internal_revenue_service number release date index number --------------------------------- --------------------- ---------------------- ------------------------- - department of the treasury washington dc person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc psi - plr-106705-05 date date ------- -------------- ------------- ------------------------------ legend x ----------------------- ------------------------------------------ a ------------------------------------------ state d1 year dear ------------------- correspondence submitted on behalf of x requesting that the service grant x an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make an election under sec_754 of the internal_revenue_code was a partner of x on d1 of year a died x inadvertently failed to timely file a sec_754 election sec_754 provides that if a partnership files an election in accordance with the regulations prescribed by the secretary the basis of partnership property is adjusted in the case of a transfer of a partnership_interest in the manner provided in sec_743 such the information submitted states that x is a state limited_liability_company a this responds to a letter dated date and subsequent sec_1_754-1 of the income_tax regulations provides that an election sec_301_9100-1 provides that the commissioner may grant a reasonable plr-106705-05 an election shall apply with respect to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable_year with respect to which the election was filed and all subsequent taxable years a transfer of an interest in a partnership on the death of a partner is eligible for the sec_754 election the value of the partnership_interest reported on the estate_tax_return including discounts is the value used to determine the basis of the partnership_interest and the adjustment to basis of partnership property under sec_743 and sec_754 see generally sec_1_1014-3 under sec_754 to adjust the basis of partnership property under sec_734 and sec_743 with respect to a distribution_of_property to a partner or a transfer of an interest in a partnership shall be made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed not later than the time prescribed by sec_1 e including extensions thereof for filing the return for that taxable_year extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term 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 determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time for days from the date of this letter to make an election under sec_754 effective year with the appropriate service_center a copy of this letter should be attached to the sec_754 election a copy is enclosed for that purpose federal tax consequences of the facts described above under any other provision of the code except as specifically set forth above no opinion is expressed concerning the based solely on the information submitted and the representations made we sec_301_9100-3 provides the standards the commissioner will use to plr-106705-05 provides that it may not be used or cited as precedent being sent to x’s authorized representatives this ruling is directed only to the taxpayer requesting it sec_6110 pursuant to a power_of_attorney on file with this office a copy of this letter is sincerely heather c maloy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc psi br 3-plr-131498-00 date date number release date index number legend x d1 state shareholder dear this letter responds to your letter dated date written on behalf of x requesting a ruling that x’s s_corporation status will be effective as of d1 facts x incorporated under state law on d1 x’s shareholder intended that x be a subchapter_s_corporation for its tax_year beginning d1 however the s_corporation_election under sec_1362 of the internal_revenue_code was not filed timely x requests a ruling that it will be recognized as a subchapter_s_corporation effective d1 pursuant to sec_1362 law and analysis sec_1362 provides that a small_business_corporation may elect to be a subchapter_s_corporation sec_1362 provides the rule on when a subchapter_s_election will be effective if a subchapter_s_election is made within the first two and one-half months of a corporation's taxable_year then that corporation will be treated as a subchapter_s_corporation for the year in which the election is made if a subchapter_s_election is made after the first two and one-half months of a corporation's taxable_year then that corporation will not be treated as a subchapter_s_corporation until the taxable_year after the year in which the subchapter_s_election is made sec_1362 provides that if 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 such election then the secretary may treat such an election as plr-131498-00 timely made for such taxable_year and effective as of the first day of that taxable_year x’s subchapter_s_corporation election was not filed timely for the election to be effective as of its taxable_year beginning on d1 nevertheless x has established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 conclusions based solely on the facts submitted and representations made and assuming that x otherwise qualifies as a subchapter_s_corporation as of d1 and x's shareholder makes any adjustments to his federal_income_tax returns necessary to comply with this ruling we conclude that x will be recognized as a subchapter_s_corporation effective for the period beginning on d1 please file a completed form_2553 election by a small_business_corporation with a copy of this ruling attached reflecting x’s election of subchapter_s_corporation status as of d1 with the applicable service_center within days from the date of this letter except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x otherwise satisfies the subchapter_s_corporation eligibility requirements this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely mary beth collins assistant to the branch chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi br - plr-134581-01 date date legend x state d1 this responds to your letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts x began doing business under state law on d1 the shareholders of x intended that x elect to be treated as an s_corporation effective d1 however the election to be treated as an s_corporation was not timely filed law and analysis sec_1362 provides that a small_business_corporation can elect to be treated as an s_corporation sec_1362 provides when an s election becomes effective if an s election is made within the first two and one-half months of a corporation’s taxable_year then that corporation will be treated as an s_corporation for the year in which the election was made if an election is made after the first two and one-half months of a corporation’s taxable_year then the corporation will generally not be treated as an s_corporation until the following taxable_year however sec_1362 provides that if no election is made pursuant to sec_1362 or if the election is made after the date prescribed for making such an election and the secretary determines reasonable_cause existed for the failure to timely make the election then the secretary can treat such an election as timely made for that taxable_year and effective as of the first day of that taxable_year plr-134581-01 in the present case x failed to timely elect s_corporation treatment effective d1 however x has established reasonable_cause for not making a timely election and is thus entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective d1 within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative s david r haglund sincerely senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


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 b03 plr-104313-09 date date legend x --------------------------------------------------------------------------------------------------- ------------------------ country ----------------- date1 ----------------------- date2 ----------------------- dear --------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election to be classified as a partnership facts x was formed under country law on date1 x represents that it is a foreign_entity eligible to elect to be classified as a partnership for federal tax purposes x intended that it be classified as a partnership effective date2 however due to inadvertence a valid form_8832 entity classification election to treat x as a partnership effective date2 was not timely filed law and analysis plr-104313-09 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 as provided in sec_301_7701-3 sec_301_7701-3 provides that unless the entity elects otherwise a foreign eligible_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 owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides that 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 this determination is based solely on the statute or law pursuant to which the entity is organized thus generally under sec_301_7701-3 a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided in sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described plr-104313-09 in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of sixty days from the date of this letter to elect to be classified as a partnership for federal tax purposes effective date2 the election should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the election except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely s curtis g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court prindle international marketing ubo keyus group trustee petitioner v commissioner of internal revenue respondent roland r and virginia a fox petitioners v commissioner of internal revenue respondent docket nos filed date robert e kovacevich for petitioners sandra veliz for respondent memorandum findings_of_fact and opinion colvin judge respondent determined that petitioners were liable for the following deficiencies in income_tax addition_to_tax and penalty the cases of prindle international marketing ubo keyus group trustee docket no and roland r and virginia a fox docket no were consolidated for trial briefing and opinion by order of this court dated date roland and virginia fox addition_to_tax penalty sec_6651 -- -- dollar_figure sec_6662 dollar_figure big_number big_number deficiency dollar_figure big_number big_number prindle international marketing ubo keyus group - trustee deficiency dollar_figure big_number addition_to_tax sec_6651 dollar_figure big_number year year we must decide the following issues whether petitioners are entitled to have roland fox's diary admitted into evidence or to use it during his testimony to refresh his recollection where petitioners had not exchanged it as required by the court's standing_pretrial_order or produced it in response to a discovery request we hold that they are not whether prindle international marketing is a sham we hold that it is and we do not recognize it for federal_income_tax purposes whether petitioners roland and virginia fox may deduct dollar_figure as contributions to a welfare_benefit_plan in we hold that they may not whether respondent's determination that petitioners roland and virginia fox received dollar_figure in unreported interest_income in was arbitrary we hold that it was whether petitioners roland and virginia fox are liable for self-employment_tax of dollar_figure for and dollar_figure for we hold that they are whether petitioners roland and virginia fox are liable for the addition_to_tax for failure_to_file under sec_6651 for and the accuracy-related_penalty for negligence under sec_6662 for and we hold that they are whether petitioner prindle international marketing is liable for the addition_to_tax for failure_to_file under sec_6651 for and we hold that it is not section references are to the internal_revenue_code in effect for the years in issue rule references are to the tax_court rules_of_practice and procedure findings_of_fact a roland and virginia fox roland and virginia fox mr and mrs fox were married in and lived in spokane washington when they filed their petition they each have three children from prior marriages mr fox joined the u s air force in he retired in he received about dollar_figure in military retirement pay per year in and he and his family moved to spokane washington in date there he earned a bachelor of arts degree in russian history he also enrolled in a graduate business administration program at eastern washington university where he took one tax course he attended a school for insurance agents in chicago illinois and took estate_planning courses from the new england life_insurance co mrs fox had no training in tax during the years in issue mr and mrs fox owned or rental mobile homes rental houses and an apartment building mrs fox managed their real_estate rental business before and after they created the trust at issue mike dunn dunn a certified_public_accountant prepared mr and mrs fox's income_tax returns from to the time of trial b oxyfresh oxyfresh usa inc oxyfresh is a network marketing also known as multilevel marketing described further below company which began operating in oxyfresh sold personal care pet care nutrition dental hygiene and skin care products a quit- smoking program and air purifiers mr fox sold oxyfresh products and recruited other people to sell oxyfresh products the distributors mr fox recruited could also recruit other people to distribute oxyfresh products mr fox engaged in this activity in and every year thereafter he received a commission for selling oxyfresh products he received a smaller commission on sales made by distributors in mr fox traveled weeks per month in the united_states and canada conducting oxyfresh training and motivational seminars because of his efforts for oxyfresh mr fox earned a percentage of the worldwide sales of oxyfresh in the years in issue mr fox owned big_number of million shares that oxyfresh had issued in the years in issue mr fox had a contract with oxyfresh a copy of which is not in the record entitling him or prindle to receive payments from oxyfresh if he performed in accordance with the contract mr fox agreed that he would not sell for oxyfresh competitors or falsely advertise oxyfresh products at a time not stated in the record mr fox stopped receiving a percentage of oxyfresh sales that were made through the efforts of other oxyfresh distributors however oxyfresh created another position for which mr fox qualified and mr fox again received a percentage of the worldwide sales of oxyfresh from to oxyfresh issued forms to mr fox mr fox reported his income from oxyfresh on a schedule c profit or loss from business in oxyfresh paid between dollar_figure and dollar_figure per month for mr fox's services c prindle international marketing around mr fox asked mrs fox's uncle dan giboney giboney an attorney about different forms in which to conduct his oxyfresh business including a living_trust c or s_corporation or partnership mr fox also spoke to an attorney not named in the record who specialized in trusts and mike dunn dunn mr fox's accountant about forms in which to conduct the oxyfresh business they told him that he could conduct his oxyfresh business as a regular_corporation an s_corporation or a business_trust in or mr fox met larry smith smith who recommended that mr fox not incorporate his oxyfresh business the record does not describe smith's professional qualifications in date mr and mrs fox decided to form a business_trust smith formed an entity called prindle international marketing prindle for mr and mrs fox in california on date on date smith wrote several documents in sacramento california which purported to make prindle a business_trust of which mr and mrs fox were the beneficiaries smith signed the documents as creator on date the u s treasury_department issued an employer_identification_number to prindle on date mr and mrs fox opened a checking account under the name prindle international marketing prindle account they were the only persons authorized to sign checks on the prindle account we use the words business_trust trust trust documents trustee grantor transferor form establish and agent in our findings_of_fact for narrative convenience we do not intend our use of those terms to indicate any conclusion about the substance of the transactions at issue mr fox asked oxyfresh and oxyfresh agreed to make checks that would have been payable to him after date payable to prindle on date mr fox applied to the washington state department of licensing for business license services for a business license in the application mr fox stated that prindle is a business which sells health-related products on date mr fox signed a washington state corporate license renewal annual report for prindle in it he stated that prindle was in the business of wholesale marketing and that he was president and trustee and mrs fox was treasurer mr fox did not give dunn any information about the trust prindle did not file federal_income_tax returns for or mr and mrs fox operated their real_estate and oxyfresh businesses after prindle was formed just as they had done before prindle was formed after prindle was formed mr fox purportedly did business as an agent for prindle mr and mrs fox directed income from their real_estate and oxyfresh businesses to prindle prindle had no employees and issued no forms w-2 d employers trust on date mr fox signed a document entitled adoption and participation_agreement which stated that he was a sole_proprietor and that he was requesting to participate in a_trust called employer trust the adoption and participation_agreement said that it was effective date the adoption and participation_agreement provided group term life_insurance coverage for mr fox on date mr fox signed a document entitled qnc contribution instructions which states contribution amount dollar_figure on that day mr fox also signed a document entitled collateralized personal line of credit instructions which states amount to be wired dollar_figure a exclusion of mr fox's diary opinion petitioners' counsel wanted mr fox to use his diary to refresh his recollection at trial about his expenses respondent objected on the grounds that petitioners had not exchanged the diary days before the call of the calendar as required by the court's standing_pretrial_order served on petitioners about months before trial and that petitioners had not indicated that the diary existed in response to respondent's discovery request petitioners' counsel said that he had not known that mr fox kept a diary the court sustained respondent's objection petitioners contend that the court erred in excluding mr fox's diary from evidence and in not allowing mr fox to use his diary to refresh his recollection we disagree respondent's counsel said at trial that respondent had asked petitioners to produce any documents which relate to petitioners' claims that there should be a decrease in taxable_income as determined by respondent petitioners' counsel did not dispute that claim petitioners contend that the diary is admissible and may be used to refresh mr fox's memory under rule of the federal rules of evidence we disagree the diary fell within the scope of respondent's discovery requests but was not produced during discovery or exchanged as required by the court's pretrial order see 913_f2d_824 10th cir in the singleton case the plaintiffs had not exchanged discoverable documents as required by the court's pretrial order and sought to use the documents to refresh a witness' memory the u s court_of_appeals for the tenth circuit rejected the assertion that because the notes were being used to refresh the memory of a witness for the plaintiffs their counsel had no duty to reveal the notes id we conclude that respondent properly objected to the admission of the diary into evidence and to mr fox's use of the diary to refresh his recollection at trial b whether to recognize prindle as a_trust for federal tax purpose sec_1 mr and mrs fox retained control_over the purported trust assets respondent contends that prindle should not be recognized for federal_income_tax purposes because it is a sham petitioners contend that prindle is not a sham a_trust may be a sham for federal tax purposes if the grantor retains control_over the property or income placed in the trust and does not change how the property or income is treated 117_f3d_1053 8th cir 992_f2d_789 8th cir affg per curiam tcmemo_1991_508 we generally do not recognize a_trust for federal tax purposes if the grantor keeps substantially unfettered powers of disposition or beneficial_enjoyment of trust property see 761_f2d_1056 5th cir 686_f2d_490 7th cir affg tcmemo_1980_568 621_f2d_1318 8th cir affg tcmemo_1979_164 petitioners dealt with the alleged trust property as if it were their own they did not change how they conducted their real_estate and oxyfresh businesses they opened a checking account for prindle however they alone had signature_authority over that account there is no evidence that anyone other than mr and mrs fox had any access to any property that prindle may have had petitioners contend that christopher bates bates was an independent_trustee and that he controlled all aspects of prindle petitioners contend that mr and mrs fox did not have unfettered powers of disposition or beneficial_enjoyment because they needed the concurrence of bates for the keyus group keyus formerly known as the joinder group to act with respect to prindle and that bates and keyus participated in telephone meetings about prindle monitored prindle's expenditures and kept prindle's records mrs fox testified that after she wrote a check on the prindle account to k-mart for clothes bates prevented her from using the prindle account to pay it she did not explain how bates did that she could not recall whether she repaid prindle for those clothes mrs fox later testified that bates allowed her to use the prindle account to pay for clothes if they were going to a seminar petitioners offered no other examples of actions bates or keyus took with prindle's income or property mr fox testified that neither bates nor keyus had any rights to any of prindle's assets we conclude that bates did not control prindle's purported assets prindle lacked economic_substance a_trust which has no economic_substance is not recognized for federal tax purposes 731_f2d_1417 9th cir affg 79_tc_714 73_tc_1235 45_tc_360 affd per curiam 381_f2d_22 5th cir petitioners presented no credible_evidence that they established prindle for any reason other than tax_avoidance petitioners contend that 435_us_561 and 69_f3d_982 9th cir revg and remanding tcmemo_1992_596 require us to recognize prindle for federal_income_tax purposes and prevent respondent and the courts from reallocating income from prindle to mr and mrs fox we disagree in those cases the courts found that a sale_and_leaseback of a building had economic_substance frank lyon co v united_states supra pincite sacks v commissioner supra pincite in contrast prindle had no economic_substance thus frank lyon co and sacks do not control here petitioners contend that prindle had economic_substance because they intended to use it so that income mr fox earned from oxyfresh would pass to their children after petitioners died citing 468_f2d_1155 9th cir we disagree brooke differs from this case in brooke the taxpayer transferred real_estate to his children as a gift the montana state probate_court appointed the taxpayer as their guardian the children rented a pharmacy apartment and medical office to the taxpayer the taxpayer used the rents to pay for the children's insurance health and education the u s court_of_appeals for the ninth circuit found that the transfers to the children were not shams and that the children had to pay income_tax on the rents id pincite we are not convinced by petitioners' argument because they have not shown that oxyfresh would have made payments after fox died mr fox's testimony on this point was contradictory he said that the income stream would continue after he died however he also agreed with mrs fox's testimony that he needed to do certain things not stated in the record to receive payments from oxyfresh and he testified that his income from all oxyfresh sales had stopped for a while because others performed better than he did this suggests that income from oxyfresh would not continue after he died finally the fact that petitioners thought they could use prindle for estate planning3 does not help them because the expectancy of such an advantage does not establish entitlement to an income_tax advantage petitioners contend that mr and mrs fox's children are the beneficiaries of prindle but the record is unclear on this point some trust documents that smith prepared and mr and mrs fox signed stated that mr and mrs fox were prindle's beneficiaries while others indicated that mr and mrs fox's children were beneficiaries prindle did not file income_tax returns to report income that mr and mrs fox deposited in the prindle account from oxyfresh and the real_estate business petitioners' position that prindle was not a sham is undermined by the fact that mr and mrs fox did not treat prindle as if it were a taxpayer also there is no evidence that mr and mrs fox filed gift_tax returns reporting the alleged transfer of property to prindle sec_2501 3it is not clear whether they meant to avoid probate_estate tax or inheritance_tax petitioners' other contentions petitioners contend that we should recognize prindle for federal tax purposes because the state of washington and oxyfresh recognized it as valid we disagree we need not recognize an entity for federal tax purposes even if it is recognized under state law 775_f2d_1092 9th cir zmuda v commissioner t c pincite petitioners contend that respondent may not rely on the presumption of correctness because respondent did not call any witnesses or introduce any evidence we disagree respondent's determination is presumed to be correct unless petitioners show that it is arbitrary petitioners do not contend that respondent's determination about prindle is arbitrary conclusion we conclude that mr and mrs fox kept substantially unfettered powers of disposition and beneficial_enjoyment of trust property the prindle arrangement was a sham and had no economic_substance and mr and mrs fox formed prindle to avoid tax we do not recognize prindle for federal tax purposes thus the income in question from mr and mrs fox's real_estate and oxyfresh activities is gross_income to mr and mrs fox and not to prindle during the years in issue and prindle need not file federal_income_tax returns for and it in light of our decision we need not decide respondent's continued follows that prindle is not liable for the addition_to_tax for failure_to_file tax returns under sec_6651 for and c welfare_benefit_plan deduction petitioners contend that they may deduct dollar_figure as their contribution to a qualified welfare_benefit_fund under sec_419 and g for we disagree a welfare_benefit_fund is any fund which is part of a plan of an employer through which the employer provides benefits to employees or their beneficiaries sec_419 if the requirements of sec_162 or sec_212 are otherwise met a taxpayer employer may deduct contributions to a welfare_benefit_fund in the year in which the taxpayer employer paid the contributions to the extent of the welfare_benefit fund's qualified_cost for that year sec_419 petitioners have not convinced us that they paid dollar_figure or any other amount to a qualified welfare_benefit_fund in mr fox testified that he sent a certified cashier's check for dollar_figure to employers trust he testified that he sent continued other contentions that prindle is not a valid trust under washington state law because of insufficient evidence showing that mr and mrs fox actually transferred assets to prindle or that prindle is a grantor_trust which should be taxed as a corporation if it an otherwise valid entity we also need not decide petitioners' contention that the oxyfresh income stream is assignable because even if it were prindle is not recognized for federal tax purposes dollar_figure in and dollar_figure in there is no documentary_evidence to corroborate this testimony petitioners cite two documents qnc contribution instructions which mr fox signed on date states contribution amount dollar_figure and collateralized personal line of credit instructions which mr fox signed on date states amount to be wired dollar_figure these documents do not show that petitioners paid dollar_figure in or at any time we conclude that petitioners may not deduct dollar_figure in under sec_419 d whether mr and mrs fox had dollar_figure in unreported interest_income respondent determined and contends that mr and mrs fox had dollar_figure in unreported interest_income from oxyfresh in neither party offered any evidence on this issue petitioners contend that respondent has the burden of producing evidence linking them to the unreported income 596_f2d_358 9th cir revg 67_tc_672 and that respondent failed to do so we agree with petitioners the u s court_of_appeals for the ninth circuit the circuit in which this case is appealable requires the commissioner to introduce some substantive evidence that shows that the taxpayer received unreported income 724_f2d_808 9th cir weimerskirch v commissioner supra oxyfresh paid compensation to mr fox but there is no evidence that oxyfresh paid any interest to mr fox or to prindle respondent has failed to show any link between petitioners and any interest_income we do not sustain respondent's determination that mr and mrs fox received dollar_figure in unreported interest_income from oxyfresh in see sanders v commissioner tcmemo_1997_ e self-employment_tax respondent determined and contends that mr and mrs fox are liable for self-employment_tax of dollar_figure for and dollar_figure for for payments from oxyfresh sec_1401 imposes a tax on self-employment_income self-employment_income is the net_earnings derived by a person from any trade_or_business carried on by that person sec_1402 and b mr fox earned_income from oxyfresh by selling oxyfresh products recruiting distributors and conducting motivational workshop sec_3 weeks per month before the years in issue mr fox treated his income from oxyfresh as self-employment_income he did not substantially change the manner in which he conducted