plus the value of the used_property revrul_94_31 describes a windfarm that consists of an array of wind turbines towers pads transformers roadways fencing on-site power collection systems and monitoring and meteorological equipment notwithstanding that the windfarm consisted of all of these items the ruling concludes that the facility for purposes of sec_45 is confined to the property on the windfarm necessary for the production of plr-169203-03 electricity from wind_energy emphasis added the present situation is similar to revrul_94_31 thus for purposes of determining the facility’s total fair_market_value at the time of relocation or replacement the facility consists of the process equipment directly necessary for the production of the qualified_fuel starting at the immediate input of the coal and chemical reagents to the mixer including any coal hoppers and reagent tanks directly feeding the mixer through the output from the pellet mill or other forming equipment including output hoppers if any hence the facility’s total fair_market_value includes the process equipment such as the mixer the pellet mill or other forming equipment the equipment necessary to interconnect such equipment the electrical instrumentation control systems and auxiliaries related to such equipment including the structures that house such electrical instrumentation and control systems the foundation platform s for the above-referenced equipment and an appropriate allocation of the engineering project management overhead and other costs assignable to the relocation of such equipment and construction the facility’s total fair_market_value does not include costs associated with the purchase and installation of equipment that supports the operation of the facility but is not directly necessary for the production of the qualified_fuel such as coal beneficiation or preparation equipment eg crushers screens dryers or scales other material handling or conveying equipment eg stacking tubes transfer towers storage bunkers mobile equipment or conveyors certain site improvements eg fencing lighting earthwork paving separate office and bathhouse trailers for facility personnel and buildings if a building for purposes of sec_168 of the code sampling and quality control are necessary for operational control of a production facility however a particular type of sampling equipment generally is not necessary for the production of qualified_fuel thus the costs of sampling equipment are excluded from the facility’s total fair_market_value unless the particular sampling equipment is necessary for operational control of the facility consistent with the holding in revrul_94_31 provided taxpayer's facility was placed_in_service prior to date within the meaning of sec_29 relocation of the facility to a different location or replacement of part of the facility after date will not result in a new placed_in_service_date for the facility for purposes of sec_29 provided the fair_market_value of the original property is more than percent of the facility's total fair_market_value at the time of relocation or replacement the cost of the new equipment included in the facility plus the value of the used_property conclusions accordingly we conclude as follows the synthetic_fuel produced at the facility using the enumerated process and the specified reagents is a solid synthetic_fuel produced from coal constituting a qualified_fuel within the meaning of sec_29 plr-169203-03 the contract for the construction of the facility constitutes a binding written contract in effect before date within the meaning of sec_29 production from the facility will be attributable solely to taxpayer within the meaning of sec_29 and taxpayer shall be entitled to the sec_29 credit for qualified_fuel from the facility that is sold to an unrelated_person the sec_29 credit attributable to taxpayer may be allocated to the partners of taxpayer in accordance with the partners’ interests in taxpayer when the credit arises for the allocation of the sec_29 credit a partner’s interest in taxpayer is determined based on a valid allocation of the receipts from the sale of the sec_29 qualified_fuel a termination of taxpayer under sec_708 will not preclude the reconstituted partnership from claiming the sec_29 credit on the production and sale of synthetic_fuel to unrelated persons because the facility was placed_in_service prior to date within the meaning of sec_29 relocation of the facility to a different location after date or replacement of part of the facility after that date will not result in a new placed_in_service_date for the facility for purposes of sec_29 provided the fair_market_value of the original property is more than percent of the facility’s total fair_market_value at the time of relocation or replacement the conclusions drawn and rulings given in this letter are subject_to the requirements that the taxpayer i maintain sampling and quality control procedures that conform to astm or other appropriate industry guidelines at the facility that is the subject of this letter ii obtain regular reports from independent laboratories that have analyzed the fuel produced in such facility to verify that the coal used to produce the fuel undergoes a significant chemical change and iii maintain records and data underlying the reports that taxpayer obtains from independent laboratories including raw ftir data and processed ftir data sufficient to document the selection of absorption peaks and integration points except as specifically ruled upon above we express no opinion concerning the federal_income_tax consequences of the transaction described above this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to taxpayer sincerely plr-169203-03 s joseph h makurath senior technician reviewer branch office of associate chief_counsel passthroughs special industries plr-169203-03 cc -----------------------------


