internal_revenue_service department of the treasury number release date index no washington d c person to contact telephone number refer reply to cc psi -- plr-101869-02 date date legend taxpayer authority bank state city county b c date year dear this letter responds to your letter dated date and subsequent correspondence submitted on behalf of taxpayer requesting a private_letter_ruling regarding the application of sec_42 of the internal_revenue_code to a proposed transfer from taxpayer to the authority of bare_legal_title to certain real_property owned by taxpayer taxpayer represents the following facts plr-101869-02 facts taxpayer is a state limited_partnership formed to develop own construct rehabilitate and operate a multifamily rental housing development consisting of b residential rental housing units located in city the project the general_partner of taxpayer is the authority a public body corporate and politic of state the limited_partner of taxpayer is bank under the applicable state law the project which was placed_in_service on date is subject_to real_estate_taxes levied by county dollar_figurec for year and does not currently qualify for real_estate tax exemption however under the applicable state law if the authority was to own the project the project would not be subject_to real_estate_taxes in county taxpayer has received a written ruling from state’s department of revenue dor that property owned by the authority but leased to taxpayer in which the authority is the sole general_partner should not be subject_to property_tax therefore taxpayer intends to transfer to the authority record title to the real_estate and improvements with respect to the project subject_to existing easements and encumbrances pursuant to a statutory form quitclaim_deed immediately after this transaction taxpayer intends to lease the project from the authority pursuant to a lease agreement taxpayer represents that it will retain all of the benefits_and_burdens_of_ownership of the project therefore there will be no sale_or_exchange of the project for federal or state_income_tax purposes taxpayer has informed the dor of the intended sale-leaseback transaction subject_to review of the transaction documentation the dor has agreed that the project would be exempt from real_estate_taxes after the sale-leaseback ruling requested based on the foregoing which assumes that under these facts the transfer of bare_legal_title to the project from taxpayer to the authority is not a sale_or_exchange for federal or state_income_tax purposes and does not result in a shift in the benefits_and_burdens_of_ownership for federal and state_income_tax purposes taxpayer requests a ruling that the sec_42 recapture provisions do not apply to the proposed transfer of bare_legal_title to the project by taxpayer to the authority law and analysis sec_42 provides a tax_credit for investment in low-income_housing buildings placed_in_service after date for any taxable_year in a 10-year credit_period the amount of credit is equal to the applicable_percentage of the qualified_basis of each qualified_low-income_building plr-101869-02 in the case of any qualified_low-income_building placed_in_service by the taxpayer after sec_42 provides in part that the term applicable_percentage means the appropriate percentage prescribed by the secretary for the month applicable under sec_42 or ii sec_42 provides that the percentages prescribed by the secretary for any month shall be percentages that will yield over a 10-year period amounts of credit that have a present_value equal to i percent of the qualified_basis of new buildings that are not federally_subsidized for the taxable_year 70-percent present_value credit and ii percent of the qualified_basis of existing buildings and of any new buildings that are federally_subsidized for the taxable_year 30-percent present_value credit sec_42 provides that the qualified_basis of any qualified_low-income_building for any taxable_year is an amount equal to the applicable_fraction defined in sec_42 of the eligible_basis of such building in general under sec_42 the eligible_basis of a new_building is its adjusted_basis as of the close of the first taxable_year of the credit_period sec_42 provides rules concerning the recapture of low-income_housing tax_credits sec_42 provides that if as of the close of any taxable_year in the compliance_period the qualified_basis of any building with respect to the taxpayer is less than the amount of qualified_basis as of the close of the preceding_taxable_year the taxpayer’s tax for the taxable_year shall be increased by the credit recapture_amount the credit recapture_amount for a recapture_event occurring during any year in the credit_period as defined in sec_42 is one-third of all credits claimed assuming no prior recapture plus interest at the overpayment rate under sec_6621 beginning with the date the recaptured amount was claimed the legislative_history to sec_42 provides generally that any change in ownership during the compliance_period is a recapture_event and that all dispositions of ownership interests in buildings are treated as transfers for purposes of recapture see h_r conf_rep no 99th cong 2d sess ii-96 and ii-102 vol c b however under sec_42 in the case of a disposition of a low-income building or an interest therein a taxpayer can avoid recapture liability for the disposition if the taxpayer posts a satisfactory bond using form_8693 low-income_housing_credit disposition bond and it is reasonably expected that the building will continue to be operated as a qualified_low-income_building for the remaining compliance_period of the building taxpayer represents in the above facts that the transfer of bare_legal_title from taxpayer to the authority is not a sale_or_exchange for federal or state_income_tax purposes and will not result in a shift of the benefits_and_burdens_of_ownership for federal and state_income_tax purposes from taxpayer to the authority this representation is a material fact in this case therefore the issue being considered in this case is not whether a sale_or_exchange or a transfer of the benefits_and_burdens_of_ownership is for federal_income_tax purposes a recapture_event under sec_42 but plr-101869-02 whether the transfer of bare_legal_title under the above facts is a disposition or change in ownership contemplated by the sec_42 legislative_history that results in a recapture_event the transfer of bare_legal_title under the above circumstances would not be made for the evasion or avoidance of federal_income_tax further the federal tax treatment of the proposed transaction has been disclosed to dor officials taxpayer represents that all indicia of ownership of the project other than bare_legal_title would remain unchanged consequently the transfer of bare_legal_title in this case is not a disposition or change in ownership contemplated by the sec_42 legislative_history to result in a recapture_event accordingly based solely on the representations and the relevant law set forth above we rule that the transfer of bare_legal_title to the project from taxpayer to the authority will not under these facts result in recapture under sec_42 no opinion is expressed or implied regarding the application of any other provision of the code or regulations specifically no opinion is expressed or implied regarding whether the transfer of bare_legal_title to the project from taxpayer to the authority is a sale_or_exchange for federal or state_income_tax purposes or causes a shift in the benefits_and_burdens_of_ownership for federal or state_income_tax purposes nor is any opinion expressed or implied regarding whether the project otherwise qualifies for the low-income_housing tax_credit under sec_42 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file a copy of this letter is being sent to taxpayer sincerely harold e burghart assistant to the chief branch office of assistant chief_counsel passthroughs and special industries enclosure copy


internal_revenue_service number release date index number ------------------ --------------- ------------------------- ----------------------------- in re department of the treasury washington dc person to contact ---------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 - plr-164149-03 date date ----------------- x ---------------------------------------------- state date dear ------------- -------------- ------------------------ this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts x was incorporated on date under the laws of state the shareholder of x desired that x elect s_corporation treatment 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 provides that if no sec_1362 election is made for 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_corporation until the taxable_year after the year in which the s election is filed 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 provided that within days from the date of this letter x submits 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 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 sincerely dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------------- id no ---------- ------------------ telephone number ---------------------- refer reply to cc ita b02 plr-104823-15 date august internal_revenue_service number release date index number ---------------------- ------- --------------------------------------- ------------------- ---------------------------------- ty ------- legend taxpayer ------------------------------------------------------------------------------------------------------------- x y ------------------------------------------------------------------------ --------------------- ------------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------------------------------------- ------------------------------ ---------------- --------------------- ------------------------ ------ ------------------------ -------------------- -------------------------- ---------------------------- ---------------------------- ---------------------------- ------------------------------------ ------------------------------------ ------------------------------------------- ----------------------- ------- ------- ----------- z vice president of finance cpa firm tax_return_preparer month date1 date2 date3 date4 date5 date6 llc1 llc2 llc3 corp year1 year2 city plr-104823-15 state dollar_figurea dollar_figureb dollar_figurec dollar_figured dollar_figuree dollar_figuref dear -------------- ------------------ -------------- -------------- -------------- -------------- -------------- -------------- this is in response to your letter of date1 requesting permission to attach an election statement to taxpayer's originally filed federal tax_return for taxable year1 the election statement was not included although it was required in order for taxpayer to use a safe_harbor method_of_accounting under section dollar_figure of revproc_2011_29 2011_1_cb_746 this request is made in accordance with sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations facts and representations taxpayer represents the following taxpayer is an x company headquartered in city state it provides a diversified range of y services to z in tax year1 taxpayer acquired the equity_interest in llc1 in a taxable transaction dated date2 the transaction qualifies as a covered transaction under sec_1_263_a_-5 of the income_tax regulations in connection with the acquisition of the equity_interest taxpayer incurred success-based transaction fees in the amount of dollar_figurea taxpayer elected to deduct or dollar_figureb and capitalize the remaining or dollar_figurec additionally in tax year1 taxpayer acquired the assets of llc2 on date3 the assets of llc3 on date4 and the equity_interest in corp on date5 all three of these acquisitions qualify as covered transactions under sec_1_263_a_-5 of the regulations in connection with the transactions taxpayer incurred success-based transaction fees in the amount of dollar_figured taxpayer elected to deduct or dollar_figuree and capitalize the remaining or dollar_figuref taxpayer engaged cpa firm to prepare and file its year1 federal_income_tax return taxpayer relied upon cpa firm to accurately prepare the return after discussions with tax_return_preparer who was a partner in cpa firm about the transactions success-based fees and the availability of the safe_harbor election in plr-104823-15 revproc_2011_29 taxpayer’s vice president of finance informed tax preparer that taxpayer decided to use the safe_harbor election that tax_return_preparer suggested for tax year1 taxpayer provided documentation and information relating to the transactions to tax_return_preparer taxpayer and taxpayer’s vice president of finance relied on tax_return_preparer as a qualified_tax professional to prepare a complete and accurate federal_income_tax return for tax year1 using the safe_harbor election they discussed the federal_income_tax return was timely filed under extension on or about date6 and included a deduction of of the success-based_fee while the remaining of the success-based_fee was capitalized consistent with the requirements of the safe_harbor election in month of year2 tax_return_preparer discovered that he had accidentally omitted from the tax year1 return the statement required under sec_4 of revproc_2011_29 for taxpayers electing to use the safe_harbor method of allocating success- based fees this oversight was discovered by tax_return_preparer before any discovery by the internal_revenue_service