PLR 200916003: Escrow accounts qualified as settlement funds from approval date

Plain-English summary

The IRS modified an earlier ruling about company escrow accounts established in response to governmental demands and legal requirements. It concluded that the accounts satisfied the three qualified-settlement-fund requirements when the first governmental authority approved them. The accounts were established to resolve claims involving alleged legal violations, and their assets were segregated from the company's other assets. Transfers became deductible in the tax year when the accounts were treated as qualified settlement funds, while earlier transfers were treated as occurring on the approval date.

Ruling snapshot

• Question: When did the escrow accounts satisfy the qualified-settlement-fund rules, and when were company transfers deductible?
• Outcome: Approved modification: the accounts qualified from the governmental approval date, which also became the deemed date for earlier transfers.
• Key authorities: IRC § 468B; Treas. Reg. § 1.468B-1(c).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 200916003
Third Party Communication: None
Release Date: 4/17/2009
Date of Communication: Not Applicable
UIL: 468B.00-00
Person To Contact:
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---------------, ID No. -------------
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Telephone Number:
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-------------------------------------------- Refer Reply To:
In Re: -------------------------
CC:ITA:B06
-------------------------------------
PLR-124833-02
Date:
December 02, 2008

LEGEND:

Company: -------------------------------------------------

C: -----------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------

D: ------------------------------------------------------------------------

Year 3: -------

Year 5: -------

Date 3: ---------------------------

Dear -------------:

This letter constitutes notice that our ruling letter dated November 30, 2005, has been modified to conclude that the escrow accounts established in Year 3 by Company satisfied all three requirements prescribed in section 1.468B-1(c) of the Income Tax Regulations on Date 3. First, Company established the escrow accounts pursuant to written demands for the deposits by the Cs, governmental authorities, and the provisions of D, which require the escrow accounts to be approved and monitored by the Cs. The first C approved the escrow accounts on Date 3. Secondly, the escrow accounts were created in Year 3 to resolve one or more contested or uncontested claims that had given rise to at least one claim asserting liability arising out of a violation

PLR-124833-02
2

of law. Finally, the assets in the escrow accounts were otherwise segregated from other assets of Company, the transferor, in Year 3.

Therefore, the transfers of funds to the escrow accounts are deductible in Year 5, the taxable year in which the escrow accounts are treated as qualified settlement funds for purposes of section 468B of Internal Revenue Code, and each subsequent date that Company transfers funds to the respective escrow accounts. In this case, transfers of funds to the escrow accounts made prior to Date 3 will be treated as transferred on Date 3, which is the first date on which the escrow accounts are treated as qualified settlement funds.

This modification has been made to reflect the current position of the Internal Revenue Service.

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

Pursuant to the powers of attorney on file in this office, a copy of this letter will be sent Company’s authorized representatives.

Sincerely,

Jeffery G. Mitchell
Branch Chief, Branch 6
Office of Associate Chief Counsel
(Income Tax & Accounting)

Enclosure: Copy for 6110 purposes