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 4-plr-110574-99 date date beneficiary trustee trust agreement third amendment court city state county statute dear we received a letter dated date and subsequent correspondence from your authorized representative requesting rulings concerning the possible estate_tax consequences resulting from the proposed modifications to twelve trusts according to the facts submitted beneficiary is the current sole income_beneficiary of twelve trusts created prior to date this ruling_request addresses one of these trusts trust trust was fully funded at the time it was established and no additions have been made to trust under article fourth of trust all trust income is to be paid to beneficiary after beneficiary attains age in addition pursuant to article fifth the trustee may distribute to beneficiary as much of the principal as the trustee in its judgment deems necessary or advisable to assure the care comfort maintenance and medical attention of beneficiary on the death of plr-110574-99 beneficiary the trust corpus is to be held in further trust for the benefit of beneficiary’s issue trustee is currently acting as the trustee of all twelve trusts under article third the powers of the trustee are at all times subject_to the continued direction and control of a board_of governors under article eleventh in the event the trustee resigns the board_of governors has the right by majority vote to transfer the administration of trust to a corporate trustee of good standing or if not so designated the resigning trustee may appoint as its successor a bank or trust company doing business in county and authorized under the laws of state to execute trusts the resigning trustee is to transfer to its successor the entire estate then remaining and the successor trustee shall assume all the obligations of the resigning trustee taxpayer represents that the board_of governors no longer functions certain disputes have arisen between beneficiary and trustee regarding the management of trust in order to resolve these disputes trustee and beneficiary entered into the agreement with respect to the twelve trusts paragraph a of the agreement provides that at any time during the term of any trust upon the written request of the current income_beneficiary and the adult remainder beneficiary a new trustee designated by the current income_beneficiary and the adult remainder beneficiary is to be substituted as the trustee of the trust provided that any such new trustee is a corporation that has been or its parent company has been in existence at least ten years is a bank or trust company then doing business in city state and that is authorized under the laws of state to execute trusts has a net_worth including the net_worth of any parent company in excess of two hundred million dollars and is not related or subordinate to any beneficiary within the meaning of sec_672 of the internal_revenue_code upon any resignation by any existing trustee of a_trust or any removal thereof other than pursuant to the immediately preceding sentence a new trustee designated by the current income_beneficiary and the adult remainder beneficiary shall be substituted as the new trustee of such trust provided that such new trustee meets the requirements set forth in items and above paragraph a of the agreement provides that the current income_beneficiary shall have the right from time to time to have one or more investment managers or submanagers manage the investment of a portion of the assets the current income_beneficiary shall also have the right from time to time to transfer investment and management of certain assets from any submanager or investment manager then investing or managing such assets directly to another submanager or investment manager or to return such assets to the trustee for investment or management paragraph b provides that all assets managed invested or administered by the trustee shall be managed invested and administered in accordance with certain investment policies all assets managed invested or administered by an investment manager or submanager shall be managed invested and administered in accordance plr-110574-99 with certain investment guidelines the current income_beneficiary may from time to time propose modifications to the investment guidelines by written notice to the trustee and any investment manager or submanager each trustee investment manager or submanager shall have the right to approve such modification such approval not to be unreasonably withheld paragraph c provides that a submanager is an agent of the trustee that has been designated and selected by the current income_beneficiary and to which investment functions have been delegated pursuant to state statute the current income_beneficiary shall have the right to propose potential submanagers from time to time for approval by the trustee such approval not to be unreasonably withheld paragraph d provides that an investment manager is a third party fiduciary not an agent of the trustee that has been designated and selected by the current income_beneficiary and to which investment administration and fiduciary responsibilities for certain trust assets are transferred with the trustee merely remaining as custodian of such assets with no fiduciary duties except to the extent provided by the provisions of state statute any investment manager must meet the requirements to become a trustee that is an investment manager must be a corporation that has been or its parent company has been in existence at least ten years a bank or trust company then doing business in city state and that is authorized under the laws of state to execute trusts have a net_worth including the net_worth of any parent company in excess of two hundred million dollars and not be related or subordinate to any beneficiary within the meaning of sec_672 of the internal_revenue_code paragraph a of third amendment to agreement provides that notwithstanding any other provision of the agreement the trust instrument or applicable law to the contrary in exercising its rights and powers under paragraph sec_4 c and d of the agreement with respect to the selection removal and replacement of investment managers and submanagers the current income_beneficiary shall be deemed to be acting in the role of a fiduciary as to all beneficiaries of trust with respect to which any such rights or powers are exercised and shall be subject_to the uniform prudent investor act of state and each investment manager and submanager shall at all times be deemed to be a fiduciary of a_trust for which it administers assets shall be subject_to the uniform prudent investor act of state and shall not be a_related_or_subordinate_party to the current income_beneficiary as defined in sec_672 determined as if the current income_beneficiary was a grantor of the trust you represent that no additions of assets actual or constructive have been made to trust subsequent to date in addition no modifications or amendments other than the proposed modifications have been made to any of the trusts in addition all trusts were irrevocable as of the date of creation prior to date the agreement has been approved by court and you propose to have the third amendment approved by court plr-110574-99 you have requested the following rulings modification of trust in accordance with the agreement and the court order will not affect the exempt status of trust for generation-skipping_transfer_tax purposes the power to remove and replace the trustee and to institute investment guidelines and policies in accordance with the agreement and the court order will not cause inclusion of trust in the gross_estate of beneficiary issue sec_2601 provides that a tax is imposed on every generation-skipping_transfer under a of the tax_reform_act_of_1986 the act the tax generally applies to any generation-skipping_transfer made after date the date of enactment of the act however b a of the act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations provide that the gst tax shall not apply to any gst under a_trust that was irrevocable on date but only to the extent that such transfer is not made out of any addition actual or constructive to the trust after date or out of income attributable to corpus so added a modification of a generation-skipping_trust that is otherwise exempt under the act and the regulations will generally result in a loss of its exempt or grandfathered status if the modification changes the quality value or timing of any powers beneficial_interest rights or expectancies originally provided for under the terms of the trust based on the facts presented and representations made we conclude that the proposed modifications to trust are administrative in nature and will not result in any change in the quality value or timing of any beneficial_interest in trust consequently trust will continue to be exempt from the gst tax therefore provided there are no additions constructive or otherwise to trust neither distributions from nor the termination of trust will be subject_to the gst tax under sec_2601 issue sec_2041 provides that the value of the gross_estate shall include the value of all property to the extent of any property with respect to which the decedent has at the time of 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 that 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 sec_2041 provides that a general_power_of_appointment is a power that is exercisable in favor of the decedent the decedent’s creditors or the creditors of plr-110574-99 the decedent’s estate however a power to consume invade or appropriate property for the benefit of the decedent that is limited by an ascertainable_standard relating to the health education support or maintenance of the decedent shall not be deemed a general_power_of_appointment sec_20_2041-1 of the estate_tax regulations provides that a power in a decedent to remove or discharge a trustee and appoint himself may be a power_of_appointment for example if under the terms of a_trust instrument the trustee or his successor has the power to appoint the principal of the trust for the benefit of individuals including himself and the decedent has the unrestricted power to remove or discharge the trustee at any time and appoint any other person including himself the decedent is considered as having a power_of_appointment revrul_95_58 1995_2_cb_191 revoking revrul_79_353 1979_2_cb_325 holds that a decedent-settlor’s reservation of an unqualified power to remove a trustee and appoint an individual or corporate successor trustee that is not related or subordinate to the decedent within the meaning of sec_672 is not considered a reservation of the trustee’s discretionary powers of distribution over the property transferred by the decedent-settlor to the trust for purposes of sec_2036 and sec_2038 sec_672 defines the term related_or_subordinate_party to mean any nonadverse_party who is the grantor’s spouse if living with the grantor or any one of the following the grantor’s father mother issue brother or sister an employee of the grantor a corporation or any employee of a corporation in which the stock holdings of the grantor and the trust are significant from the viewpoint of voting control a subordinate employee of a corporation in which the grantor is an executive in the present case the agreement gives beneficiary of trust the power to remove and replace the trustee to propose investment guidelines and policies and to recommend investment managers and submanagers the powers of the beneficiary the investment managers and the submanagers are exercisable in a fiduciary capacity any trustee investment manager or submanager may not be related or subordinate to any beneficiary of trust within the meaning of sec_672 accordingly beneficiary will not be treated as holding a general_power_of_appointment solely as a result of retaining the removal and replacement power see revrul_95_58 therefore the possession of the power will not cause trust to be included in beneficiary’s gross_estate except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under the cited provisions or any other provisions of the code this ruling is based on the facts and applicable law in effect on the date of this letter if there is a change in material fact or law local or federal before the transactions considered in the ruling take effect the ruling will have no force or effect if the taxpayer is in doubt whether there has been a change in material fact or law a request for reconsideration of this ruling should be submitted to plr-110574-99 this office 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 in accordance with a power_of_attorney on file with this office a copy of this ruling is being sent to your authorized representative sincerely assistant chief_counsel passthroughs and special industries by george masnik chief branch enclosure copy for sec_6110 purposes


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 b02 plr-127422-05 date date --------------------------------------------------------------------------------------- ein ---------------- ------------------------- --------------------------- -------------------------------------------------- ein ---------------- x ----------------------------------------------------------------------------------------------------------- trust d1 d2 project agency management plan ------------------------------------------------------------------------- agreement --------------------------------------------------------------------------------------------------------- dear -------------- ---------------------------------------------------------- --------------------- --------------------------------------------------------------------------------------- this responds to a letter dated date submitted on behalf of x by its authorized representative requesting rulings under ' and sec_678 of the internal_revenue_code agency is a united_states government agency by record of decision and plan approval dated d1 agency approved an amended plan of operations for project the the information submitted states that x is the developer and operator of project on d2 x and agency entered into agreement to establish additional trust provides that while x is in existence distributions from trust to or at the pursuant to the record of decision and plan approval x is required to set_aside plr-127422-05 plan of operations includes a management plan to provide for monitoring and mitigation of potential groundwater impacts from project and invest funds to ensure sufficient funds for implementing management plan in order to satisfy this obligation x at agency’s request created and funded trust dated d2 all income as well as principal of trust is held to satisfy x’s legal_obligation to monitor and mitigate potential groundwater impacts from project requirements for administering and updating trust and management plan consistent with the terms of the record of decision and plan approval direction of agency are to be used exclusively in accordance with the management plan and all distributions are subject_to the agreement upon termination of trust the remaining trust assets if any are required to be distributed to x or if so directed by agency directly to a person or entity other than x on behalf of x for use in accordance with the management plan and the agreement terminate trust trust provides that if x is no longer in existence at any time during any calendar_year agency has the unrestricted power to withdraw from trust all trust income earned during that year including capital_gain income remaining trust corpus and income will be distributed to agency grantor or another person shall be treated as the owner of any portion of a_trust there shall be included in computing the taxable_income and credits of that person those items of income deduction and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account in computing taxable_income or credits against the tax of an individual of a_trust whether or not he is treated as such under sec_674 whose income without the approval or consent of any adverse_party is or in the discretion of the grantor or a nonadverse_party or both may be distributed to the grantor or held or accumulated for future distribution to the grantor sec_677 provides that the grantor shall be treated as the owner of any portion trust provides that upon termination of trust if x is no longer in existence the trust terminates when the trustee receives written instructions from agency to sec_671 provides that where it is specified in sec_673 through that the additionally the letter submitted by your authorized representative on your under the terms of trust all income as well as principal of trust is held to satisfy plr-127422-05 sec_1_677_a_-1 of the income_tax regulations provides that under sec_677 a grantor is in general treated as the owner of a portion of a_trust whose income is or in the discretion of the grantor or a nonadverse_party or both may be applied in discharge of a legal_obligation of the grantor x’s legal_obligation to monitor and mitigate potential groundwater impacts and upon termination of trust any remaining assets of trust will be distributed to x accordingly x is the grantor and the owner of the trust under sec_677 and sec_1_677_a_-1 x shall include in computing its taxable_income and credits all items of income deduction and credits against tax of the trust to the extent that such items would be taken into account in computing taxable_income or credits against the tax of x behalf requested a ruling that if x is no longer in existence agency will be treated as the owner of trust under sec_678 on date an attorney from this office informed your authorized representative that this office has declined to rule on whether agency will be treated as the owner of trust under sec_678 federal tax consequences of the facts described above under any other provision of the code no opinion is expressed on whether any amounts paid_by trust are deductible by x nor is any opinion expressed on whether any such amounts should be capitalized provides that it may not be used or cited as precedent being sent to x’s authorized representatives except as specifically set forth above no opinion is expressed concerning the pursuant to a power_of_attorney on file with this office a copy of this letter is this ruling is directed only to the taxpayer requesting it sec_6110 sincerely j thomas hines chief branch associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division uil jul jep aat legend taxpayer a taxpayer b son 8s ira