third party communication none date of communication not applicable office_of_chief_counsel internal_revenue_service memorandum number release date cc pa ---------- gl-116977-08 uilc date date to lisa p lafferty general attorney washington group small_business self-employed from nancy m galib senior technician reviewer branch procedure administration subject ------------------------------- this chief_counsel_advice responds to your request for assistance dated date this advice may not be used or cited as precedent legend corporation a ------------------------------- corporation b ------------------------------------------ tax years amount month year -------------- mr y date ms z ------------------ ----------------- ---------------------------- ---------------------------- --------- issues what theory of liability applies when a corporation after an irs levy discontinues operations and transfers its contracts to a newly formed corporation that commences operation of the same business with the same employees equipment and customers gl-116977-08 conclusions corporation b is a successor_in_interest of corporation a facts corporation a is a puerto rico corporation that operated a ----------- business and had contracts with several corporate customers corporation a currently owes employment_tax liabilities for tax years federal tax_liens were filed with respect to the liability and the irs levied on corporation a’s accounts_receivable collecting approximately dollar_figureamount in month year after the irs levy corporation a’s corporate president mr y discontinued operations corporation a remains listed as an active corporation with the puerto rico department of state on date mr y formed a new corporation corporation b although mr y is not listed as an incorporator of corporation b mr y’s wife ms z is listed as an incorporator she was also vice president of corporation a revenue_officer --------------------- stated that mr y admitted closing corporation a due to the levy and opening corporation b in order to keep corporation a’s employees working any assets owned by corporation a are now used by corporation b corporation a’s former customers now make payments to corporation b --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------ mr y claims he is not an officer of corporation b the corporate officers of corporation b are unknown and the shareholders of both corporation a and corporation b are unknown law and analysi sec_1 alter ego sec_6321 creates a lien in favor of the united_states upon a delinquent taxpayer’s property and rights to property property ostensibly held by third parties may fall within the ambit of sec_6321 if the third party holds the property as the taxpayer’s alter ego g m leasin429_us_338 the irs may levy on all of the assets of an alter ego corporation to collect the liability of a taxpayer if the separate corporate entity is merely a sham ie it does not exist independent of its controlling shareholder and that it was established for no reasonable business_purpose or for fraudulent purposes 211_f3d_280 5th cir the alter ego doctrine generally involves piercing the corporate veil to gl-116977-08 hold a shareholder liable for the debts of a corporation or reverse piercing to hold the corporation liable for the debts of a shareholder when applying the doctrine courts look at the level of control evidenced by the actual substantial relationship of the parties william m fletcher fletcher cyclopedia of the law of corporations dollar_figure some jurisdictions have imposed alter ego liability absent a formal stock ownership relationship 888_f2d_725 11th cir holding a corporation liable for an individual’s tax_liability even though the individual was not a shareholder 672_f2d_92 d c cir court looked to control not mere paper ownership other jurisdictions have declined to apply the alter ego doctrine unless one of the ‘alter egos’ owns stock in the other bollore s a v import warehouse inc 448_f3d_317 5th cir citing 934_f2d_635 5th cir applying well established texas case law in both shades ridge and labadie the individual taxpayer controlled or dominated the alter ego entity in two separate tax collection cases the district_court for the eastern district of pennsylvania found one corporation to be another corporation’s alter ego when neither corporation was a shareholder of the other 40_fsupp2d_268 e d pa 164_br_721 e d pa in both cases the court principally applied successor liability and then stated that the successor_corporation was also liable as an alter ego in neither case however did the court disregard the corporate entity the corporation was not liable as a shareholder or because it exercised undue control rather liability was imposed because the corporation was a continuation of its predecessor_corporation in today’s child learning and ross the original and successor corporations had the same owners continuity of ownership is often a key factor in the successor liability analysis alter ego and successor liability are easily confused but distinct doctrines see 615_fsupp_364 d p r t he doctrine_of disregarding the corporate entity is distinct from the question of a successor's liability state law generally determines when a corporation is an alter ego puerto rico law recognizes the alter ego doctrine and appears to recognize its application to a corporate shareholder the puerto rico supreme court held that a corporation is the alter ego or business conduit of its stockholders when there is such unity of interest and ownership that the personalities of the corporation and the stockholders--whether natural or artificial persons--are intermingled and as a result the corporation actually is not a separate and independent entity departamento de asuntos del consumidor v alturas de florida development corp and luis acosta construction corp p r -eng p r emphasis added the corporation will be the mere alter ego of its stockholders with the benefits produced by the corporate business accruing exclusively and personally to them if it is necessary to prevent fraud or the accomplishment of an illicit purpose or to prevent an injustice or wrong id citing cruz v ramirez p r r the party seeking to pierce the gl-116977-08 corporate veil has the burden of proving that there is no adequate separation between the corporation and the stockholder and that the facts are such that acknowledging said legal personality would be tantamount to ‘sanctioning fraud promoting injustice evading a legal_obligation defeating public policy justifying inequity protecting fraud or defending crime ’ id citing srio d a c o v comunidad san josé inc d p r courts deciding whether to disregard the corporate entity are guided by the following factors the stockholder's control of corporate affairs the treatment of corporate assets as personal assets the unrestricted withdrawal of corporate capital the commingling of corporate and personal assets the inadequate structure of corporate capital the lack of corporate records the nonobservance of corporate formalities inaction of the other officers and directors failure to declare dividends the stockholder's holding himself or herself out as being personally liable for the obligations of the corporation and management of the corporation without regard to its independent existence id at n a critical consideration when evaluating whether corporation b is an alter ego of corporation a is whether sufficient stock ownership or control exists to justify application of the alter ego doctrine if neither corporation owns stock of the other or exercises control of the other then an alter ego relationship between corporation a and corporation b does not exist and an alter_ego_lien would not be appropriate if however one corporation controls the other to the extent that their separateness should be disregarded under the above factors then an alter_ego_lien would be appropriate successor liability generally a corporation that acquires the assets of another corporation is not liable for the debts of the transferor_corporation this general_rule is subject_to certain exceptions successor liability law embodied in most jurisdictions imposes liability in the following circumstances when the successor expressly assumes the liabilities when the transaction amounts to a de_facto merger when the successor is a mere continuation of the seller corporation and when the transaction is entered into fraudulently to escape liability 739_f2d_690 1st cir feliciano v valsyn s a civ no pg wl d p r successor liability is generally determined under state law 178_f3d_114 2d cir a fraudulent transaction successor liability applies in this case because the transaction at issue was entered into for the fraudulent purpose of escaping liability under puerto rican law a presumption gl-116977-08 of fraud on creditors arises when a debtor transfers property for no consideration the statute essentially states that any contract in which a debtor alienates goods for free or gratuitously may be considered fraudulent against any creditors feliciano wl at the presumption in this case arises because corporation a transferred assets to corporation b for no consideration after corporation a owed a federal tax_liability further corporation a’s acts via mr y evidence an intention to avoid creditors see id see also ed peters jewelry co v c j jewelry co f 3d 1st cir mr y incorporated corporation b shortly after the irs levied on corporation a’s receivables and has admitted starting corporation a due to the irs levy mr y was president of corporation a and signed contracts as president of corporation b his wife incorporated corporation a and corporation b corporation b operates the same business with the same employees and serves the same customers these facts militate towards a finding that the transaction was nothing but an attempt to escape liability recognition of both corporation a and corporation b would be tantamount to sanctioning the evasion of obligations fraud injustice or the defeat of public policy gonzalez v san just corp p r offic trans p r in short i f a corporation goes through a mere change in form without a significant change in substance it should not be allowed to escape liability 419_f3d_594 7th cir citing vernon v schuster n e ill b other theories of successor liability the de_facto merger and mere continuation exceptions both generally look to whether the successor_corporation shares common officers directors and shareholders with the transferor_corporation see 992_f2d_401 1st cir explosives corp f_supp pincite among other factors that may be considered are continuity of business operations management assets personnel and physical location courts may also look to the sufficiency of consideration rendered in exchange for the transferring corporation’s assets id 661_fsupp_880 e d va the de_facto and mere continuation terms are often used by courts interchangeably