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 ---------------------------- ------------------------ ----------------------------------------------------- telephone number --------------------- refer reply to cc tege eb qp4 plr-123585-16 date date ------------------------ -------------------------------------------------------- ------------------------------------------ ------------------------------------------------------------------------------- ---------------------------------------- ------------------------------------------------------------- state b plan x plan y plan h plan o system s public law -------------------------------- public law -------------------------------- dear -------------- this letter is in response to your ruling_request dated date and supplemented and updated by correspondence dated date and date submitted by your authorized representative regarding the federal_income_tax treatment of certain contributions under sec_414 and sec_3401 of the internal_revenue_code the following facts and representations are submitted under penalties of perjury in support of your request state b established plans x y h and o plans x y h and o are intended to qualify under sec_401 as applicable to governmental plans as defined in sec_414 the treasurer of state b administers plans x y h and o system s an instrumentality of state b is the general administrator of plans x y and h the system s plans the treasurer of state b appoints the director of system s who is responsible for the daily operations of system s plr-123585-16 plan x is a defined_benefit_plan that provides retirement benefits to employees of state b and political subdivisions of state b electing to participate in the plan plan y is a defined_benefit_plan for teachers employed with local education agencies membership in plan x and plan y is a condition for employment for full-time state employees k-12 teachers certain higher education employees and employees of participating political subdivisions of state b who enter service on or before date plan x generally requires mandatory employee contributions of of earnable compensation however for state employees who become members of plan x on or after date but before date the state assumes mandatory employee contributions up to of the employees’ earnable compensation in addition political subdivisions of state b that become participating employers in plan x may also assume mandatory employee contributions up to of the employees’ earnable compensation plan y requires mandatory employee contributions of of the employees’ earnable compensation_for k-12 teachers employed with local education agencies mandatory employee contributions to plan x and plan y are currently picked up under sec_414 in accordance with a private_letter_ruling issued to state b in plan h is a defined_benefit_plan with a defined contribution component providing retirement benefits to state employees certain higher education employees k-12 teachers employed with local education agencies and employees of participating political subdivisions all state employees certain higher education employees and k- teachers of local education agencies who are hired on or after date are required to participate in plan h as a condition_of_employment mandatory employee contributions to plan h are set pincite of the employees’ earnable compensation pursuant to the state b statute establishing plan h mandatory employee contributions to plan h are currently picked up under sec_414 plan o is a defined contribution retirement_plan for higher education employees who are exempt from the fair labor standards act for higher education employees hired prior to date state b assumes employee contributions up to of the employees’ earnable compensation and such employees may elect to participate in plan o in lieu of system s plans higher education employees hired on or after date may elect to participate in plan o in lieu of plan h and are subject_to mandatory employee contributions at the rate of of the employees’ earnable compensation under either plan o or plan h such mandatory_contributions are currently picked up under sec_414 in accordance with a state b statute plan x plan y plan h and plan o provide that the mandatory employee contributions that are picked up shall be treated as employer contributions pursuant to sec_414 that employee contributions will be paid_by the employer in lieu of contributions by the employee and that the employee will not have the option of choosing to receive the contributions in the form of cash or cash equivalents instead of having them paid_by the employer into the plan in which the employee participates plr-123585-16 political subdivisions of state b are not required to participate in system s certain political subdivisions of state b maintain closed plans that are defined benefit plans established either prior to the establishment of system s or in lieu of participation in system s a political_subdivision of state b may elect to participate in system s by executing an adoption resolution prior to the political_subdivision participating in system s as an employer starting date political subdivisions of state b may opt to participate in plan h in particular political subdivisions of state b that are not otherwise participating in plan x may adopt a resolution to participate in plan h and political subdivisions of state b that are already participating in plan x may adopt a resolution to change their participation prospectively to plan h but only with regard to their employees hired on or after date public law was signed into law by state b on ------------------ permitting in relevant part employees of political subdivisions of state b to elect to transfer membership from the closed plans to plan x or plan h and k-12 teachers of local education agencies to elect to transfer membership from plan y to plan h public law signed into law on ------------------- expands public law by permitting in relevant part political_subdivision employees currently participating in plan x to transfer their membership to plan h employee contributions to plan h remain at the same rate for employees who switch membership public law amending public law also provides that employees of a political_subdivision currently participating in a closed plan may elect to transfer membership either to plan x or plan h however if the closed plan of the political_subdivision does not have a mandatory employee contribution equal to as required by both plan x and plan h the political_subdivision must set the employee contribution to the same contribution rate under plan x and plan h as it was under the political subdivision’s closed plan if the employee contribution rate under the political subdivision’s closed plan is less than then the employer_contribution rate in plan x or plan h will be increased by the percentage difference between and the mandatory employee contribution rate in the closed plan section --------of public law also permits certain higher education employee members to make an irrevocable election to participate in either plan h or plan o upon the employee’s initial date of employment with a state-supported institution_of_higher_education you represent that in all instances the election to transfer from one plan to another is only available to an employee for whom the mandatory employee contribution rate will remain the same before and after the employee’s transfer between plans plr-123585-16 based on the above facts and representations you request the following rulings if current employees of political subdivisions that are participating employers in plan h elect to transfer on a prospective basis from plan x to plan h the mandatory employee contributions that are picked up by the participating employer will be treated as employer contributions pursuant to a valid pick-up under sec_414 if current employees of political subdivisions elect to switch from any of the closed plans to plan x or plan h the mandatory employee contributions that are picked up by the participating employer will be treated as employer contributions pursuant to a valid pick-up under sec_414 if k-12 teachers in plan y elect to transfer on a prospective basis to plan h the mandatory employee contributions that are picked up by the participating employer will be treated as employer contributions pursuant to a valid pick-up under sec_414 if certain higher education employees elect to participate in plan h or plan o upon their initial date of hire the mandatory employee contributions that are picked up by state b as the participating employer will be treated as employer contributions pursuant to a valid pick-up under sec_414 the mandatory employee contributions made pursuant to ruling requests above and picked up by the employer will not be included in employees’ gross_income for federal_income_tax purposes until distributed the mandatory_contributions made pursuant to rulings requests above and picked up by the employer will not constitute wages subject_to federal_income_tax withholding under sec_3401 sec_401 provides that a_trust created or organized in the united_states and forming a part of a qualified_stock bonus pension or profit sharing plan of an employer constitutes a qualified_trust only if the various requirements set out in sec_401 are met sec_402 generally provides that any amount actually distributed to any recipient by any employees' trust described in sec_401 which is exempt from tax under sec_501 shall be taxable to the recipient in the taxable_year of the distribution under sec_72 relating to annuities sec_1_402_a_-1 of the income_tax regulations provides in pertinent part plr-123585-16 that if an employer makes a contribution for the benefit of an employee to a_trust described in sec_401 for the taxable_year of the employer which ends within or with a taxable_year of the trust for which the trust is exempt under sec_501 the employee is not required to include such contribution in his or her income except for the year or years in which such contribution is distributed to him or her sec_414 provides that any amount contributed to an employees' trust described in sec_401 shall not be treated as having been made by the employer if it is designated as an employee contribution sec_414 provides that for purposes of sec_414 in the case of any plan established by the government of any state or political_subdivision thereof or by any agency_or_instrumentality of any of the foregoing or a governmental_plan described in the last sentence of sec_414 relating to plans of indian tribal governments where the contributions of employing units are designated as employee contributions but where any employing unit picks up the contributions the contributions so picked up shall be treated as employer contributions sec_3401 provides the definition of wages for purposes of federal_income_tax withholding sec_3401 provides in part an exception from wages for employer contributions paid on behalf of an employee or his beneficiary to a_trust described in sec_401 that is exempt from tax under sec_501 at the time of such payment the federal_income_tax treatment to be afforded contributions that are picked up by the employer within the meaning of sec_414 has been developed in a series of revenue rulings in revrul_77_462 1977_2_cb_358 the employer school district agreed to assume and pay the amounts employees were required by state law to contribute to a state pension_plan revrul_77_462 concluded that the school district's picked-up contributions to the plan were excluded from the employees' gross_income until such time as they were distributed or made available to the employees the revenue_ruling also held that under the provisions of sec_3401 the school district's contributions to the plan were excluded from wages for purposes of the collection of income_tax at the source on wages therefore no withholding was required for federal_income_tax purposes from the employees' salaries with respect to such picked-up contributions revrul_81_35 1981_1_cb_255 and revrul_81_36 1981_1_cb_255 established that the following two criteria must be met the employer must specify that the contributions although designated as employee contributions are being paid_by the employer in lieu of contributions by the employee and the employee must not be given the option of choosing to receive the contributed amounts directly instead of having them paid_by the employer to the pension_plan plr-123585-16 revrul_87_10 1987_1_cb_136 provides that the required specification of designated employee contributions must be completed before the period to which such contributions relate if not the designated employee contributions paid_by the employer are actually employee contributions paid_by the employee and recharacterized at a later date the retroactive specification of designated employee contributions as paid_by the employing unit ie the retroactive pick-up of designated employee contributions by a governmental employer is not permitted under sec_414 thus employees may not exclude from current gross_income designated employee contributions to a qualified_plan that relate to compensation earned for services rendered prior to the date of the last governmental action necessary to effect the pickup revrul_2006_43 2006_35_irb_329 amplifying and modifying revrul_81_35 revrul_81_36 and revrul_87_10 describes the actions required for a state or political_subdivision of a state or an agency_or_instrumentality of either to pick up employee contributions to a plan qualified under sec_401 so that the contributions are treated as employer contributions pursuant to sec_414 specifically revrul_2006_43 provides that a contribution to a qualified_plan established by an eligible_employer that is a governmental employer will be treated as picked up by the employing unit under sec_414 if two conditions are satisfied first the employing unit must specify that the contributions although designated as employee contributions are being paid_by the employer for this purpose the employing unit must take formal action to provide that the contributions on behalf of a specific class of employees of the employing unit although designated as employee contributions will be paid_by the employing unit in lieu of employee contributions a person duly authorized to take such action with respect to the employing unit must take such action the action must apply only prospectively and be evidenced by a contemporaneous written document eg minutes of a meeting a resolution or ordinance second the pick-up arrangement must not permit a participating employee from and after the date of the pick-up to have a cash or deferred election right within the meaning of sec_1_401_k_-1 with respect to designated employee contributions thus for example no participating employee may be given the right to opt_out of the pick-up arrangement described in sec_414 or to receive the contributed amounts directly instead of having them paid_by the employing unit to the plan revrul_2006_43 states that the pick-up rules expressed in revrul_81_35 and revrul_81_36 apply even if the employer picks up contributions through a reduction in salary or through an offset against future salary increases with respect to your first ruling_request the mandatory_contributions to plan x and plan h satisfy the criteria for picked-up contributions set forth in revrul_81_35 rev_rul plr-123585-16 revrul_87_10 and revrul_2006_43 you have represented that you previously received a private_letter_ruling on the validity of plan x’s pick-up arrangement plan h currently provides that each employer shall pick up the mandatory employee contributions to plan h state b took formal action by enacting a statute providing that mandatory employee contributions to plan h although designated as employee contributions will be paid_by the employing unit in lieu of employee contributions no provision of plan x or plan h permits employees the option to choose to receive the contributed amounts directly instead of having them paid_by the participating employer to plan x or plan h because the rate of the contribution is the same regardless of whether an employee is a participant in plan x or plan h there is no cash or deferred election with respect to the contributions we conclude that if a current employee of a political_subdivision that is a participating employer in plan h elects to transfer from plan x to plan h the mandatory_contributions picked up by the participating employer will be treated as employer contributions pursuant to a valid pick- up under sec_414 with respect to your second ruling_request as discussed above the mandatory_contributions to plan x and plan h satisfy the criteria for picked-up contributions contributions to plan x and plan h are mandatory for employees of political subdivisions of state s and public law provides that if a closed plan of a political_subdivision does not have a mandatory employee contribution equal to as required by plan x or plan h the political_subdivision must set the employee contribution to the same rate under plan x or plan h as it was under the political subdivision’s closed plan because the rate of the contribution is the same regardless of whether an employee is a participant in a closed plan plan x or plan h there is no cash or deferred election with respect to the contributions we conclude that to the extent that a closed plan provides for a valid pick-up arrangement if an employee in any of the closed plans elects to transfer from the closed plans to plan x or plan h mandatory_contributions to plan x or plan h that are picked up by the participating employer will be treated as employer contributions pursuant to a valid pick-up under sec_414 with respect to your third ruling_request as discussed above the mandatory_contributions to plan h satisfy the criteria for picked-up contributions in addition the mandatory_contributions to plan y satisfy the criteria for picked-up contributions set forth in revrul_81_35 revrul_81_36 revrul_87_10 and revrul_2006_43 you have represented that you previously received a private_letter_ruling on the validity of plan y’s pick-up arrangement because the rate of the contribution i sec_5 of compensation regardless of whether an employee is a participant in plan y or plan h there is no cash or deferred election with respect to the contributions we conclude if k-12 teachers in plan y elect to transfer on a prospective basis to plan h the mandatory_contributions made by the k-12 teachers to plan h and picked up by their respective employers will be treated as employer contributions pursuant to a valid pick-up under sec_414 plr-123585-16 with respect to your fourth ruling_request as discussed above the mandatory employee contributions to plan h satisfy the criteria for picked-up contributions in addition plan o currently provides that each employer shall pick up the mandatory employee contributions to plan o for employees hired after date state b took formal action by enacting a statute providing that mandatory employee contributions to plan o although designated as employee contributions will be paid_by the employing unit in lieu of designated employee contributions no provision of plan h or plan o allows higher education employees who participate in plan h or plan o the option to choose to receive the contributed amounts directly instead of having them paid_by their respective employers to plan h or plan o because the amount of the mandatory employee contribution i sec_5 of compensation regardless of whether an employee is a participant in plan h or plan o there is no cash or deferred election with respect to the contributions we conclude that if a higher education employee makes an irrevocable election between participating in plan h or plan o upon the initial date of hire as required under section --------of public law the mandatory employee contributions that are picked up by the participating employer will be treated as employer contributions pursuant to a valid pick-up under sec_414 with respect to your fifth ruling_request we conclude that the picked-up amounts in ruling_request sec_1 and above shall be treated as employer contributions and will not be included in the current gross_income of the employees for federal_income_tax purposes in the year in which contributions are made these amounts will be includible in the employees' or their beneficiaries' gross_income only in the taxable_year in which they are distributed with respect to your sixth ruling_request because we have determined that the picked- up amounts in ruling_request sec_1 and above are to be treated as employer contributions based on sec_3401 and revrul_77_462 we conclude that the contributions described in ruling_request sec_1 and that are picked up as employer contributions under sec_414 are excluded from wages for purposes of federal_income_tax withholding in general all payments of remuneration by an employer for services performed by an employee are subject_to taxes under the federal_insurance_contributions_act fica unless the payments are specifically excepted from the term wages or the services are specifically excepted from the term employment_fica_taxes include social_security and medicare taxes sec_3121 provides that other than the social_security_tax wage_base limitation nothing in sec_3121 excludes from the term wages any amount picked up as an employer_contribution under sec_414 if the pickup is pursuant to a salary reduction agreement whether evidenced by a written instrument or otherwise for these purposes the term salary reduction agreement includes any salary reduction arrangement regardless of whether there is approval or choice of participation by individual employees or whether such approval or choice is mandated plr-123585-16 by state statute h_r conf_rep no 98th cong 2d sess see also public employees' retirement board v shalala f 3rd 10th cir in addition under sec_3121 if an employee’s services are covered included in employment for social_security_tax purposes pickup contributions under sec_414 that are made pursuant to a salary reduction agreement are generally subject_to social_security_taxes unless the maximum wage_base exception applies also under sec_3121 if an employee’s services are covered included in employment for medicare_tax purposes pick-up contributions under sec_414 that are made pursuant to a salary reduction agreement are subject_to medicare taxes without any limit based on the_amount_of_wages this does not constitute a ruling on whether the pick-up contributions are made pursuant to a salary reduction agreement for fica tax purposes 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 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to 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 as specified in revproc_2017_1 2017_1_irb_1 b this office has not verified any of the material submitted in support of the request_for_ruling and such material is subject_to verification on examination the associate office will revoke or modify a letter_ruling and apply the revocation retroactively if there has been a misstatement or omission of controlling facts the facts at the time of the transaction are materially different from the controlling facts on which the ruling was based or in the case of a transaction involving a continuing action or series of actions the controlling facts change during the course of the transaction see revproc_2017_1 sec_11 sincerely pamela r kinard senior technician reviewer qualified_plans branch tax exempt government entities


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-134664-13 date january ------------------------------------------------- ----------------------------------------------------------------------------- grantor distribution committee -------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- trust state trustees ------------------------------------------- ---------- ------------------------------------------------------ dear --------------- this responds to a letter dated date and subsequent correspondence requesting rulings under sec_671 sec_2501 and sec_2514 of the internal_revenue_code the information submitted states that grantor proposes to create an irrevocable_trust trust for the benefit of grantor’s self grantor’s parents siblings and issue which grantor intends to execute upon receipt of a favorable private_letter_ruling from the internal_revenue_service two independent trustees are the trustees trustees of trust during grantor’s lifetime the beneficiaries of trust are grantor and grantor’s siblings however if grantor’s siblings are not living the class of permissible beneficiaries will include grantor’s parents trustees must make distributions of income and principal as directed by distribution committee and or grantor as follows at any time trustees pursuant to the direction of a majority of distribution committee with the written consent of grantor shall distribute to grantor or the beneficiaries such amounts of the net_income or principal as directed by distribution committee grantor’s consent power plr-134664-13 at any time trustees pursuant to the direction of all distribution committee members other than grantor shall distribute to the beneficiaries such amounts of the net_income or principal as directed by distribution committee unanimous member power and at any time grantor in a nonfiduciary capacity may but shall not be required to distribute to any one or more of the beneficiaries other than himself such amounts of the principal including the whole thereof as grantor deems advisable to provide for the health maintenance support and education of grantor’s issue grantor’s sole power the distribution committee may direct that distributions be made equally or unequally and to or for the benefit of any one or more of the beneficiaries of trust to the exclusion of others any net_income not distributed by trustee will be accumulated and added to principal distribution committee will be initially composed of grantor grantor’s siblings grantor’s nephew and grantor’s niece and will cease to exist upon grantor’s death trust provides that at all times the distribution committee must consist of at least two adults other than grantor either who are members of the class of persons eligible to receive distributions of income or principal under trust or if there are not two adult members of such class who are willing and able to serve who are the parent or guardian of a member of such class of eligible distributes eligible individuals if at any time fewer than two eligible individuals are members the distribution committee shall be deemed not to exist a vacancy on distribution committee must be filled in the following order the oldest of the grantor’s adult issue who willing to serve and is not already serving as a member of distribution committee the oldest of the adult issue of grantor’s parents who is willing to serve and who is not already serving as a member of distribution committee the legal guardian if any or the parent of the oldest of the grantor’s minor issue who is not already serving as a member of distribution committee the legal guardian if any or the parent of the oldest minor issue of grantor’s parents who is willing to serve and is not already serving as a member of distribution committee grantor’s father or grantor’s mother if at any time distribution committee does not include at least two members distribution committee shall be deemed not to exist the distribution committee will cease to exist upon grantor’s death upon grantor’s death the trustee will dispose_of the then-remaining principal and undistributed_income of trust as grantor directs by a will specifically referring to this power_of_appointment the testamentary power provided that no such appointment may be made to grantor’s estate grantor’s creditors or the creditors of grantor’s estate grantor’s power includes the power to appoint outright or in trust and to create new powers in default of the exercise of grantor’s testamentary power the balance of plr-134664-13 trust will be distributed per stirpes to grantor’s then living issue in further trust if none of grantor’s issue is then living but any descendant of grantor’s parents is then living trustees are to allocate income and principal per stirpes among grantor’s parents issue in further trust if no descendant of grantor’s parents is then living trustees are to distribute the remaining income and principal pursuant to state law as if grantor had died intestate and unmarried you have requested the following rulings during the period distribution committee is serving no portion of the items of income deductions and credits against tax of the trust will be included in computing the taxable_income deductions and credits of the grantor under sec_671 the contribution of property to trust by grantor will not be a completed_gift subject_to federal gift_tax any distribution_of_property by the distribution committee from trust to grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee any distribution_of_property by distribution committee from trust to any beneficiary of trust other than grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee other than grantor ruling sec_671 provides that where it is specified in subpart e of part i of subchapter_j that the grantor or another person shall be treated as the owner of any portion of a_trust there shall then be included in computing the taxable_income and credits of the grantor or the other person those items of income deductions 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 under chapter in computing taxable_income or credits against the tax of an individual sec_672 provides that for purposes of subpart e the term adverse_party means any person having a substantial_beneficial_interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust sec_673 through specify the circumstances under which the grantor is treated as the owner of a portion of a_trust sec_673 provides that the grantor shall be treated as the owner of any portion of a_trust in which the grantor has a reversionary_interest in either the corpus or plr-134664-13 the income therefrom if as of the inception of that portion of the trust the value of such interest exceed sec_5 percent of the value of such portion sec_674 provides in general that the grantor shall be treated as the owner of any portion of a_trust in respect of which the beneficial_enjoyment of the corpus or the income therefrom is subject_to a power of disposition exercisable by the grantor or a nonadverse_party or both without the approval or consent of any adverse_party sec_674 provides that sec_674 shall not apply to the power in sec_674 regardless of by whom held sec_674 describes a power to distribute corpus to or for a beneficiary provided that the power is limited by a reasonably_definite_standard which is set forth in the trust instrument sec_674 provides that sec_674 shall not apply to a power exercisable only by will other than a power in the grantor to appoint by will the income of the trust where the income is accumulated for such disposition by the grantor or may be so accumulated in the discretion of the grantor or a nonadverse_party or both without the approval or consent of any adverse_party under sec_675 and applicable regulations the grantor is treated as the owner of any portion of a_trust if under the terms of the trust agreement or circumstances attendant to its operation administrative control is exercisable primarily for the benefit of the grantor rather than the beneficiary of the trust sec_676 provides that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under any other provision of part i subchapter_j chapter where at any time the power to re-vest in the grantor title to such portion is exercisable by the grantor or a nonadverse_party or both sec_677 provides in general that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner 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 the grantor’s spouse held or accumulated for future distribution to the grantor or the grantor’s spouse or applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor’s spouse sec_678 provides that a person other than the grantor shall be treated as the owner of any portion of a_trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself or such person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would within the principles of inclusive