department of the treasury internal_revenue_service washington d c date date contact person identification_number telephone number employer_identification_number tax_exempt_and_government_entities_division number release date uil number legend state dear this is in response to your ruling_request dated date requesting a ruling that you are not required to submit a new application foe exemption under sec_508 you have been recognized as an organization exempt under sec_501 a of the code because you are described in sec_501 c and are classified as a public charity within the meaning of sec_509 you were formed by act of the state legislature this act established your purpose the processes of appointing and electing your directors and officers and other specifics about your operations your purpose is to administer the federal family education loan program you review applications of students to determine eligibility for student loans guarantee loans made to students and perform various other administrative functions your enabling statute describes you as a public nonprofit corporation with all the powers and duties incident to a nonprofit corporation under the state non-profit corporation act you state that as a corporation created pursuant to an act of state legislature you were not required to file articles of creation or incorporation with the state your enabling statute was amended multiple times but these amendments did not alter your purposes or corporate form however recently the state legislature enacted legislation impacting your corporate identity this legislation states that you are converted from a public nonprofit corporation to a nonprofit corporation it directs you to effectuate the conversion by filing a certificate of formation or certificate of conversion as deemed appropriate by the state secretary of state also the legislation states that even with this conversion you continued in existence uninterrupted from the date of your creation in addition you state that your act of filing a certificate of conversion is a purely administrative act that does not im pact your corporate structure or the continuous recognition of your nonprofit corporation status form your date of creation finally under this legislation your purpose and operations remain the same you abided by the requirements of this statute and filed documents determined to be appropriate by the state secretary of state you filed a certificate of conversion and attached to it a certificate of formation your certificate of conversion states that you are a statutorily enabled state public nonprofit corporation that is converting to a nonprofit corporation formed under state business organizations code the certificate of conversion adds that you are continuing your uninterrupted existence the attached certificate of formation states that you were formed by the state legislature pursuant to your original enabling statute ruling_request you requested the following ruling that a new entity was not created upon your filing a certificate of conversion with the secretary of state of state and as such you are not required to submit a new application_for exemption sec_501 c exempts from taxation corporations and any community chest fund or foundation that fit certain criteria sec_508 states that new organizations must notify secretary that they are applying for recognition of sec_501 c status sec_1 a -1 a provides that an organization claiming exemption under sec_501 and described in any paragraph of sec_501 shall file the form of application prescribed by the commissioner sec_1_508-1 a states that new organizations must notify the commissioner that they are applying for recognition of sec_501 c status sec_1_508-1 a provides that in general an organization organized after date will not be treated as described in sec_501 unless such organization has given the commissioner notice 74_tc_293 t c considered the question of whether a new organization was formed during the following course of actions an unincorporated association filed an application_for exemption while its application was pending the unincorporated association stated that it had changed its name and also it presented articles of incorporation bearing this new name the service determined that a new entity had been formed by the filing of these articles of incorporation it concluded that the newly formed corporation was distinctive from the unincorporated association that had previously filed an application_for exemption and the newly formed corporation needed to file its own application the tax_court agreed ruling that the two organizations should be treated as separate independent legal entities it stated that the service was entirely justified in insisting that the newly formed corporation submit a new application in order to determine whether it met the regulation requirements for tax-exempt status revrul_67_390 1967_2_cb_179 consider four situations in which organizations previously ruled as exempt underwent structural changes case an exempt trust was reorganized and adopted a corporate form to carry out the same purposes for which the trust had been established its operations were not changed case an exempt unincorporated association was incorporated and continued the operations which had qualified it for exemption case an exempt_organization incorporated under state law was reincorporated by an act of congress to carry out the same purposes contained in the state charter case an exempt_organization incorporated under the laws of one state was reincorporated under the laws of another state with no change in its purposes the ruling held that in all four situations a new legal entity had been created and the new legal entity was required to apply for exemption the old organization's exemption would not suffice revrul_77_469 1977_2_cb_196 held that an organization that filed its application_for exemption less than months after its incorporation under state law was exempt as of the date of its incorporation even though it had operated as an unincorporated association for three years prior to its incorporation the ruling highlighted that the corporation was a new legal entity from the unincorporated one analysis you were formed by an act of the state legislature as a public nonprofit corporation under state law thereafter the state legislature declared that you would no longer be a public nonprofit corporation but instead you would be a nonprofit corporation under state law you then took the appropriate steps to convert yourself from a public nonprofit corporation to a nonprofit corporation under sec_508 and sec_1_508-1 a provides that an organization claiming exemption under sec_501 a and described in any paragraph of sec_501 c shall file the form of application prescribed by the commissioner revrul_67_390 considered four cases in which organizations that were recognized as exempt underwent structural changes and the revenue_ruling concluded that by these structural changes new organizations were formed 74_tc_293 t c and revrul_77_469 found that new organizations were created when unincorporated associations filed documents to incorporate themselves your situation of converting from public nonprofit corporation to a nonprofit corporation is distinctive from every one of these cases thus your conversion does not amount to the creation of a new organization for purposes of sec_508 and sec_1_508-1 a rulings based on your facts and representations we rule as follows a new entity was not created upon your filing of a certificate of conversion and you are not required to submit a new application_for recognition of exemption this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice this ruling is directed only to the organization that requested it sec_611 o k of the code provides that it may not be used or cited by others as precedent this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because it could help resolve questions concerning your federal_income_tax status this ruling should be kept in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative sincerely michael seto manager eo technical enclosure notice


internal_revenue_service department of the treasury index number washington dc person to contact telephone number refer reply to cc intl br5 plr-117150-99 date date number release date legend bank date a date b date c date d country a country b country c x amount u s city fiscal_year fiscal_year dear this is in reply to a letter dated date a requesting rulings under of the internal_revenue_code_of_1986 the code and the treasury regulations thereunder the regulations additional information was submitted in letters dated date b date c and date d the information submitted for consideration is substantially as set forth below the rulings contained in this letter are based upon information and representations submitted by bank and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for rulings verification of the factual information representations and other data may be required as part of the audit process facts bank is a banking institution incorporated in country a bank’s head office is located in country a and bank has two foreign_branch offices one in country b and the other in u s city through which it conducts foreign_branch banking activities bank also conducts a shell branch operation through its offices in u s city bank is a calender year-end accrual basis taxpayer bank files a form 1120f for its year end fiscal_year to report its effectively_connected_income eci earned by its u s operations through its u s city branch office bank is engaged in a commercial wholesale banking business in the united_states consisting of making loans loan guarantees and providing letters of credit which earn eci to bank bank conducts its branch banking operations in the united_states under a federal license issued by and is subject_to the supervision of the office of the comptroller of the currency occ bank’s u s operations are accounted for on three separate sets of books u s city - domestic u s city - international banking facility ibf and country c - shell branch collectively the u s books the u s books are combined for purposes of financial and tax reporting in the united_states currently the bookkeeping operations lending and treasury functions relating to the u s operations eg u s city u s city-ibf and country c shell branch are performed by separate groups of employees working out of bank’s u s city branch office the country c shell branch has no employees of its own but is organized as an offshore branch for purposes of reducing u s reserve requirements on deposit liabilities