internal_revenue_service appeals_office e ninth street cleveland oh release number release date date date uil code department of the treasury employer_identification_number person to contact telephone refer reply to dear we considered your appeal of the adverse action proposed by the director exempt_organizations rulings and agreements the paragraph s check below indicate s our decision your exemption from federal_income_tax under internal_revenue_code irc sec_501 is ci _ confirmed modified a new determination_letter is enclosed denied or revoked you are required to file federal_income_tax retums on dx form_1041 for the above years you should file these returns within days from the date of this letter unless a request for extension of time is granted file the returns in accordance with their instructions and do not send them to this office _ you are not a private_foundation because you are described in irc section s _ you are an operating_foundation as described in sec_4942 j you have no liability for excise_taxes under irc for the above years _ your liability for excise_taxes under irc properly reported on your return s for the above year s was _ there is no change to your unrelated_business_income_tax liability as reported for the above years _ your form s 990-t for the above years are accepted as filed o you may direct questions about the decision to the appeals officer whose name and telephone number are shown above sincerely yours karen skinder appeals team manager department of the treasury internal_revenue_service washington d c date nov seg contact person identification_number contact number q aire employer_identification_number dear we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 the basis for our conclusion is set forth below this letter supersedes our previous letter dated issue does the applicant qualify for federal_income_tax exemption under sec_501 of the internal_revenue_code facts pursuant to a_trust agreement trust made and entered you were formed on into between the has adopted one or more employee_welfare_benefit_plans the purpose_trust states that of which is to provide welfare benefits for those employees of the corporation and their eligible dependents covered by the plan according to the form_1120s filed by evor tax_year emr was incorporated on qian the retum was marked initial return ad’ and wee as trustee the at the time the application was submitted to the internal_revenue_service the plan consisted of all four employees of the a ae president ceo and sole shareholder his wife treasurer and chief financial officer and ga lp secretary his father resided in contact mr marketing resides in mnb all four participants are listed as and dollar_figureb two part-time employees were added to the plan a_i a long-time friend and qe we requested you provide the number of hours per week of the each of these employees worked but this information was not provided you state there is no employee contract for either individual and alilpreside in gwe trustees on gre dollar_figure qam did not receive a form_w-2 from received a salary of dollar_figure meduring e mbp he died on he was not accepted for disability or life_insurance for tax_year r he due to his age and heaith effective appointed individual income_tax services for the pe he is also the accountant and income_tax preparer for qa ew on cpa as successor trustee _ mm provides accounting and resigned as trustees of the plan and rq your application states that the plan will provide death_benefits in the amount of twenty times the annual compensation on the life of each participant pre-retirement disability will be percent of salary dollar_figurey maximum for up to years post-retirement health benefits will be funded in an amount necessary to fund a reserve over the working lives of covered employees using reasonable actuarial assumptions insurance premiums are paid from contributions from no employee contributions are contemplated the application_for universal_life_insurance for ee revocable_living_trust as the beneficiary the application_for ists es living_trust as the beneficiary the application_for all the remaining employees lists qe veba plan as the beneficiary the veba plan owns all five universal_life_insurance policies for the lists each life_insurance_policy contains provisions for net cash_value surrender and partial withdrawals before the death of the insured the policy allows the insured to borrow money from the policy up to the net cash_surrender_value at the time of the loan payout options for individuals include interest payment fixed amount payable fixed period payment limited payment and joint lifetime payment you submitted three documents entitled qo oluntary employee welfare plan trust agreement trust si voluntary employee benefit association plan and i voluntary employee welfare_benefit_plan adoption_agreement adoption_agreement gi signed the trust agreement and adoption_agreement as president of the corporation as trustee and as secretary for attestation purposes the adoption_agreement lists - liag as the acting plan_administrator pending irs approval of the plan you subsequently provided a i effective that provides life_insurance for plan participants of the agreement from ag inc to act as pian administrator is a broker with qe the company was the initial trustee of the plan it wasn't until resigned as trustees and appointed emme in your letter dated lia ep that lil and you stated that negotiations were under way toreplace gp with em and yim we subsequently requested a copy of the agreement with the bank you state that no agreement had been reached with sa and nd that a verbal agreement had been reached with o act as plan trustee in response to our request for a written copy of the agreement in your letter dated with department stating they were moving forward to act as trustee of the plan provided you provided a copy of an e-mail from a representative of the the trust plan was updated to current law and rs and treasury requirements that an irs determination be obtained that sp seem plan_administrator and qm power_of_attorney for the plan work out a funding agreement set forth within the trust for accepted investments based on the unmet requirements listed above plan in regards to the independence of jong as it is properly disclosed that he is independent you also state he is independent because he is not a relative of the qe or their employee continues to act as trustee of the you state you were advised that as article sec_1 of the trust states that the trustee shall hold the trust fund in trust and shall manage and administer the same in accordance with the terms and for the purpose of the trust article sec_1 states that the plan_administrator shall have full responsibility for and contro of the administration of the plan and except as specifically provided otherwise herein and the powers necessary to carry out the provisions of the trust article ili sec_3_1 states that the trustee shall invest and reinvest the principal and income of the trust fund and keep the trust fund invested without distinction between principal and income in such securities or in such property real or personal tangible or intangible as the trustee shall deem advisable article il sec_3_2 states that the plan_administrator shall pursuant to the plan establish and carry out a funding policy consistent with the purposes of the plan and the requirements of applicable law as may be appropriate from time to time article iv sec_4 states in part that the trustee is authorized and empowered in part a to sell exchange convey transfer or dispose_of and grant options with respect to any property held by the trust b to acquire hold dispose_of any real_estate at such time in a manner and upon such terms as the trustee may deem advisable to remain manage operate repair improve partition mortgage or lease for any term or years any such real_estate or to exchange all or part of thereof for other real_estate upon such terms as the trustee deems proper c to compromise compound and settle any debt or obligation due to or from it as the trustee d to vote any stocks or other_securities at any time held in the trust fund and exercise any options appurtenant to any stocks bonds or other_securities e to accept and hold any securities or other_property received by the plan f to borrow or raise money for the purpose of the trust fund g to enforce