DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE WASHINGTON, D.C. 20224 April 29, 1999 CC:EBEO:7 TL-N-4904-97 UILC: 671.02-00; 1032.00-00; 404.00-00; 401.00-00; 4975.04-00; 83.00-00 INTERNAL REVENUE SERVICE NATIONAL OFFICE FIELD SERVICE ADVICE Number: 199925042 Release Date: 6/25/1999 MEMORANDUM FOR BROOKLYN DISTRICT COUNSEL’S OFFICE ATTN: PETER GAVAGAN CATHERINE CHASTANET FROM: Chief, Branch 7 Office of Associate Chief Counsel ( EBEO) (CC:EBEO:7) SUBJECT: This Field Service Advice responds to y our request for assistance regarding certain issues arising on an examination of the above-referenced taxpayer. Field Service Advice is not binding on Examination or Appeals and is not a final case determination. This document is not to be cited as precedent. LEGEND: TP 1= TP 2 = . TP 3 = TP 4 = TP 5 = TP 6 = TP 7 = TP 8 = TP 9 = TP 10 = TP 11 = . TP 12 = TP 13 =

2 TP 14 = A plan = B plan = C plan = D plan = E plan = F plan = G plans = H plans = I plans = J plans = K plans = L plans = M plans = N plans = O plans = P plan = Q plans = R plans = S plans = T plans = A trust = ISSUES 1. Whether the A trust is a grantor trust under IRC §671 and, if so, which entity (or entities) is entitled to any tax attributes resulting from that determination. 2. Whether TP 1 must include in gross income the interest paid on the A trust’s promissory note. 3. Whether TP 1 may exclude from gross income under IRC §1032 the proceeds from the disposition of stock by the A trust. 4. Whether TP 1 or one of its subsidiaries (TP 2 through TP 14) is entitled to deduct the fair market value of TP 1 stock contributed by the A trust to various nonqualified incentive compensation plans maintained by TP 1 or its subsidiaries. 5. Whether TP 1 or one of its subsidiaries (TP 2, TP 5, TP 6, TP 9, TP 10 or TP 13) is entitled to deduct the fair market value of the stock

3 contributed by the A trust to various qualified plans maintained by TP 1 or its subsidiaries (TP 2, TP 5, TP 6, TP 9, TP 10 or TP 13). 6. Whether the A trust can contribute TP 1 stock to satisfy obligations of TP 1 or its subsidiaries (TP 2, TP 5, TP 6, TP 9, TP 10 or TP 13) under their respective IRC § 401(k) plans. 7. Whether participants in the A -F plans who receive allocations of shares of TP 1 stock from the A trust may diversify such holdings after the stock is allocated under such plans. 8. Whether the shares of TP 1 stock held by the A trust are treated as treasury stock and included in the ca lculation of earnings per share. CONCLUSIONS 1. Based on the facts presented, we believe that the A trust is a grantor trust. TP 1 and TP 2-TP 14 will each be treated as a grantor and an owner with respect to the amount that is used to fund the A -T plans in satisfaction of their legal obligations. TP 1 is deemed to make a capital contribution to TP 2-TP 14 with respect to those amounts. Further factual development is recommended before a final determination can be made. 2. Interest paid on the A trust’s promissory note is not required to be reported as income to TP 1 with respect to the portion of the trust that it owns. However, assuming TP 1 and TP 2-TP 14 are treated as owners of the A trust, interest that is paid to TP 1, and which is attributable to portions of the A trust that TP 2-TP 14 own, is considered to be interest paid by a subsidiary to the parent co rporation. As stated in issue 1 above, additional factual information is necessary before determining whether there are multiple grantors. 3. Assuming TP 1 and TP 2-TP 14 are treated as owners, IRC §1032 would not apply to the A trust’s disposition of TP 1's stock that was treated as contributed to the A trust by a subsidiary of TP 1. Each subsidiary would recognize gain (or loss) on the A trust’s sale of TP 1 stock. However, as stated in issue 1 above, additional factual information is necessary before determining whether t here are multiple grantors. 4. TP 1 and TP 2-TP 14 are entitled to deduct the fair market value of the stock contributions used by the A trust to provide benefits on behalf of