to refer to similar concepts milliken co v duro textiles llc n e 2d ndollar_figure mass for a transaction to constitute a de_facto merger however some courts require that the successor’s stock be transferred to the original corporation’s shareholders in exchange for the assets of the original corporation tracey by 745_fsupp_1099 ndollar_figure 1p r laws ann tit provides contracts by virtue of which the debtor alienates property for a good consideration are presumed to be executed in fraud of creditors the editors note to the english version of the statute explains that t he phrase ‘for a good consideration’ in the english of this section reads in the spanish ‘a titulo gratuito’ it appears to mean consideration founded on natural duty moral obligation affection generosity etc as distinguished from ‘valuable consideration ’ for this distinction see black's law dictionary ‘consideration’ corpus juris secundum contracts p american jurisprudence contracts sec_78 p puerto rico has not adopted the uniform fraudulent transfer act ufta or the uniform fraudulent conveyance act ufca gl-116977-08 e d pa this requirement is consonant with the purpose of a de_facto merger treating a transaction having the economic_effect of statutory merger as a statutory merger even though the transaction is cast as an asset sale fletcher supra dollar_figure the facts do not indicate that corporation b transferred stock in exchange for assets so the de_facto merger theory would not apply whether a corporation is a mere continuation turns upon factfinding inquiries into five emblematic circumstances a corporation transfers its assets the acquiring_corporation pays less than adequate_consideration for the assets the acquiring_corporation continues the divesting corporation's business both corporations share at least one common officer who was instrumental in the transfer and the divesting ‘corporation is left incapable of paying its creditors ed peters jewelry co f 3d pincite citations omitted the mere continuation theory cannot be relied upon at this point because we do not know the identity of the stockholders of either corporation or the identity of the corporate officers of corporation b continuity of ownership and management are vital considerations gonzalez p r offic trans puerto rico supreme court refused to find a merger or identity between two corporations because plaintiff did not present evidence regarding commonality of corporate ownership directors officers stockholders or operations the puerto rico supreme court has principally addressed successor liability in the context of labor law puerto rico labor relations board v asoc condominos playa azul i p r offic trans p r in order to impose liability on the successor entity substantial similarity in the management of the business and continuity in the identity of the business before and after the change is required id the successorship doctrine may apply when there is a sale or transfer of assets even without continuity of financial interest or management control id when applying successor liability in the context of labor cases puerto rican courts have looked at the following factors whether there has been a substantial continuity of business operations whether the new employer uses the same plant whether he uses the same or substantially the same work force whether he uses the same or substantially the same supervisory personnel whether the same jobs exist under substantially the same working conditions whether he uses the same machinery equipment and methods of production and whether he produces the same product rodriguez oquendo vs petrie retail inc d i p no cc-2004-900 wl p r eeoc v macmillan bloedel containers inc 503_f2d_1086 6th cir these factors are borrowed directly from the federal courts and have been collectively referred to as the substantial continuity test the test generally allows for broader liability because it does not require continuity of ownership and management federal courts initially applied the substantial continuity test in labor law successor liability cases courts have expanded its use for successor liability determinations under a limited number of federal statutes such as title vii of the civil rights act of employment discrimination puerto rico has also expanded the test to apply to discrimination cases bruno lopez v motorplan inc no re-92-37 wl gl-116977-08 p r the puerto rico supreme court has not yet expanded the test for use in other areas of the law see zayas fontanez v m j consulting inc civil no dkdp20030643 wl p r court_of_appeals declined to apply the test in a negligence action because the plaintiff was not an employee of the defendant corporation as the united_states district_court for the district of puerto rico stated t he ‘successor employer’ doctrine is a federal labor law claim that the puerto rico supreme court has engrafted to state law labor claims 193_fsupp2d_392 d p r an argument may be made that the substantial continuity factors should apply in case relying on that argument however is unnecessary because corporation b is liable under established puerto rican law as explained above you also inquired as to whether the irs must make an additional_assessment against corporation b in order to file a lien or levy against corporation b in this case successor liability holds the successor liable for the debts of the transferor_corporation the successor_corporation steps in the shoes of the transferor_corporation a pre- existing assessment exists with respect to corporation a a new assessment against corporation b is not required see 357_us_51 we note that the irs may make a transferee assessment under sec_6901 for collection of income estate_and_gift_taxes or collection of other taxes including employment_taxes if the liability arises on the liquidation of a partnership or corporation or on a reorganization within the meaning of sec_368 sec_6901 the tax_court has held that an entity may be liable as both a successor and a transferee 84_tc_387 because employment_taxes are at issue sec_6901 does not apply unless the liability was incurred on a liquidation or reorganization more facts are required to determine whether a liquidation or reorganization occurred in this case further even if sec_6901 did apply a transferee assessment is not necessary because the irs made an assessment with respect to corporation a 2we assume that a statutory merger was not undertaken in this case and thus sec_368 does not apply sec_368 provides for reorganization treatment if a transaction amounts to a mere change in identity prop_reg sec_1_368-2 provides that a transaction involving an actual or deemed transfer is a mere change only if the following four requirements are met all of the stock of the resulting corporation including stock issued before the transfer is issued in respect of stock of the transferring corporation there is no change in the ownership of the corporation in the transaction except a change that has no effect other than that of a redemption of less than all the shares of the corporation the transferring corporation completely liquidates in the transaction and the resulting corporation does not hold any property or have any_tax attributes including those specified in sec_381 immediately before the transfer the first two requirements which reflect the supreme court’s holding in 315_us_194 do not appear to be satisfied in southwest consolidated the court stated that a transaction which shifts the ownership of the proprietary interest in a corporation is hardly ‘a mere change in identity form or place of organization’ within the meaning of clause e id pincite citing former sec_112 the ownership structures of corporation a and corporation b remain unknown we do not reach a conclusion as to whether a reorganization occurred gl-116977-08 you also inquired as to whether corporation b is entitled to a collection_due_process cdp hearing if lien or levy action is commenced cdp_notice is given to the person described in sec_6321 for lien filing notices and the person described in sec_6331 for levy notices sec_6320 sec_301_6330-1 a-a2 the person described in sec_6321 and sec_6331 is the person liable to pay any_tax who neglects or refuses to pay the same corporation a failed to pay the tax_liability at issue and we assume that proper notices of lien filing and intent to levy were issued to corporation a corporation b as corporation a’s successor is not entitled to cdp lien and levy notices if corporation a previously received both notices with respect to the same unpaid tax a taxpayer is only entitled to a cdp hearing with respect to the first notice of lien filing or first pre-levy or post-levy cdp_notice with respect to an unpaid tax if the taxpayer does not request a cdp hearing following the first notification the taxpayer forgoes the right to a cdp hearing sec_301_6320-1 a-b4 b a-b2 this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions 3we do not opine as to whether corporation b would be entitled to a cdp hearing if corporation a did not previously receive both cdp notices no prior lien or levy action with respect to the unpaid tax


internal_revenue_service department of the treasury washington dc uil number release date person to contact telephone number refer reply to cc tege eoeg et1 plr-118016-99 date date taxpayer ein legend firm dear this is in reply to a letter from your authorized representative dated date and subsequent correspondence requesting rulings under sec_3508 of the internal_revenue_code in particular a ruling was requested that certain real_estate brokers subject brokers will not be considered employees by reason of sec_3508 in addition a ruling was requested that certain individuals providing dual services as a real_estate broker and as an officer manager for the firm will not be considered employees with regard to their real_estate brokerage services by reason of sec_3508 and their status will be determined according to the common-law rules as regards to their management services the information submitted by the firm indicates that it is in the business of leasing and selling commercial real_property typically a subject broker of the firm represents either a tenant or sub-tenant or a landlord with respect to a leasing transaction or a buyer or seller with regard to an investment sale transaction a subject broker is required to be licensed to sell real_estate by the state in which the broker works it is represented that more than percent of a subject broker’s compensation will be in the form of commissions which are directly related to leasing and sales activities appraisal activities of a subject broker if any are incidental to the lease or sale of real_property a subject broker is paid on a commission basis according to the value of sales leases and other transactions made including consulting assignments rather than by the number of hours worked a subject broker’s services are provided pursuant to a written in addition to the brokers that are the subject of this ruling_request the firm hires other individuals to act as brokers these individuals sign a different contract with the firm no ruling is requested regarding the status of these brokers and this ruling does not apply to them plr-118016-99 contract with the firm which specifically states that the broker will not be treated as an employee for federal tax purposes sec_3508 broker contract the dual service manager broker is a licensed real_estate agent who performs real_estate brokerage services and management services for the firm in regard to real_estate brokerage services some of these individuals sign a sec_3508 broker contract and are compensated as provided above in the discussion of the subject brokers in regard to their management services compensation varies depending on the office being managed sec_3508 sets forth the tax treatment of services performed as a qualified_real_estate_agent or a direct_seller sec_3508 provides that in the case of services performed as a qualified_real_estate_agent the individual performing such services will not be treated as an employee and the person for whom the services are performed shall not be treated as an employer while sec_3508 deals with both qualified real_estate agents and direct sellers the provisions dealing with direct sellers are not applicable here sec_3508 defines a qualified_real_estate_agent as any individual who is a sales person if - a such individual is a licensed real_estate agent b substantially_all of the remuneration for the services performed by such individual as a real_estate agent is directly related to sales or other output including the performance of services rather than to the number of hours worked substantially-all-remuneration requirement and c the services performed by the individual are performed pursuant to a written contract between such individual and the person for whom the services are performed and such contract provides that the individual will not be treated as an employee with respect to such services for federal tax purposes proposed_regulations under sec_3508 were issued in while proposed_regulations cannot be relied upon in the same manner as temporary and final regulations they can provide guidance proposed regulation sec_31 b defines services performed as a real_estate agent to include any activities that customarily are performed in connection with the sale of an interest_in_real_property these include the advertising or showing of real_property the acquisition of a lease to real_property and the recruitment training or supervision of other real_estate sales persons as well as the appraisal activities of a licensed real_estate agent in connection with the sale of real_property services performed as a real_estate agent do not include the management of property proposed regulation sec_31 d provides that the substantially-all-remuneration plr-118016-99 requirement is satisfied for any calendar_year if at least percent of the total remuneration received by the individual from the service-recipient for performing such services during that calendar_year is directly related to sales or other output rather than to the number of hours worked under proposed regulation sec_31 g the term service-recipient means the person other than a client or customer for whom the services as a qualified_real_estate_agent are performed eg a real_estate firm proposed regulation sec_31 j regarding dual services provides that sec_3508 shall apply only with respect to services performed as a qualified_real_estate_agent and that whether an individual is treated as an employee or as a self-employed_individual with respect to services other than those performed as a qualified_real_estate_agent shall be determined under common-law principles example of proposed regulation sec_31 j provides an example of a licensed real_estate agent who performs services as a real_estate agent and also performs services as a bookkeeper for the same service-recipient as an illustration of a dual-service individual based on the information submitted and representations made we conclude that a subject broker who performs real_estate brokerage services as a sales person for the firm under the circumstances described in your request and who is licensed by the appropriate state as a real_estate agent meets the substantially-all-remuneration requirement and performs services for the firm pursuant to a sec_3508 broker contract is a qualified_real_estate_agent within the meaning of sec_3508 accordingly we hold that such broker will not be treated as the firm's employee for federal tax purposes and the firm will not be treated as the employer we also conclude that a dual-service manager broker who performs real_estate brokerage services for the firm under the circumstances described in your request and who is licensed by the appropriate state as a real_estate agent meets the substantially- all- remuneration requirement and performs services for the firm pursuant to a sec_3508 broker contract is a qualified_real_estate_agent within the meaning of sec_3508 with respect to real_estate brokerage services accordingly we hold that such broker will not be treated as the firm's employee with regard to real_estate brokerage services for federal tax purposes and the firm will not be treated as the employer with regard to real_estate brokerage services whether the manager broker is treated as an employee or as a self-employed_individual with respect to the management services will be determined under common-law principles temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling will be modified or revoked by adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in the letter_ruling see section dollar_figure of revproc_2000_1 2000_1_irb_4 however when the criteria in section dollar_figure of revproc_2000_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances plr-118016-99 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by penalty of perjury statements executed by an appropriate party 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 no opinion was requested and none is given regarding the status of the manager brokers under the common-law rules as regards to their management services or the status of brokers other than the subject brokers this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely yours patricia m mcdermott patricia m mcdermott branch chief office of the associate chief_counsel tax exempt government entities enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------------------ ------------------------------- ------------------------------------ ------------------------------------- ---------------------------------------------- legend legend 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 b03 plr-108024-10 date date investors ------------------------------- corporation x ---------------------------------------- z ---------------------- date ---------------- date ----------------------- date ----------------- date ----------------------- country --------------------------------------- government ----------------------------------------------------------------- act -------------------------------------------------------- act ----------------------------- act ----------------------------------------- fund ----------------------------------------------- agency -------------------------------------------------- n ------ p --- plr-108024-10 q --- r ----------------------------------------------------------------------------------------------------------- dear ---------------- this is in response to your request for a ruling under sec_165 and sec_1231 of the internal_revenue_code dated date facts the investors are a series of trusts which are treated as partnerships for federal_income_tax purposes on date the investors purchased an aggregate investment of approximately n of the stock of corporation x on date government passed act which had the purpose of stabilizing the financial markets as part of that legislation government established the fund and the agency the fund and the agency are subject_to legal and substantive supervision by government financial department on date government passed act authorizing the nationalization of corporation x under act the fund first was required to buy the shares of corporation x with nationalization to take place only after fund had attempted to purchase the stock act authorized fund to squeeze out minority shareholders of a corporation if fund acquired a minimum ownership of p stock of such corporation in all other cases a majority shareholder is required to acquire a higher minimum ownership of q in addition act authorized fund to inject capital into targeted corporations in exchange for stock in order to dilute non-fund ownership in the corporation government and fund took the following steps in order to acquire of the stock of corporation x fund provided liquidity guarantees to corporation x in addition to support provided by the government central bank and a consortium of country financial institutions fund subscribed to new shares of corporation x out of authorized capital of the company by excluding the subscription rights of all other shareholders fund acquired additional shares of corporation x stock through a public_tender_offer public documents stated that shareholders who did not accept the public_tender_offer would become subject_to an expropriation of their shares at a lower price under the governing documents in place for the investors only a small percentage of the investors’ shares were sold in the public_tender_offer such shares are not the subject of this letter_ruling plr-108024-10 a second capital increase was approved that resulted in fund increasing its ownership in corporation x to at least p following which and pursuant to government legislation granting fund the legal right to do so with regard to corporation x it was resolved that all remaining corporation x shares not already owned by fund should be transferred to fund in exchange for cash compensation determined according to the corporate statutes of country and government in an amount equal to r the legislation granting fund this right to compel transfer of corporation x shares also provided for severe penalty provisions in the event of objection by minority shareholders on date pursuant to government court action the transfer of the shares to fund took effect under the transfer resolution for the squeeze out of minority shareholders including investors minority shareholders became entitled to a cash settlement payment from fund the amount of the cash settlement payment was determined in accordance with the provisions of act which provides that the minimum level of cash compensation is equal to r following the transfer of their shares to fund investors and certain