office_of_chief_counsel internal_revenue_service memorandum number release date cc intl b5 filen-139583-09 third party communication none date of communication not applicable uilc date date to --------------------- ---------------------------- ----------------------- ------------------------------------- -------------------- --------------------- ------------------------------------------- from ------------------ -------------------- ---------------- ------------------------------ ----------- -------------------- subject ------------------------------------------------------ this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend taxpayer country x amount a amount b ------------------------------------------------------ ----------- --------------- ----------------- filen-139583-09 issue sec_1 whether interest_expense allocable to taxpayer’s u s branch is determined under sec_1_882-5 when determining its u s income_tax_liability for its taxable years if interest_expense allocable to the branch is determined under sec_1_882-5 are insurance reserves included in i worldwide liabilities under sec_1_882-5 for purposes of determining the actual ratio used to determine its u s connected liabilities step and ii u s booked liabilities under sec_1_882-5 for purposes of determining the interest_expense allocable to its income effectively connected with a u s trade_or_business u s eci under the adjusted u s booked liabilities method step does the interest_expense paid_or_accrued on u s booked liabilities under sec_1_882-5 include interest in respect of items described in sec_807 is the deductible amount of taxpayer’s interest_expense allocated to its u s eci disallowed to any extent by sec_805 conclusion sec_1 taxpayer must use the allocation method set forth in sec_1_882-5 to determine the interest_expense allocable to its u s branch for purposes of determining its u s income_tax_liability for its taxable years the amount of interest_expense allocable to taxpayer’s u s eci is computed by applying the three-step method set forth in sec_1_882-5 in applying this method taxpayer’s insurance reserves are included in worldwide liabilities under sec_1_882-5 step for purposes of calculating the actual ratio used to determine its u s - connected liabilities taxpayer’s insurance reserves are also included in its u s booked liabilities under sec_1_882-5 step for purposes of determining the amount of interest_expense allocable to its u s eci under the adjusted u s booked liabilities method the amount of interest_paid or accrued on taxpayer’s u s booked liabilities includes interest in respect of items described in sec_807 filen-139583-09 under the theory that money is fungible a pro_rata share of the total interest_expense allocated to taxpayer’s u s eci should be allocated to each u s asset including the undivided part of taxpayer’s assets reserved to meet insurance obligations pursuant to the coordination with other code section rule in sec_1_882-5 sec_801 disallows any deduction otherwise allowable under sec_805 and sec_163 for the share of the interest_expense in respect of the insurance reserves in the absence of published guidance a reasonable approach is to disallow a proportionate share of the interest_expense under sec_805 by multiplying the total interest_expense allocated to eci under sec_1_882-5 that is the interest_expense paid_or_accrued within the taxable_year on u s booked liabilities which includes interest in respect of items described in sec_807 plus the interest_expense attributable the excess of taxpayer’s u s connected liabilities over the average u s booked liabilities by a ratio the numerator of which is the average_adjusted_basis of the assets represented by the branch’s insurance reserves for the taxable_year and the denominator of which is the average_adjusted_basis of the total u s booked assets for the taxable_year in no event can the interest_expense allocated to u s insurance reserves be less than the interest with respect to the sec_807 items as shown on taxpayer’s u s books facts taxpayer conducts a u s life_insurance business through a branch that constitutes a u s permanent_establishment as that term is defined for purposes of article v of the u s -country x income_tax treaty the treaty taxpayer files a form 1120l on a calendar_year basis for its u s life_insurance branch in tax_year sec_2001 and sec_2002 taxpayer issued debt only in country x in its timely filed income_tax returns for and taxpayer did not use the interest_expense allocation rules in sec_1_882-5 to determine its deductible_interest allocable to its u s eci when calculating its taxable_income attributable to its u s operations taxpayer subsequently filed amended returns claiming branch interest_expense deductions under sec_1_882-5 of amount a for tax_year and amount b for tax_year in computing its interest_expense allocable to its u s eci under sec_1_882-5 on its amended returns taxpayer included the branch’s insurance reserves in both u s booked and world-wide liabilities however in determining its deductible_interest expense taxpayer did not reduce the amount allocated to its u s eci by items of interest in respect of the reserves described in sec_807 law and analysis issue filen-139583-09 application of sec_1_882-5 a foreign company carrying on a life_insurance business within the u s is taxable on its eci under sec_842 and sec_801 subject_to a minimum effectively connected investment rule in sec_842 an insurance company’s eci is determined under sec_882 sec_882 provides that in determining the taxable_income of a foreign_corporation engaged in a u s trade_or_business deductions are allowed only if and to the extent that they are connected with the income that is effectively connected with the conduct of a u s trade_or_business and that the proper apportionment and allocation of deductions for this purpose shall be determined as provided in regulations prescribed by the secretary sec_1_882-5 as in effect for the years at issue the regulations provides in relevant part as follows a rules of general application- overview- i in general the amount of interest_expense of a foreign_corporation that is allocable under sec_882 to income which is or is treated as effectively connected with the conduct_of_a_trade_or_business within the u s eci is the sum of interest_paid or accrued by the foreign_corporation on its liabilities booked in the u s as adjusted under the three-step process set forth in paragraphs b c and d of this section and the specially allocated interest_expense determined under section a ii of this section the provisions of this section provide the exclusive rules for allocating interest_expense to the eci of a foreign_corporation under the three-step process the total value of the u_s_assets of a foreign_corporation is first determined under paragraph b of this section step next the amount of u s -connected liabilities is determined under paragraph c of this section step finally the amount of interest_paid or accrued on liabilities booked in the united_states as determined under paragraph d of this section is adjusted for interest_expenses attributable to the difference between u s -connected liabilities and u s -booked liabilities step alternatively a foreign_corporation may elect to determine its interest rate on u s - connected liabilities by reference to its u_s_assets using the separate currency pool method described in paragraph e of this section coordination with tax_treaties the provisions of this section provide the exclusive rules for determining the interest_expense filen-139583-09 attributable to the business profits of a permanent_establishment under a u s income_tax treaty sec_1_882-5 t d fr date fr date emphasis added taxpayer is a foreign_corporation with a permanent_establishment in the u s that is carrying on a life_insurance business a foreign_corporation carrying on an insurance_business is subject_to u s tax on its eci under sec_885 sec_842 and sec_801 sec_882 provides that taxpayer may in determining its taxable_income deduct from its gross_income amounts effectively connected with its u s trade_or_business sec_882 also provides deductions with regard to taxpayer’s eci shall be apportioned and allocated under regulations promulgated by the secretary the regulations prescribe the exclusive method notwithstanding the provisions of any applicable income_tax treaties for determining the amount of interest_expense taxpayer may deduct from its gross_income subject_to tax under sec_842 thus taxpayer must apply sec_1_882-5 to determine the allocations of its deductible_interest expense issue are insurance reserves included in worldwide liabilities under step and u s booked liabilities under step the regulations provide a formulary method for determining the amount of a foreign corporation’s interest_expense that is allocable to its u s trade_or_business the method is based upon the worldwide assets and liabilities of the entire corporation the regulations do not contain any special provisions for insurance_companies instead they reserve any special rules with respect to how insurance reserves are treated in step sec_2 and of the methodology for promulgation at a later time if appropriate see sec_1_882-5 reserved treatment of insurance reserves for purposes of determining the actual ratio sec_1_882-5 reserved treatment of insurance reserves for purposes of determining whether a booked liability was properly reflected on the books of the u s trade_or_business sec_1_882-5 reserved treatment of insurance reserves for purposes of determining the allocable amount of interest where booked liabilities equal or exceed u_s_liabilities as the preamble to regulations when proposed in states sec_1_882-5 applies to insurance_companies and a section is reserved to address specific concerns of these companies particularly with respect to the treatment of insurance reserves the service is interested in receiving comments from the public regarding the classification of filen-139583-09 insurance reserves as liabilities and other issues relevant to insurance_companies fed reg 1992_1_cb_1157 date accordingly in the absence of a special rule for insurance_companies the regulation’s approach which includes the total amount of worldwide