internal_revenue_service national_office technical_advice_memorandum date number release date index numbers control number tam-116881-01 cc ita b7 taxpayer’s name taxpayer’s address taxpayer’s tin years involved date of conference legend taxpayer issues where taxpayer’s business is selling and leasing equipment should leased equipment that is also held_for_sale be treated as inventory within the meaning of sec_471 of the internal_revenue_code assuming the equipment is not inventory once placed in the leasing operation under what circumstances must taxpayer subsequently treat it as inventory conclusions under the particular facts presented taxpayer's leased equipment that is also held_for_sale should not be treated as inventory leased equipment must be treated as inventory when it is permanently removed from taxpayer's leasing operation page of facts the examining agent has requested technical_advice in connection with the examination of taxpayer’s and tax returns in these years taxpayer sold new heavy construction equipment such as excavators road pavers backhoes and earthmovers leased new equipment sold equipment that had been previously leased sold parts and products and provided equipment maintenance services taxpayer also sold used equipment including equipment that it had acquired as trade-ins at auction taxpayer filed its tax returns on a calendar_year basis except for the rare situation where a sale or lease already had been arranged before taxpayer acquired the new equipment taxpayer made all new equipment available to customers for either sale or lease taxpayer’s ultimate goal was to sell all its equipment however because of the nature of its business and its competitive business environment taxpayer often leased its equipment prior to selling it while using equipment during a lease caused its value to decrease taxpayer received income from its leases that benefitted its business taxpayer normally reacquired the leased equipment upon the early termination or expiration of the lease and would hold it for varying periods of time before selling or re-leasing it taxpayer never scrapped any equipment and eventually sold all of it taxpayer maintained title to all its equipment until it was sold initially taxpayer treated the equipment as inventory as defined in sec_471 unless the equipment had been already subject_to an existing lease when taxpayer acquired it the examining agent has not questioned this initial classification of equipment as inventory apparently used equipment acquired by taxpayer is not leased the examining agent has not questioned whether the taxpayer’s leases are bona_fide rental arrangements for example the agent has not alleged that taxpayer’s leases were conditional sale contracts infrequently a lessee would purchase the equipment and taxpayer sometimes did decrease the purchase_price to reflect the rental payments previously made however taxpayer’s standard lease agreements do not provide its lessees with a purchase option page of upon leasing equipment taxpayer moved the equipment from its inventory classification to the classification of property used in its trade_or_business and began depreciating it since date taxpayer claimed depreciation under sec_168 on leased equipment it had reacquired and was holding for sale or re-lease before date taxpayer used the income forecast method for depreciation under this method taxpayer did not claim depreciation on the reacquired equipment it was holding that was no longer out on lease taxpayer included income it earned from a lease in its gross_income in accordance with taxpayer's overall accrual_method of accounting the examining agent has not questioned taxpayer's treatment of this income the examining agent has also not questioned the characterization as ordinary_income or loss of the gains and losses the taxpayer reported when it sold equipment that had been previously leased the following example illustrates taxpayer's treatment of leased equipment depreciated under sec_168 taxpayer acquired an earthmover for dollar_figure on date and treated it as inventory after two months taxpayer leased the earthmover to lessee m for one month for dollar_figure and began to claim depreciation on it taxpayer reacquired the earthmover from m after one month and held it for two months before it leased the earthmover to lessee n for three months for dollar_figure after three months taxpayer reacquired the earthmover from n and held it until year end taxpayer included dollar_figure in gross_income and deducted dollar_figure as depreciation in the earthmover's basis on date was dollar_figure dollar_figure-dollar_figure in the spring of taxpayer leased the earthmover for seven months to lessee o for dollar_figure later that same year taxpayer reacquired the earthmover from o and on date taxpayer sold the earthmover to buyer p for dollar_figure depreciation on the earthmover computed for was dollar_figure the propriety of taxpayer’s method_of_accounting for the basis_of_property transferred from inventory to the classification as property used in a trade_or_business has not been addressed in this memorandum because the examining agent has not questioned this matter the depreciation change was implemented on a cut-off basis as a result of the enactment of sec_167 which limited the use of the income forecast method to specific properties the examining agent has not questioned this change page of on its tax_return taxpayer included dollar_figure in gross_income and deducted dollar_figure as depreciation the gain of dollar_figure on the sale of the earthmover to p dollar_figure - dollar_figure - dollar_figure was reflected on taxpayer’s return as ordinary_income the examining agent questions whether taxpayer's leased equipment that is also held_for_sale can be depreciated the agent notes that even when the equipment is out on lease taxpayer simultaneously held the equipment for sale an analysis of taxpayer's equipment summary for the two years under examination shows that approximately percent of taxpayer's equipment was leased for varying periods at least once prior to sale on average equipment was leased about five times before being sold the usual term of a lease ran between one to six months and there was no fixed minimum lease period on average about 1½ years passed before taxpayer was able to sell its equipment however when equipment that was never leased is disregarded sales of previously leased equipment usually occurred within two to four years after taxpayer had originally acquired the equipment for the two years under examination approximately percent of taxpayer's gross revenue was derived from new and leased equipment sales this revenue averaged about dollar_figure million a year of this dollar_figure million about dollar_figure million was from new equipment sales and the remaining dollar_figure million was from the sale of previously leased equipment over this same period lease income averaged about dollar_figure million which was about percent of taxpayer's total gross revenue taxpayer's depreciation deduction was about dollar_figure million each year for the years under examination on average taxpayer had on hand about dollar_figure million of previously leased equipment and about dollar_figure million of new equipment each year taxpayer sold approximately pieces of new and leased equipment and had about big_number leasing transactions for the years under examination taxpayer recovered approximately percent of its cost of equipment through sales revenue including revenue from the sale of equipment that had never been leased when considering only previously leased equipment taxpayer recovered approximately percent of its cost through sales revenue although leased equipment was usually sold for less than taxpayer's original cost taxpayer was able to sell about percent of previously leased equipment for more than its original cost in contrast about percent of new equipment was sold for more than taxpayer's original cost specifically one term and condition contained in taxpayer’s standard lease agreement states taxpayer reacquires equipment about times a year pursuant to this term and condition page of law and analysis sec_471 provides that whenever in the opinion of the secretary the use of inventories is necessary in order clearly to determine the income of any taxpayer inventories shall be taken by such taxpayer on such basis as the secretary may prescribe as conforming as nearly as may be to the best_accounting_practice in the trade_or_business and as most clearly reflecting the income sec_1_471-1 of the income_tax regulations provides that in order to reflect taxable_income correctly inventories at the beginning and end of each tax_year are necessary in every case in which the production purchase or sale of merchandise is an income-producing factor see also sec_1_446-1 sec_167 provides that there should be allowed as a depreciation deduction a reasonable allowance for the exhaustion wear_and_tear of property used in a trade_or_business or held_for_the_production_of_income sec_1_167_a_-2 provides that no depreciation deduction may be taken with respect to inventories or stock_in_trade sec_1_167_a_-10 provides in part that the period for depreciation of an asset shall begin when the asset is placed_in_service and shall end when the asset is retired from service an asset is placed_in_service when it is first placed_in_service by the taxpayer in a condition or state of readiness and availability for a specifically assigned function see sec_1_167_a_-11 and sec_1_46-3 sec_1_167_a_-8 provides that the term retirement means the permanent withdrawal from use of depreciable_property used_in_the_trade_or_business or from use in the production_of_income the withdrawal may be made in one of several ways for example the withdrawal may be made by selling or exchanging the asset or by abandonment in addition the asset may be withdrawn from productive use without disposition as for example by being placed in a supplies or scrap account the depreciation deduction provided by sec_167 for tangible_property placed_in_service after generally is determined under sec_168 this section prescribes two methods_of_accounting for determining depreciation allowances one method is the general depreciation system in sec_168 and the other method is the alternative_depreciation_system in sec_168 under either depreciation system the depreciation deduction is computed by using a prescribed depreciation method recovery_period and convention the applicable_recovery_period for purposes of either sec_168 or sec_168 is determined by reference to class_life sec_168 provides that the term class_life means the class_life if any that would be applicable with respect to any property as of date under former sec_167 as if it were in effect and the taxpayer were an elector under that section prior to its revocation sec_167 provided that in the case of a taxpayer who elected the asset_depreciation_range_system of depreciation page of the depreciation deduction would be computed based on the class_life prescribed by the secretary that reasonably reflects the anticipated useful_life of that class of property to the industry or other group sec_1_167_a_-11 sets out the method for asset classification under former sec_167 property is included in the asset_guideline_class for the activity in which the property is primarily used_property is classified according to primary use even though the use is insubstantial in relation to all of the taxpayer's activities sec_1_167_a_-11 provides that in the case of a lessor of property the asset_guideline_class in effect for lessors of such property is determined as if the property were owned by the lessee however in the case of an asset_guideline_class based upon the type of property for example trucks or railroad cars as distinguished from the activity in which used the property is classified without regard to the activity of the lessee in 19_tc_120 acq 1953_1_cb_5 the tax_court considered whether the taxpayer a dealer in new and used cars had properly claimed depreciation on certain company cars that it later sold the court stated that it is not the nature of the property itself that is determinative of the question but rather the purpose for which the property is held by the taxpayer id pincite based on the facts of the case the court found that the taxpayer's company cars were used in the taxpayer's business and accordingly were depreciable in 264_f2d_548 5th cir aff'g 28_tc_42 the court dealt with automobiles removed from inventory by a car dealer and provided to company officials and salesmen for the purpose of stimulating interest in all the dealer's cars the court found that these cars were only temporarily assigned for use in the car dealer's business and that there was no general or indefinite commitment to use the cars in the business thus the court concluded that on these facts at all times the cars were held primarily_for_sale_to_customers in the ordinary course of the car dealer's business however the court noted that if a car dealer takes cars out of inventory and puts them to the use for which a car is intended in the hands of its ultimate consumer that is transporting personnel and commits them to that purpose in the operation of the business the car dealer is entitled to depreciate the cars id pincite i leased equipment in inventory the principal question presented is whether taxpayer properly accounted for its leased equipment that was also held_for_sale the examining agent argues that taxpayer was required to account for this leased equipment as inventory and not as property used in its trade_or_business accordingly the agent concludes that taxpayer was not entitled to any deduction for depreciation sec_1_167_a_-2 the examining agent reasons that the equipment was always inventory because taxpayer's foremost goal was to sell it and the equipment was always being held by taxpayer for sale even when it was being leased on the other hand taxpayer argues that its leased page of equipment need not be included in inventory because the equipment was being used in its leasing operation accordingly taxpayer concludes that it was entitled to deductions for depreciation sec_167 to establish that it was legally entitled to depreciate leased equipment taxpayer must show that it primarily intended to use this leased equipment in its leasing operation latimer-looney chevrolet determining taxpayer’s primary intent with respect to the equipment is a question of fact this case does not involve a situation where property is acquired for resale and is temporarily used by the taxpayer in its business in that situation the property properly remains as inventory because the use of property temporarily in a business does not support recharacterizing the property as property used in a trade_or_business duval motor co in the present case the leased equipment was not being used temporarily in taxpayer’s business except for rare situations taxpayer made all equipment it acquired available for use in its leasing operation until it sold the equipment once leased taxpayer expected to re-lease the equipment multiple times before sale taxpayer derived substantial income from its leasing operation which constituted a substantial percentage of its gross revenue the leased equipment was subjected to significant wear_and_tear while it was being leased moreover on average taxpayer sold its previously leased equipment between two and four years after acquiring it it is not unusual for taxpayers to be simultaneously engaged in multiple business activities see recordak v usa ct_cl taxpayer engaged in selling and leasing microfilming equipment and revrul_80_37 1980_1_cb_51 taxpayer engaged in manufacturing leasing and selling of electronic data processing equipment here taxpayer had multiple business activities which included the selling and leasing of equipment for the two years under examination these two activities were a significant part of taxpayer’s overall business the examining agent has not questioned taxpayer’s initial classification of all new equipment as inventory this inventory was made available for both sale and lease ordinarily taxpayer did not know whether an individual piece of equipment would be leased prior to sale but from its prior experience taxpayer did know that about percent of its equipment would be leased at least once when it initially leased equipment taxpayer removed the equipment from inventory to reflect the fact it was being used in its leasing operation taxpayer’s leases in these two years were bona_fide leases for example they were with unrelated parties in arms-length transactions and generally were not with subsequent equipment purchasers further they were for significant amounts of money and periods of time the examining agent has not questioned the nature or validity of taxpayer’s leases taxpayer generally reacquired its leased equipment upon the early termination or expiration of a lease when it did taxpayer again made the equipment available for lease while not certain with respect to any specific piece of equipment taxpayer knew that once a piece of equipment was leased it would likely be leased again about page of four more times prior to its ultimate sale taxpayer acknowledges that all its equipment was always available for sale and eventually would be sold taxpayer acknowledges that its standard lease agreement gave it the right to sell equipment that was out on lease to a customer but notes that this right was only exercised in about one percent of its leases taxpayer also acknowledges that selling equipment was always its ultimate goal while we recognize taxpayer’s equipment was always held_for_sale we also recognize that taxpayer had an active sizeable leasing operation and that it devoted a significant amount of equipment to that leasing operation in our view taxpayer had a bona_fide ongoing leasing operation and was using equipment in that operation therefore based on all the facts presented we believe taxpayer’s leased equipment qualifies as property used in a trade_or_business for purposes of sec_167 and thus taxpayer is entitled to depreciation_deductions for such equipment latimer-looney chevrolet these deductions offset the income that taxpayer earned from its leasing operation key factors in this case are that taxpayer usually sold its leased equipment for substantially less than its original cost and that it only recovered an average of about percent of its cost through sales revenue the majority of taxpayer's equipment was leased multiple times and was offered to customers for lease for a substantial period of time taxpayer obtained a substantial amount of revenues from its leases and recovered a substantial portion of its equipment costs through leasing we also note that the value of taxpayer's equipment decreased with use and that taxpayer was entitled to cost_recovery in connection therewith sec_167 accordingly we believe that close consideration of the specific facts presented leads to the conclusion that taxpayer’s leased equipment that is also held_for_sale should not be treated as inventory this conclusion is wholly consistent with the viewpoint of the courts concerning the dual use of property produced by manufacturers for example in honeywell v commissioner the tax_court stated the concept of dual purpose property has been recognized in a series of cases 491_f2d_157 1st cir 423_f2d_494 9th cir 422_f2d_405 325_f2d_460 these cases stand for the proposition that a manufacturer regularly engaged in the dual business of selling and renting equipment it manufactures can claim depreciation on property that is at all times available for sale proceeds from the sale however are treated as ordinary_income even though the property might otherwise qualify for capital_gain treatment under sec_1231 87_tc_624 emphasis added acq 1988_1_cb_1 page of ii equipment return to inventory under sec_167 taxpayer is entitled to claim depreciation with respect to the equipment used in its leasing operation sec_1_167_a_-10 provides that depreciation begins when the asset is placed_in_service assuming the ready and available test of sec_1_167_a_-11 is satisfied and ends when the asset is retired from service an asset is retired from service when it is permanently withdrawn from use in the taxpayer's trade_or_business or in the production_of_income sec_1_167_a_-8 the withdrawal may be made by selling or exchanging the asset by abandonment or by placing the asset in a supplies or scrap account applying these principles to the present case taxpayer's equipment once properly removed from inventory does not revert back to inventory until the equipment is permanently withdrawn from taxpayer's leasing operation such withdrawal would happen for example when the equipment was identified by taxpayer as no longer to be offered for lease in that case once taxpayer determined that certain equipment was held only for sale to customers taxpayer would be required to reclassify that equipment as inventory and would not be entitled to claim depreciation sec_1_167_a_-2 the fact that equipment in taxpayer's leasing operation was not continually subject_to a lease for significant periods of time does not change the conclusion reached in the preceding paragraph in 45_tc_137 the tax_court stated that t he law is well established that deductions including depreciation are allowable with regard to property_held_for_the_production_of_income or for use in a trade_or_business even though no income is currently being received or accrued therefrom and even though the asset is currently idle accordingly taxpayer's equipment continued to be depreciable after taxpayer had reacquired the equipment upon the early termination or expiration of a lease caveat a copy of this technical_advice_memorandum is to be given to taxpayer sec_6110 provides that it may not be used or cited as precedent -end-


t c memo united_states tax_court estate of doris l rickman deceased doris k rickman executrix petitioner v commissioner of internal revenue respondent docket no filed date t scott tufts for petitioner james e gray for respondent memorandum opinion armen special_trial_judge this case is before the court on petitioner's motion to dismiss for lack of jurisdiction as amended and petitioner's motion to strike the issue for decision concerns the validity of the notice_of_deficiency issued in this case and whether respondent determined a deficiency in petitioner's federal estate_tax within the meaning of sec_6212 background petitioner is the estate of doris l rickman doris l rickman decedent died on date in franklin georgia decedent's husband james r rickman died on date days before decedent died doris k rickman decedent's daughter was duly appointed executrix of the decedent's_estate under letters testamentary issued by the clerk of the superior court of macon county north carolina on date doris k rickman is also the duly appointed executrix of the estate of james r rickman at the time the petition herein was filed doris k rickman resided in franklin north carolina on or about date doris k rickman filed separate form sec_709 united_states gift_tax_return on behalf of both james r rickman mr rickman and decedent for the taxable years ending on the date of their deaths schedule a of form_709 filed on behalf of mr rickman lists the following gifts all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure the record in this case indicates that doris k rickman is also known as kaye rickman donee date amount doris k rickman dollar_figure big_number janet r tipton big_number big_number james o tipton big_number janet r tipton and james o tipton are identified as decedent and mr rickman's daughter and son-in-law respectively form_709 line sec_12 through permit a taxpayer to elect to split_gifts with his or her spouse as prescribed under sec_2513 ie to have gifts made by the taxpayer and his spouse to third parties during the calendar_year considered as made one- half by each line sec_12 through of the form_709 filed on behalf of mr rickman indicate that gifts made by mr rickman during the taxable_period would be split with decedent in particular decedent is identified by name and social_security_number and it is acknowledged that mr rickman was married to decedent during the taxable_period and that a gift_tax_return will be filed by decedent for the same period however line which provides space for decedent's signature signifying her consent to the gift-splitting election was not signed on decedent's behalf the only marks on line are the handwritten letters srb although the parties agree that the letters srb were entered by one of respondent's examiners they disagree as to their meaning respondent contends that the letters signify that the spouse's return is in the same batch of returns as the return continued the schedule a of form_709 filed on behalf of decedent lists the following gifts donee date value doris k rickman dollar_figure janet r tipton dollar_figure line sec_12 through of the form_709 filed on behalf of decedent indicate that gifts made by decedent during the taxable_period would be split with mr rickman line of the form_709 is signed kaye rickman executrix during date doris k rickman filed separate form sec_706 united_states estate_tax_return on behalf of both the estate of james r rickman and petitioner schedule a of form_706 filed on behalf of the estate of james r rickman lists parcels of real_estate included in the gross_estate as follows description value at date of death lot and brick home dollar_figure golfview drive franklin n c value based on appraisal copy which is attached lot and brick home dollar_figure golfview drive franklin n c value based on appraisal copy which is attached lot and brick home dollar_figure golfview drive franklin n c continued under examination in contrast petitioner contends that the letters serve as an instruction to send the return back to the return preparer value based on appraisal copy which is attached lot palmer street building dollar_figure franklin n c value based on appraisal copy which is attached acres road franklin n c dollar_figure value based on current_year county appraisal acres carson property road dollar_figure franklin n c value based on current_year county appraisal dollar_figure acres road franklin n c dollar_figure value based on current_year county appraisal the form_706 filed on behalf of the estate of james r rickman includes a statement that his entire estate passed to decedent doris l rickman outright the form_706 filed on behalf of petitioner includes a schedule a identical in all respects to the schedule a included with the form_706 filed on behalf of the estate of james r rickman line on the form_706 filed on behalf of petitioner relating to the amount of adjusted_taxable_gifts is blank on date respondent issued a notice_of_deficiency addressed to the estate of doris l rickman deceased doris k rickman in care of t scott tufts petitioner's counsel the notice_of_deficiency sets forth respondent's determination_of_a_deficiency in petitioner's federal estate_tax in the amount of dollar_figure there is no dispute that the notice_of_deficiency lists decedent's correct social_security_number and date of death the notice_of_deficiency includes an explanation of adjustments which states a the decedent and her spouse filed federal gift_tax returns for the period ending date and elected to split the gifts made by each to third parties the gift_tax returns did not correctly reflect this election the adjusted taxable gift of the decedent is determined to be dollar_figure rather than zero as reported at line of page of the federal estate_tax_return exhibits a and b of this notice indicate how the gift_tax returns should have been filed the corrections to the gift_tax returns include the determination that all gifts by both donors must be split and that the gifts reported by the decedent's spouse were overstated because a portion of the spouse's gifts were incomplete and should not have been reported see item i of this notice for a related adjustment accordingly the taxable_estate is increased dollar_figure b on the controlling valuation_date date of decedent's death the fair_market_value of the real_property identified at item of schedule a of the federal estate_tax_return was dollar_figure rather than dollar_figure as reported accordingly the taxable_estate is increased dollar_figure c on the controlling valuation_date the fair_market_value of the real_property identified at item of schedule a was dollar_figure rather than dollar_figure as reported accordingly the taxable_estate is increased dollar_figure d on the controlling valuation_date the fair_market_value of the real_property identified at item of schedule a was dollar_figure rather than dollar_figure as reported accordingly the taxable_estate is increased dollar_figure e on the controlling valuation_date the fair_market_value of the real_property identified at item of schedule a was dollar_figure rather than dollar_figure as reported accordingly the taxable_estate is decreased dollar_figure f on the controlling valuation_date the fair_market_value of the real_property identified at item of schedule a was dollar_figure rather than dollar_figure as reported accordingly the taxable_estate is increased dollar_figure g on the controlling valuation_date the fair_market_value of the real_property identified at item of schedule a was dollar_figure rather than dollar_figure as reported accordingly the taxable_estate is increased dollar_figure h when the decedent died she was the sole heir of her predeceased spouse james r rickman who died on date on date james r rickman transferred dollar_figure to janet and james o tipton by a check which indicated that such funds were a loan on a home it is determined that this note was part of the estate of james r rickman which passed to the decedent and that the such loan is included in her gross_estate accordingly the taxable_estate is increased dollar_figure i when the decedent died she was the sole heir of her predeceased spouse james r rickman who died on date on date james r rickman directed the first union national bank of north carolina to transfer two u s treasury notes totalling dollar_figure to kaye rickman janet tipton and james tipton james r rickman died before the bank transferred the treasury notes to the designated donees therefore the treasury notes were part of the estate of james r rickman which passed to the decedent and the value of the treasury notes are included in her gross_estate accordingly the taxable_estate is increased dollar_figure the parties agree that exhibits a and b referred to in paragraph a of the explanation of adjustments were not attached to the notice_of_deficiency that was sent to petitioner respondent also concedes that there are two errors in the second sentence of paragraph i of the explanation of adjustments in particular respondent admits that the second sentence should have read on date james r rickman directed the first union brokerage services of north carolina to transfer two u s treasury notes totalling dollar_figure to kaye rickman janet tipton and james tipton emphasis added in response to the notice_of_deficiency petitioner filed a timely petition for redetermination with this court shortly after respondent filed her answer to the petition the parties became embroiled in both a discovery dispute and a disagreement over whether either party should be granted leave to file an amendment to their initial pleading a hearing was scheduled in washington d c on date for the purpose of resolving five pending motions stemming from these particular disputes on the eve of this hearing petitioner filed both a motion to dismiss for lack of jurisdiction and a motion for summary_judgment in the meantime by letter dated date doris k rickman wrote to the internal_revenue_service district_director in greensboro north carolina and requested a written_statement pursuant to sec_7517 explaining the property valuation sec_4 although the date hearing was conducted as scheduled the court decided to reserve ruling on the various collateral matters in dispute in favor of first ruling on the jurisdictional issue raised in petitioner's motion to dismiss determined by respondent in the notice_of_deficiency that was issued to petitioner although it does not appear that the district_director responded to this request we observe that petitioner's counsel was apparently provided with a copy of the revenue_agent's_report on or about date petitioner's motion to dismiss for lack of jurisdiction is premised on the theory that the notice_of_deficiency is invalid on the ground that respondent failed to make a valid determination as required by 814_f2d_1363 9th cir revg 81_tc_855 petitioner subsequently filed an amendment to its motion to dismiss relying primarily on 87_tc_1329 affd 872_f2d_1271 7th cir and 95_tc_250 revd without published opinion 946_f2d_1543 5th cir petitioner contends that the notice_of_deficiency should be declared invalid on the grounds that each of the adjustments set forth therein is without merit and reflects the gross ineptitude of the persons involved in preparing the notice respondent filed an objection to petitioner's motion to dismiss respondent maintains that the adjustments set forth in the notice_of_deficiency were determined based upon a review of petitioner's estate_tax_return and therefore the notice_of_deficiency is valid under scar v commissioner supra attached as exhibits a and b to respondent's objection are the two exhibits referred to in paragraph a of the explanation of adjustments portion of the notice_of_deficiency that respondent failed to attach to the notice_of_deficiency issued to petitioner petitioner subsequently filed a motion to strike specific portions of respondent's objection in particular petitioner requests that we strike any reference to exhibits a and b attached to respondent's objection on the ground that petitioner was prejudiced by the fact that those exhibits were not attached to the notice_of_deficiency petitioner further moves to strike that portion of respondent's objection in which respondent refers to the issue that respondent seeks to place in dispute by way of her pending motion for leave to file amendment to answer upon