placed with banking institutions and to facilitate lower cost eurodollar market deposit-taking because the country c shell branch is licensed by a foreign jurisdiction any transactions entered into under such foreign banking license must be booked in the country c branch bank represents that all of the country c shell branch's deposit transactions are entered into by bank’s u s city personnel for use in the u s operations and that u s city personnel maintain the books_and_records of the country c shell branch at the u s offices the country c shell branch assets and liabilities are subject_to federal bank regulatory supervision including examination by the occ and are reported on federal financial institutions examination council ffiec form 002s bank also represents that a substantial part of its business in its country b branch consists of taking deposits and making loans for u s tax purposes bank elected in its first eligible year to allocate interest_expense to its eci using the separate_currency_pools_method under sec_1_882-5 of the regulations although determining whether liabilities of bank’s u s trade_or_business are properly reflected on bank’s u s books_and_records is not a requirement for determining the allocable_interest under the separate_currency_pools_method bank represents that the liabilities recorded on its u s books are acquired and recorded in accordance with the requirements of the adjusted u s book liability method applicable to banks under sec_1_882-5 as part of a restructuring plan for its u s operations bank plans during its tax_year ending fiscal_year to transfer certain of its bookkeeping operations such as transactions processing collection and payments and treasury functions from the u s city branch to head office however loan production and management functions will be retained in u s city after the restructuring the bank’s personnel in country a will assume certain bookkeeping functions relating to transaction processing and payments and collections and the treasury functions on behalf of u s city and country c shell branch these transferred functions will include bookkeeping for both existing branch liabilities as well as any new branch liabilities other than the location of certain bookkeeping functions being moved to country a the u s books will be maintained in the same manner as before the restructuring head office personnel in country a will make the appropriate entries to be reflected on the appropriate set of u s books any new funding relating to assets recorded on the u s city-ibf u s city-domestic or country c shell branch books will be recorded on the corresponding u s book where the related asset is recorded through electronic communications links accounting reports will be made available to the bank’s personnel in its u s city branch office where the u s books will continue to be maintained by u s city personnel after the restructuring the treasury deposit-taking function formerly handled by the bank's u s city branch personnel will be performed by the bank's personnel located in country a bank represents that in every case where deposits are to be acquired and contemporaneously booked to the u s books the u s city branch employees will have some level of participation with respect to such deposit this participation will be in the form of u s city branch employees initiating each deposit by notifying head office at the time a funding need arises for example the funding need will arise upon notification received from a borrower of a draw down on a line of credit when a decision is made to purchase a security or an existing short-term liability requires renewal for libor loans notification to head office will normally be two days in advance in order to synchronize the funding with the loan notification made by the u s city branch personnel will include the terms principal_amount and interest rate of the loan or security to be purchased for purposes of setting forth parameters required for funding these third party liabilities will be recorded on the u s books in the same manner as before the restructuring except that head office personnel located in country a will solicit and negotiate the acquisition of the deposit liabilities and perform the bookkeeping function with respect to these transactions most of these deposits will be booked in country c shell branch after the treasury function is moved to the head office as described the bank will continue to be licensed in the u s as a bank and will remain subject_to federal supervision in the same manner as before the restructuring bank represents that the remainder of its u s based banking activities will continue without interruption activities conducted by the bank's employees in the u s will include soliciting investigating negotiating and arranging new loans performing credit checks monitoring the existing loan portfolio and coordinating deposit-taking activities with head office and general management and executive functions bank represents that historically a very substantial portion of its u_s_assets as defined in sec_1_884-1 of the regulations have been recorded on its country c shell branch books and that such practice will continue after bank’s treasury function is moved to its head office in country a bank also represents that both its u s -city domestic and u s city-ibf have transactions and assets recorded from activities that produce eci in addition after the treasury function is moved to country a the country c shell branch shall continue to be subject_to occ supervision and all assets and liabilities constituting the country c shell branch books will continue to be reported on ffiec form 002s ruling requests based on the factual representations made above bank has requested the following rulings ruling_request one after bank transfers part of its bookkeeping and treasury functions related to its u s city branch operations to its head office in country a bank may treat its interest_expense with respect to newly recorded liabilities on its u s city-domestic u s city- ibf and country c shell branch books as branch interest under sec_1 b a that is paid with respect to a u s booked liability within the meaning of sec_1_882-5 ruling_request two after bank transfers certain of its bookkeeping and treasury functions to its head office in country a it will still continue to qualify under sec_1_884-4 of the regulations as a bank that is entitled to treat a portion of its excess_interest as interest on deposits discussion ruling_request one sec_882 of the code imposes u s tax on income of a foreign_corporation that is effectively connected with the u s trade_or_business sec_882 allows foreign_corporations a deduction against eci to the extent such deduction is connected with income which is effectively connected with a conduct_of_a_trade_or_business within the u s sec_1_882-5 of the regulations provides rules for determining a foreign corporation's interest_expense allocable under sec_882 to eci sec_1_882-5 of the regulations provides that the amount of deductible_interest expense allocable to eci is determined under a three step process provided in sec_1_882-5 c and electively d or e under step a foreign_corporation first determines the total value of its u_s_assets under sec_1_882-5 under step the foreign_corporation determines the amount of u_s_liabilities under sec_1_882-5 deemed connected with the u_s_assets under step interest_expense of the foreign_corporation is allocated either under the adjusted u s -booked liabilities method provided in sec_1_882-5 or the separate currency pool method provided in sec_1_882-5 bank represents that it timely elected the separate_currency_pools_method in its first eligible year under sec_1_882-5 of the regulations under the separate_currency_pools_method the amount of interest_expense allocated to the u s trade_or_business of a foreign_corporation is determined without reference to the separate amount of interest_paid or accrued by the foreign corporation’s u s trade_or_business the amount of allocation is determined by the sum of separately computed interest deductions with respect to each currency in which the foreign_corporation has u_s_assets under sec_1_882-5 the three-step process for computing the separate interest deductions allocable to eci under sec_1_882-5 requires the determination of the amount of u_s_assets in each currency pool the u s -connected liabilities in each pool by multiplying the taxpayer’s actual or elective fixed ratio percentage by the respective u_s_assets in each pool and the prescribed interest rate in each pool by dividing the total interest_expense paid_or_accrued in the denominated currency of the u s asset pool by the average worldwide liabilities in that same currency pool the prescribed interest rate in a currency pool is multiplied by the u s -connected liabilities in the same currency pool to arrive at the calculated allocable deduction for the particular currency for purposes of the branch-level interest tax sec_884 provides for purposes of this subsection the term allocable_interest means any interest which is allocable to income which is effectively connected or treated as effectively connected with the conduct_of_a_trade_or_business in the united_states sec_884 provides in the case of a foreign_corporation engaged in a trade_or_business in the united_states or having gross_income treated as effectively connected with the conduct_of_a_trade_or_business in the united_states for purposes of subtitle a of the internal_revenue_code - a any interest_paid by such trade_or_business in the united_states shall be treated as if it were paid_by a domestic_corporation and b to the extent that the allocable_interest exceeds the interest described in subparagraph a such foreign_corporation shall be liable for tax under sec_881 in the same manner as if such excess were interest_paid to such foreign_corporation by a wholly owned domestic_corporation on the last day of such foreign corporation’s taxable_year to determine the amount of excess_interest subject_to tax under sec_884 sec_1_884-4 provides for purposes of this section the term excess_interest means- a the amount of interest allocated or apportioned to eci of the foreign_corporation under sec_1_882-5 for the taxable_year after application of sec_1_884-1 minus b the foreign corporation’s branch interest as defined in paragraph b of this section for the taxable_year but not including interest accruing in a taxable_year beginning before date minus c the amount of interest determined under paragraph c of this section relating to interest_paid by a partnership accordingly for purposes of sec_884 the amount of any interest_paid by a foreign corporation’s u s trade_or_business in the united_states that is treated as paid_by a domestic_corporation is defined under the regulations as branch interest sec_1_884-4 provides the definition of branch interest in relevant part as follows for purposes of this section the term branch interest means interest that is - i paid_by a foreign_corporation with respect to a liability that is - a a u s booked liability within the meaning of sec_1 d other than a u s booked liability of a partner within the meaning of sec_1_882-5 sec_1_882-5 qualifies a liability as a u s booked liability only if it is properly reflected on the books of the u s trade_or_business in determining whether a liability is properly reflected the regulations provide separate requirements for foreign_corporations that are banks as defined for purposes of the paragraph and for nonbanks whether a liability of a nonbank is properly reflected on the books of a u s trade_or_business is determined under sec_1_882-5 which provides in relevant part a in general a liability whether interest bearing or non-interest bearing is properly reflected on the books of the u s trade_or_business of a foreign_corporation that is not a bank as described in sec_585 without regard to the second sentence thereof if- the liability is secured predominantly by a u s asset of the foreign_corporation the foreign_corporation enters the liability on a set of books relating to an activity that produces eci at a time reasonably contemporaneous with the time at which the liability was incurred or the foreign_corporation maintains a set of books_and_records relating to an activity that produces eci and the district_director or assistant_commissioner international determines that there is a direct connection or relationship between the liability and that activity whether there is a direct connection between the liability and an activity that produces eci depends on the facts and circumstances of each case to determine whether a liability may be taken into account as properly reflected on a book of a u s trade_or_business that is a bank a more restrictive standard applies in this regard sec_1_882-5 prescribes a narrower time-frame for booking the liabilities to the u s trade_or_business a in general a liability whether interest bearing or non-interest bearing is properly reflected on the books of the u s trade_or_business of a foreign_corporation that is a bank as described in sec_585 without regard to the second sentence thereof if -- the bank enters the liability on a set of books relating to an activity that produces eci before the close of the day on which the liability is incurred and there is a direct connection or relationship between the liability and that activity whether there is a direct connection between the liability and an activity that produces eci depends on the facts and circumstances of each case b inadvertent error if a bank fails to enter a liability in the books of the activity that produces eci before the close of the day on which the liability was incurred the liability may be treated as a u s booked liability only if under the facts and circumstances the taxpayer demonstrates a direct connection or relationship between the liability and the activity that produces eci and the failure to enter the liability in those books was due to inadvertent error sec_585 provides in relevant part that for purposes of this section- b banking business of united_states branch of foreign_corporation the term bank also includes any corporation to which subparagraph a would apply except for the fact that it is a foreign_corporation sec_585 provides a in general the term bank means any bank as defined in sec_581 therefore if bank would meet the requirements of sec_581 but for the fact it is a foreign_corporation then bank may be considered a bank for purposes of sec_585 and by reference for purposes of sec_1_882-5 sec_581 provides in relevant part t he term bank means a bank or trust company incorporated and doing business under the laws of the united_states including laws relating to the district of columbia or of any state a substantial part of the business of which consists of receiving deposits and making loans and discounts or of exercising fiduciary powers similar to those permitted to national banks under authority of the comptroller of the currency and which is subject by law to supervision and examination by state or federal authority having supervision over banking institutions because bank represents that a substantial part of its business conducted through its u s city office consists of making loans and discounts and it is subject by law to the supervision and examination by the occ with respect to its u s books including its country c book bank will meet the definition of the term bank within the meaning of sec_581 and sec_585 if the deposit taking functions performed by the head office and recorded on the u s books are treated as deposits taken in the united_states if such deposits are treated as deposits taken within the united_states bank will be required to determine its branch interest for purposes of sec_1_884-4 by reference to whether liabilities are properly reflected under the stricter requirements of sec_1_882-5 ruling_request two code sec_884 provides that in the case of a foreign_corporation engaged in a trade_or_business in the united_states or having gross_income treated as effectively connected with the conduct_of_a_trade_or_business in the united_states any interest_paid by such trade_or_business in the united_states shall be treated as if it were paid_by a domestic_corporation code sec_884 provides that to the extent the allocable_interest exceeds the interest described in code sec_884 a foreign_corporation shall be liable for tax under sec_881 in the same manner as if such interest were paid to such foreign_corporation by a wholly owned domestic_corporation on the last day of such foreign corporation’s taxable_year sec_1_884-4 of the regulations provides that a portion of the excess_interest of a foreign_corporation that is a bank as defined in sec_585 without regard to the second sentence thereof shall be treated as interest on bank_deposits within the meaning of sec_871 and shall be exempt from tax under sec_881 provided that a substantial part of its business in the united_states as well as all other countries in which it operates consists of receiving deposits and making loans and discounts the portion of the excess_interest that is treated as interest on deposits shall equal the product of the foreign corporation’s excess_interest and the greater of a the ratio of the amount of interest-bearing deposits within the meaning of sec_871 of the foreign_corporation as of the close of the taxable_year to the amount of all interest bearing liabilities of the foreign_corporation on such date or b percent ruling number one based solely on the facts and representations submitted for purposes of sec_1 b i of the regulations and subject_to the rules of sec_1_884-4 for the period beginning after bank’s treasury function is moved to its head office in country a the recording and maintenance of bank’s head office acquired liabilities on the u s book will constitute the taking of deposits in the united_states within the meaning of sec_585 accordingly bank is required to determine whether its liabilities are properly reflected on the books of its u s trade_or_business under the requirements of sec_1_882-5 bank may not use the rules of sec_1_882-5 to determine whether any liabilities of its u s trade_or_business are properly reflected for purposes of determining bank’s branch interest under sec_1_884-4 the liabilities acquired by bank’s head office and recorded on one of the books that constitute a part of the u s books will qualify as booked liabilities that are properly reflected on the books of bank’s u s trade_or_business under sec_1_882-5 if such liabilities are entered onto one of the books which constitute a part of the u s book before the close of business on the day they are incurred by bank u s city-ibf and u s city-domestic book constitute a set of books that relate to an activity that produces eci under sec_1_882-5 bank’s country c shell branch books do not collectively with u s city- ibf and u s city-domestic constitute a single set of books that relate to an activity that produces eci under sec_1_882-5 however bank’s country c shell branch books will constitute a separate set of books that meet the requirements of sec_1_882-5 under the representations made by bank the liabilities recorded on the u s books have a direct connection or relationship to an activity that produces eci within the meaning of sec_1_882-5 without requiring that the u s book liabilities be individually traced to specific effectively connected loans or other u_s_assets on the u s books no opinion is expressed whether bank may treat liabilities recorded on its u s books as properly reflected on such books under the requirements of sec_1 d iii b of the regulations if any liabilities fail to meet the requirements of sec_1_882-5 of the regulations in addition no opinion is expressed with respect to sec_1_882-5 concerning whether any u s book liabilities treated as properly reflected under the requirements of sec_1 d iii are incurred or held for the principal purpose of artificially increasing the interest_expense of the u s booked liabilities within the meaning of sec_1_882-5 ruling number two based solely on the facts and representations submitted after bank transfers its treasury operations to its head office in country a bank will continue to qualify as a bank within the meaning of sec_1_884-4 and accordingly may treat a portion of its excess_interest as interest on deposits to the extent provided by the regulation for purposes of applying the requirements of sec_1_884-4 the treatment of bank’s head office acquired liabilities recorded on the u s books as the taking of deposits in the united_states for purposes of applying sec_585 under sec_1_882-5 as referenced by sec_1_884-4 also constitutes the taking of deposits in the united_states for purposes of sec_1_884-4 of the regulations meeting the other requirements of sec_585 without regard to the second sentence thereof for purposes of sec_1_882-5 also constitutes satisfaction of the sec_585 requirement for purposes of sec_1_884-4 of the regulations except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item not 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 sincerely yours paul s epstein senior technical reviewer branch office of associate chief_counsel international