liabilities and assets in the calculations under sec_1_882-5 applies to insurance_companies therefore reserves of an insurance_company are included in both worldwide liabilities for purposes of determining taxpayer’s u s -connected liabilities under sec_1 c and u s booked liabilities for purposes of determining taxpayer’s interest_expense allocable to its u s eci under the adjusted u s booked liabilities method under sec_1_882-5 issue does the interest_expense paid_or_accrued on u s booked liabilities under sec_1_882-5 include items of interest in respect of items described in sec_807 in describing the regulation’s formulary method a provides that the amount of interest_expense of a foreign_corporation that is allocable under sec_882 to income which is or is treated as eci is the sum of- interest_paid or accrued by the foreign_corporation on its liabilities booked in the u s as adjusted under the three-step process set forth in paragraphs b c and d of sec_1_882-5 and specially allocated interest_expense determined under section a ii of sec_1_882-5 under the three-step process step is the determination of the total value of the u_s_assets of a foreign_corporation under sec_1_882-5 step is the determination of the amount of u s connected liabilities under sec_1_882-5 finally in step the amount of interest_paid or accrued on liabilities booked in the u s as determined is adjusted for interest_expense attributable to the difference between u s connected liabilities and u s booked liabilities under sec_1_882-5 alternatively a foreign_corporation may elect to determine its interest rate on u s this conclusion is consistent with the regulations under sec_884 which include in u_s_liabilities the total_insurance_liabilities on u s business within the meaning of sec_842 of a foreign_corporation described in sec_842 to the extent such liabilities are not otherwise treated as u s liabilites by reason of sec_1_884-1 sec_1_884-1 it also complies with the legislative_history of the tax reform act which requires consistency among the branch_profits_tax and the determination of expenses conf rept no 99th cong 2d sess ii-647 the conferees wish to clarify that under regulations the rules for determining assets and liabilities treated as connected with the conduct of a u s trade_or_business for branch_tax purposes are to be consistent with rules used in allocating deductions for purposes of computing taxable_income filen-139583-09 connected liabilities by reference to its u_s_assets using the separate_currency_pools_method described in sec_1_882-5 sec_1_882-5 provides that when the u s booked liabilities exceeds u s connected liabilities the interest_expense allocable to eci is the product of the total interest_paid or accrued within the tax_year by the u s trade_or_business on u s booked liabilities and the scaling_ratio set forth in sec_1_882-5 the scaling_ratio is the ratio of u s connected liabilities to the average_total_amount_of_u_s_booked_liabilities sec_1_882-5 also provides that if u s booked liabilities equal u s connected liabilities the allocable_interest expense is the total interest_paid or accrued within the tax_year by the u s trade_or_business on u s booked liabilities sec_1_882-5 provides that when the u s booked liabilities are less than u s connected liabilities the interest_expense allocable to eci is the sum of the total interest_paid or accrued within the tax_year by the u s trade_or_business on u s booked liabilities and the excess of the amount of u s connected liabilities over the average_total_amount_of_u_s_booked_liabilities multiplied by the interest rate determined under sec_1_882-5 sec_1_882-5 does not define the interest_expense paid_or_accrued within the taxable_year on u s booked liabilities that is the amount of interest_expense added to the additional_amount allocated to taxpayer’s u s eci under step because its u s connected liabilities exceed its u s booked liabilities in order to determine the total amount allocated to taxpayer’s u s eci sec_807 - describe the items that an insurance_company takes into account as either a decrease in reserves included in income or an increase in reserves that may be deducted interest generally is taken into account in calculating amounts of reserves described in sec_807 - in that sec_807 refers to life_insurance_reserves as defined in sec_816 sec_816 defines life_insurance_reserves as those amounts that are computed or estimated on the basis of recognized mortality or morbidity tables and assumed rates of interest and set_aside to mature or liquidate either by payment or reinsurance future un-accrued claims arising from life_insurance contracts involving at the time with respect to which the reserve is computed life health or accident contingencies see also 381_us_233 t he undivided part of a life_insurance company’s assets represented by its reserves is considered as a fund held for the benefit of policyholders revrul_67_435 1967_2_cb_232 stating that life_insurance_reserves broadly defined as the difference filen-139583-09 between the present_value of the benefits and the present_value of the future premiums are amounts theoretically necessary to be reserved out of premiums which at assumed rates of interest will enable the company to pay all outstanding policies as they become claims providing the facts are in accord with the assumptions made for purposes of determining taxable_income the amount of life_insurance_reserves taken into account with respect to a contract is determined under sec_807 if the amount taken into account is the amount determined under sec_807 then the interest rate used to determine the reserves is the greater of the applicable_federal_rate as defined in sec_807 or the prevailing state assumed rate as defined in sec_807 if the amount of life_insurance_reserves for a contract is the net_surrender_value for the contract then the interest rate used in determining the reserve is the interest rate used to calculate the contract’s net_surrender_value sec_807 refers to unpaid_losses included in total_reserves under sec_816 the last sentence of the flush language of sec_807 provides that the amount of unpaid_losses other than losses on life_insurance contracts shall be the amount of discounted_unpaid_losses as defined in sec_846 the amount of discounted losses under sec_846 is calculated using an applicable_rate of interest see sec_846 and sec_846 sec_807 refers to amounts discounted at the appropriate rate of interest necessary to satisfy the obligations under insurance and annuity_contracts that do not involve life accident or health contingencies in addition the first sentence of the flush language of sec_807 provides that the appropriate rate of interest for any obligations is whichever of the following rates is the highest as of the time such obligation did not involve life accident or health contingencies the applicable_federal_interest_rate under sec_807 the prevailing_state_assumed_interest_rate under sec_807 or the rate of interest assumed by the insurance_company in determining the guaranteed benefit sec_807 refers to d ividend accumulations and other_amounts held at interest in connection with insurance and annuity_contracts the rate of interest for sec_807 reserves is the rate actually paid credited or accrued by the insurance_company with respect to the reserves see sec_1_809-2 filen-139583-09 sec_807 and sec_807 describe reserve items without mentioning interest an insurance_company may pay credit or accrue interest on these reserves if so then the rate of interest for these reserves also is the rate actually paid credited or accrued by the insurance_company with respect to the reserves see section d see also sec_812 relating to required_interest on reserves under sec_807 as discussed above under sec_807 insurance reserves are determined based in part upon rates of interest therefore because insurance reserves are included in u s booked liabilities under sec_1_882-5 any interest_paid or accrued on those liabilities should include any amounts considered interest in respect of items described in sec_807 cf sec_1_884-1 and sec_1_884-4 each of which include total_reserves defined in sec_816 and items referred to in sec_807 - in additional liabilities for purposes of the branch_profits_tax and branch-level interest tax respectively issue the deductible amount of the interest_expense allocated under sec_1_882-5 sec_885 cross references sec_842 for special provisions relating to foreign_corporations carrying on an insurance_business within the untied states in relevant part sec_842 provides that if a foreign company carrying on an insurance_business within the united_states would qualify under part i or ii of this subchapter for the taxable_year if without regard to income not effectively connected with the conduct of any trade_or_business_within_the_united_states it were a domestic_corporation such company shall be taxable under the relevant part i or ii of subchapter_l on its income effectively connected with its conduct of any trade_or_business with the united_states a life_insurance_company as defined in sec_816 is subject_to tax under part i of subchapter_l sections taxpayer’s u s trade_or_business would sec_818 provides that for purposes of part i of subchapter_n sec_861through items described in any paragraph of sec_807 shall be treated as amounts which are not interest sec_818 does not preclude the items described in sec_807 from being considered an interest_expense for purposes of determining the amount of the taxpayer’s eci under sec_1_882-5 under sec_1_884-4 branch interest includes interest_paid with respect to total_insurance_liabilities on united_states business within the meaning of sec_842 taxpayer may elect to treat its accrued interest on such liabilities as paid on the last day of the taxable_year in which the interest accrues under sec_1_884-4 thus reducing the amount of its excess_interest in the year of accrual filen-139583-09 qualify under part i of subchapter_l if it were a domestic_corporation accordingly taxpayer’s u s eci is taxable under part i of subchapter_l sec_801 defines life_insurance taxable_income as life_insurance_gross_income as defined in sec_803 reduced by life_insurance_deductions as defined by sec_804 