due consideration of the foregoing matter we fail to see any meaningful prejudice to petitioner in respect of the concerns expressed in its motion to strike consequently and in view of the action that we propose to take in respect of the two exhibits in question are separate form sec_3233 report of gift_tax examination changes prepared by an internal_revenue_service examiner relating to a review of the previously mentioned gift_tax returns filed on behalf of decedent and mr rickman although not particularly relevant to the jurisdictional issue to be decided we note that counsel for petitioner disputes representations appearing in the reports of gift_tax examination changes that the reports either were discussed with him or that he agreed with the adjustments set forth therein petitioner's motion to dismiss for lack of jurisdiction we shall deny petitioner's motion to strike a second hearing was conducted in this case again in washington d c on date counsel for both parties appeared at the hearing and presented argument in respect of petitioner's motion to dismiss during the course of the hearing petitioner's counsel raised an issue whether respondent's failure to comply with sec_7517 provides an alternative ground for holding the notice_of_deficiency invalid discussion the issue to be decided is whether the notice_of_deficiency issued in this case is invalid on the ground that respondent failed to make a determination within the meaning of sec_6212 as explained in greater detail below we agree with respondent that the notice_of_deficiency is valid this court's jurisdiction to redetermine a deficiency depends upon the issuance of a valid notice_of_deficiency and a timely filed petition rule a c 97_tc_437 93_tc_22 90_tc_142 at present there are no fewer than eight motions pending in this case regrettably and despite a legal file now comprised of four thick volumes little or nothing has been done in the way of preparing this case for trial at this particular juncture in the proceedings this case serves as an excellent illustration of petty bickering and unnecessary quarrelsomeness sec_6212 expressly authorizes respondent after determining a deficiency to send a notice_of_deficiency to the taxpayer by certified or registered mail at a minimum a notice_of_deficiency must indicate that respondent has determined a deficiency in tax in a definite amount for a particular taxable_year and that respondent intends to assess the tax in due course 88_f2d_650 2d cir 44_tc_382 affd 373_f2d_45 10th cir although sec_7522 provides the general_rule that a notice_of_deficiency shall describe the basis for and identify the amounts if any of tax due an inadequate description shall not invalidate the notice under that provision in 814_f2d_1363 9th cir revg 81_tc_855 the taxpayers after receiving a notice_of_deficiency that disallowed a deduction from a partnership with which the taxpayers had no connection argued that the commissioner failed to determine a deficiency as contemplated under sec_6212 a review of various statements attached to the notice_of_deficiency revealed that the commissioner had issued the notice without reviewing the taxpayers' tax_return which admittedly had been filed further the commissioner admitted to having done so to protect the government's interest scar v commissioner supra pincite after invoking this court's jurisdiction the taxpayers filed a motion to dismiss for lack of jurisdiction we held the notice_of_deficiency to be valid and denied the taxpayers' motion to dismiss 81_tc_855 in analyzing the issue on appeal the court_of_appeals for the ninth circuit concluded that the commissioner must consider information relating to a particular taxpayer before it can be said that the commissioner determined a deficiency with respect to that taxpayer scar v commissioner f 2d pincite with this standard in mind the court found the notice_of_deficiency to be invalid under sec_6212 because the notice on its face revealed that the commissioner had not reviewed the taxpayers' return or otherwise made a determination respecting the taxpayers' liability for the particular taxable_year scar v commissioner supra pincite significantly the courts applying scar including both this court and the court_of_appeals for the ninth circuit have limited the rule established in that case to its facts see 46_f3d_382 5th cir 998_f2d_1514 9th cir 875_f2d_1396 9th cir 90_tc_110 pope associates p c v commissioner tcmemo_1995_213 burnside v commissioner tcmemo_1994_308 stinnett v commissioner tcmemo_1993_429 simply stated the rule set forth in scar v commissioner supra applies in the narrow set of circumstances where the notice_of_deficiency on its face reveals that respondent failed to make a determination the following excerpt from kantor v commissioner supra reflects the court_of_appeals for the ninth circuit's view of the applicability of scar before issuing a notice_of_deficiency pursuant to u s c sec a the commissioner must make an actual determination of the taxpayer's liability scar f 2d pincite as a general_rule however we will not look behind a deficiency_notice to question the commissioner's motives and procedures leading to a determination id pincite we recognized an exception to this rule in scar where the notice_of_deficiency revealed on its face that a determination had not been made using the taxpayer's return id we later emphasized in clapp v commissioner however that the kind of review exercised in scar is applicable o nly where the notice_of_deficiency reveals on its face that the commissioner failed to make a determination f 2d pincite emphasis added in clapp we determined that the notices of deficiency were adequate to establish jurisdiction where they indicated various adjustments to income and the fact that these adjustments were based upon the disallowance of deductions the taxpayers in clapp attempted to show that the commissioner had not made an actual determination of their deficiency by introducing internal irs documents which suggested that at the time the notices were issued the irs had not decided which legal theory it would rely upon to secure a deficiency judgment we nevertheless refused to question the commissioner's determination because there was no indication on the face of the notices that a determination had not been made id pincite the disallowed deductions did not refer to unrelated entities nor had the tax_rate been arbitrarily set after reviewing appellant's notice_of_deficiency we conclude that it was sufficient to establish jurisdiction the notice clearly indicates that appellants' pcs ltd pass-through_deduction of dollar_figure was being disallowed that their tax was being recomputed and that a negligence_penalty was being imposed there is neither blatant error nor any statement which would suggest that the commissioner had not made a determination using appellants' tax_return kantor v commissioner supra pincite2 applying the principles discussed in kantor v commissioner and by this court in campbell v commissioner supra to the notice_of_deficiency issued to petitioner in the present case we are not convinced as petitioner contends that respondent failed to make the requisite determination there is no dispute that the notice_of_deficiency relates to the decedent's_estate and that respondent correctly listed the decedent's social_security_number it is also evident that respondent's determination_of_a_deficiency in petitioner's federal estate_tax derived from a review of both the estate_tax and gift_tax returns filed on behalf of both petitioner and the estate of james r rickman specifically we need go no further than to point out that the valuation adjustments in respect of the parcels of real_estate set forth in the notice_of_deficiency directly coincide with real_estate reported on petitioner's estate_tax_return in sum the evidence is irrefutable that respondent examined petitioner's estate_tax_return petitioner contends that respondent failed to make a determination as required under sec_6212 on the grounds the adjustment described in paragraph a of the explanation of adjustments was not adequately supported due to respondent's failure to attach exhibits a and b referred to therein to the notice_of_deficiency the valuation adjustments in respect of the real_estate listed on petitioner's return are purportedly based on local real_estate tax assessments for as opposed to the adjustment described in paragraph h of the explanation of adjustments has no basis in law or fact and the adjustment described in paragraph i of the explanation of adjustments contains certain errors in respect of both the date of the transfer in question and the identity of the financial_institution involved in the transfer in short we are not impressed with any of these contentions taking the notice_of_deficiency as a whole the errors and flaws that petitioner relies on while perhaps causing minor confusion do not demonstrate that respondent failed to make the requisite determination contemplated by sec_6212 see 47_tc_340 34_tc_1137 we likewise reject petitioner's invitation to carve out a narrow extension of scar to be applied in cases involving so- called gross ineptitude in our view an extension of scar in this manner would as a general_rule directly conflict with the well-settled rule that absent extraordinary circumstances we will not look behind a notice_of_deficiency 79_tc_185 73_tc_394 62_tc_324 we fail to see any extraordinary circumstances in the present case justifying a probe into respondent's motives and procedures leading to the issuance of the notice_of_deficiency in addition to arguing that the notice_of_deficiency is invalid under scar petitioner maintains that the notice_of_deficiency might be deemed invalid by virtue of respondent's failure to comply with sec_7517 sec_7517 enacted as section a of the tax reform act of publaw_94_455 90_stat_1520 provides in pertinent part a general_rule --if the secretary makes a determination or a proposed determination of the value of an item of property for purposes of the tax imposed under chapter or he shall furnish on the written request of the executor donor or the person required to make the return of the tax imposed by chapter as the case may be to such executor petitioner's reliance on 95_tc_250 revd without published opinion 946_f2d_1543 5th cir is misplaced for the reasons explained in stinnett v commissioner tcmemo_1993_429 we shall not reconsider our opinion in pearce v commissioner supra or its reversal by the fifth circuit in deciding this case see 5th cir r donor or person a written_statement containing the material required by subsection b such statement shall be furnished not later than days after the later of the date of such request or the date of such determination or proposed determination b contents of statement --a statement required to be furnished under subsection a with respect to the value of an item of property shall-- explain the basis on which the valuation was determined or proposed set forth any computation used in arriving at such value and contain a copy of any expert appraisal made by or for the secretary initially we find it significant that sec_7517 does not include an enforcement mechanism although petitioner has suggested that respondent's failure to comply with sec_7517 may provide grounds for holding the notice_of_deficiency invalid petitioner has failed to cite any authority for this proposition and we are aware of none in the absence of express language declaring that a notice_of_deficiency will be deemed invalid as a consequence of respondent's failure to comply with a written request under sec_7517 we will not graft such an extreme remedy onto the provision on the whole petitioner's reliance on sec_7517 seems superficial although the district_director may not have responded to petitioner's request pursuant to sec_7517 we note that petitioner's counsel was apparently provided with a copy of the revenue_agent's_report on or about date moreover our rules provide the means for petitioner to obtain such information either through the required informal exchange of continued finally we observe that congress has provided adequate remedies for taxpayers confronted with an inaccurate deficiency determination in light of remedies such as shifting the burden_of_proof to respondent and or awarding litigation costs petitioner's call for an expanded substantive review of the matters leading to respondent's determination is unwarranted see 875_f2d_1396 9th cir 100_tc_457 consistent with the foregoing we shall deny petitioner's motion to dismiss for lack of jurisdiction to reflect the foregoing an order denying petitioner's motion to dismiss for lack of jurisdiction as amended and petitioner's motion to strike will be issued continued information contemplated under rule a or later through formal discovery requests such as a request for production of documents


