internal_revenue_service p o box cincinnati oh release number release date date date legend b scholarship program c state d dollars amount e dollars amount dear department of the treasury employer_identification_number contact person - id number contact telephone number uil you asked for advance approval of your scholarship grant procedures under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax you requested approval of your scholarship program to fund the education of certain qualifying students our determination we approved your procedures for awarding scholarships based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding scholarships meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable also awards made under these procedures are scholarship or fellowship grants and are not taxable to the recipients if they use them for qualified_tuition_and_related_expenses subject_to the limitations provide in code sec_117 description of your request your letter indicates you will operate a scholarship program called b b is an endowment fund administered by you for the express purpose of scholarship support for individuals interested in pursuing a career in health care the intent of the scholarship program is to invest in the education of those students that may look to southeast c for employment in health care following the completion of their studies letter catalog number 58263t b is available to students in counties in the state of c awards vary in size from d dollars to e dollars as funds are available awards may be used for educational expenses including tuition books and other fees and are paid directly to the student's college or university awards are given without regard to race color creed religion gender disability or national origin information regarding b is posted on your website and published in local newspapers within a county area in c notifications are also made to human resource offices in hospitals within a county area in c and to college financial aid offices the specific criteria you use to determine eligibility for the scholarship program includes the following applicant must reside in one of ten specific counties in c applicant must be enrolled in a state or nationally accredited program of study that focuses on health care applicant must be a high school graduate who is enrolling in at least the second year of their course of study the award is contingent upon proof of registration enrollment applicant must have a cumulative grade point average of dollar_figure or higher on a scale applicant must apply each year with preference given to previous award recipients a limit of four awards per student an award in one year does not automatically result in an award the following year applicant must be focused on one of the eligible fields of study within the health care industry applicant must have no relationship with anyone on your board or employees your selection committee consists of one board member and additional members the committee consists of individuals who are in a health-related field health education education or human resource professionals if a member resigns a new member is recruited that has a similar skill set or knowledge base the greatest expertise that is desired is e e extensive knowledge of education and specifically health accurrent and working knowledge of health professions that are needed in southeast c the scholarship selection committee will give preference to applicants that are have e e e an award recipient from the previous year expressed a desire to seek employment in southeast c upon completion of studies or pursuing educational studies in a health career identified as a workforce shortage area for southeast c letter catalog number 58263t historically the committee has chosen to award scholarships to every eligible applicant at differing levels the number of applications is usually between and annually first the committee takes into consideration the total amount available for award a board designated fund was established for this scholarship five percent of the balance at year end is established as the amount to be paid out each year then eligible applications are ranked by their total score the points scale is awarded to each application based on fields of study type of accreditation previous scholarships and grade point average essays letter of reference extra-curricular activities and financial needs are also requested through the application process the committee reviews the applications online they review a blind copy no individual names of the application experience of the committee has shown that natural groups of like points often emerge within this ranked list the committee then makes a determination by group tier cut-off what amounts to award to each tier smaller scholarships are generally made to health occupations that do not require significant amounts of post-secondary education larger scholarships are generally given to occupations that require many years of college and whose students incur significant financial debt eligible applicants must meet criteria to apply including residing in an appropriate county a cumulative gpa of dollar_figure or greater with transcript verification be enrolled in their second year of college in an eligible health field of study and provide a proof of enrollment from an accredited college or university students are eligible to receive an annual award up to four times need not be concurrent scholarships are only awarded when an official transcript is verified and proof of enrollment is obtained from an accredited college or university at the time of application grade point average is verified for each applicant in order for the applicant to be eligible for a scholarship renewal the applicant must provide updated transcripts to verify that the proper grade point average has been maintained the award is mailed directly to the school that has agreed to use the grant for the selected grantee that is enrolled and in good standing if the student withdraws from the college or university and money is eligible for refund it is returned by the school to you and is added back into the fund you represent that you will complete the following arrange to receive and review grantee reports annually and upon completion of the purpose for which the grant was awarded investigate diversion of funds from their intended purposes and take all reasonable and appropriate steps to recover the diverted funds ensure other grant funds held by a grantee are used for their intended purposes and withhold further payments to grantees until you obtain grantees' assurances that future diversions will not occur and that grantees will take extraordinary precautions to prevent future diversion from occurring you represent that you will maintain the following all records relating to individual grants including information obtained to evaluate grantees identify a grantee is a disqualified_person establish the amount and purpose of each grant and establish that you undertook the supervision and investigation of grants described above letter catalog number 58263t basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is a scholarship or fellowship subject_to the provisions of code sec_117 the grant is to be used for study at an educational_organization described in code sec_170 other conditions that apply to this determination this determination only covers the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as a precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes to your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh you cannot award grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary please keep a copy of this letter in your records letter catalog number 58263t if you have questions please contact the person listed at the top of this letter sincerely jeffrey cooper director exempt_organizations rulings and agreements letter catalog number 58263t