tax_return_preparer had not informed taxpayer about the need to attach the statement to the return in order to properly make the election upon discovering the omission tax_return_preparer immediately contacted taxpayer and informed taxpayer of the oversight and the need to file a letter_ruling request for relief under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations accordingly taxpayer requests that an extension of time be granted to allow taxpayer to attach to its year1 return the mandatory statement regarding the election to use the safe_harbor method of allocating success-based fees under revproc_2011_29 law and analysis sec_263 of the internal_revenue_code and sec_1_263_a_-2 of the income_tax regulations generally provide that no deduction shall be allowed for any amount_paid out for property having a useful_life substantially beyond the taxable_year in the case of an acquisition or reorganization of a business_entity costs that are incurred in the process of acquisition and that produce significant long-term benefits must be capitalized 503_us_79 397_us_572 under sec_1_263_a_-5 a taxpayer must capitalize an amount_paid to facilitate a business acquisition or reorganization transaction described in sec_1_263_a_-5 an amount is paid to facilitate a transaction described in sec_1_263_a_-5 if the amount is paid in the process of investigating or otherwise pursuing the transaction whether an amount is paid in the process of investigating or otherwise pursuing the transaction is determined based on all of the facts and circumstances see sec_1_263_a_-5 plr-104823-15 sec_1_263_a_-5 provides that an amount that is contingent on the successful closing of a transaction described in sec_1_263_a_-5 success-based_fee is presumed to facilitate the transaction and thus must be capitalized a taxpayer may rebut the presumption by maintaining sufficient documentation to establish that a portion of the fee is allocable to activities that do not facilitate the transaction and thus may be deductible a taxpayer's method for determining the portion of a success-based_fee that facilitates a transaction and the portion that does not facilitate the transaction is a method_of_accounting under sec_446 because the treatment of success-based fees was a continuing subject of controversy between taxpayers and the service the service published revproc_2011_29 revproc_2011_29 provides a safe_harbor method_of_accounting for allocating success- based fees paid in business_acquisitions or reorganizations described in sec_1 a - e in lieu of maintaining the documentation required by sec_1_263_a_-5 this safe_harbor permits electing taxpayers to treat percent of the success-based_fee as an amount that does not facilitate the transaction ie an amount that can be deducted the remaining portion of the fee must be capitalized as an amount that facilitates the transaction section dollar_figure of revproc_2011_29 allows a taxpayer to make a safe_harbor election with respect to success-based fees section dollar_figure provides that the service will not challenge a taxpayer's allocation of success-based fees between activities that facilitate a transaction described in sec_1_263_a_-5 costs that must be capitalized and activities that do not facilitate the transaction costs that may be deducted if the taxpayer does three things first the taxpayer must treat percent of the amount of the success-based_fee as an amount that does not facilitate the transaction and thus may be deducted second the taxpayer must capitalize the remaining amount of the success-based_fee as an amount which does facilitate the transaction third the taxpayer must attach a statement to its original federal_income_tax return for the taxable_year the success-based_fee is paid_or_incurred stating that the taxpayer is electing the safe_harbor identifying the transaction and stating the success-based_fee amounts that are deducted treated as not facilitating the transaction and capitalized treated as facilitating the transaction it is this third requirement that taxpayer requests permission to accomplish with this ruling_request taxpayer requests permission to attach the statement required by sec_4 of revproc_2011_29 to its return by amending its original filed return and superseding it with a return with the proper election statement completed and attached sec_301_9100-1 through provide the standards the commissioner will plr-104823-15 use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make certain regulatory elections sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment sec_301_9100-3 provides special rules for accounting_method regulatory elections sec_301_9100-3 provides that the interests of the government are deemed prejudiced except in unusual or compelling circumstances if the accounting_method regulatory election for which relief is requested is subject_to the advance consent procedures for method changes requires a sec_481 adjustment would permit a change from an impermissible method_of_accounting that is an issue under consideration by examination or any other setting or provides a more favorable method_of_accounting if the election is made by a certain date or taxable_year conclusion based upon our analysis of the facts and representations provided taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government therefore the requirements of sec_301_9100-1 and sec_301_9100-3 have been met taxpayer is granted an extension of days from the date of this ruling to file its mandatory statement for the tax year1 transactions as required by sec_4 of plr-104823-15 revproc_2011_29 stating that taxpayer is electing the safe_harbor for success-based fees identifying the transactions and stating the success-based_fee amounts that are deducted and capitalized for tax year1 the rulings contained in this letter are based on information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular no opinion is expressed as to whether taxpayer properly included the correct costs as its success-based fees subject_to the retroactive election or whether taxpayer's transactions are within the scope of revproc_2011_29 a copy of this letter must be attached to any income_tax return to which it is relevant alternatively a taxpayer filing its return electronically may satisfy this requirement by attaching a statement to its return that provides the date and control number of the letter_ruling in accordance with the provisions of the power_of_attorney currently on file with this office a copy of this letter is being sent to your authorized representatives we are also sending a copy of this letter to the appropriate operating division director enclosed is a copy of the letter_ruling showing the deletions proposed to be made in the letter when it is disclosed 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 ______________________________ norma c rotunno senior technician reviewer branch office of associate chief_counsel income_tax accounting


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 fip b04 plr-135419-09 date august legend legend taxpayer contract number dear -------------- ------------------------------------------------------------------ ----------------------------------------------------------------- ------------------------------------------------- -- this is in response to your request for rulings concerning the application of certain provisions of the internal_revenue_code to the modification of in-force life_insurance contracts facts taxpayer is a stock_life_insurance_company taxable under sec_801 and is the issuer of contract a universal_life_insurance contract the contract is not a variable_contract under sec_817 it is a general account product the contract’s value contract value is the sum of the premiums net of any load and credited interest less withdrawals and deductions the contract credits interest at a base guaranteed rate base account on specified dates the owner of the contract can allocate all or a portion of the contract value to certain notional accounts that provide an alternative interest crediting formula investment options as issued the contract offers two investment options investment option and investment option each investment option utilizes a formula for crediting interest based on the change in value of an external equity index excluding dividends the basic operation of the formula is that upon expiration of the duration the change in value of the index is used to determine the ‘gross’ interest to be credited this ‘gross’ interest may be limited by a stated maximum subject_to this maximum the ‘gross’ interest is reduced by the amount of any guaranteed_interest if any provided by the investment option the plr-135419-09 balance is then credited to the amount in the option for example assume a contract value of dollar_figurex of which the owner allocated dollar_figurex to an investment option with a stated maximum of with a guarantee if at the duration of the investment option the ‘gross’ interest were the amount of interest credited would be guaranteed_interest plus ‘investment interest’ ‘gross’ interest reduced to because of the stated maximum reduced by the guaranteed_interest once a portion of the contract value has been allocated to an investment option it cannot be re-allocated prior to the expiration of the duration charges and withdrawals are debited under a hierarchy of the base account followed by the investment options the contract entitles taxpayer to add or cease to offer investment options at any time any cessation will not be effective until the duration of the option has expired ie if an option has a multi-year duration and taxpayer ceases offering that option any value then allocated to that option will remain in that option for the balance of the duration taxpayer proposes to add investment option to the contract all three investment options have different parameters the difference relevant here is that both investment option and proposed investment option have a multi-year duration of the same length the effective annual interest rate guaranteed under investment option is number taxpayer represents that the contract is designed to satisfy the guideline premium test of sec_7702 unless at issue the cash_value_accumulation_test is chosen the premium limitations for the contract at issue were computed using the statutorily prescribed annual effective interest rates of or percent as appropriate taxpayer further represents that the addition of investment option will not change any benefits provided under the contract including the calculation of the death_benefit as stated in the contract the contract provides that the death_benefit will be increased to the minimum extent necessary for the contract to qualify under sec_7702 additionally taxpayer represents that the addition of investment option will not require it to utilize a different reserving method for statutory accounting purposes or otherwise change the basis under which the reserve for the contract is determined requested rulings taxpayer requests the following rulings no ruling has been requested and none is made concerning the contract’s qualification as a life_insurance_contract under sec_7702 no ruling has been requested and none is made concerning whether such increase is described by sec_7702 and sec_7702a plr-135419-09 the addition of investment option to the contract will not cause the contract to have a new issue_date for any purposes under sec_7702 nor require a restart in the computation of its sec_7702 limits or a new test period under sec_7702 eg for the year periods in sec_7702 the addition of investment option to the contract will not cause the contract to by treated as a new contract resulting from a deemed exchange for purposes of determining its limits under sec_7702a the addition of investment option to the contract will not cause the contract to have a new issue_date for any purposes under sec_807 nor otherwise cause taxpayer to have to recompute its tax_reserves for the contract the addition of investment option to the contract will not require an adjustment in the computation of the contract’s guideline single or level premium limits under sec_7702 the addition of investment option to the contract will not require an adjustment in the computation of the contract’s cash_value_accumulation_test limits under sec_7702 and the addition of investment option to the contract will not require a recomputation of the contract’s sec_7702a limits under sec_7702a law and analysis in essence three issues are presented a does the addition of investment option produce a deemed exchange of the contract such that the contract with investment option is effectively a new contract b is the addition of investment option an adjustment event under sec_7702 and c is the addition of investment option a material_change under sec_7702a sec_7702 defines the term life_insurance_contract for purposes of the code providing that a life_insurance_contract is any contract that is a life_insurance_contract under applicable law but only if such contract either meets the cash_value_accumulation_test cvat of sec_7702 or both meets the guideline premium requirements of sec_7702 and falls within the cash_value corridor of sec_7702 both the cvat and guideline premium requirements determine limits by reference to the time that a policy is issued except in the case of an adjustment under sec_7702 sec_7702 c and c the cvat and guideline_level_premium are computed using an interest rate which is the greater of an annual