subject a grantor of a_trust to treatment as the owner thereof plr-134664-13 based solely on the facts submitted and representations made we conclude an examination of trust reveals none of the circumstances that would cause grantor to be treated as the owner of any portion of trust under sec_673 sec_674 sec_676 or sec_677 because none of the other distribution committee members has a power exercisable solely by himself to vest trust income or corpus in himself none shall be treated as the owner of any portion of the trust under sec_678 we further conclude that an examination of trust reveals none of the circumstances that would cause administrative controls to be considered exercisable primarily for the benefit of grantor under sec_675 thus the circumstances attendant on the operation of trust will determine whether grantor will be treated as the owner of any portion of trust under sec_675 this is a question of fact the determination of which must be deferred until the federal_income_tax returns of the parties involved have been examined by the office with responsibility for such examination ruling sec_2 and sec_2501 provides that a tax is imposed for each calendar_year on the transfer of property by gift during such calendar_year by any individual resident or nonresident sec_2511 provides that the tax imposed by sec_2501 applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-2 of the gift_tax regulations provides that a gift is complete as to any property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave in the donor no power to change its disposition whether for the donor’s own benefit or for the benefit of another but if upon a transfer of property whether in trust or otherwise the donor reserves any power over its disposition the gift may be wholly incomplete or may be partially complete and partially incomplete depending upon all the facts in the particular case accordingly in every case of a transfer of property subject_to a reserved power the terms of the power must be examined and its scope determined sec_25_2511-2 also provides an example where the donor transfers property to another in trust to pay the income to the donor or accumulate it in the discretion of the trustee and the donor retains a testamentary power to appoint the remainder among the donor’s descendants the regulation concludes that no portion of the transfer is a completed_gift however if the donor had not retained a testamentary_power_of_appointment but instead provided that the remainder should go to x or his heirs the entire transfer would be a completed_gift sec_25_2511-2 provides that a gift is incomplete in every instance in which a donor reserves the power to re-vest the beneficial title in himself or herself a gift is also incomplete if and to the extent that a reserved power gives the donor the power to name plr-134664-13 new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed_or_ascertainable_standard sec_25_2511-2 provides that a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial adverse_interest in the disposition of the transferred property or the income therefrom sec_25_2511-2 provides that the relinquishment or termination of a power to change the beneficiaries of transferred property occurring otherwise than by death of the donor is regarded as the event which completes the gift and causes the gift_tax to apply sec_25_2511-2 provides that if a donor transfers property to himself as trustee or to himself and some other person not possessing a substantial adverse_interest as trustees and retains no beneficial_interest in the trust property and no power over it except fiduciary powers the exercise or nonexercise of which is limited by a fixed_or_ascertainable_standard to change the beneficiaries of the transferred property the donor has made a completed_gift and the entire value of the transferred property is subject_to the gift_tax sec_25_2511-2 does not define substantial adverse_interest sec_25_2514-3 provides in part that a taker in default of appointment under a power has an interest that is adverse to an exercise of the power sec_25_2514-3 also provides that a coholder of a power is considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate in 308_us_39 the taxpayer created a_trust for the benefit of named beneficiaries and reserved the power_to_revoke the trust in whole or in part and to designate new beneficiaries other than himself six years later in the taxpayer relinquished the power_to_revoke the trust but retained the right to change the beneficiaries in the taxpayer relinquished the right to change the beneficiaries the court stated that the taxpayer’s gift is not complete for purposes of the gift_tax when the donor has reserved the power to determine those others who would ultimately receive the property accordingly the court held that the taxpayer’s gift was complete in when he relinquished his right to change the beneficiaries of the trust a grantor’s retention of a power to change the beneficial interests in a_trust causes the transfer to the trust to be incomplete for gift_tax purposes even though the power may be defeated by the actions of third parties 37_tc_897 see also 51_tc_352 in this case grantor retained the grantor’s consent power over the income and principal of trust under sec_25_2511-2 a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial plr-134664-13 adverse_interest in the disposition of the transferred property or the income therefrom the distribution committee members are not takers in default for purposes of sec_25_2514-3 they are merely co-holders of the power the distribution committee ceases to exist upon the death of grantor under sec_25_2514-3 a co- holder of a power is only considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate in this case the distribution committee ceases to exist upon grantor’s death accordingly the distribution committee members do not have interests adverse to grantor under sec_25_2514-3 and for purposes of sec_25_2511-2 therefore grantor is considered as possessing the power to distribute income and principal to any beneficiary himself because he retained the grantor’s consent power the retention of this power causes the transfer of property to trust to be wholly incomplete for federal gift_tax purposes grantor also retained the grantor’s sole power over the principal of trust under sec_25_2511-2 a gift is incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries in this case grantor’s sole power gives grantor the power to change the interests of the beneficiaries accordingly the retention of the grantor’s sole power causes the transfer of property to trust to be wholly incomplete for federal gift_tax purposes further grantor retained grantor’s testamentary power to appoint the property in trust to anyone including trusts other than grantor’s estate grantor’s creditors or the creditors of grantor’s estate under sec_25_2511-2 the retention of a testamentary power to appoint the remainder of a_trust is considered a retention of dominion and control_over the remainder accordingly the retention of this power causes the transfer of property to trust to be incomplete with respect to the remainder in trust for federal gift_tax purposes finally the distribution committee possesses the unanimous member power over income and principal this power is not a condition_precedent to grantor’s powers grantor’s powers over the income and principal are presently exercisable and not subject_to a condition_precedent grantor retains dominion and control_over the income and principal of trust until the distribution committee members exercise their unanimous member power accordingly this power does not cause the transfer of property to be complete for federal gift_tax purposes see 37_tc_897 51_tc_352 accordingly based on the facts submitted and the representations made we conclude that the contribution of property to trust by grantor is not a completed_gift subject_to federal gift_tax any distribution from trust to grantor is merely a return of grantor’s property therefore we conclude that any distribution_of_property by the distribution committee from trust to grantor will not be a completed_gift subject_to plr-134664-13 federal gift_tax by any member of the distribution committee further upon grantor’s death the fair_market_value of the property in trust is includible in grantor’s gross_estate for federal estate_tax purposes ruling sec_2514 provides that the exercise or release of a general_power_of_appointment created after date shall be deemed a transfer of property by the individual possessing such power sec_2514 provides that the term general_power_of_appointment means a power which is exercisable in favor of the individual possessing the power possessor the possessor’s estate the possessor’s creditors or the creditors of the individual’s estate sec_25_2514-1 provides in part that a power_of_appointment is not a general power if by its terms it is exercisable only in favor of one or more designated persons or classes other than the possessor or his creditors or the possessor’s estate or the creditors of the estate sec_2514 provides that in the case of a power_of_appointment created after date if the power is exercisable by the possessor only in conjunction with the creator of the power such power is not deemed a general_power_of_appointment sec_2514 provides that in the case of a power_of_appointment created after date if the power is not exercisable by the possessor except in conjunction with a person having a substantial interest in the property subject_to the power which is adverse to the exercise of the power in favor of the possessor such power shall not be deemed a general_power_of_appointment for purposes of sec_2514 a person who after the death of the possessor may be possessed of a power_of_appointment with respect to the property subject_to the possessor’s power which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the possessor’s power sec_25_2514-3 provides in part that a co-holder of a power has no adverse_interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power however a co-holder of a power is considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate thus for example if x y and z held a power jointly to appoint among a group of persons which includes themselves and if on the death of x the power will pass to y and z jointly then y and z are considered to have plr-134664-13 interests adverse to the exercise of the power in favor of x similarly if on y’s death the power will pass to z z is considered to have an interest adverse to the exercise of the power in favor of y the powers held by the distribution committee members under the grantor’s consent power are powers that are exercisable only in conjunction with the creator grantor accordingly under sec_2514 the distribution committee members do not possess general powers of appointment by virtue of possessing this power further the powers held by the distribution committee members under the unanimous member powers are not general powers of appointment as in the example in sec_25_2514-3 the distribution committee members have substantial adverse interests in the property subject_to this power accordingly any distribution made from trust to a beneficiary other than grantor pursuant to the exercise of these powers the grantor’s consent power and the unanimous member powers are not gifts by the distribution committee members instead such distributions are gifts by grantor based upon the facts submitted and representations made we conclude that any distribution_of_property by the distribution committee from trust to any beneficiary of trust other than grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee further we conclude that any distribution_of_property from trust to a beneficiary other than grantor will be a completed_gift by grantor except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code specifically we express no opinion on the trust provisions permitting trustee to distribute income or principal to trustees of other qualified trusts decanting plr-134664-13 this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file a copy of this letter is being sent to x’s authorized representative sincerely bradford r poston senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


office_of_chief_counsel internal_revenue_service memorandum number release date cc corp b02 clag-137633-03 uilc date date to associate area_counsel lmsb cc lm hmt new from associate chief_counsel corp cc corp b02 subject tax treatment of bankruptcy reorganization this chief_counsel_advice responds to your memorandum dated date and to your supplemental inquiry of august 8th in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent legend corp a reorganized corp a corp b division creditor representative creditor classes date date cc corp b02 clag-137633-03 page date dollar_figurea dollar_figureb dollar_figurec dollar_figured e f g h i issues whether the acquisition by corp b of a portion of the assets of corp a in exchange for the distribution of corp b stock to the former creditors of corp a pursuant to the plan_of_reorganization in a title proceeding qualifies as a g reorganization within the meaning of sec_368 whether the transfer of assets to corp b in exchange for corp b stock qualifies for nonrecognition treatment under sec_351 conclusions based upon the information provided the transaction does not qualify as a ‘g’ reorganization under sec_368 the transfer of assets to corp b in exchange for corp b stock does not qualify for nonrecognition treatment under sec_351 the original submission also questioned whether the described transaction qualified as a ‘d’ reorganization within the meaning of sec_368 of the code after discussions with your office and examination it was determined that there was no question as to the application of sec_368 and this issue was not addressed cc corp b02 clag-137633-03 page facts on date corp a and certain of its wholly-owned subsidiaries filed a voluntary petition under chapter of the united_states bankruptcy code by an order dated date the bankruptcy court approved the plan_of_reorganization the plan was consummated on date the plan provided for the consolidation of certain of corp a’s subsidiaries and the transfer of the assets of the division to a new entity all prepetition equity interests in corp a were extinguished and corp a continued certain of its business operations as reorganized corp a under relevant provisions of the plan the following transactions were to take place the estates of various subsidiaries not relevant here shall be merged with and into corp a corp b a new corporation will be organized by corp a reorganized corp a will sell the special division assets to corp b for cash estimated at dollar_figurea reorganized corp a will sell and transfer to the creditor representative an undivided e interest in the remaining division assets subject_to e of the outstanding division liabilities in exchange for the cancellation of claims of creditor classes in an amount equal to the fair_market_value of such division assets subject_to such division liabilities the creditor representative on behalf of the creditor classes will contribute to corp b the undivided e interest in the remaining division assets received by the creditor representative subject_to e of the outstanding division liabilities reorganized corp a will sell and transfer to corp b an undivided f interest in the remaining division assets subject_to f of the outstanding division liabilities corp b will assume all of the division liabilities corp b will issue to the creditor representative i on behalf of the creditor classes aa g shares of corp b common_stock and bb dollar_figureb in aggregate principal_amount of corp b notes and ii on behalf of the creditor classes and at the direction of reorganized corp a aa h shares of corp b common_stock and bb dollar_figurec in aggregate principal_amount of corp b notes cc corp b02 clag-137633-03 page the creditor representative will remit all of the corp b notes and shares of the corp b common_stock received under the plan for distribution to creditor classes to the disbursing agent reorganized corp a will issue to the disbursing agent i shares of reorganized corp a common_stock for distribution to creditor classes reorganized corp a will transfer certain of its remaining assets to three subsidiaries not relevant here in exchange for all of the issued and outstanding_stock of these subsidiaries law and analysis issue sec_368 sec_368 defines a reorganization to include a transfer by a corporation of all or part of its assets to another corporation in a title_11_or_similar_case but only if in pursuance of the plan stock_or_securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under sec_354 sec_355 or sec_356 sec_354 provides that no gain_or_loss shall be recognized if stock_or_securities in a corporation a_party_to_a_reorganization are in pursuance of the plan_of_reorganization exchanged solely for stock_or_securities in such corporation or in another corporation a party to the reorganization sec_354 provides that sec_354 shall not apply to an exchange in pursuance of a plan_of_reorganization within the meaning of subparagraph d or g of sec_368 unless the corporation to which the assets are transferred acquires substantially_all of the assets of the transferor and the stock securities and other_property received by the transferor_corporation as well as the other properties of the transferor are distributed in pursuance of the plan_of_reorganization sec_355 provides that if a a corporation distributes to a shareholder with respect to its stock or distributes to a security holder in exchange for its securities solely stock_or_securities of a corporation which it controls immediately before the distribution b the transaction was not used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or the controlled_corporation or both c the active trade_or_business requirements of sec_355 are satisfied and d as part of the distribution the distributing_corporation distributes all of the stock in the controlled_corporation held by it immediately before the distribution or an amount of stock in the controlled_corporation constituting control within the meaning of sec_368 cc corp b02 clag-137633-03 page then no gain_or_loss shall be recognized to and no amount shall be includible in the income of such shareholder on the receipt of such stock sec_356 provides that if sec_354 or sec_355 would apply to an exchange but for the fact that the property received in the exchange consists not only of property permitted by sec_354 or sec_355 to be received without recognition of gain but also of other_property or money then the gain if any to the recipient shall be recognized but in an amount not in excess of the sum of such money and the fair_market_value of such other_property in this case the described series of transactions fail to qualify as a g reorganization the requirement that the stock of the transferee corporation be distributed in a transaction that qualified under sec_354 sec_355 or sec_356 was not satisfied under sec_354 there must be an exchange of stock_or_securities in a corporation a party to the reorganization solely for stock_or_securities of such corporation or in another corporation a party to the reorganization sec_355 requires that there be a distribution to a shareholder with respect to its stock or a distribution to a security holder in exchange for its securities sec_356 applies only where property is distributed in addition to an exchange of stock_or_securities for other stock and securities based upon the information provided all prepetition stock interests in the debtor corp a were extinguished in the transaction and there were no prepetition holders of securities within the meaning of sec_354 and sec_355 the creditors of corp a that received stock in corp b were neither stockholders nor security holders therefore the threshold requirement of sec_354 and that there be an exchange by or because we conclude that the transaction fails under this provision we have not included an analysis of the other requirements of sec_368 it is our understanding that examination determined based upon the factors set forth in camp wolters enterprises inc v commissioner that the members of creditor classes were not security holders for purposes of sec_354 sec_355 or sec_356 see 22_tc_737 aff’d 230_f2d_555 5th cir cert_denied 352_us_826 we note that the transaction also fails to meet the requirements of sec_354 this section provides in pertinent part that sec_354 shall not apply to an exchange in pursuance of a plan_of_reorganization within the meaning of sec_368 unless the stock securities and other properties received by such transferor as well as the other properties of such transferor are distributed in pursuance of the plan_of_reorganization emphasis added this language requires the transferor to liquidate see generally collier on bankruptcy matthew cc corp b02 clag-137633-03 page distribution to a stockholder or security holder has not been met see generally collier on bankruptcy matthew bender 15th ed revised tatlock 540-2nd t m a-61 discharge_of_indebtedness bankruptcy and insolvency boris i bittker james s eustice federal income_taxation of corporations and shareholders warren gorham lamont 7th ed issue sec_351 sec_351 provides that no gain_or_loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately_after_the_exchange such person or persons are in control as defined in sec_368 of the corporation sec_368 defines the term control to mean the ownership of stock possessing at least of the total combined voting power of all classes of stock entitled to vote and at least of the total number of shares of all other classes of stock of the corporation sec_351 provides that if sec_351 would apply to an exchange but for the fact that there is received in addition to the stock permitted to be received under sec_351 other_property or money boot then gain if any to such recipient shall be recognized but in an amount not in excess of the sum of such money and the fair_market_value of such other_property and no loss to such recipient shall be recognized sec_351 provides that sec_351 shall not apply to a transfer of property of a debtor pursuant to plan while the debtor is under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 to the extent that the stock received in the exchange is used to satisfy the indebtedness of such debtor sec_362 provides in pertinent part that if property is acquired in connection with a transaction to which sec_351 applies then the basis of such bender 15th ed revised tatlock 540-2nd t m a-62 discharge_of_indebtedness bankruptcy and insolvency in this case the transferor reorganized corp a retained assets related to the corp a core business and continued to operate this business through its wholly-owned subsidiaries accordingly the transaction does not qualify under sec_354 we note that in a reorganization under sec_368 the short-term creditors would be treated as former shareholders of corp a for purposes of the continuity_of_interest requirement see 315_us_179 however this treatment has not been extended to determine status as a shareholder or security holder for purposes of sec_354 or sec_355 cc corp b02 clag-137633-03 page property is the same as it would be in the hands of the transferor increased in the amount of gain recognized to the transferor on such transfer in a supplemental submission you queried whether the property transfers to newly formed corp b would qualify for nonrecognition treatment under sec_351 based upon a review of the documents the asset transfers to corp b were accomplished by the following transactions reorganized corp a transfers the special division assets to corp b for dollar_figurea reorganized corp a transfers e of the remaining division assets to the creditor representative on behalf of creditor classes in satisfaction of the claims of creditor classes and the creditor representative transfers such assets to corp b in exchange for corp b stock and notes and reorganized corp a transfers the remaining f of the assets to corp b in exchange for corp b stock and notes which are distributed to the creditor representative in satisfaction of claims of creditor classes corp a and corp b have treated these transfers as a sale of assets in exchange for cash stock and notes however in determining the effect of the transaction for federal_income_tax purposes the labels attached to the transaction by corp a do not control the substance of the transfers not their form will control the issue in the instant case is whether the exchange of corp a assets for corp b stock can qualify as an exchange under sec_351 so that corp b takes a carryover_basis in these assets under sec_362 we considered whether the described series of transactions could be recast to treat corp a as having transferred the assets directly to corp b in exchange for cash stock and notes and distributed the stock and notes to creditor classes in satisfaction of their claims against corp a this recast fails to meet the requirements of section in addition to the recast transaction discussed we also considered whether creditor classes could be treated as the equitable owners of the assets of corp a and therefore regarded as the transferors of the assets to corp b see 316_us_527 bondholders of a bankrupt corporation were treated as the equitable owners of its assets and were regarded as the transferors of assets under sec_112 the predecessor to sec_351 42_tc_26 nonacq 1966_2_cb_8 bondholders and creditors of a bankrupt corporation were treated as the equitable owners of its assets and were regarded as transferors under sec_112 in this case however there are no prepetition shareholders or security holders bondholders that would be treated as the equitable owners of corp a’s assets only the short-term debt holders creditor classes would be so treated we believe this distinction weighs against such treatment further this treatment does not adequately account for the initial transfer of assets to corp b for which corp a received and retained dollar_figurea lastly we note that the results obtained under this recast runs counter to that afforded by sec_351 enacted by the bankruptcy_tax_act_of_1980 sec_351 provides in pertinent part that for purposes of sec_351 stock issued for indebtedness of the transferee cc corp b02 clag-137633-03 page on two separate grounds corp a is not a ‘transferor’ for purposes of sec_351 and sec_351 precludes application of sec_351 to a transfer of assets by corp a in order to qualify under sec_351 the person or persons transferring property must receive in exchange for such property stock in the transferee corporation that constitutes control in general ‘ownership’ for purposes of the control requirement is determined by examining the obligations and freedom of action of the taxpayer with respect to the stock received in the exchange 65_tc_1025 the control requirement is generally not satisfied where at the time of the exchange the taxpayer is under an obligation to transfer the stock of the corporation acquired in the exchange to another person see eg 188_f2d_127 2d cir cert_denied 342_us_824 89_f2d_513 3d cir 65_tc_1025 revrul_83_23 1983_1_cb_82 revrul_79_194 1979_1_cb_145 revrul_79_70 1979_1_cb_144 where a taxpayer has irrevocably foregone or relinquished the legal right to determine whether to retain the shares acquired in the exchange ownership in such shares is lacking for purposes of sec_351 65_tc_1025 the recast would treat corp a as transferring the assets to corp b in exchange for corp b stock notes and cash in order to comply with the terms of the plan corp a was obligated to immediately transfer the corp b stock received in the exchange to creditor classes because corp a had irrevocably relinquished its right to retain the stock and was under a pre-existing_obligation to dispose_of the stock its ownership of such stock is lacking for purposes of the control requirement of sec_351 even if we assume that corp a was a transferor and the control requirement was satisfied sec_351 would make sec_351 inapplicable under this recast sec_351 provides that sec_351 will not apply to a transfer of property of a debtor pursuant to plan while the debtor is under the jurisdiction of a court in a title_11_or_similar_case to the extent that the stock received in the exchange is used to satisfy the indebtedness of such debtor under the recast corp a would be treated as transferring the assets in exchange for stock of corp b and distributing that stock to corporation which is not evidenced by a security is not considered as issued in return for property the effect of this section is to secure a bad_debt deduction for creditors holding short-term indebtedness by treating creditor classes as transferors of the corp a assets we would effectively negate this result we do not believe that this recast is appropriate in light of sec_351 the receipt of corp b notes and cash would be a taxable transaction to corp a regardless of whether the receipt of stock qualified for nonrecognition treatment under sec_351 see sec_351 cc corp b02 clag-137633-03 page creditor classes in satisfaction of their claims against corp a accordingly sec_351 does not apply finally although the conclusions reached above appear to support reorganized corp a’s and corp b’s treatment of the described transactions as taxable we note that we have considered other possible recasts that would treat the transactions as nonrecognition events due to the lack of needed facts and the unavailability of such facts at this stage however we are unable to determine whether any such recasts would be viable in this case this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views if you have any further questions please call william d alexander associate chief_counsel corporate ______________________________ by gerald b fleming senior technician reviewer cc corp b02


department of the treasury internal_revenue_service - 08syy washington d c tax_exempt_and_government_entities_division sin ‘ tra tr nov attn legend state a agency m plan x plan y group b employees dear this letter is in response to a request for a private_letter_ruling dated supplemented by letter dated submitted on your behalf by your authoyized representatives in support of your request you have submitted the following facts and representations agency m is a public transportation agency organized under the laws of state a defined_benefit_plan intended to be qualified under the provisions of sec_401 of the internal_revenue_code code that apply to governmental plans agency m currently maintains plan x a page agency m proposes to establish plan y a defined_contribution_plan effective an alternative retirement_plan for existing eligible employees and would be the sole retirement_plan for employees who first become eligible for a non-bargaining unit plan after plan y will provide plan y is intended to be qualified in accordance with the provisions of sec_401 of the code agency m proposes to make an employer_contribution equal to sec_4 of plan y provides that eight percent of considered compensation to plan y on behalf of the group b employees within days after becoming an eligible_employee a group b employee each such group b employee other than an option employee shall make a one-time irrevocable election to contribute a percentage of his or her compensation to plan y the contributions amount shall be any whole percentage between zero percent and fifteen percent subject_to maximum annual_addition limits election during the specified period shall be deemed to have made an irrevocable election to contribute zero percent of his or her compensation to plan y irrevocable until the group b employee ceases to have compensation or ceases to be a group b employee a group b employee who fails to make an once the election is made it shall be sec_4 of plan y further provides that any the group b employee's taxable compensation but the picked up contributions shall be included in contributions elected under this section shall be picked up and paid_by agency m shall be reduced by the amount of the contributions picked up by agency m considered compensation_for the plan_year in which such amounts are contributed to plan y right to receive the picked up contributions until an occurrence of a distribution of plan y although