IRS Rules Management Fees Don't Constitute Private Business Use: A Win for Tax-Exempt Bonds in the Hospitality Sector
IRS Letter Rulings Weekly Digest, February 7, 2025
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202506001 [Link to Ruling]
IRS Rules Management Fees Don't Constitute Private Business Use: A Win for Tax-Exempt Bonds in the Hospitality Sector
The IRS has issued a private letter ruling (PLR-107247-24) clarifying that certain management fees do not constitute private business use under Section 141(b)(6) of the Internal Revenue Code. This ruling is significant for issuers of tax-exempt bonds in the hospitality sector, as it provides guidance on structuring management agreements to avoid jeopardizing the tax-exempt status of bond-financed projects.
The ruling involved a hotel owned by a bond issuer and managed by a service provider. The management agreement included a base fee and an incentive fee. The IRS determined neither fee constituted a share of net profits, which would have triggered private business use. The ruling clarified that incentive fees based on performance metrics, such as revenue per available room and gross operating profit, do not necessarily equate to a share of net profits.
References:
Internal Revenue Code Section 103(a)
Internal Revenue Code Section 103(b)
Internal Revenue Code Section 141(a)
Internal Revenue Code Section 141(b)(1)
Internal Revenue Code Section 141(b)(6)(A)
Internal Revenue Code Section 141(b)(6)(B)
Internal Revenue Code Section 141(c)
Income Tax Regulations Section 1.141-3(a)(1)
Income Tax Regulations Section 1.141-3(a)(2)
Income Tax Regulations Section 1.141-3(b)(1)
Income Tax Regulations Section 1.141-3(b)(4)(i)
Income Tax Regulations Section 1.141-3(b)(4)(ii)
Income Tax Regulations Section 1.141-3(d)
Revenue Procedure 2017-13, 2017-6 I.R.B. 787
202506002
IRS Grants Taxpayer a Second Chance: Extension Granted to File Disregarded Entity Election
In a recent private letter ruling (PLR-108103-24), the IRS granted a foreign entity an extension of time to file an election to be classified as a disregarded entity for federal tax purposes. The entity, formed under the laws of a foreign country, had failed to timely file Form 8832, Entity Classification Election, to elect to be disregarded as an entity separate from its owner.
The IRS reviewed the taxpayer's request and determined that the requirements for an extension under Section 301.9100-3 of the Procedure and Administration Regulations were met. The taxpayer was granted an extension of 120 days from the date of the letter to file Form 8832 with the appropriate service center. The ruling also emphasized that the extension was contingent on the taxpayer and its owner filing all required federal income tax returns and information returns, including amended returns, for all open years consistent with the requested relief.
References:
Section 301.7701-3(a) of the Procedure and Administration Regulations
Section 301.7701-3(b)(2)(i) of the Procedure and Administration Regulations
Section 301.7701-3(b)(2)(ii) of the Procedure and Administration Regulations
Section 301.7701-3(c)(1)(i) of the Procedure and Administration Regulations
Section 301.7701-3(c)(1)(iii) of the Procedure and Administration Regulations
Section 301.9100-1(b) of the Procedure and Administration Regulations
Section 301.9100-1(c) of the Procedure and Administration Regulations
Section 301.9100-2 of the Procedure and Administration Regulations
Section 301.9100-3 of the Procedure and Administration Regulations
Section 301.9100-3(a) of the Procedure and Administration Regulations
Section 301.9100-3(e) of the Procedure and Administration Regulations
202506003
IRS Rules: Momentary Ownership by Ineligible S Corp Shareholders Does Not Terminate S Election
The IRS issued a private letter ruling (PLR-109136-24) clarifying that ineligible shareholders' momentary ownership of S corporation stock does not terminate the S election. The ruling involved a corporation with an equity compensation plan that resulted in the transfer of stock to employees and service providers of related entities. Some of these related entities were ineligible S corporation shareholders.
The IRS examined the deemed ownership rules under Sections 83 and 1032 of the Internal Revenue Code and related regulations, which address transfers of property for services and the use of stock to acquire property or services. The IRS concluded that the momentary ownership by ineligible shareholders resulting from these rules was transitory and did not terminate the S election.
References:
Internal Revenue Code Section 1361(a)(1)
Internal Revenue Code Section 1361(b)(1)
Internal Revenue Code Section 1362(d)(2)
Internal Revenue Code Section 1362(d)(2)(A)
Internal Revenue Code Section 1362(d)(2)(B)
Internal Revenue Code Section 83(h)
Internal Revenue Code Section 1032
Income Tax Regulations Section 1.83-6(a)(1)
Income Tax Regulations Section 1.83-6(d)(1)
Income Tax Regulations Section 1.1032-3(a)
Income Tax Regulations Section 1.1032-3(b)
Income Tax Regulations Section 1.1032-3(c)
Income Tax Regulations Section 1.1032-3(e)
202506004
IRS Gives Green Light to Trust's IRA Distribution and Deduction Plan
The IRS has issued a private letter ruling (PLR-109140-24) confirming that a trust can take a charitable deduction for a lump-sum distribution of Individual Retirement Accounts (IRAs) to a private foundation. The ruling also clarifies the tax treatment of trustee-to-trustee transfers of inherited IRAs.
The ruling involved a trust that was the beneficiary of multiple IRAs. The trust planned to distribute a portion of the IRAs to a private foundation and transfer the remaining amounts to individual beneficiaries. The IRS ruled that the trust was entitled to a charitable deduction for the distribution to the foundation and that the trustee-to-trustee transfers would not result in taxable distributions. The ruling also clarified the rules for determining the required minimum distributions for the inherited IRAs.
References:
Internal Revenue Code Section 401(a)(9)
Internal Revenue Code Section 402(c)
Internal Revenue Code Section 408
Internal Revenue Code Section 642(c)(1)
Internal Revenue Code Section 691(a)
Internal Revenue Code Section 691(a)(1)
Internal Revenue Code Section 691(a)(2)
Revenue Ruling 78-406, 1978-2 C.B. 157
Revenue Ruling 92-47, 1992-1 C.B. 198
Income Tax Regulations Section 1.642-1(a)(1)
Income Tax Regulations Section 1.691(a)-1(b)
Income Tax Regulations Section 1.691(a)-1(c)
Income Tax Regulations Section 1.691(a)-4(a)
Income Tax Regulations Section 1.691(a)-4(b)
Income Tax Regulations Section 1.691(a)-4(b)(2)
202506005
IRS Blesses Pension Plan Surplus Transfer: A Win for Taxpayers and Retirement Savings
The IRS has issued a private letter ruling (PLR-109216-24) allowing a taxpayer to transfer excess assets from terminated defined benefit pension plans to two defined contribution 401(k) plans without incurring excise taxes. The ruling guides how to structure such transfers to comply with Section 4980 of the Internal Revenue Code, which imposes a tax on employer reversions from qualified plans.
The ruling permitted the transfer of excess assets to the 401(k) plans, treating them as a single qualified replacement plan. The transfer must meet specific requirements, including allocating the assets to participant accounts ratably over seven years. The ruling also clarified that reasonable administrative expenses can be paid from the transferred assets.
References:
Internal Revenue Code Section 4980(a)
Internal Revenue Code Section 4980(c)(1)
Internal Revenue Code Section 4980(c)(2)
Internal Revenue Code Section 4980(d)(1)
Internal Revenue Code Section 4980(d)(2)
Internal Revenue Code Section 4980(d)(2)(A)
Internal Revenue Code Section 4980(d)(2)(B)
Internal Revenue Code Section 4980(d)(2)(B)(iii)
Internal Revenue Code Section 4980(d)(2)(C)(i)
Internal Revenue Code Section 4980(d)(2)(C)(ii)
Internal Revenue Code Section 4980(d)(2)(C)(iii)
Internal Revenue Code Section 4980(d)(2)(C)(iv)
Internal Revenue Code Section 4980(d)(4)(A)
Internal Revenue Code Section 4980(d)(4)(B)
Internal Revenue Code Section 4980(d)(5)(D)(i)
Revenue Ruling 2003-85, 2003-32 I.R.B. 291
202506006
IRS Grants Extension for Partnership's Section 754 Election: A Second Chance to Adjust Basis and Save on Taxes
The IRS has granted a limited liability company (LLC) an extension of time to file a Section 754 election, which allows for adjustments to the basis of partnership property following a transfer of interest. The LLC, treated as a partnership for federal tax purposes, had inadvertently missed the deadline to file the election with its tax return.
The IRS reviewed the taxpayer's request and determined that the requirements for an extension under Section 301.9100-3 of the Procedure and Administration Regulations were met. The taxpayer was granted an extension of 120 days from the date of the letter to file the Section 754 election, effective for the specified tax year and all subsequent years. The ruling emphasized that the extension was contingent on the LLC and its partners making necessary adjustments to the basis of their properties and interests to reflect the effects of the election.
References:
Internal Revenue Code Section 754
Internal Revenue Code Section 734(b)
Internal Revenue Code Section 743(b)
Income Tax Regulations Section 1.754-1(b)
Income Tax Regulations Section 1.6031(a)-1(e)
Procedure and Administration Regulations Section 301.9100-1(b)
Procedure and Administration Regulations Section 301.9100-1(c)
Procedure and Administration Regulations Section 301.9100-2
Procedure and Administration Regulations Section 301.9100-3
Procedure and Administration Regulations Section 301.9100-3(e)
202506007
REIT's Intercompany Payments Get IRS Blessing: Ruling Provides Clarity on Income and Asset Tests
The IRS issued a private letter ruling (PLR-109232-24) clarifying the treatment of certain intercompany payments for Real Estate Investment Trusts (REITs). The ruling addressed concerns regarding the impact of these payments on a REIT's compliance with the 75% gross income test and the 75% asset test under Internal Revenue Code Section 856.
The ruling involved a REIT that owned and operated telecommunications assets through various entities, including a partnership and disregarded entities. The IRS ruled that certain payments between the REIT and these entities would not be considered gross income for purposes of the 75% test, as they were essentially payments from the REIT to itself. Additionally, certain intercompany agreements were not considered assets for purposes of the 75% asset test.
References:
Internal Revenue Code Section 856(c)(2)
Internal Revenue Code Section 856(c)(3)
Internal Revenue Code Section 856(c)(4)
Internal Revenue Code Section 856(c)(5)(J)
Internal Revenue Code Section 856(d)
Income Tax Regulations Section 1.856-2(d)(3)
Income Tax Regulations Section 1.856-3(g)
Income Tax Regulations Section 1.856-4(b)(5)(ii)
H.R. Rep. No. 2020, 86th Cong., 2d Sess. 4 (1960), 1960-2 C.B. 819, 820
202506008
IRS Grants Taxpayer's Request for Extension to File Form 8996: A Second Chance for QOFs
The IRS issued a private letter ruling (PLR-109834-24) granting a limited liability company an extension of time to file Form 8996, Qualified Opportunity Fund. The company had intended to self-certify as a Qualified Opportunity Fund (QOF) but failed to file Form 8996 with its tax return due to an error by its tax advisor.
The IRS reviewed the taxpayer's request and determined that the requirements for an extension under Treasury Regulations Section 301.9100-3 were met. The taxpayer was granted relief, and its late-filed Form 8996 was considered timely filed. The ruling clarified that the relief only applied to the late-filed Form 8996 and did not express an opinion on whether the taxpayer met the requirements to be a QOF or whether any investments made into the taxpayer were qualifying investments.
References:
Internal Revenue Code Section 1400Z-2(d)
Internal Revenue Code Section 1400Z-2(e)(4)(A)
Treasury Regulations Section 1.1400Z2(d)-1(a)
Treasury Regulations Section 1.1400Z2(d)-1(a)(2)(i)
Treasury Regulations Section 301.9100-1
Treasury Regulations Section 301.9100-2
Treasury Regulations Section 301.9100-3
Treasury Regulations Section 301.9100-3(a)
Treasury Regulations Section 301.9100-3(b)(1)
Treasury Regulations Section 301.9100-3(b)(3)
Treasury Regulations Section 301.9100-3(c)
Revenue Procedure 2024-1, 2024-1 I.R.B. 1
202506009
IRS Grants Late Election Relief for S Corporation Stock Sale: A Second Chance to Treat Stock Sale as Asset Sale
The IRS issued a private letter ruling (PLR-112560-24) granting a group of taxpayers an extension of time to make a late election under Internal Revenue Code Section 336(e). This election allows a qualified stock disposition to be treated as an asset sale, offering potential tax benefits. The taxpayers, consisting of an S corporation target, its shareholder, and the purchaser of the stock, had missed the deadline to make the election due to various reasons.
The IRS reviewed the taxpayers' request and granted an extension under Procedure and Administration Regulations Section 301.9100-3, allowing them to execute the agreement and file the election statement properly. The ruling emphasized that the extension was contingent on the taxpayers meeting certain conditions, including ensuring that their tax liabilities were not lower than they would have been had the election been filed on time.
References:
Internal Revenue Code Section 336(e)
Internal Revenue Code Section 6662
Income Tax Regulations Section 1.336-1(b)(6)
Income Tax Regulations Section 1.336-2(h)(3)
Income Tax Regulations Section 1.336-2(h)(5)
Income Tax Regulations Section 1.336-2(h)(6)
Procedure and Administration Regulations Section 301.9100-1(a)
Procedure and Administration Regulations Section 301.9100-1(c)
Procedure and Administration Regulations Section 301.9100-2
Procedure and Administration Regulations Section 301.9100-3
Procedure and Administration Regulations Section 301.9100-3(a)
Procedure and Administration Regulations Section 301.9100-3(b)(1)(i)
202506010
Better Late Than Never: IRS Grants IC-DISC Election Extension
In a recent private letter ruling (PLR-113422-24), the IRS granted a domestic corporation, Taxpayer, an extension of time to file Form 4876-A, "Election To Be Treated as an Interest Charge DISC," for its first taxable year. Taxpayer, formed to serve as an Interest Charge Domestic International Sales Corporation (IC-DISC), had missed the 90-day deadline for filing Form 4876-A due to an oversight by its accounting firm. The IRS, recognizing that Taxpayer had acted reasonably and in good faith, granted an extension of 90 days from the date of the ruling letter to file the form. The ruling clarified that the extension did not guarantee Taxpayer's eligibility for IC-DISC status or benefits, which would be subject to further review.
References:
Internal Revenue Code Section 992(b)(1)(A)
Internal Revenue Code Section 992(b)(1)(B)
Internal Revenue Code Section 996(g)
Temporary Treasury Regulation § 1.921-1T(b)(1)
Treasury Regulation § 301.9100-1(b)
Treasury Regulation § 301.9100-1(c)
Treasury Regulation § 301.9100-3(a)
Treasury Regulation § 301.9100-3(b)(1)(v)
Treasury Regulation § 301.9100-3(c)(1)
Treasury Regulation § 301.9100-3(c)(1)(i)
Treasury Regulation § 301.9100-3(c)(1)(ii)
202506011
Foreign Exchange Gets IRS Green Light for Section 1256 Contracts
The IRS issued a private letter ruling (PLR-122630-18) recognizing a foreign exchange as a "qualified board or exchange" under Section 1256(g)(7)(C) of the Internal Revenue Code. This ruling allows U.S. taxpayers to treat regulated futures contracts traded on this exchange as Section 1256 contracts, subject to specific tax rules for mark-to-market accounting.
The ruling confirmed that the foreign exchange, regulated under the Commodity Exchange Act (CEA), has rules adequate to carry out the purposes of Section 1256. This determination was based on factors such as the exchange's registration as a Foreign Board of Trade with the Commodity Futures Trading Commission (CFTC), its system of marking to market, and its compliance with record-keeping and information-sharing requirements.
References:
Internal Revenue Code Section 1256(a)
Internal Revenue Code Section 1256(b)
Internal Revenue Code Section 1256(g)(1)
Internal Revenue Code Section 1256(g)(7)
Internal Revenue Code Section 1256(g)(7)(C)
Commodity Exchange Act (CEA)
202506012
IRS Approves Employer-Related Scholarship Program: A Tax-Free Win for Students and Their Families
The IRS has granted advance approval to a private foundation's procedures for awarding employer-related scholarships under Section 4945(g)(1) of the Internal Revenue Code. The foundation's scholarship program, known as C, will provide financial assistance to eligible children of employees of B to attend qualified educational institutions. The IRS determined that the foundation's procedures meet the requirements for advance approval, ensuring that scholarship expenditures will not be subject to excise taxes. The scholarships will be administered by D, a Section 501(c)(3) exempt organization, and will be awarded based on various criteria, such as academic performance, leadership, and community involvement, without regard to financial need.
References:
Internal Revenue Code Section 4945(g)(1)
Internal Revenue Code Section 4945(d)(3)
Internal Revenue Code Section 117(a)
Internal Revenue Code Section 170(b)(1)(A)(ii)
Internal Revenue Code Section 170(c)(2)(B)
Revenue Procedure 76-47
Revenue Procedure 85-51
202506013
IRS Grants Continued Use of Substitute Mortality Tables After Merger
The IRS has granted a taxpayer's request to continue using existing substitute mortality tables for a defined benefit pension plan following a merger, as per a private letter ruling (PLR-113422-24). The taxpayer had previously received approval for gender-specific substitute mortality tables for two separate plans, Plan 1 and Plan 2, in 2018. Following the merger of Plan 2 into Plan 1, the taxpayer sought to continue using the substitute mortality tables originally approved for Plan 1 for the combined population. The IRS granted this request, subject to certain conditions, including requiring the tables to accurately predict future mortality for the combined population.
References:
Internal Revenue Code Section 430(h)(3)(A)
Internal Revenue Code Section 430(h)(3)(C)(ii)
Internal Revenue Code Section 430(h)(3)(C)(iii)
Treasury Regulations Section 1.430(h)(3)-2(c)(3)
Treasury Regulations Section 1.430(h)(3)-2(c)(6)(ii)
Treasury Regulations Section 1.430(h)(3)-2(c)(6)(iii)
Treasury Regulations Section 1.430(h)(3)-2(d)(2)(i)
Revenue Procedure 2017-55
Revenue Procedure 2024-32