4 their respective employees under the G -T plans. However, confirmation is needed with respect to (1) which entity is taking deductions for contributions made on behalf of which employees, (2) whether the contributions are made in cash or stock, and (3) how and when A trust assets are used to fund nonqualified benefits. In addition, additional information regarding the time at which deductions are being claimed and copies of the G -T plans is needed before a proper analysis can be made regardi ng whether deductions are being taken in accordance with IRC §404(a)(5) for benefits provided under the G -T plans, and whether the plans effectively defer the receipt of compensation. 5. TP 2, TP 5, TP 6, TP 9, TP 10 and TP 13, not TP 1, are entitled to deduct an amount equal to the fair market value of the stock contributed by the A trust to fund the A -F plans on behalf of the s ubsidiaries’ employees. However, confirmation of the facts is needed with respect to (1) which entity is taking deductions with res pect to contributions made on behalf of which employees, (2) whether the contributions are made in cash or stock, and (3) how and when the contributions are made to the A -F plans. 6. Although IRC §4975 prohibits the indirect sale or exchange of any property between a plan and a disqualified person, the Code exempts a plan’s acquisition of qualifying employer securities from the prohibited transaction rules under certain conditions. In this case, assuming the valuation of TP 1 stock is appropriate at the time it is contributed to the IRC §401(k) plans, TP 1 stock may be used to satisfy obligations of TP 1 and its subsidiaries (TP 2, TP 5, TP 6, TP 9, TP 10 or TP 13) under their respective IRC §401(k) plans. 7. Except in the case of an employee stock ownership plan (“ESOP”)(as defined in IRC §4975(e)(7)), the Code does not limit a participant’s ability to diversify plan assets under qualified plans. See Treasury Regulation §1.401-1(b)(5). Trustees of trusts which form a part of such plans are subject to subst antial limitations under the Code and ERISA Title I in their management of plan assets. 8. The treatment for tax purposes of TP 1 stock held by the A trust (as either treasury stock or issued stock) may have no effect on the earnings per share computation, which is a financial accounting concept with its own rules.

5 1 Our response assumes that only TP 1 stock is held by the A trust, and that only TP 1 is contributing such stock. However, we note that this fact is unclear under the terms of the A trust and the documents provided by TP 1. The A trust refers to “Company Stock”, the definition of which is unclear as to whether subsidiary stock is also involved. See A trust, § . However, references to the Company and the description of the arrangement in the recitals appear only to refer to TP 1. 2 Footnote 2 of your field service advice request, dated September 24, 1998, indicated that you have identified plans. However, we have only identified the addressed herein. 3 Our response also assumes, based on the terms of the A trust described above, that

. FACTS We understand that TP 1 established the A trust in for the purpose of holding TP 1 stock. 1 The stock held by the A trust is subsequently allocated to the A -F plans, qualified plans under IRC §401(a), and the G -T plans, nonqualified incentive compensation plans, maintained by TP 1 or its subsidiaries, TP 2-TP 14. 2

The A trust was established for a term of years. Under the terms of the A trust, the A trust acquired approximately $ of newly issued common stock of TP 1 from TP 1. The A trust purchased the stock with cash it received from TP 1 in an amount equal to the aggregate par value of the stock and a year promissory note to TP 1 (the Note”) in an amount equal to the difference between aggregate par and market values of the TP 1 stock. Each year thereafter, the A trust either repays a portion of the note with a cash contribution from TP 1 or, pursuant to section of the A trust, that year’s portion of the debt is forgiven. The stock is then apportioned and released to the trusts of the qualified A -F plans and the committees administering the nonqualified G -T plans maintained by TP 1 or its subsidiaries, TP 2-14, in accordance with the terms of the A trust. A trust, §§ et seq. 3

Under the terms of the A plan, B plan and F plan included in your submission, the term “employer”

See A plan §§ and , F plan

6 4 For the purposes of our re sponse, we assume that TP 1 through TP 14 constitute a controlled group of corporations under IRC §1563(a). §§ and , B plan §§ and 4 In addition, the A plan and the F plan provide that

. See A and F plans §§ . The B plan provides that

. B plan §§ and . Also, under the plans terms,

. In addition, the A trust provides that "

" A trust, § . The A trust also provides that "' ." A trust, § . Accordingly, while it appears from the terms of the A trust that, in addition to TP 1, TP 2-TP 14 participate in the A trust arrangement, it is unclear whether assets of the A trust are available to satisfy claims of general creditors of TP 2-TP 14 in the event of bankruptcy or insolvency. TP 1 intends the A trust to be a grantor trust under IRC §671. Documents provided by TP 1 explaining the A trust also appear to indicate that

In addition, although the information provided does not identify which tax years are at issue, we understand that We also understand that TP 1 and its subsidiaries deduct on those returns contributions to the qualified A -F plans or nonqualified G -T plans, which are made for the benefit of their respective employees.

7 DISCUSSION ISSUE 1 IRC §671 provides that where a grantor shall be treated as the owner of any portion of a trust under subpart E, part 1, subchapter J, chapter 1 of the Code, there shall be included in computing the taxable income and credits of the grantor those items of income, deductions, and credi ts against tax of the trust which are attributable to that portion of the trust (to the extent that such items would be taken into account under chapter 1 in computing taxable income or credits against tax of an individual). IRC §677(a)(2) provides that the grantor shall be treated as the owner of any portion of a trust whose income without the approval or consent of any adverse party is, or, in the discretion of the gr antor or a nonadverse party, or both, may be held or accumulated for future distribution to the grantor. Treas. Reg. § 1.677(a)-1(d) provides that under IRC §677, a grantor is, in general, treated as the owner of a portion of a trust whose income is, or in the discretion of the grantor or a nonadver se party, or both, may be applied in discharge of a legal obligation of the grantor. As noted above, the A trust provides that

We believe that at the time TP 1 funds the A trust, it is deemed to make a contribution to capital of TP 2-TP 14 because the trust assets will be used to satisfy the legal obligations of TP 2-TP 14 under their respective plans based on the allocation formula set forth in the A trust. Accordingly, TP 1 and TP 2-TP 14 will each be treated as a grantor of the trust wi th respect to the amount that is to be used to satisfy each corporation’s legal obligation. Pursuant to IRC § 677, TP 2TP 14 and TP 1 will be treated as the owners of the portion of the A trust that they are treated as the grantors of. Accord ingly, under IRC § 671, there would be included in computing the taxable income and credits of each grantor those items of income, deductions, and credits against tax of the trust which are attributable to that portion of the trust that each gr antor is treated as owning. See also Treas. Reg. § 1.671-3.

8 CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS: This determination assumes that the transfer of cash to the A trust will not be treated as a transfer of property under IRC §83 to the employees of TP 1 and TP 2TP 14. This determination also assumes that the claims of the creditors of each subsidiary and TP 1 will be limited to the am ount of stock allocated to it in Article of the A trust. For example, the A Plan and the G Plan are allocated percent of the available stock. We believe that at the time of the funding of the A trust, TP 1 has made a contribution to capital of TP 2 because TP 2’s obligation to fund the retirement plans has been satisfied to the extent of percent of the available stock. However, if TP 1 's creditors can reach the percent specifically allocated for TP 2, the argument that TP 2’s obligations have been satisfied would be more tenuous and further review would be required by National Office. In sum, the ab ility of a creditor to reach more than the perc entage of the assets allocated for its debtor would undercut our belief and argument that there is a capital contribution at the time of the funding of the A trust and our conclusions thereto.

We recommend contacting TP1 regarding

However, if further factual devel opment suggests that our assumptions, as described above, are incorrect, our office would want to reconsider the issue. ISSUE 2 Rev. Rul. 85-13, 1985-1 C.B. 184, holds that where a grantor is treated as the owner of the entire trust, the grantor is treated as the owner of the trust's property for federal income tax purposes. Therefore, a sale between the grantor and the trust w ill not be rec ognized for federal income tax purposes. To the extent that the A trust pays TP 1 interest that is attributable to the portion of the trust owned by TP 1, the transaction will be i gnored for federal income tax purposes. To the extent that the A trust pays TP 1 interest that is attributable to the portions of the trust owned by TP 2-TP 14, the interest will be

9 considered as an amount paid by the subsidiary to the parent corporation. See Rev. Rul. 85-13. CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS: As noted in issue 1 above, further factual development is needed before determining whether TP 1-TP 14, as multiple grantors, would be treated as owning the assets of the A trust that are available to satisfy claims of their general creditors and their liab ilities under the plans. We note, however, that the second s entence of the fourth full paragraph on page 4 of your memorandum states that “ ” (Emphasis added) In our view, if TP 1 does not recognize income on the interest payments from the A trust, the A trust should not be permitted to deduct such payments. ISSUE 3 IRC §1032(a) provides that a corporat ion does not recognize gain or loss on the receipt of money or other property in exchange for its stock (including treasury stock). For purposes of §1032(a), a cor poration’s transfer of its own stock as compensation for services is considered to be a disposition by the corporation for money or other property. Treas. Reg. § 1.1032-1(a). When a corporation is treated as the owner of a grantor trust, the corporation is required to include those items of income, deductions and credits attributable to the trust in computing its taxable income and credits, as if the trust does not exist. Moreover, the owner of a grant or trust is treated as the owner of all property held in the grantor trust. See Rev. Rul. 57-390, 1957-2 C.B. 326 (corporate grantor of trust includes in taxable income the gross in come from trust properties, determined by grantor-corporation as if trust had not been created); Rev. Rul. 66-159, 1966-1 C.B. 162 (where individual grantor is treated as the owner of the entire trust, no gain is recognized pursuant to IRC §1032 on the tr ust’s sale of grantor’s principal residence and timely reinvestment of the proceeds in a new residence). Accordingly, in this case, IRC §1032 applies only to the portion of the A trust’s stock that TP 1 owns. TP 1 would not recognize any gain or loss when the A trust transfers or se lls any such stock. We assume, based on the discussion in issue 1 above, that each subsidiary is treated as a grantor of the amount deemed contributed to its capital.

10 Accordingly, we believe that each subsidiary would recognize gain or loss on the A trust’s sale of any TP 1 stock that it is deemed to own. CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS: The amount of gain or loss the subs idiaries recognize depends on whether the subsidiaries are deemed to receive a cost basis in the portion of TP 1 stock that they are treated as owning. We understand that you have not asked us to address this question. However, we note that this issue would probably need to be considered further in order to obtain a definitive resolution. These conclusions are based on the assumptions and necessary additional factual development addressed in issue 1 above. Should these assumptions change as a result of further factual development, our office would want to reconsider the issue. ISSUE 4 A. Which Entity is Entitled to the Deduction .

Accordingly, and based on the following discussion, we have concluded that TP 1TP 14, respectively, are the entities entit led to deduct contributions by the A trust to the G -T plans for the benefit of their empl oyees. However, such deductions are only allowable as otherwise provided under IRC §404(a)(5) and IRC §83. Under IRC §404(a)(5), employer cont ributions to plans other than tax qualified plans are deductible in the taxable year in which the amounts attributable to the contributions are includible in the gross income of the employees participating in the plan, provided s eparate accounts are maintained for each employee if the plan covers more than one participant. Under IRC §83(h), in the case of a transfer of property to which IRC §83(a) applies, there is allowed as a deduction under IRC §162, to the person for w hom the services were performed, an amount equal to the amount included under IRC §83(a) in the gross income of the person who performed the services. If the A trust is a grantor trust under IRC §671, the assets of the A trust are treated for tax purposes as though they ar e part of the general assets of the owner(s)–either TP 1 or TP 1 - TP 14, as addressed in issue 1 above. Under Rev. Rul. 84-68, 1984-1 C.B. 3, when a parent corporation transfers cash to an employee of a subsidiary of the corporat ion, the parent’s payment is treated as a

11 5 This is distinguishable from a situation in which the parent corporation makes a contribution on behalf of a subsidiary cor poration and the parent takes the deduction. In general, a parent corporation may not deduct compensation it pays for the benefit of the employees of its wholly owned subsidia ry, even though the indirect benefit of their services inures to the parent corporation. Columbian Rope Co. v. Comm. , 42 T.C. 800 (1964), acq. on other issues, 1965-1 C.B. 4. Therefore, under IRC §§404(a)(5) and 83(h), contributions by the A trust to the G -S plans would not be deductible by TP 1 where TP 1 is neither the “employer” nor the re cipient of the services provided by employees of TP 2 - TP 14. contribution to the subsidiary ’s capital and a constructive payment by the subsidiary to its employees. The payment is deductibl e by the subsidiary as compensation, provided it is reasonable for the service’s performed. See also Rev. Rul. 80-76, 1980-1 C.B. 15, amplified by Rev. Rul. 81-45, 1981-1 C.B. 483 (when a majority stockholder of a corporation transfers st ock of the corporation to an employee of the subsidiary of the corporation, (1) the fa ir market value of the stock is includible in the employee's income under IRC §83(a) and (2) the subsidiary is allowed the IRC §83(h) deduction.) 5 Accordingly, if TP 1 is the sole grantor, the A trust’s contribution to the plans would be treated as a contribution to the subsidiary’s capital and a constructive payment by t he subsidiary to its plan which would be deductible by the subsidiary as compensation, provided it otherwise satisfied the requirements of IRC §404 and §83(h). If TP 1 and TP 2 - TP 14 are treated as the grantors and owners of the A trust assets, amounts paid by the A trust to the G -T plans, would be considered to be amounts paid by TP 1 and TP 2-TP 14, the respective grantors and owners of the A trust. Therefore, amounts paid by the A trust on behalf of TP 1 and TP 2-TP 14's employees would be paid and deductible by TP 1 and TP 2-TP 14, the employer/service recipients, in accordance with IRC §§404(a)(5) and 83(h). B. Timing of Deduction . We note that some of the incentive compensation plans submitted indicate that a portion of the annual bonus is deferred and paid out over a year period. According to some of the submitted documents, the deferred bonus is deemed to have been earned out and vested on a pro rata basis at the end of each year during the year period only to the extent the employee does not terminate employment during that year. Some of the other plans indicate that the bonus is earned at the end of the year, but paid during the next y ear. These facts suggest that there may be an issue regarding the timing of the compensation deductions.

12 IRC §404(a) provides, in part, that if contributions are paid by an employer on account of any employee under a plan deferring the receipt of compensation, such contributions or compensation are not deductible under Chapter 1 of subtitle A of the Code, but if they would other wise be deductible, they are deductible under §404, subject to the limitations contained therein. As noted above, pursuant to IRC §404(a )(5), contributions to a nonqualified deferred compensation plan are deductible in the taxable year in which the contribution is includible in the gross income of employees participating in the plan (or that would be includible but for an exclusion under Chapter 1 of the Code); but in the case of a plan in which more than one employee participates, only if separate accounts are maintained for each employee. See also Treas. Reg. § 1.404(a)(12)- 1(b)(1). The rules of IRC §404(a) apply to any method or arrangement that has the effect of a plan deferring the receipt of compensation or other benefits for employees. Under Treas. Reg. § 1.404( b)-1, where a corporation is under an obligation, whether funded or unfunded, to pay a pension or other deferred compensation to an employee or his beneficiaries, there is a method having the effect of a plan deferring the receipt of compensation for which deductions are governed by §404(a). According to Treas. Reg. § 1.404(b)-1T, Q&A-1, IRC § 404(b) clarifies that any plan, or method or arrangement, deferring the receipt of compensation is to be treated as a plan deferring the receipt of compensation for purposes of IRC § 404(a). Thus, for example, under IRC §404(a )(5), a contribution paid or incurred to a nonqualified plan, or method or arrangement, providing for deferred benefits is deductible in the taxable year of the employer in which or with which ends the taxable year of the employee in which t he amount attributable to the contribution is includible in the gross income of the employee. Treas. Reg. §1.404(b)-1T, Q&A-2(a), prov ides that a plan defers the receipt of compensation or benefits to the extent that it is one under which an employee receives compensation or benefits "more than a brief period of time after the end of the employer's taxable year in which the services creating the right to such compensation or benefits are performed." Under Treas. Reg. §1.404(b)-1T, Q&A2(b)(1), a plan is presumed to defer the receipt of compensation for "more than a brief period of time to the extent that an employee receives compensation after the fifteenth day of the third calendar month fo llowing the end of the employer's taxable year in which the related services were rendered." As an example, the regulation provides that salary under an employm ent contract or a bonus under a year-end bonus declaration is presumed to be paid under a plan, or method or arrangement,

13 deferring the receipt of compensation to the extent that the salary or bonus is received beyond the applicable 2 ½ month-period. See also Treas. Reg. §1.404(b)-1T, Q&A-2(c). As noted above, IRC §83(h) provides that in the case of a transfer of property to which IRC §83(a) applies, there is allowed as a deduction under IRC §162, to the person for whom the services were performed, an amount equal to the amount included under IRC §83(a) in the gross in come of the person who performed the services. This deduction is generally allowed to the service recipient for the taxable year in which or with which ends the taxable year in which the amount is included as compensation by the person who performed the services. Under Treas. Reg. §1.83-6(a)(3), however, wher e property is substantially vested on transfer, the deduction is allowed to the service recipient in accordance with its method of accounting (in conformity with IRC §§446 and 461). The Tax Court addressed the issue of deferred compensation in Schmidt Baking Co., Inc. v. Commissioner , 107 T.C. 271 (1996). In Schmidt Baking , the taxpayer was an accrual-basis taxpayer with a fiscal year that ended December 28, 1991. The taxpayer funded its accr ued vacation and severance pay liab ilities for 1991 by purchasing an irrevocable letter of credit on March 13, 1992. The parties stipulated that the letter of credit repres ented a transfer of a substantially vested interest in property to employees for pur poses of IRC §83, and that the fair market value of such interest was includible in the employees' gross incomes for 1992 as a result of the transfer. The Tax Court hel d that the purchase of the letter of credit, and the resulting income inclusion, constituted payment of the vacation and severance pay within the 2 ½ month period described in the regulations. According to the Tax Court, because the vacation and severance pay was treated as received by the employees within t he 2 ½ month period and were not treated as deferred compensation under IRC §404, it wa s deductible by the taxpayer for its 1991 fiscal year pursuant to its normal accrual method of accounting. Section 7001 of the Internal Revenue Restructuring and Reform Act, Pub. L. 105-206, enacted on July 22, 1998, prospectively overrules the result in Schmidt Baking by enacting IRC §404(a)(11). Under that section, for purposes of determining whether an item of compensation is deferred compensation, the compensation is not considered to be paid or received until actually received by the employee. In addition, an item of defe rred compensation is not considered paid to an employee until actually received by the employee. The Conference Report states that no inference is intended that the result in Schmidt Baking is prior law beyond its immediate facts or that the use of similar arrangements is permitted under present or prior law. See Conf. Rep. 299, 105 th Cong., 2d Sess. 344.

14 6 Payment of funds before actual payment of benefits to employee participants suggests that these arrangements are “f unded” deferred compensation arrangements. Further development of the facts in this regard is necessary. The question of the timing of the deducti on arises regardless of whether the A trust is a grantor trust under IRC §671 or a secular trust under IRC §402(b). If the A trust is a grantor trust, then the ti ming of the deduction is governed by IRC § 404(a)(5). If the A trust is a secular employee’s trust, taxable under IRC §402(b), then the timing of the deduction includes an analysis of IRC § 404(a)(5) and may also include consideration of Schmidt Baking (if there is an income inclusion event prior to the expiration of the 2 ½ month period described in the Treas. Reg. § 1.404(b)-1T). However, we cannot conc lude, based on the facts submitted, when TP 1-TP 14 are entitled to claim the deductions. CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS: We recommend that you obtain more information regarding whether the contributions from the A trust to the nonqualified plans are made in cash, stock, or a combination of both. (We note above that However, confirmation on this fact is necessary.) If the contributions are made in stock, we re commend that you obtain more information about whether the stock contains any rest rictions related to the performance of future services. . Additionally, we recommend that you obtain more information regarding (Again we note that . However, confirmation on this fact is necessary.) As stated above, some of the submitted documents suggest that This may be incorrect if the amounts are considered deferred compensation under IRC §404(a)(5). Additionally, if the G -T plans are considered “funded” and the A trust considered an IRC §402(b) trust, c onsideration of Schmidt Baking may be required to determine the timing of the deduction. 6 However, it is unclear whether we would consider Schmidt Baking to apply to the facts of this case.

15 7 As stated in footnote 5 above, this is distinguishable from a situation in which the parent corporation makes a contributi on on behalf of a subsidiary corporation and ISSUE 5 Under IRC §404(a)(3), regarding deductions for employer contributions to a qualified profit sharing plan, contributi ons are deductible by an employer in the taxable year when paid, if the taxable year ends within or with a taxable year of the trust in a year in which the trust is exempt under IRC §501(a). The amount of deduction cannot exceed 15 percent of t he participants’ compensation otherwise paid or accrued during the taxable year. The A trust provides, in part, that upon the payment or forgiveness in any trust year of any principal on the Note, common stock held by the A trust is allocated and transferr ed to the trusts established under the qualified A -F plans. The amount of the annual allocation is prescribed by the A trust. As stated above, we understand that TP 2, TP 5, TP 6, TP 9, TP 10 and TP 13 file consolidated tax returns with TP 1, and that TP 2, TP 5, TP 6, TP 9, TP 10 and TP 13, respectively, not TP 1, claimed deductions on the returns for contributions paid by the A trust to the qualified A -F plans. Accordingly, we believe that the contributions by TP 2, TP 5, TP 6, TP 9, TP 10 and TP 13, which the A trust pays to the qualified A -F plans, are deductible under IRC §404(a)(3). First, as stated above, as a grantor trust under IRC §671, assets of the A trust are treated for tax purposes as though they are part of the general assets of the owner(s), who is either TP 1 or TP 1 and TP 2, TP 5, TP 6, TP 9, TP 10 and TP 13. However, as noted in issue 4 above, if TP 1 is the sole grantor and owner, a payment by a parent corporation for the benef it of its subsidiary is recognized for federal income tax purposes as a cont ribution of capital to the subsidiary corporation and a constructive pay ment by the subsidiary. See Rev. Rul. 84-68, 1984-1 C.B. 31, citing Estate of A.P. Steckel v. Comm. , 26 T.C. 600 (1956), aff’d per curiam , 253 F.2d 267 (6 th Cir. 1958) and Anderson v. Comm. , 67 T.C. 522 (1976), aff’d per curiam , 583 F.2d 953 (7 th Cir. 1978). Accordingly, contributions by the A trust to the A -F plans in satisfaction of TP 2, TP 5, TP 6, TP 9, TP 10 and TP 13's liabilities under the plans would be deemed to be paid by TP 2, TP 5, TP 6, TP 9, TP 10 and TP 13, respectively. Therefore, the contributions are deductible in the year paid, to the extent that they ar e otherwise deductible under IRC §404(a). The amount of the deduction equals the fair market value of the money or property contributed at the time it is paid over to the trusts. See United States v. General Shoe Corporation , 282 F.2d 9 (6 th Cir. 1960), cert. denied , 363 U.S. 641 (1961); and International Freighting Corp., Inc. v. Commissioner , 45 B.T.A. 716 (1941), aff’d , 135 F.2d 310 (1943). 7

16 the parent takes the deduction. In gener al, a parent corporation may not deduct compensation paid by it for the benefit of employees of its wholly owned subsidiary, even though the indirect benefit of their serv ices inures to the parent corporation. Columbian Rope Co. v. Comm. , 42 T.C. 800 (1964), acq. on other issues, 1965-1 C.B. 4. Therefore, under IRC §404(a )(3), contributions by the A trust to the A -F plans would not be deductible by TP 1 since TP 1 is not the “employer” maintaining the plan on behalf of its employees. IRC §404(a). (Under the facts as we understand them, TP 1 has not adopted the A -F plans on behalf of its own employees. See IRC §414(b).) 8 Our response does not address whether the A trust is a plan under the provisions of ERISA Title I. ERISA Ti tle I imposes a number of requirements on employee benefit plans, such as reporting and disclosure requirements, funding standards, and duties owed by plan fiduciaries. Second, if TP 1 and TP 2, TP 5, TP 6, TP 9, TP 10 and TP 13 are treated as the grantors and owners of A trust assets, contributions by the A trust to the A -F plans, as prescribed by the terms of the A trust, would be considered to be contributions by TP 1 and TP 2, TP 5, TP 6, TP 9, TP 10 or TP 13, the respective grantors and owners for purposes of IRC §671. Therefore, A trust contributions would be considered to be paid by TP 1 and TP 2, TP 5, TP 6, TP 9, TP 10 or TP 13, the respective employer, and deductible in the tax year paid in an amount equal to the fair market value of the money or property contributed at the time it is paid over to the trusts, provided the cont ributions otherwise satisfy the requirements of IRC §404(a). However, the additional factual development discussed above is needed before determining which entity is the grantor and owner of A trust assets. ISSUE 6 Under the terms of the A plan, B plan and F plan, the IRC §401(k) plans included in your submission, employer c ontributions appear to be required to fund profit sharing contributions, IRC §401(k) elective deferrals, employer matching contributions, and/or employer matching stock contributions. In general, although the Code does not require that employer contributions be made in cash, the prohibited transaction rules under IRC §4975 prohibit the direct or indirect sale or exchange of property between a plan and a disqualified person, unless an exemption applies. See IRC §§4975(c), 4975(d). Under the circumstances presented, the A trust, as well as TP 1 through TP 14, are disqualified persons under the Code. See IRC §4975(e). Under IRC §4975(d)(13), the prohibi tions described under IRC §4975(c) do not apply to transactions exempt under §406 of ERISA Title I. 8 Section 406 of ERISA Title I lists transactions that are prohibited under ERISA Title I, which

17 9 The term “qualifying employer securities” means generally the common stock of the employer, which is readily tradable on an established market. See IRC § 409(l)(1); see also IRC §409(l)(2)(special rule for stock not readily tradable). We understand that the TP 1 stock is readily tradable on an established market. generally parallel the prohibited transac tions under IRC §4975(c). Section 408 of ERISA Title I provides exemptions under Title I, which generally parallel the exemptions under IRC §4975(d). For instanc e, pursuant to §408(e) of Title I, the provisions governing prohibited trans actions under Title I found in §406 do not apply to a plan’s acquisition of “qualifying employer securities” under certain conditions. See ERISA Title I, §408(e). 9 Those conditions are as follows: 1) the acquisition must be for adequate consideration; 2) the acquisition must not give rise to a commission; and 3) the plan is an eligible individual account plan, e.g., a profit sharing or stock bonus plan. See ERISA Title I, §408(e)(1)-(3); §407(d)(3). According to the material provided, the conditions under ERISA §§408(e)(1)- (3) appear to be satisfied, provided the valuation of the stock at the time it is contributed to the qualified plans consti tutes adequate consideration. Thus, the plans’ acquisition of TP 1 stock appears to fall within the exemption provided by IRC §4975(d)(13). Consequently, IRC §4975(d)(13) provides an exemption to the prohibition on the sale or exchange of property between the plans and the A trust. It is unclear whether assets of the A trust are used to satisfy all or a portion of these employers’ liabilities under the plans. However, in general, the Code does not require that employer contributions be funded in cash. ISSUE 7 Except in the case of an employee stock ownership plan (“ESOP”)(as defined in IRC §4975(e)(7)), the Code does not limit a participant’s ab ility to diversify plan assets under qualified plans. Subject to some important exceptions, trustees of trust which is part of an IRC § 401(a) plan can, in general, use plan assets to purchase any investments permitted by the trust agreement to the extent allowed by local law. See e.g. , Treasury Regulation §1.401-1(b)(5). Under that regulation, no specific limitations apply to investment s by trustees of an IRC §401(a) plan’s related trust; however, the trustees of su ch a trust are subject to substantial constraints under the Code and ERISA Title I. Under the exclusive benefit rule under IRC §401(a)(2), plan assets must be used for the exclusive benefit of participants and beneficiaries under the plan. In addition, IRC §404 of ERISA Title I sets forth the duties owed by a fiduciary of an ERISA plan, including the duty to discharge his duties for the exclusive purpose of providing benefits to participants and their beneficiaries, in a prudent manner. ERISA §404 also requires the

18 trustees of an ERISA plan to diversify the plan investments, unless it is not prudent under the circumstances. ISSUE 8 Assuming the subsidiaries are treated as grantors of the A trust and are therefore treated as owning a portion of TP 1 stock held by the A trust, the portion of the stock that the subsidiaries are considered to own is generally treated as outstanding for tax purposes. The portion owned by TP 1 would be treated as treasury stock. We note, however, that the treatment of TP 1 stock as treasury stock for tax purposes may have no effect on the calculation of earnings per share, which is a financial accounting concept with its own rules. We are not aware of any rules in the Code or regulations for ca lculating earnings per share or of any relevance of the earnings per share calc ulation for tax purposes. The Securities Exchange Commission (SEC), the Financial Accounting Standards Board (F ASB) and other rule making authorities for financial accounting are responsible for providing guidance on these matters. Cons equently, the tax treatment of the stock held by the A trust may have little, if any, bearing on the calculation of earnings per share. SUPPLEMENT AND CONCLUSION In addition to the foregoing issues, we recommend further development of facts regarding whether contributions to the A trust by TP 1 and the rights conferred on plan participants under the A trust constitute a trans fer of property under IRC §83. Section 83(a) of the Code provides that the excess (if any) of the fair market value of property transferred in connection with the performance of services over the amount paid (if any) for the property is includible in the gross income of the person who performed the services for the first taxable year in which the property becomes transferable or is not subject to a substantial risk of forfeiture. Section 1.83-3(e) of the Income Tax Regulations provides that for pur poses of §83 the term "property" includes real and personal property other than money or an unfunded and unsecured promise to pay money or pr operty in the future. Property also includes a beneficial interest in assets (including money) transferred or set aside from claims of the transferor's creditors, fo r example, in a trust or escrow account. Under the economic benefit doctrine, a person has currently includible income from an economic or financial benefit received as compensation, though not in cash form. Economic benefit applies when assets are unconditionally and irrevocably paid into a fund or trust to be used for the person's sole benefit. Sproull v. Commissioner , 16 T.C. 244 (1951), aff'd per curiam , 194 F. 2d 541 (6th Cir.

19 1952); Rev. Rul. 60-31, Situation 4 . In Rev. Rul. 72-25, 1972-1 C.B. 127, and Rev. Rul. 68-99, 1968-1 C.B. 193, an employee does not receive income as a result of the employer's purchase of an insurance contract to provide a source of funds for deferred compensation because the insuranc e contract is the employer's asset, subject to claims of the employer's creditors. Whether a plan is funded depends on the facts and circumstances of each case. The essential feature of a funded pl an is that its assets are segregated from the general assets of the employer and are not available to general creditors if the employer becomes insolvent. Northweste rn Mutual Life Insurance Company v. Resolution Trust Corporation , 848 F. Supp. 1515 (N.D. Ala. 1994). However, an arrangement w ill be considered to be unf unded if the benefits are to be paid from the employer's general assets and there is no "res" or property which has been set aside from the corporation' s ordinary assets in order to fund the plan. Dependahl v. Falstaff Brewing Co. , 653 F. 2d 1208, 1214 (8th Cir. 1981), cert. denied 454 U.S. 968 (1981). Thus, whether there has been a transfe r of property for the performance of service within the meaning of §83, or a person has incurred an economic benefit because the A trust will be considered to have f unded the nonqualified deferred compensation benefits of participants, w ill depend on the particular facts and circumstances of the arrangement. It is unclear from the documents provided us whether assets of the A trust are available to subsidia ries' creditors in the event of bankruptcy or insolvency of a subsidiary. Before a determination on this issue can be made, . In addition, under § of the A trust,

Further information is necessary regarding how this provision is administered : .

20 Finally, we want to emphasize that separate and distinct laws and analysis apply to qualified and nonqualified plans. Accordingly, it is critical that you bear this point in mind when developing the case and the additional facts addressed herein. If you have any further ques tions, please call the branch telephone number. By: MICHAEL ROACH Chief, Branch 7