effective rate of percent or the rate or rates guaranteed on issuance of the contract the guideline_single_premium is determined using interest at the greater of an annual effective rate of percent or the plr-135419-09 rate or rates guaranteed on issuance of the contract sec_7702 provides that if there is a change in benefits under or in other terms of the contract which was not reflected in any previous determination or adjustment made under sec_7702 there shall be proper adjustments in future determinations made under sec_7702 sec_7702a defines the term modified_endowment_contract and sets forth a 7-pay test under sec_7702a if there is a material_change in the benefits under or in the terms of the contract which was not reflected in any previous determination under sec_7702a then for purposes of sec_7702a such contract shall be treated as a new contract entered into on the day on which such material_change takes effect and appropriate adjustments shall be made in determining whether such contract meets the 7-pay test of sec_7702a to take into account the cash_surrender_value under the contract sec_807 sets forth the method for computing reserves for purposes of determining income sec_807 provides that the tax_reserve_method for a life_insurance_contract is the commissioner’s reserve_valuation method prescribed by the national association of insurance commissioners which is in effect on the date of the issuance of the contract sec_807 applies to tax years beginning after date deficit reduction tax act of pub_l_no sec_215 98_stat_494 issue a deemed exchange sec_7702 applies to contracts issued after date and to plans of insurance in existence on date as explained by the senate committee staff of s comm on finance 98th cong explanation of provisions approved by the committee pincite comm print senate committee print c ontracts issued in exchange for existing contracts after date are to be considered new contracts issued after that date for these purposes a change in an existing contract will not be considered to result in an exchange if the terms of the resulting contract that is the amount or pattern of death_benefit the premium pattern the rate or rates guaranteed on issuance of the contract or mortality and expense charges are the same as the terms of the contract prior to the change accordingly if a contract is changed such that the amount or pattern of death_benefit the premium pattern the rate or rates guaranteed on issuance of the contract or the mortality and expense charges are different than when originally issued the changed contract is to be considered a new contract see also sec_7702a cf revrul_92_95 1992_2_cb_43 date of purchase of annuity_contract received in an exchange is the date of the purchase of the original annuity_contract plr-135419-09 sec_7702a applies to contracts issued on or after date with respect to this effective date the conference_report indicates that among other things a contract is considered entered into on or after date for purposes of the effective date if on or after date the death_benefit under the contract is increased or a qualified additional benefit is increased or added to the contract and prior to date the owner of the contract did not have a unilateral right under the contract to obtain such increase or addition without providing additional evidence of insurability or the contract is converted after date from a term life_insurance_contract into a life_insurance_contract providing coverage other than term coverage without regard to any right of the owner under the contract to obtain such conversion h_r rep no pt ii pincite conf_rep in 499_us_554 the court held that under sec_1001 an exchange of property gives rise to a realization event so long as the exchanged properties are ‘materially different’ - that is so long as they embody legally distinct entitlements for example groups of stock are not materially different if they confer the same proportional interest of the same character in the same corporation but are materially different if they are issued by different corporations or confer different rights and powers in the same corporation id pincite citations omitted revrul_2003_19 2003_1_cb_468 addressed the demutualization of a mutual_insurance_company and posits three situations under which a demutualization is effected though in each situation the demutualization does not affect any of the in force contracts nor the policyholders’ rights to receive any policy dividends in all situations the members surrender their interests in the mutual company the ruling holds that the demutualization has no effect on the date each life_insurance and annuity_contract of the mutual_insurance_company was issued entered into purchased or came into existence for purposes of and 7702a furthermore the demutualization do es not require retesting or the starting of new test periods for contracts under sec_7702 through e and 7702a c a in notice_2006_95 2006_2_cb_848 guidance was provided on the use of either the or commissioners’ standard ordinary mortality and morbidity tables section dollar_figure of the notice recites the legislative_history regarding the effective date of sec_7702 and dollar_figure provides that contracts which satisfied certain conditions when originally issued are not required to change to the tables if among other things plr-135419-09 certain changes are made pursuant to the terms of the contract among the changes permitted by dollar_figure are an increase or decrease in death_benefit whether or not the change is underwritten and a change in death_benefit option such as a change from an option to option contract or vice versa see also revproc_92_57 1992_2_cb_410 providing administrative relief with respect to the rehabilitation of insurance_companies by treating the modification or restructuring of certain contracts as not resulting in a loss of grandfathered status read together these authorities lead to the conclusion that the addition of investment option does not produce a deemed exchange of the contract for purposes of sec_7702 sec_7702a or sec_807 issue b sec_7702 adjustment event sec_7702 provides that if there is a change in the benefits under or in other terms of the contract which was not reflected in any previous determination or adjustment there shall be proper adjustments in future determinations made under sec_7702 sec_7702 was meant to extend to all life_insurance contracts rules similar to those contained in sec_101 enacted two years earlier see the staff of jt comm on taxation 98th cong general explanation of the revenue provisions of the deficit_reduction_act_of_1984 pincite comm print defra blue_book sec_101 has an analog to sec_7702 in sec_101 sec_101 has been said to apply in only two circumstances if the