x ira y broker b this is in response to the date letter submitted by your authorized representatives on your behalf in which you request a series of letter rulings under sec_401 and sec_408 of the internal_revenue_code your letter of date was supplemented by a letter of date the following facts and representations support your ruling_request taxpayer a whose date of birth was june died on april taxpayer a was survived by his wife taxpayer b at the time of his death taxpayer a maintained ira x and ira y individual_retirement_arrangements with broker b taxpayer a had reached the required_beginning_date for distributions from iras prior to his death taxpayer a was receiving the distributions required under code sec_401 from ira x and ira y since then the custodian has continued to make the required distributions article v sec_5 of the broker b individual_retirement_account plan agreement provides that if no beneficiary is named the term beneficiary shall mean the decedent's_estate taxpayer a died without naming a beneficiary of either his ira x or his ira y taxpayer a’s will provides that taxpayer b is the sole executor of his estate taxpayer a’s will was admitted to page probate on june and letters testamentary were issued to taxpayer b article sixth e of taxpayer a’s will authorizes the executor to make distributions in cash or in_kind or partly in each and to allocate assets to any share different from the assets allocated to any other share as the executor determines to be for the best interest of the beneficiaries articie first of taxpayer a’s will provides son s a bequest of shares of stock in two corporations the bequest is not to exceed a specified dollar amount the balance of the stock in those two corporations is bequeathed to taxpayer b article third of the will leaves the residue of the estate to taxpayer b form_706 united_states estate_tax_return for taxpayer a’s estate shows the value of the gross_estate at the date of death as ira x as dollar_figure bequests etc to surviving_spouse shows the amount of the bequests as dollar_figure including ira x and ira y and the value of ira y as schedule m of form_706 schedule of form_706 shows the value of the ira x and ira y accounts have not been rolled over into other iras since taxpayer a's death taxpayer b as executor of the estate of taxpayer a will cause the ira x and ira y proceeds to be distributed to the estate whereupon she will allocate the proceeds of iras x and y to her share of the estate in accordance with her right as residuary beneficiary under the will taxpayer b will request distribution of the ira x and ira y proceeds pursuant to said request she will in her capacity as residuary beneficiary roll over the ira proceeds to an ira in her own name based on the above facts and representations you through your authorized representative request the following letter rulings taxpayer b may roll over ira x and ira y used to satisfy the bequest to her under article third of the will of taxpayer a into an ira set up and maintained in her name and the rollover will not result in income to either the estate or taxpayer b in the year of the rollover under sec_408 of the code after the rollover taxpayer b’s ira will be subject_to the distribution_requirements of sec_401 rather than those of sec_401 ira x and ira y used to satisfy the bequest to taxpayer b under article third of the will of taxpayer a are not inherited iras as to taxpayer b within the meaning of sec_408 of the code with respect to your ruling requests code sec_408 provides that except as otherwise provided in this subsection any amount_paid or distributed out of an individual_retirement_plan shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 code sec_408 provides that sec_408 does not apply to a rollover_contribution if such contribution satisfies the requirements of sec_408 and d b page code sec_408 provides that sec_408 does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the account is maintained if the entire amount received including money and any other_property is paid into an ira other than an endowment_contract for the benefit of such individual not later than the 60th day after the day on which he receives the payment or distribution code sec_408 provides in pertinent part that in the case of an inherited ira sec_408 shall not apply to any amount received by an individual from such account and no amount transferred from such account to another jra shall be excluded from income by reason of such transfer and such inherited account shall not be treated as an ira for purposes of determining whether any other amount is a rollover_contribution code sec_408 provides that an ira shall be treated as inherited if the individual for whose benefit the account is maintained acquired such account by reason of the death of another individual and such individual was not the surviving_spouse of such other individual thus pursuant to code sec_408 c ii a surviving_spouse who acquires ira proceeds from and by reason of the death of her husband may elect to treat those ira proceeds as her own and roll them over into her own ira code sec_408 provides that under regulations prescribed by the secretary rules similar to the rules of sec_401 and the incidental death_benefit requirements of sec_401 shall apply to the distribution of the entire_interest of an individual for whose benefit an ira trust is maintained on date final income_tax regulations were published in the federal_register with respect to code sec_401 and sec_408 see also 2002_19_irb_852 date sec_1_408-8 of the final regulations question and answer provides that a surviving_spouse of an ira owner may elect to treat the spouse’s entire_interest as a beneficiary in an individual's ira as the spouse’s own ira if such an election is made the spouses interest in the account is subject_to the distribution_requirements of sec_401 rather than those of sec_401 in order to make this election the spouse must be the sole beneficiary of the ira and have an unlimited right to withdraw amounts from the ira if a_trust is named as beneficiary of the ira this requirement is not satisfied even if the spouse is the sole beneficiary of the trust although not specifically stated in the final regulations a surviving_spouse may not elect to treat the ira of a decedent as his her own if an estate is the beneficiary of the ira even if the spouse is both the sole executor of the estate and also the sole beneficiary of the estate the preamble to the final regulations provides in relevant part that a surviving_spouse who actually receives a distribution from an ira is permitted to roll that distribution over into his her own ira even if the spouse is not the sole beneficiary of the deceased's ira as long as the rollover is accomplished within the requisite day period a rollover may be accomplished even if ira assets pass through either a_trust or an estate if the surviving_spouse rolls over the distribution to an ira in his her name the ira is subject_to the distribution_requirements of sec_401 of the code rather than sec_401 sec_408 of the code provides that rollover treatment does not apply to any amount to the extent such amount is required to be distributed under subsection a or b in this case the ira x and ira y account balances are payable to taxpayer a’s estate pursuant to the terms of the ira agreement taxpayer b as executor of the estate will cause the page ira x and ira y proceeds to be distributed to the estate whereupon she will allocate the proceeds to her share of the estate in accordance with her right under the will taxpayer b will request distribution of the ira x and ira y proceeds be made to her as residuary beneficiary under taxpayer a’s will pursuant to said request she will in her capacity as residuary beneficiary under taxpayer a’s will roll over the ira proceeds to an ira in her own name said rollover will occur within days of the date the ira amounts are distributed from ira x under the facts stated above taxpayer b is to be treated as the payee and beneficiary of ira x and ira y for purposes of code sec_408 and sec_408 and as the ira owner of her new ira for purposes of sec_401 thus with respect to your ruling requests we conclude as follows taxpayer b may roll over ira x and ira y used to satisfy the bequest to her under article third of the will of taxpayer a into an ira set up and maintained in her name and the rollover will not result in income to either the estate or taxpayer b in the year of the rollover under sec_408 of the code after the rollover taxpayer b’s ira will be subject_to the distribution_requirements of sec_401 rather than those of sec_401 ira x and ira y used to satisfy the bequest to taxpayer b under article third of the will of taxpayer a are not inherited iras as to taxpayer b within the meaning of sec_408 of the code this ruling letter assumes that ira x and ira y are qualified under code sec_408 at all times relevant thereto it also assumes that the rollover ira to be set up by taxpayer b will also meet the requirements of code sec_408 at all times relevant thereto finally it assumes that taxpayer b's rollover of the ira x and ira y distributions will be made within the time frame referenced in code sec_408 pursuant to code sec_408 this letter_ruling does not authorize the rollover of any distribution from either ira x or ira y required under code sec_401 pursuant to a power_of_attorney on file in this office a copy of this letter_ruling is being sent to your authorized representative the author of this ruling is se t ep ra t3 who may be reached at sincerely yours dion ances v sloa employee plang v ager technical group enclosures deleted copy of letter_ruling form_437


