internal_revenue_service number release date index number ------------------------------------- --------------------------------------------- -------------------- ----------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-124415-08 date date legend x --------------------------------------------------- -------------------------------------- a_trust date date date date date ----------------------------- ------------------------------------------------------------- -------------------------- ----------------- ---------------------- ---------------------- ---------------------- dear -------------------- this responds to a letter dated date and subsequent correspondence written on behalf of x requesting relief for inadvertent termination of a subchapter_s_election under sec_1362 of the internal_revenue_code code facts the information submitted states that x was incorporated on date and made an s_corporation_election effective date trust a_trust that was treated under subpart e of plr-124415-08 part of subchapter_j of chapter as owned by a was a shareholder of x thus trust was a permitted s_corporation shareholder pursuant to sec_1361 on date a died trust continued to qualify as a permissible s_corporation shareholder under sec_1361 for the two year period beginning on the date of the deemed owner’s death and ending on date on date trust became an ineligible shareholder and x’s s_corporation_election terminated x represents that effective date trust was and is qualified to elect to be an electing_small_business_trust esbt within the meaning of sec_1361 x represents that there was no intent to terminate x’s s_corporation_election and that the failure to timely file the esbt election for trust was not motivated by tax_avoidance or retroactive tax planning x and its shareholders have agreed to make any adjustments that the secretary or commissioner may require consistent with the treatment of x as an s_corporation and the treatment of trust as an esbt law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1361 of the code and sec_1_1361-1 of the income_tax regulations provide 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 a_trust which was described in sec_1361 immediately before the death of the deemed owner and which continues in existence after such death may be a shareholder but only for the year period beginning on the day of the deemed owner's death sec_1361 provides that for purposes of sec_1361 an esbt may be a shareholder plr-124415-08 sec_1361 provides that for purposes of sec_1361 except as provided in sec_1361 the term electing_small_business_trust means any trust if i such trust does not have as a beneficiary any person other than i an individual ii an estate iii an organization described in sec_170 or or iv an organization described in sec_170 which holds a contingent_interest in such trust and is not a potential_current_beneficiary ii no interest in such trust was acquired by purchase and iii an election under sec_1361 applies to such trust sec_1361 provides that an election under sec_1361 shall be made by the trustee any such election shall apply to the taxable_year of the trust for which made and all subsequent taxable years of such trust unless revoked with the consent of the secretary sec_1_1361-1 provides in part that the trustee of the trust must make the esbt election by signing and filing with the service_center where the s_corporation files its income_tax return a statement that meets the requirements of sec_1_1361-1 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 sec_1362 provides that any termination shall be effective on and 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 such termination steps were taken so that the corporation for which the termination occurred is a small_business_corporation and the corporation for which the termination occurred and each person who was a shareholder in the corporation at any time during the period specified pursuant to sec_1362 agrees to make adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such 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 conclusion based solely on the information submitted and representations made we conclude that x’s s_corporation_election terminated on date because the trustee of trust failed to timely file and complete the required esbt election under sec_1361 however we further conclude that such termination was inadvertent within the meaning of sec_1362 pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation on and after date unless x’s s election is otherwise terminated under sec_1362 provided that the respective trustee files an esbt election with the appropriate service_center within days of the date of this letter effective date for plr-124415-08 trust and accordingly that trust file any amended returns that are necessary to comply with this ruling a copy of this letter should be attached to the esbt elections except as specifically set forth above no opinion is expressed or implied concerning the federal tax consequences of the above-described facts under any other provision of the code specifically we express or imply no opinion regarding whether x is otherwise eligible to be treated as an s_corporation or whether trust is otherwise eligible to be treated as an esbt this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely audrey w ellis audrey w ellis senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


t c memo united_states tax_court charles brodman and teresa brodman petitioners v commissioner of internal revenue respondent docket no 16598-02l filed date jerry arthur jewett for petitioners michelle m lippert for respondent memorandum opinion cohen judge the petition in this case was filed in response to a notice_of_determination concerning collection action s under sec_6320 and or the issues for decision are whether there was an abuse_of_discretion in a determination that collection action could proceed and whether the court should impose a penalty under sec_6673 unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure background all of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference petitioners resided in carey ohio at the time they filed their petition petitioners timely filed form sec_1040 u s individual income_tax returns for and reporting income received in the amounts of dollar_figure dollar_figure and dollar_figure respectively on the form_1040 for petitioners inserted above their signatures a reference to signing the return under duress on date respondent sent to petitioners a notice_of_deficiency determining deficiencies of dollar_figure dollar_figure and dollar_figure for and respectively and penalties under sec_6662 for each of those years petitioners did not file a petition in response to the notice_of_deficiency in their petition in this case they acknowledge receipt of the notice_of_deficiency but claim that it was not valid because it was not signed by the secretary_of_the_treasury or his authorized delegate and the person who signed the ‘notice of deficiency’ did not have authority to do so because no delegation_order exists which authorizes that person to sign notices of deficiency for the secretary_of_the_treasury after petitioners defaulted on the date notice_of_deficiency assessments of accuracy-related_penalties and additional income_tax liabilities were made erroneously claimed earned_income credits were reversed on petitioners’ accounts for the years in issue a final notice - notice_of_intent_to_levy and notice of your right to a hearing was sent to petitioners on date a notice_of_federal_tax_lien was filed with the wyandot county recorder on date and a notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 was sent to petitioners on date petitioners received the notices sent on date and date marked them refused for fraud and returned them to the internal_revenue_service irs with instructions that they be filed as a permanent part of petitioners’ records on date petitioners filed a request for a collection_due_process_hearing in their request petitioners demanded a variety of forms including a form 23c a form 17-a a delegation_order of the revenue_agent who sent the notice_of_levy and demanded the law that makes us liable for income taxes among other things petitioners demanded provide the documents from the internal_revenue_code the code_of_federal_regulations united_states statutes at large or public law that supports the irs contention that a or 1040a is a type of tax i demand that you send me the proof that i am a virgin island resident see your tc-150 coding of me as per your manual please send me a copy of the court order to seize confiscate or take my money as per fair debit collection act send the regulations listing the taxable activity which is the bases for thi sec_1058 letter provide me with a copy of the letter in which the district_director ordered me to keep records per sec_6001 and what type of books_and_records to keep see us vs mercer sixth circuit district_court cincinnati ohio form_6809 civil penalty report please send me the logo the the bureau of alcohol_tobacco_and_firearms or the secret service should be using on their correspondence to us in title u s c chapter_3 subtitle - organization does not list these organizations as being part of the department of the treasury title_26 of the internal_revenue_code is literally the repealed national prohibition act which was repealed in and classified to title_26 in as the internal_revenue_code_of_1939 which is evidenced by usc do you have any evidence that we are subject_to the national prohibition if so please disclose now send us a copy of any dummy returns or substitute for return that have been created by the irs pertaining to us exhibit refs omitted petitioners’ request for a hearing continued with frivolous arguments and included the following paragraph as honest citizens of ohio state we desire to comply with any and all laws that compel us to action we are willing to file any and every form or return that we are required_by_law to file we desire to pay every penny of tax that we are required_by_law to pay we have no desire to obstruct or hamper any valid government agency or function just send us the law making us liable for paying income_tax on date jerry arthur jewett mr jewett executed a power_of_attorney form_2848 power_of_attorney and declaration of representative on date mr jewett sent to the irs appeals_office a letter incorporating and adding to petitioners’ frivolous arguments and asserting the individual or individuals named above are not persons or a person liable for the income_tax or required to file a form_1040 by virtue of non- residence in or lack of income earned within or effectively connected to any u_s_territory possession and or enclave deriving authority from article i sec_2 cl or article sec_3 cl of the constitution of the united_states the individual or individuals named herein are natural born citizens of one of the republic states under the constitution and law although the pages of the letter were unnumbered it consisted of pages of tax_protester boilerplate a hearing pursuant to petitioners’ request was conducted on date with a court reporter present a transcript of the proceedings was made at the hearing mr jewett repeated his frivolous arguments among other things mr jewett argued mr jewett so the only case which addresses the issue of wages not being income and a tax an individual is not a taxpayer within the meaning of the internal_revenue_code is the john cheek case and it supports the position of my clients hearing officer kane i’m not familiar with that case it sounds like the supreme court said a technicality instructions weren’t given to the jury properly it didn’t say that that position was was based on law and a solid position i’m not familiar with that but there are dozens of court cases where these arguments have been presented and i’m not aware of any of them that have been successful mr jewett well the supreme court is the ultimate arbiter and when the supreme court tells us something i tend to believe it they’re the only they’re the only court whose word is final hearing officer kane but it didn’t tell us what you’re saying it told us at least if i heard you correctly mr jewett it said that that belief is an absolute it is a defense to a charge of failing to file a return and my clients rely on that you know my clients subsequently filed for these year sec_1040x’s in which they indicated that that they actually didn’t have any income they had zero income for federal_income_tax purposes now the reasons why are extensive and they have been dealt with in the paperwork that i’ve given you so i’m not going to go into that the appeals officer provided to petitioners literal transcripts of their account on date a copy of form_4340 certificate of assessments payments and other specified matters was sent to petitioners on date a notice_of_determination concerning collection action s under sec_6320 and or was sent to petitioners the notice indicated the frivolous nature of petitioners’ arguments and stated it has been determined that the lien filing and proposed levy action are sustained the internal_revenue_service has complied with code and procedural requirements in collecting the tax in the petition in this case signed by mr jewett petitioners again challenge the authority of the officers issuing the notice_of_deficiency the notice_of_intent_to_levy and the notice of lien and the procedures by which the appeals officer verified the validity of the assessment claim that they were entitled to challenge the underlying liabilities because they received no valid notice_of_deficiency and assert that no provision of the internal_revenue_code makes them liable for the income_tax and penalties determined in the statutory notice the same arguments were repeated in petitioners’ trial memorandum signed by mr jewett and filed with the court on date mr jewett and counsel for respondent placed a conference telephone call to the court in one of the essentially identical cases on the cleveland ohio date calendar in which mr jewett represented taxpayers the conference telephone call concerned the desire of the taxpayers in one of mr jewett’s cases to withdraw him as counsel and to work with the irs in attempting to resolve their tax_liability during the conference telephone call the court advised three of those cases were submitted fully stipulated and are in the same posture as this case james benson and melanie a dunham docket no 7029-02l gregory r brown docket no 8368-02l harold v and imogene n pahl docket no 11572-02l mr jewett that upon review of his trial memoranda it appeared that he was making arguments that had led to penalties under sec_6673 against many taxpayers and that penalties had recently been affirmed by the court_of_appeals for the sixth circuit to which this case is appealable see eg hauck v commissioner tcmemo_2002_184 affd 64_fedappx_492 6th cir dollar_figure penalty affirmed the court also cited to mr jewett the cases of 118_tc_365 affd 329_f3d_1224 11th cir 119_tc_285 edwards v commissioner tcmemo_2003_149 in which awards were made under sec_6673 against the taxpayers’ counsel in addition to penalties against the taxpayers in cases where frivolous arguments were made the court also referred to everman v commissioner tcmemo_2003_137 in which mr jewett was counsel of record and his arguments about delegation of authority were rejected when this case was called from the calendar on date mr jewett acknowledged the court’s warning to him stated that his clients had been apprised of the court’s position and asserted that his clients nonetheless wished to pursue the arguments that the court had identified as frivolous mr jewett stated that he had not had time to read the cases cited to him by the court discussion all of the arguments that petitioners have presented in this case in one form or another have been rejected in prior cases those arguments dealing with the taxability of their income are irrelevant in any event because they received the statutory_notice_of_deficiency for and petitioners were not entitled to challenge their underlying tax_liability at the hearing conducted under sec_6330 sec_6330 they did not raise any bona_fide issues or collection alternatives at the hearing and they have not raised any genuine issues in this case there was no abuse_of_discretion with respect to the determination that collection should proceed numerous cases establish that no particular form of verification is required that no particular document need be provided to taxpayers at a hearing conducted under sec_6330 and that form_4340 provided to the taxpayers after the hearing satisfies the requirements of sec_6330 see eg roberts v commissioner supra 118_tc_162 hauck v commissioner supra kuglin v commissioner tcmemo_2002_51 scores of cases have disposed of claims indistinguishable from petitioners’ claims by summary_judgment with imposition of a penalty under sec_6673 see eg roberts v commissioner supra hill v commissioner tcmemo_2003_144 holguin v commissioner tcmemo_2003_125 hodgson v commissioner tcmemo_2003_122 bourbeau v commissioner tcmemo_2003_117 williams v commissioner tcmemo_2003_83 kaye v commissioner tcmemo_2003_74 smith v commissioner tcmemo_2003_45 eiselstein v commissioner tcmemo_2003_22 gunselman v commissioner tcmemo_2003_ young v commissioner tcmemo_2003_6 tornichio v commissioner t c land v commissioner tcmemo_2002_263 perry v commissioner tcmemo_2002_165 smeton v commissioner tcmemo_2002_140 newman v commissioner tcmemo_2002_135 coleman v commissioner tcmemo_2002_132 williams v commissioner tcmemo_2002_111 weishan v commissioner tcmemo_2002_88 affd 66_fedappx_113 9th cir in some such cases penalties have been imposed by the court sua sponte see eg robinson v commissioner tcmemo_2003_77 keene v commissioner tcmemo_2002_277 schmith v commissioner tcmemo_2002_252 schroeder v commissioner tcmemo_2002_190 sec_6673 provides procedures instituted primarily for delay etc --whenever it appears to the tax_court that-- a proceedings before it have been instituted or maintained by the taxpayer primarily for delay b the taxpayer’s position in such proceeding is frivolous or groundless or c the taxpayer unreasonably failed to pursue available administrative remedies the tax_court in its decision may require the taxpayer to pay to the united_states a penalty not in excess of dollar_figure sec_6673 is a penalty provision intended to deter and penalize frivolous claims and petitions cf 102_tc_596 the purpose is to compel taxpayers to think and to conform their conduct to settled principles before they file returns and litigate takaba v commissioner supra pincite in this case respondent did not move for summary_judgment or for a penalty and the case was submitted fully stipulated petitioners were specifically warned here and taxpayers and their counsel were warned in 115_tc_576 and by the numerous subsequent cases of the likelihood of a penalty under sec_6673 if they abused the protections afforded by sec_6320 and sec_6330 petitioners in this case should be treated the same as taxpayers similarly situated they should not be treated the same as taxpayers who abandon frivolous arguments before trial the court takes judicial_notice that in three other cases on the cleveland calendar in which mr jewett represented the taxpayers in presenting frivolous claims in the petition the taxpayers did not pursue those claims at the time of trial in two of those cases disposition was prior to trial by agreement of the parties in a third case mentioned above mr jewett was withdrawn as counsel the taxpayers who continue to pursue those claims are not entitled to a free ride we conclude that a penalty of dollar_figure against petitioners should be awarded to the united_states in this case it is particularly egregious for taxpayers to be aided in pursuing frivolous claims by attorneys trained in the law a frivolous claim is one that is contrary to established law and unsupported by a meritorious argument for change in the law see eg 115_tc_523 cf 99_tc_533 attorneys who practice in this court are bound by the aba model rules of professional conduct model rules rule a rule of the model rules states in part a lawyer shall not bring or defend a proceeding or assert or controvert an issue therein unless there is a basis in law and fact for doing so that is not frivolous which includes a good_faith argument for an extension modification or reversal of existing law sec_6673 provides in part as follow counsel’s liability for excessive costs -- whenever it appears to the tax_court that any attorney or other person admitted to practice before the tax_court has multiplied the proceedings in any case unreasonably and vexatiously the tax_court may require-- a that such attorney or other person pay personally the excess costs expenses and attorneys’ fees reasonably incurred because of such conduct rule b provides b effect of signature the signature of counsel or a party constitutes a certificate by the signer that the signer has read the pleading s that to the best of the signer’s knowledge information and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good_faith argument for the extension modification or reversal of existing law and that it is not interposed for any improper purpose such as to harass or to cause unnecessary delay or needless increase in the cost of litigation the signature of counsel also constitutes a representation by counsel that counsel is authorized to represent the party or parties on whose behalf the pleading is filed if a pleading is signed in violation of this rule the court upon motion or upon its own initiative may impose upon the person who signed it a represented party or both an appropriate sanction which may include an order to pay to the other party or parties the amount of the reasonable expenses_incurred because of the filing of the pleading including reasonable counsel’s fees petitioners’ counsel here did not cite at any time the law applicable to the stipulated facts of this case he failed even to read the cases cited to him by the court before he submitted the case in recent cases counsel for a taxpayer has been ordered to pay the fees and costs of respondent’s counsel incurred in responding to frivolous arguments see takaba v commissioner t c pincite edwards v commissioner tcmemo_2003_149 it seems particularly appropriate that counsel should bear costs when his clients have been penalized cf 289_f3d_452 7th cir affg 116_tc_111 in edwards v commissioner tcmemo_2002_ we explained all litigants especially members of the bar who have received training in law and professional responsibility are expected to read the cases cited for the court to assure that those cases remain current and to advance only those legal arguments that are warranted by existing law by nonfrivolous argument for its extension modification or reversal or by the establishment of new law see eg fed r civ p b 791_f2d_68 7th cir the purpose of sec_6673 and sec_6702 like the purpose of rule sec_11 and sec_38 and of sec of u s c is to induce litigants to conform their behavior to the governing rules regardless of their subjective beliefs groundless litigation diverts the time and energies of judges from more serious claims it imposes needless costs on other litigants once the legal system has resolved a claim judges and lawyers must move on to other things they cannot endlessly rehear stale arguments mr jewett asserted when the case was submitted that he is proceeding in good_faith his failure to consult or address the established law renders his assertion untenable unlike counsel in takaba v commissioner supra and in edwards v commissioner tcmemo_2003_149 however he did not extend these proceedings by meaningless motions and other delays perhaps that is why respondent did not request a penalty in this case determining the amount of excessive costs in this case would require further proceedings and would add to the delays already caused by the frivolous arguments asserted by petitioners and mr jewett other grounds for sanctions might also be considered cf matthews v commissioner tcmemo_1995_577 affd without published opinion 106_f3d_386 3d cir leach v commissioner tcmemo_1993_215 see generally 501_us_32 307_f3d_501 6th cir we have decided not to extend these proceedings for the purpose of imposing further sanctions but mr jewett and other counsel are reminded of the consequences to them if they repeat or persist in similar claims in the future see also 756_f2d_38 6th cir affg tcmemo_1983_473 to reflect the foregoing decision will be entered for respondent


