IRS written determination 201424030

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

,Significant Index Number 415.02-05
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
281424030
WASHINGTON, D.C. 20224
TAX EXEMPT AND

GOVERNMENT ENTITIES

DIVISION

MAR 202014
Re:
Taxpayer
=
$X=
$Y=
$Z=
Dear
This is in response to a request for a private letter ruling dated February 11, 2013,
as
supplemented by correspondence dated November 5, 2013, submitted by your
authorized representative. Your request involves the applicability of section 415(c) of
the Internal Revenue Code ('It he Code") to certain contributions to an employee stock
ownership plan ("ESOP"). Your authorized representative has submitted the following
facts and representations in support of this request.
Facts and Representations
The Taxpayer elected to be treated
as an S corporation for federal income tax
purposes, effective
as of June 1, 1989. The Taxpayer files its income tax returns on
I RS Form 1120S and an annual return for the ESOP on Form 5500 on a calendar year
basis
in both cases. Effective as of January 1, 1994, the Taxpayer established the Plan,
an ESOP,
as described in section 497S(e)(7) of the Code.
The Taxpayer has been profitable every year since its founding; it is well managed and
operates with a high degree of efficiency. Employee turnover is low. Although the
Taxpayer is relatively small it has conSistently generated more cash flow than is
required for the Plan to purchase 100 percent of the Taxpayer's stock and satisfy its
repurchase obligations under the Plan.

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201424030
The Plan was last amended and restated effective January 1 t 2012. The Plan's related
Trust is exempt from tax under section
501 (a) of the Code. The most recent IRS
determination letter applies
to the Plan as amended and restated effective January 1,
2007.
From 1998 through 2009 the Plan purchased the Taxpayer's shares in 9 transactions
from the Taxpayer's sale shareholder. In the last of these transactions, the remaining
shares held by this shareholder were purchased by the Plan using the proceeds of a
loan exempt under section 4975(d)(3) of the Code. This exempt loan was fully repaid
as of December 31,2012. As a result, the Plan now owns 100% of the Taxpayer, with
all of the Taxpayer's shares allocated to the accounts of the Plan's participants. The
Taxpayer's stock held
in the Plan constitutes all of the Taxpayer's stock issued and
outstanding.
The Taxpayer's business does not incur significant capital expenditures or require
significant cash reserves in relation to its earnings. As of December
31,2012, the
Taxpayer had $X of cash on hand, of which the Taxpayer's Board of Directors (the
"Board") has determined approximately $Y is necessary for the reasonable needs of the
Taxpayer's business.
The Board has determined that it would not be in the interest of the Taxpayer to retain
cash that far exceeds the reasonable needs of the business. As a consequence, the
Taxpayer proposes to make S corporation distributions (as described in section 1368(a)
of the Code) of $Z to the Plan, (an amount which will not exceed the Taxpayer's
accumulated adjustments account as described
in section 1368(e)(1) of the Code)
allowing the Taxpayer to retain as cash on hand an amount that is necessary to meet its
reasonable business needs.
The distribution would be
allocated to the participants of the Plan based on the number
of shares of Taxpayer stock allocated to each participant on the record date for the
distribution.
Requested Ruling
A ruling has been requested that no part of the proposed S corporation distributions with
respect to the Taxpayer stock will constitute or be treated as an "annual addition," as
described
in section 415(c)(2) of the Code, to accounts of participants of the Plan.
Applicable Law
Section
401 (a) of the Code provides that a trust created or organized in the United
States and forming part of a stock bonus, pension, or profit-sharing plan of an employer
for the exclusive benefit of his employees
or their beneficiaries shall constitute a
qualified trust under this section if certain requirements are met.

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201424030

Section 415(a) of the Code provides, in pertinent part, that a trust which is part of a
pension, profit-sharing, or stock bonus plan will not constitute a qualified trust under
section
401 (a) of the Code if, in the case of a defined contribution plan, contributions
and other additions under the plan with respect to any participant for any taxable year
exceed the limitation of subsection 415(c) of the Code.
Section 415(c)(1) of the Code provides that contributions and other additions with
respect to a participant exceed the limitations of this subsection
if, when expressed as
an annual addition (as defined below), such annual addition is greater than the lesser of
(A) $40,000,
or (8) 100 percent of the participant's compensation.
Section 415(d) of the Code provides for cost-of-living adjustments to certain limitations
described in section 415 of the Code. Accordingly the limitation under section
415(c)(1)(A) currently stands at $52,000 for limitation years ending in 2014.
Section 415(c)(2)
of the Code defines an "annual'addition" as the sum for any year of
employer contributions, employee contributions, and forfeitures.
Section 4975(e)(7)
of the Code defines an ESOP as a defined contribution plan which
is a stock bonus plan which is qualified,
or a stock bonus and a money purchase plan
both
of which are qualified under section 401 (a), and which are qualified under Code
section 401 (a), and which are designed to invest primarily in qualifying employer
securities.
Section 1.415(c)-1 (b)(4)
of the Income Tax Regulations (the "regulations") provides that
the Commissioner may, in appropriate cases, considering all
of the facts and
circumstances, treat transactions between the plan and the employer
or certain
allocations to participant accounts as giving rise to annual additions.
Analysis and Conclusion
The facts and circumstances of the present case
do not support the recharacterization
of these S corporation distributions as annual additions under the authority of section
1 .415( c
)-1 (b)( 4) of the regulations. I nstead these amounts constitute distributions of
earnings to the Taxpayer's shareholders and not contributions or other additions with
respect to participants of the
ESOP.
Therefore the proposed S corporation distributions to the ESOP are not employer
contributions, employee contributions,
or forfeitures, and hence do not fall within the
definition
of annual additions as defined in section 415(c)(2) of the Code.
Accordingly, we conclude with respect to your requested ruling that the proposed S
corporation distributions made by the Taxpayer with regard to the Taxpayer's stock held

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201424030
4
in the Plan's participant accounts will not constitute "annual additions" within the
meaning of section 415(c)(2) of the Code.
This ruling assumes that the Plan is qualified under section
401 (a) of the Code, and its
related trust exempt from taxation under section
501 (a) of the Code, at all times relevant
to this transaction. It also assumes that the Plan meets the requirements of section
4975(e)(7) of the Code.
This ruling is directed only to the taxpayer that requested it. Section
611 0(k)(3) of the
Code provides that it may not be used
or cited by others as precedent.
We have sent a copy of this letter to your authorized representatives pursuant to a
power of attorney (Form 2848) on file in this office. If you have any questions regarding
this matter, please contact at
Sincerely yours,
David
M. Ziegler, Manager
Employee Plans Actuarial Group 2
cc: