stephen j johnson petitioner v commissioner of internal revenue respondent docket no 11556-09l filed date that with interest and penalties p had taxable_income of dollar_figure million in and dollar_figure mil- lion in p filed income_tax returns for those years in but paid no income_tax the internal_revenue_service irs assessed tax of dollar_figure for and dollar_figure for and then served on p notice of the filing of a notice_of_federal_tax_lien nftl and a notice of proposed levy to collect p’s liabilities totaled dollar_figure p requested a collection_due_process cdp hearing during which he proposed an offer-in-compromise oic which he amended several times during and while the cdp hearing was in process during the pendency of the cdp proceeding p received from sales of investments proceeds that he did not pay to the irs in date p amended his oic to propose payments totaling dollar_figure but in date p advised that he could not afford to make the payments and that he would amend his offer downward to dollar_figure r rejected the oic and issued a notice of deter- verdate 0ct date jkt po frm fmt sfmt v files johnson sheila united_states tax_court reports mination sustaining the notices of lien and proposed levy p filed a petition for review of the determination under sec_6330 during a remand r’s settlement officer deter- mined that p’s reasonable collection potential rcp was more than three times the amount he had informally proposed which was based solely on the value of one asset he owned in calculating rcp r also took into account as dissipated assets certain of the proceeds of p’s investment_assets that he did not pay to the irs after remand r issued a supplemental notice_of_determination to proceed with collection by lien and or levy of assessed income_tax liabilities plus interest and penalties for taxable years and held where p amended or withdrew an oic r’s office of appeals did not abuse its discretion in declining the terms previously offered in that oic held further in declining p’s informal proposal on the grounds that it offered less than his rcp r’s office of appeals did not abuse its discretion by including in its cal- culation of p’s rcp certain dissipated assets and the settle- ment officer’s final projection of p’s future earnings babcock maclean and marshall j gluck for petitioner justin l campolieta for respondent opinion gustafson judge this is an appeal pursuant to sec_6330 sec_1 by which petitioner stephen johnson seeks this court’s review of a determination by the office of appeals of the internal_revenue_service irs to reject mr johnson’s proposed offer-in-compromise oic and to sustain the filing of a notice_of_federal_tax_lien nftl and notice_of_intent_to_levy in order to collect mr johnson’s unpaid federal income taxes for tax years and that determination was made after the office of appeals had conducted a collection_due_process cdp hearing pursuant to sec_6330 and a supplemental cdp hearing pursuant to a remand by this court this matter is currently before the court pursuant to the parties’ joint motion to submit this case on a stipulated record under rule the issue for decision is whether the office of appeals’ rejection of mr johnson’s oic was an abuse_of_discretion we hold that the office of appeals did not abuse its discretion unless otherwise indicated all section references are to the internal_revenue_code u s c as amended and all rule references are to the tax_court rules_of_practice and proce- dure verdate 0ct date jkt po frm fmt sfmt v files johnson sheila johnson v commissioner by rejecting mr johnson’s oic and sustaining the proposed collection action background this case was submitted fully stipulated pursuant to rule and the facts are so found the stipulations of the par- ties with accompanying exhibits are incorporated herein by this reference at the time he filed the petition mr johnson resided in the republic of singapore mr johnson’s background stephen johnson earned a degree in business from the university of pennsylvania school of business and worked as an investment banker with ubs ag mr johnson left ubs ag and in established asiawerks global investment group pte ltd asiawerks in singapore asiawerks is an invest- ment firm in which mr johnson held a 50-percent ownership_interest in and mr johnson’s primary sources of regular income were his asiawerks salary and certain tribal income he received annually as a member of the saginaw chippewa indian_tribe mr johnson’s and liabilities during and mr johnson liquidated a number of investments the gain realized from the liquidation of these investments combined with his other earnings resulted in agi of dollar_figure in and dollar_figure in and in federal_income_tax liabilities of dollar_figure for and dollar_figure for mr johnson filed returns for the years and in date but he did not make any payments towards his outstanding liabilities for those years in his briefs mr johnson stresses the stipulated fact that he liquidated the investments in order to fund a divorce settlement however as respondent points out mr johnson paid dollar_figure million to his former wife whereas his combined adjusted_gross_income agi for the two years totaled over dollar_figure million in general when calculating a taxpayer’s rcp a settlement officer may allow an expense for court-ordered payments eg alimony child_support where the pay- ments are reasonable internal_revenue_manual irm pt date however mr johnson’s payment of the dollar_figure million divorce settlement has no bearing on his rcp here because there are no ongoing payments towards this liability which need to be considered in determining his ability to pay his taxes the irs did however apply to those liabilities various overpayment credits from subsequent years and the downpayments mr johnson submitted in connection with various oics verdate 0ct date jkt po frm fmt sfmt v files johnson sheila united_states tax_court reports the irs’s notices of lien and proposed levy on date the internal_revenue_service irs issued mr johnson a notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 lien notice noti- fying him that a federal_tax_lien had been filed with respect to his outstanding income_tax liabilities for taxable years and and notifying him of his right to request a cdp hearing two days later on date the irs issued mr johnson a final notice-notice of intent to levy and notice of your right to a hearing levy notice for those same years pursuant to sec_6330 and sec_6331 advising him of the irs’s intent to levy upon his property as of that time his liabilities for and 2000-including interest and penalties-totaled dollar_figure on date the irs received from mr johnson’s representatives a form request for a collection_due_process_hearing the resulting cdp process took nearly four years since date multiple settlement officers have been involved in the cdp process and through his representatives mr johnson submitted three formal oics on forms offer_in_compromise and a number of proposed amend- ments and he informally proposed an amendment to an oic while only the most recent determination made by the office of appeals in date is now subject_to our review see 130_tc_79 an under- standing of the cdp hearing history is helpful hearing before settlement officer hunt on date mr johnson submitted his first formal oic on a form_656 dated date date oic under the date oic mr johnson proposed to pay in settlement of his outstanding tax_liabilities a total of dollar_figure in monthly installments of dollar_figure plus a deposit in the same amount mr johnson’s cdp hearing was initially assigned to settlement officer mark hunt so hunt who calculated mr johnson’s total_tax liability with accruals to be dollar_figure on date so hunt issued a preliminary deter- mination in which he calculated mr johnson’s reasonable verdate 0ct date jkt po frm fmt sfmt v files johnson sheila johnson v commissioner collection potential rcp to be dollar_figure and recommended rejection of the date oic mr johnson’s representa- tives subsequently submitted an informal proposal to amend the date oic upward to dollar_figure which mr john- son would fund with distributions from his investment in dcm ii doll technology investment fund ii lp dcm and his interest in claremont llc claremont however in date the date oic was informally amended down- ward to dollar_figure to account for mr johnson’s plan to sell his interest in dcm to an unrelated investor for percent of the value during an date telephone conference mr johnson’s representatives informed so hunt and his man- ager that asiawerks was having financial difficulty and that a portion of mr johnson’s dcm distribution which had been earmarked to fund the date oic and subse- quent oics was reinvested in asiawerks to pay his salary the parties also discussed the inclusion of certain dissipated assets in mr johnson’s rcp the value of mr johnson’s interest in asiawerks and the disallowance of a monthly loan payment on date after a series of further discus- sions mr johnson’s representatives faxed to so hunt an amended offer-in-compromise proposing a dollar_figure cash offer payable within eight months this offer was formally amended a week later on date when mr so hunt calculated mr johnson’s rcp to be dollar_figure on the basis of a future income poten- tial of dollar_figure monthly income of dollar_figure less allowable monthly expenses of dollar_figure pro- jected over months and a total equity in assets of dollar_figure in calculating mr johnson’s rcp for the purpose of this preliminary determination so hunt did not place any value on mr johnson’s 50-percent interest in asiawerks and he did not treat the distribution from cer- tain investments or the proceeds from the sale of real_property as dissipated assets in ulti- mately recommending rejection of the date oic so hunt rejected mr johnson’s asser- tion that the forced sale of securities giving rise to his tax_liabilities for years and presented a unique circumstance that would permit the acceptance of an oic for less than his rcp mr johnson received an earlier dcm distribution apparently in which is not at issue in the supplemental notice_of_determination issued by settlement officer covey so covey for clarity we will refer to the distribution at issue in the present case as the dcm distribu- tion the parties have continuously disagreed about the disallowance in computing rcp of a dollar_figure monthly loan payment attributable to a home equity loan that mr johnson’s mother took out on behalf of her son mr johnson claims that the loan was taken out so that he could fund the repayment of his outstanding tax_liabilities however he failed to substantiate that the loan proceeds were ever used for this purpose so hunt initially proposed to allow this expense in his draft determination but the appeals_office ultimately disallowed the expense in the supple- mental notice_of_determination because mr johnson was not legally obligated to repay the loan and the payments were not a necessary living expense verdate 0ct date jkt po frm fmt sfmt v files johnson sheila united_states tax_court reports johnson’s representatives submitted a revised amended offer- in-compromise date oic in which mr john- son proposed to pay dollar_figure in five bimonthly installments of dollar_figure in his date draft appeals case memorandum acm so hunt recommended acceptance of mr johnson’s date oic after calculating mr johnson’s rcp to be dollar_figure so hunt’s manager however rejected this recommendation shortly thereafter so hunt was internally reassigned to an acting position in management hearing before settlement officer devincentz settlement officer d w devincentz was assigned to com- plete mr johnson’s cdp hearing upon so hunt’s reassign- ment after reviewing all the prior correspondence and records so devincentz recalculated mr johnson’s rcp to be dollar_figure and advised mr johnson’s representatives that a short-term cash offer of dollar_figure with an additional dollar_figure downpayment would be an acceptable collection alternative on date mr johnson’s representatives informed so devincentz that asiawerks was in the process of winding up and thus mr johnson could no longer afford the payment schedule proposed in his date oic mr john- son’s representatives also informed so devincentz that mr johnson had used the remainder of his dcm distributions to fund the business operations of asiawerks and for living_expenses and that his only remaining asset was his post-dis- tribution interest in dcm valued at dollar_figure for that reason the first installment of dollar_figure consisted of dollar_figure which mr johnson would pay upon acceptance of the date oic plus the dollar_figure previously paid in connection with the date oic so hunt’s date draft acm was not a final product and contained a number of er- rors including a misstatement of mr johnson’s rcp mr johnson’s rcp was determined to be dollar_figure by combining future income potential of dollar_figure and equity in assets of dollar_figure this figure did not include the combined dollar_figure in cash already remitted to the irs in connec- tion with mr johnson’s date oic and date oic so devincentz recalculated mr johnson’s rcp to be dollar_figure by combining dollar_figure in fu- ture income potential with dollar_figure in asset equity in recalculating mr johnson’s future in- come potential so devincentz determined that only dollar_figure of the dollar_figure monthly loan payment was allowable as a necessary living expense representing the difference between the dollar_figure mr johnson was currently paying and the dollar_figure his mother had been paying towards her mortgage before the monthly loan payment arrangement this effectively increased mr johnson’s dispos- able income by dollar_figure per month so devincentz added the dollar_figure to the dollar_figure in net monthly income determined by so hunt which he then multiplied by months to arrive at a future income potential of dollar_figure moreover so devincentz increased mr johnson’s asset equity fig- ure from dollar_figure as calculated by so hunt to dollar_figure by adding the value of mr johnson’s discounted interest in a coal mine owned by asiawerks verdate 0ct date jkt po frm fmt sfmt v files johnson sheila johnson v commissioner mr johnson directed his representatives to amend the date oic downward to dollar_figure which would consist of the dollar_figure he had previously remitted in connec- tion with his prior oics and his remaining dollar_figure interest in dcm so devincentz declined this informal offer of dollar_figure and informed mr johnson that a notice of deter- mination sustaining the proposed collection action would be issued determination tax_court petition and remand the office of appeals issued its notice_of_determination on date mr johnson filed a petition with the court challenging the irs’s rejection of his oic and arguing that an offer of dollar_figure was acceptable given his financial situation respondent subsequently moved for remand because the notice_of_determination did not explain how so devincentz had calculated mr johnson’s rcp this court remanded the case to the office of appeals on date granting mr johnson a supplemental administrative hearing pursu- ant to sec_6330 supplemental hearing and determination upon remand settlement officer covey was assigned to mr johnson’s hearing and reviewed the administrative record at that time mr johnson’s unpaid balance including interest and penalties was dollar_figure and so covey ten- tatively calculated mr johnson’s rcp to be only about one- fourth of that-ie dollar_figure 10-on the basis of her under- standing of mr johnson’s financial situation a face-to-face conference was held on date in which so covey and mr johnson’s representatives discussed the issues relating to mr johnson’s unpaid tax_liabilities including the dissipation of mr johnson’s dcm distribu- tion mr johnson’s representatives claimed the dollar_figure dcm distribution was used to pay mr john- son’s representatives in connection with the ongoing tax that so covey initially calculated mr johnson’s rcp to be dollar_figure on the basis of a future income potential of dollar_figure over a period of months and a total equity in assets of dollar_figure so covey noted however that before a final calculation could be determined she needed more information regarding an appraisal of asiawerks and other companies mr johnson held inter- ests in as well as documentation substantiating that the liquidation proceeds of certain invest- ments were used for necessary living_expenses verdate 0ct date jkt po frm fmt sfmt v files johnson sheila united_states tax_court reports court_proceeding and to fund the downpayment of the date oic and that any remaining funds were either reinvested into the failing asiawerks or used for per- sonal living_expenses so covey requested that mr johnson provide by date a number of documents substan- tiating his current financial affairs including proof of disbursements from the dcm distribution and the liq- uidation of mr johnson’s investment in claremont closing statements settlement sheets bank statements verifying mr johnson’s claim that the money he reinvested in asiawerks to pay his salary had been used for necessary living_expenses mr johnson’s current form_w-2 wage and tax statement to corroborate a supposed reduction in his tribal income current statements establishing mr johnson’s remaining interests in dcm and claremont and forms b collection information statement for businesses for all companies in which mr johnson held an interest in response mr johnson’s representatives faxed so covey a letter on date advising so covey that the clare- mont investment had paid out dollar_figure and was now finished and advocating that so covey apply a flexible standard in calculating mr johnson’s rcp given that asiawerks was now defunct as is explained below most of the requested docu- ments were never provided to so covey in a letter dated date mr johnson’s represent- atives reiterated that his current offer was dollar_figure con- sisting of dollar_figure already remitted in connection with his prior oics plus dollar_figure that he believed he could obtain by liquidating his remaining dollar_figure interest in dcm that is mr johnson’s dollar_figure proposal presumed that beyond the dollar_figure he had already remitted the irs could reasonably expect to collect from him in the future no more than dollar_figure at this time mr johnson’s unpaid income_tax liabilities with accruals totaled approximately dollar_figure million on the basis of her review of the entire administrative record so covey ultimately concluded that neither of mr johnson’s proposed offers-ie neither the informal proposal of dollar_figure nor the date oic of dollar_figure that he had withdrawn-would be an acceptable offer given her calculation of his rcp in evaluating mr johnson’s proposals so covey calculated his rcp to be dollar_figure ie about percent of his total liability of about dollar_figure million on the verdate 0ct date jkt po frm fmt sfmt v files johnson sheila johnson v commissioner basis of total equity in assets of dollar_figure and future income potential of dollar_figure her asset computation was as follows personal bank accounts value of remaining dcm interest dissipated assets claremont interest sold dcm interest sold dollar_figure big_number big_number big_number total big_number so covey’s determination of mr johnson’s future income potential first computed his monthly disposable income income over allowable expenses and then multiplied that amount by months to yield four years’ worth of disposable income for his monthly income so covey took the figures from mr johnson’s own financial statement-ie wages of dollar_figure per month and tribal income of dollar_figure per month totaling dollar_figure per month so covey’s monthly expense fig- ures differed somewhat from mr johnson’s in some respects to his advantage but overall to his disadvantage and both are set out here monthly income monthly expenses national standard housing and utilities health care taxes transportation- operating cost transportation-owner- ship cost child care loan payment mr johnson so covey dollar_figure dollar_figure dollar_figure big_number big_number big_number dollar_figure big_number big_number total expenses monthly disposable income big_number -40 big_number big_number thus so covey disagreed with mr johnson both about the amount of his assets ie she included his personal bank accounts and about dollar_figure of dissipated assets and about the expenses that should be taken into account in figuring verdate 0ct date jkt po frm fmt sfmt v files johnson sheila united_states tax_court reports his disposable income chiefly she made no allowance for his dollar_figure loan payment mr johnson did not thereafter provide in response to so covey’s requests any documentation substantiating that the funds reinvested in asiawerks were used for necessary living_expenses nor forms 433-b for interests he owned in various businesses so covey therefore recommended and the office of appeals issued a supplemental notice_of_determination concerning collection action s under sec_6320 and or on date fully sustaining the proposed lien and levy actions of the collection_division in response to this supplemental notice_of_determination mr johnson filed an initial brief with this court arguing that the office of appeals failed to properly apply the irm provisions on dis- sipated assets and thus abused its discretion in rejecting mr johnson’s oics discussion i legal principles for collection_due_process a right to agency-level hearing sec_6330 provides that before a levy may be made on any property or right to property pursuant to sec_6331 a taxpayer is entitled to notice of the commissioner’s intent to levy and of the taxpayer’s right to a fair hearing before an impartial officer of the irs office of appeals sec_6330 and b similarly sec_6320 provides that after the filing of an nftl under sec_6323 the secretary shall furnish written notice of the filing and of the taxpayer’s right to a hearing which is generally conducted consistent with the procedures set forth in sec_6330 d and e sec_6320 at the agency-level cdp hearing taxpayers may raise chal- lenges to the appropriateness of collection actions and may make offers of collection alternatives which may include the posting of a bond the substitution of other assets an install- ment offer-in-compromise sec_6330 the appeals officer must consider those issues verify the requirements of applicable law and administrative procedure have been met and consider whether any pro- posed collection action balances the need for the efficient agreement an or see supra notes and verdate 0ct date jkt po frm fmt sfmt v files johnson sheila johnson v commissioner collection_of_taxes with the legitimate concern of the person involved that any collection action be no more intrusive than necessary sec_6330 as his collection alter- native mr johnson chose to submit oics in the case before us mr johnson disputes the irs’s failure to accept his latest oic b offers-in-compromise sec_7122 authorizes the secretary to compromise any civil or criminal case arising under the internal revenue laws sec_7122 provides that the secretary shall pre- scribe guidelines for evaluation of whether an oic should be accepted and thus the decision whether to accept or reject an oic is left to the secretary’s discretion 447_f3d_706 9th cir affg tcmemo_2004_13 c f_r sec_301_7122-1 proced admin regs the regulations promulgated under sec_7122 set forth three grounds for compromise of a taxpayer’s liability these grounds are doubt as to liability doubt as to collectibility and the promotion of effective tax_administration c f_r sec_301_7122-1 in his cdp hearing mr johnson sought a compromise based on doubt as to collectibility the secretary may compromise a tax_liability based on doubt as to collectibility where the taxpayer’s assets and income are less than the full amount of the liability c f_r sec_301_7122-1 under the commissioner’s administrative procedures an oic based on doubt as to collectibility will be acceptable only if it reflects the tax- payer’s reasonable collection potential rcp revproc_2003_71 sec_4 2003_2_cb_517 rcp is generally calculated by multiplying a taxpayer’s monthly income avail- able to pay taxes by the number of months remaining in the statutory period for collection see sec_6502 and adding to that product the realizable net equity in the taxpayer’s assets both parties appear to agree that mr johnson’s rcp is substantially less than his tax_liability which stood at approximately dollar_figure million as of date the par- ties obviously disagree however as to the amount of mr johnson’s rcp verdate 0ct date jkt po frm fmt sfmt v files johnson sheila united_states tax_court reports the irs may reject an oic because the taxpayer’s ability to pay is greater than the amount he proposes to pay under the compromise proposal see fargo v commissioner f 3d pincite under irs procedures the irs will not accept a compromise that is less than the reasonable collection value of the case absent a showing of special circumstances see revproc_2003_71 sec_4 mr johnson has not argued that he presents special circumstances so we determine here whether the settlement officer’s calculation of rcp was reasonable see 125_tc_301 affd 469_f3d_27 1st cir c dissipated assets where the settlement officer determines that a taxpayer has dissipated assets in disregard of the taxpayer’s out- standing federal_income_tax liability the irm provides that the dissipated assets may be included in the calculation of the minimum amount that is to be paid under an accept- able oic during an offer investigation it may be discovered that assets liquid or non liquid have been sold gifted transferred or spent on non-priority items or debts and are no longer available to pay the tax_liability this section discusses treatment of the value of these assets when considering an oic once it is determined that a specific asset has been dissipated the investigation should address whether the value of the asset or a portion of the value should be included in an acceptable offer amount inclusion of the value of dissipated assets must clearly be justified in the case file and documented on the ics or aoic history as appropriate a determination that assets were dissipated should include an analysis of the following facts when the asset s were dissipated in relation to the offer submission when the asset s were dissipated in relation to the liability how the asset was transferred if the taxpayer realized any funds from the transfer of assets the irm provisions on dissipated assets were revised in date and since then ap- pear in part but we quote the provisions as in effect when the office of appeals made the determination under review here mr johnson asserts in his brief that the irm instructs settlement officers to take dissipated assets into account only in unusual circumstances the irm however does not require unusual circumstances but requires only that the inclusion of dissipated assets must clearly be justified irm pt date the irm quoted below goes on to list a number of factors for consideration in deciding whether to include the value of dissipated assets in a taxpayer’s rcp as quoted above verdate 0ct date jkt po frm fmt sfmt v files johnson sheila johnson v commissioner how any funds realized from the disposition of assets were used the value of the assets and the taxpayer’s interest in those assets if the investigation clearly reveals that assets have been dissipated with a disregard of the outstanding tax_liability consider including the value in the rcp calculation irm pt date a dissipated asset is thus defined as any asset liquid or non- liquid that has been sold transferred or spent on non-pri- ority items or debts and that is no longer available to pay the tax_liability irm pt see also samuel v commis- sioner tcmemo_2007_312 if the taxpayer establishes that he used the dissipated assets for necessary living_expenses the irm instructs the settlement officer not to include them in the rcp calculation irm pt if the taxpayer fails to provide information substantiating the disposition of the funds from such assets the settlement officer may consider including the full value of the dissipated assets as part of the taxpayer’s rcp for purposes of determining an acceptable offer amount irm pt a consequence of including dissipated assets in rcp is that the taxpayer is fictitiously assumed to have as funds avail- able to pay his tax_liability money that he manifestly does not have anymore-an assumption that may be discouraging to the delinquent taxpayer who is trying to get right with the irs however the evident reason for this rule is to deter delinquent taxpayers from wasting money that they owe and should pay as taxes conscientious taxpayers would object- and the system would suffer-if a taxpayer with overdue taxes and with money in hand could spend his money on non-priority items and nonetheless effectively obtain forgiveness of his liability simply by proving in the collection context that he really did reduce his collection potential by wasting the assets removing dissipated assets from rcp could create perverse incentives and the tax collector must have discretion to avoid that problem it is therefore reason- able for the office of appeals to consider including dissipated assets in a taxpayer’s rcp verdate 0ct date jkt po frm fmt sfmt v files johnson sheila united_states tax_court reports d judicial review if the taxpayer is dissatisfied with the determination made by the office of appeals in his cdp hearing he may appeal that determination by filing a petition in this court sec_6330 where as here the underlying tax_liability is not at issue our review of the notice_of_determination under sec_6330 is for abuse_of_discretion see 114_tc_604 114_tc_176 we do not make an independent decision as to what would be an acceptable oic or substitute our judg- ment for that of the settlement officer rather we do not dis- turb the irs’s decision to reject an oic unless it is arbitrary capricious or without sound basis in fact or law murphy v commissioner t c pincite ii non-acceptance of the date oic for two reasons we hold that when in date the office of appeals declined to accept mr johnson’s date oic offering dollar_figure it did not abuse its discre- tion a mr johnson amended or withdrew the date oic in date the regulations require that oics be submitted in the form and manner prescribed by the secretary c f_r sec_301_7122-1 the prescribed form for an oic is form_656 see c f_r sec_601_203 statement of procedural rules revproc_2003_71 sec_4 c b pincite mr johnson’s latest form_656 was submitted in date and contained his offer to pay dollar_figure when respondent moved the court with mr johnson’s con- sent to remand this case to the office of appeals respondent apparently assumed that mr johnson’s date oic had still been pending at the time of the original date determination however it is clear that the mr johnson requests that this court order that petitioner’s pending offer_in_compromise be accepted by respondent however this court has jurisdiction to review respondent’s rejection of an oic for abuse_of_discretion we cannot order the irs to accept an oic rather if we find that the irs abused its discretion in rejecting an oic the remedy available to this court is to determine that the collection action itself-the filing of the nftl or the proposed levy-is not sustained respondent’s motion for remand filed date stated the primary issue in this verdate 0ct date jkt po frm fmt sfmt v files johnson sheila johnson v commissioner date oic was either amended or withdrawn by the time the office of appeals made its original determina- tion and could not have been accepted by the irs at that time the date oic was amended in date in a letter dated date mr johnson’s representa- tives stated mr johnson is no longer able to make the payments required under the dollar_figure offer mr johnson has instructed us to amend the pending dollar_figure offer downward to dollar_figure consisting of the dollar_figure he has already paid to the irs and the estimated dollar_figure sale value of his remaining interest in doll dcm we respectfully request that mr johnson’s offer as revised herein be accepted by the irs in a letter dated date mr johnson’s representa- tives confirmed to so covey that mr johnson’s current offer_in_compromise totals dollar_figure we find no provision in the pertinent regulations or rev- enue procedure that precludes an amendment to an oic or requires that such an amendment take any particular form consequently we conclude that on date mr john- son’s latest oic was amended downward by dollar_figure to an amount of dollar_figure as a result of that amendment there was no longer pending thereafter any offer to pay dollar_figure therefore the office of appeals did not abuse its discretion by failing to accept payment of dollar_figure case is whether respondent’s office of appeals abused its discretion in rejecting as a collection alternative a proposed offer-in-compromise the notice_of_determination however does not provide an explanation as to how the office of appeals calculated petitioner’s reasonable collection potential this suggests that respondent believed mr johnson’s date oic was still pending and had not been withdrawn otherwise respondent need only have issued a notice_of_determination stating that the date offer had been withdrawn rather than asking for a remand to clarify the calculation of mr johnson’s rcp for an offer that respondent knew was no longer pending the attachment to the supplemental notice_of_determination misstates mr johnson’s pro- posal at one point by stating your proposal was decreased from dollar_figure to dollar_figure empha- sis added but in fact the offered amount was decreased by dollar_figure to dollar_figure as the attach- ment elsewhere acknowledges verdate 0ct date jkt po frm fmt sfmt v files johnson sheila united_states tax_court reports if the date oic was not amended then it was withdrawn mr johnson’s representatives’ date letter made it clear that his payment of dollar_figure was no longer possible and was not offered if the letter did not effectively amend the offer down to dollar_figure then it must have withdrawn the offer of dollar_figure an offer will be considered withdrawn on the irs’s receipt of written notification of the withdrawal of the offer either by personal delivery or certified mail or on issuance of a letter by the irs confirming the taxpayer’s intent to withdraw the offer sec_301_7122-1 revproc_2003_71 sec c b pincite while mr johnson’s representatives’ letter did not use the term with- draw it stated that the dollar_figure offer is no longer work- able because mr johnson is no longer able to make the payments if the letter withdrew the oic then the office of appeals did not abuse its discretion in failing to accept the then-obsolete date oic b an oic offering dollar_figure would have been defective even if mr johnson’s offer to pay dollar_figure had still been pending the office of appeals would not have abused its discretion by failing to accept that offer when it issued its supplemental determination in date this is so for one of two alternative reasons first mr johnson had stated that he could not afford to make the payments that the dollar_figure oic called for if that were true then he would default on his obligations under the oic and under the standard term in paragraph l of form_656 would again become liable for the entire liability the execution of the oic would have been a pointless act or second for the reasons stated below in part iii b so covey reasonably concluded that mr johnson’s rcp exceeded dollar_figure that being the case it would not have been in the government’s interest to accept the oic and the office of appeals would not have abused its discretion by declining to accept it however the only collection alternative pending during the supplemental hearing was the amended offer of dollar_figure ie mr johnson’s offer to pay dollar_figure in addition to the dollar_figure already remitted to the irs we now analyze that proposal verdate 0ct date jkt po frm fmt sfmt v files johnson sheila johnson v commissioner iii non-acceptance of the informal proposal a mr johnson’s informal proposal was pending as we have noted irs regulations require that an oic be submitted on a form_656 whereas mr johnson’s latest and only pending proposal was the dollar_figure proposal commu- nicated by letter of date and confirmed by letter of date however for the reasons stated above in part ii a the date letter amended the date oic so that the dollar_figure proposal was pending in the form of the amended oic but even if the dollar_figure proposal was not embodied in a formal oic it was nonetheless a collection sec_6330 and was properly considered during the cdp hearing see sullivan v commissioner tcmemo_2009_4 97_tcm_1010 alternative purposes for of b mr johnson’s informal proposal was inadequate the issue did mr johnson’s rcp exceed dollar_figure we hold that the office of appeals did not abuse its discre- tion in declining mr johnson’s proposal to compromise his unpaid federal_income_tax liabilities for dollar_figure that pro- posed amount consisted of dollar_figure that mr johnson had already deposited in connection with prior offers and an addi- tional dollar_figure thus mr johnson essentially offered an additional dollar_figure in settlement of a federal_income_tax liability of approximately dollar_figure million this offer assumed that mr johnson’s entire collection potential consisted of the value of a single asset that mr johnson owned-his remaining interest in dcm after the second distribution to be considered for acceptance an offer based on doubt as to collectibility must equal or exceed a taxpayer’s reasonable collection potential irm pt date pursuant to revproc_2003_71 sec_4 an oic based on doubt as to collectibility will be acceptable only if the offer reflects the taxpayer’s rcp ie that amount less than the full liability which the irs could collect through means such as administrative and judicial remedies murphy v commis- sioner t c pincite for so covey to properly conclude that mr johnson’s pro- posal should be rejected she needed only to find that mr verdate 0ct date jkt po frm fmt sfmt v files johnson sheila united_states tax_court reports johnson’s rcp exceeded dollar_figure ie the amount he proposed to pay under his offer the precise amount by which mr johnson’s rcp exceeded dollar_figure need not be resolved because it was sufficient for so covey to find that mr john- son had available for collection an amount that was substan- tially greater than his dollar_figure offer so covey’s analysis mr johnson’s rcp exceeded dollar_figure so covey concluded and we hold that she reasonably con- cluded that mr johnson had other assets and disposable income not admitted by him that could have funded addi- tional collection in fact so covey calculated mr johnson’s rcp to be not dollar_figure but dollar_figure however if mr john- son’s rcp did substantially exceed dollar_figure then the rejection of his proposal was justified even if his rcp was not as great as dollar_figure we therefore consider three principal items any one of which by itself would support the supplemental deter- mination of the office of appeals a dissipated assets so covey concluded that mr johnson had a total equity in assets of dollar_figure which included amounts he had pre- viously received from his claremont investment and his dcm distribution which she considered dissipated assets specifically so covey included a the dollar_figure that mr johnson received from the liquidation of his interest in claremont and b dollar_figure from mr johnson’s dcm distribution of dollar_figure the portions of that distribution that she did not treat as dissipation were the dollar_figure that was remitted to the irs as a downpayment with the date oic and dollar_figure that was used to pay mr johnson’s representatives in connection with the prosecution of his tax_court proceeding pursuant to irm part any assets that have been sold gifted transferred or spent on non-priority items or debts and are no longer available to pay the tax_liability are treated as dissipated assets the irm instructs a settlement officer to consider inclusion of dissipated assets unless the taxpayer can substantiate that such assets were used to fund necessary living_expenses the burden rests on the taxpayer verdate 0ct date jkt po frm fmt sfmt v files johnson sheila johnson v commissioner however to provide complete and current financial informa- tion and to corroborate any such claims see kerr v commis- sioner tcmemo_2007_43 c f_r sec_301_7122-1 mr johnson disputes the inclusion of any of his liquidated investments as dissipated assets for purposes of calculating his rcp because he says these funds were reinvested in his failing business in order to pay him a salary which he argues was needed for necessary living_expenses if mr johnson could show that he invested these distributions into asiawerks to pay himself a salary and if he could substan- tiate that he used the resulting salary for necessary living_expenses then he could credibly argue that these assets should not be included in his rcp calculation as dissipated assets however despite pointed requests from so covey mr johnson failed to substantiate either a how much of the dcm distribution or the claremont distribution that he invested into asiawerks was actually used to pay his salary or b how much of this salary if any was used for necessary living_expenses thus so covey did not abuse her discre- tion by including the full dollar_figure as dissipated assets in calculating mr johnson’s rcp b personal bank accounts so covey determined from mr johnson’s own financial statements that he held dollar_figure in bank accounts an amount equal to more than percent of the dollar_figure he offered mr johnson did not dispute this determination he was therefore in a position to pay substantially more than the dollar_figure he offered which would come from his liquidation of dcm this fact in itself was enough to justify the rejection of his dollar_figure proposal c future disposable income according to the irm the amount to be collected from future income for purposes of calculating a taxpayer’s rcp consists of projected gross monthly income less allowable expenses forecast over a specified monthly period irm pt in calculating future income settlement officers are according to his form_w-2 mr johnson received dollar_figure as tribal income since he had at least this tribal income from which to pay living_expenses we cannot assume that asiawerks salary was spent on necessary living_expenses which the irs determined to be dollar_figure per month verdate 0ct date jkt po frm fmt sfmt v files johnson sheila united_states tax_court reports directed to consider the taxpayer’s overall general situation including such facts as age health marital status number and age of dependents level of education or occupational training and work experience id pt if a tax- payer is temporarily unemployed or underemployed the irm suggests using the level of income expected if the taxpayer were fully employed and if the potential for employment is apparent id pt in this case so covey calculated mr johnson’s future disposable income to be dollar_figure in projected gross monthly income less dollar_figure in allowable monthly expenses arriving at dollar_figure in disposable income per month which she pro- jected over a period of months mr johnson makes two principal arguments against so covey’s determination of disposable income-first that income should be reduced and second that his allowable expense should be increased first mr johnson argues that he should essentially be treated as having no future income potential at all and that the office of appeals should apply a flexible standard in projecting his monthly income given that mr johnson’s business asiawerks is now defunct in their letter dated date mr johnson’s representatives essentially argue that he has no prospect of future income other than his tribal income because asiawerks was in the process of winding up this argument however overlooks the signifi- cant difference between being temporarily unemployed or underemployed and being permanently unemployable in considering the factors outlined in the irm including mr johnson’s health education skills prior earnings and professional background so covey did not abuse her discre- tion in finding that mr johnson was very employable and could at a minimum earn a projected dollar_figure a year in addition to his tribal income second mr johnson argues that his disposable income should be reduced by loan payments of dollar_figure per month this purported expense stems from a home equity loan that his mother took out on her home the proceeds of which he claims were used by him for living_expenses the payment of taxes and legal fees incurred in connection with this pro- in an exercise of discretion so covey projected mr johnson’s gross monthly income over a period of only months even though according to irm part a she could have projected his income over months verdate 0ct date jkt po frm fmt sfmt v files johnson sheila johnson v commissioner ceeding while so hunt proposed to allow the monthly loan payments as an expense in the calculation of mr johnson’s rcp and while so devincentz would have allowed a portion of these loan payments the administrative record reflects that the office of appeals was justified in ultimately dis- allowing the dollar_figure monthly loan payments on so covey’s recommendation because mr johnson failed to establish that the payment of this debt was necessary for the produc- tion of income or for the health and welfare of the taxpayer’s family as required by the irm see irm pt a more difficult issue might have been presented had mr johnson corroborated his claim that the loan proceeds were applied toward his outstanding tax_liabilities however we need not address that hypothetical issue in the absence of any evidence to substantiate his claims that the loan pro- ceeds were used for necessary living_expenses or the payment of taxes and expenses we cannot say that so covey abused her discretion by disallowing the dollar_figure monthly loan pay- ments in calculating mr johnson’s rcp thus while mr johnson proposed to pay the irs the pro- ceeds from the anticipated sale of one asset and nothing more so covey reasonably determined in view of his profes- sional qualifications and personal earning history that his reasonable collection potential included some amount of future disposable income that being the case rejection of his proposal was not an abuse_of_discretion c mr johnson’s other arguments have no merit the office of appeals did not renege on any deal with mr johnson mr johnson claims in his answering brief that his oics were accepted by the irs four times over the last seven years but each time the irs subsequently reneged on the deals mr johnson argues that the administrative course of conduct was therefore more intrusive than necessary and denied him the fundamental fairness that congress sought to protect in cdp hearings mr johnson’s claim fails however as a matter of both fact and law verdate 0ct date jkt po frm fmt sfmt v files johnson sheila united_states tax_court reports a as a matter of fact no settlement officer purported to accept any offer made by mr johnson the record is altogether void of any instance in which a settlement officer or appeals officer purported to actually accept any of mr johnson’s oics while so hunt rec- ommended acceptance of mr johnson’s date oic in the draft date acm this recommendation was considered by so hunt’s manager ms craca and ultimately rejected a recommendation of acceptance by a settlement officer however is not an acceptance of a taxpayer’s oic b as a matter of law no settlement officer had any authority to accept any offer made by mr johnson an oic is a contract and general principles of contract law therefore determine whether a binding settlement has been reached becker holding corp v commissioner tcmemo_2004_58 one such principle is that a settlement agreement may be reached only by authorized agents or officials rep- resenting the parties 108_tc_320 affd without published opinion 208_f3d_205 3d cir p ersons dealing with an agent of the government must take notice of the limita- tions of his authority 345_f2d_558 ct_cl 74_tc_743 affd per curiam 673_f2d_784 5th cir mid- west motor express inc v commissioner 27_tc_167 affd 251_f2d_405 8th cir within the office of appeals final authority over administrative settlements involving federal tax matters has been delegated to regional directors of appeals chiefs assistant chiefs and associate chiefs of the appeals offices appeals team chiefs team managers directors of an appeals operating_unit appeals area directors deputy appeals area directors and appeals team case leaders c f_r sec_601_106 and ii statement of procedural rules irs deleg order no rev date irs deleg order no app 8-a date further authorizes appeals officers and settlement officers to conduct hearings and make determinations under sec_6320 and sec_6330 and appeals team managers to review and approve such determinations thus a settlement officer lacks authority to accept an oic consequently verdate 0ct date jkt po frm fmt sfmt v files johnson sheila johnson v commissioner regardless of any_action that so hunt might have purported to take the government had not accepted any oic that could have been breached by the adverse determinations of the office of appeals the outcome is the same if mr johnson contends not that an oic was explicitly accepted by so hunt but that in some other less formal fashion so hunt made a deal with him on behalf of the irs such a contention alleges a quasi-contract or a contract implied in fact which is ‘founded upon a meeting of minds which although not embodied in an express contract is inferred as a fact from conduct of the parties showing light of the surrounding cir- cumstances their tacit understanding ’ 70_f3d_597 fed cir quoting 261_us_592 however as the court of federal claims has explained in the w hen the united_states is a party to an alleged contract implied-in-fact the government representative whose conduct is relied upon must have actual authority to bind the government in contract 75_fedclaims_249 citations omitted the commissioner is thus not bound by an apparent settle- ment where an agent is without authority to compromise a taxpayer’s tax_liability becker holding corp v commis- sioner tcmemo_2004_58 87_tcm_1069 citing 278_us_282 here so hunt was without authority to bind respondent to a settlement and thus mr johnson could not have had any deal based on the actions of so hunt the office of appeals did not abuse its discretion by delay in the handling of mr johnson’s case mr johnson also asserts in his briefs that the cdp pro- ceedings were more intrusive than necessary in violation of sec_6330 because of the length of the proceedings and the number of settlement officers assigned to his hearings while the four-year duration of this proceeding was unfortunate we do not perceive that the office of appeals abused its discretion in conducting the cdp hearings first sec_6330 does not provide that the cdp process must not be more intrusive than necessary but rather that the proposed collection action eg lien or levy verdate 0ct date jkt po frm fmt sfmt v files johnson sheila united_states tax_court reports be no more intrusive than necessary mr johnson has made no showing that the collection actions that the office of appeals sustained were unduly intrusive second the long duration of mr johnson’s cdp hearing was largely attributable to mr johnson his case presented a moving target as his financial affairs drastically fluc- tuated with the liquidation of his investments and the failing of asiawerks in addition mr johnson delayed pro- viding the necessary financial records that were requested of him by various settlement officers many of which records he never provided personnel in the office of appeals cannot be chained to their cases the work of that office like the work in any office will have to be reassigned as time passes when employees take leave receive promotions or retire and when reassignments do occur new personnel will necessarily take time to get up to speed we do not find that the office of appeals protracted mr johnson’s proceedings in a manner that could constitute an abuse_of_discretion conclusion the determination of the irs’s office of appeals-ie not to accept mr johnson’s proposed collection alternative but instead to sustain the filing of the notice of lien and the pro- posed collection by levy of his outstanding tax liabilities- was not an abuse_of_discretion respondent may proceed with collection to reflect the foregoing decision will be entered for respondent f verdate 0ct date jkt po frm fmt sfmt v files johnson sheila