va irs department of the treasury internal_revenue_service constitution avenue n w washington d c release number release date uniform issue list date date employer id number contact person id number contact telephone number form you must file tax years dear this letter is our final_determination that you don’t qualify for tax-exempt status under sec_501 of the internal_revenue_code the code recently we sent you a proposed adverse determination in response to your application the proposed adverse determination explained the facts law and the basis for our conclusion and it gave you days to file a protest because we didn’t receive a protest within days the proposed determination is now final because you don’t qualify as a tax-exempt_organization under sec_501 of the code donors can’t deduct contributions to you under sec_170 of the code you must file federal_income_tax returns for the tax years listed at the top of this letter using the required form also listed at the top of this letter within days of this letter unless you request an extension of time to file we'll make this final adverse determination_letter and the proposed adverse determination_letter available for public inspection as required under sec_6110 of the code after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our if you agree proposed deletions follow the instructions in the notice on how to notify us with our deletions you don’t need to take any further action letter rev catalog number we’ll also notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed determination_letter under sec_6104 of the code you should contact your state officials if you have questions about how this determination will affect your state responsibilities and requirements if you have questions about this letter you can contact the person listed at the top of this letter if you have questions about your federal_income_tax status and responsibilities call our customer service number pincite-829-1040 tty for deaf or hard of hearing or customer service for businesses pincite-829-4933 we sent a copy of this letter to your representative as indicated in your power_of_attorney sincerely tamera ripperda director exempt_organizations enclosures notice redacted letter proposed adverse determination under sec_301 c redacted letter final adverse determination under sec_501 - no protest ce letter rev catalog number department of the treasury gi internal_revenue_service irs washington dc constitution ave n w date date emplover id number contact person id number contact telephone number contact fax number l l l i o s a e b ‘ dear we considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code i r c based on the information provided we determined that you do not qualify for exemption under sec_501 this letter explains the basis for our conclusion please keep it for your records facts you were formed as a nonprofit corporation under the laws of state on date your articles of incorporation articles state that you are organized exclusively for charitable religious educational and scientific purposes incl for such purposes the making of distributions to org’s that qualify as exempt org’s under sec_501 of the irs code or corresponding section of any future fed tax code you state your specific purpose is to support other organizations conducting charitable activities by collecting donations online on their behalf your sole activity is providing fundraising services for a fee to charity individuals raising funds for their personal_use and other nonprofits you were formed by the founder of for-profit organization company company provides donation acceptance services including credit card and check acceptance for many years company raised donations for charity on a fee basis in recent years company and charity entered into a multi-year contract where company would continue to raise funds online and remit donations to charity less specified processing and marketing fees priced at amount per transaction charity after executing the contract your founder established you to take over the fundraising services contract with letter rev catalog number 47630w you advertise your fundraising services on your website website and charity promotes you on its website as one of its registered collection partner s individual donors can click on a hotlink to link to your webpage from which donors choose how and to whom they want to donate your website provides options between a selected charity or menus with various fundraising projects and charities donors then make a donation you collect the credit card or check amount and you remit the donation minus your service fee to charity or other designated charity you operate daily and may have increased efforts during disaster times or dated campaigns you do not carry on any other activities besides providing fundraising services for a fee you state that you are donor_advised_fund because you accept donations from individual donors and then remit the donation amount minus your administrative and processing fees to the donor-selected charity you are funded by fundraising processing fees charged to charities and individuals for whom you accept donations on your website your state that your fees are set to cover your costs associated with collecting the donations which includes transaction costs marketing costs and operating costs such as website maintenance and officer salaries you charge charity a amount fee for each donation received you state that the fees charged are very competitive as compared to similar for-profit fundraisers you state that you will expand your activities to fundraise on behalf of other charities and individuals for their personal_use for future contracts you will tailor fee schedules per charity and will charge a per transaction fee all of your income comes from fees for fundraising services you state that founder established you because company was losing money by nature of it being a for-profit and your founder sought to reap the benefits of non-profit status such as discounted fees from online merchants and internet browsing companies you provide that company will continue its function of setting up companies to accept credit cards and other payment methods and further that your founder has two other for-profit companies that are similar to company you operate in the same office as founder’s for-profit company company and your founder’s two other for-profit businesses you have three officers and no other employees you compensate your founder founder’s spouse and your accountant as officers who are also all directors your board is comprised of three directors including your founder your founder’s spouse and your accountant tax preparer when asked you declined to expand your board to include members who are not related because you feel it is best to keep the board small making the decision making involved with rolling out the organization simpler your bylaws provide for shareholders law sec_501 exempts from federal income_taxation organizations described in sec_501 sec_501 describes organizations that are organized and operated exclusively for religious charitable educational_purposes and other exempt purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_4966 defines a donor-advised_fund as a fund or account owned and controlled by a sponsoring_organization which is separately identified by reference to contributions of the donor or donors and where the donor or a person appointed or designated by the donor has or reasonably expects to have advisory privileges over the distribution or investments of the assets sec_1_501_c_3_-1 states that in order to qualify under sec_501 an organization must be both organized and operated exclusively for one or more exempt purposes if an organization fails to meet either the organizational or operational_test it is not exempt sec_1_501_c_3_-1 states that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose letter rev catalog number 47630w sec_1_501_c_3_-1 states that an organization is not operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest it must not be operated for the benefit of designated individuals or the persons who created it sec_1_501_c_3_-1 defines the term charitable as including the promotion of social welfare by organizations designed to relieve the poor and distressed or the underprivileged to lessen neighborhood tensions to eliminate prejudice and discrimination or to combat community deterioration sec_1 c -1 e provides that an organization may meet the requirements of sec_501 even though it operates a trade_or_business as a substantial part of its activities unless its primary purpose is carrying on of a trade_or_business that does not further charitable purposes revrul_71_529 1971_2_cb_234 held that a nonprofit organization providing assistance in the management of participating colleges’ and universities’ endowment or investment funds for a charge substantially below cost qualified for exemption under sec_501 revrul_72_369 1972_2_cb_245 held that an organization formed to provide managerial and consulting services at cost to unrelated exempt_organizations did not qualify for exemption under sec_501 in 326_us_279 the supreme court held that the presence of a single non-exempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes in 70_tc_352 the court found that a corporation formed to provide consulting services was not exempt