under sec_804 life_insurance_deductions include the general_deductions provided in sec_805 among the general_deductions described in sec_805 sec_805 provides a deduction for the net increase in certain reserves required by sec_807 based upon items of interest set forth in sec_807 sec_805 provides that subject_to certain modifications described in sec_805 a life_insurance_company is allowed all of the deductions otherwise provided under subtitle a for purposes of computing taxable_income a life_insurance_company thus is generally allowed to deduct interest_expenses under sec_163 and sec_805 under sec_805 however in applying sec_163 relating to the deduction for interest no deduction is allowed for interest in respect of a reserve or similar item described in sec_807 sec_811 provides that n othing in this part shall permit that same item to be counted more than once for reserves purposes or any item to be deducted either directly or as an increase in reserves more than once sec_1_882-5 titled coordination with other sections provides that any provision that disallows defers or capitalizes interest_expense applies after determining the amount of interest_expense allocated to eci under this section for example in determining the amount of interest_expense that is disallowed as a deduction under sec_265 or sec_163 deferred under sec_163 or sec_267 or capitalized under sec_263a with respect to a united_states trade_or_business a taxpayer takes into account only the amount of interest_expense allocable to eci under this section the method for allocating and apportioning interest_expense under sec_1_882-5 recognizes that money is a fungible asset see eg sec_1_882-5 providing an approach to determine u_s_liabilities by multiplying a foreign corporation’s u_s_assets determined in step by the debt equity ratio of the entire corporation under a fungibility approach interest_expense is attributable to all activities and assets without regard to the specific reason for incurring the liability see eg sec_864 and sec_1_861-9t like sec_861 exceptions to the fungibility principle exist under sec_882 for assets and indebtedness that meet the requirements of sec_1_861-10t qualified_nonrecourse_indebtedness and c assets acquired in integrated financial transactions as limited by sec_1_861-10t related_person transactions may directly allocate interest_expense from such indebtedness to income from such asset in the manner and to the extent provided in sec_1_861-10t sec_1_882-5 filen-139583-09 the fungibility principle can be implemented with respect to the total interest_expense allocable to taxpayer’s u s eci as determined under step by allocating a proportionate share to each u s asset see eg sec_1_882-5 example under sec_1_882-5 however the interest allocated on a pro_rata basis to a particular asset might then be disallowed deferred or capitalized pursuant to another code section thus under a fungibility approach because assets represented by taxpayer’s insurance reserves are included in u_s_assets in the sec_1_882-5 formula step as well as worldwide liabilities in the actual ratio of step and u s booked liabilities under step a pro_rata portion of the total interest_expense allocable to taxpayer’s u s eci should be attributable to the branch’s insurance reserves after the allocation however the interest_deduction for the share of the interest_expense in respect of the insurance reserves would be disallowed under sec_805 pursuant to sec_1_882-5’s coordination rule in the absence of published guidance a reasonable approach is to disallow a proportionate share of the interest_expense under sec_805 by multiplying the total interest_expense allocated to eci under sec_1_882-5 that is the interest_expense paid_or_accrued within the taxable_year on u s booked liabilities which includes interest in respect of items described in sec_807 plus the interest_expense attributable to the excess of taxpayer’s u s connected liabilities over the average of u s booked liabilities by a ratio the numerator of which is the average_adjusted_basis of the assets represented by the branch’s insurance reserves for the taxable_year and the denominator of which is the average_adjusted_basis of the total u s booked assets for the taxable_year in no event can the interest_expense allocated to u s insurance reserves be less than the interest with respect to the sec_807 items as shown on taxpayer’s u s books case development hazards and other considerations 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 josephine firehock at if you have any further questions see also h_r rep no conference 99th cong 2d sess ii-648-649 suggesting a similar approach may be adopted by the secretary in promulgating regulations with respect to excess_interest allocable to eci under sec_1_882-5 for purposes of the branch profits interest tax namely that where indebtedness of the home_office is attributed to the branch the excess_interest is to be treated as incurred on each type of external borrowing by the corporation and determined by reference to the relative principal_amount of and the average interest rate on each type of external borrowing


o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date number release date conex-122124-14 uil the honorable mark pocan member u s house of representatives east doty street suite madison wi attention ------------------- dear congressman pocan i am responding to your inquiry dated date which you wrote on behalf of your constituent -------------------- ---------- wanted to know if he can offset his excess_deferral to his sec_457 plan in by the amount that he underutilized his sec_403 plan in the several years prior to internal_revenue_code irc sec_457 limits the amount a participant may contribute to a sec_457 plan in a particular year the limit is periodically adjusted for inflation sec_457 for the limit was generally dollar_figure notice internal_revenue_bulletin this limit is not defined with reference to prior years each year’s limit stands on its own accordingly ---------- cannot exceed the limit to his sec_457 plan by the amount he underutilized his sec_403 plan in years prior to conex-122124-14 i am sorry my response is not more favorable but i hope this information is helpful if you have any questions please contact me ---------------- or ----------------- at ----- ------------ john t ricotta branch chief qualified_plans branch employee_benefits tax exempt and government entities sincerely


internal_revenue_service number release date index number --------------------------- ---------------------------------- ---------------------------------------- in re --------------------------- 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-135594-18 date date legend date settlor spouse trust child child child child child child trust trust trust trust trust trust state grandfather grandmother x y year --------------------------- ------------------------------------------------------ ----------------------------------------------------- ----------------------------------------------------------------- -------------------------------------------------- ----------------------------------------------- -------------------------------------------------- -------------------------------------------------- ----------------------------------------------- -------------------------------------------------- -------------------------------------------------------------------- ------------------------ ----------------------------------------------------------------- ------------------------ ------------------------------------------------------------------- ------------------------ -------------------------------------------------------------------- ------------------------ ----------------------------------------------------------------- ------------------------ ------------------------------------------------------------------- ------------------------ ------------- -------------------------------------------------------- ------------------------------------------------------ ---------- -------- ------- plr-135594-18 year year year attorney date date court statute statute ------- ------- ------- ------------------------- ----------------------- ------------------- ------------------------------------------------------------ ----------------------------------------- ----------------------------------------- dear ------------------ this letter responds to the letter dated date and subsequent correspondence submitted by your authorized representative requesting rulings on the gift estate and generation-skipping_transfer gst tax consequences of the proposed reformation of an irrevocable_trust facts the facts submitted and the representations made are as follows on date a date after date settlor executed an irrevocable_trust trust with spouse as trustee for the benefit of their six children child child child child child and child and their descendants pursuant to the terms of trust six separate trusts trust trust trust trust trust and trust were established one to benefit each child collectively the children’s trusts individually a child’s trust the children’s trusts are governed by the laws of state under paragraphs dollar_figure and of trust each child is the primary beneficiary of his or her child’s trust property transferred to trustee shall be allocated among the children’s trusts equally between all of such trusts paragraph provides that during each primary beneficiary’s life the trustee shall distribute all of the income of such beneficiary’s child trust to the primary beneficiary and may distribute such portion or all of the principal of such child’s trust to or for the support maintenance medical_expenses health and education of the primary beneficiary as the trustee in her sole and absolute judgment and discretion determines under paragraph at the time of death of the primary beneficiary such child’s trust shall continue in separate trust shares per stirpes for his or her lineal_descendants and upon the death of each of such respective lineal_descendants then plr-135594-18 for such respective deceased lineal descendant’s lineal_descendants in separate trust shares per stirpes for their respective lives and so forth until such trusts terminate