any right obligation or claim in its discretion to protect the interests of the trust h to make and deliver deeds or any other instruments necessary i to cause any investments held by it to be registered in or transferred into its name as trustee j to hold any part or alt of the trust fund uninvested and k to do all acts which the trustee may deem necessary or proper to exercise the powers of the trustee article iv sec_4 states that the trustee may be paid such reasonable_compensation as agreed upon in writing by the corporation and the trustee article vi section states the corporation may remove the trustee at any time upon days notice in writing to the trustee article vi section allows the corporation to appoint a successor trustee upon the resignation or removal of the trustee article vil section states that the trust agreement may be terminated at any time by the corporation and upon termination dissolution or liquidation of the corporation the trust fund shall be paid out by the trustee as and when directed by the plan_administrator or the corporation in accordance with the provisions of article ii of the plan you provided an amendment to this section of the trust that was adopted or iia the amendment states the agreement may be terminated at any time upon the agreement of the corporation and the trustee or in the event of the dissolution or liquidation of the corporation the trust fund will be paid out to the participants by the trustee upon the directive of the plan_administrator in the event of the termination or dissolution of the trust all funds will be distributed to plan participants no assets will be returned to or inure to the benefit of the corporation article sec_1 of the plan agreement defines board as the board_of directors of the company or the officer or officers of the company to whom such board_of directors may delegate any of its rights duties or powers article i sec_3_2 of the plan agreement states that all monies contributed by the company as well as all earnings shall be returned to the company in the event the irs determines the plan and trust does not qualify for exemption under sec_501 of the code article 1v sec_4 of the plan states the trustee shall have the authority and discretion to manage and control the trust fund assets article v sec_5 of the plan describes the governing employee board it states that the board shall consist of at least two participants only one of whom may own stock in the company corporation sec_5 of the plan states that the board has the power and authority to designate remove or replace the plan_administrator and approve of overrule or revise any rules regulations or interpretations adopted by the plan_administrator article x section of the plan states that the board and the governing employee board acting jointly have the right to amend the plan and trust at any time section states the company reserves the right to permanently discontinue contributions to the trust at any time by written notification to the plan_administrator the governing employee board and the trustee the plan defines the board as the board_of directors of the company the adoption_agreement provides that the plan will cover all employees of qr who are at least years of age completed big_number or more hours_of_service within a fiscal_year part- time employees working less than hours a week seasonal employees less than months of service or temporary unionized employees and employees who are insurable at standard rates the participation commencement_date is the first day of the plan_year following the completion of years_of_service but no more than years afte and ceri were hired in eeethe plan was amended on to waive the two year waiting_period you included a copy of the first amendment to the adoption_agreement dated - sec_1 of the amendment states the governing employee board shall include and q ssee mmeee you provided a second amendment dated eee which lists ge 2nd ged as members of the board ’ the financial information you provided shows you received the following payments from eee iam 20c as includes sheed for gemm who was not approved for disability or life_insurance and thus ineligible to participate in the plan you provided the following information for tax_year name salary benefits aay a ae premiums s---_ a eae pie sea so ie reoaene tie s cm a es s ou see above reference the amount of benefits attributable to the iri for llbtotals sheed or ' of all is soren or benefits the amount of premiums_paid on behalf of the ep for of the total premiums for all employees you provided the following information for tax_year name salar benefits sas _icoe naa say aaa dollar_figure eo7z ep ‘me dollar_figure zz premiums ae yd dollar_figure qu s dollar_figure vp aie la the amount of benefits attributable to the iee totals sqqgeb or b of all benefits of the the amount of premiums_paid on behalf of the q gggg-lbs for is sq or total premiums for all employees dollar_figure ge dollar_figure oz al ss law sec_501 of the code provides for the exemption of voluntary employees’ beneficiary associations that provide for the payment of life sick accident or other_benefits to the members of such association or their dependents or designated beneficiaries if no part of the net eamings of such association inures other than through such payments to the benefit of any private_shareholder_or_individual sec_1_501_c_9_-1 of the income_tax regulations provides that for an organization to be described in sec_501 an organization must meet all the following requirements a the organization must be an association of employees b membership in the association must be voluntary c the organization's purpose is to provide for the payment of life sick accident or other_benefits to its members or their dependents or designated beneficiaries and substantially_all of its operations are in furtherance of providing such benefits and d no part of the net_earnings of the organization inures other than by payment of the benefits referred to in c to the benefit of any private_shareholder_or_individual sec_1_501_c_9_-2 of the regulations states that the determination whether the selection or administration of objective conditions has the effect of providing disproportionate benefits to officers shareholders or highly compensated employees generally is to be determined on the basis of ali the facts and circumstances sec_1_501_c_9_-2 of the regulations states that a uniform percentage of compensation is a permissible restriction on the amount of life benefits received by the individual whose life is covered sec_1_501_c_9_-2 of the regulations provides in effect that a voluntary employee beneficiary association must be an entity such as a corporation or trust established under applicable local law having an existence independent of the member-employees or their employer sec_1_501_c_9_-2 of the regulations states that in order to be described in sec_501 an organization must be controlled-- i by its membership ii by independent_trustee s such as a bank or iii by trustees or other fiduciaries at least some of whom are designated by or on behalf of the membership sec_1_501_c_9_-3 of the regulations describes nonqualifying benefits from a veba to include the provision of loans to members except in times of distress the provision of savings facilities for members any benefit that is similar to a pension or annuity payable at the time of mandatory or voluntary retirement sec_1_501_c_9_-4 of the regulations provides that no part of the net_earnings of a veba inure to the benefit of any shareholder or individual other than through the payment of permitted types of life sick accident or other benefit prohibited inurement will be determined with regard to all of the facts and circumstances sec_1_501_c_9_-4 of the regulations states for purposes of subsection a the payment to any member of disproportionate benefits where such payment is not pursuant to objective and nondiscriminatory standards will not be considered a benefit within the meaning of sec_1_501_c_9_-3 as an example the payment to highly compensated personnel of benefits that are disproportionate in relation to benefits received by other members of a plan will constitute prohibited inurement sec_1_501_a_-1 of the regulations provides that the words private shareholder’ or individual in sec_501 refers to persons having a private interest in the activities of an