under sec_501 because its activities constituted the conduct_of_a_trade_or_business that is ordinarily carried on by commercial ventures organized for profit in easter house v u s cl_ct aff'd 846_f2d_78 fed cir the court found that an organization’s primary activity was providing adoption services in a commercial manner in so ruling the court determined that the organization competed with other commercial organizations providing similar services fees were the only source of revenue it accumulated very substantial profits because it set its fees in order to generate a profit the accumulated capital was substantially greater than the amounts spent on charitable and educational activity and the organization did not solicit and did not plan to solicit contributions in zagfly inc v commissioner 105_tcm_1214 an applicant proposed to sell flowers over the internet allowing purchasers to direct a portion of their payment to recognized exempt_organizations and to the applicant to cover its operating costs the applicant argued that its primary purpose was not to operate a business but rather to serve charitable purposes as it would facilitate the donation of its profits to other unrelated charitable organizations the court held that the applicant itself was not operated for exempt purposes and rather was engaged in a trade_or_business that was not substantially related to an exempt_purpose application of law based on the facts presented in your application and supporting documents we conclude that you are not operated for exempt purposes accordingly you do not qualify for exemption as an organization described in sec_501 your application and supporting documentation must demonstrate that your organization meets the operational_test under sec_1_501_c_3_-1 exempt_organizations must operate exclusively for exempt purposes sec_501 the term exclusively has been interpreted to mean primarily sec_1_501_c_3_-1 a single substantial non-exempt purpose is sufficient to prevent exemption better business bureau v u s u s pincite if an organization fails the operational_test it cannot qualify as an exempt_organization under sec_501 letter rev catalog number 47630w you were established to provide online fundraising services to nonprofit_organizations for a fee this is a substantial non- exempt_purpose and as such you do not qualify for exemption your sole activity of providing fundraising and marketing services to unrelated nonprofit_organizations is not charitable within the meaning of the code and regulations sec_1_501_c_3_-1 you provide services in a commercial manner similar to the organizations described in revrul_72_369 supra and in 70_tc_352 also see easter house v u s cl_ct you are similar to the organization in zagfly inc v commissioner 105_tcm_1214 that was held not to qualify for exemption as your primary activity of facilitating charitable donations to other unrelated nonprofit_organizations is not an exempt activity serving charitable or otherwise exempt purposes further you lack the donative_intent to make your activity charitable as you do not offer your services for free or substantially below cost similar to the organization described in revrul_71_529 supra finally you are not a donor_advised_fund as defined in sec_4966 conclusion based on the information provided we are not able to conclude that you are operated exclusively for exempt purposes you cannot qualify for tax exemption because more than an insubstantial part of your activities are not in furtherance of exempt purposes if you don’t agree you have a right to file a protest if you don’t agree with our proposed adverse determination to do so you must send a statement to us within days of the date of this letter the statement must include e e e e e your name address employer_identification_number ein and a daytime phone number acopy of this letter highlighting the findings you disagree with anexplanation of why you disagree including any supporting documents the law or authority if any you are relying on the signature of an officer director trustee or other official who is authorized to sign for the organization or your authorized representative e one of the following declarations for an officer director trustee or other official who is authorized to sign for the organization under penalties of perjury i declare that i examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete for authorized representatives under penalties of perjury i declare that i prepared this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete your representative attorney certified_public_accountant or other individual enrolled to practice_before_the_irs must file a form_2848 power_of_attorney and declaration of representative with us if he or she has not already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney letter rev catalog number 47630w we will review your protest statement and decide if you provided a basis for us to reconsider our determination you also have a right to a conference after you submit your statement if you want a conference you must request it when you file your protest statement you can also ask the office of appeals to review your application_for tax-exempt status your right to request appeals review is in addition to your right to a conference as outlined in revenue_procedure rev_proc and revproc_2014_9 you must notify us in writing if you want us to forward your case to the appeals_office you can find more information about the process and the role of the appeals_office in section of revproc_2014_9 and publication overview of the appeals process if the person representing you in this process is not an officer director trustee or other official who is authorized to sign for the organization he or she must file form_2848 as explained above and otherwise meet the requirements in publication conference and practice requirements if you don’t file a protest within days you can’t seek a declaratory_judgment in court at a later date because the law requires that you use the irs administrative process first sec_7428 of the code where to send your protest please send your protest statement any request for consideration by the office of appeals form_2848 if needed and any supporting documents to the applicable address u s mail street address for delivery service you can also fax your statement and supporting documents to the fax number listed at the top of this letter if you fax your statement please contact the person listed at the top of this letter to confirm that he or she received it if you agree if you agree with our proposed adverse determination you don’t need to do anything if we don’t hear from you within days we’ll issue a final adverse determination_letter that letter will provide information on your income_tax filing_requirements you can find all forms and publications mentioned in this letter on our website at www irs gov formspubs if you have questions you can contact the person listed at the top of this letter we sent a copy of this letter to your representative as indicated on your power_of_attorney sincerely michael seto manager eo technical enclosure publication cc letter rev catalog number 47630w


internal_revenue_service number release date index number --------------------------------------- --------------------------------- ---------------------------------- --------------------------------------- ------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------------- id no -------------- ----------------------------------------------------- telephone number --------------------- refer reply to cc psi b04 plr-139232-10 date date re ----------------------------------------------- ------------------------------------------------------------- -------------------------------- legend ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ----------------------------------- ---------------------- --------------------------------------------------------------- grantor spouse trust ---------------------------------------------------------------- trust ------------------------------------------------------------ trust ------------------------------------------------------------ agreement ---------------------------------------------------------------------------------------------------------------- son son’s spouse daughter spouse bank date date date year state state statute state statute state statute state statute ------------------------------------------------------- ------------------------------------------------ ------------------------------------------------- ------------------------------------------------ ------------------------------ ------------------------- ---------------- --------------------------- ------- ---------------- ----------------------------------------------------- ----------------------------------------------------- -------------------------------------------------------------- --------------------------------------------------- plr-139232-10 dear ---------------------------------- this letter responds to your authorized representative’s letter of date requesting rulings on the income estate gift and generation-skipping_transfer gst tax consequences of the proposed reformation of trust the facts submitted are as follows grantor and spouse each created an inter_vivos revocable_trust trust on date grantor contributed her separate assets to trust grantor died on date a date before date after the death of grantor_trust was to be continued for spouse son and daughter following the death of spouse trust was divided into two trusts trust for the benefit of son and trust for the benefit of daughter trust is governed by the laws of state son and bank are co-trustees trustees trust is the subject of this ruling_request article vii of trust provides that during son’s life all income from trust is to be distributed to son after the death of son if son’s spouse survives him trustees will distribute one-half of the income to son’s spouse during her lifetime and the remaining one-half to grantor’s then living grandchildren share and share alike principal may be distributed to son in case of illness or economic emergency up to the greater of dollar_figure or five percent of the trust assets for his support maintenance and health consistent with his standard of living if in the opinion of trustees the income is not sufficient principal may be distributed to son’s children prior to reaching the age of or when they complete their education for their support maintenance and education upon the death of son and son’s spouse if the son’s youngest living child has reached the age of all of the remaining trust estate is to be distributed to grantor’s grandchildren share and share alike and to the issue of a deceased grandchild per stirpes article iii b of trust grants son sole investment authority over trust assets provided that son is serving as on of the trustees of trust it further provides generally that bank will rely on son’s investment advice and follow son’s instructions bank is not liable for any losses that occur from following son’s instructions in the event of son’s resignation death or inability to serve as one of the trustees bank will serve as sole trustee article iii c of trust defines the term income as all of the income of the trust estate less costs of administration and all proper charges against the estate whether or not incoming funds or rights or ownerships constitute income shall be determined under the general powers of the trustees paragraph c of the general powers of the trustee attached as an addendum to trust provides that the trustee need not make any adjustments in bookkeeping as between income and principal accounts in connection with premiums_paid or discounts plr-139232-10 received on securities purchased it is authorized to credit or to charge premiums or discounts to investments to credit scrip stock_dividends extraordinary dividends or other receipts and to charge estate or inheritance or other taxes or charges either to or against principal or income as in its discretion shall seem proper under the circumstances state enacted state statute which provides in relevant part that a trustee may adjust between principal and income to the extent the trustee considers necessary if the trustee invests and manages the trust assets as a prudent investor and the terms of the trust describe the amount to be distributed to a beneficiary by referring to the trust's income in deciding whether and to what extent to exercise this power a trustee shall consider all factors relevant to the trust and its beneficiaries including certain listed factors state statute further provides in relevant part that a trustee may not make an adjustment i if possessing or exercising the power to make an adjustment causes an individual to be treated as the owner of all or part of the trust for income_tax purposes and the individual would not be treated as the owner if the trustee did not possess the power to make an adjustment ii if possessing or exercising the power to make an adjustment causes all or part of the trust assets to be included for estate_tax purposes in the estate of an individual who has the power to remove a trustee or appoint a trustee or both and the assets would not be included in the estate of the individual if the trustee did not possess the power to make an adjustment iii if the trustee is a beneficiary of the trust or iv if the trustee is not a beneficiary but the adjustment would benefit him directly or indirectly state statute provides that in exercising the power to adjust under statute a fiduciary shall administer a_trust or estate impartially based on what is fair and reasonable to all the beneficiaries except to the extent that the terms of the trust clearly manifest an intention that the fiduciary shall or may favor one or more of the beneficiaries state statute provides generally that its purpose is to provide statutory provisions for the resolution of disputes and other matters involving trusts_and_estates state statute further provides that the provisions are intended to provide nonjudicial methods for the resolution of matters including agreement state statute provides in relevant part that if all parties agree to a resolution of any dispute under state statute then the agreement must be a written_agreement signed by all parties the written_agreement is binding and conclusive on all persons interested in the trust on date trustees and the beneficiaries of trust including the current beneficiary and contingent beneficiaries by representation entered into a nonjudicial plr-139232-10 dispute resolution agreement agreement pursuant to state statute agreement is intended to comply with the requirements of state statute and becomes effective on the date trustees obtain a favorable private_letter_ruling from the internal_revenue_service pursuant to the terms of agreement the trustees and the beneficiaries have agreed to amend and modify trust as follows a to provide that son as trustee has sole management and investment authority over trust 1’s assets b to remove the requirement that bank review and approve son’s investment decisions including bank’s right to approve or disapprove a change in trust 1’s assets c to address the adjustment of receipts between principal and income d to provide that son invests trust 1’s assets prudently e to provide that in the event of resignation death or inability of son to serve as trustee bank will serve as sole trustee and have sole investment authority over trust 1’s assets if bank determines due to incapacity that son is no longer capable of investing and managing trust 1’s assets bank may request son resign as trustee may disregard his investment instructions and or may take steps to remove son as trustee f to provide that granting sole investment authority to son involves risks g to provide that bank may exercise its discretion to adjust receipts between income and principal h to acknowledge the manner in which bank has previously adjusted receipts between income and principal and to determine the tax treatment of receipts for prior tax years i to determine treatment of future distributions j to provide that the adjustment between principal and income fulfills bank’s duty or impartiality between current and contingent beneficiaries and that if the internal_revenue_service does assess any federal income gift estate or generation-skipping_transfer_tax the tax will be assessed against the trust for such beneficiary and k to establish that the trustees will not be liable to the beneficiaries for their actions with respect to trust 1’s investments and that bank will not be liable with respect to the adjustment of receipts between principal and income and the distribution of such receipts to son plr-139232-10 in recital u of agreement the parties define the term receipts to mean interest dividends return of principal capital_gain dividends and capital_gain distributions the term receipts does not include money received in partial_liquidation to the extent that the entity at or near the time of distribution indicates that it is a distribution in partial_liquidation money or property received if the total amount of money and property distributed in a distribution or series of related distributions is greater than twenty percent percent of the entity’s gross assets as shown by the