under paragraph paragraph dollar_figure provides that any trust created under trust if not otherwise fully terminated shall terminate fully and all principal and undistributed_income shall be distributed to the respective income_beneficiary at the end of twenty-one years after the death of the last to die of settlor and all primary beneficiaries of the trusts created under trust paragraph dollar_figure provides generally that the trustee may receive property from the settlor or any other person or persons by lifetime_gift under a will or trust or from any other source with respect to additions during any calendar_year from any donor each beneficiary may demand for a period of thirty days immediately after each such initial contribution and any additions during any calendar_year from each donor up to the maximum amount allowable with respect to such donor as an annual exclusion for gift_tax purposes within sec_2503 and sec_2513 payable in cash or in_kind immediately upon receipt by the trustee of the demand in writing such payment shall be made from the gift of that donor for that year or from property purchased with such gift if any such beneficiary is a minor at the time of such gift of any donor for that year or if any such beneficiary fails in legal capacity for any reason at such time then such beneficiary’s guardian may make such demand on behalf of said beneficiary and the property received pursuant to such demand shall be held by the guardian for the benefit of said beneficiary the trustee shall give written notice of the receipt of any property by the trustee to be held in trust hereunder to all beneficiaries of the trust or to the guardian of any minor beneficiary or any other beneficiary who fails in legal capacity within thirty days of the receipt of such property settlor transferred dollar_figurex to each child’s trust in year year year and year settlor timely filed form sec_709 united_states gift and generation-skipping_transfer_tax returns for year year year and year on each form_709 settlor and spouse signified consent to treat all gifts made by settlor in year year year and year as having been made one-half by each spouse under sec_2513 on each form_709 for year year and year the transfers of dollar_figurex to each child’s trust were incorrectly reported on form sec_709 schedule a part 1-gifts subject only to gift_tax instead of schedule a part 3-indirect skips no affirmative allocation of gst_exemption was made to the transfers to each child’s trust furthermore the automatic allocation of the gst_exemption was not reported on schedule c computation of generation-skipping_transfer_tax grandfather transferred dollar_figurey to each child’s trust in year and year grandfather and grandmother timely filed form sec_709 for year and year on each form_709 grandfather and grandmother signified consent to treat all gifts made by grandfather in year and year as having been made one-half by each spouse under sec_2513 on plr-135594-18 each form_709 for year and year the transfers of dollar_figurey to each child’s trust were incorrectly reported as an outright gift to each of child through child on schedule a part 1-gifts subject only to gift_tax instead of a gift to each child’s trust on schedule a part 2-direct skips no affirmative allocation of gst_exemption was made to the transfers to each child’s trust furthermore accountant left blank schedule c of form sec_709 for both grandfather and grandmother for year and year attorney drafted trust settlor created and funded trust relying on the advice of attorney based on affidavits of settlor and attorney settlor created trust to provide for his descendants of all generations and to reduce the overall transfer_taxes payable on trust assets by ensuring that the assets held in trust would not be includible in a primary beneficiary’s gross_estate upon his or her death and to minimize the amount subject_to gst tax by utilizing settlor’s and spouse’s gst_exemption settlor also intended to ensure that the primary beneficiary would avoid incurring federal gift and estate_tax in connection with a transfer to trust the withdrawal provision in paragraph dollar_figure contains a drafting error each primary beneficiary’s withdrawal right over the assets contributed to a child’s trust in any given year is not limited to the greater of dollar_figure or percent of the value of the trust assets accordingly any lapse of a primary beneficiary’s withdrawal right would be treated as a taxable transfer by that primary beneficiary under sec_2514 to the extent that the property that could have been withdrawn exceeds in value the greater of dollar_figure or percent of the aggregate value of the assets subject_to withdrawal moreover each primary beneficiary would become a transferor to his or her child’s trust for gst tax purposes with respect to the portion of the child’s trust constituting a gift by the child thereby preventing i an effective deemed_allocation of gst_exemption under sec_2632 by settlor and spouse with respect to settlor’s transfers to that child’s trust for each of year year year and year and ii an effective deemed_allocation of gst_exemption under sec_2632 by grandfather and grandmother with respect to grandfather’s transfer to that child’s trust for each of year and year in addition the portion of each child’s trust relating to the lapsed withdrawal right in excess of dollar_figure or percent of the value of the trust assets would be included in the primary beneficiary’s gross_estate for estate_tax purposes the error was discovered when settlor engaged new estate_planning counsel who reviewed settlor’s current estate plan including trust settlor was informed of the drafting error that defeated the intent of the settlor in establishing trust on date trustee filed a petition in state court requesting judicial reformation of the erroneous provision of paragraph effective as of the date trust was originally created on date state court issued an order reforming trust to eliminate the scrivener’s error retroactive to the date of trust’s creation the order is contingent upon the issuance of a favorable private_letter_ruling by the internal_revenue_service plr-135594-18 as reformed trust limits the annual lapse of each primary beneficiary’s withdrawal right to the greater of dollar_figure or percent of the value of the trust assets you have requested the following rulings as a result of the reformation no child will be deemed to have released a general_power_of_appointment within the meaning of sec_2514 and sec_2041 by reason of the lapse of any right of withdrawal held by the child with respect to any transfers to his or her child’s trust accordingly no child will be deemed to have made a taxable gift under sec_2514 to his or her child’s trust and no part of his or her child’s trust will be included in his or her gross_estate under sec_2041 as a result of the reformation the only transferors to each child’s trust for gst tax purposes are settlor spouse grandfather and grandmother as a result of the reformation each of settlor’s and spouse’s gst_exemption is automatically allocated to one-half of the transfers by settlor to each child’s trust and each of grandfather’s and grandmother’s gst_exemption is automatically allocated to one-half of the transfers by grandfather to each child’s trust law and analysis ruling sec_2001 provides that a tax is imposed on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2033 provides generally that the value of the gross_estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death sec_2041 provides that the value of the gross_estate includes the value of all property to the extent of any property with respect to which the decedent has at the time of his death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released such a power_of_appointment by a disposition which is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent’s gross_estate under sec_2035 to inclusive for purposes of sec_2041 the power_of_appointment shall be considered to exist on the date of the decedent’s death even though the exercise of the power is subject_to a precedent giving of notice or even though the exercise of the power takes effect only on the expiration of a stated period after its exercise whether or not on or before the date of the decedent’s death notice has been given or the power has been exercised plr-135594-18 sec_2041 provides that for purposes of sec_2041 the term general_power_of_appointment means a power which is exercisable in favor of the decedent his estate his creditors or the creditors of his estate sec_2041 provides that the lapse of a power_of_appointment created after date during the life of the individual possessing the power shall be considered a release of such power the preceding sentence shall apply with respect to the lapse of powers during any calendar_year only to the extent that the property which could have been appointed by exercise of such lapsed powers exceeded in value at the time of such lapse the greater of the following amounts a dollar_figure or b percent of the aggregate value at the time of such lapse of the assets out of which or the proceeds of which the exercise of the lapsed powers could have been satisfied sec_2501 provides generally that a tax is imposed for each calendar_year on the transfer of property by gift by any individual resident or nonresident sec_2511 provides that the gift_tax shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2514 provides that the exercise or release of a general_power_of_appointment created after date shall be deemed a transfer of property by the individual possessing such power sec_2514 provides that for purposes of sec_2514 the term general_power_of_appointment means a power which is exercisable in favor of the individual possessing the power his estate his creditors or the creditors of his estate sec_2514 provides that the lapse of a power_of_appointment created after date during the life of the individual possessing the power shall be considered a release of such power the rule_of the preceding sentence shall apply with respect to the lapse of powers during any calendar_year only to the extent that the property which could have been appointed by exercise of such lapsed powers exceeds in value the greater of the following amounts dollar_figure or percent of the aggregate value of the assets out of which or the proceeds of which the exercise of the lapsed powers could be satisfied in 387_us_456 the court considered whether a state trial court’s characterization of property rights conclusively binds a federal court or agency in a federal estate_tax controversy the court concluded that the decision of a state trial_court as to an underlying issue of state law should not be controlling when applied to a federal statute rather the highest court of the state is the best authority on the underlying substantive rule_of state law to be applied in the federal matter if there is no decision by that court then the federal authority must apply what it plr-135594-18 finds to be state law after giving proper regard to the state trial court’s determination and to relevant rulings of other courts of the state in this respect the federal_agency may be said in effect to be sitting as a state court state statute provides in part that a proceeding to approve or disapprove a proposed modification or termination of a_trust may be commenced by a trustee or a beneficiary state statute provides in part that the court may reform the terms of a_trust even if unambiguous to conform the terms to the settlor’s intention if it is proved by clear_and_convincing evidence that the settlor’s intent or the terms of the trust were affected by a mistake of fact or law in this case an examination of the relevant trust instruments affidavits and representations of the parties indicate that the original terms of paragraph resulting from a scrivener’s error were contrary to the intent of settlor the purpose of the reformation is to correct the scrivener’s error not to alter or modify the trust instrument accordingly based on the facts presented and the representations made we conclude that as a result of the reformation of trust each of settlor’s children child through child does not possess general powers of appointment over the assets of his or her respective child’s trust except to the extent of each child’s withdrawal right under the reformed trust instrument as a result of the reformation no child will be deemed to have released a general_power_of_appointment within the meaning of sec_2514 and sec_2041 by reason of the lapse of any right of withdrawal held by the child with respect to any transfers to his or her child’s trust accordingly no child will be deemed to have made a taxable gift under sec_2514 to his or her child’s trust and no part of his or her child’s trust will be included in his or her gross_estate under sec_2041 ruling sec_2 and sec_2513 provides generally that a gift made by one spouse to any person other than the donor’s spouse is considered for purposes of the gift_tax as made one-half by the donor and one-half by the donor’s spouse but only if at the time of the gift each spouse is a citizen or resident_of_the_united_states sec_25_2513-1 of the gift_tax regulations provides that the consent is effective only if both spouses signify their consent to treat all gifts made to third parties during that calendar_period by both spouses while married to each other as having been made one-half by each spouse such consent if signified with respect to any calendar_period is effective with respect to all gifts made to third parties during such calendar_period except in part if one spouse transferred property in part to his or her spouse and in part to third parties the consent is effective with respect to the interest transferred to third parties only insofar as such interest is ascertainable at the time of the gift and severable from the interest transferred to his spouse plr-135594-18 sec_25_2513-1 provides that the consent applies alike to gifts made by one spouse alone and to gifts made partly by each spouse provided such gifts were to third parties and do not fall within any of the exceptions set forth in sec_25_2513-1 through b the consent may not be applied only to a portion of the property interest constituting such gifts if the consent is effectively signified on either the husband’s return or the wife’s return all gifts made by the spouses to third parties except as described in subparagraphs through of this paragraph during the calendar_period will be treated as having been made one-half by each spouse sec_2601 imposes a tax on every generation-skipping_transfer which is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the gst tax is determined by multiplying the taxable_amount by the applicable_rate sec_2641 provides that the term applicable_rate means with respect to any gst the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer under sec_2642 the inclusion_ratio with respect to any property transferred in a gst is the excess if any of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of the gst_exemption under sec_2631 allocated to the trust or to property transferred in a direct_skip and the denominator of which is the value of the property transferred to the trust or involved in the direct_skip reduced by the sum of any federal estate_tax or state death_tax actually recovered from the trust attributable to such property and any charitable deduction allowed under sec_2055 or sec_2522 with respect to such property sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption amount which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2652 provides in part that the term transferor means in the case of any property subject_to the tax imposed by chapter the donor sec_26_2652-1 of the generation-skipping_transfer_tax regulations provides that the individual with respect to whom property was most recently subject_to federal estate or gift_tax is the transferor of that property for purposes of chapter under sec_26_2652-1 example t transfers dollar_figure to a new trust providing that the trust income is to be paid to t’s child c for c’s life and on the death of c the trust principal is to be paid to t’s grandchild gc the trustee has discretion to distribute plr-135594-18 principal for gc’s benefit during c’s lifetime c has a right to withdraw dollar_figure from the trust for a 60-day period following the transfer thereafter the power lapses c does not exercise the withdrawal right the transfer by t is subject_to federal gift_tax because a gift_tax is imposed under sec_2501 without regard to exemptions exclusions deductions and credits and thus t is treated as having transferred the entire dollar_figure to the trust on the lapse of the withdrawal right c becomes a transferor to the extent c is treated as having made a completed_transfer for purposes of chapter therefore except to the extent that the amount with respect to which the power_of_withdrawal lapses exceeds the greater of dollar_figure or percent of the value of the trust property t remains the transferor of the trust property for purposes of chapter sec_2652 provides that if under sec_2513 one-half of a gift is treated as made by an individual and one-half of such gift is treated as made by the spouse of such individual such gift shall be so treated for purposes of this chapter sec_26_2652-1 provides that in the case of a transfer with respect to which the donor’s spouse makes an election under sec_2513 to treat the gift as made one-half by the spouse the electing spouse is treated as the transferor of one-half of the entire value of the property transferred by the donor regardless of the interest the electing spouse is actually deemed to have transferred under sec_2513 the donor is treated as the transferor of one-half of the value of the entire property 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 under sec_2632 if an individual makes a direct_skip transfer during his or her lifetime any unused portion of such individual’s gst_exemption is automatically allocated to the property transferred to the extent necessary to make the inclusion_ratio zero under sec_2612 the term direct_skip means a transfer subject_to tax imposed by chapter or of an interest in property to a skip_person sec_26_2632-1 provides in part that an automatic allocation of gst_exemption is effective as of the date of the transfer to which it relates a form_709 need not be filed to report an automatic allocation sec_2632 provides that if any individual makes an indirect_skip during such individual’s lifetime any unused portion of such individual’s gst_exemption shall be allocated to the property transferred to the extent necessary to make the inclusion_ratio for such property zero sec_2632 provides that for purposes of sec_2632 the term indirect_skip means any transfer of property other than a direct_skip subject_to the tax imposed by plr-135594-18 chapter made to a gst_trust sec_2632 provides in part that the term gst_trust means a_trust that could have a generation-skipping_transfer with respect to the transferor unless the exceptions enumerated in i through vi apply sec_2642 provides in part 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 sec_2001 in this case each child’s trust is a gst_trust for purposes of sec_2632 settlor and spouse timely filed form sec_709 for year year year and year signifying their consent to treat the gifts made in each of year year year and year to each child’s trust as having been made one-half by each spouse under sec_2513 accordingly under sec_2652 settlor and spouse will be treated as the transferor of one-half of the value of the entire property transferred to each child’s trust in year year year and year based on the facts presented and the representations made we rule that the automatic allocation rules under sec_2632 apply to allocate settlor’s and spouse’s gst_exemption to one-half of the transfers of property made to each child’s trust in each of year year year and year grandfather and grandmother timely filed form sec_709 for year and year signifying their consent to treat the gifts made in each of year and year to each child’s trust as having been made one-half by each spouse under sec_2513 accordingly under sec_2652 grandfather and grandmother will be treated as the transferor of one-half of the value of the entire property transferred to each child’s trust in year and year based on the facts presented and the representations made we rule that the automatic allocation rules under sec_2632 apply to allocate grandfather’s and grandmother’s gst_exemption to one-half of the transfers of property made to each child’s trust in each of year and year in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter plr-135594-18 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely lorraine e gardner lorraine e gardner senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter cc