amount or pattern of the benefit is changed by the policy owner or upon the occurrence of a change in benefits previously scheduled that could not earlier be taken into account see the staff of jt comm on taxation 97th cong general explanation of the revenue provisions of the tax equity and fiscal responsibility act of pincite comm print tefra blue_book the senate report underlying sec_101 s rep no pt i pincite states that a t the start of the contract the guideline premiums are based on the future_benefits specified in the contract as of such date if future contract benefits are changed at a subsequent date the guideline premiums will be adjusted upward or downward to reflect the change such adjustments should not be made for increases in the death_benefit that reflect excess_interest that has been credited the tefra blue_book supra pages contains two examples where adjustments are made to the guideline premium in the first ten years after issue of an option contract the death_benefit is increased by dollar_figure and the guaranteed_interest rate is increased from to the second addresses an adjustment event involving an increase in death_benefit and an additional premium payment on an option plr-135419-09 contract with respect to the cash_value_accumulation_test tied to the net_single_premium the tefra blue_book states that even though the statute does not specifically call for an adjustment an adjustment to the net_single_premium is required by the language of the test itself to reflect increases or decreases in the death_benefit provided under the policy in describing sec_7702 the committee reports indicate that t he bill provides that proper adjustments be made for any change in the future_benefits or any qualified additional benefit or in any other terms under the contract which was not reflected in any previous determination made under the definitional section changes in the future_benefits or terms of a contract can occur at the behest of the company or the policyholder or by the passage of time however proper adjustments may be different for a particular change depending on which alternative test is being used or on whether the changes result in an increase or decrease of future_benefits in the event of an increase in current or future_benefits the limitations under the cash accumulation test must be computed treating the date of change in effect as a new date_of_issue for determining whether the changed contract continues to qualify as life_insurance under the definition prescribed in the bill thus if a future benefit is increased because of a scheduled change in death_benefit or because of the purchase of a paid-up addition or its equivalent such a change will require an adjustment and new computation of the net_single_premium definitional limitation under the guideline_premium_limitation an adjustment will be required under similar circumstances but the date of change for increased benefits should be treated as a new date only with respect to the changed portion of the contract likewise no adjustment shall be made if the change occurs automatically due for example to the growth of the cash_surrender_value whether by the crediting of excess_interest or the payment of guideline premiums or due to changes initiated by the company if the contract fails to meet the recomputed limitations a distribution of cash to the policyholder may be required senate committee print supra pincite see also h_r rep no pt ii pincite defra blue_book supra pincite as originally enacted sec_7702 applied the sec_1035 and sec_1031 regime when a change in the terms of the contract reduced future_benefits under the contract a technical correction included in the tax_reform_act_of_1986 changed this regime to the and year recapture regime this correction was not explained in the conference_report but was in the senate report which described present law almost verbatim plr-135419-09 from the earlier committee reports and in putting the correction in context explained that the bill retains the requirement that in determining whether the contract continues to qualify as life_insurance proper adjustments be made when future_benefits are changed t he bill provides that if there is a change in the benefits under or in other terms of the contract which was not reflected in any previous determination or adjustment made under the definitional section there shall be proper adjustments in future determinations made under the definitional section s rep no pincite see also staff of jt comm on taxation 99th cong explanation of technical corrections to the tax_reform_act_of_1984 and other recent tax legislation pincite comm print a seminal article on sec_7702 explains that the definition’s r eliance on limitations based on the contractual benefits specified when the contract is issued made it necessary to devise a mechanism to cope with changes in the terms of the contract the mechanism used to adjust the limitations to changes in the contractual terms are the adjustment rules pike reflections on the meaning of life an analysis of sec_7702 and the taxation of cash_value life_insurance tax l rev pike notes that t he threshold question in examining this provision is whether an event has occurred that triggers an adjustment although the terms ‘benefits under the contract’ and ‘other terms of the contract’ are not defined in the statute the legislative_history provides several illustrations of adjustment-triggering events id pincite therefore t he adjustment rule trigger is not limited to changes in the basic death_benefit an adjustment is required to reflect any ‘change in the benefits under or in other terms of the contract ’ consequently an increase in the endowment benefit or any qualified additional benefit also triggers an adjustment id pincite pike observes that i t is unclear whether company initiated changes should never trigger adjustments for contracts subject_to the guideline_premium_limitation because the payment of excess_interest interest_paid at a rate in excess of the contractually guaranteed rate does not trigger an adjustment no adjustment should result from a short-term guarantee of a higher interest rate it is arguable however that increases in the permanent contractually guaranteed rate of interest or reductions in the mortality charges should trigger an adjustment at a minimum where the timing and magnitude of the changes are sufficient to call into question the original contractual terms an adjustment is appropriate id pincite n plr-135419-09 moreover pike notes i t is unclear whether an adjustment is required when a policyholder withdraws cash from a contract under which the net amount_at_risk remains constant under such a contract the cash withdrawal reduces both the current death_benefit and the endowment benefit an adjustment should be required unless the reduced level of benefits was previously reflected in the computations of the tax net single premiums and the guideline premiums if the tax net_single_premium or the guideline premium would have been smaller if the post-withdrawal endowment benefit had been provided at all prior times then the change was not reflected in the prior computations id pincite n it has been said that adjustment events can include long-term changes to basic interest and other guarantees desrochers et al life_insurance modified endowments under sec_7702 and 7702a see also desrochers the definition of life_insurance under sec_7702 of the internal_revenue_code soc’y actuaries transactions with regard to the interest rate used to determine compliance with sec_7702 the house report explains in the context of the cash_value_accumulation_test that t o be consistent with the definitional test reference to the cash_surrender_value the ‘rate or rates guaranteed on issuance of the contract’ means the interest rate or rates reflected in the contract’s nonforfeiture values with respect to variable_contracts that do not have a guaranteed rate then the 4-percent rate shall apply h_r rep no pt ii pincite the senate committee print is substantially the same t o be consistent with the definitional test reference to the cash_surrender_value the ‘rate or rates guaranteed on the issuance of the contract’ means the interest rate or rates reflected in the contract’s nonforfeiture values assuming the use of the method in the standard nonforfeiture law with respect to variable_contracts that do not have a guaranteed rate the percent rate shall apply senate committee print supra pincite the defra blue_book helps explain this plr-135419-09 in making the determination that a life_insurance_contract meets the cash_value_accumulation_test the net_single_premium for any time is computed using a rate of interest that is the greater of an annual effective rate of percent or the rate or rates guaranteed on the issuance of the contract to be consistent with the definitional test reference to the cash_surrender_value the ‘rate or rates guaranteed on the issuance of the contract’ means the interest rate or rates reflected in the contract’s nonforfeiture values ie the cash_surrender_value assuming the use of the method in the standard nonforfeiture law with respect to variable_contracts that do not have a guaranteed rate the 4-percent rate applies the statutory reference to the rate or rates of interest guaranteed on the issuance of the contract serves the same role as the ‘minimum rate or rates’ referred to in the tefra provision of sec_101 thus although the company may guarantee a higher interest rate from time to time either by contractual declaration or by operation of a formula or index generally the rate guaranteed on the issuance of the contract refers to the floor rate that is the rate below which the interest credited to the cash_surrender_value of the contract cannot fall the statutory reference to ‘rate or rates’ recognizes that a contract may guarantee different floor rates for different periods of the contract although each is guaranteed upon issuance and remains fixed for the applicable_period for the life of the contract likewise the reference to multiple rates indicates that the comparison of the statutorily prescribed rate eg percent or percent to the rate or rates guaranteed and the selection of the higher one must be done for each period for which an interest rate is guaranteed in the cash_surrender_value specifically it should be noted that when the initial interest rate guaranteed to be credited to the contract is in excess of the generally applicable floor rate assumed in the contract the higher initial interest rate is the rate guaranteed on the issuance of the contract with respect to the initial period of that guarantee de_minimis guarantees ie guarantees of short duration in excess of the otherwise assumed floor rates may be ignored in certain situations generally short-term guarantees extending no more than one year will be de_minimis in the calculation of the guideline_level_premium but will not be considered de_minimis in the calculation of the guideline_single_premium or the net_single_premium the rate or rates guaranteed on issuance of the contract may be explicitly stated in the contract or may be implicitly stated by a guarantee of particular cash surrender values defra blue_book supra pincite footnote sec_51 and sec_52 omitted footnote is significant stating that d iscussions herein relating to the determination of the ‘rate or plr-135419-09 rates guaranteed on issuance of the contract are generally applicable for purposes of computing definitional test limitations under both the cash_value_accumulation_test and the guideline premium cash_value_corridor_test accordingly it would appear that where the contract does not state a specific guaranteed rate the appropriate statutory rate is to be used as noted by a commentator a contract in which the minimum rate is set by an index would generally use the minimum guaranteed basis except that the initial index value would be used if it is higher than the statutory and contractual minimum desrochers the definition of life_insurance under sec_7702 of the internal_revenue_code soc’y actuaries transactions for variable_contracts i n determining the net_single_premium under the cash_value_accumulation_test a percent interest rate is to be used if no nonforfeiture interest rate is provided similarly for the guideline premium test a percent rate applies in the determination of the guideline_single_premium id pincite the addition of investment option having a duration longer than one year in essence effects a long-term change in a guaranteed rate of interest the rate of interest guaranteed for investment option number percent is less than the statutorily prescribed effective annual rates of and percent the actual rate of interest will be determined by a formula tied to an index though the contract is not a variable_contract the statutorily prescribed rates should be used with reference to investment option because the rate guaranteed under this option is less than the statutorily prescribed rates because the sec_7702 premium limitations were determined using the statutorily prescribed rates the addition of investment option is not a change in the benefits or other terms of the contract which were not reflected in any previous determination or adjustment hence the addition of investment option is not an adjustment event under sec_7702 issue c sec_7702a material_change sec_7702a provides that if there is a material_change in the benefits under or in other terms of the contract which was not