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 tege eoeg eo3 plr-134198-16 date date legend college ------------------------ trust --------------------------------------------------------------------- dear ------------ this letter responds to a letter from your authorized representative dated date and subsequent correspondence requesting a ruling that the issuance of units from college to trust the making or receipt of payments with respect to the units and the redemption of units all as described in this ruling letter will not generate unrelated_business_taxable_income to college college represents the facts as follows facts college is an educational_institution recognized as a tax-exempt_organization described in sec_501 and sec_170 of the internal_revenue_code college’s trustee committee on investment working with a consultant and investment managers has the responsibility for managing college’s pooled endowment the endowment the investment objective of the endowment is to provide a growing stream of income to support college’s programs while at the same time preserving the purchasing power of the endowment trust is a charitable_remainder_unitrust described in sec_664 under the terms of the trust agreement trust’s donor and his wife are entitled to an annual payout of a unitrust_amount equal to a percentage of the net fair_market_value of trust’s assets upon the deaths of donor and his wife the remainder_interest in trust will be distributed to college as the remainder beneficiary the internal_revenue_code_of_1986 as amended to which all subsequent section references are made unless otherwise indicated plr-134198-16 college is the sole trustee and in that capacity is the legal owner of the assets of the trust college does not and will not charge any fee for management of trust however it may recover its actual costs of administering trust as a charge against trust presently trust’s assets are managed by an outside investment firm trust’s returns generally have been lower than the returns on college’s endowment as trustee and remainder beneficiary college wants to achieve greater economies of scale in the management of trust’s assets a potentially higher and more stable investment return for trust and increased diversification of trust’s investments to this end college intends to enable trust to participate indirectly in the return on college’s endowment in lieu of a partnership or a direct commingling college proposes to create a contractual obligation pursuant to which college will issue a contract right to trust for its endowment units units the value of the units both at the time of acquisition and at the time of redemption will be based on the value of all underlying investment_assets held in the endowment the value of each unit will equal the value of the endowment divided by the number of outstanding units each unit will give trust a contractual right to receive periodic_payments equal to the number of units owned multiplied by the same spending rate that college establishes for the endowment allowing trust to receive an investment return equal to that of the endowment distributions will be made at least quarterly trust will be able to choose either to reinvest part of a distribution in additional units or to redeem units depending on trust’s cash requirements for meeting its minimum distribution trust will treat payouts to its beneficiaries up to the endowment spending amount as ordinary_income regardless of the character of the underlying income of the endowment whether capital_gain ordinary_income or return_of_capital and regardless of whether the payout by trust is made entirely from distributions of income or in part from redemption of units the units will give trust a contractual right to receive periodic_payments from the endowment as determined by college but no interest whatsoever in the underlying investment_assets of the endowment or with respect to other trusts also invested in units with respect to the endowment except for the right to review the payout computation trust will have no power or right of any kind to control direct supervise recommend or review college’s business activities operations or decisions with respect to the endowment trust will not have the right to veto or opt_out of any of the underlying endowment investments the proposed contract provides that with respect to the issuance of units college is neither a partner nor an agent of trust trust will not be liable for any cost expense or payment incurred or due by college or for which college is liable or responsible relating to the endowment or the underlying endowment assets college will indemnify and hold trust harmless from and against any liability arising out of any_action or inaction by college with respect to the endowment or the underlying assets college also will pay any_tax owed on unrelated plr-134198-16 business taxable_income earned by the endowment’s portfolio while college will not charge any fee for managing trust’s assets college may recover its actual costs of managing the endowment as a charge against the endowment which will decrease the value of all the endowment units including trust’s units college also may recover its actual costs of administering trust as a charge against trust trust is representative of a number of charitable_remainder annuity trusts and charitable_remainder unitrusts with respect to which college has and will have the sole charitable_remainder interest and for which college is and will be the trustee college plans to make units available to these other trusts on the same terms as described in this letter for trust including that it will not assess a fee for the services it provides to any of these trusts but may recover its costs law and analysis sec_501 provides that entities organized and operated exclusively for charitable educational scientific and certain other purposes generally are exempt from federal_income_tax however sec_511 imposes a tax on the unrelated_business_taxable_income of organizations described in sec_501 sec_512 defines the term unrelated_business_taxable_income as the gross_income derived by any organization from any unrelated_trade_or_business regularly carried on by it less the allowable deductions which are directly connected with the carrying on of such trade_or_business both computed with the modifications provided in sec_512 sec_513 defines the term unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of the organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its exempt_purpose or function sec_513 provides that the term trade_or_business includes any activity which is carried on for the production_of_income from the sale_of_goods or the performance of services an activity does not lose its identity as a trade_or_business merely because it is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which may or may not be related to the exempt purposes of the organization sec_1_513-1 provides that income of an exempt_organization subject_to the tax imposed by sec_511 is included in its gross_income in the computation of unrelated_business_taxable_income if it is income from a trade_or_business such trade_or_business is regularly carried on by the organization and the conduct of such trade_or_business is not substantially related other than through the production of funds to the organization’s performance of its exempt functions plr-134198-16 sec_1_513-1 provides that for purposes of sec_513 the term trade_or_business has the same meaning it has in sec_162 and generally includes any activity carried on for the production_of_income from the sale_of_goods or performance of services revrul_69_528 1969_2_cb_127 describes an organization that was formed to provide investment services on a fee basis exclusively to organizations exempt under sec_501 the organization received funds from unrelated exempt_organizations and invested the proceeds in stocks reinvested the income and realized appreciation and upon request liquidated a participant’s interests and distributed the proceeds to the participant the service held that providing investment services on a regular basis for a fee is a trade_or_business ordinarily carried on for profit the service further held that the activity would constitute an unrelated_trade_or_business even if the services were regularly provided by one tax-exempt_organization for other tax-exempt organizations college’s situation is distinguishable from the entity described in revrul_69_528 which provided investment services on a regular basis for a fee college will not charge any fees for managing trust’s assets it will only recover the actual costs of managing its endowment as a charge against the endowment and any actual costs of administering trust as a charge against trust college will receive no income from providing management services to trust accordingly college’s services provided under the contractual arrangement as represented will not generate any income that could be characterized as unrelated_business_taxable_income within the meaning of sec_513 conclusion based solely on the facts and representations submitted we rule that the contractual arrangement described herein under which college will issue units to trust make payments on the units and be reimbursed to cover costs allocable to the management of the endowment or administration of the trust will not generate unrelated_business_taxable_income to college the same result will occur with respect to the issuance of any other endowment units to any other charitable_remainder_trust or charitable_remainder_unitrust with respect to which college has and will have the sole charitable_remainder interest for which college will be the trustee and to which college makes units available on the same terms as described in this letter for trust including that it will not assess a fee for managing its endowment or for the administrative services it provides as trustee the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an individual with authority to bind the taxpayer this office has not verified any of plr-134198-16 the material submitted in support of the request for rulings and such material is subject_to verification on examination this letter does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections specifically described and except as expressly provided in this letter no opinion is expressed or implied concerning the tax consequences of any aspects of any transaction or item_of_income discussed or referenced in this letter because it could help resolve questions concerning federal_income_tax status this letter should be kept in college’s permanent records a copy of this letter must be attached to any_tax return to which it is relevant alternatively if college files a return electronically this requirement may be satisfied by attaching a statement to the return that provides the date and control number of this letter this letter will be made available for public inspection under sec_6110 after certain deletions of identifying information are made for details see the enclosed notice notice of intention to disclose a copy of this letter showing the deletions that we intend to make on the version that will be made available to the public is attached to the notice if college disagrees with our proposed deletions it should follow the instructions in notice this ruling letter is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent by anyone else in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading sincerely mike repass senior technician reviewer tege associate chief_counsel cc


department of the treasury internal_revenue_service washington d c date cc dom fs proc tl-n-5156-98 number release date uilc internal_revenue_service national_office field_service_advice memorandum for district_counsel from subject assistant chief_counsel field service reconsideration of field_service_advice previously issued concerning the computation of deficiency_interest on the taxpayer's tax_deficiency tax period this field_service_advice responds to your request for further explanation of the conclusion reached in the field_service_advice issued on date that interest on the deficiency for year begins to accrue on the unextended due_date of the year return field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend x year year year u v w x dollar_figure dollar_figure dollar_figure dollar_figure issue the field_attorney has requested further explanation of the service's position stated in the field_service_advice dated date as to when underpayment interest begins to accrue on x’s deficiency in tax for year conclusion it is our understanding that x has not provided any different or additional facts in connection with this issue addressed in the field_service_advice dated date based on the facts provided the service's position remains the same as that stated in the initial field_service_advice provided which concluded that underpayment interest on x's deficiency in tax of dollar_figureu for the year began to accrue on march year the original due_date without extensions of x’s income_tax return for year fact sec_1 we have included in this field_service_advice the same facts that we were provided in preparing the field_service_advice dated date it is our understanding that the taxpayer has not supplemented or otherwise changed the facts since the initial field_service_advice was provided on september year x timely filed with extension its form_1120 u s_corporation income_tax return for year on its form_1120 for year x reported an overpayment of dollar_figurev which x elected to have credited against its liability for estimated_tax for year x did not however designate against which installment of estimated_tax the overpayment for year was to be applied thus pursuant to revrul_84_58 1984_1_cb_254 the service credited the overpayment against x's estimated_tax for year as of march year the due_date for x's first installment of estimated_tax for year x’s tax_liability for year was less than the amount of the overpayment applied from year and none of the year overpayment was needed to avoid the addition_to_tax imposed under sec_6655 for failure to pay any estimated_tax due for year dollar_figurew of the overpayment was used to pay x’s tax_liability for year which arose in the fourth quarter of year when there was a sale of an asset which resulted in investment_tax_credit_recapture x elected to have the balance of the overpayment of dollar_figurex credited against its estimated_tax for year according to the facts provided x has never used the balance of the overpayment from year against the estimated_tax for any subsequent year in 1the facts recited herein are taken from your request for field_service_advice inasmuch as we have not verified these facts we express no opinion on their accuracy order to avoid the imposition of the addition_to_tax imposed under sec_6655 for failure to pay estimated_tax as a result of the audit of x’s year the service determined that there was a deficiency of dollar_figureu for that year which has yet to be assessed pending the resolution of this interest issue x contends that interest should never begin to accrue on the subsequently determined deficiency for year since no portion of the year overpayment was ever used to avoid the imposition of the addition_to_tax under sec_6655 for failure to pay estimated_tax law and analysis the service is not changing its position and conclusions reached in the field_service_advice dated date accordingly the analysis stated in that field_service_advice is the same and is incorporated by reference herein additionally as noted in the field_service_advice dated date in all cases the overpayment is a payment of the succeeding year’s income_tax_liability no later than the due_date without regard to extensions of the succeeding year’s income_tax return consequently to the extent the overpayment is not needed to satisfy specific installments of estimated_tax for the succeeding year’s estimated_tax interest on the first year’s deficiency begins to run from the original unextended due_date of the succeeding year’s income_tax return it is the service's position that the date the overpayment becomes a payment on account of the succeeding year's estimated_tax determines the date the prior_year's_tax became unpaid for purposes of sec_6601 prior to that date the government has had the use of the funds with respect to the prior_year's_tax and no interest is payable on the overpayment that is the subject of the taxpayer's election see sec_6402 sec_301_6402-3 and sec_301_6611-1 interest should be charged from the point the prior_year's_tax is both due and unpaid 36_fedclaims_680 acq aod cc-1997-008 date 588_f2d_342 2d cir revrul_88_98 1988_2_cb_356 where the overpayment is not needed to satisfy any installment of estimated_tax in the succeeding year the overpayment would be treated as a payment of the succeeding year's income_tax sec_6513 provides that if any overpayment of income_tax is in accordance with sec_6402 claimed as a credit against estimated_tax for the succeeding tax_year such amount shall be considered as a payment of income_tax for the succeeding taxable_year whether or not claimed as a credit in the return of estimated_tax for such succeeding taxable_year and no claim for credit or refund of such overpayment shall be allowed for the taxable_year in which the overpayment arises see also sec_6513 which provides that a payment of income_tax made before the date prescribed for payment of the tax is considered paid on that date the date prescribed for payment of tax is the time fixed for filing the return determined without regard to any extension of time for filing the return sec_6151 further it is on this date that the overpayment is treated as a payment for purposes of computing interest on any overpayment of income taxes with respect to the succeeding year under sec_6611 and d thus we conclude that the statute requires that an overpayment which the taxpayer elects to credit against estimated_tax for the succeeding year must be treated as a payment against the next year's tax_liability with an effective date no later than the due_date of the next year's return in the instant case no part of the year return overpayment was needed to avoid the addition_to_tax for failure to pay estimated income taxes in year therefore interest on the subsequently determined deficiency for year begins to run from the date on which the return overpayment is applied to the succeeding year’s tax_liability which is the unextended due_date of the succeeding year’s income_tax return - march year it is on this date that the year deficiency became both due and unpaid case development hazards and other considerations x has taken that position that the year overpayment was not used to pay estimated_taxes for year and therefore the government had full use of the year overpayment during all of year x makes the statement in its request for reconsideration that there was no tax_liability for year when in fact there was a tax_liability for year as noted herein even though the year overpayment is not used to pay the estimated_taxes for year the overpayment is still considered as payment of the year tax_liability and thus deemed paid as of the due_date without extensions of the year tax_return x's position is based on an analysis that the government had full use of the year overpayment during all of year and under a use of funds analysis interest should not begin to run until there is an actual application of the overpayment to pay estimated_taxes based on the foregoing we still recommend that the service calculate the interest due for the underpayment of the assessed tax_deficiency for x's year from march year if you have any questions please call deborah a butler assistant chief_counsel field service by sara m coe chief procedural branch field service division cc regional_counsel southeast southeast assistant regional_counsel tl


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to plr-166103-01 cc psi date date legend x state d1 a b dear this letter responds to a letter dated date from your authorized representative requesting on behalf of x a ruling under sec_1362 of the internal_revenue_code facts x was incorporated under state law on d1 the shareholders of x a and b decided that x would be an s_corporation the shareholders relied upon a tax attorney to file x's form_2553 election by a small_business_corporation with an effective date of d1 the form_2553 however was not filed timely x requests a ruling that it will be recognized as an s_corporation effective for taxable_year beginning d1 under sec_1362 law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation plr-166103-01 sec_1362 provides the rule on when an s election will be effective if an s election is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made if an s election is made after the first two and one-half months of a corporation’s taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election or no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year conclusion based on the facts submitted and representations made we conclude that x has established reasonable_cause for its failing to make a timely election and that x is eligible for relief under sec_1362 accordingly if x makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 containing an effective date of d1 for the election within days following the date of this letter then such election will be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center a copy is enclosed for that purpose 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 an s_corporation for federal tax purposes pursuant to a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely christine ellison chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index numbers --------------------------------------------------- ------------------------------------------------- --------------------------- ---------------------------------- 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-109643-17 date august -------------------------------------------------- x --------------------------------------------------------------------------------------------------------- ------------------------------------------ ----------------------------------- y --------------------------------------------------------------------------------------- ------------------------------------------ z ------------------- w ------------------------------------------ --------------------------- state -------------- date ------------------- dear ------------------ this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting rulings under the internal_revenue_code code facts the information submitted states that x is a state limited_liability_company that is classified as a partnership for federal tax purposes x was formed on date x has two managing members y a state limited_liability_company that is classified as a corporation for federal tax purposes and z a state limited_liability_company that is plr-109643-17 disregarded as an entity separate from its owner for federal tax purposes z is ultimately wholly owned by w a state corporation the other interests in x are non- managing member interests owned either indirectly by w including through subsidiaries of z or by private investors x plans to convert to a state limited_partnership in accordance with state law the conversion before the conversion y z and one of z’s subsidiaries will each form a single-member limited_liability_company that will be disregarded as an entity separate from its respective owner for federal tax purposes the disregarded entities in connection with the conversion z and z’s subsidiary will each contribute all of its interest in x to its respective disregarded_entity y will contribute a portion of its interest in x to its disregarded_entity the three disregarded entities will become general partners of x for federal tax purposes their regarded owners will be treated as the general partners of x x represents the following the limited_partnership agreement that will replace x’s limited_liability_company agreement will be substantively identical to the document it is replacing though it will reflect the formation of the disregarded entities and their role as general partners in x as part of the conversion the balances in each partners’ capital accounts immediately after the conversion will be the same as they were immediately before the conversion each partner’s share of liabilities of x immediately after the conversion will be the same as it was immediately before the conversion x will continue to carry on the business operations conducted before the conversion and will retain the same method_of_accounting and accounting_period each partner’s total percentage interest in x’s profits losses and capital after the conversion will be the same as that partner’s percentage interest in x’s profits losses and capital before the conversion and the allocation of tax items will also remain unchanged there will be no change in any partner’s share of value gain_or_loss associated with the partnership’s unrealized_receivables within the meaning of sec_751 or inventory_items within the meaning of sec_751 in connection with the conversion the conversion will not be treated as a revaluation event under sec_704 or the regulations thereunder x has not issued any profits interest in the two years preceding the date of the conversion plr-109643-17 the sec_704 book basis of the property of x securing nonrecourse debt exceeds the amount of such debt x requests rulings that the conversion will not cause x or its members to recognize taxable_income gain_or_loss and the conversion will not cause x to be treated as an association_taxable_as_a_corporation law and analysis sec_708 provides that an existing partnership is considered as continuing if it is not terminated under sec_708 a partnership is considered as terminated only if no part of any business financial operation or venture of the partnership continues to be carried on by any of its partners in a partnership or within a 12-month_period there is a sale_or_exchange of percent or more of the total interest in partnership capital and profits sec_1_708-1 of the income_tax regulations provides in part that a contribution of property to a partnership does not constitute a sale_or_exchange for purposes of sec_708 revrul_84_52 1984_1_cb_157 addressed the federal_income_tax consequences of a conversion of a general_partnership interest into a limited_partnership_interest in the same partnership in revrul_84_52 x was formed as a general_partnership with equal partners a b c and d the partners proposed to convert the general_partnership into a limited_partnership with a and b as limited partners and c and d as both general partners and limited partners each partner’s total percentage interest in the partnership’s profits losses and capital would remain the same after the conversion and the general partnership’s business would continue revrul_84_52 held that even though a b c and d were exchanging their interests in a general_partnership for interests in a limited_partnership no gain_or_loss would be recognized similarly revrul_95_37 1995_1_cb_130 examined the conversion of a domestic_partnership into a domestic limited_liability_company classified as a partnership for federal tax purposes revrul_95_37 held that such a conversion is treated as a partnership-to-partnership conversion that is subject_to the principles of revrul_84_52 revrul_95_37 also stated that the same holdings would apply if the conversion had been of an interest in a domestic limited_liability_company that is classified as a partnership for federal tax purposes into an interest in a domestic_partnership sec_301_7701-3 of the procedure and administration regulations provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with at least two members can elect to be classified as either an association or a partnership and an eligible_entity with plr-109643-17 a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that unless the entity elects otherwise a domestic eligible_entity is i a partnership if it has two or more members or ii disregarded as an entity separate from its owner if it has a single owner conclusion based solely on the information submitted and representations made we conclude that the conversion will not cause a termination of x and that neither x nor its members will recognize taxable_income gain_or_loss upon the conversion we further conclude that the conversion will not cause x to be treated as an association_taxable_as_a_corporation except as specifically ruled above we express or imply no opinion concerning the federal tax consequences of the transaction described above under any other provision of the code 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 the ruling contained in this letter is 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 ruling_request it is subject_to verification on examination in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely holly porter chief branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service department of the treasury washington dc number release date index number ---------------------------- --------------------------- ------------------------------- -------------------------- ------------------------- - - person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc tege eoeg eo1 plr-119554-10 date date entity --------------------------------------------- ----------------------------------------------------------- area board trust trustee system committee -------------------------------------------- ----------------------------------- -------------------------------------------------------------------------- ------------------------------------------ -------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ------- administrator --------------------------------------------------------------------------------- --------------------------------------------------------------- year year year date ------- --------- --------- ------------------------ -------------------- ------------- --------------------------------------------------------------------------------- --------------- plr-119554-10 date state law dear ----------------- this letter responds to a letter from your authorized representative dated date as well as subsequent correspondence submitted on behalf of the entity requesting a ruling that the trust’s income is excludable from gross_income under sec_115 of the internal_revenue_code the entity represents the following facts facts entity was formed in year by voters of the area the board resolved in year as clarified by a board resolution in year to provide hospital and medical coverage to the entity’s current and former employees and their spouses and eligible dependents pursuant to a resolution of the board on date the trust was established on date by and between the entity and the trustee to fund the entity’s obligation to provide certain post-employment health and welfare benefits to its retirees and their spouses and eligible dependents eligible recipients these medical dental vision life_insurance longterm care and similar benefits are provided through an agreement with the system a state_agency and subject_to the law the administrator on behalf of the entity makes all contributions to the trust and selects qualified_investments consistent with the broad policies and objectives established by the committee the assets of the trust are held for the exclusive purpose of providing post-employment health and welfare benefits to eligible recipients and paying the reasonable administrative and actuarial expenses of the trust the entity may amend the trust agreement at any time provided inter alia that trust assets are used for the exclusive benefit of eligible recipients and for reasonable administrative expenses the entity may remove the trustee with proper notice upon termination of the entity’s obligation to provide health and welfare benefits to eligible recipients the trustee when directed by the administrator shall distribute any trust assets remaining after all liabilities are satisfied to the entity or to a public-sector successor of the entity if the entity or a successor no longer exists the trustee shall distribute any remaining assets to the state any political_subdivision of the state or any plr-119554-10 entity in accordance with state law the income of which is excludable from gross_income under sec_115 law and analysis sec_115 provides that gross_income does not include income derived from any public_utility or the exercise of any essential government function and accruing to a state or any political_subdivision thereof in revrul_77_261 1977_2_cb_45 income from an investment fund established under a written declaration of trust by a state for the temporary investment of cash balances of the state and its participating political subdivisions was excludable from gross_income for federal_income_tax purposes under sec_115 the ruling indicated that the statutory exclusion was intended to extend not to the income of a state or municipality resulting from its own participation in activities but rather to the income of a corporation or other entity engaged in the operation of a public_utility or the performance of some governmental function that accrued to either a state or municipality the ruling points out that it may be assumed that congress did not desire in any way to restrict a state’s participation in enterprises that might be useful in carrying out projects that are desirable from the standpoint of a state government and which are within the ambit of a sovereign properly to conduct in revrul_90_74 1990_2_cb_34 the income of an organization formed funded and operated by political subdivisions to pool various risks casualty public liability workers’ compensation and employees’ health was excludable from gross_income under sec_115 in revrul_90_74 private interests neither materially participated in the organization nor benefited more than incidentally from the organization the trust was established and is maintained by the entity to fund various health and welfare benefits provided through the system to its retired employees and their spouses and dependents providing such benefits to former public employees constitutes the performance of an essential_governmental_function within the meaning of sec_115 see revrul_90_74 and revrul_77_261 the provision of health and welfare benefits to retirees and their dependents satisfies the obligation of the entity to provide those benefits thus the income of the trust accrues to the benefit of the entity which is a unit of local_government in the state no private interests participate in or benefit from the operation of the trust other than as providers of goods and services any amounts remaining in the trust after all health and benefits plus reasonable fees and expenses have been paid shall be returned to the entity or its successor in no instance will any remaining assets by distributed to an plr-119554-10 entity other than the state a political_subdivision or a sec_115 entity the benefit to retired employees is incidental to the public benefit see revrul_90_74 conclusion based solely on the facts and representations submitted by the entity including the amendments to the trust agreement dated date we conclude that the income of the trust is derived from the exercise of an essential_governmental_function and will accrue to a state or a political_subdivision thereof for purposes of sec_115 consequently we rule that the trust’s income is excludable from gross_income under sec_115 except for the specific ruling above no opinion is expressed or implied regarding the federal tax consequences of the facts of this case under any other provision of the code specifically no representation is made that contributions or premiums_paid on behalf of or benefits received by employees former employees retirees spouses dependents or others will be tax-free this ruling concerns only the federal tax treatment of the trust's income and may not be cited or relied upon as to any matter relating to the taxation of accident or health contributions or benefits under a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative this ruling is directed only to the taxpayer who requested it according to sec_6110 this ruling may not be used or cited as precedent sincerely sylvia hunt assistant chief exempt_organizations branch office of division counsel associate chief_counsel tax exempt government entities enclosure copy for sec_6110 purposes


internal_revenue_service number release date index nos cc dom p si - plr-115707-00 date x y z country date date dear this is in reply to a letter dated date submitted by x’s authorized representative on behalf of x requesting a ruling that x be given an extension of time to elect to be classified as a partnership for federal tax purposes the information submitted states that x a country international business_company was formed in date and began operations on date x is owned by y and z x planned to file an election pursuant to sec_301_7701-3 of the procedure and administration regulations to be classified as a partnership for federal tax purposes however no such election was made x represents that pursuant to notice_97_18 1997_1_cb_389 because y did not have a significant interest in x at the time of the transfer and did not recognize any gain on the transfer the contributions to x by its owners upon formation were not required to be reported under sec_1491 through of the internal_revenue_code as in effect on date sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes a business_entity is any entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code sec_301_7701-2 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or as a partnership sec_301_7701-3 provides that unless a foreign eligible_entity elects otherwise the entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owners if it has a single owner that does not have limited_liability sec_301_7701-3 provides that for purposes of sec_301_7701-3 a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member to elect to be classified other than as provided in sec_301_7701-3 an eligible_entity must file form_8832 entity classification election with the designated service_center sec_301_7701-3 an election will be effective on the date specified on the form_8832 or on the date filed if no such date is specified the effective date specified on the form_8832 cannot be more than days prior to the date the election is filed sec_301_7701-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election sec_301_9100-1 defines a regulatory election as 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 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301 a based solely on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time retroactive to date to elect to be treated as a partnership until days following the date of this letter a copy of this letter should be attached to the form_8832 except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the code the ruling set forth in this letter is conditioned upon the facts and representations submitted by x and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for a ruling verification of the information representations and other data may be required as part of the audit process this ruling is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representatives paul f kugler associate chief_counsel passthroughs and special industries sincerely enclosures copy of this letter copy for sec_6110 purposes


tcmemo_2008_159 united_states tax_court alberto campos petitioner v commissioner of internal revenue respondent docket no filed date alberto campos pro_se jeffrey d heiderscheit for respondent memorandum findings_of_fact and opinion vasquez judge respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax the issues for decision are whether petitioner is entitled to dependency_exemption deductions and child tax_credits for his three children findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time he filed the petition petitioner resided in texas petitioner and ruth femat ms femat formerly ruth femat campos married in they had three children together children they separated before the 65th judicial district_court of el paso county texas district_court granted petitioner’s and ms femat’s final decree of divorce on date divorce decree in the divorce decree the district_court appointed ms femat and petitioner as joint managing conservators of the children the district_court also awarded petitioner custody of the children for a period amounting to less than one-half of each calendar_year petitioner had physical custody of the children on some weekends and holidays and hours on each child’s birthday the district_court awarded ms femat custody for all times not specifically awarded to petitioner in the divorce decree the divorce decree requires that petitioner pay ms femat dollar_figure per month in child_support in addition the divorce decree requires petitioner to maintain health insurance on the children and pay half of all medical_expenses not covered by insurance the divorce decree does not address who may claim the dependency_exemption deductions for the children and petitioner and ms femat never entered into an agreement regarding who could claim the dependency_exemption deductions for the children opinion petitioner has neither claimed nor shown that he satisfied the requirements of sec_7491 a to shift the burden_of_proof to respondent with regard to any factual issue accordingly petitioner bears the burden_of_proof see rule a i dependency sec_151 and c allows a deduction for a dependent as defined in sec_152 a son or daughter of the taxpayer more than half of whose support during the calendar_year is provided by the taxpayer is a dependent sec_152 sec_152 however further provides that if a child receives more than one-half of his support during the calendar_year from parents who are divorced or legally_separated or who live apart at all times during the last months of the calendar_year and if the child is in the custody of one or both of his parents for more than one-half of the calendar_year then the child is treated as receiving more than one-half of his support 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 during the year from the parent having custody for the greater portion of the calendar_year custodial_parent sec_152 provides an exception to this rule where the custodial_parent releases the claim to the dependency_exemption deduction for the year the custodial_parent must sign a written declaration that the custodial_parent will not claim such child as a dependent for such taxable_year and the noncustodial_parent must attach such written declaration to the noncustodial parent’s return for that taxable_year sec_152 ms femat is the custodial_parent because she had custody of the children for more than one-half of the year and is treated as providing more than one-half of the children’s support she has never executed a written declaration waiving the dependency_exemption deductions for the children because petitioner is the noncustodial_parent and ms femat never executed a waiver of the exemption deductions we conclude that petitioner is not entitled to dependency_exemption deductions for the children ii child_tax_credit sec_24 provides that a taxpayer may claim a credit for each qualifying_child a qualifying_child is defined inter alia as any individual if the taxpayer is allowed a the noncustodial_parent is the parent who is not the custodial_parent sec_152 deduction under sec_151 with respect to such individual for the taxable_year sec_24 we conclude that petitioner is not entitled to dependency_exemption deductions pursuant to sec_151 for his three children for consequently his children are not qualifying children pursuant to sec_24 accordingly petitioner is not entitled to child tax_credits under sec_24 with respect to his children for in reaching all of our holdings herein we have considered all arguments made by the parties and to the extent not mentioned above we conclude they are irrelevant or without merit to reflect the foregoing decision will be entered for respondent