organization revrul_81_94 1981_1_cb_330 holds that the inurement prohibition precludes the tax exemption of an organization operated to promote the private interests of an individual or individuals standing in relation to the organization as an investor for private gain sec_414 of the code provides that highly_compensated_employee means any employee who a wa sec_2 5-percent_owner at any time during the year or the preceding years or b for the preceding year had compensation from the employer in excess of dollar_figure and was in the top- paid group_of_employees for any preceding year as the employer elects in lima surgical associates inc voluntary employees’ beneficiary plan trust huntington national bank trustee v united_states cl_ct affd f 2d fed cir the claims_court held that a veba plan formed and controlled by three surgeons that provided non-qualifying retirement benefits and that limited the authority of the trustee did not qualify for exemption under sec_501 of the code the court held the plan did not meet three of the four mandatory requirements for a qualified veba as stated in regulation sec_1 c -1 because it is not a voluntary association of employees because it is not controlled by an independent_trustee within the meaning of regulation sec_1_501_c_9_-2 it does not provide for the payment of life sick accident or other permissible benefits and the trust provides disproportionate benefits to its officers shareholders and highly compensated in a manner prohibited under regulation sec_1_501_c_9_-4 and because the trust violates the proscription against private_inurement by providing disproportionate benefits to its officers shareholders and highly compensated employees in a manner prohibited under regulation sec_1_501_c_9_-4 in wade l moser v commissioner 56_tcm_1604 t c memo affd as to other issues 914f 2d 90-2ustc big_number 8th cir the irs disallowed a dollar_figure deduction by the taxpayer to a veba plan the tax_court allowed the deduction in full as a sec_162 business_expense the tax-exempt status for the veba plan was not an issue decided by the court the veba was subsequently revoked by the irs in joel a schneider m d 63_tcm_1787 t c memo a doctor was allowed to deduct veba contributions in excess of dollar_figure million over three years where of the benefit was for the doctor and his children the trust applied for tax-exempt status under sec_501 but was denied and this was not an issue in the case application of law inurement sec_501 in conjunction with sec_501 exempts from federal_income_tax a voluntary employees’ beneficiary association veba providing for the payment of life sick accident or other benefit to its members or their dependents or designated beneficiaries if no part of the net_earnings of the association inures other than through such payments to the benefit of any private_shareholder_or_individual you were organized pursuant to a_trust agreement executed on signed the agreement in his capacity as the percent shareholder of the corporation and as he was one of two members one of the two trustees until his resignation on of the goveming employee board_of the plan on resigned as trustees and min cpa was appointed the sole trustee of the plan article vi of the trust agreement states si may remove the trustee at any time we and gp is the sole owner of sb the company that funds the plan he and received percent and percent of the benefits of the plan for and respectively they are each insured for dollar_figure nib their applications for life_insurance list each other as the beneficiary whereas the plan is listed as the beneficiary for the remaining employees the plan is subject_to a degree of direct control by the sole owner of the contributing employer has ultimate contro over the plan by determining the level of contributions and benefits and reserves the right to appoint remove and control the activities of trustees as contributing employer he also controls the right to terminate the plan at any time mnm the owner-member since he is during your operation and upon your termination you provide a dominant share of aggregate benefits to wr the highly compensated owner-employee and his wife reason of having direct control_over uses operation administration and termination these circumstances indicate that you operate qb rather than primarily for the benefit of an primarily for the benefit of employee group you accumulate funds predominantly for the current benefit of and qm because you are subject_to termination at the discretion of 3b he is able to direct the distribution of his allocable share of trust assets in this manner you function substantially as an investment fund for the direct and private benefit of maintains effective_control over your in addition by ae and and the accumulation of investment funds for the private benefit of fall within the ambit of permissible benefits as described in sec_1_501_c_9_-3 of the regulations under these circumstances notwithstanding that current benefits are subject_to a restriction that is generally permissible under sec_1_501_c_9_-2 of the regulations you are organized and operated to promote the private interests of and oan greer does not and the holding of revrul_81_94 is applicable to your plan in that the plan promotes the private interests of the guaaiie by providing a large percentage of benefits to them and by not using the services of an independent_trustee to oversee the plan and its investment this inurement precludes the plan from qualifying for exemption under sec_501 your plan is similar to the plan discussed in lima surgical associates inc veba in that your trust covers a small number of employees and provides a dominant share of the aggregate benefits to the aaa other impermissible benefits universal_life_insurance policies are not eligible for inclusion in a c since the policies have provisions for period payments to the insured as a settlement option it is not an eligible benefit based on sec_1 c -3 f of the regulations also the life_insurance policies allow loans which are impermissible benefits under sec_501 independent_trustee sec_1_501_c_9_-2 of the regulations states that in order to be described in sec_501 an organization must be controlled by its membership or independent_trustee s such as a bank or by trustees or other fiduciaries at jeast some of whom are designated by or on behaif of the membership although the qb resigned as trustees on adoption of the plan they appointed has resigned accountant to act as a temporary independent_trustee although sq as trustee he is still able to exert significant control_over the operation of the plan because he controls the company that provides the funding for the plan and he has authority to remove the trustee at any time he indirectly exhibits control_over the trustee in that he uses the trustee as the accountant for jggm the company he owns as well as for his own personal accounting three years after the cpa their personal and business and income_tax services wears many hats for the rap mmb cannot be described as an independent_trustee as he permanent trustee you you attempted to secure the services of a bank to act as assurances that negotiations were underway to have as trustee for the plan upon our request for a copy of the written_agreement you stated that h an agreement with the bank but that a verbal agreement had been reached you could n with ea upon our request for a copy of a written_agreement you provided a copy of an e-mail from a representative of beimnb that they are willing to act as a trustee as long as the plan has secured tax-exempt status from the irs the plan has been in existence and it still has not secured the services of an independent_trustee this since allows the to maintain too much control_over the assets of the plan o act gave applicant's position you state the courts have not generally upheld the internal revenue service's position with regard to vebas as to private_inurement impermissible control by owner and failure to observe nor-discriminatory rules and prepaid expenses you cite wade l moser vs commissioner which ruled that a dollar_figure deduction claimed by the taxpayer to a veba pian to pre-fund a severance benefit was deductible as a sec_162 business_expense the court rejected the irs assertion that the plan was nothing more than a private investment fund created and operated for the benefit of the principal shareholders