internal_revenue_service index number number release date department of the treasury washington d c contact person telephone number in reference to cc dom fi p plr-106666-99 date date legend plan state law month year state old plan group a carrier group b carrier group c carrier commissioner department administrator reinsurance mechanism excess_amount collective retention amount administration_expenses fund dear this is in response to your date letter and to your subsequent correspondence dated april and date requesting a ruling that the plan is taxable as an insurance_company under the provisions of sec_831 of the internal_revenue_code facts the plan is an unincorporated statutory association of insurance carriers it was established in year pursuant to state law for the purposes of providing a new residual market mechanism in state for providing worker’s’ compensation insurance to employers unable to procure such insurance through ordinary methods the plan replaced state’s old plan which was in effect prior to the plan’s formation the plan has been approved by the commissioner which also regulates it and commenced operations on january year the plan is required to file quarterly financial reports with the department the plan has not as yet filed a federal_income_tax return for year during the first period the plan is operative each of the plan’s one year policy periods is referred to as a plan period employers previously assigned to the old plan were not renewed by the old plan carriers instead those employers were informed about options they were entitled to exercise with respect to the plan and were given an opportunity to complete an application_for coverage from a group a or a group b carrier under the plan each group a and group b carrier is responsible for the losses_incurred by its respective insured employers from the effective date of the new policies each underwrites by providing insurance coverage through a residual market mechanism the plan is designed to guarantee insurance coverage and quality loss prevention and control services for employers it covers the commissioner has appointed administrator as the plan’s and the reinsurance mechanism’s administrator administrator is responsible for the plan’s general administration including the development of operating rules and forms governance actuarial services selection and monitoring of group b carriers monitoring of group a carriers assignment of employers to carriers dispute resolution and the management of interstate assignments all insurance carriers licensed to write workers’ compensation insurance in state are required by state law to participate in the plan with respect to policies that are incepted from month year an insurer can participate as a group a group b or group c carrier all group b carriers are also group c carriers employers unable to obtain workers compensation insurance coverage through ordinary methods who together form the residual market may apply to the plan for coverage insurers choosing to be group a carriers provide coverage directly to their pro-rata shares of the residual market based on the premiums they write in the voluntary market and in doing so accept the resulting financial consequences the group b carriers are chosen through a competitive bid process to provide coverage to the residual market that is not written by the group a carriers together under the plan the group a and group b carriers underwrite the entire residual market in state policy coverage with respect to the risks they underwrite is generally for a plan period unless rewritten to a short term policy for lapsed coverage the plan operates in part through the reinsurance mechanism pursuant to that mechanism the group b carriers cede of their collected premiums less a fee and of their losses allocated loss adjustment expenses and premium collection expenses expenses to the plan losses are defined as payments the group b carriers are required to make to eligible insureds under the policies the plan will pay the group b carriers for their losses allocated loss adjustment expenses and expenses the collective retention amount up to the point where the plan incurs a deficit for a plan period the plan incurs a deficit when the amount of the plan’s losses paid allocated loss adjustment expenses servicing carrier fees administrative fees taxes assessments and all other plan expenses paid exceeds the amounts of premiums actually received by the plan the group b carriers and or administrator net of any return_premiums plus the amount of investment_income earned on invested_assets the plan will assess the group c carriers an amount equal to the excess_amount the excess_amount is an amount equal to the sum of all losses paid expenses paid and administration_expenses in excess of the collective retention amount as a condition to holding its certificate of authority to transact workers’ compensation insurance_business in state each group c carrier is responsible for paying its pro-rata share of the excess_amount that share is based on the premiums it wrote in the state voluntary market during the relevant plan period the pro-rata shares are recalculated upon the determination by the administrator with the approval of the commissioner that any group c carrier is unable to pay its pro-rata share due to a default of its obligations under the arrangement whether voluntarily or by reason of the carrier’s placement in any receivership liquidation rehabilitation or other statutory insolvency proceeding the effect of this arrangement is to allocate on a pro-rata basis the excess_amount to the group c carriers with respect to policies issued during a plan period and to provide those carriers are effectively jointly liable for that deficit administrator is to apprise the department on a quarterly basis of its actuarial estimate of the likelihood of a deficit and of the amount thereof such estimates are to be determined by an evaluation procedure approved by the department if there is a projected deficit administrator is also to provide the department with projections as to when assessments are to begin upon receipt of a notice of assessment to pay its pro- rata share of the excess_amount each group c carrier is required to remit its payment promptly if a group c carrier fails to pay its pro-rata share whether voluntarily or by reason of its placement in any receivership liquidation rehabilitation or other statutory insolvency proceeding the delinquent carrier’s obligation is shared pro-rata by the other group c carriers if the plan’s combined results with respect to policies issued during a plan period result in a surplu sec_1 a fund will be created the distribution of any surplus will be as follows to employers to group b carriers to group c carriers not including those group c carriers that are also group b carriers and to administrator ruling requested the plan requests a ruling that it is taxable as an insurance_company under sec_831 applicable law and rationale whether an entity is an insurance_company for federal_income_tax purposes depends on the character of the business it actually does in the taxable_year sec_1_831-3 of the regulations states that for purposes of sec_831 and sec_832 the term_insurance company means only those companies qualifying as insurance_companies under former sec_1_801-1 now sec_1_801-3 of the regulations regulations sec_1_801-3 defines an insurance_company as a company whose primary and predominant business activity during the taxable_year is the issuing of insurance or annuity_contracts or the reinsuring of risks underwritten by insurance_companies under sec_7701 an insurance_company is treated as a corporation for federal tax purposes regardless of whether it is classified as a corporation under state law see revrul_83_132 1983_2_cb_270 thus the code and regulations treat an entity primarily and predominantly engaged in the insurance_business as an insurance_company subject_to tax as a corporation regardless of the legal form of its organization sec_1_831-3 and sec_1_801-3 of the regulations revrul_83_172 1983_2_cb_106 revrul_71_404 1971_2_cb_260 see also 285_us_182 commissioner v w h luguire burial ass’n co inc 1a surplus is generated when the amount of losses paid alae servicing carrier fees taxes assessments incurred but not reported claims administrative fees and all other plan expenses are less than premiums actually received by the plan the group b carriers and or administrator net of any return_premiums plus the amount of investment_income earned on invested_assets the surplus calculation combines the results of the plan and the class c carriers f 2d 5th cir neither the code nor the regulations thereunder define the terms insurance or insurance_contract the accepted definition of insurance for federal_income_tax purposes is found in 312_us_531 in which the supreme court stated that h istorically and commonly insurance involves risk shifting and risk distributing id pincite case law has defined an insurance_contract as a contract whereby for an adequate_consideration one party undertakes to indemnify another against loss arising from certain specified contingencies or perils i t is contractual security against possible anticipated loss 199_f2d_508 7th cir in addition the risk transferred must be risk of economic loss 66_tc_1068 aff’d 572_f2d_1190 7th cir cert_denied 439_us_835 risk shifting occurs when a person facing the possibility of an economic loss transfers some or all of the financial consequences of the loss to the insurer if the insured has shifted its risk to the insurer then a loss by the insured does not affect the insured because the loss is offset by the insurance proceeds see revrul_92_93 1992_2_cb_45 permitting a parent company to deduct the premiums_paid to the insurance subsidiary for group-term_life_insurance on an employee of the parent risk_distribution incorporates the statistical phenomenon known as the law of large numbers 811_f2d_1297 9th cir when additional statistically independent risk exposures are insured an insurance company’s potential total loss increases as does the uncertainty regarding the amount of that loss as uncertainty regarding the company’s total loss increases however there is an increase in the predictability of the insurance company’s average loss total loss divided by the number of exposure units that is when the sample number increases the probability density function of the average loss tends to be more concentrated around the mean due to this increase in predictability there is a downward trend in the amount of capital a company needs per risk unit to remain at a given level of solvency see revrul_89_61 1989_1_cb_75 in revrul_71_155 1971_1_cb_152 a nonprofit association was composed of licensed insurance_companies that made insurance available to persons in high risk categories those persons were not otherwise able to obtain insurance the insurance policies were issued directly by members of the association and the entire risk of loss on a particular policy was borne by the member that issued it the ruling concludes that the association was a trade_association holding implicitly that the association itself was not engaged in the insurance_business unlike the plan the organization described in revrul_71_55 did not assume any insurance risk and therefore was not itself engaged in the insurance_business the plan does not act simply as an agent of the group c carriers if a group c carrier fails to pay its pro-rata share of any deficit the deficiency is shared pro-rata by the other group c carriers further if a group c carrier becomes insolvent its liability is apportioned among the remaining group c carriers the plan will reinsure policies written by the group b carriers receiving on a monthly basis the premiums received by those carriers less a fee and less the losses they pay the plan is thus responsible for payments of all claims on the policies it reinsures to the extent the plan’s required_payments exceed the premiums for the provided coverage and the investment_income thereon less its expenses the group c carriers in state will be assessed an excess_amount nonetheless the plan itself is effectively entitled to the premiums_paid by the employers in the residual market that are assigned to the group b carriers and is liable for the losses_incurred by those employers accordingly we conclude that the plan’s primary business is the insurance_business and that it is an insurance_company for tax purposes cf revrul_81_174 1981_1_cb_335 and revrul_81_175 1981_1_cb_337 except as specifically set forth above no opinion is expressed regarding the plan’s status or the tax character of the arrangements described herein specifically no opinion is expressed regarding the tax character of any surplus distributions by the plan or of any payments of excess amounts nor is any opinion expressed regarding whether the plan is an organization described in sec_501 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to plan sincerely assistant chief_counsel financial institutions and products by signed by mark smith mark smith chief branch


t c memo united_states tax_court bstate of charles a borgatello deceased c norman borgatello and josephine e donnelly co-executors and c norman borgatello successor trustee to the charles a borgatello living_trust petitioners v commissioner of internal revenue respondent docket no filed date john w ambrecht and gregory arnold for petitioners donna f herbert for respondent memorandum opinion wells chief_judge respondent determined a deficiency of dollar_figure in the federal estate_tax of the estate of charles a borgatello the estate after concessions the issues we must decide involve the fair_market_value of stock representing an - - 76-percent interest in valley improvement co inc vic as of date to value the 76-percent shareholder's interest in vic we must first decide the fair_market_value of two shopping centers owned by vic montecito village north mvn and montecito village south mvs as of date the parties agreed on the value of vic's other assets some of the facts have been stipulated and are incorporated herein by this reference unless otherwise noted all section references are to the internal_revenue_code and all rule references are to the tax_court rules_of_practice and procedure charles borgatello died a resident of california mr borgatello died on date background for the purpose of valuing mr borgatello's assets the estate's executors elected the alternate_valuation_date of date on the alternate_valuation_date vic owned percent of mvn and mvs vic also owned other assets with a total value pursuant to the parties’ stipulations of dollar_figure rounded per the parties' stipulations on the alternate valley improvement co is a california c_corporation the value of the other assets is as follows real_property fair_market_value santa angela lane dollar_figure monterey county ranch remainder_interest big_number acres of vacant land outside solvang interest big_number continued - - valuation_date vic had total liabilities of dollar_figure the net value of vic's assets on the alternate_valuation_date equaled the values of mvn and mvs plus dollar_figure assets of dollar_figure minus liabilities of dollar_figure continued alamo pintado outside of solvang big_number seven properties zoned m-1 in santa barbara nopalitos big_number nopalitos big_number kimball street big_number kimball street big_number kimball street big_number carpinteria street big_number powers avenue big_number total dollar_figure tangible personalty equipment cattle dollar_figure total dollar_figure investments fair_market_value chevron corp stock dollar_figure pepsico inc stock big_number transamerica corp stock big_number general motors stock big_number general motors e stock big_number general motors h stock western art big_number total dollar_figure other assets fair_market_value cash dollar_figure accounts and notes receivable big_number other current_assets big_number other assets big_number total dollar_figure the parties made a computational error in their stipulation this amount was reported as dollar_figure in the stipulation not dollar_figure according to the parties net asset value is generally the difference between assets and liabilities where assets have been adjusted to reflect fair market values and liabilities have been adjusted to reflect the reality of their ultimate payment discussion the estate contends that the combined value of mvn and mvs is dollar_figure mvn dollar_figure and mvs dollar_figure on the basis of those values and the stipulated value of vic's other assets the estate contends that mr borgatello's big_number shares of vic stock are worth dollar_figure respondent contends that the combined value of mvn and mvs is dollar_figure mvn dollar_figure and mvs dollar_figure on the basis of those values and the stipulated value of vic's other assets respondent contends that mr borgatello's interest in vic is worth dollar_figure procedural issue before we tackle the issues of the fair market values of mvn and mvs and mr borgatello's interest in vic we must first address an evidentiary issue concerning certain appraisal reports prepared by the experts in this case the estate commissioned several appraisals of mvn and mvs one of the real_estate appraisers wayne holden was asked to value mvn and mvs as of the date of mr borgatello's death for this purpose mr holden produced a set of appraisals that he completed on date holden i reports subsequently the estate asked mr holden to appraise mvn and mvs as of the alternate_valuation_date mr holden updated his previous appraisals in two letters dated date holden ii reports the holden ii - reports ostensibly adjusted mr holden's conclusions regarding the shopping center values in the holden i reports for changes in the real_estate market during the months between the date of mr borgatello's death and the alternate_valuation_date on the basis of the holden ii reports the estate decided to elect the alternate_valuation_date during the audit of the instant case the estate provided respondent with the holden i and ii reports later during discussions with respondent's appeals_office the estate provided the appeals officer with two reports by carlos a cardenas cardenas reports valuing mvn and mvs on the alternate_valuation_date the cardenas reports were not used in the preparation of the estate's tax_return and were not provided to the internal_revenue_service during the audit of the estate at trial the estate did not use the holden i or ii reports or the cardenas reports instead the estate used two new appraisals by mr holden holden iii reports which valued mvn and mvs on the alternate_valuation_date respondent's valuation of mvn and mvs is based upon two appraisal reports in a single bound volume prepared by david marx mr marx prepared a limited summary report in which he reviewed the holden i ii and cardenas reports and adopted some background data and conclusions from those reports in -- - particular mr marx adopted background data pertaining to montecito-santa barbara area vacancy rates and fair rental value he also agreed with the estate's experts' analyses pertaining to highest_and_best_use zoning site and improvement and neighborhood description the first two pages of each of mr marx's reports contain cover letters dated date from mr marx to respondent's attorney both letters contain the following disclaimer this limited summary report is valid only if another reviewer or entity 1s in possession of the holden i holden ii and cardenas appraisals the appraiser agreed on some of the factual data and issues in these reports and these items were used in this limited summary report as part of the analysis of the subject the three appraisals being reviewed will be relied upon as to facts concerning the site improvements zoning and other descriptions the appraiser will not complete a zoning analysis site improvement analysis or highest_and_best_use or neighborhood descriptions these items are found in the appraisals reviewed by david marx and are assumed to be valid emphasis in the original at the trial of the instant case the estate objected to the admission of mr marx's reports the cardenas reports and the holden i and ii reports the court admitted over the estate's objection the holden i and ii reports into evidence the court conditionally admitted mr marx's reports but reserved ruling on the admissibility of the cardenas reports the court instructed the parties to brief the admissibility of mr marx's reports and the cardenas reports the estate disputes the admissibility of mr marx's reports on several grounds chiefly however the estate argues that the cardenas reports are inadmissible hearsay pursuant to rule of the federal rules of evidence additionally the estate argues that if the cardenas reports were excluded it would cause mr marx's reports to become invalid in accordance with the above- guoted disclaimer respondent contends that the cardenas reports are not hearsay because they constitute admissions by the estate rule d b of the federal rules of evidence expressly provides that any statement offered against a party where that party has manifested an adoption or belief in the statement's truth is admissible see fed r evid d b statements admitted pursuant to rule d b of the federal rules of evidence are admissible only against parties who have adopted them or who bear a specified relationship to the declarant see hospital corp of am v commissioner tcmemo_1996_559 in the instant case the cardenas reports were given to respondent before trial by the estate's counsel the reports were not obtained by respondent directly from the estate's experts the estate supplied the reports to respondent as representations of the values and the data underlying those values of mvn and mvs --- - the act of producing the reports to respondent constitutes an adoption of belief in the truth of their contents pursuant to rule d b of the federal rules of evidence consequently we hold that the requirements of rule d b of the federal rules of evidence are satisfied and the cardenas reports are admissible ’ the estate vaguely suggests that the cardenas reports were provided to respondent during settlement negotiations and therefore are inadmissible pursuant to rule of the federal rules of evidence although respondent acknowledged at trial that there may be some question as to whether the cardenas reports were provided to respondent during settlement negotiations the estate failed to demonstrate that such was the case consequently we hold that the estate has not shown that the cardenas reports are inadmissible pursuant to rule of the federal rules of evidence the estate's other main argument against the admission of mr marx's report is based upon our holding in diego investors iv ‘ the cardenas reports are admissible on other grounds as well one significant distinction between expert and fact witnesses is that experts are permitted to rely on evidence outside the trial record see h group holding inc v commissioner tcmemo_1999_334 the evidence outside the record may be hearsay and need not be otherwise admissible but it can be used by the expert to formulate an opinion see fed r evid v commissioner tcmemo_1989_630 in diego investors iv the court refused to allow an expert selected and paid for by the commissioner to testify as the taxpayers' witness the taxpayers in diego investors iv sought to call the commissioner's expert to enhance their tactical position by using selected portions of a report pertaining to sales data while refuting the remainder of the expert's unfavorable conclusions although diego investors iv is distinguishable from the instant case in numerous ways one critical distinction is that in the instant case respondent has gained no tactical advantage by adopting some of the information in the estate's expert's reports in the instant case the estate provided the holden i ii and cardenas reports to respondent as evidence of the values of mvn and mvs as well as to provide the facts and data underlying those values the estate now seeks to exclude those reports because they believe that if they are successful we shall conclude that mr marx's reports are invalid based on the language in mr marx's disclaimer however it appears that the estate failed to appreciate that the use of expert testimony is within the sound discretion of the trial judge the test for admissibility of expert testimony is whether the testimony will aid the trier of fact to understand the evidence see fed r evid 488_f2d_1148 9th cir -- - under rule of the federal rules of evidence the trial judge is given broad discretion in his role as gatekeeper to decide what evidence is relevant reliable and helpful to the trier of fact see 156_f3d_952 9th cir in the instant case the estate's experts' reports are being offered to aid the court in understanding mr marx's report they are not being offered to refute the unfavorable conclusions of the estate's experts nor are they being offered for a matter of out-of-context conjecture or opinion which supports only one party's position as was the case in diego investors iv respondent gained no real tactical advantage in the instant case when mr marx adopted information from the estate's experts' reports the use of such reports is tantamount to an informal stipulation which saves the court time in deciding a case that could have been settled by the parties indeed such information should have been incorporated into a formal stipulation we hold that the marx and cardenas reports are admitted into evidence fair_market_value of the mvs and mvn shopping centers as is customary in valuation cases the parties in the instant case rely primarily on expert opinion evidence to support their contrary valuation positions in such cases we evaluate the opinions of experts in light of the demonstrated qualifications of each expert and all other evidence in the record see 480_f2d_171 9th cir affg 54_tc_493 86_tc_547 we have broad discretion to evaluate 'the overall cogency of each expert's analysis ' 838_f2d_330 9th cir quoting 783_f2d_906 9th cir affg in part and revg in part t c memo affg in part and revg in part on another ground tcmemo_1986_318 expert testimony sometimes aids the court in determining values and sometimes it does not see eg 94_tc_570 92_tc_101 stating that expert testimony is not useful when the expert is merely an advocate for the position argued by one of the parties we are not bound by the formulas and opinions proffered by an expert witness and shall accept or reject expert testimony in the exercise of sound judgment see 304_us_282 94_tc_193 where necessary we may reach a determination of value based on our own examination of the evidence in the record see 538_f2d_927 2d cir affg t c -- memo 110_tc_530 where experts offer divergent estimates of fair_market_value we decide what weight to give these estimates by examining the factors they used in arriving at their conclusions see 38_tc_357 we have broad discretion in selecting valuation methods see 640_f2d_249 9th cir affg on this issue and revg in part tcmemo_1978_191 and the weight to be given the facts in reaching our conclusion because finding market_value is after all something for judgment experience and reason 202_f2d_105 2d cir affg a memorandum opinion of this court moreover while we may accept the opinion of an expert in its entirety see buffalo tool die manufacturing co v commissioner t c we may be selective in the use of any part of such opinion or reject the opinion in its entirety see parker v commissioner supra pincite because valuation necessarily results in an approximation the figure at which this court arrives need not be one as to which there is specific testimony if it is within the range of values that may properly be arrived at from consideration of all the evidence see estate of o'connell v commissioner supra pincite silverman v commissioner supra pincite real_estate_valuation is a question of fact resolved on the basis of the entire record see 674_f2d_761 9th cir 64_tc_889 the trier of fact must weigh all relevant evidence to draw the appropriate inferences see 323_us_119 helvering v national grocery co supra pincite estate of newhouse v commissioner supra pincite the standard for valuation is fair_market_value which is defined as the price that a willing buyer would pay a willing seller both persons having reasonable knowledge of all relevant facts and neither person being under a compulsion to buy or to sell see sec b estate_tax regs see also 411_us_546 112_tc_130 the standard is objective using a purely hypothetical willing buyer and seller who are presumed to be dedicated to achieving maximum economic advantage in any transaction involving the property see estate of simplot supra pincite which must be achieved in the context of market and economic conditions at the valuation_date see estate of newhouse v commissioner supra pincite -- there are generally three kinds of valuation methods used to determine the fair_market_value of real_property the comparable sales_method the income_method and the cost method see 92_tc_958 affd without published opinion 921_f2d_280 9th cir variously using these methods the appraisers in the instant case estimated the property values as follows montecito village north appraisal method holden marx income approach dollar_figure dollar_figure discounted cash-flow sales comparison big_number big_number cost -- -- montecito village south appraisal method holden marx income approach dollar_figure dollar_figure discounted cash-flow sales comparison big_number big_number cost big_number -- ‘mr holden performed a cost approach analysis for montecito village north but only for the date of death not the alternate_valuation_date the date of death value was determined by mr holden to be dollar_figure although the parties used more than one method to value mvn and mvs each expert relied most heavily on a version of the income_method called the discounted cash-flow method the sales comparison and the cost approach methods played insignificant roles in their analyses and appear to have little effect on mr -- - holden's and mr marx's bottom line valuations the income_method on the other hand is embraced by both mr marx and mr holden and dominates their analyses because the parties' main focus is on the income_method of valuing mvn and mvs our focus too will be on the income valuation method with respect to the cost approach the estate's expert said the following the cost approach to value is an indicator for new or proposed improvements however older improvements such as the subject are more difficult to analyze the most important factor in appraising older properties is the estimate of depreciation although great care is taken in this analysis it is difficult for the appraiser to truly and accurately estimate the value losses by depreciation this is mainly due to the lack of full knowledge of the infrastructure of a building you cannot see into the walls and many areas are inaccessible therefore it is difficult to determine the true condition of all building components this weakens the support for the depreciation estimate the typical purchaser does not generally use this approach to make an investment decision also there is a lack of comparable land sales this makes the analysis for the land value weak therefore this approach is given least weight in support of the final estimate of value as for the sales comparison approach we are concerned about the lack of suitable comparables in the monecito-santa barbara area upon which to base any meaningful analysis mr holden echoed this concern in his report stating that due to the varying characteristics of the sales data direct market comparison as a method to value mvn and mvs is weak under the circumstances of the instant case the sales comparison approach is unreliable this unreliability is reflected in mr holden's report where he abandons his cost approach and sales comparison analyses and adopts whole hog his conclusions from his discounted cash-flow analysis as the fair_market_value of mvn and mvs the parties in the income valuation method method appraiser specifies the duration of periodic_income the dcf method of reversions -- - guantity variability instant case rely on a version of the called the discounted cash-flow dcf is a set of procedures in which an timing and as well as the quantity and timing and discounts each to its present_value at a specified yield in formulating their dcf analyses each expert in the instant case uses different input assumptions but their cash-flow estimates end up being very similar year year year year year year year year year year year year year year year year year year fprrfmwmoo ooata op wn fe hr wn ofpf wn ef mvn holden dollar_figure big_number big_number big_number big_number big_number big_number big_number mvs holden dollar_figure big_number big_number big_number big_number big_number marx dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number marx dollar_figure big_number big_number big_number big_number big_number big_number the main reason the cash-flow estimates of the experts are as follows continued the parties arrive at different values for mvn and mvs is that their experts make different assumptions concerning the discount rate ’ both mr marx and mr holden arrive at a discount rate by abstracting sales of comparable commercial properties in order to derive a capitalization rate the capitalization rate is the property's cash-flow divided by its sales_price the discount rate is ascertained by making adjustments to the capitalization rate primarily for inflation mr holden's capitalization rate was derived from a pool of comparable sales more extensive than mr marx's capitalization rate most of mr holden's comparables however are properties located in places outside the montecito-santa barbara area such as oxnard and los angeles california indeed we find that aspect of mr holden's analysis troubling mvn and mvs are located in an area adjacent to the city of santa barbara mvn and mvs are more than miles away continued year big_number big_number year --- year --- big_number year -- big_number the discount rate is a rate of return on capital used to convert future payments rental income or receipts into a present_value -- - from mr holden's comparables in huntington beach and los angeles and more than miles away from oxnard mr holden acknowledges that mvn and mvs are situated in santa barbara's most desirable neighborhood he also notes that mvn and mvs make up the majority of the commercial property in montecito they almost set their own rental market the montecito-santa barbara community is unique in that there is very limited vacant land it is a small community and there are not many shopping centers for sale at any given time in contrast to los angeles and orange counties where many shopping centers are for sale at any particular moment in time moreover during santa barbara voters passed measure e which restricts the building of commercial and industrial properties in the city limits of santa barbara mr holden states that although it is too early to tell how measure e would affect the real_estate market in santa barbara more than likely it will cause a shortage of commercial rental facilities and create high rents accordingly the unique character of the montecito-santa barbara real_estate market will be maintained well after the alternate_valuation_date mr holden attempted to demonstrate the rising capitalization rates of commercial shopping center sales in southern california however because of the unique character of the montecito-santa barbara area we are primarily concerned only with how the softness in the real_estate market was affecting capitalization rates in that area mr holden reported that sales in the santa barbara area during the time in question commanded capitalization rates of dollar_figure percent and percent mr marx researched three additional sales in santa barbara during and and found capitalization rates ranging from dollar_figure percent to percent on the basis of such data mr marx concludes that an overall capitalization rate of dollar_figure percent to percent is appropriate in valuing mvn and mvs he settles on percent as the capitalization rate mr holden on the other hand went outside the santa barbara area in order to justify a higher capitalization rate for mvn and mvs in his view southern california was experiencing a soft real_estate market at the time of the alternate_valuation_date mr holden fails to explain however why any market softness is not already reflected in the capitalization rates of the montecito-santa barbara area comparables we are inclined to keep the capitalization rate in the instant case within the range of in the average capitalization rate in southern california was dollar_figure percent in it was dollar_figure percent in it was dollar_figure percent in it was dollar_figure percent and in it was dollar_figure percent - - capitalization rates found in the montecito-santa barbara area at or near the time of the alternate_valuation_date mvn and mvs are uniquely situated because of the lack of commercial rental property in the area mr holden fails to convince the court that his use of widespread southern california comparables is appropriate in analyzing mvn and mvs we are persuaded therefore that a capitalization rate of percent is in line with capitalization rates generally in the montecito-santa barbara area at the alternate_valuation_date and is a reasonable estimation of the appropriate capitalization rate to use in valuing mvn and mvs as stated above the discount rate is a derivative of the capitalization rate messrs holden and marx agree that a percent adjustment is needed to account for inflation mr marx makes a further adjustment that considers leasing and selling commissions along with absorption and tenant improvement issues which reduces mr marx's capitalization rate adjustment by approximately one-half of a percent mr holden makes no such adjustment given the range of estimated adjustments suggested by the experts we find that dollar_figure percent is a reasonable adjustment to the capitalization rate in order to arrive at the appropriate discount rate --- - another area of disagreement among the experts is the appropriate duration of the cash-flow period mr holden uses a 7-year cash-flow period whereas mr marx uses a 10-year cash-flow period mr holden justifies his 7-year period on the basis of inter alia market uncertainties and the fact that as the cash- flow period is extended into the future the analysis becomes less reliable mr holden also notes that real_estate markets tend to flow in 7-year cycles mr marx points out that a year cash-flow period is supported by information from local brokers and national real_estate publications although years may be a reasonable cash-flow period in some cases we are inclined to follow the trends of the montecito-santa barbara real_estate market we find therefore that mr marx's estimate of a 10-year cash-flow period is persuasive because it follows more closely santa barbara's real_estate norms on the basis of the foregoing discussion we find mr holden's valuation estimates to be too low and find mr marx's estimates to be too high we believe that dollar_figure is a reasonable estimate of the value of mvn and dollar_figure is a reasonable estimate of the value of mvs with such values in mind we now proceed to value mr borgatello's interest in vic -- - value of mr borgatello's interest in vic knowing the value of mvs and mvn we are now able to decide the price at which mr borgatello's dollar_figure percent stock interest in vic would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or to sell and both having reasonable knowledge of the relevant facts sec_20_2031-1 estate_tax regs in the case of unlisted stock such as the stock in guestion the price at which sales of such stock are made in arm's-length transactions in an open market is the best evidence of value see 110_tc_530 the record in the instant case does not contain any such sale of stock where the value of unlisted stock cannot be determined from actual sale prices its value generally is to be determined by taking into consideration a host of factors including among others the company's net_worth prospective earning power and dividend-paying capacity see eg estate of davis supra pincite when valuing a real_estate_holding_company however the main emphasis is on the company's assets see id the net asset value method is the most reasonable one to use in a case such as the instant case where the corporation functions as a holding rather than an operating company and earnings are relatively low in comparison to the fair_market_value of the underlying assets - - see eg estate of davis v commissioner supra 72_tc_1062 the net asset value method involves arriving at the company's net asset value the value of the company's assets less liabilites where the assets have been adjusted to reflect their fair_market_value and then discounting that value to account for various factors that affect its marketability principal factors affecting the discount in the instant case are the tax_liability inherent in the built-in_gain assets of vic and the lack of marketability due to the difficulty of selling stock ina small closely_held_corporation such as vic we do not employ a fixed formula in considering the factors that we use to determine the fair_market_value of unlisted stock see estate of davis supra pincite the weight to be given to the various factors in arriving at fair_market_value depends upon the facts of each case see sec_25_2512-2 gift_tax regs we have broad discretion in assigning weight to the various factors and in selecting the method of valuation see 640_f2d_249 9th cir affg on this issue and revg in part tcmemo_1978_191 sec_25_2512-2 gift_tax regs the determination of the value of closely held stock is a matter of judgment rather than one of mathematics see estate of davis supra pincite moreover because the valuation is -- - necessarily an approximation it is not required that the value that we determine be one as to which there is specific testimony provided that it is within the range of figures that properly may be deduced from the evidence see id as in most valuation cases the parties in the instant case rely extensively on the opinions of their respective experts to support their differing views about the fair_market_value on the valuation_date each expert utilizes the net asset value method in order to value mr borgatello's interest in vic for purposes of determining the appropriate discount to be applied to vic's assets the estate introduced the report of james brockardt who asserts that the net asset value of vic should be discounted by percent for lack of marketability respondent offered the report of roger wilde who asserts that vic's net asset value should be discounted by percent for lack of marketability mr wilde arrives at his discount using a build-up method mr wilde examines various factors and assigns a percentage value to each some factors increase and some decrease the net asset value discount wilde made the following adjustments to be included in the discount for lack of marketability shareholder dividends and compensation paid local economy and real_estate market pincite management continuity - potential corporate gain and tax restrictions on stock transfer transaction and other costs ole ole ole ole omaba wn br idoern ow ole ole - - mr brockardt on the other hand presents a general discussion of various factors but does not assign a percentage value to any of them he bases his total discount on his judgment and consideration of the factors as a whole thus for example mr wilde reveals exactly how much of a discount he allows for the built-in gains in the assets of vic whereas with mr brockhardt's report we do not know how much of the discount was attributable to built-in gains mr wilde's build-up method presents a useful framework to consider the various factors at play in the instant case below we consider those factors within his framework and in light of mr brockardt's report mr wilde reduces the discount by percent because of vic's consistent and strong cash-flow dividend payment capability and low vacancy rate of the vic's shopping centers mr wilde further states the company's financial statements and dividend policy indicate that the company has paid nominal dividends but does pay the controlling shareholder significant salary this would be a favorable factor for an investor in the shares being valued messrs marx and holden accounted for the cash-flow provided by the properties and the economic conditions of the santa barbara area in their valuations of mvn and mvs the estate argues that when arriving at a value for the corporation we - - should not consider factors that have already been taken into account in the valuation of vic'ss assets we agree with the estate as pertains to cash-flow and dividend paying capacity sec_5 of revrul_59_60 1959_1_cb_243 provides in pertinent part b the value of the stock of a closely held investment or real_estate_holding_company whether or not family owned is closely related to the value of the assets underlying the stock for companies of this type the appraiser should determine the fair market values of the assets of the company operating_expenses of such a company and the cost of liquidating it if any merit consideration when appraising the relative values of the stock and the underlying assets the market values of the underlying assets give due weight to potential earnings and dividends of the particular items of property underlying the stock capitalized at rates deemed proper by the investing public at the date of appraisal a current appraisal by the investing public should be superior to the retrospective opinion of an individual for these reasons adjusted net_worth should be accorded greater weight in valuing the stock of a closely held investment or real_estate_holding_company whether of not family owned than any of the customary yardsticks of appraisal such as earnings and dividend paying capacity emphasis added the revenue_ruling implies that potential earnings are already accounted for in the market_value of mvn and mvs and should not be considered again in valuing the vic stock as pertains to economic conditions and the softness in the real_estate market in estate of berg v commissioner tcmemo_1991_279 affd in -- p7 - part and revd and remanded in part on another ground 976_f2d_1163 8th cir we stated the values arrived at by the expert were the basis for the date of death values of the corporate properties because in appraising the properties the expert took into account the market for such property as well as general economic conditions in grand forks the fair_market_value of vaberg's corporate assets and therefore the fair_market_value of percent of the vaberg stock has already been adjusted for such conditions to the extent that the market for residential real_estate and general economic conditions would have a negative impact on the fair_market_value of the dollar_figure percent of vaberg stock held by the decedent petitioner has already reduced the reported value of the stock on account of such impact for this court to adjust the discounts for minority interest and lack of marketability for these factors would be to duplicate the reduction in reported value due to such factors on the basis of our reasoning in estate of berg supra mr wilde's 5-percent increase in the net asset value discount attributable to the general economic conditions of the santa barbara area is inappropriate similarly the 5-percent decrease in the net asset value discount attributable to mr wilde's consideration of vic's cash-flow and ability to pay dividends is inappropriate pursuant to the reasoning of revrul_59_60 c b which is consistent with our conclusion in the instant case the estate additionally contends that mr wilde's adjustment for management continuity is already reflected in the value of mvn and mvs we do not agree - - it is not evident that mr wilde's management continuity factor is reflected in the value of mvn and mvs or vic's other assets the estate incorrectly equates mr wilde's discussion of management continuity with the management costs associated with overseeing mvn and mvs such management costs are indeed reflected in the value of mvn and mvs what we believe mr wilde refers to in his brief discussion of management continuity is that managing vic's real_estate does not require the expertise needed to oversee a management intensive operating company with many employees because vic is a real_estate_holding_company that maintains low vacancy rates in its properties percent of total square footage vacant in a sluggish market mr wilde concludes that the likelihood of a buyer being able to successfully manage the real_estate holdings is strong indeed it seems likely that any buyer of vic will choose not to employ vic's current managers to oversee the company's properties continuity of the current vic management is unnecessary for the company to succeed as a going concern the question then becomes whether mr wilde's management continuity factor affects the discount in the manner he suggests we tend to think it does not mr wilde reduces the net asset value discount by percent for the management continuity factor but we think the factor is neutral consequently we do not assign any weight to it - - we shall assign weight to the consideration of the built-in capital_gain tax inherent in vic's assets we may allow the application of a built-in capital_gains_tax discount if we believe that a hypothetical buyer would have taken into account the tax consequences of the built-in capital_gains when arriving at the amount he would be willing to pay for mr borgatello's vic stock see estate of davis v commissioner t c pincite estate of jameson v commissioner tcmemo_1999_43 both parties agree in the instant case that a willing buyer would consider those tax consequences but they disagree on how much to discount the net asset value to account for this factor the largest portion of mr wilde's net asset value discount is attributable to the built-in gains inherent in vic'ss assets in calculating the discount attributable to the tax on the built-- in gains mr wilde utilizes a 10-year holding_period for the assets assuming a 2-percent growth rate mr wilde estimates the value of vic's assets to be dollar_figure for the year on the basis of such estimated value mr wilde calculates the built-in_gain and applies california' sec_9_3 percent capital_gains_rate and a 34-percent federal_income_tax rate to arrive at a future tax in in the amount of dollar_figure applying a discount rate of percent long term afr percent for added risk mr wilde determines the present_value of the future tax -- - to be dollar_figure in order to arrive at the discount attributable to the future tax mr wilde divided dollar_figure the present_value of the future tax by dollar_figure the total value of vic's real_estate and investments to arrive at a 19-percent rounded from percent discount accordingly mr wilde's discount is not calculated as a percentage of net asset value rather it is calculated as a percentage of the value of vic's real_estate and investment_property mr wilde errs in calculating the discount attributable to the tax on the built-in_gain this manner mr wilde errs in that the present_value of the future tax should have been stated as a percentage of net asset value not as a percentage of only vic's real_estate and investments the estate correctly points out that the figure that mr wilde arrives at is irrelevant for purposes of calculating the percentage amount by which the taxes reduce the net asset value because it excludes some assets and all liabilities asa percentage of net asset value the discount amount would not be percent the present_value of the future tax dollar_figure divided by mr wilde's net asset value dollar_figure produces a 5-percent discount accordingly after correcting that error the discount attributable to the tax on the built-in gains --- - inherent in vic's assets would be percent not percent rounded to percent mr brockardt does not engage in the kind of explicit analysis in which mr wilde engages but mr brockardt does calculate on the basis of mr holden's valuations of mvn and mvs the impact of an immediate tax on the net asset value of vic according to mr brockardt an immediate tax on the built-- in gains would warrant a 2-percent discount in the net asset value of vic on the basis of our valuations of mvn and mvs an immediate tax on the built-in_gain would warrant a 3-percent discount in the net asset value of vic applying that amount as a discount to the net asset value is unrealistic because it does not account for any holding_period for the assets the estate's expert concedes that there would be some period of tax_deferral although he did not articulate how long the period of deferral would be mr wilde assumes a 10-year holding_period we arrived at this amount as follows net asset value dollar_figure total assets at market_value dollar_figure less book_value big_number unrealized capital_gain dollar_figure net california gain dollar_figure less california tax pincite big_number net federal gain dollar_figure less federal tax pincite big_number total_tax on capital_gain dollar_figure total capital_gain as a percentage of net asset value - - for the assets adjusting mr wilde's figures for our lower valuation of the shopping centers does not yield a different percentage value ’ the range of discount values attributable to the tax on the built-in_gain in vic's assets presented by the experts i sec_32 percent if the assets are immediately liquidated to percent if the assets are held for years although there is no evidence that a willing buyer of vic would immediately liquidate the assets there is also not much support for respondent's contention that a buyer would wait years before liguidating the assets in reaching a middle ground therefore we find it reasonable to discount the net asset value by the current fair_market_value of the built-in_gain assets is dollar_figure dollar_figure real_estate plus investments in stock and art dollar_figure such amount assuming a 2-percent annual growth rate for the 10-year holding_period would be worth dollar_figure on date after adjusting for annual depreciation of dollar_figure per year during the 10-year holding_period adding dollar_figure to the projected built in gain the total projected built-in_gain on date is dollar_figure the california tax on that amount pincite percent is dollar_figure total federal gain is dollar_figure and taxed at the 34-percent corporate federal rate produces dollar_figure in federal tax the total amount of federal and california taxes on the projected built-in_gain is dollar_figure assuming as mr wilde did a discount rate of percent long term afr percent for added risk the present_value of the future dollar_figure in taxes is dollar_figure this amount as a percentage of net asset value is percent dollar_figure divided by dollar_figure - - percent to account for the tax_liability inherent in vic's assets one of petitioner’s main contentions for discounting the vic stock is the presence of a stock purchase agreement although we believe that such agreement would have some chilling effect ona hypothetical sale we do not agree that it would have the effect that the estate contends it would have the agreement provides that before mr borgatello or his estate sells his vic shares he must first offer his shares to the other vic shareholders on pro_rata basis at the price offered to the outside buyer the other shareholders have days to exercise their right_of_first_refusal and they may purchase any amount of the shares offered after that 15-day period expires vic has the option of buying as many shares as it desires after the consecutive 15-day periods expire mr borgatello could then sell the remaining shares to the third-party buyer the estate contends that the stock purchase agreement will inevitably lead to mr borgatello's dollar_figure percent block being sold in two smaller blocks because the minority shareholders will purchase just enough of the shares to gain control of vic leaving the third-party buyer with a minority interest the estate however does not offer any evidence to prove that any of the vic minority shareholders possess the means or the - -- inclination to purchase enough of the stock to force mr borgatello's dollar_figure percent block to be sold in two smaller blocks more importantly our analysis presumes that the transaction involves a willing buyer and a willing seller under no particular compulsion to enter into a transaction we seriously doubt that a willing seller under no compulsion to sell would dispose_of an 76-percent block of stock in the manner suggested by the estate what is more likely is that the buyer and seller would seek assurances from the other shareholders that they would not interfere in the transaction by exercising their rights pursuant to the stock purchase agreement this would add some uncertainty and a chilling effect to the transaction but not to the extent that the estate argues consequently we accept respondent's assessment of the stock purchase agreement and discount the net asset value by percent for that factor the final adjustment mr wilde makes to the net asset value accounts for transaction costs associated with the eventual sale of the assets mr wilde's estimation of these transaction costs is percent of the net asset value in an immediate liguidation mr brockardt estimates these costs to be percent of the net asset value given the narrow range of these figures we think a 6-percent discount for transaction costs is a reasonable estimate - - in sum a total discount of percent accounts properly for the lack of marketability of the vic stock discounting the net asset value by percent leads to a valuation adjustment of dollar_figure on the basis of the foregoing examination of the record we conclude that the fair_market_value of mr borgatello's vic shares is as follows net asset value dollar_figure less valuation adjustment big_number aggregate fair_market_value dollar_figure fair_market_value per share dollar_figure shares outstanding fair_market_value of shares dollar_figure to reflect the foregoing decision will be entered pursuant to rule


department of the treasury internal_revenue_service washington d c office_of_chief_counsel number info release date index no dear date i am responding to your date inquiry on behalf of your constituent wrote about the application of the segment tax to on-demand air charter flights in a recent technical_advice_memorandum tam issued by the irs i hope the following information is helpful to you the air transportation excise_taxes are user fees and the amounts collected are paid into the airport_and_airway_trust_fund the trust fund the trust fund uses these funds to plan construct develop operate and maintain the united states’ airport and airway system in addition the trust fund covers the portion of the department of transportation’s budget dealing with air transportation and air safety this includes over one-half of the operating costs of the federal aviation administration prior to the taxpayer_relief_act_of_1997 the act air transportation providers calculated the excise_tax on domestic air transportation solely as a percentage of the amount_paid for that transportation in addition providers of international air transportation beginning or ending in the united_states calculated an international_travel_facilities_tax as a fixed amount applicable to any amount_paid for that air transportation the act decreased this percentage and added a new tax on each segment of taxable_transportation the act provides that the segment tax is imposed on the amount_paid for each domestic_segment of taxable_transportation in the context of commercial air transportation the segment tax applies to each passenger who pays any amount for a segment the term domestic_segment is defined as one takeoff and one landing which is taxable_transportation described in sec_4262 of the internal_revenue_code sec_4261 of the code the international_travel_facilities_tax is similar to the segment tax because both are calculated not as a percentage of the amount_paid but as a fixed amount applicable to any amount_paid for the transportation revrul_72_309 1972_1_cb_348 shows how to calculate the international_travel_facilities_tax when the purchaser makes a single payment for a charter that revenue_ruling concluded that when an individual or organization pays a single amount for a charter implicit in the charter fee is an amount_paid for the transportation of each passenger actually on the flight the similar language in sec_4261 and sec_4261 supports the conclusion that the segment tax should apply in the same way as the international_travel_facilities_tax thus although the irs has not issued guidance on the segment tax specifically the guidance for the similar international_travel_facilities_tax clearly suggests the segment tax should also apply per passenger the per-passenger application means all users of the airport and airway system will share equally in the cost rather than commercial air passengers bearing a higher share of those costs than passengers in chartered aircraft the secretary_of_the_treasury can prescribe the extent if any to which any ruling applies without retroactive effect sec_7805 of the code the holding of a tam applies retroactively unless the secretary exercises this discretionary authority generally a tam will not apply retroactively where the irs has a contrary regulation or revenue_ruling on point or where the irs has issued an earlier tam or letter_ruling to the taxpayer about the same matter under consideration in the tam revenue_procedure 2001_1_irb_79 the irs has not issued any regulation or revenue_ruling on the segment tax thus because the irs had not issued a letter_ruling to the taxpayer before issuing the tam it would generally not be appropriate to apply the tam nonretroactively simply because the taxpayer disagreed with the position reached in that tam i recognize the application of the segment tax to each passenger may be the subject of disagreement however where taxpayers are unclear on the application of a particular tax they can request a letter_ruling rather than wait for published guidance from the irs the letter_ruling program provides guidance to taxpayers when they are unclear on the application of the code each year we announce the procedures for requesting a letter_ruling in the first revenue_procedure published in the internal_revenue_bulletin this year’s procedures are in revproc_2001_1 2001_1_irb_1 copy enclosed if you have any questions please contact me or at sincerely associate chief_counsel passthroughs and special industries by richard a kocak chief branch enclosures


department of the treasury internal_revenue_service washington d c pax exempt and government entities division uniform issue code es t ep ka th dec xxxxxxxkaxkakaxxanakk xxxxxkxkxxxkaxkhaaakk hho xxxxkkkk xxxxxxxkkaxkaxxakaakk legend taxpayer a guardian ira'x account f account z amount d bank u financial_institution wo court m date date xxxxxxkxxxaxxkkk xxxxxxaxxxxxxkkk xxxxxkxaxakaxkkk hooookokxxkkk hhoooooooookkkxk xxxxkxkxxkaxxkxk xxxkxxxkkxkkkkak xxxxkxxxxxaxxkak xxoookhiioookkkkk kxkkk hho xxxxxxkkxxkxkkkk xxxkkkkkkxxkkkkk xxxxxxxockxxxxxxx xxkxmmkkxkaxakkk xxxxxxxxkxxkakak xxxxxxxxxxxxxxaxx xxxxxxxaxakkx peg sec_2 date date date yearm year n xxxxxxxxxxaxxxxxk xkxxxpokxxkkkkka xxxxxxxxxkkakakk xxxxxaxkaxxxxxkkk xxxxakxkxxxxaxkax dear xxxxxxxxx this is in response to your ruling_request dated date and supplemented by a letter dated date as submitted by your authorized representative in which you as the court appointed guardian of taxpayer a request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code ‘code’ for a distribution made by taxpayer a from ira x the following facts and representations have been submitted under penalty of perjury in support of the ruling requested guardian represents that taxpayer a age received a distribution from ira x totaling amount d guardian e asserts that taxpayer a's failure to accomplish a rollover within the 60-day period prescribed by sec_408 was due fo her mentat condition which impaired her ability to make sound financial decisions or understand the consequences of her actions during the 60-day period guardian e further represents that amount d has not been used for any other purpose guardian e represents and has submitted documentation showing that taxpayer a suffers from severe mental_disability on date prior to guardian e's appointment taxpayer a requested and received a distribution of amount d from ira x which was deposited into a non-fra account at bank u documentation shows that taxpayer a has been treated for mental health conditions since year m on date taxpayer a was awarded social_security disability ssd status and has received ssd payments since then n year n a mental health center labeled taxpayer a’s condition as severe and found her to be highly nonfunctional and dependent on her parents with whom she lived until they passed away after the parents death her uncle an accountant handled taxpayer a's financial affairs until date when taxpayer a forced him to relinquish such control taxpayer a’s mental condition deteriorated over time and on date a neighbor filed a petition for guardianship with court m the examining committee members found taxpayer a to be incapacitated and her sister was appointed as plenary guardian the sister later resigned and on date court m appointed guardian e to replace her hokkkxk page since the establishment of the guardianship with guardian e taxpayer a has been living in an assisted iving facility guardian e now handles all of taxpayer a’s decision making and financial affairs taxpayer a's assets have been transferred to account z held by financial_institution w a court ordered depository_account ‘taxpayer a’s sister received a notice from the rs indicating that taxpayer a owed taxes and was being assessed interest and a penalty as a result of having received a distribution from ira x the notice was faxed to guardian e who is addressing all of taxpayer a’s business matters the effects of taxpayer a’s long standing mental health conditions restricted her ability to handle her financial affairs and complete the rollover transaction within the 60-day rollover period prescribed by sec_408 of the code based on the facts and representations a ruling is requested that the intemal revenue service waive the 60-day rollover requirement with respect to the distribution of amount d from ira x sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ra shail be included in gross_income by the payee or distribute as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 d a of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the account is maintained if the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day ‘on which he receives the payment or distribution or the entire amount received including money and other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 a i received by an individual from an ira if at any time during the one-year period ending on the day of such receipt such individual teceived any other amount described in sec_408 3xa i from an ira which was not includible in gross_income because of the application of sec_408 baer sec_408 d of the code provides a similar 60-day rollover period for partial rollovers sec_408 3xi of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 d d of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 r b date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 d i of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information and documentation submitted by guardian e on behalf of taxpayer a is consistent with the assertion that taxpayer a's failure to accomplish a timely rollover of amount d into an ira within the 60-day rollover period prescribed by sec_408 of the code was due to her mental health conditions which affected her ability to handle her financial affairs and complete a rollover within the required 60-day rollover period therefore pursuant to sec_408 c i of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount from ira x is granted a period of days from the issuance of this ruling letter to guardian e into a rollover ira provided all other requirements of section redeposit amount d d of the code except the 60-day requirement are met with respect to such contribution amount d sec_408 d of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this ruling is directed solely to-the taxpayer who requested it sec_6110 k of the code provides that it may not be used or cited by others as precedent will be considered a rollover_contribution within the meaning of xxxxxxxxxxxaxx_ page a copy of this ruling is being sent to your authorized representative in accordance with a power_of_attorney on file with this office if you wish to inquire about this ruling please contact xxxxxxxxx id number xxxxx xxxxxxkx at xxxxx please address all correspondence to se t-ep ra‘t4 sinoerely yours ado ove employee_plans technical group foe laura b warshawsky manager enclosures deleted copy of ruling letter notice of intention to disclose