department of the treasury internal_revenue_service washington d c contact person identification_number telephone number employer_identification_number se t-eo ra t tax_exempt_and_government_entities_division number release date date date uil legend benefit fund a union benefit fund b dear we have considered your ruling_request dated date concerning the federal income and excise_tax consequences under sec_507 sec_4941 and sec_4946 of the internal_revenue_code_of_1986 as amended hereafter code related to a proposed transfer of assets in the manner and for the purposes described below facts you have represented the following facts you have been recognized as an organization exempt under sec_501 of the code and classified as a private_foundation within the meaning of sec_509 benefit fund a is an employee_benefit_plan within the meaning of sec_3 of the employee_retirement_income_security_act_of_1974 as amended hereafter erisa and an employee welfare_benefit_plan within the meaning of erisa sec_3 union is the plan_sponsor of benefit fund a within the meaning of erisa section b benefit fund a’s assets are comprised of contributions from union employers union employees other employee benefit plans in which union members have participated and earnings thereon there are no longer any contributions being made to benefit fund a benefit fund a provides death_benefits to the beneficiaries of deceased members and retired members of union benefit fund a is not a separate_entity from union for federal_income_tax purposes and the income earned on its assets is exempt from federal_income_tax under sec_501 union’s benefit committee acting as the named beneficiary of benefit fund a proposed an amendment that provided that if benefit fund a was terminated the proceeds would be used for various purposes including any purpose deemed appropriate by union's general executive board union’s general executive board through its authority as sponsor of benefit fund a passed a resolution providing for both the termination of benefit fund a and the near- simultaneous creation of benefit fund b which was established as a successor to benefit fund a pursuant to this resolution approximately fund a to union and all other assets and liabilities to a successor fund benefit fund b with the same name trustees plan_administrator participants beneficiaries purpose and substantially the same benefits as the fund benefit fund a ’ this same resolution was approved with the exception that approximately transferred to you dollars of these funds would later be dollars was transferred from benefit as a result of this transfer a class action lawsuit was instituted in federal district_court by participants in and beneficiaries of benefit fund a against you benefit fund a benefit fund b and several defendants named individually pursuant to the filed summons and complaint some of the persons individually named in the complaint as defendants were at certain times fiduciaries of several entities including union’s benefit committee union’s general executive board benefit fund a and benefit fund b furthermore these individually named defendants were as to you foundation managers and fiduciaries and one of them still is the summons and complaint alleged that the above referenced parties violated their fiduciary duties under erisa by their transference of approximately subsequent termination of benefit fund a dollars out of benefit fund a and their litigation over this matter has ensued for over years with neither side achieving a favorable ruling on the merits of their position you represent that through court intervention to settle this matter it appeared to the parties that neither side had better than a chance of prevailing on the merits with any potential decision by the court being an all or nothing proposition n order to avoid the continued expense and hardship of litigation through the aid of judicial intervention the litigants agreed to settle this matter in the first of two agreements to settle the ongoing litigation was entered into by all parties except for you all defendants including you were represented by the same counsel from commencement of the legal action through the beginning of these negotiations after months of negotiations you sought views from outside counsel who advised that your litigation position was superior to that of the other defendants and that the terms offered you were inferior to those offered to the other defendants new independent counsel retained by you was unable to reach terms that your board considered in your best interests the agreement indemnified the defendants for their alleged breach of erisa fiduciary duties related to the transfer of all assets out of fund a and the subsequent termination of fund a the settlement agreement was approved by the presiding federal district_court in objections of your counsel settlement over the approval of that partial settlement put pressure on you as the only remaining defendant to settle the lawsuit motions by the remaining parties for summary_judgment were denied by the court which also dismissed a number of your defenses a second settlement agreement was entered into by class counsel on behalf of plaintiffs and by you as the sole remaining defendant this preliminarily approved by the court pending a the court’s ultimate determination after a fairness hearing and b issuance of a favorable letter_ruling by the irs the agreement provides for the establishment of a settlement account that would be funded with an settlement agreement was settlement approximate under half of the amount transferred from benefit fund a to you and just about half of your net assets at the time of settlement the dollar payment from you you state that this amount represents just settlement agreement provides the following an approximate dollar payment to the settlement account plus any interest accrued thereon ess i the cost of giving notice to participants ii whatever legal fees and costs are awarded to class counsel by the court iii any interest accruing to the settlement account on those fees and costs and iv taxes imposed is to be paid to benefit fund b to provide additional benefits to the beneficiaries of the participants and any and all claims arising from the facts and events stated in support of plaintiffs’ claim could no longer be used by any member of the class to support a claim against you and any of your directors officers employees agents or attorneys the experienced judge who mediated the final settlement negotiations after extensive negotiations in his presence recommended that both parties settle the case on the terms reflected in a memorandum of understanding that resolved all major issues between the parties and with minor modifications became the litigation counsel and your independent tax counsel both advise that the proposed settlement is in your best interests settlement agreement your independent you have requested the following rulings dollars to benefit fund b will not payment by you of approximately constitute an act of self-dealing under sec_4941 of the code for you and any of your directors officers employees agents or attorneys in reference to this payment payment by you of approximately constitute a taxable_expenditure under sec_4945 of the code in reference to this payment payment by you of approximately transfer described in sec_507 of the code so that your private_foundation_status will not be terminated under this provision and no termination_tax will be imposed under sec_507 dollars to benefit fund b is nota dollars to benefit fund b will not law sec_507 of the code provides that the status of any organization as a private_foundation shall be terminated only if it notifies the secretary of its intent to accomplish a termination or there have been either willful repeated acts or failures to act or a willful flagrant act or failure to act giving rise to chapter liability for tax and the secretary notifies such organization that it is liable for the tax imposed by subsection c and either such organization pays the tax or pays any portion not abated under subsection g sec_507 of the code provides that in the case of a transfer of assets of any private_foundation to another private_foundation pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization the transferee foundation shall not be treated as a newly created organization sec_507 of the code imposes a termination_tax equal to certain defined amounts which are generally the lower_of the aggregate tax_benefit resulting from the tax exempt status or the fair_market_value of the assets sec_4941 of the code imposes an excise_tax on each act of self-dealing between a disqualified_person and a private_foundation sec_4941 of the code imposes an excise_tax on the participation of a foundation_manager in an act of self-dealing between a disqualified_person and a private_foundation sec_4941 of the code provides that the term self-dealing means any direct or indirect transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation sec_4945 of the code imposes an excise_tax on a private foundation's making of any taxable_expenditure under sec_4945 sec_4945 of the code provides the term taxable_expenditure means any amount_paid or incurred by a private_foundation for any purpose other than one specified in sec_170 sec_4946 of the code defines the term disqualified_person with respect to a private_foundation to include a substantial_contributor to the foundation or a foundation_manager sec_4946 of the code defines the term substantial contributor’ with reference to sec_507 as any contributor who contributed or bequeathed an aggregate amount of more than dollar_figure to the private_foundation if such amount is more than percent of the total contributions and bequests received by the foundation before the close of the taxable_year of the foundation in which the contribution or bequest is received by the foundation from such person sec_1_507-3 of the federal_income_tax regulations hereafter regulations provides that if a private_foundation incurs liability for one or more of the taxes imposed under chapter or any penalty resulting therein prior to or as a result of making a transfer of assets described in sec_507 of the code to one or more private_foundations in any case where transferee_liability applies each transferee foundation shall be treated as receiving the transferred assets subject_to such liability to the extent that the transferor foundation does not satisfy such liability sec_1_507-3 of the regulations provides that as used in sec_507 of the code the term other adjustment organization or reorganization shall include any partial_liquidation or any other significant disposition of assets to one or more private_foundations sec_53 d -2 f of the foundation and similar excise_taxes regulations hereafter foundation regulations provides that except as provided in sec_53 d - c sec_4941 of the code shall not apply to the indemnification by a private_foundation of a foundation_manager with respect to the manager's defense in any civil judicial or civil administrative_proceeding arising out of the manager's performance of services or failure to perform services on behalf of the foundation against all expenses other than taxes including taxes imposed by chapter penaities or expenses of correction including attorneys’ fees judgments and settlement expenditures if i such expenses are reasonably incurred by the manager in connection with such proceeding and ii the manager has not acted willfully and without reasonable_cause with respect to the act or failure to act which led to such proceeding or to liability for tax under chapter sec_53_4945-6 of the foundation regulations provides that expenditures_for unreasonable administrative expenses including compensation consultant fees and other fees for services rendered will ordinarily be taxable_expenditures under sec_4945 of the code unless the foundation can demonstrate that such expenses were paid_or_incurred in the good_faith belief that they were reasonable and that the payment or incurrence of such expenses in such amounts was consistent with ordinary business care and prudence in 461_fsupp_1382 d c texas plaintiff contributed monies to a law school on the condition that the contribution would be fully deductible by plaintiff when it was determined by the irs that a portion of contributions made by plaintiff to foundation established to facilitate plaintiff's contributions to law school were not so deductible return by foundation to plaintiff of contribution not deductible was held by the district_court not to be an act of self-dealing within the meaning of sec_4941 of the code the district_court held that the return by the foundation of the amount of those contributions which the foundation should not have received and which it was not entitled to keep is not a ‘transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private foundation’ within the meaning of sec_4941 of the code id pincite analysis ruling the issue is whether pursuant to a preliminary court approved settlement agreement the transfer of approximately indemnification of you and your directors officers employees agents or attorneys in reference to this transfer is or is not an act of self-dealing under sec_4941 of the code dollars from you to benefit fund b and the you are recognized as a private_foundation under sec_501 and sec_509 of the code sec_4941 imposes an excise_tax on each act of self-dealing between a private_foundation and a disqualified_person with the definition of self-dealing including a direct or indirect transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation sec_4946 provides that the term disqualified_person with respect to a private_foundation includes a substantial_contributor here fund b is considered a substantial_contributor to you and therefore a disqualified_person fund a was a substantial_contributor to you under sec_4945 of the code as a result of the approximate dollar transfer fund a terminated and fund b succeeded to all the assets and liabilities of fund a including the same name trustees plan_administrator participants beneficiaries purpose and substantially the same benefits as fund a as successor to fund a fund b is considered a substantial_contributor to you and therefore a disqualified_person in reference to any proposed transfer of assets from you to fund b we find that the settlement will not result in an act of self-dealing in 461_fsupp_1382 d c texas the court decided the issue of whether sec_4941 of the code applied to a foundation’s return to a substantial_contributor of monies it received via the contributor’s conditional gift the court held that the return by the foundation of the amount of those contributions which the foundation should not have received and which it was not entitled to keep is not a transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation within the meaning of sec_4941 of the code id pincite by analogy to underwood the proposed transfer of approximately settlement agreement represents the amount of money that you should not have received and which you are not entitled to keep specifically in underwood the foundation’s right to the contributed money was based on a condition_precedent that was not met terminating foundation’s legal right to the contributed money and requiring its return herein you state that your legal right to the money transferred from fund a is terminated by a condition_subsequent that condition being the court’s settlement agreement terminating your legal right to the money and requiring its return as you are not the legal owner of these assets the return of these assets to fund b as the successor legal owner cannot be said to constitute a transfer of assets for a finding of self-dealing under sec_4941 dollars from you to fund b pursuant to the our finding is predicated on the settlement being in your best interests as referenced years over the legality of the transfer fully above vigorous litigation has ensued for over from fund a to you and fund b you represent that the established the rights and liabilities of you and the other litigants this was not a friendly action and all parties were represented by competent legal counsel there is no suggestion here of any collusion to benefit you or any other litigant your independent counsel represent that the settlement is in your best interests and the judge mediating the settlement negotiations also recommended the settlement settlement agreement because the settlement agreement fairly establishes each litigant’s rights and liabilities you do not have any greater interest in the amount transferred from fund a than the amount which you retain in the settlement ruling the issue is whether pursuant to a preliminary court approved settlement agreement the payment by you of approximately expenditure under sec_4945 of the code dollars to benefit fund b will constitute a taxable sec_4945 of the code imposes an excise_tax on a private foundation's taxable_expenditures which includes any amount_paid or incurred by a private_foundation for any purpose other than charitable purpose as defined under sec_170 sec_53 b of the foundation regulations provides that expenditures_for unreasonable administrative expenses including compensation consultant fees and other fees for services rendered will ordinarily be taxable_expenditures unless the foundation can demonstrate that such expenses were paid_or_incurred in the good_faith belief that they were reasonable and that the payment or incurrence of such expenses in such amounts was consistent with ordinary business care and prudence the court in underwood v united_states supra also considered whether a foundation's return of a conditional contribution was a taxable_expenditure within the meaning of sec_4945 of the code the court stated that the amounts returned were assets that the foundation should not have received and which it was not entitled to keep such amounts were not considered an amount_paid or incurred by a private_foundation within the meaning of sec_4945 the settlement agreement settled the parties’ right and liabilities arising out of the litigation see ruling for a complete discussion of this issue the agreement has been preliminarily approved by the court and is binding upon the parties as if the issues were fully litigated and judgment entered by the court accordingly under the rationale of underwood the payment by you of approximately dollars to fund b under the terms of the settlement agreement is an amount that you are not legally entitled to keep and its return is not an amount_paid or incurred by you alternatively we regard the payment as an administrative expense which under the circumstances is reasonable therefore the payment by you of approximately of the code and b of the foundation regulations dollars will not be a taxable_expenditure under sec_4945 settlement ruling the issue is whether pursuant to a preliminary court approved settlement agreement the payment by you of approximately a taxable_termination of your private_foundation_status under sec_507 of the code dollars to benefit fund b is a transfer resulting in under sec_507 of the code an organization’s private_foundation_status is terminated if it either notifies the secretary of its intent to accomplish a termination or there have been either willful repeated acts or failures to act or a willful flagrant act or failure to act giving rise to chapter tax_liability sec_507 of the code imposes a termination_tax equal to certain defined amounts which are generally the lower_of the aggregate tax_benefit resulting from the tax exempt status or the fair_market_value of the assets you have not notified the secretary of any intent to terminate your private_foundation_status nor are we aware of any acts giving rise to liability tax under chapter of the code as stated in ruling and ruling your payment of approximately dollars to benefit fund b pursuant to the settlement agreement does not give rise to taxation under sec_4941 and sec_4945 of the code therefore you are not liable for a termination_tax under sec_507 of the code accordingly based upon the information submitted in your ruling_request we rule as follows dollars to benefit fund b will not payment by you of approximately constitute an act of self-dealing under sec_4941 of the code for you and any of your directors officers employees agents or attorneys in reference to this payment payment by you of approximately constitute a taxable_expenditure under sec_4945 of the code in reference to this payment payment by you of approximately transfer described in sec_507 of the code so that your private_foundation dollars to benefit fund b is nota dollars to benefit fund b will not status will not be terminated under this provision and no termination_tax will be imposed under sec_507 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 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 this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because it could help resolved questions concerning your federal_income_tax status this ruling should be kept in your permanent records 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 in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative sincerely robert c harper jr manager exempt_organizations technical group enclosure notice