t c memo united_states tax_court dale j krohn petitioner v commissioner of internal revenue respondent docket no filed date dale j krohn pro_se chris j sheldon for respondent memorandum findings_of_fact and opinion colvin judge respondent determined a deficiency in petitioner’s federal_income_tax of dollar_figure for and additions to tax of dollar_figure for failure_to_file under sec_6651 dollar_figure for failure to pay under sec_6651 and dollar_figure for failure to pay estimated_tax under sec_6654 in the answer respondent conceded that petitioner is not liable for the addition_to_tax under sec_6651 for respondent now contends that the correct amount of the addition_to_tax under sec_6651 for is dollar_figure the issues for decision are whether petitioner is liable for a dollar_figure deficiency in federal_income_tax for we hold that he is whether petitioner is liable for the addition_to_tax for failure_to_file under sec_6651 of dollar_figure for we hold that he is whether petitioner is liable for the addition_to_tax for failure to pay estimated_tax under sec_6654 of dollar_figure for we hold that he is findings_of_fact petitioner resided in arizona when he filed his petition in petitioner received social_security_benefits in the amounts of dollar_figure and compensation in the amounts of dollar_figure from paul development inc dollar_figure from wendell builders inc and dollar_figure from walker custom homes inc none of these payors withheld federal_income_tax for petitioner in petitioner did not file a federal_income_tax return for he did not make estimated_tax payments for respondent determined that petitioner received taxable_income based on documents provided by third-party payors and sent a notice_of_deficiency to petitioner petitioner timely filed a petition with this court petitioner did not cooperate with respondent in preparing for trial before trial petitioner asserted that he had a right not to testify because to do so would have required him to waive his fifth_amendment privilege_against self-incrimination petitioner did not identify or exchange any documents identify witnesses or file a pretrial memorandum as required by the standing_pretrial_order respondent complied with these requirements opinion a burdens of production and proof burden of production a sec_6201 if a taxpayer asserts a reasonable dispute with respect to any item_of_income reported on a third-party information_return and the taxpayer has fully cooperated with the secretary the secretary has the burden of producing reasonable and probative information concerning that deficiency in addition to the information_return sec_6201 petitioner did not introduce any evidence to refute respondent’s evidence or show that respondent’s determination of petitioner’s income is in error we conclude that respondent does not have the burden of production under sec_6201 because petitioner did not assert a reasonable dispute with respect to any item_of_income reported on an information_return and petitioner has not fully cooperated with respondent even if respondent had the burden of proceeding under sec_6201 respondent met that burden by producing information returns with certified transcripts from respondent’s administrative files and from social_security administration files and declarations and supporting records from robert curtis pankow president of wendell builders inc craig douglas walker president of walker custom homes inc and paul brian walker president of paul development inc the declarations were made under penalties of perjury and are governed by u s c section the declarations at issue are in the form required by u s c section the declarations are admissible under rule sec_803 and sec_902 of the federal rules of evidence rule of the federal rules of evidence provides an exception to the hearsay rule for records that are kept in the course of a regularly conducted activity and made at or near the time of the event by a person with knowledge rule of the federal rules of evidence states the requirements for self-authentication of a business record to qualify under rule a domestic record of a regularly conducted business activity must be accompanied by a declaration certifying that the record was made at or near the time of the occurrence of the matters set forth by or from information transmitted by a person with knowledge of those matters was kept in the course of the regularly conducted activity and was made by the regularly conducted activity as a regular practice all of the underlying documents were kept in the regular course of business and the related declarations of the validity of these documents were made by people familiar with them we conclude that sec_6201 does not apply in this case b determination in unreported income cases the u s court_of_appeals for the ninth circuit to which an appeal of this case would lie has held that in order for the presumption of correctness to attach to the notice_of_deficiency in unreported income cases the commissioner must establish some evidentiary foundation linking the taxpayer to the income- producing activity 596_f2d_358 9th cir revg 67_tc_672 or some substantive evidence demonstrating that the taxpayer received unreported income 680_f2d_1268 9th cir see also 774_f2d_932 9th cir once there is evidence of actual receipt of funds by the taxpayer the taxpayer has the burden of proving that all or part of those funds is not taxable 87_tc_74 there is ample evidence linking petitioner to income- producing activities he received nonemployee compensation from wendell builders inc walker custom homes and paul development inc and social_security_benefits at trial respondent submitted forms 1099-misc miscellaneous income a certified transcript from the social_security administration nonemployee compensation payor records and declarations under penalties of perjury of those payors as to the validity of these underlying documents the transcripts declarations and supporting documents show that petitioner received income during the years in issue thus petitioner bears the burden of proving respondent’s determinations are in error see edwards v commissioner supra weimerskirch v commissioner supra burden_of_proof respondent bears the burden of proving the increased addition_to_tax raised in the pleadings see rule a this increase is computational petitioner contends that respondent generally bears the burden_of_proof we disagree the burden_of_proof for a factual issue relating to liability for tax may shift to the commissioner under certain circumstances sec_7491 under sec_7491 the burden_of_proof with respect to a factual issue relevant to a taxpayer’s liability for tax shifts from the taxpayer to the commissioner if inter alia the taxpayer has a complied with substantiation requirements under the internal_revenue_code sec_7491 b maintained all records required by the internal_revenue_code sec_7491 and c cooperated with reasonable requests by the secretary for information documents and meetings id a taxpayer bears the burden of proving that he or she has met the requirements of sec_7491 see h conf rept pincite 1998_3_cb_747 s rept pincite 1998_3_cb_537 petitioner does not contend that he meets the requirements of sec_7491 and the record shows that he did not meet those requirements because he did not cooperate with respondent thus petitioner bears the burden_of_proof except as to the increased addition_to_tax see rule a 290_us_111 whether petitioner’s fifth_amendment claims affect the burden_of_proof before trial petitioner asserted fifth_amendment rights against self-incrimination however even if petitioner’s claim was bona_fide which we need not decide it would have no effect on petitioner’s burden_of_proof see 460_us_752 92_tc_661 89_tc_501 affd 884_f2d_258 6th cir b petitioner’s income in petitioner has not shown that respondent’s determination relating to the amount of his income for is incorrect we conclude that petitioner received income as described in the findings_of_fact c petitioner’s deductions a taxpayer must keep records that are sufficient to enable the commissioner to determine his or her tax_liability sec_6001 sec_1_6001-1 income_tax regs deductions are a matter of legislative grace 503_us_79 a taxpayer must substantiate the payments which give rise to claimed deductions 65_tc_87 affd per curiam 540_f2d_821 5th cir see sec_6001 petitioner alleged in the petition that he is entitled to claim deductions however petitioner has not identified the items that he contends are deductible or offered any evidence supporting his claim thus he may not deduct any amount for we conclude that petitioner’s deficiency in income_tax for was dollar_figure d additions to tax sec_7491 places on the commissioner the burden of producing evidence that it is appropriate to impose additions to tax to meet the burden of production under sec_7491 the commissioner must produce evidence showing that it is appropriate to impose the particular addition_to_tax but need not produce evidence relating to defenses such as reasonable_cause or substantial_authority 116_tc_438 h conf rept supra pincite c b pincite petitioner is required to file a return for but has not done so he did not make estimated_tax payments with respect to his tax_liability for thus respondent has met the burden of production respondent conceded that petitioner is not liable for the addition_to_tax under sec_6651 for thus sec_6651 reducing the amount imposed by sec_6651 to percent for any month in which both sec_6651 and additions are imposed does not apply and the 5-percent rate does respondent has established that petitioner is liable for the addition_to_tax under sec_6651 for in an amount greater than respondent determined in the notice_of_deficiency we conclude that petitioner is liable for additions to tax for failure_to_file under sec_6651 of dollar_figure and failure to pay estimated_tax under sec_6654 of dollar_figure for to reflect the foregoing decision will be entered for respondent


internal_revenue_service number release date index number ------------------------------------------ -------------------------- -------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ----------- telephone number ---------------------- refer reply to cc ita b04 plr-102259-13 date date legend taxpayers llc year year year dollar_figurea dollar_figureb dollar_figurec firm -------------------------------------------- --------------------------------------------- --------------------------------------------------------- ------- ------- ------- ------------ -------------- -------------- ----------------------------------- dear ---------------------------- this letter responds to your letter requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to make a regulatory election specifically you have requested an extension of time to make an election under sec_108 of the internal_revenue_code and sec_1_108-5 of the income_tax regulations to exclude income resulting from the discharge of qualified_real_property_business_indebtedness and to reduce the basis of depreciable real_property effective for taxpayers’ year tax_return facts taxpayers husband and wife file a joint federal_income_tax return reporting income on a calendar_year and use the cash_receipts_and_disbursements_method of accounting taxpayers are limited partners who each own an interest in llc a limited_liability_company that is treated as a partnership for federal_income_tax purposes plr-102259-13 in year taxpayers each received a schedule_k-1 from llc that showed cancellation of debt income cod in the amount of dollar_figurea total debt before payoff in the amount of dollar_figureb and the market_value of the property in december of year in the amount of dollar_figurec the schedule k-1s also included a footnote stating that the partners may be able to exclude some or all of the cancellation of debt income pursuant to sec_108 which relates to qualified_real_property_business_indebtedness prior to llc filing its year federal tax returns a member of llc contacted taxpayers who orally informed the member that they intended to make the sec_108 election on their year joint federal_income_tax return taxpayers’ year form_1040 was prepared by firm which did not take into account the schedule k-1’s footnote regarding sec_108 due to this oversight firm did not discuss the sec_108 and sec_1_108-5 election with taxpayers nor did it make the election on taxpayers’ behalf to reduce the basis of depreciable_property and to exclude income resulting from the discharge of qualified_real_property_business_indebtedness taxpayers’ year form_1040 was timely filed in year while preparing taxpayers’ year federal_income_tax return firm discovered that the current_year schedule k-1s from llc reduced taxpayers’ tax basis capital accounts and pursuant to sec_1_1017-1 reduced taxpayers’ proportionate interest in the adjusted_basis of llc’s depreciable_property as though the sec_108 election had been made after discovering the firm’s oversight in not including the form_982 making the sec_108 election on taxpayers’ year federal joint income_tax return taxpayers filed this request for an extension of time to make the election firm and llc have submitted affidavits consistent with the above facts taxpayers represent that granting relief under sec_301_9100-3 will not result in a lower tax_liability in the aggregate for all years to which the election applies than taxpayers would have had if the election had been timely made taxpayers’ adjusted_basis in the depreciable_property is greater than the amount of cod income and taxpayers will not exclude an amount under sec_108 that exceeds the excess of the principal_amount of indebtedness over the fair_market_value of the real_property law and analysis sec_108 provides that gross_income does not include any amount that would be includible in gross_income by reason of the discharge_of_indebtedness if in the case of a taxpayer other than a c_corporation the indebtedness discharged is qualified_real_property_business_indebtedness plr-102259-13 sec_108 provides in general that the amount excluded under sec_108 with respect to any qualified_real_property_business_indebtedness shall not exceed the excess of the outstanding principal_amount of such indebtedness immediately before the discharge over the fair_market_value of the real_property described in sec_108 sec_108 requires a taxpayer to make an election to exclude cod income under sec_108 sec_108 provides that in the case of a partnership sec_108 and sec_108 are applied at the partner level sec_1_108-5 provides that the election under sec_108 is made on the timely filed including extensions federal_income_tax return for the taxable_year in which the taxpayer has discharge_of_indebtedness income that is excludible from gross_income under sec_108 the election is made on a completed form_982 reduction of tax_attributes due to discharge_of_indebtedness and sec_1082 basis_adjustment sec_301_9100-1 through sec_301_9100-3 provide the standards that the service will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-3 provides that requests for extension of time for regulatory elections other than automatic extensions covered in sec_301_9100-2 will be granted when the taxpayer provides evidence including affidavits to establish that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government under sec_301_9100-3 a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election however a taxpayer is not considered to have reasonably relied on a qualified_tax professional if the taxpayer knew or should have known that the professional was not competent to render advice on the regulatory election or was not aware of all relevant facts in addition sec_301_9100-3 provides that a taxpayer is deemed not to have acted reasonably and in good_faith if the taxpayer- i seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested ii was informed in all respects of the required election and related consequences but chose not to make the election or iii uses hindsight in requesting relief plr-102259-13 sec_301_9100-3 provides that the commissioner will grant a reasonable extension of time to make the regulatory election only when the interests of the government will not be prejudiced by the granting of relief sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in a taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money similarly if the tax consequences of more than one taxpayer are affected by the election the government's interests are prejudiced if extending the time for making the election may result in the affected taxpayers in the aggregate having a lower tax_liability than if the election had been timely made sec_301_9100-3 provides that the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable_year that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer's receipt of a ruling granting relief under this section under the facts submitted by taxpayers we conclude that taxpayers have acted reasonably and in good_faith under sec_301_9100-3 in addition we conclude that granting relief will not prejudice the interests of the government under sec_301_9100-3 conclusion based solely on the information submitted and the facts as represented in the ruling_request we grant taxpayers an extension of days from the date of this letter to file an amended_return to make the election under sec_108 and sec_1_108-5 the election is to be made on form_982 except as expressly provided in the preceding paragraph we do not express or imply an opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically this letter does not rule on whether the amount of income at issue is properly treated as cancellation_of_indebtedness_income under sec_61 in addition this letter also does not rule on whether the income in fact qualifies for exclusion from income under sec_108 this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives plr-102259-13 a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely michael j montemurro chief branch office of associate chief_counsel income_tax accounting cc


internal_revenue_service number release date index number ----------------------------------- ---------------------------- ------------ ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------------ id no ------------ ----------------- telephone number ---------------------- refer reply to cc intl b01 plr-120634-13 date date ty --------------- legend taxpayer rrsp tax preparer tax years date date year year year year year ----------------------------------- ------------------------- ---------------------- ------------------------------------------ --- ---------------------------------------------------- --------------- ----------------------- -------------------------- ------- ------- ------- ------- ------- year ------- plr-120634-13 year ------- dear ----------------- this letter revokes and replaces a private_letter_ruling dated -------------------issued to taxpayer this letter responds to taxpayer’s letter dated -------------------- requesting an extension of time under sec_301_9100-3 to elect the provisions of revproc_2002_23 2002_1_cb_744 for tax years the ruling contained in this letter is based upon information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by taxpayer while this office has not verified any of the material submitted in support of the requested ruling it is subject_to verification on examination the information submitted for consideration is substantially as set forth below facts taxpayer was born in canada and was a resident of canada until date when he moved to the united_states he became a lawful permanent resident_of_the_united_states on date taxpayer established rrsp in year and made annual contributions to rrsp from year through year as of the date of this ruling_request taxpayer has not received any distributions from rrsp taxpayer does not have any u s income tax-related education skills or training he engaged tax preparer to prepare his u s income_tax returns for year sec_3 and although taxpayer provided tax preparer with information about rrsp tax preparer did not advise taxpayer of the requirement to make an election under article xviii of the united states-canada income_tax convention the treaty to defer recognition of undistributed_income accrued by rrsp taxpayer prepared his own u s income_tax return for year with the aid of tax preparation software the software that taxpayer used to prepare his year return did not prompt him to file form_8891 u s information_return for beneficiaries of certain canadian registered retirement plans while preparing his year u s income_tax return taxpayer discovered with the aid of the software that he was required to file form_8891 to make a valid election under article xviii of the treaty as of the date of the ruling_request the internal_revenue_service has not communicated with taxpayer in any way regarding rrsp plr-120634-13 ruling requested taxpayer requests the consent of the commissioner of internal revenue for an extension of time under sec_301_9100-3 to make an election pursuant to revproc_2002_23 to defer u s federal income_taxation on income accrued by rrsp during tax years as provided for by article xviii of the treaty law and analysis sec_301_9100-1 provides that the commissioner has discretion to grant a taxpayer a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301 -1 b provides that an election includes an application_for relief in respect of tax and defines a regulatory election as an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government in the present situation the election provided in revproc_2002_23 is a regulatory election within the meaning of sec_301_9100-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer an extension of time provided that taxpayer satisfies the standards set forth in sec_301_9100-3 based solely on the information submitted and representations made we conclude that taxpayer satisfies the standards of sec_301_9100-3 accordingly taxpayer is granted an extension of time until days from the date of this ruling letter to make an election for tax years under revproc_2002_23 as provided in sec_301_9100-1 the granting of an extension of time is not a determination that taxpayer is otherwise eligible to make the above-described election pursuant to dollar_figure of revproc_2002_23 once the election is made it cannot be revoked except with the consent of the commissioner for open tax years taxpayer must file amended u s income_tax returns and attach form_8891 for rrsp for each plr-120634-13 subsequent tax_year through the tax_year in which a final distribution is made from rrsp taxpayer must attach a form_8891 for rrsp to his u s income_tax return except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter a copy of this letter must be attached to the u s income_tax return for the year in which taxpayer obtained the ruling and should be associated with the amended returns for open tax years this letter_ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely __________________________________ m grace fleeman senior technical reviewer branch office of associate chief_counsel international enclosure copy for purposes


department of the treasury washington dc person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc psi b04 - plr-115162-11 date date internal_revenue_service number release date index number -------------------- ------------- --------------------------------------- -------------------- ---------------------------- re ---------------------- ------------------------------ --------------------------- legend legend wife husband child child child child child child trust trust trust trustee state state date date date date state statute state statute years years -------------------------- -------------------------------- ---------------------- ---------------------------- ----------------------- ----------------------- -------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- --------------------- ----------------------------- -------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- ---------------------- -------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- ------------------------------------------------ -------------------------------------------------------- -------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- -------------------------------- plr-115162-11 dear -------------- this letter responds to the letter dated date and subsequent correspondence submitted by your authorized representative requesting rulings concerning the income and generation-skipping_transfer gst tax consequences of a proposed division and subsequent combination of certain trusts the facts and representations submitted are summarized as follows prior to date wife established trust on date and husband established trust on date and trust on date all three trusts were irrevocable when established wife and husband are still living husband now has six children child through child from a previous marriage and child through child from his marriage to wife trust under article a of trust during the lives of wife and husband the trustee is to hold the trust estate as the principal of a_trust for the primary benefit of child child child and any children subsequently born of the marriage of wife and husband primary beneficiaries the trustee is to pay to any one or more of the primary beneficiaries so much of the net_income and principal including all and in such shares as the trustee in his absolute discretion shall deem advisable on the death of the last to die of wife and husband the trustee shall divide the remaining principal and accumulated income into shares as provided in article b article b provides that the trustee shall divide any property into equal shares one share for each then living primary beneficiary and one share for each primary beneficiary not then living but who has then living descendants each share set apart for any then living primary beneficiary who has not attained the age of years shall be held as a separate trust for the primary benefit of that primary beneficiary from each separate trust the trustee shall pay to the primary beneficiary so much of the net_income and principal including all as the trustee in his absolute discretion shall determine the trustee shall distribute to the primary beneficiary one-half of the principal of the beneficiary’s separate trust when the primary beneficiary reaches age and the remainder of the trust when the primary beneficiary reaches age if the primary beneficiary dies before reaching age the trustee shall distribute the then principal of the separate trust and any accumulated income to the then living descendants of the primary beneficiary in equal shares per stirpes or in default of any such descendant the trustee shall divide and administer the principal as provided in article b any share set apart for any then living primary beneficiary age or plr-115162-11 above shall be distributed to that primary beneficiary any share set apart for a primary beneficiary who is not then living but who has then living descendants shall be distributed to those descendants in equal shares per stirpes article iv provides that if any trust created under the agreement establishing trust has not terminated by the 21st anniversary of the death of the last to die of wife and the children of husband who were living on the date of the agreement that trust shall terminate on that anniversary and be distributed to the person for whose primary benefit the trust was created trust names an individual as trustee and under article vi provides that at any time the trustee may appoint any individual or any corporation as successor or additional trustee of that trust provided that there shall never be more than two trustees of any trust and during wife’s life an individual who is related or subordinate to wife within the meaning of sec_672 shall not be eligible to serve as trustee child child and child were born after the execution of the trust agreement currently trust is being held for the benefit of child through child the primary beneficiaries trust was created and funded prior to date it is represented that no additions have been made to trust since date accordingly trust an irrevocable_trust is exempt from gst tax under sec_26_2601-1 trust article i a of trust provides that the trustee shall hold the trust estate as the principal of a_trust for the primary benefit of child the beneficiary and pay to the beneficiary or any child of his so much of the principal in such shares as the trustee in his absolute discretion deems advisable the trustee may terminate the trust at anytime by distributing the entire principal to the beneficiary if the trustee in his sole discretion believes that to be in the best interests of the beneficiary on the death of the beneficiary the trustee shall distribute the principal of the trust to the then living descendants of the beneficiary in equal shares per stirpes or in default of any such descendant to the then living descendants of husband in equal shares per stirpes or in default of any such descendant to husband’s distributees defined below article i a further provides that in each calendar_year of the trust in which any gifts are made or deemed under federal gift_tax laws to have been made to the trust the beneficiary shall have the right to demand distribution to him of the lesser_of i dollar_figure or percent of the value of the principal of the trust on december of such calendar_year whichever is greater and ii the amount of such gifts article i b states that if a child or children are born to husband and wife after the date of the trust agreement and husband or any person transfers any property to the trustee for the benefit of any such child the trustee shall hold such property as plr-115162-11 principal of a separate trust for the primary benefit of such child on the same terms and conditions as the trust created for the benefit of child pursuant to the provisions of article i a article vi a provides that whenever on the occurrence of any event any property is required under trust to be distributed to the distributees of any individual such property shall be distributed to the persons who would be entitled thereto and in the shares to which such person would be entitled under the laws of state then in effect if such individual had died immediately after the occurrence of such event predeceased by husband intestate and domiciled in state and such property had constituted his entire net distributable estate_trust names an individual as trustee and under article iv d provides that at any time wife or if she is not living the trustee or trustees may appoint any individual or any corporation as successor or additional trustee of a_trust created under the trust agreement there shall never be more than two trustees of any trust and during husband’s life no individual who is related or subordinate to husband within the meaning of sec_672 shall be a trustee under trust under the terms of trust three separate trusts were created trust a to benefit child trust b to benefit child and trust c to benefit child the terms of trust govern trusts a b and c trust a was created and initially funded before date after that date in years through and years through husband and wife made additions to trust a and elected to gift split on form sec_709 united_states gift and generation-skipping_transfer_tax returns accordingly the portion of trust a which is attributable to pre-date transfers is exempt from gst tax under sec_26_2601-1 it is represented that the portion of trust a attributable to the post-date additions has a zero inclusion_ratio trust b was created and initially funded before date after that date in year and years through and through husband and wife made additions to trust b and elected to gift split on form sec_709 accordingly the portion of trust b which is attributable to the pre-date transfers is exempt from gst tax under sec_26_2601-1 it is represented that the portion of trust b attributable to the post-date additions has a zero inclusion_ratio trust c was created and initially funded after date husband and wife made additions to trust c in year sec_1 and and years through it is represented that trust c has a zero inclusion_ratio trust plr-115162-11 under article a of trust during husband’s life the trustee is to hold the trust estate as the principal of a_trust for the primary benefit of all of husband’s children including any born after the agreement was executed the trustee is to pay to any one or more of husband’s children or descendants so much of such principal including all and in such shares as the trustee in his absolute discretion shall deem advisable in each calendar_year of the trust in which any gifts are made or deemed under federal gift_tax laws to have been made to the trust each then living child of husband and descendant of husband shall have the right to demand distribution to him or her of the lesser_of i dollar_figure or twice the amount of the federal gift_tax annual exclusion if that is greater ii dollar_figure or percent of the value of the principal of the trust on december of such calendar_year whichever is greater and iii the amount of each such gift divided by the number of such children and descendants living on the date of such gift article i a further provides that at husband’s death the trustee shall divide the trust for husband’s descendants who survive him in equal shares per stirpes each share for a child of husband shall be held as a separate trust for the primary benefit of that child the trustee of each separate trust is to pay to the beneficiary child or any descendant of his so much of the principal including all as the trustee in his absolute discretion deems advisable on the death of the beneficiary child the trustee shall distribute the principal of the trust to the beneficiary child’s then living descendants in equal shares per stirpes or in default of such descendant to the then living descendants of husband in equal shares per stirpes or in default of any such descendant to husband’s distributees provided however that any share distributable to a descendant of husband for whose primary benefit a_trust exists under trust shall be added to the principal of such trust each share set apart for any other descendant of husband shall be distributed to that descendant article i b provides that if any trust created under the agreement establishing trust has not terminated by the 21st anniversary of the death of the last to die of the descendants of husband’s father who were living on the date of that agreement the trust shall terminate on that anniversary and be distributed to the person for whose primary benefit the trust was created article vi a provides that whenever on the occurrence of any event any property shall be required to be distributed to the distributees of any individual such property shall be distributed to the persons who would be entitled thereto and in the shares to which such person would be entitled under the laws of state then in effect if such individual had died immediately after the occurrence of such event predeceased by husband’s wife intestate and domiciled in that state and such property had constituted his entire net distributable estate_trust names an individual as trustee and under article iv d provides that at any time wife or if she is not living the trustee or trustees may appoint any individual or any corporation as successor or additional trustee of a_trust created under the plr-115162-11 agreement there shall never be more than two trustees of any trust and during husband’s life no individual who is related or subordinate to husband within the meaning of sec_672 shall be a trustee under trust trust is being held for the benefit of child through child trust was created and initially funded before date after that date in year sec_1 through and years and husband and wife made additions to the trust and elected to gift split on form sec_709 accordingly the portion of trust which is attributable to pre-date transfers is exempt from gst tax under sec_26_2601-1 it is represented that the portion of trust attributable to the post-date additions has a zero inclusion_ratio proposed division and combination trust trust and trust each provide that the trusts created under the respective trust agreement shall be administered construed and the validity and effect of the provisions of the agreement shall be determined in accordance with the laws of state effective as of date the trustees of trust trusts a b and c and trust resigned and appointed trustee as sole successor trustee trustee is located in state accordingly state law applies to the administration of trust sec_1 and trust trusts a b and c and trust will be referred to collectively as the family trusts trustee proposes to divide and combine the family trusts to create separate trusts for each of child through child it is represented that the transaction will allow each separate trust to have its own distribution and investment policy for the child who is the beneficiary after receiving a favorable letter_ruling from the internal_revenue_service trustee will execute a memorandum of division and combination of trusts memorandum to set forth the terms of the division and combination and effectuate the transaction memorandum states that the trustee has determined it would be administratively convenient and would not impair the rights of child through child to modify the structure and administration of the family trusts through the division and combination trustee proposes to divide trust sec_1 and into six separate and equal shares one share for each of child through child immediately after the division the separate shares of trust sec_1 and will be combined into six trusts each held for the benefit of one of child through child child through child trusts in addition trust a will merge into child trust trust b will merge into child trust and trust c will merge into child trust trustee will give notice of the division and combination to all six children the effective date of the division and combination will be days after the date of the notice under paragraph of memorandum an equal one-sixth share of each and every asset in the family trusts will be distributed to each child’s trust to the extent plr-115162-11 mathematically possible odd shares will be sold for cash and equal one-sixth shares of the proceeds will be distributed to each child’s trust paragraph states that upon the effective date and subject_to memorandum questions of administration within the meaning of restatement second of conflict of laws sec_271 of each child’s trust shall be governed by primary reference to trust to the greatest extent possible all other non-administrative matters ie distribution timing vesting etc for each pro-rata portion of each child’s trust that is attributable respectively to trust trust or trust will be governed by the respective original trust agreement for trust trust or trust paragraph provides that the pro-rata portion of each child’s trust that is attributable respectively to trust trust or trust shall terminate as provided for in the respective original trust agreement state statute provides that after notice to the qualified beneficiaries a trustee may combine two or more trusts into a single trust or divide a_trust into two or more separate trusts if the result does not impair the rights of any beneficiary or adversely affect achievement of the purposes of the trust under state statute a qualified_beneficiary is a beneficiary who is currently entitled to distributions of income or principal from the trust trustee has requested the following rulings the division and combination of the family trusts into child through child trusts as provided in memorandum will not cause the family trusts or child through child trusts to become subject_to chapter no gain_or_loss will be recognized for federal_income_tax purposes under sec_61 and sec_1001 by the family trusts or any of the beneficiaries as a result of the division and combination of the family trusts the assets of child through child trusts will have the same basis under sec_1015 and holding_period under sec_1223 both before and after the division and combination ruling sec_2601 of the internal_revenue_code imposes a tax on every generation- skipping transfer which is defined under sec_2611 as a taxable_distribution a taxable_termination or a direct_skip sec_2631 as effect in years provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 as in effect in years provides that the dollar_figure amount under sec_2631 is to be adjusted for inflation for calendar years after and before plr-115162-11 sec_2631 as in effect for years provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption amount which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 as in effect for years provides that the gst_exemption amount for any calendar_year is equal to the applicable_exclusion_amount under sec_2010 for each calendar_year under sec_2642 the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer is defined as the excess if any of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of the gst_exemption allocated to the trust and the denominator of which is the value of the property transferred to the trust or involved in the direct_skip under a of the tax_reform_act_of_1986 the act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the generation-skipping_transfer_tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 the tax does not apply to any generation-skipping_transfer under a_trust that was irrevocable on date and no addition actual or constructive was made to the trust after that date sec_26_2601-1 provides that any trust in existence on date will be considered irrevocable unless the settlor held a power that would have caused inclusion of the trust in the settlor's gross_estate under sec_2038 or sec_2042 if the settlor had died on date sec_26_2601-1 provides that if an addition is made to an irrevocable_trust that is excluded from chapter by reason of paragraph b of this section the trust is thereafter deemed to consist of two portions a portion not subject_to chapter the non-chapter portion and a portion subject_to chapter the chapter portion each with a separate inclusion_ratio as defined in sec_2642 the non-chapter portion represents the value of the assets of the trust as it existed on date the applicable_fraction as defined in sec_2642 for the non-chapter portion is deemed to be and the inclusion_ratio for such portion is the chapter portion of the trust represents the value of all additions made to the trust after date the inclusion_ratio for the chapter portion is determined under sec_2642 sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under sec_26_2601-1 or will not cause the trust to lose its exempt status the regulation provides that the rules contained in the paragraph are applicable only for purposes of determining whether an exempt trust retains its exempt status for gst tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the plr-115162-11 trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy b i a b or c by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust sec_26_2601-1 example considers a situation in which in grantor established an irrevocable_trust for the benefit of his two children a and b and their issue under the terms of the trust the trustee has the discretion to distribute income and principal to a b and their issue in such amounts as the trustee deems appropriate on the death of the last to die of a and b the trust principal is to be distributed to the living issue of a and b per stirpes in the appropriate local court approved the division of the trust into two equal trusts one for the benefit of a and a's issue and one for the benefit of b and b's issue the trust for a and a's issue provides that the trustee has the discretion to distribute trust income and principal to a and a's issue in such amounts as the trustee deems appropriate on a's death the trust principal is to be distributed equally to a's issue per stirpes if a dies with no living descendants the principal will be added to the trust for b and b's issue the trust for b and b's issue is identical except for the beneficiaries and terminates at b's death at which time the trust principal is to be distributed equally to b's issue per stirpes if b dies with no living descendants principal will be added to the trust for a and a's issue the division of the trust into two trusts does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the division in addition the division does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust therefore the two partitioned trusts resulting from the division will not be subject_to the provisions of chapter sec_26_2601-1 example considers a situation where in the grantor established an irrevocable_trust for grantor's child and the child's issue in grantor's spouse also established a separate irrevocable_trust for the benefit of the same child and issue the terms of the spouse's trust and grantor's trust are identical in the appropriate local court approved the merger of the two trusts into one trust to save administrative costs and enhance the management of the investments the merger of the two trusts does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the merger in addition the merger plr-115162-11 does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust therefore the example concludes that the trust that resulted from the merger will not be subject_to the provisions of chapter in the present case trust is exempt from gst tax under sec_26_2601-1 portions of trust a_trust b and trust which are attributable to pre-date transfers are also exempt from gst tax under sec_26_2601-1 it is represented that portions of trust a_trust b and trust which are attributable to post-date transfers have a zero inclusion_ratio and therefore are not subject_to gst tax trust c was funded after date it is represented that trust c has a zero inclusion_ratio and therefore is not subject_to gst tax as noted above the rules in sec_26_2601-1 apply in the case of trusts that are exempt from gst tax because the trusts were in existence and irrevocable prior to date no guidance has been issued concerning modifications that may affect the status of chapter trusts that are exempt from gst tax because sufficient gst_exemption was allocated to the trusts to result in an inclusion_ratio of zero at a minimum a modification that would not affect the gst status of a non-chapter trust should similarly not affect the exempt status of a chapter trust the present case involves facts that are similar to example sec_5 and in sec_26_2601-1 the beneficiaries of the child through child trusts are the same as the beneficiaries of trust sec_1 and the distribution timing vesting and termination provisions for each pro-rata portion of each child’s trust that is attributable respectively to trust trust or trust will be governed by the respective original trust agreement for trust trust or trust based on the facts presented and the representations made we conclude that the division and combination of the family trusts into child through child trusts as described above will not shift any beneficial_interest in the trusts to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification in addition the division and combination of the family trusts into child through child trusts as described above will not extend the time for vesting of any beneficial_interest in the trusts beyond the period provided for in trust trust or trust accordingly based on the facts submitted and representations made we conclude that the division and combination of the family trusts into child through child trusts will not cause the family trusts or child through child trusts to become subject_to chapter ruling sec_61 states that unless otherwise provided gross_income means all income from whatever source derived under sec_61 gross_income includes gains derived from dealings in property plr-115162-11 sec_1001 provides that the gain from the sale_or_other_disposition of property is the excess of the amount_realized over the adjusted_basis provided in sec_1011 for determining gain and the loss is the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized sec_1001 provides that except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property must be recognized sec_1_1001-1 of the income_tax regulations provides that except as otherwise provided in subtitle a the gain_or_loss realized from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or as loss sustained under sec_1_1001-1 the severance of a_trust occurring on or after date is not an exchange of property for other_property differing materially either in_kind or in extent if i an applicable_state_statute or the governing instrument authorizes or directs the trustee to sever the trust and ii any non-pro rata funding of the separate trusts resulting from the severance whether mandatory or in the discretion of the trustee is authorized by an applicable_state_statute or the governing instrument an exchange of property results in the realization of gain_or_loss under sec_1001 if the properties are materially different 499_us_554 properties exchanged are materially different if the properties embody legal entitlements different in_kind or extent or if the properties confer different rights and powers id pincite in cottage savings the court held that mortgage loans made to different obligors and secured_by different homes embody distinct legal entitlements and that the taxpayer realized losses when it exchanged interests in the loans id pincite in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent id pincite in revrul_56_437 1956_2_cb_507 the service concluded that a partition of jointly owned property is not a sale_or_other_disposition of property where the co-owners of the joint property sever their joint_interests but do not acquire a new or additional interest as a result thereof thus neither gain nor loss is realized on the partition the proposed division and combination of the family trusts into child through child trusts as provided in memorandum is authorized by state statute paragraph of memorandum provides that equal one-sixth shares of each and every asset in the family trusts will be distributed to each child’s trust to the extent mathematically possible odd shares will be sold for cash and equal one-sixth shares of the proceeds will be distributed to each child’s trust accordingly consistent with plr-115162-11 sec_1_1001-1 and revrul_56_437 the pro_rata division and distribution of assets from the family trusts into child through child trusts is a not a realization event based on the facts provided and the representations made we conclude that no gain_or_loss will be recognized for federal_income_tax purposes under sec_61 and sec_1001 by the family trusts or any of the beneficiaries as a result of the division and combination of the family trusts into child through child trusts as provided in memorandum ruling sec_1015 provides that the basis in property acquired by a transfer in trust is the same as it would be in the hands of the grantor with adjustments for gain and loss recognized sec_1_1015-2 provides that in the case of property acquired after date by a transfer in trust other than a transfer in trust by gift bequest or devise the basis_of_property so acquired is the same as it would be in the hands of the grantor increased by the amount of gain or decreased in the amount of loss recognized to the grantor under the law applicable to the year in which the transfer was made sec_1_1015-2 applies the uniform basis principles in sec_1_1015-1 for determining the basis_of_property where more than one person acquires an interest in property by transfer in trust under sec_1_1015-1 property acquired by gift has a single uniform basis although more than one person may acquire an interest in the property the uniform basis of the property remains fixed subject_to proper adjustment for items under sec_1016 and sec_1017 sec_1223 provides that in determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person if under this chapter such property has for the purpose of determining gain_or_loss from a sale_or_exchange the same basis in whole or in part in his hands as it would have in the hands of such other person in this case sec_1001 and sec_61 do not apply to the proposed transaction thus based upon the facts provided and the representations made we conclude that the assets of each child’s trust will have the same basis under sec_1015 and holding_period under sec_1223 both before and after the division and combination of the family trusts into child through child trusts as provided in memorandum the rulings contained in this letter are based upon information and representations submitted by the taxpayers and accompanied by a penalty of perjury plr-115162-11 statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely associate chief_counsel passthroughs and special industries by ______________________________ lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter cc