other minority shareholders filed suits against corporation x in the courts of country requesting that their shares of stock in corporation x be returned to them the suits note that the provisions relating to the recapitalization and the related modifications to the squeeze-out rules were newly introduced into the law of country in the context of the measures aimed at stabilization of the financial markets and allege violations of the constitution of country and several articles of the z contract investors also filed suits against fund requesting additional compensation_for transferring their shares to fund investors request a ruling that they recognized a loss under sec_165 of the internal_revenue_code equal to the amount received in the transaction less their basis in the shares of corporation x and that under sec_1231 the loss is treated as a sec_1231 loss applicable law sec_165 of the code provides that any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise may be deducted sec_165 states that the basis for determining the amount of the deduction for any loss shall be the adjusted_basis provided in sec_1011 for determining the loss from the sale_or_other_disposition of property sec_1_165-1 of the income_tax regulations states that sec_165 provides that in computing taxable_income under sec_63 any loss actually sustained during the taxable_year and not made good by insurance or some other form of compensation shall be allowed as a deduction subject_to any provision of the internal revenue laws which prohibits or limits the amount of the deduction this deduction for plr-108024-10 losses sustained shall be taken in accordance with sec_165 and the regulations thereunder sec_1_165-1 of the regulations states that to be allowable as a deduction under sec_165 a loss must be evidenced by closed and completed transactions fixed by identifiable events and except as otherwise provided in sec_165 and sec_1_165-11 relating to disaster losses actually sustained during the taxable_year only a bona_fide loss is allowable substance and not mere form shall govern in determining a deductible loss sec_1_165-1 of the regulations provides that as to the year of deduction a loss shall be allowed as a deduction under sec_165 only for that taxable_year in which the loss is sustained for this purpose a loss shall be treated as sustained during the taxable_year in which the loss occurs as evidenced by closed and completed transactions and as fixed by indentifiable events occurring in such taxable_year sec_1_165-1 of the regulations provides that if a casualty or other event occurs which may result in a loss and in the year of such casualty or event there exists a claim for reimbursement with respect to which there is a reasonable_prospect_of_recovery no portion of the loss with respect to which reimbursement may be received is sustained for purposes of sec_165 until it can be ascertained with reasonable certainty whether or not such reimbursement will be received whether a reasonable_prospect_of_recovery exists with respect to a claim for reimbursement of a loss is a question of fact to be determined upon an examination of all facts and circumstances whether or not such reimbursement will be received may be ascertained with reasonable certainty for example by a settlement of the claim by an adjudication of the claim or by an abandonment of the claim issue does investors’ filing of a suit against x in courts of country prevent the loss from being sustained in year sec_165 provides for the deduction of losses sustained during the taxable_year for which no compensation is received in the case of individuals sec_165 limits the deduction to losses_incurred in a trade_or_business or in any transaction entered into for profit in order to be deductible a loss must be evidenced by a closed and completed transaction fixed by identifiable events and actually sustained during the taxable_year 326_us_287 sec_1_165-1 a loss is only deductible for the taxable_year in which such loss is sustained sec_1_165-1 the determination of whether a loss occurred during a particular taxable_year is purely one of fact 524_f2d_888 9th cir affg t c memo a critical inquiry is to focus on the year that the taxpayer loses control_over and possession of the property at issue 274_us_398 plr-108024-10 whether a reasonable prospect for recovery exists with respect to a claim for reimbursement of the loss is a question of fact to be determined upon examination of all of the facts and circumstances whether or not such reimbursement will be received may be ascertained with reasonable certainty for example by a settlement of the claim by an adjudication of the claim or by an abandonment of the claim the determination of whether reasonable certainty exists as to reimbursement is an objective inquiry into the facts and circumstances surrounding the loss as of the close of the taxable_year in which the deduction is claimed see 326_us_287 ramsey scarlett co v commissioner 61_tc_795 aff'd 521_f2d_786 4th cir brown v commissioner tcmemo_1996_284 various cases and rulings discuss the timing of a loss caused by a seizure of stock by a foreign government such cases and rulings generally permit the loss in the year of the seizure finding that there was not a reasonable prospect for recovery_of the loss in spite of the purported existence of claims for reimbursement for example in united_states v s s white dental mfg co the supreme court held that a taxpayer creditor and stockholder of a corporation seized by the german government in could take a deduction for the loss of the taxpayer’s investment in the year of seizure even though in a later year the german government bound itself to make a payment to the taxpayer in respect of the seized property in fuchs v commissioner 413_f2d_503 2d cir a loss caused by the seizure of rental properties by the czechoslovakia government in was held to be deductible in notwithstanding that the taxpayer recovered a portion of her loss from a fund set up by the united_states government in see also 48_tc_711 revrul_62_197 1962_2_cb_66 discusses when a loss is permitted to u s taxpayers whose property was seized by the government of cuba it states it is the position of the service that acts of confiscation whether by way of seizure intervention in expropriation or similar taking of property by the cuban government constitute identifiable events which in light of all of the circumstances have resulted in closed and completed transactions notwithstanding promise of indemnification emphasis added an act of confiscation has occurred when the taxpayer has been deprived of ownership of property or the normal attributes of ownership such as receipt of income and control_over the operation or use of the property with little or no chance of being compensated therefore in revrul_75_121 1975_1_cb_70 the taxpayer’s domestic subsidiary s formed to own and operate property in a foreign_country was occupied by the government of that country contingent upon the investment of 100x dollars in capital improvements in s by the taxpayer secured_by the stock of s the ruling holds that there is a loss when the taxpayer after originally agreeing to make the investment later determined such investment to be unfeasible upon which the foreign government declared the stock of s to be forfeited revrul_76_41 1976_1_cb_52 which in part clarified revrul_75_121 stated that implicit in revrul_75_121 is the requirement that plr-108024-10 a seizure of stock in a domestic_corporation results in a loss for purposes of sec_165 sec_172 and sec_1231 only if the u s shareholder cannot expect to regain legal ownership of the stock through a u s court_proceeding in boehm v commissioner the court held that there was no prospect of recovery as to stock in a failing corporation in spite of a shareholders derivative suit that was filed against the corporation and its board_of directors the shareholders purchased stock for dollar_figure in by the corporation had sustained large losses and a receiver was appointed the shareholders instituted a stockholder’s derivative suit against the corporation and nine members of its board_of directors the suit was settled in and the shareholders took a loss for the stock at that time the court denied the loss holding that the stock had become worthless in a previous year even though the shareholders were pursuing a claim against the corporation the court determined that the shareholders had not shown that there was any value to the suit as there was no evidence in the stipulation of the merits of the suit the probability of recovery or any assurance of collection of an amount sufficient to pay the creditor’s claim and to provide a sufficient surplus for stockholders so as to give any real value to their stock u s pincite unlike the situation in rev ruls and the stock in this case is not stock in a u s subsidiary and investors cannot expect to regain legal ownership through a u s court_proceeding under the reasoning of boehm v commissioner the mere fact of having filed a suit to recover their shares does not automatically establish that there is a valid claim for reimbursement or recovery under boehm it is necessary to consider the merits of the suit including the probability of recovery in this case although investors have instituted a suit in the courts of country to regain their stock in view of the circumstances under which corporation x stock was transferred the investors have represented that they have no reasonable prospect of recovering their corporation x shares as a result of these legal actions instead the legal actions were intended as an incentive to fund to offer additional compensation_for the stock based upon this it is appropriate to consider the loss as sustained as of date when the stock was transferred to fund pursuant to the forced sale issue does the loss result from the involuntary_conversion of the stock into other_property or money under sec_1231 sec_1231 provides that the term sec_1231 loss means any recognized loss from a sale_or_exchange or conversion described in sec_1231 sec_1231 provides that sec_1231 gain means any recognized gain from the compulsory or involuntary_conversion as a result of destruction in whole or in part theft or seizure or an exercise of the power of requisition or condemnation or the threat or imminence thereof into other_property or money of property used in a trade_or_business or any capital_asset held for more than one year that is held in connection with a trade_or_business or a transaction entered into for profit plr-108024-10 sec_1_1231-1 of the regulations provides that for purposes of sec_1231 the terms ‘compulsory or involuntary conversion’ and ‘involuntary conversion’ of property mean the conversion of property into money or other_property as a result of complete or partial destruction theft or seizure or an exercise of the power of