his work for oxyfresh after smith formed prindle thus those payments are subject_to self-employment_tax sec_1402 petitioners contend that mr fox had no self-employment_income if we recognize prindle as a_trust for federal tax purposes however we do not recognize prindle as a_trust for federal tax purposes for reasons stated in paragraph b above petitioners contend that the oxyfresh payments to prindle or to mr fox are passive_income because they were a percentage of all oxyfresh company sales not only sales from distributors that he recruited we disagree the payments from oxyfresh were not passive_income because mr fox's activities to earn them were not passive mr fox had to work for oxyfresh to receive payments from oxyfresh mr fox owned oxyfresh stock but petitioners do not contend that the payments from oxyfresh were dividends petitioners contend that the oxyfresh payments are not self- employment income because they would continue even after mr fox died for reasons stated in paragraph b-2 we are not convinced that oxyfresh would continue to make payments after mr fox died petitioners rely on 86_f3d_1126 fed cir in which the u s court_of_appeals_for_the_federal_circuit held that payments from nationwide mutual insurance co 's agency security compensation plan to a retired independent agent who sold nationwide policies were not subject_to self-employment_tax in gump the government contended that the payments were part of the taxpayer's compensation_for selling insurance id the court_of_appeals disagreed and held that payments were made to cancel the payor's business relationship with the taxpayer id the court_of_appeals held that the payments to cancel the business relationship were not self- employment income id oxyfresh did not pay mr fox or prindle to cancel their business relationship thus gump differs from this case we conclude that mr and mrs fox are liable for self- employment_tax of dollar_figure for and dollar_figure for f whether mr and mrs fox are liable for the addition_to_tax for failure_to_file for and the accuracy-related_penalty for and respondent determined and contends that mr and mrs fox are liable for the addition_to_tax for failure_to_file an income_tax return for under sec_6651 and the accuracy-related_penalty for and under sec_6662 for negligence sec_6651 a taxpayer is liable for an addition_to_tax of up to percent for failure_to_file timely federal_income_tax returns unless the taxpayer shows that such failure was due to reasonable_cause and not willful neglect sec_6651 469_us_241 81_tc_806 affd without published opinion 767_f2d_931 9th cir sec_6662 taxpayers are liable for a penalty under sec_6662 equal to percent of the part of the underpayment which is attributable to negligence sec_6662 for purposes of sec_6662 negligence is a failure to reasonably attempt to comply with the internal_revenue_code sec_6662 the accuracy-related_penalty under sec_6662 does not apply to any part of an underpayment if the taxpayer shows that there was reasonable_cause for that part of the underpayment and that the taxpayer acted in good_faith based on the facts and circumstances sec_6664 reliance on professional advice a taxpayer may establish that he or she had reasonable_cause for failure_to_file a timely return and was not negligent under sec_6662 by proving that he or she reasonably relied in good_faith on the advice of a competent independent expert or tax professional possessed of all the information see united_states v boyle supra pincite 414_f2d_749 4th cir affg tcmemo_1968_98 91_tc_396 affd without published opinion 940_f2d_1534 9th cir 86_tc_785 86_tc_492 affd 864_f2d_1521 10th cir georgia ketteman trust v commissioner 86_tc_91 petitioners contend that they are not liable under sec_6651 or sec_6662 on the grounds that mr and mrs fox relied on competent advice we disagree mr fox spoke with giboney mrs fox's uncle who is an attorney about possible forms for their oxyfresh business giboney said that a_trust sounded fine to him petitioners did not call giboney as a witness we do not know his expertise dunn said that mr fox could operate his oxyfresh business as a_trust however it is not clear whether dunn reviewed the trust documents that smith prepared mr fox testified that he did not give dunn any information regarding the trust mr fox did not rely on dunn in good_faith because he kept information from him dunn attended the trial but did not testify we may draw an unfavorable inference from his failure to testify for petitioners 6_tc_1158 affd 162_f2d_513 10th cir petitioners contend that we may not draw an adverse inference from dunn's failure to testify because the uncalled witness rule does not apply in federal court we disagree the u s court_of_appeals for the ninth circuit applied the adverse inference rule_of wichita terminal elevator co v commissioner supra in 886_f2d_1237 9th cir affg 89_tc_1063 mr fox testified that he asked an unidentified attorney who specialized in trusts about which form he should use for his oxyfresh business mr fox testified that the attorney's conclusion was the same as that of giboney and dunn we do not know the expertise of the people on whom petitioners claim to have relied and we do not know specifically what their opinion was conclusion we conclude that mr and mrs fox are liable for the addition_to_tax for failure_to_file a return for under sec_6651 and the accuracy-related_penalty for and under sec_6662 for negligence to reflect the foregoing decision will be entered for petitioner in docket no and under rule in docket no


internal_revenue_service number release date index number ------------------------- ------------------- ------------------ -------------------------- ---------------------------- legend 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-117027-10 date date x --------------------------------------------------------------------- ------------------- brand engine company state_agency committee ------------- ----------------------------------- ------------- -------------------------------------------------- --------- -------------------------------------------------- ------------------------- region ------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ dollar_figuren ----------- dear --------------- this replies to a letter_ruling request dated date submitted on x’s behalf by its authorized representative requesting rulings under sec_4051 of the internal_revenue_code plr-117027-10 according to the information submitted x manufactures light medium and heavy duty trucks and tractors through several of its divisions including brand x delivers its products and services worldwide through an extensive dealer network x through brand will engage in sales of trucks and tractors that will take into account certain subsidies offered by state for_the_use_of liquefied natural_gas lng engines as described below brand currently has a contract with engine company to provide it with diesel truck and tractor engines for installation into brand’s trucks and tractors brand will obtain the lng conversion engines from engine company as well through the same procedures already established for the diesel engines engine company researches develops and markets high performance low emission engine and fuel injection systems that use alternative fuels such as lng both directly and through its partially and wholly owned subsidiaries state enacted legislation that allowed state to fund certain programs to reduce air pollution from motor vehicles some of these funds are allocated to a regional agency that serves as the air pollution control agency for region agency engages in grant programs to assist end users of trucks and tractors in replacing diesel trucks and tractors with ones powered by alternative_fuel state law established committee to determine which projects should be funded through agency through this process agency entered into an agreement with engine company through its subsidiary to provide for lng engine buy downs out of agency funds the buy down will provide engine company with an dollar_figuren per engine incentive which will reduce the cost of installing an lng system on a truck or tractor engine engine company collects participation agreements from prospective purchasers of lng system trucks and tractors and coordinates the applications with agency if agency accepts the participation_agreement the dollar_figuren incentive is passed through to the person who ultimately purchases the truck or tractor from the brand dealer hereinafter the program participant the obligations of the program participant and the consequences for breach of any obligation are described in the participation agreements specifically the participation agreements contain a geographic restriction requiring that at least of annual mileage or engine hours be used within agency’s jurisdiction for at least years the participation agreements also provide for various payments ranging from to of dollar_figuren that the program participant must pay to agency if the program participant does not meet the obligations contained in the agreement if the trucks or tractors are subsequently leased the lessee must agree to the terms of the participation_agreement the flow of funds from agency or committee through engine company and brand is as follows the program participant applies for the buy down through engine company which submits the application to agency once agency approves the application agency releases funds to engine company to buy down the cost of an lng engine conversion engine company passes this buy down along to brand by selling the lng conversion to brand at a dollar_figuren discount this ultimately lowers the price at plr-117027-10 which brand sells the converted truck or tractor to the brand dealer after the brand dealer’s mark-up the dealer sells the truck or tractor to the program participant for a lower price than the program participant would have paid without the buy down the engine conversion work will be performed on-site at brand’s manufacturing facilities the price for the conversions will be computed after engine company rebates and the agency buy down all of the trucks and tractors will be custom ordered and destined for use within agency’s jurisdiction for transactions involving buy downs the brand dealer will not provide brand with exemption certificates described in sec_145_4052-1 of the temporary excise_tax regulations under the highway revenue act of pub l and sec_48_4082-1 of the manufacturers and retailers excise_tax sec_4051 generally imposes on the first_retail_sale of certain articles including automobile truck chassis truck bodies including in each case parts or accessories sold on or in connection therewith or with the sale thereof truck trailer and semitrailer chassis truck trailer and semitrailer bodies and tractors a tax of percent of the amount for which the article is so sold sec_4052 provides that the term first_retail_sale means the first sale for a purpose other than for resale or leasing in a long-term_lease after production manufacture or importation sec_4052 provides that in the case of any article sold otherwise than through an arm's-length_transaction at less than the fair market price the tax under subchapter_c of chapter shall be computed on the price for which similar articles are sold at retail in the ordinary course of trade as determined by the secretary sec_145_4052-1 generally provides that the term first_retail_sale means a taxable sale a sale is taxable if it is not exempt under sec_4221 the item sold was for resale or for leasing in a long-term_lease pursuant to sec_48_4052-1 or there has been a prior taxable sale under certain circumstances sec_145_4052-1 provides that a certificate signed by the purchaser may be accepted by a seller in support of a nontaxable sale to the purchaser sec_48_4052-1 provides tax is not imposed by sec_4051 on the sale of an article for resale or leasing in a long-term_lease if by the time of sale the seller has in good_faith accepted from the buyer a statement that the buyer executed in good_faith and that is in substantially the same form and subject_to the same conditions as the certificate described in sec_145_4052-1 except that the certificate must be signed under penalties of perjury and need not refer to form_637 or include a registration number plr-117027-10 sec_145_4052-1 provides that the price for which an article is sold includes the total consideration paid for the article whether that consideration is paid in money services or other forms similar rules to sec_4216 and the regulations thereunder relating to charges to be included in the price and excluded from the price shall apply sec_145_4052-1 provides that for purposes of sec_145_4051-1 and sec_145_4052-1 a sale is considered to be made under circumstances otherwise than at arm's length if i one of the parties is controlled in law or in fact by the other or there is common_control whether or not such control is actually exercised to influence the sale price or ii the sale is made pursuant to special arrangements between a seller and a purchaser you have requested a determination that the first_retail_sale of brand trucks and tractors occurs when the brand dealer purchases the trucks or tractors you have also requested a determination that the tax_base is determined after the buy down described above is taken into account the first issue is whether the first_retail_sale occurs when brand sells the truck or tractor to the brand dealer or when the brand dealer sells the truck or tractor to the program participant under sec_4052 the first_retail_sale means the first sale for a purpose other than for resale or leasing in a long-term_lease after production manufacture or importation in order for there to be a tax exempt sale due to an intended resale the purchaser must provide the seller an exemption_certificate similar to the certificate described in sec_145_4052-1 in this case the dealer will not provide such an exemption_certificate thus we conclude that the first_retail_sale occurs when brand sells the truck or tractor to the brand dealer see also sec_145_4052-1 example the second issue is whether the tax_base includes or excludes the amount of the buy down sec_4051 imposes a tax on the first_retail_sale of certain articles including automobile truck chassis automobile truck bodies truck trailer and semitrailer chassis truck trailer and semitrailer bodies and tractors in this case the lng engines subject_to the buy downs are not taxable articles under sec_4051 rather they are components used in the manufacture of taxable articles further sec_4052 provides that if an article is sold otherwise than through an arm's-length_transaction at less than the fair market price the tax shall be computed on the price for which similar articles are sold at retail here by virtue of a buy down provided to engine company by agency brand purchases component lng engines from engine company at a reduced cost and passes the savings on to the brand dealer the brand dealer then sells the truck or tractor to the program participant at a lower cost than would otherwise be the case without the buy down the sale is at plr-117027-10 arm’s length under sec_145_4052-1 because brand does not control the brand dealer and the sale price is the result of a bona_fide cost reduction brand gets from engine company and agency rather than through a special arrangement between brand and the brand dealer accordingly we conclude that the tax_base is determined after the buy down is taken into account except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely stephanie bland senior technician reviewer branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc fip plr-121492-02 date date legend taxpayer trustee broker stock state a state b date date x y amount amount dear this is in reply to a letter dated date submitted by your authorized representative requesting a ruling that certain identified short_sales with respect to stock will continue to fall within the exception to sec_1259 of the internal_revenue_code provided in sec_1001 of the taxpayer_relief_act_of_1997 public law facts taxpayer is a limited_partnership organized under the laws of state a to engage in investment activities taxpayer has sought to protect its assets by among other things diversifying its assets in order to help achieve diversification taxpayer executed short against the box transactions with respect to stock held by taxpayer during the period beginning on date and ending on date taxpayer executed x separate short_sales in respect of y shares of stock the short_sales these transactions were short against the box transactions because taxpayer also owned y shares of stock at the time it entered into the short_sales trustee a banking organization chartered under the laws of state b that engages in the trust business held the y shares owned by taxpayer in a custody account maintained on behalf of taxpayer taxpayer represents that before the close of the 30-day period beginning on date trustee as investment manager and on behalf of taxpayer clearly plr-121492-02 identified the y shares of stock and the short_sales in its books_and_records as offsetting positions trustee continues to hold the y shares of stock on behalf of taxpayer and taxpayer has not delivered shares to close the short_sales in order to effect the short_sales taxpayer established a securities trading account margin_account with broker so that taxpayer could execute purchases and sales of securities through broker and borrow cash on margin from the broker broker charges interest on any borrowings by taxpayer from the margin_account broker acting at the direction and on behalf of taxpayer entered into a series of securities_lending agreements with third parties the lenders for the total y shares of stock that were sold short cash collateral in an amount equal to the current fair_market_value of the borrowed shares had to be posted with the lenders on behalf of taxpayer broker posted the required cash collateral with the lenders broker received the lender’s rebate on the collateral posted and then credited taxpayer with the rebate less an amount retained by broker as a fee taxpayer was also required to post with broker the same number of shares as were sold short this was accomplished by having taxpayer transfer the shares to the custody account maintained on behalf of taxpayer by trustee after the shares were transferred from the securities lender to broker broker sold the shares in the capital markets and deposited the short_sale proceeds in the margin_account if at any time the lenders require more collateral broker must post the collateral on behalf of taxpayer if at the time the collateral is posted the amount of required collateral is more than the cash in the margin_account the difference is deemed a loan by the parties from broker to taxpayer as noted above broker charges interest on such loans broker proposes to change the interest rate on the margin_account borrowings as well as the fee broker retains from the lender’s rebate broker has proposed to fix the interest charged on margin borrowings at the federal funds rate less amount basis points and to pass along the lender’s rebate based on the federal funds rate less amount basis points law and analysis sec_1001 of the taxpayer_relief_act_of_1997 the effective date provision provides an exception to sec_1259 for sales of positions etc held before date if before date the taxpayer entered into any transaction which is a constructive_sale of any appreciated_financial_position and before the close of the day period beginning on date such transaction and position are clearly identified in the taxpayer’s records as offsetting the exception ceases to apply as of the date such transaction is closed or the taxpayer ceases to hold the position the legislative_history of sec_1259 explains that the effective date provision prevents any identified transaction or position from being taken into account in determining whether a plr-121492-02 constructive_sale after date has occurred s rep no 105th cong 1st sess h_r rep no 105th cong 1st sess sec_1_1233-1 of the income_tax regulations provides that a short_sale is not deemed to be consummated until delivery of property to close the short_sale taxpayer represents that it identified both the y shares of stock and the short_sales as offsetting positions as of the date indicated in the effective date provision at this time trustee still holds the y shares of stock on behalf of taxpayer and taxpayer has not delivered shares to close the short_sales because taxpayer has not closed the short_sales and trustee continues to hold the y shares of stock on behalf of taxpayer the short_sales and the y shares of stock still fall within the effective date provision of sec_1259 the changes to the interest rate charged on the margin_account and the fee retained by the broker will not cause either the y shares of stock or the short_sales to be taken into account in determining whether a constructive_sale has occurred under sec_1259 conclusion based on the facts submitted and representations made by taxpayer the short_sales will continue to fall within the exception to sec_1259 provided in sec_1001 of the taxpayer_relief_act_of_1997 except as specifically ruled upon no opinion is expressed as to the federal tax treatment of the above transaction this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to taxpayer’s authorized representative sincerely yours patrick e white assistant to the chief branch office of associate chief_counsel financial institutions products enclosures copy of this letter sec_6110 copy


internal_revenue_service number release date index number ----------------------------------------------------------- ---------------------------------------- -------------------------------------- ----------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-144916-07 date date legend x ----------------------------------------- ----------------------------- trust1 ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- -------------------------- ----------------------------------- trust2 ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ----------------------------------- ----------------------------------- trust3 ------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ----------------------------------- ----------------------------------- trust4 ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------- ----------------------------------- ----------------------------------- plr-144916-07 trust5 ------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- ------------------------ ----------------------------------- trust6 ------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- ------------------------ ----------------------------------- trust7 ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------- ----------------------------------- ----------------------------------- trust8 ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- ------------------------ ----------------------------------- trust9 ------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- ------------------------ ----------------------------------- trust10 ------------------------------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- ------------------------- ------------------------------------ trust11 ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- ------------------------- ------------------------------------ trust12 ------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- plr-144916-07 ------------------------- ------------------------------------ trust13 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- ------------------------- ------------------------------------ trust14 --------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- ------------------------- ------------------------------------ trust15 ----------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- ------------------------- ------------------------------------ trust16 --------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- ------------------------- ------------------------------------ trust17 --------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- ------------------------- ------------------------------------ trust18 ----------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- ------------------------- ------------------------------------ trust19 ---------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- ------------------------- ------------------------------------ trust20 --------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- ------------------------- ------------------------------------ trust21 ------------------------------------------------------------------- plr-144916-07 ---------------------------------------------------------------------------------------------------------- ------------------------- ------------------------------------ trust22 ------------------------------------------------------------------ ---------------------------------------------------------------------------------------------------------- ------------------------- ------------------------------------ a ------------------------ t -------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------- ------------------------------ a ------ b --------- c ----- d ----- e ----- f -------- state ------------- date1 ----------------------- date2 ----------------- date3 -------------------------- date4 ---------------------- date5 ---------------------- date6 --------------------------- dear ----------------- plr-144916-07 this responds to a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representative requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated under the laws of state on date1 and elected to be an s_corporation effective date2 on date3 a a shareholder of x transferred a shares of x stock to each of trust1 trust2 trust3 trust4 trust5 trust6 trust7 trust8 trust9 trust10 trust11 trust trust13 trust14 trust15 trust16 trust17 trust18 trust19 trust20 and trust21 on date4 a transferred an additional a shares of x stock to each of these trusts on date5 a transferred b shares of x stock to each of these trusts also on date5 a transferred b shares of x stock to trust22 on date6 t another shareholder of x transferred c shares of x stock to each of trust12 trust13 trust14 trust15 trust16 and trust18 d shares of x stock to each of trust19 and trust21 e shares of x stock to each of trust17 and trust20 and f shares of x stock to trust22 x represents that trust1 trust2 trust3 trust4 trust5 trust6 trust7 trust8 trust9 trust10 trust11 trust trust13 trust14 trust15 trust16 trust17 trust18 trust19 trust20 trust21 and trust22 qualify to be treated as a qualified subchapter_s trusts qssts described in sec_1361 except that the beneficiary of each respective trust failed to make the election under sec_1361 therefore these trusts were not eligible s_corporation shareholders and x’s s_corporation_election terminated on date3 moreover x’s s_corporation_election would have terminated on date4 date5 or date6 due to the transfers of x stock to the trusts on those dates had the election not already terminated on date3 x represents that x and x’s shareholders including the beneficiaries of trust1 trust2 trust3 trust4 trust5 trust6 trust7 trust8 trust9 trust10 trust11 trust trust13 trust14 trust15 trust16 trust17 trust18 trust19 trust20 trust21 and trust22 have filed tax returns consistent with x being an s_corporation and with the trusts treated as qssts x further represents that the circumstances resulting in the termination of x’s s_corporation_election were inadvertent and were not motivated by tax_avoidance or retroactive tax planning x and each person who was or is a shareholder of x at any time since date3 agree to make any adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary with respect to such period sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that a small_business_corporation means a domestic_corporation that is not an ineligible_corporation and that does not have as a plr-144916-07 shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be an s_corporation shareholder sec_1361 provides that for purposes of sec_1361 in the case of a_trust described in sec_1361 the deemed owner shall be treated as the shareholder sec_1361 provides that for purposes of sec_1361 a_trust with respect to stock transferred to it pursuant to the terms of a will but only for the year period beginning on the day on which such stock is transferred to it may be an s_corporation shareholder sec_1361 provides that for purposes of sec_1361 in the case of a_trust described in sec_1361 the estate of the testator shall be treated as the shareholder sec_1361 provides that in the case of a qsst with respect to which a beneficiary makes an election under sec_1361 such trust shall be treated as a_trust described in sec_1361 and for purposes of sec_678 the beneficiary of such trust shall be treated as the owner of that portion of the trust which consists of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1362 provides that a beneficiary of a qsst or his legal_representative may elect to have sec_1361 apply sec_1361 provides that an election under sec_1362 shall be effective up to days and months before the date of the election sec_1_1361-1 of the income_tax regulations provides that the current income_beneficiary of the trust must make the qsst election under sec_1361 by signing and filing with the service_center with which the corporation files its income_tax return the applicable form or statement including the information listed in sec_1 j ii sec_1361 provides that the term qualified_subchapter_s_trust means a_trust a the terms of which require that i during the life of the current income_beneficiary there shall be only one income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of such beneficiary’s death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to that beneficiary and b all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to one individual who is a citizen or resident_of_the_united_states plr-144916-07 sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation a termination of an s_corporation_election under sec_1362 is effective on or after the date of cessation sec_1362 provides that if an election under sec_1362 by any corporation was terminated under sec_1362 or the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified under sec_1362 agrees to make the adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary for that period then notwithstanding the circumstances resulting in such termination the corporation shall be treated as an s_corporation during the period specified by the secretary based solely on the facts submitted and the representations made we conclude that x’s s_corporation_election terminated on date3 resulting from the failure of the beneficiaries of trust1 trust2 trust3 trust4 trust5 trust6 trust7 trust8 trust9 trust10 trust11 trust trust13 trust14 trust15 trust16 trust17 trust18 trust19 trust20 and trust21 to make the election under sec_1361 on behalf of each trust respectively we further conclude that the termination was inadvertent within the meaning of sec_1362 in addition we conclude that pursuant to the provisions of sec_1362 x will be treated as an s_corporation from date3 and thereafter provided that trust1 trust2 trust3 trust4 trust5 trust6 trust7 trust8 trust9 trust10 trust11 trust trust13 trust14 trust15 trust16 trust17 trust18 trust19 trust20 trust21 and trust22 qualify as qssts and x’s election to be an s_corporation was valid and was not otherwise terminated under sec_1362 accordingly the shareholders of x must include in income their pro_rata share of the separately_stated and nonseparately computed items of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided in sec_1368 for this purpose the beneficiaries of trust1 trust2 trust3 trust4 trust5 trust6 trust7 trust8 trust9 trust10 trust11 trust trust13 trust14 trust15 trust16 trust17 trust18 trust19 trust20 and trust21 shall be treated as the shareholders of x with respect to the stock of x held by each trust respectively beginning date3 and plr-144916-07 thereafter in addition the beneficiary of trust22 shall be treated as the shareholder of x with respect to the stock of x held by trust22 beginning date5 and thereafter if x or its shareholders fail to treat x as described above this letter_ruling shall be null and void this ruling is conditioned on the beneficiaries or their legal representatives of trust1 trust2 trust3 trust4 trust5 trust6 trust7 trust8 trust9 trust10 trust11 trust trust13 trust14 trust15 trust16 trust17 trust18 trust19 trust20 and trust21 filing a qsst election under sec_1361 effective date3 and on the beneficiary or his legal_representative of trust22 filing a qsst election effective date5 with the appropriate service_center within days from the date of this letter a copy of this letter should be attached to each qsst election so filed except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 or whether trust1 trust2 trust3 trust4 trust5 trust6 trust7 trust8 trust9 trust10 trust11 trust trust13 trust14 trust15 trust16 trust17 trust18 trust19 trust20 trust21 and trust22 are qssts within the meaning of sec_1361 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 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 j thomas hines chief branch office of associate chief_counsel passthroughs special industries copy of this letter copy for sec_6110 purposes enclosures cc


t c summary opinion united_states tax_court kenneth p shanks petitioner and lydia l shanks intervenor v commissioner of internal revenue respondent docket no 24592-09s filed date kenneth p shanks pro_se lydia l shanks pro_se horace crump for respondent thornton judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated all section references are to the internal_revenue_code as amended the issue for decision is whether for petitioner is entitled to relief from joint_and_several_liability under sec_6015 background kenneth p shanks petitioner and lydia l shanks intervenor collectively the shankses married in and separated in they have two children during petitioner worked as a produce clerk for kroger limited kroger earning dollar_figure of wages during intervenor worked for staffers inc staffers earning dollar_figure of wages in addition during intervenor received dollar_figure of nonemployee compensation from examone world wide inc examone and dollar_figure of unemployment benefits from the mississippi department of employment security intervenor deposited her examone earnings and her unemployment benefits in the shankses’ joint checking account but petitioner did not review the bank records he relied upon intervenor to keep the bank balances although petitioner knew that intervenor performed services for examone and received unemployment benefits he did not know the amounts of these items that intervenor received in the shankses filed a joint federal_income_tax return for taxable_year jackson hewitt tax service prepared the return using information the shankses provided petitioner signed the return without reviewing it on their joint_return the shankses reported their combined wages from kroger and staffers but they did not report intervenor’s nonemployee compensation from examone or her unemployment benefits on their joint_return the shankses claimed a dollar_figure refund attributable in part to an earned_income_credit and additional_child_tax_credit the shankses used the refund to obtain dollar_figure in proceeds from a tax_refund anticipation loan the shankses shared these proceeds respondent determined a dollar_figure deficiency in the shankses’ federal_income_tax the deficiency was attributable in part to dollar_figure of self-employment_tax on intervenor’s unreported nonemployee compensation the remaining dollar_figure of deficiency represented reductions to the shankses’ earned_income_credit and additional_child_tax_credit these last-mentioned computational adjustments resulted from respondent’s increasing the shankses’ income to include intervenor’s unreported nonemployee compensation and unemployment benefits 1more particularly on their joint_return the shankses reported zero total_tax dollar_figure of income_tax_withholding of which dollar_figure represented petitioner’s withholding on his wage income and dollar_figure represented intervenor’s withholding on her own wage income a dollar_figure earned_income_credit and a dollar_figure additional_child_tax_credit 2because of an offsetting increase in the shankses’ child continued discussion generally married taxpayers may elect to file a joint federal_income_tax return sec_6013 after making the election each spouse is jointly and severally liable for the entire tax due on their aggregate income sec_6013 an individual may seek relief from joint_and_several_liability under sec_6015 which offers three avenues of possible relief under subsections b c and f in general sec_6015 provides full or apportioned relief from joint_and_several_liability with respect to an understatement sec_6015 provides proportionate tax relief to divorced or separated taxpayers with respect to a deficiency and in certain circumstances sec_6015 provides equitable relief if relief is unavailable under sec_6015 or c an individual against whom a deficiency has been asserted may petition this court to determine the appropriate relief under sec_6015 sec_6015 in determining the appropriate relief continued tax_credit resulting from the inclusion of the unreported income in the shankses’ income the deficiency reflects no additional tax_liability apart from the items described above 3the parties have stipulated that petitioner made an administrative request for relief under sec_6015 at the same time that he filed his petition cf 115_tc_183 n in the absence of any objection from the commissioner treating the raising of sec_6015 relief in the petition as a timely filed election affd 282_f3d_326 5th cir available under sec_6015 we apply a de novo scope and standard of review see 132_tc_203 i sec_6015 relief under sec_6015 if certain requirements are met a requesting spouse may be relieved of joint_and_several_liability from a tax understatement that is attributable to the nonrequesting spouse if among other requirements the requesting spouse establishes that he or she did not know and had no reason to know that the other spouse understated that spouse’s tax_liability on the return sec_6015 no relief is available under this provision if the requesting spouse has actual knowledge of the underlying transaction that produced the omitted income 115_tc_183 affd 282_f3d_326 5th cir because petitioner knew that intervenor performed services for examone and received unemployment benefits he is not entitled to relief under sec_6015 ii sec_6015 relief a eligibility--the knowledge requirement if various requirements are met an election under sec_6015 treats the former spouses as if they had filed separate returns and each spouse’s liability is limited to the portion of the deficiency properly allocable to the electing spouse as determined under the rules contained in sec_6015 see sec_6015 d such an election is generally not valid if the secretary demonstrates that the individual making the election had actual knowledge at the time such individual signed the return of any item giving rise to a deficiency or portion thereof which is not allocable to such individual under subsection d sec_6015 in his pretrial memorandum and again at the commencement of trial respondent’s counsel conceded that petitioner was entitled to elect relief under sec_6015 with respect to the dollar_figure of self-employment_tax attributable to intervenor’s nonemployee compensation in his opening remarks at trial respondent’s counsel explained this concession as being based on a determination by respondent’s appeals_office that it could not be shown that mr shanks had knowledge of the unemployment benefits and the income from exam one but at the conclusion of trial respondent’s counsel sought to retract this concession on the ground that petitioner’s testimony established that he had actual knowledge of these omitted items so as to invalidate his election under sec_6015 4respondent does not contend that petitioner fails the requirements for electing relief under sec_6015 in any respect other than allegedly having actual knowledge of the omitted income examone earnings because petitioner knew that intervenor performed services for examone he should have known of this omitted income but that does not mean he had actual knowledge of it see 114_tc_333 finding that the requesting spouse lacked actual knowledge of the omitted income from his ex-wife’s business even though he knew of the business and had access to her business records but never checked them to determine whether she had accounted for all her income petitioner testified credibly that although intervenor deposited her examone earnings in their joint checking account he did not know the amounts of these deposits because he never reviewed the bank accounts entrusting that task to her intervenor did not directly contradict this testimony she testified merely that petitioner had access to the joint checking account and was aware of what was going on respondent who introduced no evidence on this point has failed to carry his burden of proving that petitioner had actual knowledge of intervenor’s omitted earnings from examone cf sec_1_6015-3 example iii income_tax regs where the requesting spouse knew that the nonrequesting spouse had income from his business but did not know the exact amount her sec_6015 election was valid except insofar as she knew the minimum amount of his earnings from the business consequently we disagree with respondent that petitioner’s sec_6015 election is invalid because petitioner had actual knowledge of intervenor’s examone earnings unemployment benefits petitioner testified that he was aware that intervenor was receiving unemployment benefits in but did not know the amount intervenor by contrast testified that petitioner wasn’t aware of the unemployment respondent introduced no evidence on this point on the basis of this sparse record we conclude that petitioner had at least reason to know of the unemployment benefits but we need not decide whether petitioner had actual knowledge of the unemployment benefits because as discussed below even if he lacked actual knowledge petitioner has not shown that the portion of the deficiency attributable to the unemployment benefits is not properly allocable to him b allocation of deficiency generally a spouse who is eligible for relief under sec_6015 is allocated a portion of the joint_return deficiency in proportion to the net amount of items taken into account in computing the deficiency that is allocable to the electing spouse sec_6015 as an exception to this general_rule two types of items are treated separately in making thi sec_5furthermore as discussed infra for purposes of our analysis of whether petitioner is entitled to equitable relief under sec_6015 it is not determinative whether petitioner had actual knowledge or only reason to know of the unemployment benefits allocation rather than being aggregated with all other items to which the deficiency is attributable disallowed credits and any_tax other than income_tax imposed by sec_1 or alternative_minimum_tax imposed by sec_55 that is required to be included with the joint_return sec_6015 consequently pursuant to this rule the disallowed credits and the self-employment_tax that make up the shankses’ deficiency are treated separately in allocating the deficiency items giving rise to a deficiency on a joint_return are generally allocated as if the spouses had filed separate returns sec_6015 erroneously omitted items of income are allocated to the spouse who was the source of the income sec_1_6015-3 income_tax regs but an erroneous item that otherwise would be allocated to the nonrequesting spouse is allocated to the requesting spouse to the extent that the requesting spouse received a tax_benefit on the joint_return sec_6015 sec_1_6015-3 income_tax regs self-employment_tax on intervenor’s examone earnings the omitted income from intervenor’s examone earnings is allocated to her consequently the dollar_figure of self-employment_tax on these earnings is also attributable to her and not to petitioner respondent does not contend that petitioner realized any_tax benefit on the joint_return as relates to this unreported self-employment_tax liability we conclude and hold consistent with respondent’s original concession that the dollar_figure of the deficiency that is attributable to intervenor’s self-employment_tax liability is properly allocable to her and not to petitioner disallowed tax_credits the regulations provide that if a disallowed credit is attributable in whole or part to both spouses then the irs will determine on a case by case basis how such item will be allocated sec_1_6015-3 income_tax regs respondent has effectively determined that the disallowed credits are to be allocated to both spouses declining to relieve petitioner of joint_and_several_liability with respect to the disallowed credits on the basis of our review of all the facts and circumstances we conclude that the disallowed credits are properly allocable to both petitioner and intervenor after all it was the combination of petitioner’s income and intervenor’s income her reported wage income plus her omitted examone earnings and unemployment benefits that caused their total income to exceed allowable income limits for the earned_income_credit and additional_child_tax_credit shown on their joint_return moreover the shankses’ tax_refund was attributable in significant part to the earned_income_credit and additional_child_tax_credit that respondent has disallowed insofar as the record shows the shankses shared equally the benefit of the tax_refund in the form of a tax_refund anticipation loan petitioner as the requesting spouse bears the burden of proving the portion of the deficiency that is properly allocable to him see sec_6015 sec_1_6015-3 income_tax regs he has not shown that the portion of the deficiency attributable to the disallowed credits is not properly allocable to him iii sec_6015 relief because we have held that petitioner is not entitled to relief under sec_6015 and is entitled to only partial relief under sec_6015 we finally consider whether he may be eligible for additional relief under sec_6015 see sec_6015 sec_6015 provides that a taxpayer may be relieved from joint_and_several_liability if it is determined after considering all the facts and circumstances that it is inequitable to hold the taxpayer liable for the unpaid tax or deficiency revproc_2003_61 sec_4 - 2003_2_cb_296 sets out seven threshold conditions that a requesting spouse must meet before the commissioner will consider a request for relief under sec_6015 respondent does not dispute that petitioner meets these threshold conditions revproc_2003_61 sec_4 c b pincite sets forth a nonexclusive list of factors to be evaluated in requests for relief under sec_6015 for spouses who have met the threshold conditions the factors are marital status economic hardship that would result absent relief knowledge or reason to know of the item giving rise to the deficiency any legal_obligation of the nonrequesting spouse to pay the tax_liability pursuant to a divorce decree or agreement significant benefit received by the requesting spouse the requesting spouse’s compliance with income_tax laws following the year for which relief is requested spousal abuse and the requesting spouse’s mental or physical health at the time the return was filed or relief was requested petitioner and intervenor are separated this factor weighs in support of equitable relief see id sec_4 a i c b pincite but as discussed below petitioner has failed to establish that any of the other enumerated factors weigh in favor of relief 6under these guidelines the requesting spouse’s actual knowledge of the income giving rise to the deficiency weighs strongly against granting relief see revproc_2003_61 sec_4 a iii b 2003_2_cb_296 such knowledge may be overcome only if the factors in favor of equitable relief are particularly compelling id by contrast reason to know of the item giving rise to the deficiency is weighted no more heavily than other factors id at a minimum petitioner had reason to know of intervenor’s examone earnings and unemployment benefits this factor weighs against equitable relief see id sec_4 a iii b c b pincite the omission of part of intervenor’s income from the shankses’ joint_return resulted in a higher tax_refund which petitioner and intervenor shared petitioner has not established that he received no significant benefit beyond normal support from the understatement see sec_1_6015-2 income_tax regs stating that the fact that the spouse received a benefit from the understatement on the return is a factor that may be taken into account in determining whether the spouse significantly benefited from an understatement revproc_2003_61 sec_4 v c b pincite this factor also weighs against relief petitioner claims he will suffer economic hardship if he is not granted relief because he is caring for his two children generally economic hardship exists if collection of the tax_liability will render the taxpayer unable to pay reasonable basic living_expenses see sec_301_6343-1 proced admin regs petitioner has made no such showing this factor weighs against relief see revproc_2003_61 sec_4 a ii c b pincite petitioner does not contend and the record does not suggest that intervenor had a legal_obligation to pay the outstanding income_tax_liability pursuant to a divorce decree or agreement nor does the record suggest that petitioner was subject_to abuse or was in poor mental or physical health either when he signed the joint_return or when he requested relief see revproc_2003_61 sec_4 a iv b i and ii c b pincite finally the record does not show whether petitioner has been in compliance with the income_tax laws for years after the totality of the factors discussed above convinces us that it is not inequitable to hold petitioner liable for the part of the deficiency attributable to items other than intervenor’s dollar_figure of self-employment_tax consequently we hold that petitioner is not entitled to equitable relief under sec_6015 to reflect the foregoing an appropriate decision will be entered