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si 1-plr-101577-00 date feb legend x date this responds to a letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts x was incorporated on date the shareholders of x desired that x elect s_corporation treatment for x effective on date but the election to be treated as an s_corporation was not timely filed accordingly x requests a ruling that it will be treated as an s_corporation effective date law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one-half months of a corporation's taxable_year then that corporation will not be treated as an s plr-101577-00 corporation until the taxable_year after the year in which the s election is filed sec_1362 provides that if no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply x did not file an election to be treated as an s_corporation under sec_1362 x has however established reasonable_cause for not making a timely s election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective date within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative signed dianna k miosi sincerely dianna k miosi chief branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index numbers --------------------------------------------------- --------------------------------- ---------------------------------------------------------- -------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------------ telephone number ---------------------- refer reply to cc psi b03 plr-128817-17 date march legend p1 p2 a ----------------------------------------------------------------------------------------------------- -------------------- ----------------------------------------------------------------------------------------------------- -------------------------- ------------------------------ state -------------- year1 ------- r -------- dear ------------------ this letter responds to a letter dated date and subsequent correspondence submitted on behalf of p2 by p2’s authorized representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_754 of the internal_revenue_code code facts the information submitted states that p2 is a state limited_liability_company that is classified as a partnership for federal tax purposes p1 classified as a partnership for federal tax purposes owns a r interest in p2 a a partner in p1 died during year1 plr-128817-17 p1 filed a timely election under sec_754 for year1 however p2 inadvertently failed to file a timely election under sec_754 for year1 law sec_754 provides in part that if a partnership files an election in accordance with the regulations prescribed by the secretary the basis of partnership property is adjusted in the case of a distribution_of_property in the manner provided in sec_734 and in the case of a transfer of a partnership_interest in the manner provided in sec_743 such an election shall apply with respect to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable_year with respect to which the election was filed and all subsequent taxable years the optional_adjustment_to_basis under sec_754 will be available to both an upper-tier partnership utp and a lower-tier partnership ltp when there is a sale_or_exchange of a partnership_interest or the death of a partner in utp and both utp and ltp have made an election under sec_754 to adjust the basis of partnership property on a sale_or_exchange of a partnership_interest or on the death of a partner revrul_87_115 1987_2_cb_163 sec_1_754-1 of the income_tax regulations provides in part that an election under sec_754 to adjust the basis of partnership property under sec_734 and sec_743 with respect to a distribution_of_property to a partner or a transfer of an interest in a partnership shall be made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed not later than the time prescribed by sec_1_6031_a_-1 including extensions thereof for filing the return for the taxable_year sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time 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 code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 plr-128817-17 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result p2 is granted an extension of time of days from the date of this letter to make an election under sec_754 effective for its year1 taxable_year and thereafter the election should be made in a written_statement filed with the appropriate service_center for association with p2’s year1 return a copy of this letter should be attached to the statement filed this ruling is contingent on p2 adjusting the basis of its properties to reflect any sec_734 or sec_743 adjustments that would have been made if the sec_754 election had been timely made these basis adjustments must reflect any additional_depreciation that would have been allowable if the sec_754 election had been timely made regardless of whether the statutory period of limitation on assessment or filing a claim_for_refund has expired for any year subject_to this grant of late relief any depreciation deduction allowable for an open_year is to be computed based upon the remaining useful_life and using property basis as adjusted by the greater of any depreciation deduction allowed_or_allowable in any prior year had the sec_754 election been timely made additionally the partners of p1 and p2 must adjust the basis of their interests in p1 and p2 to reflect what that basis would be if the sec_754 election had been timely made regardless of whether the statutory period of limitation on assessment or filing a claim_for_refund has expired for any year subject_to this grant of late relief specifically the partners of p1 and p2 must reduce the basis of their interests in p1 and p2 in the amount of any additional_depreciation that would have been allowable if the sec_754 election had been timely made except as specifically ruled upon above we express or imply no opinion concerning the tax consequences of any facts discussed or referenced in this letter specifically we express no opinion as to whether p2 is a partnership for federal tax purposes this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination plr-128817-17 in accordance with a power_of_attorney on file with this office we are sending a copy of this letter_ruling to your authorized representative sincerely associate chief_counsel passthroughs special industries by _____________________________ caroline hay assistant to the branch chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes cc


internal_revenue_service number release date index number --------------------------------------- ------------------------------------ ------------------------------------- ----------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-141330-09 date march legend x -------------------------------------------------- ------------------------------------------------------------------------------------------ country d ------ -------------------------- dear --------------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting that the service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a partnership for federal tax purposes facts according to the information submitted x was formed on d under the laws of country x intended to be treated as a partnership for federal tax purposes effective d however x inadvertently failed to timely file form_8832 entity classification election to elect to be treated as a partnership for federal tax purposes law and analysis sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with at least two members can elect to be classified as either an association or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner plr-141330-09 sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with two or more members all of which have limited_liability may elect to be treated as a partnership for federal tax purposes pursuant to the rules of sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed sec_301_7701-3 provides that such an election must be signed by either a each member of the electing entity who is an owner at the time the election is filed or b any officer manager or member of the electing entity who is authorized under local law or the entity’s organization documents to make the election and who represents to having such authorization under penalties of perjury sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time 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_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government conclusion based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center to elect to be treated as a partnership for federal tax purposes effective d a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose plr-141330-09 except as specifically set forth above no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x's authorized representative sincerely associate chief_counsel passthroughs special industries s by faith colson senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes cc