you note that over percent of the insurance premiums and the cost of funding the severance benefit were for benefits attributable to the principal shareholders from the court ruling you quote thus we hold that is not a determinative factor the fact that the plan benefits are skewed in favor of the in deciding the issue of deductibility of inland's veba contribution as the committee had as to the issue of control you quote in part although significant input into the management of the veba's assets the independent_trustee was the actual titleholder of those assets and it retained possession and exerted day-to-day control_over the assets you cite joel a schneider m d as another tax_court memo which followed moser in holding that an employer does not necessarily retain too much control when it retains the right to alter or terminate a plan as long as the funds in the plan never revert to or inure to the benefit of the employer in this case the plan benefits attributed to one participant were in excess of of the aggregate benefits you conclude that the tax_court rejected in both cases the difference in cost of benefits as a basis for denial of tax_benefit and that the trustee is now independent and is expected to shortly be replaced by an independent_contractor you distinguish the findings in lima from your case on several grounds including a finding that it was created to replace a terminated retirement_plan and that the corporation retained too much contro over the veba you state in lima the court approved the uniform percentage of the compensation method which is the same basis used to determine benefits in the meter management veba service response to applicant's position in moser the court began their opinion by stating the question of whether the veba plan qualified for exemption under sec_501 was not an issue in their ruling however the plan was subsequently revoked by the irs the court was asked to rule on whether the funding corporation to the plan was entitled to a dollar_figure business deduction under sec_162 as an ordinary and necessary business_expense the irs disallowed the deduction in part because percent of the deduction was attributable to one individual of note is the fact that the trustee of the veba plan was an independent trust company the court determined the contribution was a sec_162 business deduction and that there wasn't a statutory or regulatory provision prohibiting a deduction to an employee_benefit_plan because a large portion of the benefits were attributable to one employee the court made its ruling in part because an independent_trustee exerted day-to-day control_over the assets in schneider the issue was also the deductibility of contributions to a veba plan by a corporation as a sec_162 business_expense the service had already denied the application_for tax-exempt status for the veba plan that received the contributions that were being challenged in schneider an independent bank served as trustee which gave the court the assurance that the employer did not retain too much control_over the plan also schneider was decided prior to the sec_419 and sec_419a of the code which in effect allowed deductions only for the costs of current benefit plus and actuarially determined allowance for certain reserves and benefits accounts the schneider case has no relevance to qualification for exemption under sec_501 and little relevance to current issues of deductibility in lima the only court case cited where the primary issue was whether a_trust qualified for tax- exempt status under sec_501 the court held the plan did not qualify for exemption as it did not meet three of the four mandatory requirements listed in regulation sec_4 c -1 the court held the trust was not a voluntary association of employees because it was not controlled by an independent_trustee it did not provide for the payment of life sick accident or other -benefits and the trust violated the proscriptions against private_inurement because it provides disproportionate benefits to its officers shareholders and highly compensated employees ina way prohibited under regulation sec_1_501_c_9_-4 your plan can be compared to lima in that you do not have an independent_trustee and you are providing disproportionate benefits to the nb these two factors together form the basis for our opinion that you do not qualify for exemption under sec_501 throughout the process of reviewing your request for tax-exempt status under sec_501 you have promised that you will obtain the services of an independent_trustee on a number of occasions in response to our questioning qumiememek as a trustee to the plan he resigned in ep he was temporarily replaced by aga cpa who you claim is an independent_trustee even though he is the accountant for gig and the personal accountant in income_tax preparer for the giiags you are now in negotiations with weee who require you to have tax-exempt status before they will agree to act as the trustee it is now three years after the plan was adopted and you still do not have an independent_trustee conclusion the trust is organized and operated in a way that violates the inurement proscriptions of sec_1_501_c_9_-4 of the income_tax regulations the trust was established for the personal and private benefit of g kand qeenl pand initially for gi the father of qj the lack of an independent_trustee in combination with the allocation of a dominant share of aggregate benefits to the ane indicates that the trust is organized and operated for their benefit and not for any employee group therefore the net_earnings of the trust improperly inure to the benefit of the the universal life policies in the plan are not eligible for inclusion in a c because they allow for periodic_payments and loans the trust is not controlled by an independent_trustee as required in sec_1 c -2 c of the income_tax regulations therefore the trust does not qualify for tax-exempt status under sec_501 of the code you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination f your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process if you want representation during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if if you do not intend to protest this determination you do nat need to take any further action we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to the applicable address mail to deliver to internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh if you fax you may fax your statement using the fax number shown in the heading of this letter your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely n oo robert choi director exempt_organizations rulings agreements


renkemeyer campbell weaver llp troy renkemeyer tax_matters_partner petitioner v com- missioner of internal revenue respondent renkemeyer campbell gose weaver llp troy renkemeyer tax_matters_partner petitioner v com- missioner of internal revenue respondent docket nos filed date p is the tax_matters_partner of a kansas limited_liability partnership engaged in the practice of law for the law firm’s tax_year ended date three of the law firm’s partners were attorneys performing legal services the fourth partner was an s_corporation owned by a tax-exempt esop whose beneficiaries were the law firm’s three attorney partners for tax_year ended date the law firm’s only partners were the three attorneys for tax_year ended date the three attorney partners each had a one-third capital interest and a 30-percent profits and loss interest in the law firm the s_corporation had a 10-percent profits and loss interest in the law firm approximately percent of the law firm’s net business income for its tax_year ended date was derived from legal services rendered by the three attorney partners for tax_year ended date the law firm allocated percent of its net business income to the s_corporation r determined that the special_allocation did not reflect economic reality and consequently reallocated the law firm’s net business income to its partners on the basis of each partner’s profits and loss interest r further determined that the three attorney partners’ distributive shares of the law firm’s net business income for tax_year ended date and tax_year ended date were net_earnings_from_self-employment subject_to tax on self-employment_income held r’s reallocation of the law firm’s net business income for its tax_year ended date is sustained held further the law firm’s three attorney partners’ distributive shares of the law firm’s net business income for its tax years ended date and are subject_to the tax on self-employ- ment income troy renkemeyer pro_se gregory j stull for respondent opinion jacobs judge the parties submitted these consolidated cases fully stipulated pursuant to rule verdate 0ct date jkt po frm fmt sfmt v files renke sheila united_states tax_court reports during the years in question troy renkemeyer sometimes referred to as petitioner was the tax_matters_partner of renkemeyer campbell weaver llp the law firm a lim- ited liability_partnership l l p registered under the laws of kansas petitioner is a member of the bar of this court respondent mailed petitioner two notices of final partnership administrative adjustment-one for the law firm’s tax_year ended date the tax_year on date and the second for the law firm’s tax_year ended date the tax_year on date after concessions the issues remaining are whether a special_allocation of the law firm’s net business income for the tax_year should be disallowed and whether income generated from the law firm’s legal practice for the and tax years and allocated to the law firm’s attorney partners is subject_to self-employment_tax the law firm’s principal_place_of_business and petitioner’s residence was kansas when the petition was filed unless otherwise indicated all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and proce- dure i the law firm background the law firm was organized on date its practice emphasizes federal tax law during the tax_year the law firm’s partners consisted of troy renkemeyer todd campbell and tracy weaver all lawyers and rcgw invest- ment management inc rcgw a kansas corporation in the tax_year the firm’s partners were messrs renkemeyer campbell and weaver law although petitioner asserts that a written partnership_agreement exists for the tax_year he was unable to produce a copy of the agreement a partnership_agreement effective for the tax_year was entered into the record respondent issued the notice in docket no to renkemeyer campbell weaver llp troy renkemeyer tax_matters_partner and the notice in docket no to renkemeyer campbell gose weaver llp troy renkemeyer tax_matters_partner although listed in the caption in docket no gose was not a partner of the law firm in either year at issue verdate 0ct date jkt po frm fmt sfmt v files renke sheila renkemeyer campbell weaver llp v commr rcgw’s business activities primarily involved the purchase sale and rental of real_estate rcgw filed an election to be taxed as an s_corporation which was effective date rcgw was percent owned by rcgw investment management inc employee_stock_ownership_plan and trust the esop messrs renkemeyer campbell and weaver were the beneficiaries of the esop during all relevant times the law firm maintained its income_tax records on the cash_receipts_and_disbursements_method of accounting and as noted supra p it operated on a fiscal_year ending april ii the law firm’s tax_year the law firm timely filed form_1065 u s return of part- nership income for its tax_year attached to the return was a schedule_k-1 partner’s share of income credits deductions etc for each partner according to the schedules k-1 the four partners held the following profits and loss interests partner percent troy renkemeyer todd campbell tracy weaver rcgw the schedules k-1 reported the following capital interests partner troy renkemeyer todd campbell tracy weaver rcgw percent the parties stipulated that of the law firm’s gross revenues for the tax_year dollar_figure was generated by the performance of legal services by petitioner and messrs campbell and weaver and dollar_figure was generated as a result of the recognition of passthrough income from rcgw on the esop apparently was intended to be a qualified_employee benefit plan pursuant to the provisions of sec_401 in order that its trust would be exempt from income_tax pursuant to sec_501 the question of the tax-exempt qualification of the esop was not raised by either party consequently we do not make a determination in this regard on or about date rcgw forfeited its authority to do business in kansas for failure to timely file its annual report verdate 0ct date jkt po frm fmt sfmt v files renke sheila united_states tax_court reports form_1065 the law firm reported ordinary_income from busi- ness activities net business income of dollar_figure the law firm allocated its net business income to its partners as fol- lows partner troy renkemeyer todd campbell tracy weaver rcgw amount dollar_figure big_number big_number big_number percent of total the law firm’s form_1065 statement partners’ capital_account summary for the tax_year disclosed the fol- lowing capital_account information partner beginning capital capital contributed schedule m-2 ll withdrawal renkemeyer campbell weaver rcgw -dollar_figure -big_number big_number big_number dollar_figure big_number big_number dollar_figure big_number big_number big_number dollar_figure big_number big_number -0- ending capital -dollar_figure big_number big_number big_number rcgw filed a form_1120s u s income_tax return for an s_corporation on which it reported other income of dollar_figure all of which was passed through from the law firm although the law firm’s form_1065 for the tax_year reported business revenues from its law practice no portion of those revenues was included on the law firm’s tax_return as net_earnings_from_self-employment respondent examined the law firm’s tax_return for the tax_year and concluded that the partners’ distributive shares of the law firm’s net business income should be reallo- cated to each partner consistent with the profits and loss sharing percentage as reported on the partners’ respective schedules k-1 see supra p further respondent reduced the law firm’s gross business revenues by dollar_figure and consequently reduced the law firm’s net business income after determining that a legal fee in a like amount had not been received during the tax_year as a result of the examination respondent determined each partner’s distributive_share of the law firm’s net busi- ness income for the tax_year to be petitioner does not dispute this reduction verdate 0ct date jkt po frm fmt sfmt v files renke sheila renkemeyer campbell weaver llp v commr partner troy renkemeyer todd campbell tracy weaver rcgw amount dollar_figure big_number big_number big_number percent of total respondent also determined that petitioner’s and messrs campbell’s and weaver’s distributive shares of the law firm’s net business income as redetermined by respondent were subject_to self-employment_tax under the self-employment_contributions_act_of_1954 secs iii the law firm’s tax_year on date the law firm’s partnership_agreement was amended and rcgw’s interest was eliminated the amended partnership_agreement provided for two classes of ownership interests general managing partner partnership units and investing partnership units with the general man- aging partner partnership units having full authority to act on behalf of the partnership pursuant to the amended part- nership agreement each partner was required to contribute dollar_figure for his general managing partner partnership units and dollar_figure for his investing partnership units the resulting interests in the law firm under the amended partnership_agreement were as follows partner troy renkemeyer todd campbell tracy weaver general managing partner interest investing partner interest thus petitioner and messrs campbell and weaver shared equal authority in the law firm with respect to the alloca- tion of the partners’ distributive shares the partnership_agreement provided that all profits and losses of the partner- ship and all income deductions and credits were to be allo- cated according to the partners’ ownership interests set forth supra except that the allocation of such profit and income items for any given calendar month to the capital_account of any given partner shall be limited in such calendar month to the average monthly collections from such partner’s verdate 0ct date jkt po frm fmt sfmt v files renke sheila united_states tax_court reports clients for purposes of this agreement the term average monthly collec- tions shall mean the average of the monthly collections of the current fiscal_year however this paragraph should not apply to the extent it would cause the