entity’s year-end financial statements immediately preceding the initial distribution or capital_gain realized through the sale of investments in the ordinary course of business section of agreement provides that the parties acknowledge and agree that for taxable years prior to date bank has been adjusting receipts between principal and income treating all receipts as income and paying such receipts out of income to son in a manner that was fair and reasonable section of agreement provides that the parties acknowledge and agree that for year and for all taxable years following bank will have the power to adjust receipts between principal and income treat all receipts as income and distribute such income to son during his lifetime and to one or more of the beneficiaries following his death pursuant to the powers granted to bank in the state principal and income act trustees have requested the following rulings that the reformation of trust and bank’s power to adjust between principal and income will not constitute a sale exchange or other_disposition of trust 1’s assets and will not result in the recognition of any gain_or_loss by trust or the beneficiaries for federal_income_tax purposes that bank’s adjustment between principal and income and any resulting distributions of capital_gain to son will be treated as income for federal_income_tax purposes that bank’s possession and exercise of the power to adjust between principal and income will not cause any of the beneficiaries of trust or bank to be treated as the owner of any part of trust 1’s assets under sec_678 of the internal_revenue_code that the reformation of trust and bank’s power to adjust between principal and income will not cause trust to lose its status under of the tax_reform_act_of_1986 as exempt from the gst tax under chapter plr-139232-10 that bank’s possession and exercise of the power to adjust between principal and income will not constitute a taxable transfer by any beneficiary to trust for federal gift_tax purposes and that the reformation of trust and bank’s power to adjust between principal and income will not cause any part of trust 1’s assets to be included in a beneficiary’s estate under sec_2041 ruling sec_1 through sec_1_643_b_-1 of the income_tax regulations provides a comprehensive definition of income as that term applies to trusts_and_estates it provides in part that items such as dividends interest and rents are generally allocated to income and proceeds from the sale_or_exchange of trust assets are generally allocated to principal however an allocation of amounts between income and principal pursuant to applicable local law will be respected if local law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust for the year including ordinary and tax-exempt_income capital_gains and appreciation for example a state statute providing that income is a unitrust_amount of no less than percent and no more than percent of the fair_market_value of the trust assets whether determined annually or averaged on a multiple year basis is a reasonable apportionment of the total return of the trust similarly a state statute that permits the trustee to make adjustments between income and principal to fulfill the trustee's duty_of impartiality between the income and remainder beneficiaries is generally a reasonable apportionment of the total return of the trust sec_1_643_b_-1 further provides that a switch between methods of determining trust income authorized by state statute will not constitute a recognition event for purposes of sec_1001 a switch to a method not specifically authorized by state statute but valid under state law including a switch via judicial decision or a binding nonjudicial settlement may constitute a recognition event to the trust or its beneficiaries for purposes of sec_1001 in this case trustees and the beneficiaries executed agreement pursuant to state statute and state statute which permits bank to make adjustments between income and principal to fulfill bank's duty_of impartiality between the income and remainder beneficiaries the execution of agreement constitutes a switch between methods of determining trust income authorized by state statute bank’s ability to allocate amounts between income and principal including ordinary and tax-exempt_income capital_gains and appreciation pursuant to state statute will be respected because it is a reasonable apportionment between the income and remainder beneficiaries sec_671 provides that where it is specified in subpart e of part i of subchapter_j that the grantor or another person shall be treated as the owner of any portion of a_trust there shall then be included in computing the taxable_income and plr-139232-10 credits of the grantor or the other person those items of income deductions and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under chapter in computing taxable_income or credits against the tax of an individual sec_678 provides in general that a person other than the grantor shall be treated as the owner of any portion of a_trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself or such person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would within the principals of sec_671 to inclusive subject a grantor of a_trust to treatment as the owner thereof in this case trustees and the beneficiaries executed agreement pursuant to state statute and state statute which permits bank to make adjustments between income and principal to fulfill bank's duty_of impartiality between the income and remainder beneficiaries the ability of bank to make adjustments between income and principal to fulfill the bank's duty_of impartiality does not cause bank to have a power exercisable solely by itself to vest the corpus or the income therefrom in itself under sec_678 with respect to the beneficiaries the execution of agreement constitutes a switch between methods of determining trust income authorized by state statute1 and does not cause any of the beneficiaries to hold a power exercisable solely by any beneficiary to vest the corpus or the income therefrom in himself under sec_678 the switch between methods of determining trust income authorized by state statute1 will not constitute a release or modification of a power described in sec_678 by either bank or the beneficiaries based on the facts submitted and representations made we conclude the following the reformation of trust and bank’s power to adjust between principal and income will not pursuant to sec_1_643_b_-1 constitute a sale exchange or other_disposition of trust 1’s assets and will not result in the recognition of any gain_or_loss by trust or the beneficiaries for federal_income_tax purposes bank’s adjustment between principal and income and any resulting distributions of capital_gain to son will be treated as income under sec_1_643_b_-1 bank’s possession and exercise of the power to adjust between principal and income will not cause any of the beneficiaries of trust or bank to be treated as the owner of any part of the trust 1’s assets under sec_678 ruling plr-139232-10 sec_2601 imposes a tax on every generation-skipping_transfer made after date under a of the tax_reform_act_of_1986 act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the gst tax is generally applicable to gsts made after date however under b a of the act and sec_26_2601-1 the gst tax does not apply to a transfer under a_trust that was irrevocable on date but only to the extent that the transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added under sec_26_2601-1 any trust in existence on date will be considered irrevocable unless the decedent had a power that would have caused inclusion of the trust in his or her gross_estate under sec_2038 or sec_2042 if the decedent had died on date 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 under the regulation unless specifically provided otherwise these rules are applicable only for purposes of determining whether an exempt trust retains its exempt status for gst tax purposes thus unless specifically noted the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of 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 sec_26_2601-1 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 provides that a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer to determine whether a modification of an irrevocable_trust will shift a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification if the effect of the modification cannot be immediately determined it is deemed to shift a beneficial_interest in the trust to a beneficiary who occupies a lower generation as plr-139232-10 defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust in addition administration of a_trust in conformance with applicable local law that defines the term income as a unitrust_amount or permits a right to income to be satisfied by such an amount or that permits the trustee to adjust between principal and income to fulfill the trustee's duty_of impartiality between income and principal beneficiaries will not be considered to shift a beneficial_interest in the trust if applicable local law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust and meets the requirements of sec_1_643_b_-1 sec_26_2601-1 example considers a situation where in the grantor a resident of state x establishes an irrevocable_trust for the benefit of grantor's child a and a's issue the trust provides that trust income is payable to a for life and upon a's death the remainder passes to a's issue per stirpes in state x amends its income and principal statute to permit the trustee to make adjustments between income and principal when the trustee invests and manages the trust assets under the state's prudent investor standard the trust describes the amount that shall or must be distributed to a beneficiary by referring to the trust's income and the trustee after applying the state statutory rules regarding allocation of receipts between income and principal is unable to administer the trust impartially the provision permitting the trustees to make these adjustments is effective in for trusts created at any time the trustee invests and manages the trust assets under the state's prudent investor standard and pursuant to authorization in the state statute the trustee allocates receipts between the income and principal accounts in a manner to ensure the impartial administration of the state statute will not be considered to shift any beneficial_interest in the trust therefore the trust will not be subject_to the provisions of chapter further no trust_beneficiary will be treated as having made a gift_for federal gift_tax purposes and neither the trust nor any trust_beneficiary will be treated as having made a taxable_exchange for federal_income_tax purposes in this case trust was irrevocable on date and it is represented that there have been no additions made after date the beneficiaries have entered into an agreement with son and bank as trustees to reform trust to clarify and amend trustees’ investment responsibilities and to allow bank to make adjustments between principal and income pursuant to state statute and state statute statutes similar to that described in sec_26_2601-1 and sec_26_2601-1 example therefore the proposed administration of trust in accordance with state statute and state statute will not be considered to shift any beneficial_interest in trust for gst purposes accordingly based on the facts submitted and representations made we conclude that if bank makes adjustments plr-139232-10 between principal and income in accordance with agreement and in accordance with and pursuant to state statute and state statute the proposed modification to trust will not adversely affect trust sec_1’s status as exempt from gst tax further we conclude that the other modifications to trust contained in agreement are administrative in nature and therefore are not considered to shift any beneficial interests in trust thus we conclude that the reformation of trust pursuant to agreement will not adversely affect trust 1’s status as exempt from gst tax ruling sec_2501 imposes a tax on the transfer of property by gift during the calendar_year by any individual sec_2511 provides that the gift_tax applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2514 provides that the exercise or release of a general_power_of_appointment created after date shall be deemed a transfer of property by the individual possessing the power sec_2514 provides that the term general_power_of_appointment means a power that is exercisable in favor of the individual possessing the power his estate his creditors or the creditors of his estate sec_25_2514-1 of the gift_tax regulations provides in part that a power in a donee to remove or discharge a trustee and appoint himself may be a power_of_appointment for example if under the terms of a_trust instrument the trustee or his successor has the power to appoint the principal of the trust for the benefit of individuals including himself and a another person has the unrestricted power to remove or discharge the trustee at any time and appoint any other person including himself a is considered as having a power_of_appointment however the mere power of management investment custody of assets or the power to allocate receipts and disbursements as between income and principal exercisable in a fiduciary capacity whereby the holder has no power to enlarge or shift any of the beneficial interests therein except as an incidental consequence of the discharge of such fiduciary duties is not a power_of_appointment as set forth above under ruling sec_26_2601-1 example concludes that where a trustee administers a_trust in accordance with a state statute that permits the trustee to make adjustments between income and principal no trust_beneficiary will be treated as having made a gift_for federal gift_tax purposes in addition no beneficiary has a general_power_of_appointment as defined in sec_2514 plr-139232-10 consequently based on the facts submitted and the representations made we conclude that the reformation of trust pursuant to the agreement and the power of bank to adjust between principal and income pursuant to state statute will not cause any beneficiary to have made a transfer of property for gift_tax purposes ruling sec_2041 provides that the value of the gross_estate includes the value of all property to the extent of any property with respect to which the decedent has at the time of death a general_power_of_appointment sec_2041 defines the term general_power_of_appointment as a power which is exercisable in favor of the decedent his estate his creditors or the creditors of his estate subject_to certain exceptions sec_20_2041-1 of the estate_tax regulations provides in part that if a_trust instrument provides that the beneficiary may appropriate or consume the principal of the trust the power to consume or appropriate is a power_of_appointment created after date a power in a donee to remove or discharge a trustee and appoint himself may be a power_of_appointment however the mere power of management investment custody of assets or the power to allocate receipts and disbursements as between income and principal exercisable in a fiduciary capacity whereby the holder has no power to enlarge or shift any of the beneficial interests therein except as an incidental consequence of the discharge of such fiduciary duties is not a power_of_appointment in this case bank is the only trustee with the power to make adjustments between income and principal under agreement and state statute no beneficiary of trust has any power over trust 1’s assets other than the power of management and investment of assets neither son nor any of the other beneficiaries has a power to replace bank as trustee or appoint successor trustees in the event of son’s resignation death or inability to serve as co-trustee bank becomes the sole trustee of trust therefore no beneficiary will be considered to have a general_power_of_appointment under sec_20_2041-1 accordingly based on the facts submitted and representations made we conclude that the reformation of trust and bank’s powers to adjust between principal and income pursuant to agreement and state statute will not cause any portion of trust 1’s assets to be included in a beneficiary's gross_estate under sec_2041 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 plr-139232-10 except as specifically ruled herein we express or imply 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 taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely by ______________________________ leslie h finlow senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes cc


department of the treasury int ernal revenue service washington d c o f f i c e o f c h i e f c o u n s e l number release date cc intl br6 tl-n-7238-00 uilc date internal_revenue_service national_office field_service_advice memorandum for david r smith associate area_counsel miami cc lm rfp mia attn tamara s moravia-israel attorney lmsb from subject anne p shelburne assistant to the branch chief cc intl br6 this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be used or cited as precedent disclosure statement field_service_advice is chief_counsel_advice and is open to public inspection pursuant to the provisions of sec_6110 the provisions of sec_6110 require the service to remove taxpayer identifying information and provide the taxpayer with notice of intention to disclose before it is made available for public inspection sec_6110 and i sec_6110 also authorizes the service to delete information from field_service_advice that is protected from disclosure under u s c sec_552 b and c before the document is provided to the taxpayer with notice of intention to disclose only the national_office function issuing the field_service_advice is authorized to make such deletions and to make the redacted document available for public inspection accordingly the examination appeals or counsel recipient of this document may not provide a copy of this unredacted document to the taxpayer or their representative the recipient of this document may share this unredacted document only with those persons whose official tax_administration duties with respect to the case and the issues discussed in the document require inspection or disclosure of the field_service_advice legend country a fsc pr co products taxable_year taxable_year us co issue whether a taxpayer that qualifies for the benefits of both sec_936 and the foreign_sales_corporation fsc provisions may apply the profit split provisions of sec_936 first and then apply the fsc provisions conclusion a taxpayer that qualifies for the benefits of both sec_936 and the fsc provisions must apply the fsc provisions first and then apply the sec_936 profit split provisions facts us co a united_states_corporation designs manufactures and sells products and provides products-related services and support us co owns of pr co a united_states_corporation and fsc a foreign_sales_corporation incorporated in country a for taxable_year sec_1 and pr co has made an election under sec_936 and elected the profit split provisions under sec_936 and sec_936 us co products are manufactured in the united_states and puerto rico in taxable_year sec_1 and pr co sold manufactured products to us co which then sold the products to foreign distributors both related and unrelated pr co also made some sales directly to foreign distributors both related and unrelated fsc acted as a commission fsc with respect to these sales by us co and pr co to foreign distributors in the taxable years at issue us co applied the sec_936 profit split provisions first to allocate combined taxable_income cti as defined in sec_936 between pr co the electing_corporation and us co the appropriate domestic_member of the affiliated_group us co then applied the fsc provisions’ combined taxable_income method to calculate the taxable_income of fsc and its related_supplier attributable to sales of export_property as a result of this ordering us co’s sec_936 cti calculation did not deduct the fsc commissions associated with sec_936 covered sales law and analysis the foreign_sales_corporation fsc provisions sec_921 through under sec_921 through portions of the foreign_trade_income of a fsc are exempt from united_states income_tax sec_921 provides that the exempt_foreign_trade_income of a fsc shall be treated as foreign_source_income not effectively connected with the conduct_of_a_trade_or_business within the united_states exempt_foreign_trade_income is defined by sec_923 as a certain percentage or fraction of the fsc’s foreign_trade_income foreign_trade_income is defined by sec_923 as the gross_income of a fsc attributable to foreign_trading_gross_receipts foreign_trading_gross_receipts include gross_receipts from the sale exchange or other_disposition of export_property by the fsc or by any principal for whom the fsc acts as a commission agent sec_924 temp sec_1 a -1t b sec_927 defines export_property as property a manufactured produced grown or extracted in the united_states by a person other than a fsc b held primarily for sale lease or rental in the ordinary course of trade_or_business by or to a fsc for direct use consumption or disposition outside the united_states and c not more than percent of the fair_market_value of which is attributable to articles imported into the united_states_property manufactured in puerto rico by a sec_936 corporation may qualify as export_property for purposes of the fsc provisions see sec_927 the term ‘united states’ includes the commonwealth of puerto rico where a fsc acts on a commission basis for a related supplier1 and commissions paid to the fsc give rise to gross_receipts to the related_supplier which would have been foreign_trading_gross_receipts under sec_924 had the fsc made the sale directly special pricing rules may apply to determine the fsc’s commission income temp sec_1 a -1t d generally the amount of income that may be earned by a commission fsc is the amount that the fsc would have been permitted to earn under the gross_receipts method the combined taxable_income method or the sec_482 method had the fsc made the sale directly sec_925 b temp sec_1 a -1t for purposes of applying the combined taxable_income method to transactions handled on a commission basis for a related_supplier by a fsc temp sec_1 a -1t d iii provides the combined taxable_income of a fsc and the related_supplier from the transaction is the excess of the related supplier’s gross_receipts from the transaction which would have been foreign_trading_gross_receipts had the sale been made by the fsc directly over the related supplier’s and the fsc’s total costs excluding the commission paid or payable to the fsc but including the related supplier’s cost_of_goods_sold and its and the fsc’s noninventoriable costs see sec_1 c ii which relate to the gross_receipts from the transaction sec_936 temp sec_1_927_d_-2t provides a definition of related_supplier for purposes of sec_921 through and the regulations under those sections the term related_supplier means a related_party which directly supplies to a fsc any property or services which the fsc disposes of in a transaction producing foreign_trading_gross_receipts or a related_party which uses the fsc as a commission agent in the disposition of any property or services producing foreign_trading_gross_receipts b definition of related_party the term related_party means a person which is owned or controlled directly or indirectly by the same interests as the fsc within the meaning of sec_482 and sec_1_482-1 the administrative pricing methods of sec_925 and may be used only if the prerequisites of sec_925 are met the sec_936 tax_credit is designed to encourage investment and employment in puerto rico and other possessions of the united_states under the general_rule of sec_936 the intangible_property_income of a sec_936 corporation is included on a pro_rata basis in the gross_income of all its shareholders unless the sec_936 corporation elects one of two methods of computation of taxable_income the cost sharing method of sec_936 or the profit split method of sec_936 under the profit split method the electing corporation’s taxable_income from the active_conduct_of_a_trade_or_business in a possession with respect to a product produced or service rendered in whole or in part by the electing_corporation is equal to fifty percent of the affiliated group’s combined taxable_income cti from covered sales of the product or service sec_936 cti must be separately computed for each product produced or type of service rendered for sec_936 purposes cti is computed by deducting from the gross_income of the affiliated_group other than foreign affiliates derived from covered sales of each product or type of service all expenses losses and other deductions properly apportioned or allocated to gross_income from such sales and a ratable part of all expenses losses or other deductions which cannot definitely be allocated to some item or class_of_gross_income which are incurred by the affiliated_group other than foreign affiliates sec_936 we conclude the language of sec_936 should be interpreted consistently with its plain meaning to mean that pr co is required to apply the fsc provisions first to calculate fsc commissions from covered sales before determining cti for sec_936 purposes in a case involving the interpretation of sec_936 and sec_1_936-6 q a the tax_court stated where a statute is clear on its face we require unequivocal evidence of legislative purpose before construing the statute so as to override the plain meaning of the words used therein 96_tc_895 unless circumstances dictate otherwise when we find the terms of a statute unambiguous judicial inquiry is complete 481_us_454 931_f2d_1493 11th cir thus the party who seeks to convince a court to adopt a reading of a statute which is at odds with its plain meaning labors under a heavy burden united_states v nec corp supra pincite 106_tc_1 pincite in determining cti from sales of a possession product under the profit split option sec_1_936-6 q a provides that e xpenses losses and other deductions are to be allocated and apportioned on a ‘fully-loaded’ basis under sec_1_861-8 to the combined gross_income of the possessions_corporation and other members of the affiliated_group other than foreign affiliates as the legislative_history to sec_936 explains the combined taxable_income of the island_affiliate and its mainland affiliates from the sale of the product produced in whole or in part in the possession is the excess of the gross_receipts from the sale of such product to third parties or foreign affiliates over the total costs relating to such product incurred by the island_affiliate and its mainland affiliates costs which are treated as relating to a product produced in whole or in part in the possession are all direct and indirect expenses losses and other deductions including marketing expenses with respect to sales of such product ie the expenses will be fully- loaded h_r rep no 97th cong 2d sess see also joint_committee on taxation staff general explanation of the tax equity and fiscal responsibility act of 97th cong 2d sess in this context fully-loaded means that all expenses factually related to the products shall be allocated and apportioned in full to the income derived from the sale of the products see coca-cola co t c pincite covered sales are defined by sec_936 as sales by members of the affiliated_group other than foreign affiliates to persons who are not members of the affiliated_group or to foreign affiliates sales of products produced in whole or in part by pr co and by us co and sold by us co to related and unrelated foreign distributors are covered sales where fsc derives commissions from these covered sales the fsc commissions are an expense incurred by the affiliated_group properly allocated to the covered sales which must be taken into account for purposes of the sec_936 cti calculation accordingly the fsc provisions must first be applied to calculate fsc 1's commissions from covered sales before it is possible to determine cti under the profit split method of sec_936 in other words given the explicit statutory language that cti shall be computed by deducting from gross_income from covered sales all expenses losses and other deductions properly apportioned or allocated to such sales cti cannot be correctly determined without first applying the fsc provisions to compute the relevant fsc commission as noted by the claims_court in a case interpreting the domestic_international_sales_corporation disc provisions the predecessor provisions to the fsc regime statutes that confer special tax reduction benefits are to be construed strictly exceptions from the normal_tax requirements of the internal_revenue_code are to be defined narrowly dow corning corp v united_states cl_ct pincite citation omitted sec_936 provides that cti shall be computed by deducting from gross_income from covered sales all expenses losses and other deductions properly apportioned or allocated to such sales us co maintains that the fsc commission is not an actual expense but merely an accounting mechanism to ensure the appropriate fsc exemption we note however that the fsc commission is an amount actually paid or payable by the related_supplier to the fsc fsc commission expense is reported as a deduction on the related supplier’s u s_corporation income_tax return form_1120 see eg 110_tc_375 discussing a redetermination of the taxpayer’s fsc commission expense as reported on its and forms neither sec_936 nor the regulations promulgated thereunder provide that fsc commission expense to the extent properly allocated or apportioned to covered sales is not to be considered in the sec_936 cti calculation this is in contrast to the fsc cti computation which expressly excludes the fsc commission for its determination see temp sec_1 a -1t d iii accordingly we consider it appropriate to construe strictly sec_936 and interpret the language all expenses and other deductions as used therein to include fsc commission expense pr co is thus required to apply the fsc provisions first to calculate fsc commissions from covered sales before determining cti for sec_936 purposes interaction of sec_936 and the fsc provisions the basis on which the taxpayer’s affiliated_group is claiming both a partial exemption under the fsc provisions and the benefits of sec_936 more specifically the sec_936 profit split provisions is the definition of the term united_states under sec_927 under that definition puerto rico but no other u s possession is treated as part of the united_states for fsc purposes therefore for fsc purposes property manufactured in puerto rico is treated as manufactured in the united_states historically one could look back to the disc provisions which were in existence at the time sec_936 was enacted the disc provisions were even broader under sec_993 the term united_states is defined to include the commonwealth of puerto rico and the possessions of the united_states the definition for disc purposes applied in when sec_936 was first enacted and in when sec_936 was enacted however the legislative_history of neither sec_936 sec_936 nor the fsc provisions provides any discussion of the interactions of the two provisions rather the legislative_history of the sec_936 profit split method provides that in computing combined taxable_income the expenses to be allocated and apportioned to combined gross_income should be fully loaded see sec_1_936-6 q a which also provides that royalties paid to foreign affiliates are to be treated as research developmental and experimental expenses for purposes of computing combined taxable_income under sec_936 thus because the sec_936 profit split method provides for fully loaded expenses and specifically includes expenses paid to a foreign_affiliate fsc commission expenses must be included in computing cti under the profit split method as neither the fsc provisions nor sec_936 provide a different rule fsc commission expenses must be included in determining cti under the sec_936 profit split provisions since this is the case the fsc provisions must be applied first in cases where both provisions apply please call if you have any further questions by anne p shelburne assistant to the branch chief cc intl br6


internal_revenue_service number release date index number ------------------- --------------------------------------------------------- ---------------------------------------- ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number refer reply to cc psi b03 plr-150682-08 date date legend x y ----------------------------------------------------------------------------------------------------- ----------------------- ------------------------------------------------ state ------------- date ----------------------- dear ------------- we received your letter dated date submitted on behalf of x requesting a ruling under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations that x be granted an extension of time to file an election to be treated as an association_taxable_as_a_corporation under sec_301_7701-3 this letter responds to your request facts x was formed on date as a state limited_liability_company x is wholly-owned by y y intended that x be treated as an association_taxable_as_a_corporation for federal tax purposes effective date however x inadvertently failed to timely file a form_8832 entity classification election law and analysis plr-150682-08 sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with a single owner can elect to be classified as an association and thus a corporation under sec_301_7701-2 or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301_7701-3 unless the entity elects otherwise a domestic eligible_entity is i a partnership if it has two or more members or ii disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed if an election specifies an effective date more than days prior to the date on which the election is filed it will be effective days prior to the date it was filed sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 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 conclusion plr-150682-08 based solely on the facts submitted and the representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 accordingly x is granted an extension of time of sixty days from the date of this letter to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date the election should be made by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives 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 s curtis g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes