department of the treasury internal_revenue_service washington d c date number release date cc intl br2 kmkogan tl-n-3070-99 uilc internal_revenue_service national_office field_service_advice memorandum for theodore leighton associate area_counsel financial services and health care manhattan group cc lm fsh man attn alise alair from subject valerie a mark assistant to the branch chief cc intl br2 this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent corp a division b sub sub country m amount l amount m legend amount n amount o amount p amount q amount r year t year u year v year w date x date y date z issue whether the chain_deficit_rule of sec_952 allows the shipping subsidiaries to offset their foreign_base_company_shipping_income with sub 1’s year u and year v deficits in earnings_and_profits conclusion sec_952 permits sub 1’s year u and year v deficits in earnings_and_profits that are attributable to the foreign_base_company_shipping_income category of sub from those years to offset the foreign_base_company_shipping_income of the shipping subsidiaries in year u and year v the portion of sub 1's deficits in earnings_and_profits that is attributable to the foreign_base_company_shipping_income category is determined for each year by multiplying the deficit for that year by the ratio of the net_loss if any in sub 1's foreign_base_company_shipping_income category to sub 1's total net_loss for that year further factual development is necessary however to determine whether sub in fact incurred deficits attributable to foreign_base_company_shipping_income during those years facts based on your memorandum and additional information provided to us by the international examiner we understand the facts to be as follows corp a is a domestic_corporation engaged through its domestic and foreign subsidiaries in the shipping business prior to date z corp a owned directly all of the stock of sub a country m corporation engaged in the shipping business sub owned directly all of the stock of sub a country m corporation and approximately other country m corporations that were engaged in the shipping business shipping subsidiaries sub 1’s taxable_year is the calendar_year dividend note on or around date y sub declared a dividend of amount l payable to its sole shareholder corp a in satisfaction of this obligation sub issued a note dividend note in the same amount to corp a payable over a period of five years ie year t through year w at an amount m annual rate of interest sub made regular payments of principal and interest to corp a on the dividend note while it was outstanding reorganization on or around date z corp a reorganized its foreign operations in part to take advantage of the chain_deficit_rule in sec_952 consistent with this purpose corp a moved all of its country m subsidiaries ie sub sub and the shipping subsidiaries into a single straight chain of ownership with sub at the top of the chain and each of the other entities somewhere in the chain below sub corp a also appears to have caused sub to dispose_of its shipping business_assets as a result of the reorganization sub began to function solely as a holding_company for corp a’s other country m subsidiaries management agreement prior to the reorganization of corp a’s foreign operations a number of agreements were entered into by various members of the corp a group the first agreement the management agreement was signed by sub sub and approximately of the shipping subsidiaries contracting subsidiaries on date x under this agreement sub agreed to arrange for the appointment of sub as manager of certain of sub 1’s and the contracting subsidiaries’ operations and to perform services for the contracting subsidiaries and sub the services that sub agreed to perform for the contracting subsidiaries and sub pursuant to this agreement consisted of the following provide planning supervision and advisory services in respect of the whole operations of sub and the contracting subsidiaries provide or contract for all general administrative office and support services necessary for the operations of sub and the contracting subsidiaries seek vessels suitable for purchase by the contracting subsidiaries negotiate the terms of any such purchases and supervise the delivery of vessels to the contracting subsidiaries provided that sub could enter into a binding commitment on the part of sub or any of the contracting subsidiaries with any third party in respect of the purchase of a vessel only after receiving express authority from sub or the contracting subsidiary to do so determine vessels suitable for sale by the contracting subsidiaries and negotiate the terms arrange and complete such sale provided that sub could enter into a binding commitment on the part of sub or any of the contracting subsidiaries with any third party in respect of the sale of a vessel only after receiving express authority from sub or the contracting subsidiary to do so seek business opportunities and negotiate the terms of any such business opportunities provided that sub could enter into a binding commitment on the part of sub or any of the contracting subsidiaries with any third party in respect of such a business opportunity only after receiving express authority from sub to do so if requested by a contracting subsidiary negotiate arrange complete and supervise the chartering or other employment of its vessel and in such instance enter into an agreement substantially upon the terms stated in a commercial management agreement described below negotiate all borrowing arrangements of sub and the contracting subsidiaries and supervise the implementation of such arrangements provided that sub could enter into a binding commitment in respect of any borrowing or financing on behalf of sub or any of the contracting subsidiaries after receiving express authority from sub and such contracting subsidiary to do so liaise with and instruct the secretary of sub in connection with such officer’s obligations and duties if requested by a contracting subsidiary provide customary technical management services and in such instance enter into an agreement substantially upon the terms stated in a technical management agreement described below keep separate books records and accounts relating to all the activities of sub and each of the contracting subsidiaries and at the end of each month provide to sub an analysis of the previous month’s trading and operational results as well as an intended budget for the operations of each of the vessels in the forthcoming month operate such bank accounts and in such names as sub may require subject_to the control of sub enter into make and perform all contracts agreements and other undertakings as in the opinion of the sub may be necessary or advisable or incidental to the carrying out of the objectives of the management agreement review supervise and monitor the performance of all parties providing technical or commercial management or general management services to the contracting subsidiaries submanagement agreement a second agreement the submanagement agreement was signed by sub and division b a division of corp a on date x under this agreement division b became obligated to perform the following services that sub had agreed to perform for sub and the contracting subsidiaries under the management agreement provide such planning supervision and advisory services in respect of sub and the contracting subsidiaries as may be requested by sub provide or contract for all general administrative office and support services necessary for accounting and data processing services for sub sub and the contracting subsidiaries provide such advice or support services as may be requested by sub with respect to closings on sales and purchases of vessels and loan arrangements and supervise the delivery of the vessels to the contracting subsidiaries keep separate books records and accounts relating to all the activities of sub sub and each of the contracting subsidiaries and at the end of each month provide to sub an analysis of the previous quarter’s trading and operational results as well as an intended budget for the operations of each of the vessels in the forthcoming month operate such bank accounts and in such names as sub may require subject_to the control of sub subject_to the instructions of sub enter into make and perform all contracts agreements and other undertakings which in the opinion of division b are necessary or advisable or incidental to the carrying out of the objectives of the submanagement agreement provide such advice with respect to corporate affairs as may be requested by sub commercial management agreements and technical management agreements finally on date x each of the contracting subsidiaries entered into a commercial management agreement and a technical management agreement with division b pursuant to each commercial management agreement division b agreed to perform the following services for the relevant contracting subsidiary referred to in the agreement as the owner subject_to the owner’s consent negotiate contracts for the employment of a vessel and keep the owner fully informed of the vessel’s movements appoint port agents and arrange for bunkers and other variable voyage services and for loading and discharging cargo cause to be remitted from the paying party directly to the account nominated by the owner of a vessel without setoff any freight hire demurrage and other_amounts due under contracts of employment of a vessel and take such actions as reasonably may be necessary to enforce such payment obligations attend to the processing and issuance of all cargo documents including bills of lading for and on behalf of an owner of a vessel in accordance with the instruction of the owner keep the owner of a vessel informed at all times of all claims disputes and suits which may be asserted in connection with the contracts of employment for a vessel and in accordance with instructions of the owner use its best efforts to settle and deal with such claims disputes and suits pursuant to each technical management agreement division b agreed to perform the following services for the relevant contracting subsidiary referred to in the agreement as the owner provide nautical superintendence such as arranging the supervision and control of safety equipment and moorings providing instructions and updates on navigation arranging for assistance and support to the vessel in case of emergencies arranging for necessary salvage and towage in connection with the vessel and undertaking such measures as are reasonably necessary to prevent or mitigate damages when an escape or discharge of oil or other substance from the vessel occurs or threatens to occur and causes or threatens to cause pollution damage provide technical superintendence such as arranging for and supervising the maintenance installation and repair of all aspects of the vessel and its equipment and monitoring the vessel’s performance engage and provide ship’s personnel ensuring that the vessel is always properly manned arrange for purchase and forwarding of ship’s provision and catering stores and the placing of contracts in relation thereto unless expressly instructed otherwise by the owner of a vessel enter into carry out and terminate at its discretion contracts for stores lubrication oils equipment parts and the provision of services to the vessel arrange for competitive insurance acceptable to the owner of a vessel compensation the management agreement provided that sub on behalf of the contracting subsidiaries would pay the following fees to sub as remuneration for its performance of services under the management agreement for any vessel for which sub was a technical manager amount n per month for any vessel for which sub was a commercial manager amount r of the gross revenues related to such vessel for any vessel for which sub was supervising others for either a technical or commercial management amount o per month for all other services an amount equal to sub 2’s cost plus amount p per month per vessel the submanagement agreement provided that sub would pay division b as remuneration for its performance of services under the submanagement agreement amount q per month per vessel the commercial management agreement for each contracting subsidiary provided that the contracting subsidiary would pay division b as remuneration for division b’s performance of services under such commercial management agreement a chartering commission of amount r of the gross revenues generated by the charter the technical management agreement for each contracting subsidiary provided that the contracting subsidiary would pay division b as remuneration for division b’s performance of services under such technical management agreement a fixed monthly fee of amount n bookkeeping entries of sub during the years at issue sub appears to have booked a series of accounts_receivable representing amounts owed by the contracting subsidiaries under the various management contracts schedules listing these payments are entitled management fee expense due sub each of these schedules contains the following statement the foreign vessels pay sub who pays corp a management fees for accounting and technical services that corp a performs on behalf of the foreign vessels income earned by sub and the shipping subsidiaries in year u and year v in year u and year v some of the shipping subsidiaries earned foreign_base_company_shipping_income within the meaning of sec_954 during those same years sub reported the following income management fees from the contracting subsidiaries under the management agreement dividends from entities in which sub had a less than percent ownership_interest interest from banks and other financial institutions unrelated to sub interest on a loan made by sub to its parent corp a and capital_gain from the sale of two foreign subsidiaries related subsidiaries engaged in the shipping business this income was more than offset however by interest_paid by sub to corp a on the dividend note and management fees purportedly paid to sub under the management agreement as a result sub incurred deficits in its earnings_and_profits in year u and year v law and analysis the issues addressed in this memorandum relate to corp a’s claim that deficits sub incurred in its earnings_and_profits in year u and year v may be used to offset the foreign_base_company_shipping_income earned by the shipping subsidiaries in those same years under the chain_deficit_rule in sec_952 a qualified chain_deficit_rule the chain_deficit_rule in sec_952 hereinafter referred to as the qualified chain_deficit_rule because it is a modified version of the chain_deficit_rule repealed in permits a controlled_foreign_corporation cfc to elect to reduce the amount of its subpart_f_income for any taxable_year that is attributable to a qualified_activity by the amount of any deficit in earnings_and_profits of a qualified 1we do not know the extent of sub 1’s interest in the related subsidiaries as a result we do not know whether they constituted shipping subsidiaries as defined in this memorandum shipping subsidiaries are entities that are wholly-owned either directly or indirectly by sub sec_1221 of the tax_reform_act_of_1986 p l repealed prior sec_952 generally effective for taxable years of foreign_corporations beginning after date sec_1012 of the technical_and_miscellaneous_revenue_act_of_1988 p l added new sec_952 also generally effective for taxable years of foreign_corporations beginning after date chain member for a taxable_year ending with or within the taxable_year of the cfc this reduction may occur however only to the extent the deficit in the earnings_and_profits of the qualified_chain_member is attributable to the same qualified_activity that generated the subpart_f_income of the cfc sec_952 for purposes of this rule the term qualified_activity is defined generally as any activity giving rise to a particular category of foreign_base_company_income including foreign_base_company_shipping_income see sec_952 sub was a qualified_chain_member with respect to the shipping subsidiaries the term qualified_chain_member is defined with respect to a cfc as another corporation created or organized under the laws of the same country in which the cfc is created or organized and that meets one of the following tests the cfc owns all of the stock of the other corporation directly or indirectly through one or more corporations other than the common parent or the other corporation owns all of the stock of the cfc directly or indirectly through one or more corporations other than the common parent sec_952 this ownership requirement must have been met at all times during the taxable_year in which the deficit arose id a cfc is defined as any foreign_corporation of which more than percent of the total combined voting power of all classes of stock entitled to vote or the total value of the stock of such foreign_corporation is owned whether directly indirectly or constructively within the meaning of sec_958 by united_states_shareholders on any day during the taxable_year of such foreign_corporation sec_957 the term 3any reduction in subpart_f_income under the qualified chain_deficit_rule may occur only after the application of the limitations in sec_952 current_earnings_and_profits limitation and c b accumulated_deficit_rule see sec_952 you have not asked about and thus we have not considered the application of these limitations to the facts of this case sec_952 imposes additional requirements in the case of activities that give rise to foreign_personal_holding_company_income or insurance_income activities that generate foreign_personal_holding_company_income are qualified activities for purposes of the qualified chain_deficit_rule only if such activities are performed by a qualified_financial_institution as defined in sec_952 or a qualified_insurance_company as defined in sec_952 sec_952 and vi similarly in the case of activities that give rise to insurance_income such activities are qualified activities for purposes of the qualified chain_deficit_rule only if they are performed by a qualified_insurance_company as defined in sec_952 sec_952 united_states_shareholder is defined with respect to any foreign_corporation as a united_states_person who owns whether directly indirectly or constructively within the meaning of sec_958 percent or more of the total combined voting power of all classes of stock entitled to vote of such foreign_corporation sec_951 the term united_states_person is defined to include a domestic_corporation sec_957 cross-referencing the definition in sec_7701 during the years at issue corp a was a domestic_corporation that directly owned all of the stock of sub and indirectly owned all of the stock of the shipping subsidiaries sub and the shipping subsidiaries were all country m corporations accordingly corp a qualified as a united_states_shareholder with respect to those entities and all of those entities qualified as cfcs see sec_951 sec_957 and sec_958 further sub wholly-owned directly or indirectly each of the shipping subsidiaries during each of the years at issue accordingly sub was a qualified_chain_member with respect to each of the shipping subsidiaries during each of the years at issue see sec_952 subpart_f_income of sub and the shipping subsidiaries must be attributable to the same qualified_activity there are no regulations under sec_952 specifying how to determine deficits in earnings_and_profits that are attributable to qualified activities in light of such absence it is reasonable and appropriate to make this determination by following the generally applicable rules under sec_861 and sec_904 for allocating expenses to determine a cfc’s income and earnings_and_profits to the extent the application of these rules results in a net_loss in a category of a cfc’s subpart_f_income described in sec_952 - iv or in the case of a qualified_insurance_company or qualified_financial_institution sec_951 and vi any deficit in the earnings_and_profits of the cfc is considered attributable to the qualified_activity that when profitable generates income in that category in the same proportion that the net_loss in that category bears to the total net_loss of the cfc for the taxable_year 5for example these rules are applicable in determining a cfc’s net foreign_base_company_income see sec_1_954-1 applicable to taxable years of a cfc beginning after date and sec_4_954-1 applicable to taxable years of a cfc beginning after date and on or before date 6108_tc_344 aff’d 152_f3d_450 5th cir is the only case that has considered in part the operation of the qualified chain_deficit_rule in that case the courts considered the issue of whether certain deficits of a cfc continued accordingly the portion of sub 1’s deficits in its earnings_and_profits during those years that may be used to offset the foreign_base_company_shipping_income of the shipping subsidiaries is determined by multiplying the deficit by the ratio of sub 1’s net_loss in the foreign_base_company_shipping_income category to sub 1's total net_loss making this determination in the context of this case is a multi-step process first for each of the years in issue sub 1's gross_income must be examined to determine whether any of it qualifies as foreign_base_company_shipping_income within the meaning of sec_954 second the rules for allocating and apportioning expenses to classes of gross_income must be applied to determine whether sub has a net_loss in the foreign_base_company_shipping_income category and if so what portion of sub 1's deficit is attributable to the net_loss in this category for each of those years b foreign_base_company_shipping_income corp a contends that all of the gross_income received by sub during year u and year v constituted foreign_base_company_shipping_income within the meaning of sec_954 specifically corp a claims that sub 1's income during those years constituted either related_services income as defined in sec_1_954-6 or incidental income as defined in sec_1_954-6 and ii we do not agree with corp a’s contentions based on our review of the information provided in connection with this memorandum it appears that the only foreign_base_company_shipping_income sub may have received during the years in issue was the capital continued could offset the income of a subsidiary cfc under the qualified chain_deficit_rule to satisfy the qualified_activity requirement the taxpayer in that case needed to show two things first it needed to show that its deficits were attributable to the activities of a qualified_financial_institution second the taxpayer needed to show that its deficits were attributable to activities that when profitable would produce foreign_personal_holding_company_income both the tax_court and the fifth circuit using different analyses determined that the taxpayer failed to show the existence of the first element because they determined that the cfc with deficits was not a qualified_financial_institution they did not address the second element accordingly the taxpayer was not entitled under the qualified chain_deficit_rule to use the deficits of its unprofitable cfc to offset the income of its profitable cfc in this case the qualified_activity of the subsidiaries is an activity that gives rise to foreign_base_company_shipping_income the issue is whether sub has deficits attributable to an activity that if profitable would generate foreign_base_company_shipping_income accordingly the analyses in the stanford decisions are not directly relevant to the facts of this case gain from the sale of the two related subsidiaries although more information will be necessary to confirm this conclusion subpart_f_income is defined as including foreign_base_company_income which in turn is defined as including foreign_base_company_shipping_income sec_952 sec_954 in general foreign_base_company_shipping_income consists of several categories of income including income derived in connection with the use or lease of any aircraft or vessel in foreign_commerce income derived in_connection_with_the_performance_of_services directly related to the use of any aircraft or vessel in foreign_commerce income incidental to foreign_base_company shipping operations of the cfc a related cfc or an entity in which the cfc owns an interest and certain dividends and interest received from certain foreign_corporations and gains from the sale of stock or obligations in certain foreign_corporations sec_1_954-6 ii iii and v for purposes of these rules the term foreign_base_company shipping operations is defined as a trade_or_business that derives foreign_base_company_shipping_income described in categories and supra sec_1_954-6 sub did not receive gross_income from the use or lease of a vessel in foreign_commerce as stated above foreign_base_company_shipping_income includes gross_income derived from or in connection with the use or hiring or leasing for use of any aircraft or vessel in foreign_commerce sec_1_954-6 this category consists of income derived from transporting passengers or property by aircraft or vessel in foreign_commerce and income derived from hiring or leasing an aircraft or vessel to another for use in foreign_commerce sec_1_954-6 and ii for purposes of these rules a vessel is generally defined as any water craft or other artificial contrivance capable of being used or intended to be used as a means of transportation on water sec_1_954-6 an aircraft or vessel is used in foreign_commerce to the extent it is used for the transportation of property or passengers between a port in the united_states and a port in a foreign_country between two ports within the same foreign_country between two ports in different foreign countries sec_1_954-6 and b the term port means any place whether on or off shore where aircraft or vessels are accustomed to load or unload goods or to take on or let off passengers sec_1_954-6 sec_1_954-6 describes several other categories of foreign_base_company_shipping_income none of which appear to be present in this case accordingly they are not discussed in this memorandum none of the information provided in connection with this memorandum suggests that sub owned or leased a vessel used by it or anyone else in the transportation of passengers or property in foreign_commerce during the years in issue to the contrary the facts indicate that during this period sub functioned solely as a holding_company for corp a’s other country m subsidiaries accordingly it does not appear that any of sub 1's gross_income during year u and year v falls into this category of foreign_base_company_shipping_income nor does corp a contend that it does sub did not receive income from services directly related to the use of an aircraft or vessel in foreign_commerce foreign_base_company_shipping_income also includes income that is derived from or in_connection_with_the_performance_of_services directly related to the use of an aircraft or vessel in foreign_commerce sec_1_954-6 this category of income consists of income derived from or in connection with intragroup services and services for a passenger consignor or consignee sec_1 d i intragroup services are defined as services performed for a person who is the owner lessor lessee or operator of a vessel used in foreign_commerce by such person or by a related_person and which fall into at least one of the following categories terminal services such as dockage wharfage storage lights water refrigeration and similar services stevedoring and other cargo handling services container-related services including the rental of containers and related equipment performed either in connection with the local drayage or inland haulage of cargo or in the course of transportation in foreign_commerce services performed by tugs lighters barges scows launches floating cranes and other similar equipment maintenance and repairs training of pilots and crews licensing of patents know-how and similar intangible_property developed and used in the course of foreign_base_company shipping operations services performed by a booking operating or managing agent and any service performed in the course of the actual transportation of passengers or property sec_1_954-6 - ix passenger consignor or consignee services are defined as services provided by the operator or person related to the operator of a vessel in foreign_commerce for the passenger consignor or consignee sec_1_954-6 they include for example categories - and of intragroup services described supra as well as the rental of living accommodations and the furnishings of meals barber shop and other services to passengers aboard vessels excess baggage and demurrage dispatch and dead freight sec_1 d i - v for purposes of these rules a person is a related_person with respect to a cfc if it is a related_person within the meaning of sec_954 corp a’s contention that some of sub 1's gross_income during the years in issue constituted related_services income as defined in sec_1_954-6 appears to refer to the management fees ostensibly received by sub under the management agreement it is unclear from the information provided in connection with this memorandum whether such fees to the extent they were in fact accrued by sub constituted compensation_for management services that sub was obligated to perform on behalf of the contracting subsidiaries the only contract to which sub was a party was the management agreement under its terms sub was obligated to perform a limited number of services these consisted of arranging for the appointment of persons to manage the operations of the contracting subsidiaries functioning as a conduit for the payment of the management fees to these persons from the contracting subsidiaries approving certain actions undertaken by sub in connection with the management agreement although it is unclear whether sub 1's approval authority was limited to actions undertaken on sub 1's behalf only or extended to actions undertaken on behalf of the contracting subsidiaries and occasionally providing funds necessary to the operation of a contracting subsidiary’s vessel sub does not appear to have been obligated to perform any services under the management agreement directly related to the use of a vessel in foreign_commerce accordingly to the extent that sub earned_income in connection with the management agreement such income appears more like an agency fee or commission from the contracting subsidiaries for setting up the contract and performing other obligations unrelated to the use of a vessel in foreign_commerce accordingly it does not appear to constitute related_services income within the 8in fact the commercial management agreements and the technical management agreements obligate division b to perform on behalf of the contracting subsidiaries many of the types of services described in sec_1_954-6 these contracts were entered into directly between division b and each contracting subsidiary sub was not a party to any of them meaning of sec_1_954-6 although it may qualify as foreign_base_company_services_income within the meaning of sec_954 to confirm these conclusions you should conduct additional factual development to determine the precise nature of the services sub performed for the contracting subsidiaries where such services were performed and whether any fees paid_by the contracting subsidiaries in return for these services were properly and consistently recorded and accounted for by the relevant parties sub did not receive incidental income the third category of foreign_base_company_shipping_income potentially relevant to this case consists of incidental income derived by a cfc in the course of its foreign_base_company shipping operations ie the active_conduct_of_a_trade_or_business that derives income from the use or hiring or leasing for use of an aircraft or vessel in foreign_commerce or from the performance of services directly related to the use of an aircraft or vessel in foreign_commerce sec_1_954-6 specifically this category of foreign_base_company_shipping_income is defined by the regulations as including gain from the sale exchange or other_disposition of related shipping assets income from temporary investments that are used to meet the working_capital requirements of a foreign_corporation engaged in foreign_base_company shipping operations or that are held pursuant to a plan to purchase any tangible asset for use in foreign_base_company shipping operations interest on accounts_receivable and evidences of indebtedness that arise from the conduct of foreign_base_company shipping operations by the cfc or a related_person income derived from granting concessions to others aboard aircraft or vessels used in foreign_commerce income derived from stock and currency futures used to hedge risks arising in the conduct of foreign_base_company shipping operations income derived by the lessor of an aircraft or vessel used in foreign_commerce from additional rentals of related equipment such as shipping containers and interest derived by the seller from a purchase_money_mortgage loan in respect of the sale of an aircraft or vessel used in foreign_commerce sec_1_954-6 - vii related shipping assets are defined in sec_1_955a-2 to include assets used or held for use in connection with the production_of_income from foreign_base_company shipping operations they include but are not limited to the following money bank_deposits and other temporary investments reasonably required to meet working_capital requirements of the cfc in its conduct of foreign_base_company shipping operations accounts_receivable and similar evidences of indebtedness which arise form the conduct of foreign_base_company shipping operations by the cfc or a related_party amounts held pursuant to a specific plan to purchase a tangible asset for use in foreign_base_company shipping operations amounts paid into escrow to secure payment of charter fees or a debt against an asset used in foreign_base_company shipping operations capitalized expenditures made under a contract to purchase an asset for use in foreign_base_company shipping operations pre-paid expenses and deferred charges incurred in the course of foreign_base_company shipping operations stock acquired and retained to insure a source of supplies or services in the conduct of foreign_base_company shipping operations and currency futures acquired and retained as a hedge against foreign_currency fluctuations in connection with foreign_base_company shipping operations sec_1_955a-2 - viii corp a appears to claim that sub 1's gross_income other than the purported management fees discussed supra constituted income derived from temporary investments described in sec_1_955a-2 we do not agree with this position for two reasons first in order for sub 1’s income to fall within this category of foreign_base_company_income sub must have been engaged in foreign_base_company shipping operations as discussed above during the years in issue sub was not engaged in the use or hiring or leasing for use of a vessel in foreign_commerce since it neither owned nor leased vessels described in sec_1_954-6 upon which it or someone else transported property or passengers in foreign_commerce as that term is defined in sec_1_954-6 further sub did not appear during the years in issue to have been engaged in the performance of services directly related to the use of any aircraft or vessel in foreign_commerce within the meaning of sec_1_954-6 finally sub 1’s assets that generated its gross_income during these years do not appear to constitute the type of temporary investments described in sec_1_955a-2 the regulation specifies money bank_deposits and other temporary investments which are reasonably necessary to meet the working_capital requirements of such corporation in its conduct of foreign_base_company shipping operations since sub was not engaged in shipping operations it had no need for working_capital necessary to conduct such operations more generally corp a’s position disregards the last sentence in sec_954 which provides that foreign_base_company_shipping_income does not include any dividend or interest_income that is foreign_personal_holding_company_income within the meaning of sec_954 except for certain dividends and interest received from a foreign_corporation in respect of which taxes are deemed paid_by sub under sec_902 that sentence was added to sec_954 by section b of the omnibus_budget_reconciliation_act_of_1993 p l in order to change the categorization of income derived from working_capital for shipping operations from the shipping basket to the passive basket for foreign_tax_credit_limitation purposes see rep conference_report pp accordingly even if sub 1's income other than its purported management fees was in fact derived from temporary investments described in sec_1_955a-2 as claimed by corp a it was not dividend and interest_income received from foreign_corporations in respect of which taxes were deemed paid_by sub under sec_902 see discussion infra as such it is precisely the type of income that congress intended to exclude from the definition of foreign_base_company_shipping_income as a result of the change to sec_954 sub may have received foreign_base_company_shipping_income in the form of capital_gain finally foreign_base_company_shipping_income of a cfc includes generally dividends and interest received from a foreign_corporation in respect of which taxes are deemed paid under sec_902 and gain recognized from the sale exchange or sec_1_954-6 does not yet reflect this change to sec_954 other_disposition of stock or obligations of such a foreign_corporation but only to the extent that such dividends interest and gains are attributable to foreign_base_company_shipping_income of the foreign_corporation sec_954 whether dividends interest and gains paid_by a foreign_corporation are attributable to foreign_base_company_shipping_income of the foreign_corporation is determined according to the rules set forth in sec_1_954-6 in the case of dividends and sec_1_954-6 and f in the case of interest and gains during the years at issue a foreign_corporation did not qualify as a foreign_corporation in respect of which taxes are deemed paid under sec_902 unless the cfc directly owned percent or more of the voting_stock of the corporation the corporation was not more than three tiers below the u s shareholder in a chain of ownership and certain percent indirect ownership requirements were met see sec_902 prior to amendment by section a of the taxpayer_relief_act_of_1997 pl moreover the determination of whether a foreign_corporation is one with respect to which a cfc would be deemed under sec_902 to pay taxes is made without regard to whether the foreign_corporation actually pays any taxes or dividends sec_1_954-6 based on the information provided in connection with this memorandum it appears that only a portion of the income received by sub during the years at issue may qualify as foreign_base_company_shipping_income within the meaning of sec_954 the facts indicate that during this time sub received dividends from entities in which sub had a less than percent ownership_interest interest from several unrelated banks and other financial institutions interest from its parent corp a and capital_gain from the sale of two of the shipping subsidiaries neither the dividends nor either kind of interest received by sub qualify as foreign_base_company_shipping_income within the meaning of sec_954 since such income was not paid_by foreign_corporations whose taxes sub would be deemed to have paid under sec_902 sub 1's interest in the entities paying the dividends was smaller than a percent voting power interest it did not own any interest in the banks and financial institutions that paid it interest and corp a was sub 1's domestic parent on the other hand capital_gain from the sale of the two related subsidiaries will qualify as foreign_base_company_shipping_income if the following facts are shown first during the years at issue each of these entities must have been a foreign_corporation in respect of which taxes would be deemed paid_by sub under sec_902 second the gain received by sub from the sale of each related subsidiary must have been attributable to foreign_base_company_shipping_income of that entity as described in sec_1_954-6 and sec_1_954-6 you will need to conduct additional factual development to determine whether these facts are present in the event that you determine that both of these facts are present with respect to only one of the related subsidiaries sold by sub only the gain from the sale of that entity will qualify as foreign_base_company_shipping_income within the meaning of sec_954 other categories of foreign_base_company_income received by sub as discussed above we believe that the only type of income that sub received during the years at issue that may qualify as foreign_base_company_shipping_income within the meaning of sec_954 is the capital_gain from the sale of the related subsidiaries sub 1’s other income specifically the dividends and interest received by sub including the interest received from corp a may be foreign_personal_holding_company_income within the meaning of sec_954 in addition to the extent that capital_gain from the sale of sub 1’s subsidiaries does not qualify as foreign_base_company_shipping_income it will likely qualify as foreign_personal_holding_company_income within the meaning of sec_954 whether sub earned_income qualifying as foreign_personal_holding_company_income is relevant to the application of the expense allocation and apportionment rules discussed infra to the facts of this case c expense allocation and apportionment rules if it is determined that any of sub 1’s gross_income qualifies as foreign_base_company_shipping_income under sec_954 the next step is to determine the net_income or loss in this category of foreign_base_company_income as noted previously because there are no rules under sec_952 for making this determination it is appropriate to follow the rules under sec_861 and sec_904 for allocating expenses to determine net_income sec_1_904-5 provides rules for allocating and apportioning expenses of a cfc to determine the separate limitation character of interest_paid by a cfc to its u s shareholder under the look-through rules of sec_904 these rules are as follows first the cfc’s gross_income in each separate category is determined sec_1_904-5 in effect this requires that each item_of_income first be grouped according to the category of subpart_f_income from which it is derived and then each of these categories must be grouped according to the applicable foreign_tax_credit_limitation categories id second any expenses that are definitely related to less than all of gross_income as a class are allocated and apportioned under the principles of sec_1_861-8 or sec_1_861-10t as applicable to income in each separate category sec_1_904-5 an expense is considered definitely related to a class_of_gross_income and therefore allocable to such class if the cfc incurs the expense as a result of or incident to an activity or in connection with property from which the class_of_gross_income is derived sec_1_861-8 third expense from related_person interest is allocated to and reduces but not below zero the income in the passive foreign_personal_holding_company_income category as determined in step supra sec_1_904-5 for purposes of these rules related_person interest is defined as any interest_paid or accrued by a cfc to any united_states_shareholder within the meaning of sec_951 with respect to the cfc or to any other related_person to which the look-through rules of sec_904 apply sec_1_904-5 fourth related_person interest_expense in excess of passive foreign_personal_holding_company_income excess related_person interest_expense is apportioned among all of the cfc’s remaining foreign_tax_credit_limitation categories containing income using either the asset method or the modified gross_income_method discussed infra sec_1_904-5dollar_figure determine sub 1's gross_income within each category and subcategory of subpart_f_income a subpart_f_income categories in accordance with rules summarized in the preceding paragraph the first step in the process of allocating and apportioning sub 1's expenses is to determine the amount of sub 1's gross_income in the applicable subpart_f categories as described in sec_4_954-1 sec_1_904-5 as discussed above sub reported the following income during the years at issue management fees from the contracting subsidiaries under the management agreement dividends from entities in which sub had a less than percent ownership_interest 10the expense allocation and apportionment rules contain a fifth step applicable to expenses that are not definitely related expenses or that are definitely related to all of a cfc’s gross_income as a class see sec_1_904-5 since the facts provided in connection with this memorandum indicate that sub did not have any expenses of this type we will not discuss this step in this memorandum interest from banks and other financial institutions unrelated to sub interest on a loan made by sub to its parent corp a and capital_gain from the sale of the two related subsidiaries based on our examination of the facts provided in connection with this memorandum we concluded that fees received by sub in connection with the management agreement likely constituted agency fees or commissions that did not qualify as foreign_base_company_shipping_income we also concluded that the gross_income described in paragraphs - was probably foreign_personal_holding_company_income within the meaning of sec_954 not foreign_base_company_shipping_income as contended by corp a finally we concluded that the capital_gain described in paragraph constituted foreign_base_company_shipping_income only to the extent that sub 1’s interest in each related subsidiary met the ownership requirements in sec_902 as in effect during the years at issue and gain from the sale of each related subsidiary was attributable to its own foreign_base_company_shipping_income as described in sec_1_954-6 and sec_1_954-6 all other gain from the sale of the related subsidiaries likely constituted foreign_personal_holding_company_income within the meaning of sec_954 accordingly for subpart_f purposes it appears that sub 1's income during the years at issue consisted largely of foreign_personal_holding_company_income with possibly a small amount of foreign_base_company_shipping_income b foreign_tax_credit_limitation categories sec_904 defines the various foreign_tax_credit_limitation categories based on the facts provided in connection with this memorandum all of sub 1's foreign_base_company_shipping_income to the extent it received any constituted income in the shipping foreign_tax_credit_limitation category see sec_904 with respect to the foreign_personal_holding_company_income received by sub during the years at issue it appears that most if not all of that income constituted income in the passive foreign_tax_credit_limitation category see sec_904 sub was not predominantly engaged in the active_conduct_of_a_banking_financing_or_similar_business and thus none of the interest it received qualified as financial_services_income within the meaning of sec_904 see sec_904 income in the passive foreign_tax_credit_limitation category does not include financial_services_income sub owned less than percent of the entities paying the dividends that it received and therefore that income did not qualify as dividends from noncontrolled sec_902 corporations within the meaning of sec_904 see sec_904 income in the passive foreign_tax_credit_limitation category does not include dividends from noncontrolled sec_902 corporations finally none of the dividends and interest received by sub during the years at issue qualified for look-through treatment under sec_904 since none of this income was paid_by related entities entitled to look-through treatment under sec_1_904-5 see sec_1_904-5 the only foreign_personal_holding_company_income received by sub during the years at issue that may not constitute income in the passive foreign_tax_credit_limitation category is the interest from the banks and other financial institutions unrelated to sub you will need to conduct additional fact development to determine whether such income constitutes high_withholding_tax_interest within the meaning of sec_904 to the extent that it does that income will constitute income in that foreign_tax_credit_limitation category and not income in the passive foreign_tax_credit_limitation category directly allocate sub 1's expense from the performance of services the second step in the process of allocating and apportioning sub 1's expenses is to allocate expenses that are definitely related to less than all of sub 1's gross_income as a class the only definitely related expenses that have been claimed by the sub are expenses related to the management services however as discussed above even if sub legitimately accrued fees in_connection_with_the_performance_of_services on behalf of the contracting subsidiaries we do not believe that such fees constituted foreign_base_company_shipping_income although they may have qualified as foreign_base_company_services_income within the meaning of sec_954 to the extent sub incurred expenses in connection with these fees and these fees qualified as foreign_base_company_services_income such expenses are allocable to these fees if such allocation creates a net_loss in this category of foreign_base_company_income the portion of the deficit attributable to this net_loss would be available under the qualified chain_deficit_rule solely to offset foreign_base_company_services_income if any earned by the shipping subsidiaries if you determine that sub actually received income related to the performance of services we will be happy to provide additional guidance on applying the qualified chain_deficit_rule to determine what portion of sub 1's deficits are attributable to this other income directly allocate sub 1's related_person interest_expense to its passive foreign_personal_holding_company_income the third step in the process of allocating and apportioning sub 1’s expenses is to allocate sub 1’s related_person interest_expense to and reduce but not below zero sub 1’s passive foreign_personal_holding_company_income all of sub 1’s interest_expense during the years at issue appears to have constituted related_person interest_expense since all of its interest payments during that time were made on the dividend note to corp a its united_states_shareholder further the facts indicate that sub 1’s related_person interest_expense greatly exceeded its passive foreign_personal_holding_company_income that it received during this period accordingly for each year at issue you will need to allocate to sub 1’s passive foreign_personal_holding_company_income an amount of its interest_expense equal to such income apportion sub 1’s excess related_person interest_expense among the various categories of its remaining gross_income the fourth step in the process of allocating and apportioning sub 1’s expenses is to apportion sub 1’s excess related_person interest_expense between or among all of its remaining foreign_tax_credit_limitation categories containing income as discussed above it appears that the only other foreign_tax_credit_limitation categories of sub that contained income were the shipping basket and possibly the high_withholding_tax_interest basket pursuant to sec_1_904-5 sub 1's excess related_person interest_expense must be apportioned among these statutory groupings in the manner described below a methods for apportioning excess related_person interest_expense of a cfc in general a cfc apportions interest_expense not directly allocable to a particular category of gross_income using either the asset method of sec_1_861-9t or the modified gross_income_method of sec_1_861-9t if the asset method is used the apportionment generally is made using the average total value of the cfc’s assets within each such grouping for the taxable_year computed on the basis of values at the beginning and end of the year sec_1 9t g i and i in determining the value of its assets the cfc elects to use either their tax book_value or their fair_market_value sec_1_861-9t alternatively if the modified gross_income_method is used the apportionment is made on the basis of the cfc’s gross_income as determined under sec_1 9t j dollar_figure 11note that domestic corporations are limited to apportioning their interest_expense continued b procedure for electing method of apportionment the decision to use either the asset method of apportionment or the modified gross_income_method of apportionment is made by the controlling united_states_shareholders on behalf of the cfc see notice_89_91 1989_2_cb_408 stating service’s intent to clarify and amend sec_1_861-9t for this purpose the term controlling united_states_shareholders means those united_states_shareholders as defined in sec_951 who in aggregate own directly or indirectly more than percent of the total combined voting power of all classes of stock of the cfc entitled to vote sec_1_861-9t the controlling united_states_shareholders make the election by attaching a written_statement described in sec_1_964-1 to their return id a controlling united_states_shareholder that apportions its interest_expense under the asset method using the fair_market_value_method of valuation may not elect the modified gross_income_method of apportionment on behalf of its cfcs sec_1_861-9t for reasons of simplicity and ease of administration domestic corporations traditionally have chosen to apportion their interest_expense under the asset method using the tax_book_value_method of valuation and domestic corporations that are controlling united_states_shareholders traditionally have elected the modified gross_income_method of interest_expense apportionment on behalf of their cfcs we were not provided with any information regarding the methods of interest_expense apportionment used by corp a and sub accordingly consistent with these trends we have assumed for purposes of this memorandum that corp a apportioned its interest_expense using the asset method of apportionment and that it determined the value of its assets using the tax_book_value_method of valuation similarly we have assumed that corp a elected the modified gross_income_method of apportionment on sub 1's behalf you will need to develop additional facts to determine whether these assumptions are correct if you determine that these assumptions are not correct we will be happy to provide additional guidance regarding the proper application of the interest_expense allocation and apportionment rules in light of the new facts c apportion sub 1's excess related_person interest_expense using the modified gross_income_method of apportionment continued using the asset method of apportionment see sec_1_861-9t they may not use the modified gross_income_method however like cfcs when using the asset method of apportionment they may choose either the fair_market_value_method of valuation or the tax_book_value_method of valuation sec_1_861-9t as stated above under the modified gross_income_method of apportionment a cfc apportions its interest_expense on the basis of its gross_income if a cfc does not own stock in any lower-tier cfc its interest_expense is allocated on the basis of its own gross_income sec_1_861-9t in the case of a cfc that owns stock either directly or indirectly in any lower tier cfc this rule is applied as follows commencing with the lowest-tier cfc in the chain allocate and apportion that corporation’s interest_expense on the basis of its own gross_income this yields gross_income in each grouping net of interest_expense sec_1_861-9t moving to the next higher-tier cfc in the chain combine the gross_income of that corporation within each grouping with its pro_rata share as determined under principles similar to sec_951 of the gross_income net of interest_expense of the lower-tier cfc within the same grouping subject_to the following adjustments a b exclude from the gross_income of the upper-tier cfc any dividends or other_payments received from the lower-tier corporation other than interest subject_to look-through under sec_904 and exclude from the gross_income net of interest_expense of the lower-tier cfc any subpart_f_income net of interest_expense apportioned to such income sec_1_861-9t repeat the process in paragraph supra for each next higher-tier cfc in the chain sec_1_861-9t the facts indicate that during the years at issue sub received a nominal amount of passive foreign_personal_holding_company_income and that it possibly received nominal amounts of foreign_base_company_shipping_income and high_withholding_tax_interest income the facts also indicate that sub 1's related_person interest_expense during the years at issue greatly exceeded the nominal amount of passive foreign_personal_holding_company_income that it received sub owned stock both directly and indirectly in the shipping subsidiaries we have assumed for purposes of this memorandum that the only income received by the shipping subsidiaries was foreign_base_company_shipping_income pursuant to the rules prescribed by sec_1_861-9t for applying the modified gross_income_method of apportionment in cases involving multiple tiers of cfcs such income is effectively ignored when apportioning sub 1's interest_expense between or among its statutory and residual groupings of gross_income other than its passive foreign_personal_holding_company_income accordingly sub ‘s excess related_person interest_expense must be apportioned among its remaining gross_income based on the proportion that such income in each foreign_tax_credit_limitation category bears to its total remaining income see sec_1_904-5 this means that if sub received foreign_base_company_shipping_income and some high_withholding_tax_interest income in a particular year at issue its excess related_person interest_expense for that year will be apportioned among both of those categories of income based on the percentage of its total income other than its passive foreign_personal_holding_company_income that each of these categories of income reflects the portion of sub 1's deficit in its earnings_and_profits for that year that will be considered attributable to the qualified_activity that generates foreign_base_company_shipping_income and thus available under the qualified chain_deficit_rule to offset foreign_base_company_shipping_income of the shipping subsidiaries will be the portion that bears the same relationship to its total deficit for that year that the net_loss in its shipping basket bears to its total net losses for that year alternatively if sub did not receive any high_withholding_tax_interest income then all of its excess related_person interest_expense will be apportioned to its shipping basket and the total amount of its deficit in its earnings_and_profits will be attributable to the qualified_activity that generates foreign_base_company_shipping_income the analysis in this memorandum is based on a number of assumed facts if you determine that the facts are different from what we have assumed and you need additional guidance applying these rules in light of the new facts or you have any additional questions please call kelly myers kogan at assistant to the branch chief branch valerie a mark office of association chief_counsel international


office_of_chief_counsel internal_revenue_service memorandum number release date cc tege eoeg et1 postn-165915-04 uilc date date to director submission processing cincinnati oh attn entity unit from office of division counsel associate chief_counsel tax exempt government entities ---------------------- subject railroad_retirement_tax_act status in accordance with the coordination procedure established between the service and the railroad retirement board rrb the rrb has provided us with its opinion that the following businesses are not employers under the railroad retirement act and the railroad unemployment insurance act ------------------------------------------------------------------------- -------------------------------------------------------------------------- ------------------------------------------------------------- -------------------------------------------------------- ---------------------------------------------------------- we have reviewed the opinion of the rrb and based upon the information submitted to the rrb we also conclude that ---------------------and ----------------------------------------------are not employers under the railroad_retirement_tax_act please take the appropriate action regarding these businesses ---------------------------------- ---------------------------------------- ---------------------------------- ----------------------------------------- will e mcleod


internal_revenue_service number release date index number --------------------------------- -------------------------------- ------------------- ------------------------- - in re --------------------------------------------------- ------------------------------------------------ ----------------- --------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------ telephone number -------------------- refer reply to cc ita b01 plr-107747-05 date february legend tribe ----------------------------------------------------------------------------------------- ----------------------- ---------------------------------------------------- ----------------------------------------------------- --------------------------------------------------------------- ---------------------------------------- --------------------- --------------------- --- general council council reservation university date date a dear ------------------ this responds to tribe’s request for a ruling that university is an instrumentality of tribe for purposes of sec_7871 of the internal_revenue_code facts and representations tribe located on reservation is listed in revproc_2001_15 2001_1_cb_465 as an indian_tribal_government that is an entity that exercises governmental functions for purposes of the indian_tribal_government tax status act of title ii of pub_l_no 1983_1_cb_510 as amended by pub_l_no 1983_2_cb_309 indian tribes listed in revproc_2001_15 are to be treated similarly to states for specified purposes under the internal_revenue_code plr-107747-05 general council composed of all adult members of tribe is the supreme governing body of tribe council is a business council of representatives from tribe all members of council are elected by vote of general council general council has authorized council to act on behalf of tribe to exercise a variety of powers including the authority to establish or charter public bodies by official resolution university is a public college or university chartered by resolution of council on date to provide educational opportunities to residents of reservation and anyone else choosing to enroll university’s daily operations are managed by a president and a board_of directors all members of university’s board_of directors are appointed by council all decisions by university’s board_of directors concerning governance including appointment of a president and removal of directors or a president are made subject_to council’s authority to insist that such decisions be made only with the consent of council general council has the authority to direct council to remove a president or members of the university board_of directors university is required to submit an annual budget report to council for approval failure of council to approve the budget would result in university’s loss of tribe’s financial support university’s primary source of funding is tribe more than a percent of university’s annual revenue is currently provided by tribe university is located in office space owned by tribe for which university pays no rent or utility fees no part of the net_earnings of university may inure to the benefit of or be distributed to its members directors officers or other private persons council will immediately within days from date amend university’s charter to provide that upon dissolution of university all assets of university will be distributed for the benefit of tribe law and analysis sec_170 allows subject_to certain limitations a deduction for charitable_contributions as defined in sec_170 payment of which is made within the taxable_year sec_170 includes in the definition of charitable_contribution a contribution or gift made for exclusively public purposes to or for_the_use_of a state a possession_of_the_united_states or any political_subdivision of any of the foregoing or the united_states or the district of columbia sec_7701 provides that the term indian_tribal_government means the governing body of any tribe band community village or group of indians or if applicable alaska natives which is determined by the secretary after consultation with the secretary of the interior to exercise governmental functions plr-107747-05 sec_7871 provides that an indian_tribal_government shall be treated as a state for purposes of determining whether and in what amount any contribution or transfer to or for_the_use_of such government or a political_subdivision thereof is deductible under sec_170 relating to income_tax deduction for charitable etc contributions and gifts sec_7871 provides that the term indian_tribe means any indian_tribe band nation or other organized group or community which is recognized as eligible for the special programs and services provided by the united_states to indians because of their status as indians sec_170 provides in relevant part that in the case of an individual the deduction provided in sec_170 shall be allowed for any charitable_contribution to a governmental_unit referred to in sec_170 to the extent that the aggregate of such contributions does not exceed percent of the taxpayer's contribution_base for the taxable_year sec_170 provides that the term contribution_base generally means adjusted_gross_income entities eligible to receive tax-deductible contributions include not only governmental units described in sec_170 but also wholly-owned instrumentalities of states or political subdivisions see revrul_75_359 1975_2_cb_79 revrul_79_323 1979_2_cb_106 revrul_57_128 1957_1_cb_311 sets forth the following factors to be taken into account in determining whether an entity is an instrumentality of one or more governmental units whether the organization is used for a governmental purpose and performs a governmental function whether performance of its function is on behalf of one or more states or political subdivisions whether there are any private interests involved or whether the states or political subdivisions have the power and interests of an owner whether control and supervision of the organization is vested in a public authority or authorities whether express or implied statutory or other authority is necessary for the creation and or use of the organization and whether this authority exists and the degree of financial autonomy of the entity and the source of its operating_expenses tribe is recognized as an indian_tribal_government that is to be treated similarly to a state for specified purposes under the internal_revenue_code university is used for a governmental purpose and performs a governmental function on behalf of tribe university is a public university chartered by council to provide educational opportunities to all residents of reservation there are no private interests involved in university and tribe has the power and interests of an owner all of university’s assets will be distributed for tribe’s benefit plr-107747-05 upon dissolution of university university is a public college or university controlled solely by tribe university’s president and all members of university’s board_of directors are appointed by council and general council has the authority to direct council to remove any president or director all decisions by university’s board_of directors concerning governance including appointment of a president and removal of directors or a president are made subject_to council’s authority to insist that such decisions be made only with the consent of council statutory authority for the creation of university is found in the tribal requirement that university be chartered by resolution of council tribe controls the financial affairs of university university is required to submit an annual budget report to council for approval failure of council to approve the budget would result in university’s loss of tribe’s financial support university’s primary source of funding is tribe and university pays no utility fees or rent for its physical location provided by tribe conclusion we conclude that university is an instrumentality of tribe for purposes of sec_7871 we further conclude that contributions made to university exclusively for public purposes are charitable_contributions as defined in sec_170 of the internal_revenue_code and deductible pursuant to sec_170 to the extent otherwise allowed by sec_170 except as specifically provided herein no opinion is expressed or implied on the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer who requested it sec_6110 provides that this ruling may not be used or cited as precedent in accordance with a power_of_attorney on file we are sending a copy of this letter to tribe the ruling contained in this letter is based upon information and representations submitted by authority and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the materials submitted in support of the request for a ruling it is subject_to verification upon examination sincerely karin goldsmith gross senior technical reviewer branch income_tax accounting


internal_revenue_service uniform issue list no _ t ep ra ty department of the washington dc y contact person telephone number in reference to date jul atten legend entity a entity b entity c entity d religion e religious_order f federation g association h union i union j court k church l official m committee v committee w _ of plan x city y state z dear this is in response to a request for a private_letter_ruling submitted on behalf of entity a dated date and supplemented by additional correspondence dated date and date the ruling_request concerns whether plan x qualifies as a church_plan under sec_414 of the intemal revenue code the code the following facts and representations have been submitted entity a is a not-for-profit corporation located in state z founded in entity a was organized by religious_order f religious_order f operates within religion e and is dedicated to helping needy families of religion e as well as housing and caring for the frail and elderly of religion e according to its articles of association entity a is called upon to establish a home for the aged of religion e in city y as well as to provide maintenance medical_care and attendance to its residents this sense of purpose is further reflected in entity a’s mission statement where entity a pledges to enhance the quality of life of older persons by providing a broad range of residential and community based services in a professionally competent and financially responsible manner entity a was granted an exemption from federal_income_tax on date under sec_101 of the internal_revenue_code_of_1939 its exemption was reconfirmed by a letter dated date under sec_501 of the code entity a has been determined not to be an organization described in sec_509 of the code in order to expand the base of its activities and to avail other organizations of its expertise in the area of care for the elderly entity a was reorganized in into a membership corporation with one member entity b which has the right to elect the board_of directors of entity a entity b is a state z not-for-profit corporation that was incorporated in date entity b was organized for charitable purposes entity b is the parent organization of entity a entity c and entity d entity b is organized as a corporation that has no member as such entity b is governed by a self-perpetuating board_of directors entity b was formed by three incorporators each of whom was an officer of entity a the incorporators of entity b elected entity b’s initial board_of directors the board_of directors elect their own successors in accordance with the bylaws of entity b at least a majority of the board_of directors of entity b must be persons who are also members of the board_of directors of entity a thus management and control of entity a and entity b will be vested in the same persons entity c is a state z not-for-profit corporation that was incorporated in february of entity c was organized for charitable purposes to provide daycare to adults who need daytime supervision the mission of entity c is identical to the mission of entity a entity c provides religion e activities to its clients and religion e dietary restrictions are adhered to religion e law is observed at the daycare facilities entity c is a membership corporation whose sole member is entity b at least a majority of the directors of entity c must be persons who are also directors of entity a and entity b entity d is a for-profit stock corporation in state z that provided catering services entity b is also the sole shareholder of entity d a majority of directors of entity d must also be directors of entity b as part of a reorganization of entity a and the incorporation of entity b entity c and entity d entity b became the parent_corporation of entity a entity c and entity d it was intended that entity a entity b and entity c may transfer or share assets personnel and services entity a entity b and entity c are recognized as organizations exempt from federal_income_tax under sec_501 of the code and have been determined not to be organizations described in sec_509 of the code by a group_exemption_letter issued by the intemal revenue service in response to the group exemption application submitted by entity b in august of under the group_exemption_letter entity a retains its tax-exempt status and entity b and entity c are tax-exempt organizations from the date of their incorporation entity a is associated with religion e by virtue of sharing common religious bonds and convictions with religion e organizations and religion e as a whole it is dedicated to carrying out its health care mission in keeping with religion e life beliefs and traditions under the bylaws of entity a committee v is established to set religious policy within entity a committee v shall be comprised of at least three members of the board_of directors of entity a entity a employs a full-time official m to conduct moming and aftemoon services in church k as well as weekly services and religious programs entity a also employs a pastoral counselor entity a observes ali religion e holidays and festivals all residential activities must follow religion e requirements and regulations including special observance procedures for religion e holidays entity a strictly adheres to religion e dietary restrictions all programming at entity a is focused around religion e calendar and holidays of 2y entity a is associated with federation g a local organization which provides services to members of religion e on a national basis entity a is a member of association h an association of entities which provide services to the elderly members of religion e entity a is actively affiliated and seeks guidance from union i on issues affecting entity a’s compliance with the laws of religion e furthermore entity a seeks guidance from union j an organization affiliated with union i that provides guidance on what is or is not acceptable to be used at entity a in matters associated with the observance of religious days entity a seeks guidance from court k a form of religion e court to resolve matters involving religion e law it is represented that as to the governance of entity a all current members of the board_of directors are adherents to religion e it is further represented that based on all the above factors entity a shares common religious bonds and convictions with religion e and therefore is associated with or controlled by religion e entity a has maintained plan x for its eligible employees since date beginning date employees of entity c and entity d also participate in plan x it is represented that the total number of employees of taxable entity d that participate in plan x is less than three percent of the total of all employees who participate in plan x entity a has not made an election under sec_410 of the code to have certain provisions of the code apply to plan x including sec_410 relating to participation sec_411 relating to vesting and sec_412 relating to minimum_funding plan x provides for the establishment of committee w it is further represented that plan x has since its inception been administered by committee w whose sole purpose is the administration of plan x members of committee w are appointed by the board_of directors of entity a based upon the previous representations entity a requests a ruling that beginning date plan x qualifies as a church_plan under sec_414 of the code sec_414 of the code generally defines a church_plan as a plan established and maintained for its employees or their beneficiaries by a church or by a convention or association of churches which is exempt from taxation under sec_501 of the code sec_414 of the code provides in pertinent part that the term church_plan does not include a plan if less than substantially_all of the individuals included in the plan are individuals described in sec_414 or sec_414 or their beneficiaries under sec_414 of the code a plan established for its employees by an employer which is not itself a church or a convention or association of churches but is associated with a church or a convention or association of churches will be treated as a is church_plan if it is maintained by an organization whether a civil law corporation or otherwise the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits or both for the employees of a church or a convention or association of churches if such organization is controlled by or associated with a church or a convention or association of churches in pertinent part sec_414 of the code provides that an employee of a church or a convention or association of churches shall include an employee of an organization whether a civil law corporation or otherwise which is exempt from tax under sec_501 of the code and which is controlled by or associated with a church_or_convention_or_association_of_churches sec_414 of the code provides that a church or a convention or association of churches which is exempt from tax under sec_501 of the code shall be deemed the employer of any individual included as an employee under subparagraph b of sec_414 sec_414 of the code provides that an organization whether a civil law corporation or otherwise is associated with a church or a convention or association of churches if the organization shares common religious bonds and convictions with that church_or_convention_or_association_of_churches sec_1_414_e_-1 of the income_tax regulations provides that for purposes of sec_414 of the code the term church includes a religious_order or a religious_organization if such order or organization is an integral part of a church and is engaged in carrying out the functions of a church whether a sec_4 civil law corporation or otherwise in order for an organization to have a church_plan under sec_414 of the code it must establish that its employees are employees or deemed employees of a church or a convention or association of churches under sec_414 of the code by virtue of the organization’s affiliation with a church or a convention or association of churches in addition in the case of a plan established by an organization that is not itself a church or a convention or association of churches the plan must be maintained by an organization described in sec_414 of the code in this case entity a is a non-profit corporation organized under the laws of state z entity a was organized by religious_order f religious_order f operates within religion e and is dedicated to helping needy families of religion e as well as housing and caring for the frail and elderly of religion e entity a established a home for the aged of religion e in city y and provides maintenance medical_care and attendance to its residents entity a is exempt from federal_income_tax under sec_501 of the code as an organization described in sec_501 22b it is represented that entity a shares common religious bonds and convictions with religion e organizations and religion e as a whole and that it is dedicated to carrying out its health care mission in keeping with religion e life beliefs and traditions committee v has been established to set religious policy within entity a it is represented that as to the governance of entity a all current members of the board_of directors are adherents to religion e it is further represented that based on all the factors describing entity a its mission and purpose and its association with religion e organizations that entity a shares common religious bonds and convictions with religion e and therefore is associated with or controlled by religion e it is represented that the mission of entity c is identical to the mission of entity a and that entity c observes religion e law at the daycare facilities effective date due to a reorganization entity a became a member of a controlled_group with entity b entity c and entity d entity a entity b and entity c are recognized as organizations exempt from federal_income_tax under sec_501 of the code entity a established plan x for its employees date as part of the reorganization of entity a employees of entity c and entity d began participating in plan x on date in view of the common religious bonds and convictions between entity a and entity c with religion e the employees of entity a and entity c are deemed employees of an organization associated with religion e and are therefore church employees described in sec_414 of the code for purposes of the church_plan rules in addition it is represented that the number of employees of taxable entity d who participate in plan x is less than percent of the total number of participants in plan x therefore pursuant to sec_414 of the cade substantially_all of the individuals included in plan x are individuals described in sec_414 or sec_414 of the code it is represented that plan x is administered by committee w whose members are appointed by the board_of directors of entity a it is further represented that the sole purpose of committee w is the administration and oversight of plan x under the mules of sec_414 of the code committee w is an organization the principal purpose of which is the administration of plan x and is controlled by entity a an organization associated with religion e accordingly based on the above facts and representations we conclude that plan x qualifies as a church_plan under sec_414 of the code on and after date this letter expresses no opinion as to whether plan x satisfies the requirements for qualification under sec_401 of the code the determination as to whether a plan is qualified under sec_401 of the code is with the jurisdiction of the appropriate area manager’s office of the internal_revenue_service this letter expresses no opinion as to whether any organization referred to above is a church or a qualified_church-controlled_organization within the meaning of sec_3121 of the code this ruling is directed only to the taxpayer that requested it and applies only with respect to plan x as submitted with this request sec_61 k of the code provides that this private_letter_ruling may not be used or cited as precedent in accordance with a power of attomey on file with this office the original of this letter is being sent to your authorized representative sincerely yours lichard wiokersham richard wickersham manager employee_plans technical guidance and quality assurance tax_exempt_and_government_entities_division enclosures deleted copy of the letter notice


internal_revenue_service department of the treasury index number 280g washington dc ruling release date person to contact telephone number refer reply to cc ebeo br4 - plr-113427-98 date date acquiring acquiring sub target buyer year date w date y date x group b group c group d f g h i plr-113427-98 j m this is in response to your letter of date requesting rulings under sec_280g of the internal_revenue_code specifically you requested a ruling whether under the facts outlined below there will be a change in the ownership or effective_control of target or in the change in the ownership of a substantial portion of the assets of target within the meaning of sec_280g of the code the facts as submitted are set forth below acquiring is a widely-held publicly traded corporation as of date x immediately prior to the merger there were f shares of acquiring voting_stock outstanding which were held by approximately g persons target a widely-held publicly traded corporation had h shares of common_stock outstanding as of date y which were held by approximately i persons in year buyer commenced a tender offer for the stock of target which target’s board_of directors determined was not in the best interests of target target’s board_of directors approved certain severance agreements with senior executives and modified an existing employment agreement and existing senior executive severance_pay plan the terms of these agreements were amended later in year in response to an increased offer from buyer later in year acquiring expressed interest in acquiring target in a taxable transaction acquiring acquiring sub a subsidiary of acquiring and target entered into a merger agreement dated date w the merger agreement was approved by both the acquiring and the target shareholders on date x pursuant to the merger agreement acquiring sub merged with and into target and target became a wholly owned subsidiary of acquiring the directors of acquiring sub became the directors of target pursuant to the merger agreement the former target shareholders received acquiring stock and cash the former target shareholders acquired m percent of the outstanding acquiring stock following the merger group b a pre-merger acquiring shareholder holds j percent of the voting power in acquiring group c a pre-merger acquiring shareholder has the right to name one nominee on each management slate of nominees to the board_of directors of acquiring plr-113427-98 there is no agreement binding any acquiring shareholder to vote for the nominee of group c group c’s ownership decreased to less than five percent following the merger group d held a greater than five percent ownership_interest in acquiring prior to the merger group d’s ownership_interest decreased to less than five percent following the merger acquiring represents that neither group b group c group d nor any other shareholder of acquiring has any agreement written or unwritten express or implied to act in concert to control acquiring other than agreements that may exist among members of the same group acquiring also represents that the management of acquiring has no knowledge that any holders of acquiring stock have any such agreement other than the agreements that may exist among members of the same group sec_280g of the internal_revenue_code provides that no deduction will be allowed for any excess_parachute_payment sec_280g of the code defines the term excess_parachute_payment as an amount equal to the excess of any parachute_payment over the portion of the base_amount allocated to such payment sec_280g of the code defines the term parachute_payment as any payment in the nature of compensation to or for the benefit of a disqualified_individual if i such payment is contingent on a change i in the ownership or effective_control of the corporation or ii in the ownership of a substantial portion of the assets of the corporation and ii the aggregate present_value of the payments in the nature of compensation to or for the benefit of such individual which are contingent on such change equals or exceeds an amount equal to three times the base_amount sec_280g provides that all members of the same affiliated_group shall be treated as one corporation for purposes of sec_280g sec_4999 of the code imposes on any person who receives an excess_parachute_payment a tax equal to percent of the amount of the payment sec_1_280g-1 of the proposed income_tax regulations q a sec_27 sec_28 and sec_29 published in the federal_register on date fed reg big_number provides guidance concerning when a corporation will be considered to have undergone a change in ownership or effective_control or a change in the ownership of a substantial portion of its assets q a a provides that a change in the ownership or control of a corporation occurs on the date that any one person or more than one person acting as a group acquires ownership of stock of the corporation that together with stock held by such plr-113427-98 person or group possesses more than percent of the total fair_market_value or total voting power of the stock of such corporation q a b provides that persons will not be considered to be acting as a group merely because they happen to purchase or own stock of the same corporation at the same time or as a result of the same public offering however persons will be considered to be acting as a group if they are owners of an entity that enters into a merger consolidation purchase or acquisition of stock or similar_business transaction with the corporation example of q a deals with a corporate merger there corporation p merged into corporation o and the shareholders of p received o stock in exchange for their p stock the example concludes that because the p shareholders received a greater than percent interest in o o experienced a change in ownership by implication the example concludes that p did not experience such a change q a a provides in part that a change_of effective_control of a corporation is presumed to occur on the date that either any one person or more than one person acting as a group acquires or has acquired during the 12-month_period ending on the date of the most recent acquisition by such person or persons ownership of stock of the corporation possessing percent or more of the total voting power of the stock of such corporation or a majority of the members of the corporation’s board_of directors is replaced during any 12-month_period by directors whose appointment or election is not endorsed by a majority of the members of the corporation’s board_of directors prior to the date of the appointment or election the presumption of q a a and may be rebutted by establishing that the acquisition or acquisitions of the corporation’s stock or the replacement of the majority of the members of the corporation’s board_of directors does not transfer the power to control directly or indirectly the management and policies of the corporation from any one person or more than one person acting as a group to another person or group q a b contains the same language as q a b concerning when persons will be considered to be acting as a group it has been represented that immediately following the merger the target shareholders will have acquired more than percent of the value of the outstanding acquiring stock viewing the merger form acquiring’s perspective acquiring surrendered potential ownership or control when it issued its stock to target’s shareholders in consideration for target’s stock since target’s shareholders acquired sufficient stock value and voting power due to this transaction acquiring experienced a change_of_ownership under q a viewing the merger from target’s perspective all of target’s stock was transferred to acquiring in consideration for the issuance of acquiring stock to target plr-113427-98 shareholders which resulted in acquiring’s shareholders receiving a greater than percent voting interest in target accordingly under q a it is presumed that target experienced a change in effective_control however the facts submitted indicate that the shareholders will not act in a concerted way to control the management and policies of target the facts also indicate that target’s board_of director’s was replaced by directors whose appointment was endorsed by a majority of target’s board_of directors prior to the date of appointment accordingly based strictly on the information submitted and acquiring’s representations we rule as follows provided that after the merger the shareholders of acquiring do not act in a concerted way to control the management and policies of target the merger will not cause a change in the ownership or effective_control of target nor will it cause a change in the ownership of a substantial portion of target’s assets within the meaning of sec_280g of the code the provisions of sec_280g of the code do not apply to any payments received by employees or former employees of target and its subsidiaries that are contingent upon the merger the provisions of sec_4999 of the code do not apply to any payments that are received by employees or former employees of target and its subsidiaries that are contingent upon the merger except as specifically ruled on above no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent the taxpayer should attach a copy of this ruling to any income_tax return to which it is relevant temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not been adopted therefore this ruling will be modified or revoked by the adoption of temporary or final regulations to the extent that the regulations are inconsistent with any conclusion in the ruling however when the criteria in section dollar_figure of revproc_98_1 1998_1_irb_7 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances in accordance with the power_of_attorney on file with this office copies of this letter are being sent to your authorized representatives plr-113427-98 enclosure copy for purposes sincerely yours robert b misner assistant chief branch office of the associate chief_counsel employee_benefits and exempt_organizations