profit allocation in any calendar month to be less than five thousand dollars dollar_figure notwithstanding anything con- tained herein to the contrary in the event the limited_liability partner- ship collects a fee in an amount over one hundred thousand dollars dollar_figure pursuant to a single engagement then the partners other than the partner whose client pays such fee shall collectively receive of such fee and shall share in such fee equally the law firm timely filed form_1065 for its tax_year and reported net business income of dollar_figure the law firm allocated its net business income to its partners on schedules k-1 as follows partner troy renkemeyer todd campbell tracy weaver amount dollar_figure big_number big_number percent of total respondent accepted this special_allocation of net business income respondent determined that the net business income allo- cated to petitioner and messrs campbell and weaver was subject_to self-employment_tax discussion i the law firm’s tax_year special_allocation we first address whether the special_allocation of the law firm’s tax_year net business income was proper peti- tioner bears the burden_of_proof rule a see 290_us_111 the law firm an l l p was for the tax years at issue an eligible_entity see sec_301_7701-3 proced admin regs by not electing otherwise the law firm was classified as a partnership see sec_301_7701-3 proced admin regs a partnership is not subject_to federal_income_tax sec_701 sec_6031 rather the partners are liable for tax in their separate or individual capacities sec_701 each partner is required to take into account his distributive_share of the verdate 0ct date jkt po frm fmt sfmt v files renke sheila renkemeyer campbell weaver llp v commr partnership’s income gain loss deductions and credits sec_702 a partner’s distributive_share of income gain loss deduc- tions or credits generally is determined by the governing partnership_agreement sec_704 a partnership_agreement may be either written or oral stern v commissioner tcmemo_1984_383 sec_1_761-1 income_tax regs if the partnership_agreement does not provide how a partner’s distributive_share is to be determined or if the allocation provided in the partnership_agreement does not have substantial economic_effect the partner’s distributive_share is determined in accordance with the partner’s interest in the partnership sec_704 holdner v commissioner tcmemo_2010_175 a partner’s interest in a partnership refers to the manner in which the partners have agreed to share the economic benefit or burden corresponding to the income gain loss deduction or credit or item thereof that is allocated sec_1_704-1 income_tax regs a partner’s interest in a partnership is determined by taking into account all rel- evant facts and circumstances sec_704 103_tc_170 sec_1_704-1 income_tax regs for the tax years at issue the relevant regulations pro- vided that all partners’ interests in a partnership are pre- sumed to be equal on a per capita basis sec_1_704-1 income_tax regs this presumption may be rebutted if the facts and circumstances show otherwise id petitioner asserts that the special_allocation of the net business income of the law firm for its tax_year was proper because the allocation was made pursuant to the provisions of the partnership_agreement but as noted supra p the partnership_agreement effective for the tax_year is not in the record petitioner’s bald assertion that the missing partnership_agreement provides for a special_allocation is not sufficient to carry petitioner’s burden to establish the propriety of the special_allocation of the net business income of the law firm for its tax_year further although petitioner asserts that the partnership_agreement effective for the tax_year is similar to the partnership_agreement effective for the tax_year the partnership_agreement and the verdate 0ct date jkt po frm fmt sfmt v files renke sheila united_states tax_court reports partnership_agreement is in the record the part- nership agreement does not support petitioner’s claim that the special_allocation of the net business income of the law firm for its tax_year is proper petitioner alleges that the only change made in the amended version of the partnership_agreement was to eliminate the corporate_partner rcgw as a capital partner however the partnership_agreement provides that the allocation of the partners’ distributive shares is to be made according to the ownership interests of the partners except that the allocation to each partner is to be limited to the average monthly collection of fees from the partner’s clients with the further exception that the allocation is not to be less than dollar_figure per calendar month assuming arguendo that this provision was part of the partnership_agreement effective for the tax_year we cannot see how the special_allocation in which rcgw received percent of the law firm’s net_income was consistent with the partner- ship agreement of the amount of the law firm’s gross busi- ness revenues for the tax_year less than percent of the revenue computed after the reduction for the dollar_figure unpaid fee was attributable to rcgw hence we look to the partners’ respective interests in the partnership determined by taking into account all facts and circumstances to deter- mine the proper allocation of the law firm’s net business income see sec_704 in determining the partners’ respective interests in a part- nership the following factors are deemed relevant a the partners’ relative capital contributions to the partnership b the partners’ respective interests in partnership profits and losses c the partners’ relative interests in cashflow and other nonliquidating distributions and d the partners’ rights to capital upon liquidation holdner v commissioner supra estate of ballantyne v commissioner tcmemo_2002_160 affd 341_f3d_802 8th cir sec_1 b ii income_tax regs by applying these factors to the specific facts of these cases we conclude that the special_allocation of the law firm’s net business income for the tax_year was improper the law firm generated dollar_figure in legal fees from the three attorney partners but only dollar_figure from rcgw verdate 0ct date jkt po frm fmt sfmt v files renke sheila renkemeyer campbell weaver llp v commr the first factor to be considered is the partners’ relative capital contributions the only information with respect to the partners’ respective capital accounts consists of the information set forth on statement of the law firm’s form_1065 and the partners’ respective schedules k-1 for the tax_year both of which indicate that rcgw made no capital contributions in the tax_year to the partnership whereas petitioner and messrs campbell and weaver each contributed capital to the partnership during the tax_year indeed the record does not reveal whether rcgw contributed capital to the partnership in any year con- sequently this factor does not support the law firm’s special_allocation for the tax_year the second factor we consider is the partners’ interests in the profits and losses of the partnership as noted supra p according to the schedules k-1 petitioner and messrs campbell and weaver each held a 3333-percent capital interest and a 30-percent profits and loss interest whereas rcgw held a 10-percent profits and loss interest con- sequently this factor does not support the law firm’s special_allocation for the tax_year the third factor we consider is the partners’ interests in cashflow and other nonliquidating distributions again the record is unclear with respect to this factor but statement of the law firm’s tax year’s form_1065 and the partners’ respective schedules k-1 report that in the tax_year rcgw received no distributions from the partnership whereas petitioner and messrs campbell and weaver did receive distributions consequently this factor does not sup- port the law firm’s special_allocation for the tax_year the fourth and final factor to be considered is the partners’ rights to distributions of capital upon liquidation of the part- nership the record does not include information with respect to this factor for the tax_year or earlier consequently this factor does not support the law firm’s special_allocation for the tax_year to conclude the facts and circumstances support respond- ent’s reallocation of the law firm’s net business income for its tax_year consistent with the partners’ profits and loss interests verdate 0ct date jkt po frm fmt sfmt v files renke sheila united_states tax_court reports ii self-employment_tax we now turn our attention to whether the attorney part- ners’ distributive shares of the law firm’s business income for the and tax years are subject_to self-employment_tax petitioner again bears the burden_of_proof with respect to this issue sec_1401 imposes a tax on the self-employment_income of every individual for a taxable_year the self- employment_tax self-employment_income is defined as the net_earnings_from_self-employment derived by an individual during any taxable_year excluding the portion in excess of the social_security_wage_base limitation for the year as well as all earnings from self-employment if the total amount of the individual’s net_earnings from self- employment for the taxable_year is less than dollar_figure sec_1402 sec_1402 defines net_earnings_from_self-employment as the gross_income derived by an individual from any trade_or_business car- ried on by such individual less the deductions allowed by this subtitle which are attributable to such trade_or_business plus his distributive_share whether or not distributed of income or loss described in sec_702 from any trade_or_business carried on by a partnership of which he is a member sec_702 provides that in determining his income_tax each partner shall take into account separately his distributive_share of the partnership’s taxable_income or loss exclusive of items requiring separate computation under other paragraphs of sec_702 therefore in general a partner must include his distributive_share of partnership income in calculating his net_earnings_from_self-employment fees for services like those generated by a law partnership are part of the partners’ distributive shares under sec_702 consequently such fees are generally included in calculating net_earnings_from_self-employment unless an exclusion applies sec_1402 provides several exclusions from the gen- in particular section tax rule eral self-employment a provides verdate 0ct date jkt po frm fmt sfmt v files renke sheila renkemeyer campbell weaver llp v commr there shall be excluded the distributive_share of any item_of_income or loss of a limited_partner as such other than guaranteed payments described in sec_707 to that partner for services actually rendered to or on behalf of the partnership to the extent that those payments are established to be in the nature of remuneration for those services petitioner posits that his and messrs campbell’s and weaver’s interests in the law firm organized as a kansas l l p each should be considered a limited partner’s interest in a limited_partnership for purposes of sec_1402 petitioner maintains that his and messrs campbell’s and weaver’s respective interests in the law firm share character- istics of those of a limited_partner in a limited_partnership because a their interests are designated as limited partner- ship interests in the law firm’s organizational documents and b his and messrs campbell’s and weaver’s interests in the law firm enjoy limited_liability pursuant to kansas law hence petitioner argues his and messrs campbell’s and weaver’s distributive shares of the law firm’s business income qualify for the sec_1402 exception we dis- agree with petitioner’s position a limited_partnership has two fundamental classes of part- ners general and limited general partners typically have management power and unlimited personal liability on the other hand limited partners lack management powers but enjoy immunity from liability for debts of the partnership bromberg ribstein partnership sec_1 b supp indeed it is generally understood that a limited_partner could lose his limited_liability protection were he to engage in the business operations of the partnership con- sequently the interest of a limited_partner in a limited part- petitioner in his opening brief refers to a chart allegedly attached to the brief as an exhibit that compares the characteristics of a partner in a general_partnership a limited_partnership and an l l p under kansas law with the characteristics of the law firm’s investing partners’ interests no such chart was attached to petitioner’s brief we are mindful that at the time of the statute’s enactment the revised_uniform_limited_partnership_act of provided that a limited_partner would lose his limited_liability protec- tion if in addition to the exercise of his rights and powers as a limited_partner he takes part in the control of the business however if the limited partner’s participation in the control of the busi- ness is not substantially the same as the exercise of the powers of a general_partner he is liable only to persons who transact business with the limited_partnership with actual knowledge of his participation in control revised unif ltd pship act sec_303 6b u l a verdate 0ct date jkt po frm fmt sfmt v files renke sheila united_states tax_court reports nership is generally akin to that of a passive investor see id sec_12 a in contrast all partners of an l l p enjoy limited_liability protection and may have management powers id sec_1 b supp in essence an l l p is a general_partnership that affords a form of limited_liability protection for all its partners by filing a statement of qualification with the appropriate state authorities see 132_tc_368 bromberg ribstein supra sec_1 b in kansas an l l p is formed under the kansas uniform_partnership_act which governs general partnerships see kan stat ann sec_56a-1001 a kansas partnership that elects to become an l l p con- tinues to be the same entity that existed before the filing of a statement of qualification under k s a 56a-1001 kan stat ann sec_56a-201 b sec_1402 was originally enacted as sec_1402 at a time before entities such as l l p s were contemplated and the applicable statute did not and still does not define a limited_partner when l l p s and limited_liability companies began to be frequently used it was determined that there needed to be a definition of lim- ited partner for purposes of the self-employment_tax in the secretary issued proposed_regulations which were intended to do just that see sec_1_1402_a_-2 proposed income_tax regs fed reg date the proposed_regulations ignited controversy as a result con- gress enacted legislation which provided that no temporary or final_regulation with respect to the definition of a limited_partner under sec_1402 of the internal_revenue_code_of_1986 may be issued or made effective before date taxpayer_relief_act_of_1997 publaw_105_34 111_stat_882 indeed a sense of the senate resolution with respect to this provision stated sec_734 sense of the senate with respect to self- employment_tax of limited partners a findings -the senate finds that- l l p s did not exist until see bromberg ribstein partnership sec_1 b supp verdate 0ct date jkt po frm fmt sfmt v files renke sheila renkemeyer campbell weaver llp v commr certain types of entities such as limited_liability companies and lim- ited liability partnerships were not widely used at the time the present rule relating to limited partners was enacted and that the proposed regu- lations attempt to address owners of such entities the senate is concerned that the proposed change in the treatment of individuals who are limited partners under applicable state law exceeds the regulatory authority of the treasury_department and would effectively change the law administratively without congressional action and the proposed_regulations address and raise significant policy issues and the proposed definition of a limited_partner may have a substantial impact on the tax_liability of certain individuals and may also affect individuals’ entitlement to social_security_benefits b sense of senate -it is the sense of the senate that- the department of the treasury and the internal_revenue_service should withdraw proposed regulation a -2 which imposes a tax on limited partners and congress not the department of the treasury or the internal rev- enue service should determine the tax law governing self-employment for limited partners cong rec as of congress had not issued any other pronounce- ments with respect to the definition of a limited_partner for purposes of the self-employment_tax nor had the secretary we therefore are left to interpret the statute without elabo- ration since sec_1402 does not define limited_partner we apply accepted principles of statutory construction to ascertain congress’ intent it is a well-established rule_of construction that if a statute does not define a term the term is to be given its ordinary meaning 135_tc_1 see 444_us_37 and we look to the legislative_history to ascertain congress’ is obscured by ambiguity see 481_us_454 if the statutory purpose intent limited_partner is a technical term which has become obscured over time because of the increasing complexity of partnerships and other flowthrough entities as well as the history of sec_1402 we therefore must look to the legislative_history for guidance sec_1402 was enacted by the social_security amendments of publaw_95_216 sec b 91_stat_10 although the moratorium has expired the secretary has not yet promulgated any replace- ment regulations verdate 0ct date jkt po frm fmt sfmt v files renke sheila united_states tax_court reports the relevant legislative_history provides insight with respect to congress’ intent under present law each partner’s share of partnership income is includ- able in his net_earnings_from_self-employment for social_security purposes irrespective of the nature of his membership in the partnership the bill would exclude from social_security coverage the distributive_share of income or loss received by a limited_partner from the trade_or_business of a limited_partnership this is to exclude for coverage purposes certain earnings which are basically of an investment nature however the exclu- sion from coverage would not extend to guaranteed payments as described in c of the internal_revenue_code such as salary and professional fees received for services actually performed by the limited_partner for the partnership h rept part pincite emphasis added the insight provided reveals that the intent of sec_1402 was to ensure that individuals who merely invested in a partnership and who were not actively partici- pating in the partnership’s business operations which was the archetype of limited partners at the time would not receive credits toward social_security coverage the legisla- tive history of sec_1402 does not support a holding that congress contemplated excluding partners who per- formed services for a partnership in their capacity as part- ners ie acting in the manner of self-employed persons from liability for self-employment taxes aside from a nominal amount of income arising from rec- ognition of certain pass-through income from rcgw all of the law firm’s revenues were derived from legal services per- formed by petitioner and messrs campbell and weaver in their capacities as partners petitioner and messrs campbell and weaver each contributed a nominal amount dollar_figure for their respective partnership units thus it is clear that the partners’ distributive shares of the law firm’s income did not arise as a return on the partners’ investment and were not earnings which are basically of an investment nature instead the attorney partners’ distributive shares arose from legal services they performed on behalf of the law firm to conclude we hold that the respective distributive shares of petitioner and messrs campbell and weaver arising from the legal services they performed in their capacity as part- ners in the law firm are subject_to self-employment taxes for the and tax years verdate 0ct date jkt po frm fmt sfmt v files renke sheila renkemeyer campbell weaver llp v commr we have considered petitioner’s other arguments and con- clude they are irrelevant moot or meritless to reflect the foregoing and the concessions of the parties decisions will be entered under rule f verdate 0ct date jkt po frm fmt sfmt v files renke sheila


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc intl br3-plr-156425-01 date date legend corp a corp b corp c corp d date date date x percent y percent dear this is in response to a letter dated date requesting a ruling that corp a and its subsidiaries be permitted to change to the tax_book_value_method of asset valuation for purposes of apportioning interest_expense for their tax_year ending on date the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for a ruling it is subject_to verification on examination corp a is a domestic_corporation that is the parent of an affiliated_group_of_corporations plr-156425-01 that files a consolidated federal_income_tax return on a calendar_year basis corp b had changed its name to corp a in connection with a merger that occurred on date under this merger a subsidiary of corp b merged into corp c a domestic_corporation and corp c became a wholly owned subsidiary of corp b prior to date corp c was the common parent of an affiliated_group_of_corporations that filed a consolidated federal_income_tax return on a calendar_year basis also as a result of the merger corp d a domestic_corporation became a member of the corp a affiliated_group prior to the merger corp d was the common parent of an affiliated_group_of_corporations that filed a consolidated federal_income_tax return on a calendar_year basis as of date corp d was x percent owned by a wholly-owned domestic subsidiary of corp b and y percent owned by a wholly-owned domestic subsidiary of corp c prior to the merger corp b and corp d had consistently used the tax_book_value_method of asset valuation as described in temp sec_1_861-9t for purposes of interest_expense apportionment for several years prior to the merger corp c used the fair_market_value_method of asset valuation as described in temp sec_1_861-9t as a result of the merger corp c and corp d and their subsidiaries will be included in corp a’s consolidated federal_income_tax return for the portion of corp a’s tax_year beginning on date sec_864 of the internal_revenue_code provides that all allocations and apportionments of interest_expense shall be made on the basis of assets rather than gross_income temp sec_1_861-9t sets forth the rules specific to the apportionment of interest_expense temp sec_1_861-9t provides that a taxpayer may elect to determine the value of its assets on the basis of either the tax_book_value_method or the fair_market_value of its assets temp sec_1_861-8t provides that once a taxpayer uses the fair_market_value_method the taxpayer and all related_persons must continue to use such method unless expressly authorized by the commissioner to change methods temp sec_1_861-9t provides that if the taxpayer chooses the fair_market_value_method of asset valuation the taxpayer must establish the fair_market_value of its assets to the satisfaction of the commissioner otherwise the commissioner may determine the appropriate values or require the taxpayer to use the tax_book_value_method of apportionment temp sec_1_861-9t sets forth the rules for determining the fair_market_value of taxpayer’s assets under the fair_market_value_method corp a requests pursuant to temp sec_1_861-8t and sec_1 9t g ii that corp c and corp d and their subsidiaries be permitted to use the tax_book_value_method of asset valuation to apportion interest_expense effective for the tax plr-156425-01 year beginning on date this request was made in order to conform following the merger the method of valuing assets to apportion interest used by corp c and its subsidiaries to the method used by corp b and corp d and their subsidiaries corp a’s ruling_request states that corp c desires to use the tax_book_value_method because that method decreases complexity and avoids potential disagreements with the service with respect to the fair_market_value of assets avoids the cost of having fair_market_value studies performed and provides greater certainty of tax results to both the taxpayer and the service based solely upon the information submitted the representations made and the reasons given for this request corp c and its subsidiaries may change from the fair_market_value_method of asset valuation for purposes of apportioning interest_expense to the tax_book_value_method pursuant to temp sec_1_861-8t and sec_1_861-9t for the tax_year beginning on date corp a and its subsidiaries including corp c and corp d and their subsidiaries may use the tax_book_value_method of asset valuation for purposes of apportioning interest_expense for their tax_year ending on date 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 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 sincerely anne o’connell devereaux senior technical reviewer branch office of the associate chief_counsel international