reflected in any previous determination under sec_7702a then the contract shall be treated as a new contract entered into on the day on which such material_change takes effect and appropriate adjustments shall be made in determining whether such contract meets the 7-pay test to take into account the cash_surrender_value under the contract sec_7702a provides that except as otherwise provided in sec_7702a terms used in sec_7702a shall have the same meaning as when used in sec_7702 we are concerned with whether the addition of investment option implicates sec_7702a in this connection the triggering language of sec_7702a is identical to that in sec_7702 with the addition of the adjective material before change sec_7702a provides that material_change includes any increase in the death_benefit under the contract or any increase in or addition of a qualified additional plr-135419-09 benefit the term does not include an increase attributable to the payment of necessary premiums or to the crediting of interest or other earnings including policyholder dividends in respect of the necessary premium and any cost-of-living increase provided in regulations the goal of sec_7702a is to minimize the investment use of life_insurance to this end the 7-pay test requires that the amount of the death_benefit for the first years of the contract must be greater than the death_benefit that is required under present law for the same premium dollar by requiring increased insurance protection during the first years of the contract the committee believes that the purchase of life_insurance as an investment vehicle will be reduced h_r rep no pincite in explaining the material_change provision this report uses an example of an increased death_benefit the essence of the material_change rule is that when the essential elements of a contract are changed in a manner that affects the premium limitation adjustments and testing need to be completed here the addition of investment option does not involve a change in any benefit or other term of the contract which was not reflected in any previous determination under sec_7702a hence it is not a material_change to the contract we rule as follows ruling sec_1 the addition of investment option to the contract will not cause the contract to have a new issue_date for any purposes under sec_7702 nor require a restart in the computation of its sec_7702 limits or a new test period under sec_7702 eg for the year periods in sec_7702 the addition of investment option to the contract will not cause the contract to be treated as a new contract resulting from a deemed exchange for purposes of determining its limits under sec_7702a the addition of investment option to the contract will not cause the contract to have a new issue_date for any purposes under sec_807 nor otherwise cause taxpayer to have to recompute its tax_reserves for the contract the addition of investment option to the contract will not require an adjustment in the computation of the contract’s guideline single or level premium limits under sec_7702 plr-135419-09 the addition of investment option to the contract will not require an adjustment in the computation of the contract’s cash_value_accumulation_test limits under sec_7702 and the addition of investment option to the contract will not require a recomputation of the contract’s sec_7702a limits under sec_7702a caveats 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 no ruling has been requested and no opinion is expressed concerning whether the contract qualifies as a life_insurance_contract pursuant to sec_7702 the treatment of any rider thereto or concerning the treatment of the contract under subchapter_l of the code 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 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely s john e glover senior counsel branch office of associate chief_counsel financial institutions products


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 b03 plr-126728-08 date date legend x a b -------------------------------------------- ----------------------- ------------------- ------------------------- -------------------------- ------------------------- date ------------------ state ---------- dear ----------------- this letter responds to a letter dated date and subsequent correspondence written on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts x was formed as a limited_liability_company under state law on date x filed form_8832 entity classification election to be treated as an association_taxable_as_a_corporation effective date x’s members a and b also intended for x to be an s_corporation effective date however x’s form_2553 election by a small_business_corporation was not timely filed x requests a ruling that it will be recognized as an s_corporation effective date plr-126728-08 law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides that an election under sec_1362 may be made by a small_business_corporation for any taxable_year at any time during the preceding_taxable_year or at any time during the taxable_year and on or before the 15th day of the third month of the taxable_year sec_1362 provides that if a small_business_corporation makes an election under sec_1362 for any taxable_year and the election is made after the 15th day of the third month of the taxable_year and on or before the 15th day of the third month of the following taxable_year then the election is treated as made for the following taxable_year sec_1362 provides that if an election under sec_1362 is made for any taxable_year determined without regard to sec_1362 after the date prescribed by sec_1362 for making the election for the taxable_year or no election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for the taxable_year and sec_1362 shall not apply conclusion based solely on the facts submitted and the representations made we conclude that x has established reasonable_cause for failing to make an s_corporation_election in a timely manner thus we conclude that x is eligible for relief under sec_1362 accordingly if x makes an election to be an s_corporation effective date by filing a completed form_2553 with the appropriate service_center within days from the date of this letter then such election will be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center a copy is enclosed for that purpose except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether x is otherwise eligible to be an s_corporation for federal tax purposes in accordance with a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative plr-126728-08 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination sincerely s mary beth carchia senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures a copy of this letter a copy for sec_6110 purposes cc