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date uniform issue list no contact person identification_number contact number fax number egend - z i i s o i v i w m i a i c s i f i o dear we have considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code based on the information provided we have concluded that you do not qualify for exemption as an organization described in sec_501 the basis for our conclusion is set forth below facts ws es le you were formed as a non-profit corporation under state law as a non-membership your mission as stated in your amended articles of incorporation is organization the specific purpose of this corporation is dedicated to a philosophy of excellence in providing affordable access to high quality health care services information and referral services and educating the public on matters that promote healthy communities and improve the quality of life in your application you describe your activities as e e e healthcare services percent you state that this activity consists of two components under l you help address the growing crisis in your state where a large number of people are living without affordable healthcare insurance the purpose of this program is to provide opportunities to assist the uninsured to obtain medical treatment including screenings routine and preventive care and emergency care to eliminate the health crisis in your state under m you state that you provide services to assist under-represented children in your state and families to qualify for health care coverage under state-sponsored plans te health wellness education percent you state this activity consists of two components under n this program is designed as an online resource center of healthcare information and resources designed to keep communities informed of acute chronic diseases and illnesses that have clustered in low-income poverty stricken or underserved communities throughout the state under o you intend to establish a scholarship program for deserving high school seniors seeking financial aid for undergraduate study at accredited colleges and universities in the u s information and referral services percent you state you intend to become an online resource center for information and referral services that are vital to empowering underserved communities to understand how when and where to seek medical treatment and other healthcare services based on the information in your application and in subsequent correspondence it appears that your principal activity is arranging for the sale of health insurance either through an employer or directly to low-income individuals who do not qualify for the state medicaid program who may or may not be employed who do not have health insurance and who cannot afford to purchase health insurance on their own gee on your website y you state that your commitment is e toimprove access to healthcare to improve the health and wellbeing of underserved communities to help health insurance better serve vulnerable populations to encourage education among our youth in addition you provide information on your website about various types of health insurance programs that you have available the website informs people that they can contact you by either phone or email to buy health insurance you state that you currently have two directors r chairman and s who are father and son you state that once you receive recognition of exemption they will resign and be replaced by outside individuals according to action taken by your board_of directors on date x your president is s your secretaries are t and s and your chief financial officer is s related by marriage you state that once your receive recognition of exemption an unrelated third party will serve as your president you have adopted a conflicts of interest policy t and r are u is a for-profit corporation that holds an insurance agent's license issued by the state of x u is in the business of selling insurance r owns a percent of u’s stock and s owns b percent of its stock u’s chairman is r its president is s and its secretary and treasurer is t both you and u have nearly identical names in addition you and u use the same stationery and share the same office and telephone number effective date y you and u entered into a management agreement under which u serves as your manager and performs various services for you including researching and investigating resources for health insurance plans that are affordable for low-income uninsured populations qualifying screening and proposing healthcare providers subject_to approval of your directors administering affordable health insurance plans managing the provider agreement with p managing claims managing billing and collections services and providing monthly reports according to the management agreement in return for these services you pay u a fee of dollar_figurec per month you state that currently this fee is dollar_figured per month but you have not submitted an amendment to the management agreement reflecting this change you state that your future plans include offering additional benefits such as legal services for year z you paid management fees of dollar_figuree to u you also paid approximately dollar_figuref to p for subscribers’ life_insurance benefits dollar_figureg to physicians and hospitals for covered services and dollar_figureh to a third-party administrator for claims handling and administrative services you incurred no other expenses relating to providing healthcare or community education mortgages banking debt consolidation and additional life_insurance options law sec_501 of the code provides for the exemption from federal_income_tax of organizations organized and operated exclusively for religious charitable or educational_purposes sec_1_501_c_3_-1 of the income_tax regulations states that in order to be exempt as an organization described in sec_501 of the code an organization must be both organized and operated exclusively for one or more of the purposes specified in such section an organization fails to meet either the organizational_test or the operational_test it is not exempt if sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as it engages primarily in activities operated exclusively for one or more exempt purposes only if which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose be sec_1_501_c_3_-1 of the regulations states that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus to meet the requirements of this subdivision it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests revrul_71_529 1971_2_cb_234 held that a nonprofit organization that provides assistance in the management of participating colleges’ and universities’ endowment or investment funds for a charge substantially below cost qualifies for exemption under sec_501 of the code revrul_72_369 1972_2_cb_245 involved an organization formed to provide managerial and consulting services on a cost_basis for unrelated organizations exempt under sec_501 of the code to improve the administration of their charitable programs this revenue_ruling concluded that the organization did not qualify for exemption under sec_501 because providing managerial and consulting services on a regular basis for a fee is a trade_or_business ordinarily carried on for profit the fact that it provided services at cost and solely for exempt_organizations was insufficient to characterize this activity as charitable within the meaning of sec_501 furnishing the services at cost lacked the donative element necessary to establish this activity as charitable tsa in 326_us_279 the supreme court held that the presence of a single non-exempt purpose if substantial in nature will destroy a claim for exemption regardless of the number or importance of truly exempt purposes in 70_tc_352 the tax_court held that an organization did not qualify for exemption under sec_501 of the code because it was primarily engaged in an activity that was characteristic of a trade_or_business and ordinarily carried on by for-profit commercial businesses in easter house v u s cl_ct aff'd in an unpub opinion 846_f2d_78 fed cir cert den 488_us_907 the claims_court concluded that an organization's business_purpose of operating an adoption service and not the advancement of educational and charitable activities was its primary goal accordingly the organization did not qualify for exemption under sec_501 of the code the organization competed with other commercial organizations providing similar services the organization in exchange for a fee provided adoption services to parents seeking to adopt a child including services to pregnant women who intended to place their newborns for adoption these fees were the organization's sole source_of_income in 283_fsupp2d_58 d d c the district_court found that the organization was formed principally to organize host conduct and sponsor educational and other charitable functions on its facilities the organization's patrons were not limited to tax- exempt entities but included patrons of a private and corporate nature the organization paid significant advertising and promotional expenses and derived substantial income from weddings and special events held at its conference center the court determined that the organization's activities competed with a number of commercial as well as non-commercial entities which strongly evidenced a commercial nature and purpose the court concluded that although the organization carried out a number of charitable and educational activities these were incidental to its primary activity of operating a for-profit conference center shei in 92_tc_1053 the court concluded that when an organization operates for the benefit of private interests it does not operate exclusively for exempt purposes prohibited private benefits may include an advantage profit fruit privilege gain or interest occasional economic benefits flowing to persons as an incidental consequence of an organization pursuing exempt charitable purposes will not generally constitute prohibited private benefits thus should the organization be shown to benefit private interests more than incidentally it will be deemed to further a nonexempt purpose under sec_1_501_c_3_-1 of the regulations this nonexempt purpose will prevent the organization from operating primarily for exempt purposes absent a showing that no more than an insubstantial part of its activities furthers a private interest or any other nonexempt purpose rationale wey ea notwithstanding the statements in your application and on your website your principal activity is arranging for the sale of health insurance either directly or through an employer to low-income individuals who do not qualify for the state medicaid program who do not have health insurance and who cannot afford to purchase health insurance on their own you have not demonstrated that you carry on any type of meaningful charitable or educational activities you are controlled and operated by the same persons who own control and operate u a for-profit licensed insurance agency thus you are operated as an adjunct to u for the purposes of assisting vu attracting new healthcare insurance clients and facilitating u's sale of healthcare insurance to these individuals in in addition you do not provide services to your subscribers at substantially below cost similar to the organization in revrul_71_529 supra even if you provided these services at cost that would be insufficient to characterize your activities as charitable within the meaning of sec_501 see revrul_72_369 supra although some of your activities further a charitable or educational purpose under better business bureau of washington d c inc v u s supra the presence of the substantial non- exempt purposes described above prevents you from qualifying for exemption under sec_501 of the code furthermore you are operated primarily for the private benefit of u a for-profit licensed insurance agency that is owned operated and controlled by the same related individuals who control and operate you thus you are operated primarily for a private purpose rather than for a public purpose as required by sec_1_501_c_3_-1 of the regulations see american campaign academy v commissioner supra finally you are primarily engaged in carrying on a commercial activity the sale of insurance rather than a charitable or educational activity thus under b s w group inc v commissioner supra you do not qualify for exemption under sec_501 c of the code see also easter house inc v u s supra and airlie foundation v r s supra therefore you have failed to establish that you are organized and operated exclusively for one or more exempt_purpose as required by sec_501 of the code and sec_1 c - a of the regulations conclusion you do not qualify for exemption as an organization described in sec_501 of the code and you must file federal_income_tax returns 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 the information affects our determination ta you also have a right to request a conference to discuss your protest this request should be made when you file your protest statement an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you want representation during the conference procedures you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications for more information about representation see publication practice_before_the_irs if you if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to protest as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if if you do not intend to protest this determination you do not need to take any further action we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to this address internal_revenue_service se t eo ra t constitution ave n w washington dc fax if you may also fax your statement using the fax number shown in the heading of this letter you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely lois g lerner director exempt_organizations rulings agreements tax_exempt_and_government_entities_division date date department of the treasury internal_revenue_service washington d c contact person identification_number contact number employer_identification_number form required to be filed tax years dear 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_501 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 file the returns in accordance days of this letter unless you request an extension of time to file 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 instructions in notice action if you agree with our deletions you do not need to take any further if you disagree with our proposed deletions follow the if you have any questions about your 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 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 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 uil legend x dear ------------------ the foundation will be allowed to treat a proposed set-aside in the amount of dollar_figurex dollars as a qualifying_distribution under sec_4942 of the internal_revenue_code code federal_income_tax under sec_501 of the code as an organization described in sec_501 and has been classified as a private_foundation within the meaning of sec_509 the foundation specializes in making precision grants and charitable initiatives conceived to maximize charitable leverage within its primary service area an area which has been devastated recently by a natural disaster for these purposes charitable leverage refers to enabling organizations with relatively high numbers of volunteers small paid bureaucracies and fresh promising approaches to area needs the trustees implement this policy with a carefully crafted need ascertainment and review process this process utilizes trustees with expert knowledge and experience in particular fields of interest and itself mobilizes volunteer resources at many points all to foster the foundation’s basic mission the relief of human suffering activities in its service area the disaster has temporarily crippled the foundation’s operations by dispersing its personnel rendering its headquarters unusable and interfering with communications most of the grantee organizations and volunteers through which the foundation carries out its work are similarly disrupted and the members of the public who directly benefit from the foundation’s expenditures have been displaced from their homes for an indefinite time the information provided indicates the foundation has been recognized as exempt from this is in reference to your letter dated date requesting a ruling that you the natural disaster has created three barriers to continuing the foundation’s charitable the trustees propose creation of a set-aside in the amount of dollar_figurex dollars which will be the trustees recognize that various governmental agencies will provide funding for a variety of basic human services and restoration they also know that fund raising activities throughout the united_states and many foreign countries will send large amounts of money into the area however the trustees strongly believe that these efforts as essential as they may be will not supplant the need for carefully targeted grants dispensed by its experienced system which is specifically oriented toward its particular service area expended over a period of thirty-six months commencing in date for critical volunteer- oriented programs and medical_research in the service area to better achieve the foundation’s mission this fund would be created from amounts which the foundation would otherwise distribute in september october november and december of the current calendar_year if restoration and repopulation of the service area develops more rapidly than anticipated the foundation will endeavor to start the review and disbursements process more rapidly the fund will assist in restoring the foundation’s systematic charitable triage procedures assess the most important expenditures_for the service area not fully addressed by government programs and foster a spirit of volunteerism in the service area sec_4942 of the code imposes an excise_tax on the undistributed_income_of_a_private_foundation for any taxable_year under sec_4942 the term undistributed_income means the amount by which the distributable_amount for such tax_year exceeds the qualifying distributions made out of such distributable_amount g b i provides that an amount set_aside for a specific project will be treated as a qualifying_distribution if it is paid for the specific project within five years and the private_foundation establishes to the satisfaction of the secretary_of_the_treasury that the project is one that can better be accomplished by such a set-aside than by an immediate payment of funds sec_53_4942_a_-3 of the foundation and similar excise_taxes regulations provides that an amount set_aside for a specific project that furthers the purposes described in sec_170 or sec_2 of the code may be treated as a qualifying_distribution in the year in which set_aside but not in the year actually paid if the requirements of sec_4942 of the code and the regulations there under are satisfied to meet such requirements the private_foundation must establish to the satisfaction of the commissioner that the amount set_aside will be paid for the specific project within months after it is set_aside and the set-aside satisfies the suitability test sec_53_4942_a_-3 of the regulations provides that the suitability test is satisfied if the private_foundation establishes to the satisfaction of the commissioner that the specific project for which the amount is set_aside is one that can be better accomplished by the set- aside than by the immediate payment of funds the regulation goes on to provide that specific projects that can be better accomplished by the use of a set-aside include but are not limited to projects in which relatively long-term grants or expenditures must be made in order to assure the continuity of particular charitable projects or program-related investments for purposes of determining a private foundation's qualifying distributions section this ruling will be made available for public inspection under sec_6110 of the code based on the information provided we have concluded that the funds set-aside by the foundation for relief from the affects of the natural disaster in the foundation’s service area will satisfy the requirements of the suitability test under sec_4942 and sec_53_4942_a_-3 of the regulations and constitute qualifying distributions under sec_4942 of the code this ruling is based on the understanding that the amount set_aside will be paid for the specific project within months after it is set_aside and that the set-aside will be evidenced by the entry of a dollar amount on the books_and_records of the foundation as a pledge or obligation to be paid at a future date or dates 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 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 please contact the person whose name and telephone number are shown in the heading of this letter enclosure notice robert c harper jr manager exempt_organizations technical group sincerely


tcmemo_2012_307 united_states tax_court richard h philpott and elsa l philpott petitioners v commissioner of internal revenue respondent docket no filed date richard h philpott and elsa l philpott pro sese richard j hassebrock for respondent memorandum findings_of_fact and opinion cohen judge respondent determined a dollar_figure deficiency in petitioners’ federal_income_tax for and an dollar_figure addition_to_tax under sec_6651 respondent also determined a dollar_figure fraud_penalty against richard h philpott petitioner under sec_6663 unless otherwise indicated all section references are to the internal_revenue_code for the year in issue and all rule references are to the tax_court rules_of_practice and procedure the applicability but not the amount of the fraud_penalty was determined against petitioner by grant of respondent’s motion for partial summary_judgment on the basis of petitioner’s conviction under sec_7201 after concessions the issues for decision are whether petitioners are entitled to a net_operating_loss nol_carryover whether they are liable for the sec_6651 late-filing addition_to_tax and whether the fraud_penalty applies to the entire redetermined deficiency the recomputed amounts asserted by respondent are a dollar_figure deficiency a dollar_figure late-filing addition_to_tax and a dollar_figure fraud_penalty findings_of_fact some of the facts have been stipulated and the stipulated facts have been incorporated in our findings by this reference petitioners resided in ohio at the time they filed the petition during petitioner received business income for various insurance and financial services as well as real_estate activities petitioners did not file a federal_income_tax return for until date that return was prepared by john j quatman on a schedule c profit or loss from business petitioner reported dollar_figure in gross_receipts for his insurance and financial services and deducted dollar_figure in business_expenses petitioner’s gross_receipts were understated by dollar_figure and his reported deductions were overstated by dollar_figure on the schedule c however petitioner was entitled to dollar_figure in other deductions in relation to the omitted gross_receipts petitioners’ tax_return did not report any income or loss from an s_corporation in which petitioner had an interest an unidentified dollar_figure nol was claimed on the return deductions were claimed on the insurance and financial services schedule c for interest_expenses related to a truck wash business known as baywash baywash was a business owned and operated by an s_corporation known as jrp associates jrp in which petitioner had a partial interest jrp was formed about was unable to commence operations and suffered financial defaults on financing arrangements in about jrp did not file corporate_income_tax returns on date petitioner was indicted in the u s district_court for the southern district of ohio for violations of sec_7201 for and on date petitioner entered into a plea agreement wherein he agreed to plead guilty to tax_evasion for judgment of guilt was entered on date opinion the petition in this case was filed date by notice served date the case was set for trial in cincinnati on date on date respondent filed a motion for partial summary_judgment seeking an adjudication that petitioner is collaterally estopped by his conviction under sec_7201 from contesting his liability for a fraud_penalty under sec_6663 petitioner opposed the motion asserting that his plea was made u nder duress due to the extreme cost of attorney and accounting fees even though no money was believed to be owed respondent’s motion was granted by an order stating in part the law is well settled that a criminal conviction under sec_7201 estops a taxpayer from denying fraudulent intent and an underpayment_of_tax for the same year see eg 96_tc_858 aff’d 959_f2d_16 2d cir marretta v commissioner tcmemo_2004_128 aff’d 168_fedappx_528 3d cir petitioners do not deny the conviction but suggest that the guilty plea was under duress petitioners’ argument is not a basis for disregarding the collateral_estoppel effect of a guilty plea and conviction see eg williams v commissioner t c memo wapnick v commissioner tcmemo_1997_133 lilley v commissioner tcmemo_1989_602 klein v commissioner tcmemo_1984_392 aff’d 880_f2d_260 10th cir thus the court concludes that there is no genuine issue of material fact and that the penalty issue may be decided as a matter of law under rule tax_court rules_of_practice and procedure the determination of collateral_estoppel does not preclude petitioners from challenging the amount of the deficiency for or establishing that some part of the deficiency is not due to fraud respondent’s burden of establishing applicability of the sec_6663 penalty however is satisfied by proof of the conviction before trial petitioner stipulated the unreported gross_receipts and the disallowed deductions set forth in our findings respondent conceded the allowable other deductions shortly before trial apparently for the first time petitioner claimed that his income for was fully offset by an nol carried forward in relation to jrp and the baywash business by letter dated date quatman sent to respondent’s counsel an unsigned and unfiled form_1120s u s income_tax return for an s_corporation for quatman testified at trial that he made a mistake during the criminal investigation of petitioner in not computing the nol carryforward that the carryforward would have offset all of the unreported income and that as a result of quatman’s mistake petitioner was indicted and pleaded guilty to income_tax evasion although a few documents indicating abandonment of the baywash activity in were stipulated there is no evidence substantiating the amount of the loss claimed indicating whether the intended activity was active or passive showing that any or all of the loss was not claimed for prior years and establishing petitioner’s share of any loss or petitioner’s basis in the s_corporation all of these items would have to be proven by petitioner before any offsets to the admitted unreported income could be allowed see generally sec_172 lehman v commissioner tcmemo_2010_74 mcwilliams v commissioner tcmemo_1995_454 sec_1_172-1 income_tax regs quatman pleaded during his testimony for more time to prepare accurate returns for jrp acknowledging that only cursory books were kept we are not persuaded that any amount of time would produce reliable and credible substantiation of losses and tracing of loss_carryovers available to petitioner for certainly there is no justification for keeping the record in this case open a claim made so belatedly in view of the serious consequences already endured by petitioner as a result of mistakenly overlooking it is inherently untrustworthy no allowance may be made for the alleged nol carryforward petitioners stipulated that their return for was filed in over five years after it was due that stipulation establishes that the sec_6651 addition_to_tax is appropriate and leaves to petitioners the burden of showing that the addition_to_tax should not apply see 116_tc_438 petitioners have offered no excuse or cause to avoid the late-filing addition_to_tax sec_6663 provides i f the secretary establishes that any portion of an underpayment is attributable to fraud the entire underpayment shall be treated as attributable to fraud except with respect to any portion of the underpayment which the taxpayer establishes by a preponderance_of_the_evidence is not attributable to fraud petitioners were advised in the court’s order granting partial summary_judgment in respondent’s pretrial memorandum and in respondent’s posttrial brief that they could argue that not all of the deficiency was due to fraud they failed to file the answering brief ordered by the court and have not pointed to any part of the deficiency that arguably is not due to fraud in any event the fraud_penalty will be imposed only against petitioner and not against elsa l philpott see sec_6663 for the foregoing reasons respondent’s recomputed deficiency addition_to_tax and penalty will become the decision of the court decision will be entered under rule


ee seog s03s department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date jan a y g as o00 -o0o contact person identitication number telephone number dear sir or madam this is in reference to a letter dated date requesting advance approval of your grant procedures under sec_4945 of the internal_revenue_code the information submitted indicates that grants will be administered and supervised by b b is exempt from federal_income_tax under sec_501 c of the internal_revenue_code and has been classified as other than a private_foundation under sec_509 and sec_170 your scholarship program is called c under the terms of an agreement you will make annual contributions to b to fund scholarships for the benefit of students living in urban centers who would normally be overlooked but who have demonstrated the potential to succeed b will prepare and furnish application forms receive all applications determine the recipients and amount to be awarded notify the recipients of the award confirm enrollment in an educational_institution make payment of the award and supervise and investigate the use of the grant funds by the recipients in their educational programs recipients are determined solely by b utilizing selection criteria whereby each candidate is evaluated based on the following scholastic aptitude as measured by performance on the scholastic aptitude test scholastic performance measured by rank in class counselor appraisal and interests activities and leadership contributions in addition financial need is taken into consideration the c program does not involve scholarships granted to children of employees of a particular company scholarships will only be awarded to students that plan to enroll in an institution that meets the requirements of sec_170 of the code the recipient will not be restricted in his her course of study 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_institution described in sec_170 because your scholarships are not employer-related grants the provisions of revproc_76_47 1976_2_cb_670 are not applicable based upon the information submitted and assuming your program will be conducted as proposed with a view to providing objectivity and nondiscrimination in the awarding of scholarship grants we rule that your grants to b for the awarding of scholarship grants comply with the requirements of sec_4945 of the code expenditures made in accordance with these procedures will not constitute taxable_expenditures within the meaning of sec_4945 of the code and as such are eligible for the exclusion from income provided for in sec_117 of the code to the extent that such grants are actually used for qualified_tuition_and_related_expenses within the meaning of sec_117 of the code this ruling is conditioned on the understanding that there will be no material changes in the facts upon which it is based it is further conditioned on the understanding that no grants will be awarded to your organization’s creators officers directors trustees or members of the selection committee or for a purpose inconsistent with the purposes described in sec_170 of the code the approval of your grant-making procedures is a one time approval of your system of standards and procedures for selecting recipients of grants that meet the requirements of sec_4945 of the code thus approval will apply to succeeding grant programs only as long as the standards and procedures under which they are conducted do not differ materially from those described in your request we are informing the ohio te_ge office of this action please keep a copy of this ruling with your organization's permanent records this ruling is directed only to the organization that requested it sec_61 k of the ‘ code provides that it may not be used or cited as precedent if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely bereta v seok gerald v sack manager exempt_organizations technical group