t c memo united_states tax_court law offices of michael b l hepps petitioner v commissioner of internal revenue respondent docket no filed date michael barry loui hepps for petitioner james b urie for respondent memorandum opinion marvel judge this matter is before the court on respondent’s motion for judgment on the pleadings under rule a motion because petitioner attached exhibits to its response to respondent’s motion that require us to consider 1all rule references are to the tax_court rules_of_practice and procedure and all section references are to the internal_revenue_code in effect for the years in issue matters outside the pleadings we shall treat respondent’s motion as a motion for summary_judgment under rule see rule b summary_judgment is a procedure designed to expedite litigation and avoid unnecessary time-consuming and expensive trials fla peach corp v commissioner 90_tc_678 summary_judgment may be granted with respect to all or any part of the legal issues presented if the pleadings answers to interrogatories depositions admissions and any other acceptable materials together with the affidavits if any show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law rule a and b see 98_tc_518 affd 17_f3d_965 7th cir 90_tc_753 the moving party bears the burden of proving that there is no genuine issue of material fact and factual inferences will be read in a manner most favorable to the party opposing summary_judgment 85_tc_812 background this is an appeal from respondent’s determination that petitioner is not entitled to an abatement of interest on employment_taxes under sec_6404 for the tax periods ending date date date date date date date and date petitioner’s principal_place_of_business was located in philadelphia pennsylvania when its petition in this case was filed in date petitioner discovered that its employment_taxes for the periods in issue had not been paid to the internal_revenue_service the service due to an embezzlement upon discovering the embezzlement petitioner and or its principal michael b l hepps entered into an agreement installment_agreement with the service to make periodic_payments on the outstanding employment_tax liability the periodic_payments were derived from and depended upon payments petitioner or petitioner’s principal received monthly from a third party and the service was aware of this fact on some date after the installment_agreement was implemented the service levied upon the third party who allegedly owed money to petitioner or petitioner’s principal petitioner contends that the seizure was made in violation of an understanding it had with the service the seizure resulted in the third party whose payments were funding the installment_agreement terminating its relationship with petitioner and or petitioner’s principal as a result petitioner was no longer 2the record is unclear as to whether the third party was obligated to pay petitioner or petitioner’s principal able to make the installment payments petitioner immediately contacted the service to negotiate lower periodic_payments despite several letters and telephone calls from petitioner to the service however petitioner’s collection matter was never formally resolved by a closing_agreement offer_in_compromise or in any other manner because petitioner maintained that the interest in question is attributable to the service’s wrongful_levy petitioner filed a request for an abatement of interest on the unpaid employment_taxes under sec_6404 on date respondent issued a full disallowance-- final_determination final_determination in which he denied petitioner’s request for abatement on the grounds that sec_6404 does not authorize the internal_revenue_service to abate the assessment of interest on employment_taxes however respondent’s final_determination did not discuss or apparently consider the possible application of sec_6404 to petitioner’s request for abatement on date petitioner’s imperfect petition seeking a review of respondent’s failure to abate interest under sec_6404 was filed because the petition did not meet the 3the record for purposes of respondent’s motion does not contain a copy of petitioner’s request for abatement and does not disclose when petitioner requested the abatement of interest requirements of rule b we ordered petitioner to file a proper amended petition by date on date petitioner’s amended petition was filed on date respondent’s motion was filed in his motion respondent contends that his determination not to abate interest was not an abuse_of_discretion because under sec_6404 sec_6211 and sec_6212 and 112_tc_19 he lacks the authority to abate assessments of interest on employment_taxes respondent also contends that sec_6404 does not apply because petitioner has not suggested that any of the interest assessed was excessive or miscalculated on date petitioner’s response opposing respondent’s motion was filed in its response petitioner contends that numerous representatives of the government have indicated that what occurred was entirely the government’s fault and that the interest should be abated and that the service ought to be held to their word petitioner also denied respondent’s contention that sec_6404 did not apply this case was scheduled for hearing at the court’s date philadelphia pennsylvania trial session counsel for both parties appeared and presented oral arguments on the motion 4respondent does not dispute the timeliness of petitioner’s amended petition among the arguments petitioner presented was an argument that respondent should have abated interest under sec_6404 counsel for respondent argued at the hearing that sec_6404 did not apply because the interest at issue was not erroneously or illegally assessed citing sec_6404 nor was it excessive in amount citing sec_6404 neither party brought to the court’s attention our memorandum opinion in h h trim upholstery co v commissioner tcmemo_2003_9 discussion i abatement of interest under sec_6404 a sec_6404 sec_6404 provides in pertinent part that the commissioner may abate an assessment of interest on a any deficiency attributable in whole or in part to any unreasonable error or delay by an officer_or_employee of the internal_revenue_service acting in his official capacity in performing a ministerial or managerial act or b any payment of any_tax described in sec_6212 to the extent that any unreasonable error or delay in such payment is attributable to such officer_or_employee being erroneous or dilatory in performing a ministerial or managerial act sec_6211 defines a deficiency as the amount by which the tax imposed by subtitle a or b or chapter or of the internal_revenue_code exceeds the amount of such tax shown on the taxpayer’s return and the amount of such tax previously assessed sec_6212 authorizes the secretary5 to issue notices of deficiency with respect to taxes imposed by subtitle a or b or chapter or of the code these subtitles and chapters of the code cover taxes on income estates gifts certain qualified_pension plans and qualified_investment entities the code provisions related to employment_taxes are contained in subtitle c the commissioner’s authority to abate an assessment of interest involves the exercise of discretion and we must give due deference to the commissioner’s discretion woodral v commissioner supra pincite 91_tc_1079 in order to prevail petitioner must prove that the commissioner abused his discretion by exercising it arbitrarily capriciously or without sound basis in fact or law woodral v commissioner supra pincite mailman v commissioner supra pincite see also sec_6404 rule a in woodral v commissioner supra pincite we held that the commissioner lacks authority under sec_6404 to abate an assessment of interest on employment_taxes because neither sec_6211 nor sec_6212 mentions subtitle c we also 5the term secretary means the secretary_of_the_treasury or_his_delegate sec_7701 and the term or_his_delegate means any officer employee or agency of the treasury_department duly authorized by the secretary_of_the_treasury directly or indirectly by one or more redelegations of authority to perform the function mentioned or described in the context sec_7701 held that because the commissioner has no authority to abate assessments of interest on employment_taxes under sec_6404 he cannot commit an abuse_of_discretion by refusing to do so because a person with no discretion simply cannot abuse it id because our opinion in woodral is controlling we hold that respondent is entitled to summary_judgment on petitioner’s claim_for_abatement under sec_6404 respondent has no authority under sec_6404 to abate the interest assessed on petitioner’s unpaid employment_taxes and consequently respondent did not abuse his discretion by refusing to abate the interest in this case b sec_6404 petitioner also contends that respondent should have abated interest under sec_6404 we construe petitioner’s argument to be