internal_revenue_service number release date index number ------------------- --------------------------------------------------- ------------------------- re ----------------------------- 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 psi b04 plr-103861-18 date date legend -------------------- ----------------------------------------------- ------------------------------------------------- --------------------------------- date grantor spouse trust --------------------------------------------------------------------------- son daughter friend friend guardian trustee power_of_appointment committee ---------------------------------------------- ----------------- ------------------------------------ ------------------------------------------------- --------------------------------------------- -------------------------------------------------- ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ------------------ ------------------- -------------- state state dear --------------- this letter responds to your authorized representative’s letter of date requesting rulings under sec_671 sec_2501 sec_2514 sec_2041 and sec_1014 of the internal_revenue_code plr-103861-18 the facts submitted and representations made are as follows on date grantor and spouse collectively grantors created trust an irrevocable_trust for the benefit of grantors grantors’ issue and friend and friend collectively the beneficiaries a corporate trustee is trustee of trust the situs of trust is state grantors are married and reside in state a community_property_state trust provides that all property transferred to trust is community_property moreover any and all property transferred to trust prior to the death of the first spouse to die predeceased grantor is and shall retain its character as community_property during grantors’ lifetimes trustee must distribute such amounts of net_income and or principal to each grantor and the beneficiaries as directed by the power_of_appointment committee and or grantors as follows trustee pursuant to a writing executed by either of the grantors and by a majority of the other members of the power_of_appointment committee shall distribute to the beneficiaries and or grantors such amounts of income or principal including the whole thereof as the power_of_appointment committee appoints grantor’s consent power trustee pursuant to a writing executed by all then serving members of the power_of_appointment committee other than grantors shall distribute to or for the benefit of the beneficiaries and or grantors such amounts of income or principal including the whole thereof as the power_of_appointment committee appoints unanimous member power and each grantor has the power in a nonfiduciary capacity at any time and from time to time to appoint to any one or more of the beneficiaries such amounts of the principal including the whole thereof as such grantor deems advisable to provide for the health education maintenance or support of the beneficiaries grantor’s sole power the power_of_appointment committee may appoint income or principal equally or unequally and to or for the benefit of either or both of grantors or any one or more of the beneficiaries of trust to the exclusion of others any net_income not distributed by trustee will be accumulated and added to principal the power_of_appointment committee is composed of grantors child guardian acting on behalf of child friend and friend daughter while a minor is considered a member of the power_of_appointment committee acting through her guardian if at any time the power_of_appointment committee includes three or more members other than the grantors then all the members of the power_of_appointment committee including the grantors may by unanimous vote at any time and from time to time add one or more members of the power_of_appointment committee provided that plr-103861-18 such members are beneficiaries and provided further that if any one or more of them is a minor the members of the power_of_appointment committee shall by unanimous vote have designated an individual to serve as guardian for such minor the members of the power_of_appointment committee in their capacities as such shall not serve or act in a fiduciary capacity the power_of_appointment committee ceases to exist upon the first to occur of the death of the survivor of the predeceased grantor or the date the power_of_appointment committee is reduced to one member other than grantors if the power_of_appointment committee ceases to exist prior to the distribution date the trustee may pursuant to a written instrument at any time distribute to the beneficiaries and or grantors such amounts of the net_income or principal of trust including the whole thereof as the trustee determines any distribution from trust to either grantor prior to the death of the predeceased grantor will be a distribution of community_property any distribution of income or principal from trust to a beneficiary prior to the death of the predeceased spouse whether made by the power_of_appointment committee the trustee or a grantor’s exercise of the powers retained by grantors will be a distribution of community_property with respect to the lifetime powers of appointment retained by grantors prior to the death of the predeceased grantor any such appointment by grantor of the principal of trust will be funded equally from each grantor’s share of community_property each grantor consents to all distributions by the other grantor with respect to the testamentary_power_of_appointment retained by the predeceased spouse any appointment by the predeceased spouse shall be funded solely from the predeceased spouse’s one-half interest in the property held trust upon the death of the predeceased grantor trustee shall distribute the predeceased grantor’s entire_interest in the trust property to or for the benefit of any person or entity or entities other than the predeceased grantor’s estate the predeceased grantor’s creditors or the creditors of the predeceased grantor’s estate as predeceased grantor appoints by will predeceased grantor’s testamentary power upon the death of the predeceased grantor any remaining property held in trust in the predeceased grantor’s one-half interest that has not been effectively appointed by will shall be distributed five percent to each serving member of the power_of_appointment committee other than the grantor’s issue and any remaining balance shall be distributed per stirpes to the grantor’s issue who are then living and subject_to restrictions in the trust for beneficiaries article if none such remaining balance shall be disposed of under an alternate disposition article which provides for distributions according to applicable state law plr-103861-18 upon the death of the surviving grantor trustee shall distribute the balance of trust to or for the benefit of any person or entity or entities other than the surviving grantor’s estate the surviving grantor’s creditors or the creditors of the surviving grantor’s estate as surviving grantor appoints by will surviving grantor’s testamentary power upon the death of the surviving grantor any remaining property held in trust that has not been effectively appointed by will shall be distributed five percent to each serving member of the power_of_appointment committee other than the grantor’s issue and any remaining balance shall be distributed per stirpes to the grantors’ issue who are then living subject_to restrictions in the trust for beneficiaries article if none such remaining balance shall be disposed of under an alternate disposition article which provides for distributions according to applicable state law no distribution by the trustee to a beneficiary and no distribution to a beneficiary pursuant to the exercise of a power_of_appointment granted hereunder shall discharge any individual’s legal_obligation to support the beneficiary you have requested the following rulings as long as the power_of_appointment committee is serving no portion of the items of income deductions and credits against tax of trust shall be included in computing under sec_671 the taxable_income deductions and credits of grantors or any member of the power_of_appointment committee the contribution of property to trust by grantors will not be a completed_gift subject_to federal gift_tax any distribution_of_property by the power_of_appointment committee from trust to either grantor will not be a completed_gift subject_to federal gift_tax by any member of the power_of_appointment committee any distribution_of_property by the power_of_appointment committee from trust to any beneficiary of trust other than to either grantor will not be a completed_gift subject_to federal gift_tax by any member of the power_of_appointment committee no member of the power_of_appointment committee upon his or her death will include in his or her estate any property held in trust because such member is deemed to have a general_power_of_appointment within the meaning of sec_2041 over property held in trust the basis of all community_property in trust on the date of the death of the predeceased grantor will receive an adjustment in basis to the fair_market_value of such property at the date of death of the predeceased grantor plr-103861-18 ruling sec_671 provides that where it is specified in subpart e of part i of subchapter_j that the grantor or another person shall be treated as the owner of any portion of a_trust there shall then be included in computing the taxable_income and credits of the grantor or the other person those items of income deductions and credits 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 in computing taxable_income or credits against the tax of an individual sec_672 provides for purposes of subpart e that the term adverse_party means any person having a substantial_beneficial_interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust sec_673 through specify the circumstances under which the grantor is treated as the owner of a portion of a_trust sec_673 provides that the grantor shall be treated as the owner of any portion of a_trust in which the grantor has a reversionary_interest in either the corpus or the income therefrom if as of the inception of that portion of the trust the value of such interest exceeds five percent of the value of such portion sec_674 provides in general that the grantor shall be treated as the owner of any portion of a_trust in respect of which the beneficial_enjoyment of the corpus or the income therefrom is subject_to a power of disposition exercisable by the grantor or a nonadverse_party or both without the approval or consent of any adverse_party sec_674 provides that sec_674 shall not apply to the power in sec_674 regardless of by whom held sec_674 provides that sec_674 shall not apply to a power exercisable only by will other than a power in the grantor to appoint by will the income of the trust where the income is accumulated for such disposition by the grantor or may be so accumulated in the discretion of the grantor or a nonadverse_party or both without the approval or consent of any adverse_party sec_674 provides that sec_674 shall not apply to a power to distribute corpus to or for a beneficiary provided that the power is limited by a reasonably_definite_standard sec_674 provides that sec_674 shall not apply to a power exercisable without the approval or consent of any other person by a trustee or trustees none of whom is the grantor and no more than half of whom are related or subordinate parties who are plr-103861-18 subservient to the wishes of the grantor to distribute apportion or accumulate income to or for a beneficiary or beneficiaries or to for or within a class of beneficiaries or to pay out corpus to or for a beneficiary or beneficiaries or to a class of beneficiaries whether or not income beneficiaries under sec_675 and applicable regulations the grantor is treated as the owner of any portion of a_trust if under the terms of the trust agreement or circumstances attendant to its operation administrative control is exercisable primarily for the benefit of the grantor rather than the beneficiary of the trust sec_676 provides that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under any other provision of part i subchapter_j chapter where at any time the power to revest in the grantor title to such portion is exercisable by the grantor or a nonadverse_party or both sec_677 provides in general that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under sec_674 whose income without the approval or consent of any adverse_party is or in the discretion of the grantor or a nonadverse_party or both may be distributed to the grantor or the grantor’s spouse held or accumulated for future distribution to the grantor or the grantor’s spouse or applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor’s spouse sec_678 provides that a person other than the grantor shall be treated as the owner of any portion of a_trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself or such person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would within the principles of inclusive subject a grantor of a_trust to treatment as the owner thereof sec_679 provides that a united_states_person who directly or indirectly transfers property to a foreign_trust shall be treated as the owner for his taxable_year of the portion of such trust attributable to such property if for such year there is a united_states_beneficiary of any portion of the trust based solely on the facts submitted and representations made we conclude that an examination of trust reveals none of the circumstances that would cause either grantor to be treated as the owner of any portion of trust under sec_673 sec_674 sec_676 or sec_677 as long as the power_of_appointment committee remains in existence and is serving because none of the power_of_appointment committee members has a power exercisable solely by himself to vest trust income or corpus in himself none shall be treated as the owner of any portion of the trust under sec_678 plr-103861-18 we further conclude that an examination of trust reveals none of the circumstances that would cause administrative controls to be considered exercisable primarily for the benefit of either grantor under sec_675 thus the circumstances attendant to the operation of trust will determine whether either grantor will be treated as the owner of any portion of trust under sec_675 this is a question of fact the determination of which must be deferred until the federal_income_tax returns of the parties involved have been examined by the office with responsibility for such examination ruling sec_2 and sec_2501 provides that a tax is imposed for each calendar_year on the transfer of property by gift during such calendar_year by any individual resident or nonresident sec_2511 provides that the gift_tax applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-2 of the gift_tax regulations provides that a gift is complete as to any property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave in the donor no power to change its disposition whether for his own benefit or for the benefit of another but if upon a transfer of property whether in trust or otherwise the donor reserves any power over its disposition the gift may be wholly incomplete or may be partially complete and partially incomplete depending upon all the facts in the particular case accordingly in every case of a transfer of property subject_to a reserved power the terms of the power must be examined and its scope determined sec_25_2511-2 provides an example where the donor transfers property to another in trust to pay the income to the donor or accumulate it in the discretion of the trustee and the donor retains a testamentary power to appoint the remainder among the donor's descendants the regulation concludes that no portion of the transfer is a completed_gift however if the donor had not retained a testamentary_power_of_appointment but instead provided that the remainder should go to x or his heirs the entire transfer would be a completed_gift sec_25_2511-2 provides that a gift is incomplete in every instance in which a donor reserves the power to revest the beneficial title in himself or herself a gift is also incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed_or_ascertainable_standard under sec_25_2511-2 a donor is considered as himself having a power if it is exercisable by the donor in conjunction with any person not having a substantial adverse_interest in the disposition of the transferred property or the income therefrom plr-103861-18 a trustee as such is not a person having an adverse_interest in the disposition of the trust property or its income sec_25_2511-2 provides that the relinquishment or termination of a power to change the beneficiaries of transferred property occurring otherwise than by death of the donor is regarded as the event which completes the gift and causes the gift_tax to apply sec_25_2511-2 provides that if a donor transfers property to himself as trustee or to himself and some other person not possessing a substantial adverse_interest as trustees and retains no beneficial_interest in the trust property and no power over it except fiduciary powers the exercise or nonexercise of which is limited by a fixed_or_ascertainable_standard to change the beneficiaries of the transferred property the donor has made a completed_gift and the entire value of the transferred property is subject_to the gift_tax sec_25_2511-2 does not define substantial adverse_interest sec_25_2514-3 provides in part that a taker in default of appointment under a power has an interest that is adverse to an exercise of the power sec_25 b also provides that a co-holder of a power is considered as having an adverse_interest where he may possess the power after the possessor's death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate in 308_us_39 the taxpayer created a_trust for the benefit of named beneficiaries and reserved the power_to_revoke the trust in whole or in part and to designate new beneficiaries other than himself six years later in the taxpayer relinquished the power_to_revoke the trust but retained the right to change the beneficiaries in the taxpayer relinquished the right to change the beneficiaries the court stated that the taxpayer’s gift is not complete for purposes of the gift_tax when the donor has reserved the power to determine those others who would ultimately receive the property accordingly the court held that the taxpayer's gift was complete in when he relinquished his right to change the beneficiaries of the trust a taxpayer’s retention of a power to change the beneficial interests in a_trust causes the transfer to the trust to be incomplete for gift_tax purposes even though the power may be defeated by the actions of third parties 37_tc_897 see also 51_tc_352 in this case grantors each retained the grantor's consent power over the income and principal of trust under sec_25_2511-2 a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial adverse_interest in the disposition of the transferred property or the income therefrom pursuant to trust upon the predeceased grantor's death the predeceased grantor's remaining interest in trust ie one-half that the predeceased spouse did not effectively appoint pursuant to his or her limited testamentary_power_of_appointment plr-103861-18 predeceased grantor balance shall be distributed out of and shall no longer be subject_to the terms of trust consequently upon the death of the predeceased grantor the power_of_appointment committee will no longer possess any powers over the property transferred to trust by the predeceased grantor under sec_25_2514-3 a coholder of a power is only considered as having an adverse_interest where he may possess the power after the possessor's death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate accordingly upon the predeceased grantor's death the power_of_appointment committee members would not be takers in default and do not have interests adverse to the predeceased grantor under sec_25_2514-3 and for purposes of sec_25_2511-2 they are merely coholders of the power at the time of the predeceased spouse's death therefore the predeceased grantor is considered as himself or herself possessing the power to distribute income and principal to any beneficiary because he or she retained the grantor's consent power the retention of the power with respect to the predeceased grantor causes the transfer of property to trust to be wholly incomplete for federal gift_tax purposes likewise after the predeceased grantor's death the surviving grantor continues to retain the grantor's consent power over the balance of trust the committee members are not takers in default for purposes of sec_25_2514-3 they are merely coholders of the power the power_of_appointment committee ceases to exist upon the death of the surviving grantor accordingly upon the surviving grantor's death the power_of_appointment committee members do not have interests adverse to the surviving grantor under sec_25_2514-3 and for purposes of sec_25_2511-2 therefore the surviving grantor is considered as himself or herself possessing the power to distribute income and principal to any beneficiary because he or she retained the grantor's consent power the retention of the power with respect to the surviving grantor causes the transfer of property to trust to be wholly incomplete for federal gift_tax purposes if the committee ceases to exist the trustee has the power to distribute net_income to the beneficiaries however the trustee’s power is not a condition_precedent to each grantor’s consent power each grantor’s consent power over income is presently exercisable and not subject_to a condition_precedent thus the trustee’s power to distribute net_income does not cause the transfer of property to be complete with respect to the income_interest in trust for federal gift_tax purposes therefore each grantor is considered as possessing the power to distribute income to any beneficiary himself or herself because he or she retained the grantor’s consent power each grantor also retained the grantor’s sole power over the principal of trust under sec_25_2511-2 a gift is incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed_or_ascertainable_standard in this case the grantor’s sole power gives each plr-103861-18 grantor the power to change the interests of the beneficiaries even though each grantor's power is limited by an ascertainable_standard ie health education maintenance and support each grantor's power is not a fiduciary power accordingly the retention of the grantor’s consent power and grantor’s sole power cause the transfer of property to trust to be incomplete for federal gift_tax purposes if the power_of_appointment committee ceases to exist the trustee in its fiduciary capacity also has the power to distribute principal to one or more beneficiaries the powers of the trustee are not conditions precedent to the grantors’ powers each grantor’s sole power over principal is presently exercisable and not subject_to a condition_precedent accordingly each grantor retains dominion and control_over the principal of trust until the trustee exercises his or her power to appoint principal see 37_tc_897 thus the trustee’s powers to distribute principal do not cause the transfer of property to be complete with respect to the remainder in trust for federal gift_tax purposes accordingly the retention of the grantor’s consent power and the grantor’s sole power causes the transfer of property to trust to be incomplete for federal gift_tax purposes further each grantor retained either a predeceased grantor’s testamentary power or a surviving grantor’s testamentary power depending upon the order of death to appoint the property in trust to any persons other than to the grantor’s estates grantor’s creditors or the creditors of grantor’s estates under sec_25_2514-3 the retention of a testamentary power to appoint the remainder of a_trust is considered a retention of dominion and control_over the remainder accordingly the retention of this power causes the transfer of property to trust to be incomplete with respect to the remainder for federal tax purposes finally the power_of_appointment committee members possess the unanimous member power over income and principal this power is not a condition_precedent to grantors’ powers each grantor’s powers over the income and principal are presently exercisable and not subject_to a condition_precedent each grantor retains dominion and control_over the income and principal of trust until the power_of_appointment committee members exercise their unanimous member powers accordingly the unanimous member power does not cause the transfer of property to be complete with respect to the income_interest for federal gift_tax purposes see 37_tc_897 51_tc_352 accordingly based on the facts submitted and the representations made we conclude that the contribution of property to trust by grantors is not a completed_gift subject_to federal gift_tax any distribution from trust to either grantor prior to the death of the predeceased grantor is a distribution of community_property any distribution from trust to either grantor is merely a return of each grantor’s property therefore we conclude that any distribution_of_property from trust by the power_of_appointment plr-103861-18 committee to either grantor will not be a completed_gift subject_to federal gift_tax by any member of the power_of_appointment committee further upon the predeceased spouse's death the fair_market_value of the predeceased spouse's interest in trust is includible in the predeceased grantor's gross_estate for federal estate_tax purposes moreover upon the surviving grantor's death the fair_market_value of the balance in trust is includible in the surviving grantor's gross_estate for federal estate_tax purposes ruling sec_4 and sec_2514 provides that the exercise or release of a general_power_of_appointment created after date shall be deemed a transfer of property by the individual possessing such power sec_2514 provides that the term general_power_of_appointment means a power which is exercisable in favor of the individual possessing the power possessor the possessor's estate the possessor's creditors or the creditors of the possessor's estate sec_25_2514-1 provides that a power_of_appointment is not a general power if by its terms it is exercisable only in favor of one or more designated persons or classes other than the possessor or his creditors or the possessor's estate or the creditors of the estate or expressly not exercisable in favor or the possessor or his creditors or the possessor’s estate or the creditors of his estate sec_2514 provides that in the case of a power_of_appointment created after date if the power is exercisable by the possessor only in conjunction with the creator of the power such power is not deemed a general_power_of_appointment sec_2514 provides that in the case of a power_of_appointment created after date if the power is not exercisable by the possessor except in conjunction with a person having a substantial interest in the property subject_to the power which is adverse to the exercise of the power in favor of the possessor such power shall not be deemed a general_power_of_appointment for purposes of sec_2514 a person who after the death of the possessor may be possessed of a power_of_appointment with respect to the property subject_to the possessor's power which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the possessor's power sec_25_2514-3 provides in part that a coholder of a power has no adverse_interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power however a co-holder of a power is considered as having an adverse_interest where he may possess the power after the possessor's death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate thus for example if x y and z held a power jointly to appoint among a group of persons which includes themselves and if on the death of x the plr-103861-18 power will pass to y and z jointly then y and z are considered to have interests adverse to the exercise of the power in favor of x similarly if on y's death the power will pass to z z is considered to have an interest adverse to the exercise of the power in favor of y sec_2041 provides that the value of the gross_estate shall include the value of all property to the extent of any property with respect to which the decedent has at the time of death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released such a power by a disposition which is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent's gross_estate under sec_2035 to inclusive under sec_2041 the term general_power_of_appointment is defined in relevant part to mean a power which is exercisable in favor of the decedent his estate his creditors or the creditors of his estate sec_2041 provides however that in the case of a power_of_appointment created after date if the power is not exercisable by the decedent except in conjunction with the creator of the power such power is not deemed a general_power_of_appointment sec_2041 provides however that in the case of a power_of_appointment created after date if the power is not exercisable by the decedent except in conjunction with a person having a substantial interest in the property subject_to the power which is adverse to the exercise of the power in favor of the decedent -- such power shall not be deemed a general_power_of_appointment for purposes of sec_2041 a person who after the death of the decedent may be possessed of a power_of_appointment with respect to the property subject_to the decedent's power which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the decedent's power sec_20_2041-3 of the estate_tax regulations provides in part that a co-holder of a power_of_appointment has no adverse_interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power however a co-holder of a power is considered as having an adverse_interest where he may possess the power after the decedent's death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate thus for example if x y and z held a power jointly to appoint among a group of persons which includes themselves and if on the death of x the power will pass to y and z jointly then y and z are considered to have interests adverse to the exercise of the power in favor of x similarly if on y's death the power will pass to z z is considered to have an interest adverse to the exercise of the power in favor of y plr-103861-18 the powers held by the power_of_appointment committee members under the grantor’s consent power are powers that are exercisable only in conjunction with the creators either grantor or the survivor thereof accordingly under sec_2514 and sec_2041 the power_of_appointment committee members do not possess general powers of appointment by virtue of possessing these powers further the powers held by the power_of_appointment committee members under the unanimous member power are not general powers of appointment for purposes of sec_2514 and sec_2041 as in the examples in sec_25_2514-3 and sec_20_2041-3 the power_of_appointment committee members have substantial adverse interests in the property subject_to this power accordingly any distribution made from trust to a beneficiary other than to either grantor pursuant to the exercise of these powers the grantor's consent power and the unanimous member power are not gifts by the power_of_appointment committee members instead such distributions are gifts by the grantors based upon the facts submitted and representations made we conclude that any distribution_of_property by the power_of_appointment committee from trust to any beneficiary of trust other than the grantors will not be a completed_gift subject_to federal gift_tax by any member of the power_of_appointment committee further we conclude that any distribution_of_property from trust to a beneficiary other than grantors will be a completed_gift by the grantors trust provides that all distributions of the net_income or principal prior to the death of the predeceased spouse whether made by the power_of_appointment committee the disinterested trustee or a grantor's exercise of the powers retained by such grantor to a beneficiary is and shall be a distribution out of community_property accordingly distributions to beneficiaries other than grantors will be gifts made one-half by each grantor finally we conclude that the powers held by the power_of_appointment committee members are not general powers of appointment for purposes of sec_2041 and accordingly the possession of these powers by the power_of_appointment committee members will not cause trust property to be includible in any committee member's gross_estate under sec_2041 ruling sec_1014 provides in part that except as otherwise provided in this section the basis_of_property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent will if not sold exchanged or otherwise_disposed_of before the decedent's death by such person be the fair_market_value of the property at the date of the decedent's death sec_1014 provides that in the case of decedents dying after date property which represents the surviving spouse's one-half share of community_property held by the decedent and the surviving_spouse under the community_property_laws of any state is considered for purposes of sec_1014 to have been acquired from or to have passed_from_the_decedent if at least one-half of the whole of the community plr-103861-18 interest in such property was includible in determining the value of the decedent's gross_estate sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for adequate_and_full_consideration in money_or_money's_worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom sec_2038 provides that the value of the decedent's gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for adequate_and_full_consideration in money_or_money's_worth by trust or otherwise where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power in whatever capacity exercisable by the decedent alone or by the decedent in conjunction with any other person without regard to when or from what source the decedent acquired such power to alter amend revoke or terminate or where any such power is relinquished during the three-year period on the date of the decedent's death grantors are married and reside in state a community_property_state trust provides that all transferred property to trust is community_property moreover any and all property transferred to trust prior to the death of the predeceased grantor is and shall retain its character as community_property as concluded above upon the death of each of grantor his or her respective interest in trust as either the predeceased grantor or the surviving grantor will be includible in his or her respective gross_estate for federal estate_tax purposes accordingly based upon the facts submitted and representations made we conclude that the basis of all community_property in trust on the date of death of the predeceased grantor will receive an adjustment in basis to the fair_market_value of such property at the date of death of the predeceased grantor except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code specifically we express no opinion the tax consequences of the trust provisions permitting trustee to distribute income or principal to trustees of other trusts decanting plr-103861-18 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 enclosure copy for sec_6110 purposes lorraine e gardner lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs and special industries


internal_revenue_service number release date index number -------------------------------- ------------------------------- ------------------------------------ attn ------------------------------------------ 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 psi plr-106300-16 date date legend decedent ------------------------------------------------------ --------------------------------- spouse ------------------------------------------------------ ----------------------------- date date ----------------------------- -------------------- dear ------------------ this letter responds to your personal representative’s letter of date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election under sec_2010 of the internal_revenue_code code portability election to allow a decedent’s surviving_spouse to take into account that decedent’s deceased spousal unused exclusion dsue amount the facts and representations submitted are as follows decedent died on date survived by spouse date is a date after the effective date of the amendment to sec_2010 which provides for portability of a dsue amount to a surviving_spouse to obtain the benefit of portability of decedent’s dsue amount to spouse decedent’s estate was required to file form_706 united_states estate and generation-skipping_transfer_tax return on or before the date that is nine months after decedent’s date of death or the last day of the period covered by an extension plr-106300-16 decedent’s form_706 was due on date the estate discovered its failure to elect portability after the due_date for making the election decedent’s estate represents that the value of decedent’s gross_estate is less than the basic exclusion amount in the year of the decedent’s death and that during her lifetime decedent made no taxable_gifts decedent’s estate requests an extension of time pursuant to sec_301_9100-3 to elect portability of decedent’s dsue amount pursuant to sec_2010 law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2010 provides that a credit of the applicable credit_amount shall be allowed to the estate of every decedent against the tax imposed by sec_2001 sec_2010 provides that the applicable credit_amount is the amount of the tentative_tax that would be determined under sec_2001 if the amount with respect to which such tentative_tax is to be computed were equal to the applicable_exclusion_amount on date congress amended sec_2010 effective for estates of decedents dying and gifts made after date to allow portability of a decedent’s unused applicable_exclusion_amount between spouses tax relief unemployment insurance reauthorization and job creation act of pub_l_no sec_303 124_stat_3296 sec_2010 provides that the applicable_exclusion_amount is the sum of the basic exclusion amount and in the case of a surviving_spouse the dsue amount sec_2010 generally provides that the basic exclusion amount is dollar_figure to be adjusted for inflation annually after calendar_year sec_2010 defines the dsue amount to mean the lesser_of a the basic exclusion amount or b the excess of -- i the applicable_exclusion_amount of the last deceased spouse of the surviving_spouse over ii the amount with respect to which the tentative_tax is determined under sec_2001 on the estate of such deceased spouse sec_2010 provides that a dsue amount may not be taken into account by a surviving_spouse under sec_2010 unless the executor of the estate of the deceased spouse files an estate_tax_return on which such amount is computed and makes an election on such return that such amount may be so taken into account the election plr-106300-16 once made shall be irrevocable no election may be made if such return is filed after the time prescribed by law including extensions for filing such return sec_2010 provides that the secretary shall prescribe regulations as may be necessary or appropriate to implement sec_2010 sec_20_2010-2t a of the estate_tax regulations as in effect on date provides that to allow a decedent’s surviving_spouse to take into account that decedent’s dsue amount the executor of the decedent’s estate must elect portability of the dsue amount on a timely filed form_706 under sec_20_2010-2t a the due_date of an estate_tax_return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been granted under sec_20_2010-2t a the portability election is made by timely filing a complete and properly prepared estate_tax_return unless the executor satisfies the requirements for the election not to apply in sec_20_2010-2t a i sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 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 code except subtitles e g h and i sec_301_9100-1 provides that the term statutory election means an election whose due_date is prescribed by statute the term regulatory election means an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute a request for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner 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 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer failed to make the election because after exercising reasonable diligence taking into account the taxpayer’s experience and the complexity of the return or issue the taxpayer was unaware of the necessity for the election plr-106300-16 the due_date for the portability election is prescribed by statute in the case of an estate required to file an estate_tax_return under sec_6018 see sec_2010 sec_6075 and sec_6018 in the case of an estate that is not required to file an estate_tax_return under sec_6018 the due_date is prescribed by regulation see sec_20_2010-2t a see also sec_20_2010-2 and revproc_2014_18 2014_7_irb_513 sec_2 accordingly in the latter case a taxpayer may seek an extension of time to elect portability under the provisions of sec_301_9100-3 sec_6018 requires the filing of an estate_tax_return in all cases where the gross_estate exceeds the basic exclusion amount in effect under sec_2010 for the calendar_year which includes the date of death for purposes of this determination under sec_6018 the basic exclusion amount is reduced but not below zero by the sum of -- a the amount of the adjusted_taxable_gifts within the meaning of sec_2001 made by the decedent after date plus b the aggregate amount allowed as a specific exemption under sec_2521 as in effect before its repeal by the tax reform act of with respect to gifts made by the decedent after date decedent’s estate represents that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is not required to file an estate_tax_return under sec_6018 under these facts the commissioner has discretionary authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly we grant an extension of time of days from the date of this letter in which to elect portability under sec_2010 the election should be made by filing a complete and properly prepared form_706 and a copy of this letter within days from the date of this letter to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center stop cincinnati oh for purposes of electing portability a form_706 filed by decedent’s estate within days from the date of this letter will be considered to be timely filed 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 if it is later determined that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is required to file an estate_tax_return pursuant to sec_6018 the commissioner is without authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void plr-106300-16 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 associate chief_counsel passthroughs special industries by leslie h finlow leslie h finlow senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury washington dc person to contact telephone number refer reply to cc intl - plr-107354-99 date date internal_revenue_service index no number release date a date b date c country d dear this is in response to your letter dated date requesting a ruling under sec_877 of the internal_revenue_code_of_1986 code that a’s loss of u s citizenship did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code the information submitted for consideration is substantially as set forth below the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by penalty of perjury statements 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 on date b and became a u s citizen at birth on the basis of her parents being citizens of the united_states a has been a resident of country d since date b a renounced her united_states citizenship on date c on the date of a’s expatriation her net_worth exceeded the net_worth required under sec_877 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 taxed on u s source income as modified by sec_877 for such taxable_year unless such loss did not have for one of its principal purposes the avoidance of u s taxes plr-107354-99 sec_2107 and sec_2501 a provide special estate and gift_tax regimes respectively for individuals who expatriate with a principal purpose to avoid u s taxes a former citizen or former 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 b a former u s citizen or former long term-resident 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 a c under notice_98_34 1998_27_irb_40 an eligible former citizen will not be presumed to have a principal purpose of tax_avoidance if that former citizen 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 under sec_877 because a became at birth a citizen_of_the_united_states and a citizen of another country and continues to be a citizen such other country see sec_877 a submitted all the information required by notice_98_34 accordingly based solely on the information submitted and the representations made it is held that a has made a complete and good_faith submission in accordance with sec_877 and notice_98_34 accordingly based solely on the information submitted and the representations made it is held that a has made a complete and good_faith submission in accordance with sec_877 and notice_98_34 it is further held that a will not be treated under sec_877 as having as one of her principal purposes of expatriating the avoidance of u s taxes because the information submitted clearly established the lack of a principal purpose to avoid taxes under subtitle a or b of the code 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 taxable periods prior to her loss of u s citizenship or for taxable periods after her loss of u s citizenship under sections of the code other than sec_877 sec_2107 and sec_2501 a plr-107354-99 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 section 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 a sincerely yours ________________ allen goldstein office of the associate chief_counsel international cc


internal_revenue_service number release date index number ------------------------------------ ------------------------------------ ------------------------------- ---------------------------------------------------- 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 psi b01 plr-103503-13 date date legend x state date ---------------------------- ------------------------- ----------------- -------------------------- dear ---------- this responds to a letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts x was incorporated under the laws of state on date the shareholders of x intended that x elect to be treated as an s_corporation effective date however the election to be treated as an s_corporation effective date was not timely filed law and analysis sec_1362 of the code provides that a small_business_corporation can elect to be treated as an s_corporation sec_1362 of the code provides guidance on when the s election becomes effective if an s election is made within the first two and one-half months of a plr-103503-13 corporation’s taxable_year then that corporation will be treated as an s_corporation for the year in which the election was made if the corporation makes an election after the first two and one-half months of a corporation’s taxable_year then the corporation will generally not be treated as an s_corporation until the following taxable_year sec_1362 of the code provides that if no election is made pursuant to sec_1362 or if the election is made after the date prescribed for making such an election and the secretary determined reasonable_cause existed for the failure to timely make the election then the secretary can treat such an election as being timely made for that taxable_year and effective as of the first day of that taxable_year x did not file a timely election to be treated as an s_corporation under sec_1362 x has however established reasonable_cause for not making a timely s election therefore x is entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective date if within days from the date of this letter x submits a properly completed form_2553 with a copy of this letter attached to the appropriate service_center 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 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 the taxpayer’s authorized representatives sincerely david r haglund david r haglund branch chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes cc


t c summary opinion united_states tax_court kim anthony polonczyk petitioner v commissioner of internal revenue respondent docket no 17434-04s filed date kim anthony polonczyk pro_se rebecca dance harris for respondent cohen judge this case was heard pursuant to the provisions of sec_7463 in effect when the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax for that was attributable to three items of unreported income the issues for decision are whether petitioner’s unemployment_compensation is taxable under sec_85 whether petitioner had interest_income from his checking account with forth worth city credit_union and whether petitioner had taxable_income from a farmers new world life_insurance co distribution unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure background some of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference petitioner resided in san antonio texas at the time that he filed his petition on date petitioner timely filed form_1040 u s individual_income_tax_return for the income_tax year petitioner reported dollar_figure of ira_distributions and dollar_figure of itemized_deductions on the form_1040 petitioner did not report any other income for on date the internal_revenue_service irs sent to petitioner a statutory_notice_of_deficiency for dollar_figure for the irs determined that petitioner did not report dollar_figure of unemployment income from the texas workforce commission texas workforce dollar_figure of interest_income from fort worth city credit_union the credit_union and dollar_figure of taxable_income from a farmers new world life_insurance co farmers distribution the irs relied on a form 1099-g certain government payments in determining that petitioner had received dollar_figure of unemployment_compensation from the texas workforce in petitioner does not dispute receipt of this amount the irs relied on a form 1099-int interest_income in determining that petitioner had received dollar_figure of interest_income on his checking account at the credit_union the irs relied on a form 1099-r distributions from pensions annuities retirements or profit sharing plans ira’s insurance contracts in determining that petitioner received a dollar_figure gross distribution from farmers in dollar_figure of which was taxable after the case was set for trial petitioner wrote to counsel for respondent disputing the interest and farmers income determinations and requesting help in obtaining subpoenas for the records of the credit_union and farmers the irs obtained an affidavit of records custodian of fort worth city credit_union the affidavit is not dated attached to the affidavit is a form 1099-int that reports dollar_figure in interest_income to petitioner in also attached to the affidavit is a statement of account that reports that petitioner’s savings account with the credit_union earned dollar_figure of interest_income in and reflects dollar_figure being deposited into the savings account on date the statement of account also reports that petitioner’s checking account earned dollar_figure of interest_income in however there is no evidence indicating whether that amount was ever deposited in or credited to the checking account the irs attempted to obtain information from farmers with respect to the gross distribution that it reported for petitioner as of the time of trial the irs had not obtained any additional information from farmers as to this amount unemployment_compensation discussion under sec_61 gross_income means all income from whatever source derived the general_rule of sec_85 is that in the case of an individual gross_income includes unemployment_compensation sec_85 unemployment_compensation means any amount received under a law of the united_states or of a state which is in the nature of unemployment_compensation sec_85 petitioner does not dispute that he received unemployment_compensation during petitioner argued at trial that he did not report the unemployment_compensation because an irs worksheet said that it was not taxable petitioner’s posttrial clarification memorandum argues that he did not report the unemployment_compensation because his income from the texas workforce falls below the minimum income level for filing of dollar_figure petitioner’s argument that he did not have enough income to file a return in has no merit without regard to the dollar_figure of unemployment_compensation petitioner had dollar_figure of ira distribution income making it necessary to file a return in that year he was obligated to report all of his income on that return including unemployment_compensation received accordingly respondent’s determination as to this amount is sustained interest_income and farmers distribution sec_6201 provides that if the taxpayer in a court_proceeding asserts a reasonable dispute with respect to the income reported on an information_return and fully cooperates with the commissioner the commissioner shall have the burden of producing reasonable and probative information in addition to the information_return petitioner filed a form_1040 in which he did not report the dollar_figure of interest_income from the credit_union petitioner testified that the average balance in his checking account was around dollar_figure and that the average balance in his savings account was around dollar_figure petitioner disputed that his checking account could have earned dollar_figure of interest_income in year the records presented at trial showed returned draft fees that apparently were the cause of a dispute between petitioner and the credit_union petitioner asserted that the interest_income from the credit_union had been incorrectly reported to the irs because the credit_union had a vendetta against him petitioner has asserted a reasonable dispute with respect to the interest_income and the information produced by respondent does not show any more than dollar_figure being deposited into petitioner’s savings account therefore respondent has not met the burden imposed by sec_6201 respondent contends that the insurance distribution was the result of a loan that petitioner took out from an annuity policy petitioner denies that he had an annuity policy with farmers respondent produced no probative information about the nature of the payment therefore respondent has not met the burden imposed by sec_6201 these issues are decided in favor of petitioner to reflect the foregoing under rule decision will be entered


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date march xxxxkx xxxkxxx xxxxkx uil code contact person identification_number contact number employer_identification_number xxkkkx form required to be filed tax years dear this is our final_determination that you do not qualify for exemption from federal_income_tax under internal_revenue_code sec_501 as an organization described in code sec_501 we made this determination for the following reason s there are an insufficient number of insureds to provide for an adequate premium-pooling base in addition your risk is too heavily concentrated in one insured as a result your business lacks one of the principle elements of insurance risk_distribution thus because you do not qualify as an insurance_company you do not meet the statutory requirement for exemption under sec_501 of the code you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file with their instructions and do not send them to this office result in a penalty_failure_to_file the returns timely may file the returns in accordance we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions instructions in notice action if you agree with our deletions you do not need to take any further if you disagree with our proposed deletions follow the if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions about your xxxxxx sincerely lois g lerner director exempt_organizations enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date date contact person xxxxxx xxkkxxxk xxxxxxk legend identification_number contact number fax number employer_identification_number xxkxkxx place xxxxxx a xxkxxx b xxkxxkx c xxkxkx d xxxxkkx e xxkxxkx f xxxxxx date xxxxxx year xxxkxxx xxkxxxkx m o xxxxkx xxkxxxx o xxxxxkx p xxxxxkx q c xxkxkx xxxxxx s xxkxxxkx t u xxkxxxkx xxkxxkx v xxxxkx w xxkxxkx xx y xxxxkx dear we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 the basis for our conclusion is set forth below xxxxxx facts you were incorporated on date in place you are in the business of providing certain commercial casualty and property insurance-type services you also reinsure certain contracts as described below you filed an election under sec_953 of the internal_revenue_code which allows an election by a foreign_insurance_company to be treated as a domestic_corporation you are wholly owned by a you have only one class of stock-m of no par_value shares out of these m shares you issued n shares in equal amounts to individuals d and e the total consideration paid for the shares was dollar_figureo paid in cash d and e also serve as your only corporate officers and directors president treasurer and assistant secretary e serves as your director vice president secretary and assistant treasurer neither d nor e holds financial interests in any other insurance_companies moreover neither d nor e has any agreement or relationship with any of the shareholders of the insurance_companies with which you conduct business the documents indicate that you are wholly owned by a which is wholly owned by d and e in equal parts d serves as your director corporate executive officer ceo you have employed company f as your resident manager for an annual compensation estimated to be less than dollar_figurep in addition to the gq direct-written insurance contracts that you issued to b you and entity c entered into an agreement titled joint underwriting stop loss endorsement c is not related to you a b dore you represent that c is a regulated insurer agreement you are responsible for payment of claims up to certain specified thresholds if the thresholds are met then c becomes liable for payment of claims up to certain specified limits the specified limits for c’s payment of claims are exceeded then you again become liable it also appears that for each of the above-referenced contracts you receive of the total premiums c receives of the total premiums it is unclear whether b pays you and c directly or whether b pays you and you remit to c it appears that under this if during year you entered into two types of reinsurance arrangements in the first arrangement you assumed reinsurance contracts from c the primary issuers on these contracts are unaffiliated insurance_companies that underwrite credit-type policies credit property credit disability and or credit life and policies for vehicle service contracts for year you received dollar_figurer in premium income from this arrangement you refer to the second arrangement as a reinsurance risk pooling program in this arrangement you participate in a reinsurance risk_pool with several other unrelated insurance_companies pool participants the risk_pool is operated by c each pool participant has one or more affiliated operating entities for which it underwrites insurance coverage generally casualty type coverage b insures a portion of the direct insurance underwritten by the pool participants using a so-called stop loss endorsement you currently participate in over s insurance policies with more than t insureds you blend together your direct-written insurance and then reinsure the entire book on a quota-share basis with each of the pool participants during year you received dollar_figureu in premiums with respect to this second arrangement d ra xxxxxkx your gross_income totaled dollar_figurev for year which consists of dollar_figurew in direct written premiums and dollar_figurex in reinsurance assumed and pooled premiums of your total premium income for year is from b is from the first reinsurance arrangement and is from the reinsurance risk pooling program for year your assets totaled dollar_figurey and total capital equaled dollar_figureo law and analysis neither the code nor the regulations define the terms insurance or insurance_contract the standard for evaluating whether an arrangement constitutes insurance is 312_us_531 in which the court stated that historically and commonly insurance involves risk-shifting and risk-distributing in a transaction which involve s an actual ‘insurance risk’ at the time the transaction was executed insurance has been described as involv ing a contract whereby for adequate_consideration one party agrees to indemnify another against loss arising from certain specified contingencies or perils epmeir v united_states 199_f2d_508 7th cir insurance is contractual security against possible anticipated loss id cases analyzing captive insurance arrangements have distilled the concept of insurance for federal_income_tax purposes to three elements applied consistently with principles of federal income_taxation involvement of an insurance risk shifting and distribution of that risk and insurance in its commonly accepted sense see eg 979_f2d_162 9th cir affig 96_tc_18 the risk transferred must be risk of economic loss f 2d 7th cir the risk must contemplate the fortuitous occurrence of a stated contingency 183_f2d_288 2d cir and must not be merely an investment or business risk legierse u s pincite revrul_89_96 1989_2_cb_114 allied fidelity corp v commissioner revrul_2007_47 r b provides that an arrangement that provides for the reimbursement of inevitable future costs does not involve the requisite insurance risk for purposes of determining whether the amount_paid for the arrangement is deductible as an insurance premium and whether the assuming entity may account for the arrangement as an insurance_contract for purposes of subchapter_l of the code in revrul_2007_47 a domestic_corporation engaged in a business process that was inherently harmful to people and property applicable government regulations require the corporation to take action to remediate the harm and therefore the_domestic_corporation will incur future cost to restore its business location there is no uncertainty that future costs will be incurred the_domestic_corporation entered into a contract with a domestic insurance_company to be reimbursed for its future costs the arrangement had no limits on its duration citing and amplifying revrul_89_96 1989_2_cb_114 revrul_2007_47 holds that this was not an insurance arrangement arrangements that are entered into to manage losses that are at least substantially certain to occur or that are not the result of fortuitous events do not constitute insurance the fortuity principle is central to the notion of what constitutes insurance revrul_2007_47 holds that an arrangement that purports to be an insurance_contract that lacks the requisite insurance risk or fortuity may instead be characterized as a deposit arrangement a loan or a contribution_to_capital an option or indemnity contract based on the substance of the arrangement between the parties xxxxxx risk shifting occurs if a person facing the possibility of an economic loss transfers some or all of the financial consequences of the potential loss to the insurer such that a loss by the insured does not affect the insured because the loss is offset by a payment from the insurer see revrul_60_275 1960_2_cb_43 risk shifting not present where subscribers all subject_to the same flood risk agreed to coverage under a reciprocal flood insurance exchange risk_distribution incorporates the statistical phenomenon known as the law of large numbers the concept of risk_distribution emphasizes the pooling aspect of insurance that it is the nature of an insurance_contract to be part of a larger collection of coverages combined to distribute risks between insureds 96_tc_18 aff'd 979_f2d_162 9th cir the new york stock exchange gratuity fund insurance that isn’t insurance yale l j explained that b y diffusing the risks through a mass of separate risk shifting contracts the insurer casts his lot with the law of averages the process of risk_distribution therefore is the very essence of insurance see also 797_f2d_920 10th cir risk_distribution means that the party assuming the risk distributes his potential liability in part among others 988_f2d_1135 fed cir rlisk distribution involves spreading the risk of loss among policyholders in treqanowan f 2d pincite the court quoting note distributing risk allows the insurer to reduce the possibility that a single costly claim will exceed the amount taken in as premiums and set_aside for the payment of such a claim by assuming numerous relatively small independent risks that occur over time the insurer smoothes out losses to match more closely its receipt of premiums 811_f2d_1297 9th cir risk_distribution necessarily entails a pooling of premiums so that a potential insured is not in significant part paying for its own risks see 881_f2d_247 6th cir in situation of revrul_2002_89 2002_2_cb_984 s a wholly owned subsidiary of p a domestic parent_corporation entered into an annual arrangement with p whereby s provided coverage for p’s professional liability risks the liability coverage s provided to p accounted for of the total risks borne by s under the facts of situation the service concluded that insurance did not exist for federal_income_tax purposes on the other hand in situation of revrul_2002_89 the premiums that s received from the arrangement with p constituted less than of s's total premiums for the year under the facts of situation the service reasoned that the premiums and risks of p were pooled with those of unrelated insureds and thus the requisite risk shifting and risk_distribution were present accordingly under situation the arrangement between p and s constituted insurance for federal_income_tax purposes in revrul_2002_90 2002_2_cb_985 s a wholly owned insurance subsidiary of p directly insured the professional liability risks of operating subsidiaries of its parent s was adequately capitalized and there were no related guarantees of any kind in favor of s most importantly s and the insured operating subsidiaries conducted themselves in a manner consistent with the standards applicable to an insurance arrangement between unrelated parties together the operating subsidiaries had a significant volume of independent homogeneous risks under the facts presented the ruling concludes the arrangement between s and each of the operating subsidiaries of s's parent constitute insurance for federal_income_tax purposes xxxxxx for valid non-tax business purposes the transport company situation of revrul_2005_40 r b describes a scenario where a domestic_corporation operated a large fleet of automotive vehicles in its courier transport business covering a large portion of the united_states this represented a significant volume of independent homogeneous risks entered into an insurance arrangement with an unrelated domestic_corporation whereby in exchange for an agreed amount of premiums the domestic carrier insured the transport company against the risk of loss arising out of the operation of its fleet in the conduct of its courier business the unrelated carrier received arm's length premiums was adequately capitalized received no guarantees from the courier transport company and was not involved in any loans of funds back to the transport company the transport company was the carrier's only insured while the requisite risk-shifting was seemingly present the risks assumed by the carrier were not distributed among other insured’s or policyholders therefore the arrangement between the carrier and the transport company did not constitute insurance for federal_income_tax purposes the facts in situation of revrul_2005_40 mirror the facts of situation except that in addition to its arrangement with the transport company the carrier entered into a second arrangement with another unrelated domestic company in the second arrangement the carrier agreed that in exchange for premiums it would insure the second company against its risk of loss associated with the operation of its own transport fleet the amount that the carrier received from the second agreement constituted of the total_amounts it received during the tax_year on a gross and net_basis thus of the carrier's business remained with one insured the revenue_ruling concluded that the first arrangement still lacked the requisite risk_distribution to constitute insurance even though the scenario involved multiple insureds in situation of revrul_2005_40 llcs elected classification as associations each contributing between five and of the insurer’s total risks the service concluded that this transaction constituted insurance for federal_income_tax purposes the principal concern with regard to your activities is whether there is sufficient risk_distribution as discussed above the idea of risk_distribution involves some mathematical concepts for example risk_distribution is said to incorporate the statistical phenomenon known as the law of large numbers whereby distributing risks allows the insurer to reduce the possibility that a single costly claim will exceed the amount taken in as premiums the concept hinges on the assumption of numerous relatively small and independent risks that occur randomly over time 811_f2d_1297 pincite as discussed the service in revrul_2002_90 concluded that insurance existed where insureds each contributed between five and to the insured’s total risks situation of revrul_2005_40 the service concluded that insurance existed where llcs electing classification as associations each contributed between five and of the insurer's total risks moreover in situation of revrul_2002_89 supra the service concluded that insurance existed where a wholly owned subsidiary insured its parent but the arrangement represented less than of the insurer’s total risk for the year similarly in the present facts are similar to those under situation of revrul_2002_89 supra and in situation of revrul_2002_89 supra the liability situation of revrul_2005_40 supra coverage provided to the parent_corporation by its wholly owned subsidiary accounted for xxxxxxk of the total risks borne by the subsidiary similarly in situation of revrul_2005_40 supra a second insurer contributing of the insured’s risks was added to the single-insured scenario of situation the service concluded in both of the above scenarios that insurance did not exist because there lacked a sufficient number of insureds to provide for an adequate premium pooling base the service’s published guidance does not address whether insurance exists where the number of insureds varies between and nor does such guidance deal with the fact patterns involving a concentration of risk with a single insured of less than assuming that all of your contracts do constitute insurable risks over of your total risks for the year tax_year are with the three entities that make-up b in the present case the fact pattern for the year in question presents a heavy concentration of risks in just a few insureds in our view such concentration of risk does not allow the insurer to reduce the possibility that a single costly claim will not exceed the amount of premiums taken in from such a limited number of insureds therefore there is not sufficient risk_distribution to conclude that insurance exists consequently you do not qualify as an insurance_company you appear to rely on 96_tc_45 to support its argument that it qualifies as an insurance_company you believe that the court in harper group holds that where a single-insured paid of the total premium risk_distribution was sufficient to qualify the arrangement as insurance because less than of your risk is from b applicant asserts that the arrangement should qualify as insurance under harper group this is a misunderstanding of harper group in harper group to of the total premiums received for the years at issue were not related to a single policyholder rather the to were the total percentages received from all related policyholders including brother sister corporations a total of entities the court’s analysis in harper group must be read in its entirety and all the facts and circumstances must be considered ie that there are entities making up the nearly two thirds risk concentration in all the years at issue the service took a similar position in revrul_2002_90 concluding that insurance existed in an arrangement involving insureds each contributing between and of the insurer's total risks moreover in situation of revrul_2005_40 the service concluded that insurance existed where llcs electing classification as associations each contributed between and of the insurer’s total risks also in situation of revrul_2002_89 the service concluded that insurance existed where a wholly owned subsidiary insured its parent but the arrangement represented less than of the insurer’s total risk for the year sec_501 of the code exempts certain insurance_companies from federal_income_tax for the reasons stated above you are not an insurance_company within the meaning of sec_501 therefore you are not exempt from federal_income_tax under sec_501 you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination your protest statement should be accompanied by the following declaration under penalties of perjury declare that have examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all the relevant facts and such facts are true correct and complete xxxxxx you also have a right to request a conference to discuss your protest this request should be made when you file your protest statement an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you want representation during the conference procedures you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so and power_of_attorney all forms and publications mentioned in this letter can be found at www irs qgov forms and publications for more information about representation see publication practice_before_the_irs if you if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to this address internal_revenue_service xxkxxxx xkxkxx constitution ave n w washington dc you may also fax your statement using the fax number shown in the heading of this letter you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely lois g lerner director exempt_organizations


t c summary opinion united_states tax_court thomas r tavella petitioner v commissioner of internal revenue respondent docket no 11463-07s filed date thomas r tavella pro_se alexander d devitis for respondent dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency in petitioner’s federal_income_tax of dollar_figure for the issue for decision is whether petitioner is subject_to self-employment_tax background some of the facts and one of the issues has been stipulated the stipulated facts and issue are so found the stipulation of facts and the exhibits received in evidence are incorporated herein by reference at the time the petition was filed petitioner resided in california during petitioner worked as a consultant and independent_contractor for the sole_proprietorship of mark h randall mr randall who was doing business as the mark randall company mark randall petitioner entered into an oral contract sealed with a handshake with mr randall to work together and build his business and make it successful petitioner has worked exclusively for mark randall since petitioner described his work with mark randall as collaborative but petitioner does not handle any account completely on his own petitioner used the title president of mark randall because it conveyed to clients his importance to the business of mark randall petitioner however maintained no ownership_interest in and had no executive responsibility for mark randall as mark randall had no offices petitioner maintained a home_office for his work any travel required for petitioner’s work was usually on weekends he usually called on his clients on sunday typically petitioner consulted with synagogues in fundraising matters he conducted interviews from his home with members of the client congregations to determine their feelings about their synagogue and whether they would be willing to increase their donations petitioner might also conduct meetings with volunteer congregants to help them solicit funds mark randall paid petitioner a fixed rate per month per client until either the contract between mark randall and the client ended or the fee to the client was reduced petitioner included a schedule c profit or loss from business with his federal_income_tax return for stating his business or profession as consultant petitioner however did not report any self-employment_tax respondent examined petitioner’s return and determined that petitioner owes self- employment_tax on his income from mark randall as a result of the adjustment to self-employment_tax respondent made other computational adjustments that will be resolved by the court’s decision on the self-employment_tax issue discussion generally the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer has the burden of proving that those determinations are erroneous see rule a 290_us_111 in some cases the burden_of_proof with respect to relevant factual issues may shift to the commissioner under sec_7491 because there is no dispute as to any factual issue in this case sec_7491 is inapplicable statutory_employee petitioner argues that he is a so-called statutory_employee and therefore is not subject_to self-employment taxes generally the tax on self-employment_income applies to the net_earnings_from_self-employment of an individual sec_1401 sec_1402 in simplified terms net_earnings from self employment means the gross_income derived by an individual from any trade_or_business carried on by such individual less the deductions attributable to the trade_or_business sec_1402 the term trade_or_business generally does not include the performance of services by an individual as an employee sec_1402 the term employee for employment_tax purposes has the same meaning as in sec_3121 sec_1402 an employee for employment_tax purposes is defined in pertinent part by sec_3121 as follows sec_3121 employee --for purposes of this chapter the term employee means- any officer of a corporation or any individual who under the usual common_law rules applicable in determining the employer-employee relationship has the status of an employee or any individual other than an individual who is an employee under paragraph or who performs services for remuneration for any person as an agent or commission_driver who distributes certain food products as a life_insurance salesman as a home worker working on certain materials or goods or as a traveling or city salesman who is not an agent or commission_driver who meets certain other requirements the listed individuals if the contract_of_service contemplates that substantially_all of such services are to be performed personally by such individual will be classified as employees except that an individual will not be included in the term employee if he has a substantial investment in facilities used in connection with the performance of the services other than in facilities for transportation sec_3121 the social_security act amendments of restyled the predecessor of sec_3121 and extended coverage to specified classes of workers irrespective of their common-law status see 397_us_179 n according to s rept 81st cong 2d sess 1950_2_cb_302 the definition of employee was to be expanded to include individuals performing certain categories of service which are subject_to clear-cut definition and if the services are not performed in one of the designated occupational groups the paragraph is inapplicable with respect to such services petitioner takes the position that his work was similar to that of life_insurance agents and that he competed with them for clients according to petitioner it is reasonable to assume that the list of jobs was meant to be examples of and not a finite list to the exclusion of all others who may work in the same manner sec_3121 however does not provide that the term employee includes the occupations on the list it defines the term employee and lists discrete and specific categories of service that are not so ambiguous as to allow petitioner in his service profession to fit the definition of statutory_employee as prescribed by that section the legislative_history clearly states the intention of congress to exclude from the definition of employee individuals performing services that are not performed in one of the designated occupational groups if the statute does not include him petitioner counters by arguing that since he competes with life_insurance salesmen allowing them to be classified as statutory employees while denying him the same classification is unfair and violates his right of equal protection under equal protection analysis a classification in a federal statute is subject_to strict scrutiny only if it impermissibly interferes with the exercise of a fundamental right or operates to the peculiar disadvantage of a suspect class 427_us_307 411_us_1 neither of these circumstances applies here consequently the rational basis standard is the appropriate one to apply under the standard where a rational basis exists for divergent treatment of different classes of persons under a tax statute the statute is not in violation of the fifth_amendment because of the divergent treatment 461_us_540 400_us_4 generally under this standard a differentiation in treatment is not violative of equal protection principles if any state of facts rationally justifying it is demonstrated to or perceived by the courts united_states v maryland savings-share ins corp supra pincite the supreme court has stated that the presumption of constitutionality can be overcome only by the most explicit demonstration that a classification is a hostile and oppressive discrimination against particular persons and classes the burden is on the one attacking the legislative arrangement to negative every conceivable basis which might support it 309_us_83 the presumption of the existence of a rational basis for a classification in a revenue statute is particularly strong 69_tc_505 56_tc_1379 affd per curiam 459_f2d_1045 2d cir the supreme court in united_states v w m webb inc supra pincite suggests that congress intended by the statutory revision to limit those occupations that might be considered to be filled by employees petitioner has not shown that congress did not rationally decide to include individuals in specific service professions in the category of employee regardless of the common_law rules for determining the employer-employee relationship and to exclude others the court finds that the legislative classification is constitutional petitioner therefore cannot be a statutory_employee under sec_3121 it follows that petitioner had income from self-employment and is liable for self-employment_tax for see sec_1401 and sec_1402 to reflect the foregoing decision will be entered for respondent