designated as employee contributions are paid_by agency m in lieu of contributions by the group b employee employee does not have the option of choosing to receive the contributed amounts directly instead of having them paid_by agency m to plan y sec_4 of plan y also provides that the group b contributions made pursuant to this section a group b employee shall not have any agency m proposes to offer its employees who participate in plan x options with respect to participating in plan y employees are current plan x participants who elect to continue to accrue benefits under plan x continue to receive credited service under plan x and will not be eligible to receive allocations of employer contributions or to make pick-up contributions under plan y option employees will option employees may option rage nonetheless elect to make voluntary after-tax contributions to plan y a current plan x participant group b employee who wishes a once this employee has elected to to transfer the lump-sum present_value of the b have the ultimate to be eligible for employer contributions and to make pick up contributions to plan y must first elect to freeze his or her credited service under plan x freeze his or her credited service under plan x must then elect accrued_benefit under plan x to plan y benefit at retirement calculated under plan x based on credited service through date through the date of actual termination of employment employee may not elect a distribution of the present_value of his or her accrued_benefit under plan x as part of this election the lump-sum present_value of the plan x accrued_benefit will establish a beginning account balance in plan y for the group b employee who elects to transfer the present_value of his or her accrued_benefit from plan x to plan y and final average salary the employee a group b or plan x will continue in effect until it has satisfied its to each option employee who elects to continue to liabilities accrue a benefit under plan x and to each option employee who - elects to make voluntary after-tax contributions to plan y but does not transfer his or her interest under plan xk to plan y based on the aforementioned facts and representations you have requested the following rulings that neither the option to transfer the present_value of the accrued_benefit under plan x to plan y nor an actual election by an employee to make such a transfer will constitute a taxable_event for the employee under sec_72 or sec_402 of the code that the transferred amount will not be considered an annual_addition to plan y in the year of the transfer under sec_415 of the code ‘ that the fact that the present_value of the accrued_benefit is transferred from plan x to plan y will not by reason of the transfer subject plan y to the code sec_415 limit that the picked-up contributions will be treated as employer contributions for federal_income_tax purposes and will not be taxable to participants in the year in which the contribution is made to plan y page that no part of the’ contribution picked up by agency m nor any investment earnings on the contribution is includible in the taxable_income of the participant on whose behalf the contribution was made until the contribution amount is actually distributed from plan y sec_402 of the code provides that except as otherwise provided in this section any amount actually distributed to any distributee by any employee’s trust described in sec_401 which is exempt from tax under sec_501 c shall be taxable to the distributee in the taxable_year of the distributee in which the amount is distributed under sec_72 relating to annuities sec_72 of the code provides for an additional tax on any amount received from a qualified_retirement_plan defined in sec_4974 which includes plans described in‘ sec_401 which such amount is received is equal to percent of the portion of such amount which is includible in gross_income except where such income is distributed on or after an employee attain sec_59 under sec_72 the additional tax for the taxable_year in or on account of one or more exceptions provided for of the code as sec_401 of the code provides that a_trust created or organized in the united_states and forming part of a qualified_stock bonus pension or profit sharing plan of an employer constitutes a qualified_trust only if the various requirements set out in sec_401 are met revrul_56_693 c b as modified by rev provides that a pension_plan fails rul c b to meet the requirements of sec_401 employee to withdraw any part of the employee’s accrued_benefit other than a benefit attributable to voluntary_employee_contributions prior to certain distributable events eg retirement death disability severance of employment om termination of the plan it permits an if revrul_67_213 1967_2_cb_149 involves the transfer of funds directly from the trust forming part of plan to the trust forming part of the revenue_ruling provides in part that if interest in a qualified_plan is transferred from the trust forming part of that plan to the trust forming part of another qualified_plan without being made available to the participant no taxable_income will be recognized by reason of such transfer a qualified_stock bonus plan a participant’s a qualified_pension page in the case at issue it is represented that during the no amount will be transfer of amounts from plan x to plan y distributed or made available to the group b employee but will instead be transferred directly from plan x to plan y a group b employee who elects to transfer the lump sum present_value of his or her accrued_benefit from plan x to plan y may not elect to receive a distribution of this plan x amount in lieu of having such amount transferred directly to plan y further accordingly we conclude with respect to ruling_request one that neither the option to elect to transfer the present_value of the accrued_benefit nor the actual transfer of the present_value of the accrued_benefit under plan x to plan y will constitute a taxable_event for the group b employee under sec_402 of the code furthermore as the amounts transferred will not be includible in the group b employees’ gross_income at the time of the transfer such transfer will not result in the imposition of an early_distribution_tax under sec_72 of the code with respect to ruling requests two and three section of the code provides that a defined_benefit_plan i sec_415 a not a qualified_plan if the plan provides for the payment of benefits with respect to a participant which exceed the limitation of sec_415 of the code code limits the amount of annual benefits in a defined_benefit_plan sec_415 of the sec_415 b of the code provides that a defined_contribution_plan is not a qualified_plan if contributions and other additions made to the plan with respect to a participant in a taxable_year exceed the limitation of sec_415 of the code and other additions to a participant’s account in a defined_contribution_plan sec_415 limits the amount of annual contributions sec_1 b iv of the income_tax regulations the regulations provides that when there is a transfer of funds from one qualified_plan to another the annual_benefit attributable to the assets transferred does not have to be taken into account by the transferee_plan in applying the limitations of sec_415 sec_1 b iv of the regulations provides that the transfer of funds from one qualified_plan to another will not be considered an annual_addition for the limitation_year in which the transfer occurs plan x and plan y are assumed to be qualified_plans therefore the proposed transfer from plan kx to plan y is a page accordingly with iv and b transfer from one qualified_plan to another respect to ruling_request numbers two and three we conclude that pursuant to sec_1 b the regulations the amount transferred from plan x to plan y will not be considered an annual_addition to plan y in the year of the transfer and the annual_benefit attributable to the assets transferred from plan x to plan y does not have to be taken into account by plan y in applying the limitations of sec_415 of course the annual_benefit associated with the amounts transferred from plan x to plan y continues to be taken into account by plan x for purposes of b iv of with respect to ruling requests four and five h the code provides that contributions otherwise designated as employee contributions shall be treated as employer contributions if such contributions are made to a plan described in sec_401l a established by a state government or a political_subdivision thereof and are picked up by the employing unit of the federal_income_tax consequences to be accorded in that revenue_ruling the of the code is specified in revenue revrul_77_462 concluded that the school contributions that are picked up by the employer within the meaning of sec_414 ruling c b employer school district agreed to assume and pay the amounts employees were required by state law to contribute to a state pension_plan district’s picked-up contributions to the plan are excluded from the employee’s gross_income until such time as they are distributed to the employees that under the provisions of sec_3401 a the school district’s contributions to the plan are excluded from wages for purposes of the collection of income_tax at source on wages therefore no withholding is required from the employees’ salaries with respect to such picked-up contributions the revenue_ruling held further of the code the issue of whether contributions have been picked up by an employer within the meaning of sec_414 h addressed in revrul_81_35 c b ruling c b that the following two criteria must be met must specify that the contributions although designated as employee contributions are being paid_by the employer in lieu of contributions by the employee and the employee must not be given the option of choosing to receive the contributed amounts directly instead of having them paid_by the employer to the pension_plan of the code is and revenue these revenue rulings established the employer page revrul_87_10 1987_1_cb_136 provides that in order to satisfy revenue rulings and the required specification of designated employee contributions must be completed before the period to which such contributions relate thus employees may not exclude from current gross_income designated employee contributions to a qualified_plan that relate to compensation earned for services prior to the date of the last governmental action necessary to effect the pick up sec_4 of plan y as proposed satisfies the criteria set forth in revrul_81_35 and revrul_81_36 because it specifies that contributions made pursuant to this section although designated as group b employee contributions are paid_by agency m in lieu of contributions by the group b employee and that the group b employee does not have the option of choosing to receive the contributed amounts directly instead of having such amounts paid_by agency m to plan y accordingly we conclude that the pick-up contributions will be treated as employer contributions for federal_income_tax purposes and will not be taxable to the participant in the year in which the contributions are made to plan y furthermore no part of the contribution picked-up by agency m investment earnings on the contribution is includible in taxable_income of the participant on whose behalf the contribution was made until the contribution amount is actually distributed from plan y or any for purposes of the application of sec_414 of the it is immaterial whether the employer picks up code contributions through a reduction in salary an offset against future salary increases or a combination of both these rulings apply only if the effective date for the commencement of any proposed pick up is not any earlier than the later of the date the plan y it is adopted by agency m or the date is put into effect these rulings are based on the assumption that plan x and plan y meet the requirements for qualification under sec_401 of the code at the time of the transfer and at the time of the proposed contributions and distributions this ruling is further based on sec_4 of plan y proposed as set forth in your letter dated september a sec_2002 ‘this ruling is also based on the condition that a group b employee who elects to make contributions to plan y pursuant to the terms of sec_4 as proposed may not make more than one page irrevocable election to make such contributions and that a one time irrevocable election made by a group b employee to contribute zero percent of compensation to plan y pursuant to the terms of sec_4 as proposed is an election that may not be subsequently altered or amended no opinion is expressed as to whether the amounts in question are subject_to tax under the federal_insurance_contributions_act no opinion is expressed as to whether the amounts in question are paid pursuant to a salary reduction agreement within the meaning of sec_3121 b of the code no opinion is expressed as to the tax treatment of the transactions described herein under the provisions of any other section of either the code or the regulations that may be applicable thereto this letter_ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited by others as precedent a copy of this letter is being sent to your authorized representative in accordance with a power_of_attorney on file in this office if you have any questions concerning this ruling please contact ep ra t2 at sincerely yours signed sotce b floyd joyce e floyd manager employee_plans technical group t tax_exempt_and_government_entities_division enclosures deleted copy of letter_ruling notice


t c memo united_states tax_court john n sweeney petitioner v commissioner of internal revenue respondent docket no 21167-05l filed date john n sweeney pro_se monica j miller for respondent memorandum opinion wells judge the instant case is before the court on respondent’s motion for summary_judgment pursuant to rule and to impose a penalty pursuant to sec_6673 the issue we 1unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure and all section references are to the internal_revenue_code must decide is whether respondent’s appeals_office abused its discretion in determining to proceed with collection of petitioner’s tax_liability for taxable years and for the reasons stated below we shall grant respondent’s motion for summary_judgment and to impose a penalty pursuant to sec_6673 background at the time of filing the petition in the instant case petitioner resided in melbourne florida petitioner failed to file federal_income_tax returns or pay tax for taxable years through respondent sent petitioner a notice_of_deficiency for each year petitioner petitioned this court regarding taxable_year that case is at docket no petitioner failed to petition this court regarding any other taxable years and accordingly respondent assessed deficiencies plus sec_6651 and sec_6654 additions to tax and interest for taxable years and petitioner’s current liabilities including interest through the trial date of date for the years in issue are dollar_figure dollar_figure and dollar_figure respectively on date respondent sent petitioner a letter final notice_of_intent_to_levy and notice of your right to a hearing with respect to the years in issue in the instant case on date petitioner sent respondent a form request for a collection_due_process_hearing respondent’s appeals officer reviewed petitioner’s correspondence and determined that all of petitioner’s contentions were frivolous on date respondent’s appeals officer sent petitioner a letter in which respondent notified petitioner that respondent had received petitioner’s request for a sec_6330 hearing and scheduled a telephone conference for date pincite p m the letter advised petitioner that the underlying liabilities could not be raised at the hearing because petitioner had received statutory notices of deficiency respondent’s letter also directed petitioner to an internal_revenue_service irs publication the truth about frivolous tax arguments available on the irs’s web site finally the letter advised petitioner of this court’s authority to impose a sanction of up to dollar_figure pursuant to sec_6673 petitioner did not respond to this letter and failed to participate in the scheduled phone conference on date respondent sent petitioner a letter again requesting that petitioner contact respondent and provide any additional 2petitioner denies receiving a statutory_notice_of_deficiency however this is only because petitioner claims to have received non-statutory notices of deficiency accordingly the fact of receipt is deemed conceded information petitioner wished to have considered in the hearing the letter requested a response by date on date petitioner sent respondent a letter captioned legal notice in which petitioner asserted only frivolous arguments petitioner also sent a second letter containing frivolous arguments all of the arguments petitioner raised in those letters were also raised in the 12-page amended petition filed with this court in petitioner’s deficiency case at docket no on date this court struck sua sponte paragraph sec_5 through and through of the petition in that case as frivolous and advised petitioner regarding sec_6673 based on the administrative file and correspondence respondent’s appeals officer determined that the proposed levy was appropriate and sent petitioner a notice_of_determination petitioner timely petitioned this court pursuant to sec_6330 petitioner’s lengthy petition and reply to respondent’s answer raise only frivolous arguments respondent filed a motion for summary_judgment and to impose a penalty pursuant to sec_6673 on date discussion summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials and may be granted where there is no genuine issue of material fact and a decision may be rendered as a matter of law rule a and b fla peach corp v commissioner 90_tc_678 the moving party bears the burden of proving that there is no genuine issue of material fact and factual inferences are viewed in a light most favorable to the nonmoving party 119_tc_252 85_tc_812 79_tc_340 the party opposing summary_judgment must set forth specific facts that show a genuine question of material fact exists and may not rely merely on allegations or denials in the pleadings 91_tc_322 87_tc_214 sec_6330 provides that no levy may be made on any property or right to property of a person unless the secretary first notifies him or her in writing of the right to a hearing before the appeals_office the appeals officer must verify at the hearing that the applicable laws and administrative procedures have been followed sec_6330 at the hearing the person may raise any relevant issues relating to the unpaid tax or the proposed levy including appropriate spousal defenses challenges to the appropriateness of collection actions and collection alternatives sec_6330 the person may challenge the existence or amount of the underlying tax however only if he or she did not receive any statutory_notice_of_deficiency for the tax_liability or did not otherwise have an opportunity to dispute the tax_liability sec_6330 where the validity of the underlying tax_liability is properly in issue the court will review the matter de novo where the validity of the underlying tax is not properly at issue however the court will review the commissioner’s administrative determination for abuse_of_discretion 114_tc_604 114_tc_176 petitioner had the opportunity to challenge the correctness of his tax_liability for and but instead chose not to petition this court in response to the notices of deficiency regarding those years therefore petitioner’s underlying tax_liability for and is not properly in issue and we review respondent’s determination to proceed with collection for an abuse_of_discretion the record demonstrates that the only issues petitioner raised throughout the sec_6330 administrative process and in his petition to this court were frivolous tax_protester type arguments we do not address petitioner’s frivolous arguments with somber reasoning and copious citations of precedent as to do so might suggest that these arguments possess some degree of colorable merit see 737_f2d_1417 5th cir the record in the instant case demonstrates that respondent’s appeals officer was impartial had no prior involvement with petitioner and verified that all applicable laws and administrative procedures were followed accordingly we hold that respondent’s determination to proceed with the proposed levy to collect petitioner’s tax_liability for and was not an abuse_of_discretion and that no genuine issue of material fact exists requiring trial respondent is entitled to summary_judgment sec_6673 provides that this court may require the taxpayer to pay a penalty not in excess of dollar_figure whenever it appears to this court a the proceedings were instituted or maintained by the taxpayer primarily for delay b the taxpayer’s position is frivolous or groundless or c the taxpayer unreasonably failed to pursue available administrative remedies respondent has moved that the court impose a penalty in the instant case the record indicates that petitioner was warned that this court could impose a penalty if he persisted in raising frivolous tax_protester arguments despite being warned petitioner raised frivolous arguments throughout the sec_6330 administrative process in his petition to this court in his reply to respondent’s answer and in his response to respondent’s motion for summary_judgment accordingly we shall impose a dollar_figure penalty on petitioner pursuant to sec_6673 to reflect the foregoing an appropriate order and decision will be entered