internal_revenue_service number release date index number ------------------------------ ----------------------------- ---------------------------- ---------------------------------------- ------------------------------------ in re ------------------------ ------------------------ - department of the treasury washington dc person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc psi b04 - plr-103604-03 date date settlor ----------------- date ---------------------- trust ------------------------------------------------------------------------------------------------- legend son --------------------- son ---------------- son --------------------- son ------------------ trust ------------------------------- ------------------------------------------------------------------------------------------------------- --------------------------------------------- --------------------------------------------- --------------------------------------------- -------------------------------------------- bank ---------------------------- year ------- year ------- trust ------------------------------- trust ----------------------------- trust -------------------------- this is in response to a letter dated date and subsequent the facts submitted and representations made are as follows on date settlor date -------------------------- state ------------------- statute --------------------------------------------- grandchild -------------------------- grandchild ------------------------ grandchild ------------------------ date --------------------------- plr-103604-03 dear ------------------- correspondence requesting rulings regarding the income gift and generation-skipping_transfer gst tax consequences of the proposed division of a_trust facts executed an irrevocable_trust agreement trust creating four separate equal trusts trust trust trust and trust one for the benefit of each of settlor’s children son son son and son respectively under sec_1 of the distributive provisions of trust until a child of settlor reaches age or dies earlier the net_income of the child’s trust will be accumulated unless the corporate trustee deems it requisite or desirable that any part of that income be used to meet the reasonable needs of the child under sec_1 when the child reaches age the previously accumulated income will be added to principal and the current net_income of the child’s trust will be paid to the child for life under sec_1 of the distributive provisions upon the death of the child any amount of the net_income of the child’s trust as the corporate trustee will from time to time deem requisite or desirable will be paid to the deceased child’s living issue per stirpes until the trust terminates under sec_2 of the distributive provisions or the death of the last survivor of those issue before that termination under sec_1 of the distributive provisions upon the death of the child without any then living issue or if the child leaves issue upon the death of the last survivor of those issue before termination of the trust all of the then remaining assets of the trust will inure to the benefit of i settlor’s then living issue per stirpes or if none ii those then living among the three named daughters of settlor’s spouse or the then living issue per stirpes of a deceased daughter or if none iii the then living issue per stirpes of settlor’s named brother or if none iv a specified college or its successor for a specified use or if not then in existence v a specified university under sec_1 of the distributive provisions the corporate trustee may under sec_2 of the distributive provisions unless sooner terminated under plr-103604-03 distribute principal to the current income_beneficiary of any trust created under trust if in its sole judgment the corporate trustee determines that the available net_income from that beneficiary’s trust plus income other than capital_gains readily available to that person from other sources is not sufficient to meet the reasonable needs of that beneficiary in that beneficiary’s station in life the above provisions each trust must terminate upon the expiration of the period years after the death of the last survivor among settlor and the individual beneficiaries named or provided for under sec_1 who were alive when trust was executed upon that termination the then remaining assets of each trust will be distributed to i settlor’s then living issue per stirpes or if none ii those then living among the three named daughter’s of settlor’s spouse or the then living issue per stirpes of a deceased daughter or if none iii the then living issue per stirpes of settlor’s named brother or if none iv a specified college or its successor for a specified use or if not then in existence v a specified university upon ultimate termination of trust the assets in each son’s trust will be distributed among that son’s then living issue per stirpes without being pooled and redivided among all of settlor’s issue trustee with four individuals named as his successors in addition each son of settlor may qualify as a successor individual trustee upon reaching age among its powers the corporate trustee is authorized to divide or allot all or any portion of the assets of the trusts in accordance with the terms of trust in_kind or in money or partly in_kind and partly in money grandchild grandchild and grandchild separate trusts one for each of grandchild grandchild and grandchild the assets of trust will be distributed equally among the three successor separate trusts on a pro_rata basis unless on the date of division trust has outstanding loans to any among grandchild grandchild and grandchild any such loan will be allocated to the separate trust created for the grandchild who borrowed money from trust with a corresponding cash allocation to the other separate trusts to ensure that each trust receives an equal share of the trust assets taxpayer_identification_number and will be administered under the terms of trust except that each of the successor trusts will be held for the benefit of a different beneficiary and that beneficiary’s issue if any of settlor’s descendants for whom a separate successor under the proposed division each of the successor trusts will apply for its own bank is named as the corporate trustee settlor was named as the individual settlor died in year son died in year survived by his three children the trustees of trust for son plan to divide trust equally into three on date the trustees of trusts submitted a petition to the local court no additions actual or constructive were made to trust trust trust and upon the termination_date of trust the separate trusts for settlor’s descendants plr-103604-03 trust has been established dies without issue before the termination_date of trust the assets of that descendant’s separate trust will be apportioned per stirpes among the then living issue of the deceased descendant’s nearest lineal ancestor who has living issue and who is a lineal descendant of settlor will not be pooled with each other but will be distributed to the individual beneficiaries then eligible to receive income from such trusts in proportion to those income interests seeking judicial confirmation that the corporate trustee in its sole discretion is authorized to divide trust trust and trust under state statute and seeking judicial approval of the proposed division of trust on date the local court issued the requested ruling conditioned upon the trustees’ receipt of a favorable ruling from the internal_revenue_service trust after date disposition of the assets of trust or of the successor trusts under sec_1001 beneficiaries of trust or of the successor trusts that is subject_to gift_tax under sec_2501 considered to have been created and to have become irrevocable before date and will be exempt from generation-skipping_transfer_tax under chapter trust and trust after the death of the son of settlor for whom such trust is held will not constitute a taxable disposition of the assets of those trusts for purposes of sec_1001 trust and trust after the death of the son of settlor for whom such trust is held will not result in a transfer by any of the beneficiaries of those trusts that is subject_to gift_tax under sec_2501 the judicial confirmation of the corporate trustee’s power to divide trust the judicial confirmation of the corporate trustee’s power to divide trust the proposed division of trust will not constitute a sale or other taxable the proposed division of trust will not result in a transfer by any of the after the proposed division of trust the three successor trusts will be we have been asked to rule as follows after the issuance of the date court order containing the judicial plr-103604-03 confirmation trust trust and trust continue to be exempt from generation- skipping transfer_tax under chapter ruling_request more separate trusts if state statute provides that trustees have the power to divide a_trust into two or i the new trusts so created are not inconsistent with the terms of the governing instrument and ii the terms of the new trusts provide in aggregate for the same succession of interests and beneficiaries as are provided in the original trust funding of the new trusts created pursuant to the authority granted under this subdivision must either i be carried out by pro_rata allocation of the assets of the original trust ii be based upon the fair_market_value of the assets at the date of division or iii be carried out in a manner fairly reflecting the net appreciation or depreciation of the trust assets measured from the valuation_date to the date of division sec_1001 provides that the amount_realized from the sale or other sec_1001 provides that the gain from the sale_or_other_disposition of sec_61 of the internal_revenue_code provides that gross_income means all income from whatever source derived sec_61 provides that gross_income includes gains derived from dealings in property property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in such section for determining loss over the amount_realized disposition of property shall be the sum of any money received plus the fair_market_value of the property received entire amount of the gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or as loss sustained mutual agreement requested that the trustee distribute all of the trust corpus consisting revrul_69_486 1969_2_cb_159 involved two beneficiaries of a_trust who by sec_1001 provides that except as otherwise provided in subtitle a the the division of trust is distinguishable from revrul_69_486 because the plr-103604-03 of notes to one of the beneficiaries and all of the trust corpus consisting of common_stock to the other beneficiary the trust instrument as well as local law was silent regarding whether the trustee had the authority to make such a non-pro rata distribution_of_property in_kind because the trustee was not specifically authorized to make an allocation of specific property in_kind the beneficiaries were treated as having an absolute right to a ratable in_kind distribution revrul_69_486 treated the beneficiaries as receiving the notes and common_stock pro_rata followed by an exchange between the beneficiaries giving all of the common_stock to one and all of the notes to the other since in substance an exchange between the beneficiaries was deemed to occur revrul_69_486 held that the beneficiaries recognized gain under sec_1001 and sec_1002 trustees are authorized to make pro_rata and non-pro rata distributions of trust property under the trust instrument and under local law thus the beneficiaries of the trust are not required to receive pro_rata distributions for each asset of the trust because the trustees of the trust have the authority to make non-pro rata distributions based on fair market values the proposed division of trust into separate trusts will not be treated as pro_rata distributions followed by an exchange of assets among the beneficiaries of the trust with respect to the non-pro rata distribution_of_property interests in this regard see also revrul_83_61 1983_1_cb_78 of a taxpayer's property_tax consequences of a gain_or_loss in property value are deferred until the taxpayer realizes the gain_or_loss 252_us_189 holding a pro_rata stock_dividend merely reflected the increased worth of the taxpayer's stock and the taxpayer realizes increased worth of property only by receiving something of exchangeable value proceeding from the property court addressed whether a sale_or_exchange has taken place that results in a realization of gain_or_loss under sec_1001 the court stated that an exchange of property gives rise to a realization event under sec_1001 if the properties exchanged are materially different consequently the court held that an exchange of mortgages constituted a realization event under sec_1001 because the exchanged interests - loans that were made to different obligors and secured_by different homes - embodied legally distinct entitlements trusts would be identical to those of the original trust the beneficiaries of each successor trust would have the same property interests and legal entitlements as they had under trust accordingly it is consistent with the holding in cottage savings to find that the beneficiaries' interests after the proposed distribution of trust corpus into successor trusts will not differ materially from the beneficiaries' interests under trust rather than assessing tax_liability on the basis of annual fluctuations in the value under the proposed division of trust the provisions of each of the successor in 499_us_554 the supreme accordingly based on the facts submitted and the representations made and sec_2512 provides that if a gift is made in property the value thereof at sec_2501 imposes a tax on the transfer of property by gift by an individual plr-103604-03 thus the division of trust into successor trusts will not be a sale exchange or other_disposition of property of trust that gives rise to a realization of income to any beneficiary trust or the successor trusts under sec_1001 assuming the transaction is carried out and is effective under state law we conclude that the proposed division of trust will not constitute a sale or other taxable disposition of the assets of trust or of the successor trusts under sec_1001 ruling_request sec_2511 provides that the tax imposed by sec_2501 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 the date of the gift shall be considered the amount_of_the_gift sec_2512 provides that where property is transferred for less than an adequate_consideration in money or money’s worth then the amount by which the value of the property exceeded the value of the consideration is deemed a gift be identical to those of trust except that each of the three trusts will be established for the benefit of a single grandchild of settlor based on the facts submitted and the representations made and assuming the transaction is carried out and is effective under state law we conclude that the proposed pro_rata division of trust will not result in a transfer by any of the beneficiaries of trust or of the three successor trusts that is subject_to federal gift_tax under sec_2501 ruling_request transferor to a skip_person transfer_tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the tax does not apply to a transfer from a_trust if the trust was irrevocable on date and no addition actual or constructive was made to the trust after that date under sec_26_2601-1 any trust in existence on date will be considered irrevocable unless the in this case the dispositive provisions of the three successor trusts to trust will under a of the tax_reform_act_of_1986 act the generation-skipping sec_2601 imposes a tax on each generation-skipping_transfer made by a sec_26_2601-1 provides that a modification will not cause an sec_26_2601-1 provides rules for determining when a modification plr-103604-03 settlor had a power that would have caused inclusion of the trust in his or her gross_estate under sec_2038 or sec_2042 if the settlor had died on date judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax will not cause the trust to lose its exempt status the regulation provides that the rules contained in the paragraph are applicable only for purposes of determining whether an exempt trust retains its exempt status for generation-skipping_transfer_tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust example contained in sec_26_2601-1 considers a situation where in grantor established an irrevocable_trust for the benefit of his two children a and b and their issue under the terms of the trust the trustee has the discretion to distribute income and principal to a b and their issue in such amounts as the trustee deems appropriate on the death of the last to die of a and b the trust principal is to be distributed to the living issue of a and b per stirpes in the appropriate local court approved the division of the trust into two equal trusts one for the benefit of a and a's issue and one for the benefit of b and b 's issue the trust for a and a's issue provides that the trustee has the discretion to distribute trust income and principal to a and a's issue in such amounts as the trustee deems appropriate on a's death the trust principal is to be distributed equally to a's issue per stirpes if a dies with no living descendants the principal will be added to the trust for b and b's issue the trust for b and b's issue is identical except for the beneficiaries and terminates at b's death at which time the trust principal is to be distributed equally to b's issue per stirpes if b dies with no living descendants principal will be added to the trust for a and a's issue the division of the trust into two trusts does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person in the present case trust was irrevocable on date it is accordingly based on the facts submitted and the representations made and the proposed division of trust into three separate trusts is substantially_similar plr-103604-03 or persons who held the beneficial_interest prior to the division in addition the division does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust therefore the two partitioned trusts resulting from the division will not be subject_to the provisions of chapter represented that no additions actual or constructive were made to trust after that date to the situation described in example of sec_26_2601-1 the proposed division will not result in a shift of any beneficial_interest in the trust assets to any beneficiary who occupies a generation lower than the persons holding the beneficial interests prior to the reorganization the three successor separate trusts must terminate on the same date that trust is required to terminate thus the proposed division will not extend the time for vesting of any beneficial_interest in the three successor separate trusts beyond the period provided for in trust assuming the transaction is carried out and is effective under state law we rule that after the proposed division of trust the three successor trusts will be considered to have been created and to have become irrevocable before date and will be exempt from generation-skipping_transfer_tax under chapter ruling when properties exchanged are materially different under the judicial confirmation in the date court order there are no exchanges of the beneficial interests in the trust sec_1 and the judicial confirmation merely evidences the power granted to the trustee and the legal entitlements of the beneficiaries under the original trust agreement accordingly based on the facts submitted and the representations made we conclude that the judicial confirmation will not give rise to a realization event under sec_1001 and will constitute a taxable disposition for purposes of sec_1001 rulings corporate trustee’s power to divide trust trust and trust after the death of the son of settlor for whom such trust is held merely evidences the power granted to the trustee and the legal entitlements of the beneficiaries under the terms of trust the this ruling does not address whether any actual or proposed division of trust sec_1 cottage savings supra provides that a realization event occurs under sec_1001 as discussed above the judicial confirmation in the date court order of the except as specifically ruled herein we express no opinion on the federal tax plr-103604-03 judicial confirmation does not cause any transfers to occur nor does it in any way alter the original provisions of trust accordingly based on the facts submitted and the representations made we rule that the judicial confirmation of the corporate trustee’s power to divide trust trust and trust after the death of the son of settlor for whom such trust is held will not result in a transfer by any of the beneficiaries of those trusts that is subject_to gift_tax under sec_2501 further after the issuance of the date court order containing the judicial confirmation trust trust and trust continue to be exempt from generation-skipping_transfer_tax under chapter consequences of the modification under the cited provisions or under any other provisions of the code provides that it may not be used or cited as precedent senior counsel branch office of associate chief_counsel enclosure copy for sec_6110 purposes cc this ruling is directed only to the taxpayer who requested it sec_6110 _________________________ passthroughs and special industries lorraine e gardner sincerely yours


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 b03 plr-117313-06 date date --------------------------------------------- ----------------------------------------------------------------------- ------------------------------------------------------------------------ legend x -------------------------------------------------------------------- trusta agreement ------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------- trusta1 ----------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- trusta2 ------------------------------------------------------------------------ trusta3 ------------------------------------------------------------------------ trusta4 ---------------------------------------------------------------- trusta5 ----------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------- trustb agreement ------------------------------------------------------------ trustb1 -------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- ------------------------------------------------------------------------ ------------------------------------------------------------------------ ----------------------------------------------------------------------- --------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- plr-117313-06 -------------------------------------------------------------------- trustb2 ------------------------------------------------------------------------ -------------------------------------------------------------------- trustb3 ------------------------------------------------------------------------ -------------------------------------------------------------------- trustb4 ------------------------------------------------------------------------- -------------------------------------------------------------------- trustb5 ------ ---------------------------------------------------------------------- -------------------------------------------------------------------- trustb6 ------------------------------------------------------------------------------ --------------------------------------------------------------------- a ---------------------------------------------------------------------- b ---------------------------------------------------------------------- state1 state2 date1 date2 date3 date4 date5 ----------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- ------------------------ ------------------ ------------------ plr-117313-06 dear -------------------- this letter responds to your letter dated date and subsequent correspondence requesting a ruling on behalf of x that pursuant to sec_1362 of the internal_revenue_code certain trusts qualify as shareholders of an s_corporation facts the information submitted states that x was incorporated in state1 on date2 x made a timely s_corporation_election effective date2 on date1 a and b united_states citizens and husband and wife executed trusta agreement under state2 law the trusta agreement created sub-trusts trusta1 trusta2 trusta3 trusta4 and trusta5 under the terms of section iii of the trusta agreement shares of the trust assets were apportioned as separate and distinct trusts but physical separation of the assets was not required a and b the grantors of the trust authorized the trustee to mingle and commingle investments but wishes it understood that grantor is creating independent trusts for all purposes on date2 trusta1 trusta2 trusta3 trusta4 and trusta5 acquired x corporation stock section xiv of the trusta agreement provides that the trust is irrevocable section iv of the trusta agreement provides that a and b retain the right and power to acquire or reacquire any trust property and substitute other_property of equivalent value without incurring liability to a_trust beneficiary or other party the trusta agreement states that the substitution power granted to the power holder is exercisable in a non- fiduciary capacity section vii of the trusta agreement provides each beneficiary of the respective sub-trusts the right to appoint to himself a proportionate share of additions made to the sub-trust each year the amount appointed cannot exceed the amount excludable for gift_tax purposes in any calendar_year on date3 a and b united_states citizens and husband and wife executed trustb agreement under state2 law the trustb agreement created sub-trusts trustb1 trustb2 trustb3 trustb4 trustb5 and trustb6 under the terms of section iii of the trustb agreement shares of the trust assets were apportioned as separate and distinct trusts but physical separation of the assets was not required a and b the grantors of the trust authorized the trustee to mingle and commingle investments but wishes it understood that grantor is creating independent trusts for all purposes on date3 the sub-trusts created under trusta agreement merged under state2 law into the sub-trusts created under trustb agreement the x corporation stock held by the plr-117313-06 trusta agreement sub-trusts was transferred to the trustb agreement sub-trusts on date3 section xiv of the trustb agreement provides that the trust is irrevocable section iv of the trustb agreement provides that a and b retain the right and power to acquire or reacquire any trust property and substitute other_property of equivalent value without incurring liability to a_trust beneficiary or other party the trustb agreement states that the substitution power granted to the power holder is exercisable in a non- fiduciary capacity section vii of the trustb agreement provides each beneficiary of the respective sub-trusts the right to appoint to himself a proportionate share of additions made to the sub-trust each year the amount appointed cannot exceed the amount excludable for gift_tax purposes in any calendar_year a and b were treated on their joint federal_income_tax returns as owners of the x corporation stock transferred to the sub-trusts created under the trusta agreement and merged into the sub-trusts created under the trustb agreement from the time of the stock transfers through date4 effective one day later on date5 a and b irrevocably relinquished their power to substitute trust assets with respect to trustb agreement sub-trusts elections were made to treat each of the trustb agreement sub-trusts as electing small_business trusts under sec_1361 effective date5 the beneficiaries of the sub-trusts created under trusta agreement and trustb agreement received timely notification of their withdrawal rights and no beneficiary has exercised those rights law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that a small_business_corporation may not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that for purpose of sec_1361 a husband and wife shall be treated as one shareholder sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter i as owned by plr-117313-06 an individual who is a citizen or resident_of_the_united_states may be a shareholder in an s_corporation the deemed owner of the trust shall be treated as the shareholder under sec_1361 sec_1_1361-1 of the income_tax regulations provides that for purposes of sec_1_1361-1 stock owned by a husband and wife is treated as if owned by one shareholder regardless of the form in which they own the stock for example if husband and wife are owners of a subpart e trust they will be treated as one individual both husband and wife must be u s citizens or residents sec_675 provides that the grantor shall be treated as the owner of any portion of a_trust in respect of which a power_of_administration is exercisable in a nonfiduciary capacity by any person without the approval or consent of any person in a fiduciary capacity sec_675 provides that power_of_administration means among other things a power to reacquire the trust corpus by substituting other_property of an equivalent value sec_1_675-1 iii flush language provides in part that if a power is not exercisable by a person as trustee the determination of whether the power is exercisable in a fiduciary or nonfiduciary capacity depends on all of the terms of the trust and the circumstances surrounding its creation and administration 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 the person has previously partially released or otherwise modified such a power and after the release or modifications retains such control as would cause a grantor to be treated as the owner of such portion of the trust within the principles of sec_671 to inclusive sec_678 provides that sec_678 shall not apply with respect to a power over income as originally granted or thereafter modified if the grantor of the trust is otherwise treated as the owner under the provisions of subpart e other than sec_678 conclusion based solely on the facts and representations submitted we conclude that the circumstances surrounding the administration of the sub-trusts created under the trusta agreement and the trustb agreement will determine whether the power_of_administration is exercisable in a fiduciary or nonfiduciary capacity 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 internal_revenue_service office where plr-117313-06 the returns are filed therefore we cannot determine at this time whether a and b will be treated as the owners of the sub-trusts created under the trusta agreement and the trustb agreement under sec_675 provided that the circumstances indicate that the power_of_administration is exercisable in a nonfiduciary capacity a and b will be treated as the owners of the sub-trusts created under the trusta agreement and the trustb agreement under sec_675 and sec_678 accordingly the sub-trusts created under the trusta agreement were permitted shareholders in x an s_corporation under sec_1361 if otherwise eligible from date2 until date3 the sub-trusts created under the trustb agreement were permitted shareholders in x an s_corporation under sec_1361 if otherwise eligible from date3 through date4 except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether x is otherwise eligible to be an s_corporation for federal tax purposes is being sent to x’s authorized representative in accordance with a power_of_attorney on file with this office a copy of this letter 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 s james a quinn senior technician reviewer acting branch office of associate chief_counsel passthroughs and special industries enclosures a copy of this letter a copy for sec_6110 purposes