requisition or condemnation or the threat or imminence thereof revrul_72_1 1972_1_cb_52 situation holds that a taxpayer y owning stock in a foreign_corporation t may deduct the loss caused by the nationalization of the stock of t whose assets were located in the foreign_country when there was no reasonable prospect for payment of such compensation nor of recovery_of y’s interest in the corporation or indemnification by insurance or otherwise in addition the ruling notes that if the prospect for compensation is favorable but y is required as a condition to receiving compensation to enter into a formal contract of sale with country b in respect of y’s stock in t such a ‘sale’ will be viewed by the service as merely an agreement as to the amount of compensation to be paid for the involuntary_conversion of y’s stock revrul_75_121 holds that the taxpayer’s loss qualifies under sec_1231 when s a domestic subsidiary formed to own and operate property in a foreign_country was occupied by the government of that foreign_country contingent upon the investment of 100x dollars in capital improvements in s by the taxpayer the taxpayer agreed to make the investment but later determined such investment to be unfeasible and so notified the foreign government upon which the foreign government declared the stock of s to be forfeited with compensation under the pledged agreement generally a seizure for federal tax purposes occurs when a governmental authority enters into physical possession of property without authority of a court order with compensation to be determined later and is limited to the taking of property for public use revrul_79_269 1979_2_cb_297 an act of confiscation whether by way of seizure intervention in expropriation or similar taking of property occurs when a foreign government deprives a taxpayer of ownership of property or the normal attributes of ownership such as receipt of income and control_over the operation or use of the property with little or no chance of being compensated therefore revrul_62_197 1962_2_cb_66 clarified by revrul_64_149 1964_1_cb_233 modified by revrul_69_498 1969_2_cb_31 compensation may be received in some instances of seizure by a foreign government revrul_72_1 situation the expropriation or confiscation of property by a foreign government is considered a loss under and an involuntary_conversion for purposes of sec_1231 see revrul_72_1 1972_1_cb_52 see also revrul_62_197 situation at times forced sales of stock have been held to be involuntary_conversions however other cases and rulings have held that forced sales of stock do not qualify as involuntary_conversions in revrul_79_269 1979_2_cb_297 a sale of stock by a plr-108024-10 trustee in bankruptcy of a customer’s securities held in a margin_account of a bankrupt brokerage firm was not considered an involuntary_conversion sale of stock by one of two shareholders under a state deadlock statute was held not to be an involuntary_conversion 274_f2d_656 affg 31_tc_1168 american natural_gas co v u s ct_cl held that a sale of public_utility stock by sec order was not an involuntary_conversion the acquisition of stock in this case by fund was pursuant to the squeeze-out provisions of government law the circumstances of this sale differ from the cases cited above in which a forced sale was not considered an involuntary_conversion while the cases cited above resulted in the forced sale of stock pursuant to a government order those sales did not result in the acquisition by the government or a government controlled_entity of the stock and the stock was not acquired for a public purpose rather they resulted in another private party acquiring the stock in this case the forced sale resulted in acquisition of stock by fund an instrumentality of government for a public purpose the stabilization of the economy of country pursuant to the provisions of act described above fund first was required to buy the shares of corporation x with nationalization to take place only after fund had attempted to purchase the stock act authorized fund to squeeze out minority shareholders of a corporation if fund acquired a minimum ownership of p stock of such corporation in addition act authorized fund to inject capital into targeted corporations in exchange for stock in order to dilute non-fund ownership in the corporation as described above fund acquired p of the shares of corporation x on date all remaining corporation x shares not already owned by fund were transferred to fund in exchange for cash compensation this was pursuant to the express provisions of act described above which directed that fund should acquire the shares of corporation x either by purchase or by nationalization if necessary under revrul_72_1 this should be treated as an involuntary_conversion of the stock of corporation x through seizure or confiscation even though the stock was purchased under the laws of government and the shareholders of corporation x received compensation equal to r the terms of act make it clear that it was the intention of government to acquire the stock of corporation x for public purposes the provisions of act first instructed fund to acquire the shares through purchase and if that was not possible authorized the nationalization of corporation x therefore it is held that investors recognized a loss under sec_165 of the internal_revenue_code as of date equal to the amount received in the transaction less their basis in the shares of corporation x and that under sec_1231 the loss is treated as a sec_1231 loss 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 plr-108024-10 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant 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 christopher f kane chief branch income_tax accounting


internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc psi br 3-plr-101906-01 date date number release date index number legend x d1 state shareholders dear this responds to your letter dated date and subsequent correspondence written on behalf of x requesting a ruling that x’s s_corporation status will be effective as of d1 facts x incorporated under state law on d1 x’s shareholders intended that x be a subchapter_s_corporation for its tax_year beginning d1 however the s_corporation_election under sec_1362 of the internal_revenue_code was not filed timely x requests a ruling that it will be recognized as a subchapter_s_corporation effective d1 pursuant to sec_1362 law and analysis sec_1362 provides that a small_business_corporation may elect to be a subchapter_s_corporation sec_1362 provides the rule on when a subchapter_s_election will be effective if a subchapter_s_election is made within the first two and one-half months of a corporation's taxable_year then that corporation will be treated as a subchapter_s_corporation for the year in which the election is made if a subchapter_s_election is made after the first two and one-half months of a corporation's taxable_year then that corporation will not be treated as a subchapter_s_corporation until the taxable_year after the year in which the subchapter_s_election is made sec_1362 provides that if no sec_1362 election is made for any plr-101906-01 taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and effective as of the first day of that taxable_year x’s subchapter_s_corporation election was not filed timely for the election to be effective as of its taxable_year beginning on d1 nevertheless x has established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 conclusions based solely on the facts submitted and representations made and assuming that x otherwise qualifies as a subchapter_s_corporation as of d1 and x's shareholders make any adjustments to their federal_income_tax returns necessary to comply with this ruling we conclude that x will be recognized as a subchapter_s_corporation effective for the period beginning on d1 please file a completed form_2553 election by a small_business_corporation with a copy of this ruling attached reflecting x’s election of subchapter_s_corporation status as of d1 with the applicable service_center within days from the date of this letter except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x otherwise satisfies the subchapter_s_corporation eligibility requirements this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely mary beth collins assistant to the branch chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------------------------------------ ------------------------------------------------------------ ------------------------------------------------------- -------------------------------------- ---------------------------------- department of the treasury washington dc person to contact ---------------------- id no ---- -------- telephone number --------------------- refer reply to cc fip plr-144720-06 date date legend fund ----------------------------------------------------------------------------------------- ----------------------------------- ----------------------------------------------------------------------------------------- --------------------------------------------------- fund -------------------------------------------------------------------------------------------------------------------- -------------------------------------------------- --------------------------------------------------- ------------------------------------------------ fund ------------------------------------------------------------------------------- --------------------------------------------------- ------------------------------------------------ fund -------------------------------------------------------------------- ----------------------------------------------------------------------------------------- ------------------- --------------------------------------------------- ------------------------------------------------ fund sec_1 through -------------------- fund or plr-144720-06 tax-exempt fund ----------------------------------------------------------------------------------------- -------------------------------------------- --------------------------------------------------------------------------- --------------------------------------------------- ------------------------------------------------ former adviser ----------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------------------------ former affiliate ------------------------------------------ transfer agent ----------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- ------------------------------------------ transfer agent -------------------------------------------------------------- ------------------------------------------ distribution plans -------------------------------------------------------------------- order ----------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ ---------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ -------------------------- dear ------------- this responds to your request dated date and supplemental correspondence dated date date date date date date and date submitted on behalf of fund sec_1 through each a fund and collectively funds by your authorized representative you request that the internal_revenue_service rule as follows first that payments made to each of the funds pursuant to the distribution plans will constitute qualifying_income for purposes of sec_851 of the internal_revenue_code_of_1986 as amended the code and second that the allocation of these payments among the funds’ classes of shares as provided in the distribution plans will not result in preferential dividends under sec_562 plr-144720-06 facts each fund is registered as an open-end management investment_company under the investment_company act of u s c sec_80a-1 et seq as amended the act each fund is classified as a domestic_corporation for federal_income_tax purposes and has elected to be treated as a regulated_investment_company ric under sec_851 of the code each fund has three or more classes of shares that have different arrangements for shareholder services or the distribution of shares or both funds represent that these arrangements satisfy the requirements of rule 18f-3 of the act and that the classes of shares constitute qualified groups of shares within the meaning of revproc_99_40 1999_2_cb_565 under these arrangements each class of shares in each fund is specially allocated the fees and expenses associated with shareholder servicing and distribution of shares of that class each class of shares also is specially allocated certain other fees and expenses such as transfer agency fees on the basis of amounts actually incurred by that class investment advisory fees and custodial fees are not specially allocated among the classes but rather are allocated based on the relative net asset value of each class of shares former adviser is registered with the sec as an investment adviser and served as such to the funds during the period covered by the order former affiliate is an affiliate of former adviser and is registered with the sec as an investment adviser and broker-dealer transfer agent initially provided transfer agency services directly to funds funds’ business was highly profitable to transfer agent during this initial period as a result of a favorable fee schedule and the relatively low cost of servicing funds the order finds that former adviser in the course of a review of transfer agent options recommended to funds’ boards of directors that transfer agent be replaced with transfer agent an affiliate of former adviser who would undertake to provide transfer agency services to funds more economically the boards of directors of funds adopted this recommendation transfer agent then subcontracted with transfer agent to perform substantially the same work it had previously performed but at a significant discount from the fees it had previously charged funds transfer agent provided a customer service call center and provided oversight and quality control_over the work of transfer agent the order further finds that while offering funds a limited fee reduction through the institution of fee caps former adviser retained the majority of the savings it had plr-144720-06 negotiated with transfer agent the order therefore finds that transfer agent earned net fees far in excess of costs for the period covered by the order the order further finds that former adviser and former affiliate willfully violated certain provisions of the investment advisers act of as amended the advisers act by failing to disclose to the boards of directors of funds when proposing the new transfer agency arrangement with its affiliate transfer agent that transfer agent had offered to continue as transfer agent at a substantially lower fee also undisclosed to the boards of directors was a side letter entered into between former adviser former affiliate and transfer agent under which former adviser agreed to recommend the appointment of transfer agent as sub-transfer agent to transfer agent in exchange for a guarantee by transfer agent of specified amounts of asset management and investment banking fees to former adviser and former affiliate respectively and the fact that transfer agent would earn a large profit while performing only limited functions while transfer agent continued to perform substantially_all transfer agency functions although former adviser and former affiliate did not admit or deny any wrongdoing or liability the order provides for the imposition of sanctions on former adviser and former affiliate including the payment to funds of certain escrowed transfer agency fees under the terms of the order transfer agent was required to escrow all transfer agency fees received from funds throughout the remaining term of its contracts less any payments made to sub-transfer agents and actual operational costs and expenses from these escrowed amounts former adviser and former affiliate were required to make distributions to funds in amounts equal to the difference between the amounts actually paid_by funds for transfer agency services and the amounts that funds would have paid under the new transfer agency contract had the new contract been in effect during the escrow period the order additionally requires former adviser and former affiliate to pay disgorgement prejudgment_interest and civil money penalties credited against the total amount of required disgorgement were previous payments that represented the amount generated under the side letter revenue guarantee a further amount was credited against prejudgment_interest the remaining amount of disgorgement which relates to profits earned by transfer agent from funds plus an amount of prejudgment_interest was required to be paid to the united_states treasury additionally former adviser was required to pay civil money penalties to the united_states treasury former adviser and former affiliate agreed that in any related investor action they would not benefit from any offset or reduction of any investor’s claim by the amount of any fair fund distribution to such investor that is proportionately attributable to the civil penalty the order provides that a fair fund be established pursuant to section a of the sarbanes-oxley_act of pub_l_no for the amounts paid_by former plr-144720-06 adviser and former affiliate the disgorgement prejudgment_interest and civil money penalty amounts were paid to the sec and transferred to a fund the fair fund established under the terms of the order upon the sec’s approval of the proposed distribution plan the amounts in the fair fund are to be returned to former adviser and former affiliate for distribution in accordance with the plan plans for the distribution of these amounts await sec approval the distribution plans set forth a calculation of amounts paid to each of the funds entitled to share in the distributed amounts on a class by class basis that is by treating each class of shares in a fund entitled to share in the distributed amounts as a separate fund and separately determining the distributable_amount for each class funds distribute all their investment_company_taxable_income icti and net exempt-interest income each year on their federal_income_tax returns for the years in which funds incurred transfer agency fees fund sec_1 through the -------------------- deducted these fees in computing icti fund was generally unable to deduct transfer agency fees pursuant to sec_265 of the code to the extent however that fund recognized taxable ordinary_income such as market_discount on tax-exempt obligations it deducted a portion of the transfer agency fees against that gross_income non-deductible transfer agency fees were taken into account in determining the amount of fund 5’s exempt-interest dividend payments under sec_852 a portion of fund 5’s tax-exempt_income was treated under sec_57 as a tax preference for alternative_minimum_tax purposes funds seek a ruling that all amounts received by funds pursuant to the escrow distribution plan and fair fund distribution plan whether categorized as escrowed transfer agency fees disgorgement prejudgment_interest penalty or earnings on the foregoing constitute qualifying_income to funds under sec_851 of the code funds further seek a ruling that the allocation of these distributions among the classes of shares within each fund will not result in preferential dividends under sec_562 law and analysis ruling_request payments made to funds pursuant to the escrow distribution plan and the fair fund plan will constitute qualifying_income for purposes of sec_851 sec_851 of the code defines a ric in part as a domestic_corporation registered under the act as a management company sec_851 of the code limits the definition of a ric to a corporation meeting certain election gross_income and diversification requirements plr-144720-06 sec_851 of the code provides that a corporation shall not be considered a ric for any taxable_year unless it derives at least percent of its gross_income from certain enumerated sources qualifying_income in congress amended sec_851 to include as qualifying_income other income derived with respect to a ric’s business of investing in stock securities or currencies the other income clause sec_851 now defines qualifying_income in relevant part as- dividends interest payments_with_respect_to_securities_loans as defined in sec_512 and gains from the sale_or_other_disposition of stock_or_securities as defined in sec_2 of the act or foreign_currencies or other income including but not limited to gains from options futures or forward contracts derived with respect to the ric’s business of investing in such stock securities or currencies sec_851 further provides that for purposes of sec_851 of the code amounts excludable from gross_income under sec_103 shall be treated as included in gross_income sec_852 of the code permits a ric that holds at least percent of the value of its total assets in obligations described in sec_103 to designate and pay exempt-interest dividends in accordance with the requirements of sec_852 sec_852 provides that an exempt-interest dividend is treated by the ric’s shareholders as an item of interest excludable from gross_income under sec_103 taxable funds in revrul_92_56 1992_2_cb_153 the service concluded that a reimbursement of advisory fees paid in a prior year and received by a ric from its investment_advisor in the normal course of business and not as a result of a transaction entered into to artificially inflate the ric’s qualifying gross_income was qualifying_income under the other income clause of sec_851 of the code recoveries of overcharged transfer agency fees received by funds pursuant to the distribution plans are similar to the reimbursed advisory fees described in revrul_92_56 both transfer agency services and investment advisory services are incurred in the normal course of funds’ business of investing in stock securities and currencies recovery_of overcharges of fees for these services undertaken through litigation or settlement relates directly to this normal course of business similarly penalty amounts arising out of the overcharge of transfer agency fees are directly attributable to the recovery_of compensation_for the overcharged fees and thus to the conduct of funds’ normal course of business accordingly we rule that recoveries of transfer agency fees and penalty amounts received by the taxable funds pursuant to the distribution plr-144720-06 plans are qualifying_income to the taxable funds under sec_851 of the code amounts in the nature of interest received by the taxable funds pursuant to the distribution plans including prejudgment_interest earnings on prejudgment_interest earnings on escrowed amounts earnings on disgorgement and earnings on penalty amounts also constitute qualifying_income under sec_851 because interest is expressly enumerated as a type of qualifying_income in that section tax-exempt fund as ruled in a related letter plr-148672-06 amounts received as recoveries of overcharged transfer agency fees not deducted in the year in which they were incurred pursuant to sec_265 of the code are not includible in gross_income of the tax-exempt fund in the year of recovery the related letter further rules however that these recoveries of transfer agency fees may properly be constructively treated by the tax-exempt fund as interest excludable from income under sec_103 solely for purposes of ensuring that the tax- exempt fund may designate these amounts as exempt-interest dividends in the year of recovery in accordance with sec_852 and for purposes of the determination of qualifying_income under the flush language of sec_851 the flush language of sec_851 provides that amounts excluded from gross_income under sec_103 shall be treated as included in gross_income for purposes of sec_851 of the code we therefore rule that recoveries of transfer agency fees received by the tax-exempt fund that are constructively treated as interest excludable from gross_income under sec_103 are treated as included in gross_income for purposes of sec_851 in accordance with the foregoing analysis of like amounts recovered by the taxable funds we further rule that recoveries of transfer agency fees amounts in the nature of interest including prejudgment_interest earnings on prejudgment_interest earnings on escrowed amounts earnings on disgorgement and earnings on penalty amounts and penalty amounts received by the tax- exempt fund pursuant to the distribution plans are qualifying_income to the tax- exempt fund under sec_851 of the code ruling_request allocation of distributions received by funds pursuant to the distribution plans to share classes within each fund as provided in the distribution plans will not result in preferential dividends under sec_562 the distribution plans provide for an allocation of distributions of recovered transfer agency fees interest and penalty amounts among the classes of shares of each fund under the fair fund plan the calculation of plr-144720-06 amounts to be distributed to each class is to be made based on the ratio of the transfer agency fees paid_by each class to the total transfer agency fees paid_by all classes under the escrow plan a similar calculation is to be made based on the ratio of the savings that each class would have realized from the retroactive application of the new transfer agency fee rate during the escrow period to the total transfer agency fee savings that would have been realized during this period by all classes of shares revproc_99_40 1999_2_cb_565 describes conditions under which distributions made to shareholders of a ric may vary and nevertheless be deductible as dividends under sec_562 of the code section dollar_figure of this revenue_procedure describes allocations of fees or expenses_incurred by a ric meeting the requirements of the revenue_procedure to its qualified groups of shares under this section a different share of fees and expenses not including advisory or custodial fees or the fees related to the management of the ric’s assets that are actually incurred in different amounts by a qualified_group of shares or are incurred for services of a different kind or to a different degree than other qualified groups may be allocated to that qualified_group of shares of a ric that meets the requirements of the revenue_procedure funds represent that funds meet all requirements of revproc_99_40 and that recoveries of overcharged transfer agency fees under the distribution plans are allocated as described in section dollar_figure of that procedure section dollar_figure of revproc_99_40 addresses allocations of waivers or reimbursements of fees and expenses described in section dollar_figure of the procedure if as funds represent the fee or expense was originally allocated on the basis of the amount incurred on behalf of each qualified_group of shares this section provides that the benefit of a waiver or reimbursement of the fee or expense is to be allocated to the qualified_group of shares on behalf of which the expense was incurred because reimbursements of transfer agency fees recovered under the plans are to be allocated to each class of shares of funds on the basis of the amount of transfer agency fees originally incurred by and allocated to each class of shares the reimbursements are allocated consistently with the method of allocation of waivers and reimbursements described in section dollar_figure of revproc_99_40 in accordance with that procedure we therefore rule that allocations of reimbursements of transfer agency fees recovered under the distribution plans by funds do not result in preferential dividends under sec_562 of the code we rule further that although not described in this revenue_procedure related and corresponding allocations of amounts recovered in the nature of interest and as penalties among the classes of shares of fund in a manner consistent with revproc_99_40 do not give rise to preferential dividends no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described in this letter except as expressly provided plr-144720-06 this ruling is directed only to the taxpayers who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter should be attached to the federal_income_tax return of a fund for each taxable_year in which it receives recoveries of transfer agency fees amounts in the nature of interest and penalty amounts pursuant to the order and in which it makes distributions to its shareholders pursuant to the distribution plans as described in this letter alternatively a fund filing its income_tax return electronically may satisfy this requirement by attaching a statement to its return that provides the date and control number of this letter_ruling letter is being sent to your authorized representative in accordance with the power_of_attorney on file with this office a copy of this sincerely susan thompson baker susan thompson baker assistant to the branch chief branch office of the associate chief_counsel financial institutions products


internal_revenue_service department of the treasury number release date index number ty dear washington dc person to contact telephone number refer reply to cc intl br1-plr-108291-00 date date this is in response to your letter of date requesting a ruling that a’s surrender of his u s alien registration card green card did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code additional information was submitted in a letters dated date and april 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 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 a was born in country b on date c a has been involved with business d for over years in year e he moved to city f in the united_states and started company g in business d in year h he contracted to work for company i a country j company for five years and was give the option to purchase company k a country b subsidiary of company j in business d on a fully leveraged basis he purchased company k and was its chief_executive_officer but it was managed by his son daughters and other family members while he completed his five-year contract with company j in year l he returned to country b and took over active_management of company k a has always maintained close family personal and business ties with country b and intends to live there the rest of his life and to work there until he retires a expatriated on date m sec_877 generally provides that a citizen who loses u s citizenship or a u s long-term_resident who ceases to be taxed as a lawful permanent resident individuals who expatriate within the 10-year period immediately preceding the close of the taxable_year will be subject_to the special rules of sec_877 for such taxable_year unless such loss did not have for one of its principal purposes the avoidance of u s taxes sec_2107 and sec_2501 provide special estate and gift_tax regimes plr-108291-00 respectively for individuals who expatriate with a principal purpose to avoid u s taxes a former u s citizen or former u s long-term_resident will be treated as having expatriated with a principal purpose to avoid u s taxes for purposes of sec_877 sec_2107 and sec_2501 a if the individual’s average income_tax_liability or the individual’s net_worth on the date of expatriation exceed certain thresholds see sec_877 sec_2107 and sec_2501 a former u s citizen whose net_worth or average tax_liability exceeds these thresholds however will not be presumed to have a principal purpose of tax_avoidance if that former citizen is described within certain statutory categories and submits a request for a ruling within one year of the date of loss of u s citizenship for the secretary’s determination as to whether such loss had for one of its principal purposes the avoidance of u s taxes see sec_877 sec_2107 and sec_2501 under notice_98_34 1998_27_irb_30 modifying notice_97_19 1997_1_cb_394 a former long-term_resident whose net_worth or average tax_liability exceeds the applicable thresholds will not be presumed to have a principal purpose of tax_avoidance if that former resident is described within certain categories and submits a complete and good_faith request for a ruling as to whether such loss had for one of its principal purposes the avoidance of u s taxes notice_98_34 requires that certain information be submitted with a request for a ruling that an individual’s expatriation did not have for one of its principal purposes the avoidance of u s taxes a is eligible to request a ruling pursuant to notice_98_34 because he is a resident of country b and his worldwide income is subject_to country b tax the country in which he was born also both of a’s parents were born in country b a submitted all of the information required to be submitted by notice_97_19 as modified by notice_98_34 including additional information requested by the service after review of the submission the taxpayer has made a complete and good_faith submission in accordance with sec_877 and notice_97_19 as modified by notice_98_34 however because the information submitted does not clearly establish the existence or lack of a principal purpose to avoid taxes under subtitle a or b of the code no opinion is expressed as to whether a's expatriation will have for one of its principal purposes the avoidance of such taxes while this ruling rebuts the presumption of tax_avoidance under sec_877 it is not conclusive as to whether a subsequently may be found to have a principal purpose of tax_avoidance under sec_877 sec_2107 and sec_2501 based on all the facts and circumstances see sec_877 plr-108291-00 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 in addition no opinion is expressed as to a’s u s tax_liability for the taxable years prior to or after his expatriation under sections of the code other than sec_877 sec_2107 and sec_2501 a copy of this letter must be attached to a’s u s income_tax return for the year in which a obtained the ruling whether or not a is otherwise required to file a return 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 copies of this letter are being sent to a and one of a’s representatives sincerely w edward williams senior technical reviewer cc intl br1 office of the associate chief_counsel international


o f f i c e o f t h e c h i e f c o u n s e l number release date uil department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date ------------------------------ ---------------------------- -------------- ----------------------- cc ita b01 genin-103531-13 -------------- dear this responds to your letter of date to the office of the associate chief_counsel international concerning the tax treatment of certain amounts paid to a us citizen pursuant to a marital settlement agreement this area of the internal_revenue_code falls under the jurisdiction of the office of the associate chief_counsel income_tax and accounting for this reason your letter was forwarded to this office for reply your letter states that the marital settlement agreement may provide in part that payments of spousal support made are expressly designated as payments that are not includable in gross_income of the payee under sec_71 and not allowable as a deduction for the payor under sec_215 sec_71 of the internal_revenue_code provides that gross_income includes amounts received as alimony or separate_maintenance sec_71 defines alimony or separate_maintenance as any payment in cash if a such payment is received by or on behalf of a spouse under_a_divorce_or_separation_instrument b the divorce_or_separation_instrument does not designate such payment as a payment which is not includable in gross_income under sec_71 and not allowable as a deduction under sec_215 c in the case of an individual legally_separated from his spouse under a decree of divorce or separate_maintenance the payee spouse and the payor spouse are not members of the same household at the time such payment is made and d there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment in cash or property as a substitute for such payments after the death of the payee spouse in addition the payor and payee spouses cannot file a joint_return under sec_71 a divorce_or_separation_instrument means in part a decree of divorce or separate_maintenance or a written instrument incident to such decree or a written_separation_agreement genin-103531-13 sec_215 provides that in the case of an individual there shall be allowed as a deduction an amount equal to the alimony or separate_maintenance payments paid during such individual’s taxable_year sec_215 provides that the term alimony_or_separate_maintenance_payment means any alimony_or_separate_maintenance_payment as defined in sec_71 which is includable in the gross_income of the recipient under sec_71 if a divorce_or_separation_instrument designates that a payment otherwise qualifying as alimony shall be excludable from the gross_income of the payee and nondeductible by the payor then that payment does not satisfy sec_71 in that case the payment does not meet the statutory definition of alimony under sec_71 includable in gross_income correlatively the payment is not deductible under sec_215 see q and a-8 of sec_1_71-1t of the income_tax regulations this letter has called your attention to certain general principles of the law it is intended for information purposes only and does not constitute a ruling see section dollar_figure of revproc_2014_1 2014_1_irb_7 date if you need any additional assistance please contact -------------- an attorney of my staff ------------------------- ------- -- sincerely lewis k brickates chief branch office of the associate chief_counsel income_tax and accounting


internal_revenue_service number release date index number department of the treasury washington dc person to contact telephone number refer reply to cc corp 2-plr-104505-03 date date acquiring parties h s parent foreign_subsidiary date company official outside professional state z country y plr-104505-03 this letter responds to a letter submitted on behalf of parent and foreign_subsidiary dated date requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election the extension is being requested in order to allow parent and foreign_subsidiary to file an election to restore value under sec_1_382-8 of the income_tax regulations hereinafter referred to as the election additional information was received in a letter dated date the material information submitted for consideration is summarized below parent is a state z corporation and prior to an ownership_change on date was the common parent of a consolidated_group of corporations parent also owned all the stock of foreign_subsidiary incorporated under the laws of country y foreign_subsidiary is a controlled_foreign_corporation as defined in sec_957 and is not engaged in conduct_of_a_trade_or_business in the united_states acquiring parties formed h a state z corporation h in turn formed s a wholly- owned state z corporation on date parent merged into s with parent being the surviving corporation after the merger parent and its eligible subsidiaries constituted a loss group for purposes of sec_1_1502-91a with respect to their consolidated net operating losses the merger resulted in an ownership_change for parent and its loss group as the result of parent’s ownership_change parent’s value was reduced under sec_1_382-8 by the value of foreign subsidiary’s stock sec_382 provides that the amount of the taxable_income of any new_loss_corporation for any post-change_year which may be offset by pre-change losses shall not exceed the sec_382 limitation for such year under sec_382 the sec_382 limitation is determined by multiplying the value of the old_loss_corporation by the applicable long term tax-exempt rate a special rule designed to prevent double counting by controlled groups is set forth in sec_1_382-8 sec_1_382-8 requires the value of the stock of each component_member of the controlled_group be reduced by the value of the stock owned by that component_member in any other component_member component members of a controlled_group can elect under sec_1_382-8 to restore some or all of the value to the member whose value is reduced under sec_1 c the election to restore value is made following the procedures set forth in sec_1_382-8 parent and foreign_subsidiary are component members of a controlled_group under sec_1_382-8 and intended that all the value of foreign_subsidiary be restored to parent under sec_1_382-8 however for various reasons parent and foreign_subsidiary failed to make the election in a timely manner under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time 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 internal_revenue_code except subtitles e g h and i plr-104505-03 sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1_382-8 therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for parent and foreign_subsidiary to file the election provided parent and foreign_subsidiary show they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the government information affidavits and representations submitted by parent foreign_subsidiary company official and outside professional explain the circumstances that resulted in the failure to timely file the election the information establishes that parent and foreign_subsidiary reasonably relied on a qualified_tax professional who failed to make or advise parent and foreign_subsidiary to make the election and that the interests of the government will not be prejudiced if relief is granted see sec_301 b v based on the facts and information submitted including the representations made we conclude that parent and foreign_subsidiary have shown they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-3 until days from the date on this letter for parent and foreign_subsidiary to file the election the above extension of time is conditioned on the taxpayers' parent's and the members of its controlled group's and h’s and the members of its controlled group’s tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers' tax_liability for the years involved a determination thereof will be made by the director's office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers' liability is lower sec_301_9100-3 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 in particular we express no opinion with respect to whether an ownership_change occurred whether parent and foreign_subsidiary are component members of a controlled_group the amount of value if any that may be restored or as to values or amounts of nols in addition we express no opinion as to the tax effects or consequences of filing the return or the election late under the provisions of any plr-104505-03 other section of the code or regulations or as to the tax treatment of any conditions existing at the time of or effects resulting from filing the return or the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-3 we relied on certain statements and representations made by parent foreign_subsidiary parent's authorized representative foreign subsidiary’s authorized representative company official and outside professional under penalties of perjury however the director should verify all essential facts moreover notwithstanding that the extension is granted under sec_301_9100-3 to file the election any penalties and interest that would otherwise be applicable still apply this letter is directed only to the taxpayer s who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant pursuant to a power_of_attorney on file in this office copies of this letter are being sent to your authorized representatives sincerely ken cohen senior technician reviewer branch office of associate chief_counsel corporate