that respondent’s failure adequately to consider sec_6404 precludes the entry of a summary_judgment sec_6404 provides as follows sec_6404 general_rule --the secretary is authorized to abate the unpaid portion of the assessment of any_tax or any liability in respect thereof which-- is excessive in amount or is assessed after the expiration of the period of limitations properly applicable thereto or is erroneously or illegally assessed in woodral v commissioner t c pincite we held that we had jurisdiction under sec_6404 to review the commissioner’s failure to abate interest under all subsections of sec_6404 and that sec_6404 does not limit our jurisdiction to review cases under sec_6404 to those asserting a right to abatement under sec_6404 nevertheless in woodral because the taxpayers did not cite any authority or introduce any evidence to support their claim that the assessments of interest were excessive erroneous or illegal we held that the commissioner did not abuse his discretion by failing to abate the assessments of interest under sec_6404 id pincite in h h trim upholstery co v commissioner tcmemo_2003_9 which we filed on date we held that a taxpayer was entitled to a partial abatement of interest related to the taxpayer’s employment_tax liability because the service in response to the taxpayer’s request for a payoff figure failed to inform the taxpayer of additional interest and an addition_to_tax that had accrued but had not yet been assessed citing woodral v commissioner supra we concluded that the reference in sec_6404 to any_tax included employment_taxes and that the reference in sec_6404 to any liability in respect to the tax includes interest that has accrued on the underlying tax h h trim upholstery co v commissioner supra we then interpreted the term excessive in sec_6404 as it relates to interest to include a concept of unfairness under all of the facts and circumstances id after examining the facts of the case we concluded that petitioner’s employment_tax liability for one of the quarters at issue would have been fully paid on date but for the commissioner’s error that requiring petitioner to pay interest accrued as a result of the commissioner’s error was unfair and that the interest accrual attributable to the commissioner’s error was therefore excessive we held that the commissioner’s determination not to abate interest for the period from date through date was an abuse of the commissioner’s discretion in this case petitioner’s argument is essentially an argument about unfairness petitioner contends that respondent’s error in levying upon money owed to petitioner or to petitioner’s principal caused the third party to terminate its relationship with petitioner and or its principal and deprived petitioner of the income stream that was funding the installment_agreement petitioner also contends that representatives of respondent have acknowledged respondent’s mistake and have even agreed that interest should be abated but have taken the position that no section of the code gives respondent the authority to abate interest under the circumstances of this case respondent not only disputes that any representative has acknowledged interest should be abated but respondent also contends that sec_6404 is not applicable apparently because petitioner did not specifically request relief under sec_6404 in order to grant summary_judgment under rule we must conclude that there is no dispute about a material fact and that the moving party is entitled to a decision as a matter of law we are unable to do so not only is there a dispute about the material facts with respect to the application of sec_6404 but our opinion in h h trim upholstery co v commissioner supra raises the issue of whether respondent improperly failed to consider sec_6404 in determining that petitioner was not entitled to an abatement of interest the opinion in h h trim upholstery co was filed on date respondent’s final_determination was dated june 6respondent’s only contention with respect to sec_6404 is that he did not have to consider it because petitioner did not specifically request relief under sec_6404 we do not believe that respondent’s excuse is adequate petitioner’s petition and its response to the motion allege facts that focus on the unfairness of respondent’s determination not to abate interest even though they do not specifically mention sec_6404 moreover petitioner alleged in his petition that he was entitled to relief under sec_6404 and in his response to the motion he specifically denied respondent’s allegation that sec_6404 did not apply neither party brought the opinion in h h trim upholstery co to our attention in either its motion papers or at the hearing our research has not located any other case that has interpreted sec_6404 and applied it to abate interest on an unpaid employment_tax liability under the circumstances it is reasonable to conclude that neither party has considered how the opinion in h h trim upholstery co might affect the application of sec_6404 to the facts of this case the parties should have the opportunity to develop the facts consider how the memorandum opinion in h h trim upholstery co affects the legal analysis and discuss whether this case may be resolved without the necessity of a trial although we shall deny respondent’s motion with respect to sec_6404 for the reasons stated above we caution petitioner that it has the burden of introducing credible_evidence to establish that the accrual and assessment of some part of the interest at issue in this case was unfair and therefore excessive ii conclusion we shall grant respondent’s summary_judgment motion with respect to petitioner’s abatement claim under sec_6404 7in h h trim upholstery co v commissioner tcmemo_2003_9 the taxpayer proved that the interest that was abated under sec_6404 would not have accrued but for the commissioner’s mistake however because respondent did not adequately consider sec_6404 in making his final_determination that petitioner was not entitled to an abatement of interest under sec_6404 and because there is a dispute regarding the material facts we are unable to conclude that respondent is entitled to summary_judgment with respect to sec_6404 see h h trim upholstery co v commissioner tcmemo_2003_9 to reflect the foregoing an appropriate order will be issued


department of the treasury internal_revenue_service washington d c date number release date cc intl br3 tl-n-7483-99 uilc internal_revenue_service national_office field_service_advice memorandum for kenneth j rubin assistant district_counsel group pennsylvania district philadelphia pa cc ner pen phi from barbara a felker chief cc intl br3 subject this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be used or cited as precedent legend usparent ussub1 ussub2 fsub fcorp1 fcorp2 country x d e year year year tl-n-7483-99 year f g issue for purposes of sec_902 of the internal_revenue_code where fsub settled a year foreign tax controversy by paying additional foreign_income_tax in year must fsub adjust its pools of post-1986_undistributed_earnings and post-1986_foreign_income_taxes in year or may usparent recompute those pools for year and claim a refund of u s tax attributable to additional deemed-paid foreign tax_credits based on the recomputed year pools conclusion because the year taxes accrued and paid in year differ from the amounts claimed in year as credits under sec_902 of the code by fsub’s u s shareholder there has been a foreign_tax_redetermination for purposes of sec_905 and sec_1_905-3t and d since none of the exceptions of sec_1_905-3t and applies fsub must adjust its pools of post- undistributed_earnings and post-1986_foreign_income_taxes in year usparent may not redetermine its u s tax for year facts usparent ussub1 ussub2 and other affiliates filed a consolidated federal_income_tax return for year a taxable_year beginning before date in that year ussub1 owned of the stock of ussub2 which owned of the stock of fsub a country x corporation in year the government of country x sold the entire_interest in fcorp1 to fsub and fcorp2 a foreign_corporation unrelated to fsub fcorp2 was owned by a u s_corporation fsub and fcorp2 each received d ownership of fcorp1 the sale was contingent upon fsub and fcorp2 each selling more than half of its newly acquired interest in fcorp1 to country x citizens or entities pursuant to this requirement in a series of sales beginning in year and continuing into year fsub and fcorp2 each sold equivalent amounts of shares in fcorp1 so that their individual ownership after the series of sales was completed was equal to e that amount was more than and less than of the stock of fcorp1 as required all of the sales were made to country x citizens or entities none of the purchasers was a u s shareholder as defined in sec_951 of the code tl-n-7483-99 accordingly after the series of sales was completed in year fcorp1 was a non- controlled sec_902 corporation for purposes of sec_904 in year fsub realized gain on its sale of fcorp1’s stock in the amount of dollar_figuref fsub considered the gain to be nontaxable in country x and therefore fsub did not report the gain on its country x’s income_tax return however for u s tax purposes ussub2 reported fsub’s gain in year less allocated and apportioned expenses as subpart_f_income as that term is defined in sec_952 of the code ussub2 included that income in its passive_income separate category for purposes of sec_904 in year the tax authorities for country x began auditing fsub’s tax_return for year the tax authorities questioned fsub’s position that the stock sale in year was not taxable for several years fsub contested the tax authorities’ position on this issue however in year the tax authorities and fsub reached a settlement under which country x assessed and fsub paid taxes in the amount of dollar_figureg on the gain on the sale of fcorp1’s stock usparent filed in year an amended federal_income_tax return for year requesting a refund in the amount of dollar_figureg representing additional deemed-paid foreign tax_credits for the additional country x tax assessed and paid_by fsub in year year is a taxable_year beginning after date law and analysis sec_951 of the code treats certain undistributed_earnings and profits of a controlled_foreign_corporation primarily subpart_f_income as defined in sec_952 as a current income inclusion of u s shareholders corporate and individual who own or more of the voting_stock of the controlled_foreign_corporation a foreign_corporation is a controlled_foreign_corporation if more than of its combined voting power or value is owned or is considered to be owned by u s shareholders under sec_952 subpart_f_income includes foreign_base_company_income which includes foreign_personal_holding_company_income as defined in sec_954 foreign_personal_holding_company_income includes the excess of gains over losses from the sale of stock and certain other_property sec_954 here fsub was a controlled_foreign_corporation and ussub2 was the u s shareholder of fsub ussub2 reported fsub’s gain in the amount of dollar_figuref on the sale of fcorp1’s stock in year less allocated and apportioned expenses as subpart_f_income for foreign_tax_credit_limitation purposes ussub2 included that income in its passive_income separate category as required by sec_904 of the tl-n-7483-99 code which generally defines passive_income to include foreign_personal_holding_company_income sec_960 of the code provides that u s corporate shareholders that are required to include amounts attributable to the earnings_and_profits of controlled_foreign_corporations in gross_income under sec_951 are deemed to have paid a portion of the foreign taxes paid accrued or deemed to have been paid_by the controlled_foreign_corporation on or with respect to their earnings_and_profits as if the amount so included were a dividend under sec_902 under sec_902 u s_corporations owning at least of the voting_stock of a foreign_corporation are deemed to have paid a share of the foreign_income_taxes paid_by the foreign_corporation in the year in which the corporation’s earnings_and_profits become subject_to u s tax as dividend income of the u s shareholder prior to the tax_reform_act_of_1986 deemed-paid taxes were determined based on annual accounts of earnings and taxes from which dividend distributions were sourced on a last-in_first-out basis when a foreign_subsidiary had profits subject_to foreign tax in some years and deficits in other years and did not distribute all its earnings currently some of the foreign taxes would never be creditable since dividends could not be paid out of deficit years also under previous law the amount of the credit was affected when the foreign corporation’s effective_tax_rate changed from year to year sec_905 of the code requires a recomputation of the taxpayer’s u s tax_liability for the year or years affected whenever accrued taxes when paid differ from the amounts claimed as credits by the taxpayer related to the year-by-year determination of deemed-paid credits under pre-1987 law a redetermination of u s tax was required whenever a foreign_tax_redetermination with respect to a foreign_subsidiary affected the amount of foreign taxes deemed paid_by the u s shareholder under sec_902 in order to alleviate the problems associated with the year-by-year approach to the determination of deemed-paid taxes congress in revised sec_902 of the code to provide that the u s shareholder of a foreign_corporation determines the amount of foreign taxes deemed paid_by it on the basis of multi-year pools of undistributed_earnings and foreign_income_taxes revised sec_902 generally applies to earnings_and_profits accumulated in years beginning after date and foreign_income_taxes attributable to those earnings this change was intended to alleviate the situation described above in which deemed-paid foreign tax_credits were lost as a result of a deficit in a foreign corporation’s earnings_and_profits in addition this change limits the ability of taxpayers to claim a deemed- paid credit that reflects foreign taxes higher than the average rate over a period of tl-n-7483-99 years by averaging the high tax years and the low tax years of the foreign_corporation in determining the foreign taxes attributable to the dividend see h_r rep no 99th cong 1st sess c b vol also in congress enacted sec_989 of the code which authorized the secretary_of_the_treasury to issue regulations providing for an alternative adjustment to the recomputations of a taxpayer’s u s tax_liability for the years or years affected by a foreign_tax_redetermination as then required by sec_905 sec_1_905-3t issued in pursuant to the authority granted in sec_989 provides that a foreign_tax_redetermination that affects foreign taxes deemed paid_by a u s taxpayer under sec_902 will be accounted for through an adjustment on a prospective basis to the affected pools of post-1986_undistributed_earnings and post-1986_foreign_income_taxes of the foreign_corporation under the regulations as subsequently modified by notice_90_26 1990_1_cb_336 a u s taxpayer’s tax_liability for the year or years affected by a foreign subsidiary’s foreign_tax_redetermination is recomputed only in four limited circumstances each of which involves an overstatement of the originally claimed credit and none of which applies here if the foreign tax_liability is in a hyper-inflationary currency if the foreign_tax_redetermination occurs after a distribution to a u s shareholder and the redetermination would cause the foreign corporation’s pool of foreign taxes to be reduced below zero eg tax is refunded after it is deemed paid and removed from the pool the service in its discretion may require a taxpayer to redetermine its u s tax_liability if the amount of the foreign tax_liability accrued in foreign_currency exceeds the amount of foreign tax paid in foreign_currency by at least and if a u s shareholder of a controlled_foreign_corporation receives a distribution of previously_taxed_earnings_and_profits and the controlled foreign corporation’s income out of which the distribution was made had been subject_to the foreign country’s corporate_income_tax which is reduced because of the distribution sec_1_905-3t and in congress revised sec_905 of the code to expand the definition of a foreign_tax_redetermination to include situations where accrued taxes are not paid before the date two years after the close of the taxable_year to which those taxes relate as revised sec_905 codifies the prospective pooling adjustment rule_of sec_1_905-3t expressly providing that no redetermination of a u s shareholder’s tax_liability or deemed-paid taxes shall be tl-n-7483-99 made on account of a foreign subsidiary’s tax payment made more than two years after the year to which the payment relates taxpayer_relief_act_of_1997 pub_l_no sec_1102 111_stat_788 the amendment to sec_905 applies to only foreign taxes which relate to taxable years beginning after date taxpayer_relief_act_of_1997 pub_l_no sec_1102 111_stat_788 the statutory change does not apply here even though year the year of the settlement between fsub and the country x tax authorities began after date since the foreign taxes at issue relate to year a taxable_year that began before that date however the result is the same under sec_1_905-3t which applies to year here there is a foreign_tax_redetermination for purposes of sec_905 of the code and sec_1 905-3t since the amount of deemed-paid tax accrued by fsub and claimed as a credit in year by ussub2 differs from the amount of accrued taxes paid in year accordingly a prospective adjustment must be made in year to fsub’s passive_income separate category pools of post-1986_undistributed_earnings and post-1986_foreign_income_taxes to reflect the additional tax payment to the extent allowed under sec_902 usparent will be eligible to claim credit for these taxes in connection with a passive dividend or income inclusion from fsub in year and later years it has been asserted that here there is not a foreign_tax_redetermination for purposes of sec_905 of the code and sec_1 905-3t because the amount of foreign tax paid_by fsub to country x on the gain from the stock sale in year is identical to the foreign tax accrued on that transaction and claimed as a credit on the amended_return it is correct that because the tax was contested the tax did not accrue under the all-events test until the controversy was resolved which here was in year see 320_us_516 and sec_1_461-2 under the relation back concept applicable to foreign tax_credits although accrued and paid in year the tax relates back to and is considered to accrue in year see revrul_84_125 1984_2_cb_125 revrul_70_290 1970_1_cb_160 revrul_58_55 1958_1_cb_266 the assertion incorrectly focuses on the fact that the amount of tax ultimately paid_by fsub was identical to the amount of tax ultimately accrued the argument fails to take into account the statutory test that sec_905 of the code applies when the amount of accrued foreign tax when paid differs from the amount of foreign tax claimed as a credit the test applies to compare the amount originally accrued and claimed as a credit with revised accrued amounts that are paid and allowed as a credit since the tax must be both properly accrued and paid for credit to be allowed see sec_905 and the amount of foreign tax accrued and paid_by fsub differed from the amount used to calculate usparent’s deemed paid credits tl-n-7483-99 on its year return as originally filed sec_905 and sec_1 905-3t apply and dictate the result in this case case development hazards and other considerations taxpayer has not raised but could raise in the future after losing the argument on the issue presented in this request for field_service_advice the issue of whether sec_1_905-3t is a valid exercise of the regulatory authority granted by sec_989 of the code prior to the amendments sec_905 on its face required redeterminations of u s tax in the event of any change in foreign tax_liability that affected the allowable credit sec_989 is part of subpart j relating to foreign_currency translation and transactions congress wanted to permit pooling adjustments in lieu of sec_905 redeterminations that would otherwise result when currency fluctuations between the date foreign taxes were accrued and paid changed the dollar amount of the allowable credit see h_r conf_rep no 99th cong 2nd sess c b vol and general explanation of the tax_reform_act_of_1986 pp date the sec_905 temporary regulations require pooling adjustments in the case of all foreign tax redeterminations not just those resulting from currency fluctuations and thus arguably go beyond the purposes of this subpart j however we believe the regulations reasonably implement the statutory purpose since it would not achieve the congressional purpose of simplification to permit pooling adjustments for currency fluctuations but require redeterminations of u s tax_liability in every situation in which the foreign tax paid was not exactly the same as the accrued liability sec_905 of the code was specifically amended in to require that the pools of post-1986_undistributed_earnings and post-1986_foreign_income_taxes be adjusted prospectively in lieu of redeterminations in circumstances like those in this case sec_905 the explicit statutory authority for regulations to provide for pooling adjustments generally added in to sec_905 does not appear even to authorize regulations that would permit a redetermination of u s tax in this situation however as stated above both the pooling adjustment regulatory authority and the statutory mandate of a prospective adjustment in these circumstances are only effective for taxes which relate to taxable years beginning after date and therefore the amendments do not apply to under the regulations a prospective adjustment must be made in to fsub’s passive_income separate category pools of post-1986_undistributed_earnings and post-1986_foreign_income_taxes the deduction attributable to the payment of the additional foreign taxes apparently reduces fsub’s passive earnings pool in tl-n-7483-99 below zero unfortunately this creates a somewhat sympathetic predicament for ussub2 since none of the taxes can be deemed paid unless fsub generates enough passive earnings in a single year to eliminate the deficit and create a positive balance in the passive earnings pool sec_1_902-1 no taxes can be deemed paid if post-1986 current plus accumulated earnings are zero or less than zero since most passive_income is subpart_f_income that must be currently included in the shareholder’s income there is limited opportunity to accumulate passive earnings in a controlled_foreign_corporation and the nimble dividend treatment of subpart_f_income creates the prospect of income inclusions without credits despite the existence of accumulated foreign taxes in the passive category we note that usparent’s ownership of ussub2 was reduced to in and therefore ussub2 was not included in usparent’s consolidated_return for and later years accordingly ussub2 and not the usparent group would be entitled to credit any fsub taxes that could be deemed paid in years after please call if you have any further questions barbara a felker chief cc intl br3 office of the associate chief_counsel international


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 corp plr-128096-10 date date legend grandparent -------------------------------------------------------------------------------------------------- -------------------------- parent ------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- -------------- sub ------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- ---------------- a b state a a b c d e --------------- ---------------------------------------- ------------- ------ ------- ----------------------------------- ----- ------ plr-128096-10 f g h ---- ----------------- ----------------- i --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------- ---------------------------------------- year j year k date date date date date date date date date date ------- ------- -------------------- ------------------------- ---------------------------- ------------------------- ----------------------- -------------------------- --------------------- --------------------------- ------- -------------------- asset a --------------------------------------------------------------------------------------- --------------------------------------------------- --------------------- this letter responds to your date letter requesting a ruling regarding some of the federal_income_tax consequences of a proposed transaction the information submitted in that request and in later correspondence is summarized below plr-128096-10 on date parent then an a -owned subsidiary of grandparent purchased b of the stock of sub a state a corporation for dollar_figurec for state law purposes sub has only one class of stock common_stock outstanding on date grandparent distributed d of the stock of parent to grandparent’s shareholders in a transaction intended to be described in section e of the internal_revenue_code_of_1986 as amended prior to the distribution grandparent parent and sub joined in the filing of a consolidated_return with grandparent as the common parent after the distribution parent and sub joined in the filing of a consolidated_return with parent as the common parent on date parent obtained an appraisal of sub that was prepared by a the appraisal stated that the value of the common_stock of sub as of date was dollar_figuref assuming that certain open account indebtedness described in the next paragraph constitutes debt sub has relatively few obligations to persons other than parent however sub owes parent approximately dollar_figureg in accounts_payable under parent’s cash management system for amounts borrowed by sub from parent before date and approximately dollar_figureh as of date pursuant to a note that encompasses amounts borrowed by sub from parent on or after date under the same system under the system parent pays sub’s expenses and parent collects sub’s revenues parent’s payment of sub’s expenses gives rise to an account payable entry on sub’s books and a corresponding asset on parent’s books parent’s collection of sub’s revenues gives rise to an account receivable entry on sub’s books and a corresponding liability on parent’s books under the system the accounts_payable of sub to parent are netted periodically against the accounts_receivable of sub from parent the accounts_payable of sub arising before date were not the subject of a note and no interest was charged with respect to such accounts_payable the accounts_payable of sub arising on or after date are as alluded to above the subject of a written demand note the note issued by sub to parent that provides for an interest charge sub’s obligation to parent with respect to such accounts_payable arising before on or after date is referred to below as an intercompany account which is an asset on parent’s books and a liability on sub’s books during year k parent decided to cause sub to sell sub’s business and wind up sub’s affairs on date parent obtained a legal opinion regarding the priority claim on the assets of sub in dissolution enjoyed by the intercompany account vis-à-vis the sub common_stock under the law of state a on date sub sold almost all of its assets to an acquisition subsidiary owned by b for dollar_figurei since date sub has been winding up its affairs and paying its debts and sub’s activities have been limited to disposing of any assets excluded from the sale and resolving unsettled claims no later than date sub will convert to a limited_liability_company the llc under the law of state a that is an eligible_entity within the meaning of sec_301_7701-3 the conversion eventually the llc will terminate its existence plr-128096-10 parent requests a ruling regarding the application of sec_165 to the liquidation of sub including the conversion parent makes the following representations since date sub has not made any distributions with respect to its common stock or redeemed any of its common_stock the common_stock of sub was not worthless within the meaning of sec_165 without regard to sec_1_1502-80 on or before date the common_stock of sub was not worthless within the meaning of sec_165 prior to date taking into account the deferral of sec_165 under sec_1 c to the best knowledge of parent grandparent’s consolidated_return will not reflect a claim for a loss under sec_165 with respect to the common_stock of sub for a tax_return year that precedes the date of the conversion since date parent has owned directly and until the conversion will own directly stock in sub meeting the requirements of sec_1504 within the meaning of sec_165 as of the time of the conversion more than percent of the aggregate of sub’ sec_5 gross_receipts for all taxable years will have been from sources other than royalties rents except rents derived from rental of properties to employees of the corporation in the ordinary course of its operating business dividends interest except interest received on deferred purchase_price of operating_assets sold annuities and gains from sales or exchanges of stocks or securities within the meaning of sec_165 taking into account the fact that sub has been a member of a consolidated_group the effect of payments and collections under the cash management system of parent and sub and the effect of any acquisitions by sub preceding the conversion the full amount of the intercompany account including the portion that is the subject of the note is entitled to a priority claim on the assets of sub in dissolution that takes precedence over the claim embodied in the common_stock of sub and thus the intercompany account must be repaid in a liquidation of sub before any payment or distribution can be made with respect to any claim in liquidation on sub’s assets that is attributable to the common_stock of sub since the date of the adoption of the plan to liquidate sub and continuing through the time of the conversion there will have been no distributions or other_payments by sub to parent including collections by parent on behalf of sub and deemed distributions by sub to parent upon the conversion that in the aggregate exceed the plr-128096-10 balance of the intercompany account owed by sub to parent at the time of the adoption of such plan since the date of the adoption of the plan to liquidate sub and continuing through the time of the conversion the fair_market_value of the assets of sub will not have exceeded i the balance of the intercompany account including the portion that is the subject of the note plus ii any liabilities of sub that constitute debt for tax purposes determined without regard to the intercompany account neither parent nor llc has a plan or intention to reincorporate the assets of sub received in the conversion or in any other liquidating_distribution by sub including a plan or intention to elect pursuant to sec_301_7701-3 by parent or the llc for the llc to be treated as other than an entity disregarded as separate from its owner for federal_income_tax purposes effective after the conversion either asset a does not constitute a significant portion of the historic_business_assets of sub within the meaning of sec_1_368-1 or asset a will not be transferred or deemed transferred by sub to parent based on the facts and representations described above we rule as follows provided that the requirements for claiming a worthless securities deduction under sec_165 and sec_165 taking into account sec_1_1502-80 are otherwise satisfied parent may claim a worthless securities deduction under sec_165 and sec_165 for its sub common_stock upon the liquidation of sub including the conversion regardless of whether the intercompany account or a portion thereof constitutes debt or equity for federal_income_tax purposes however the provisions of sec_1_1502-36 must be taken into account in determining parent's basis in its sub common_stock parent's basis in the intercompany account to the extent that the intercompany account constitutes preferred_stock for federal_income_tax purposes and the effect on sub's attributes that will result from any deduction or loss on sub stock the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process 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 concerning whether any of the other requirements of sec_165 are met and no opinion is expressed concerning whether the stock of sub became worthless in year j or a prior year in addition the ruling in this plr-128096-10 letter is conditioned on the standard representations contained in revproc_2010_1 and on there not being claimed on grandparent’s consolidated_return a deduction attributable to the worthlessness of sub’s common_stock 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 a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely _stephen p fattman_ stephen p fattman special counsel to the associate chief_counsel corporate office of the associate chief_counsel corporate


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b01- plr-103483-02 date date legend x a b c year state dear this letter is in response to your request dated date on behalf of x seeking a private_letter_ruling under sec_1362 of the internal_revenue_code that x’s rental income from commercial properties is not passive_investment_income facts x is a corporation incorporated under the laws of state x anticipates making an election under sec_1362 to be treated as an s_corporation x owns commercial real_estate property x provides various services with respect to the leasing of its property these services include conducting regular inspections of property maintaining the roofs exterior walls heating and air conditioning systems plumbing foundations and structures of property maintaining fire and casualty insurance on the property reviewing and supervising all tenant alterations additions or improvements to the property paying all property taxes reviewing all property_tax assessments pursuing property appeals marketing property to potential tenants and evaluating those potential tenants negotiating all leases relating to the property along with any amendments or extensions of the leases and maintaining all financial and accounting_records for the property x received or accrued a in rents and paid_or_incurred b in relevant expenses for year law and analysis except as provided in sec_1362 sec_1362 provides that a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an s_corporation_election shall be terminated whenever the corporation i has accumulated earning and profits at the close of each of consecutive taxable years and ii has gross_receipts for each of such taxable years more than percent of which are passive_investment_income sec_1375 imposes a tax on the income of an s_corporation if the s_corporation has accumulated_earnings_and_profits at the close of such taxable_year and gross_receipts more than percent of which are passive_investment_income sec_1362 provides that except as otherwise provided the term passive_investment_income means gross_receipts derived from royalties rents dividends interest annuities and sales or exchanges of stock_or_securities sec_1_1362-2 defines rent as amounts received for_the_use_of or right to use property whether real or personal of the corporation sec_1_1362-2 provides that the term rents does not include rents derived in the active trade_or_business of renting property rents are derived in an active trade_or_business of renting property only if based on all the facts and circumstances the corporation provides significant services or incurs substantial costs in the rental business generally significant services are not rendered and substantial costs are not incurred in connection with net leases whether significant services are performed or substantial costs are incurred in the rental business is determined based upon all the facts and circumstances including but not limited to the number of persons employed to provide the services and types and amounts of costs and expenses_incurred other than depreciation based solely on the facts as presented in the ruling_request and viewed in light conclusion of the applicable law and regulations we conclude that x provides significant services and incurs substantial costs in its business accordingly we conclude that the rents x receives from its rental property will not be passive_investment_income under sec_1362 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed concerning whether x satisfies the s_corporation eligibility requirements of sec_1361 further the passive_investment_income rules of sec_1362 are completely independent of the passive_activity rules of sec_469 unless an exception under sec_469 applies the rental_activity remains passive for purposes of sec_469 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 pursuant to the power_of_attorney on file with this office a copy of this ruling will also be sent to the taxpayer_representative sincerely carolyn hinchman gray acting assistant to the branch chief branch office of associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes