internal_revenue_service number release date index number ----------------- ------------------------------------- -------------------- ------------------------------------ legend department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ---------------------- id no ----------- telephone number -------------------- refer reply to cc psi b06 plr-139361-14 date date taxpayer ------------------------------------- ---------------------- investor company a company b company c company d company e company f company g parent business a business b utility supplier operator licensor state a state b state c state d state e plant a plant b plant c date date date date --------------------------------- ----------------------------- -------------------------- -------------------------------- ------------------------------------------- ------------------------------------------------------- -------------------------------- --------------------------- ------------------------------ ------------------------------------------------------------------------ --------------- -------------------------------------------- ---------------------------------------------------------- ---------------------------- ---------------------- ------------ ----------------- ------ -------- ------------ -------------------------------- ----------------------------- ----------------------------------- --------------------- --------------------- ---------------- --------------------- plr-139361-14 date date date date date date date additive additive center ------------------------------------------------------------------------------------------ ------------- -------------------- ---------------- ------------------ --------------------------- --------------------------- ----------------- -------------------- ---------------------- test rep ----------------------------------------------------------------------------------------- --------- --------------------------- ------------------------------------------------------------------------------------------ --------------------------- ------------------------------------------------------------------------------------------ ----------------- -------------------------- test rep test rep source region a dear -------------- this is in response to your request for rulings submitted by your authorized representative concerning the federal_income_tax consequences of the transaction described below the facts as represented are as follows background taxpayer a state a limited_liability_company is a calendar_year taxpayer and employs the accrual_method of accounting for both book and tax purposes taxpayer owns all of the interests in company a company b and company c each of which is a state a limited_liability_company the members of taxpayer are company d and investor each of which is a state a limited_liability_company company d is owned by company e a state b limited_liability_company and company f a state c limited_liability_company each of company d company e and company f is an affiliate of company g a state c_corporation that is primarily engaged in business a investor is a state a limited_liability_company that is an indirect wholly owned subsidiary of parent a state a corporation that is primarily engaged in business b plr-139361-14 investor has elected to be classified as an association_taxable_as_a_corporation for u s federal tax purposes taxpayer was organized on date to hold the interests in company a company b and company c prior to date all of the interests in taxpayer were held by company d on date company d transferred three facilities for the production of refined_coal to each of company a company b and company c each of those facilities was constructed and placed_in_service at a site in state b on or about date and produced and sold refined_coal with the expectation that it would be burned to produce steam company d continued to operate the facilities at that location until date on date company a entered into contracts with utility to locate a refined_coal_production_facility on a site adjacent to plant a in state d and to sell refined_coal produced in that facility to utility also on date company a entered into an agreement with supplier an affiliate of utility to purchase coal feedstock to be used in its refined_coal_production_facility separately on date company b entered into similar agreements with utility to locate a refined_coal_production_facility on a site adjacent to plant b in state d and to purchase coal feedstock for that facility from supplier likewise on date company c entered into similar agreements with utility to locate a refined_coal_production_facility on a site adjacent to plant c in state d and to purchase coal feedstock from that facility from supplier subsequently each of company a company b and company c relocated their respective facilities to those sites where they now are in operation on date investor acquired all of the class b membership interests in taxpayer from company d in a transaction treated as a taxable sale_or_exchange of an undivided_interest in the assets of taxpayer followed by a contribution of taxpayer’s assets by both investor and company d to a newly formed partnership simultaneously investor and company d entered into a limited_liability agreement with respect to taxpayer setting forth their agreement regarding the respective rights and obligations of the class a and class b interests in taxpayer the management and related decision-making of taxpayer and certain related matters pursuant to the agreements with supplier each of company a company b and company c purchases coal feedstock from supplier some of that coal feedstock was purchased at the sites where the facilities are located and some of the coal feedstock is purchased when loaded on barges or railcars that subsequently deliver the coal to such sites the coal supply agreements do not prohibit the companies from purchasing coal feedstock from third parties and do not prohibit them from purchasing more feedstock coal than utility would expect to buy from them in the form of refined_coal the feedstock coal purchased by each of company a company b and company c typically is coal that supplier itself purchased from third party vendors consistent with coal specifications provided by utility the companies use the process plr-139361-14 as described below to produce refined_coal that they sell to utility pursuant to refined_coal sales agreements all of the refined_coal produced in their facilities is expected to be used as a fuel at utility’s power plants to produce steam for the generation of electricity however any refined_coal not purchased by utility can be sold to one or more third parties none of the taxpayer company a company b and company c have any employees rather each of company a company b and company c entered into separate operations and maintenance agreements with operator a state a limited_liability_company and affiliate of company d pursuant to those agreements operator will operate repair and maintain the facilities in accordance with an agreed operating plan will make arrangements to coordinate delivery of spare parts and supplies will coordinate deliveries of coal feedstock purchases and sales of refined_coal and will perform certain administrative functions in support thereof in addition operator will arrange for testing of refined_coal as described below description of the process the process at issue for production of refined_coal currently employed at the facility involves the mixing of proprietary chemicals additives with feedstock coal prior to combustion the process the patent for the process is licensed by licensor to each of company a company b and company c licensor is entitled to certain per ton royalties based on production for_the_use_of the technology test results have shown that when mixed with coal the proprietary additives result in reduced nox so2 and mercury emissions during combustion different chemicals are targeted at specific pollutants based on the characteristics of the feedstock coal burned at the plants the companies have chosen a combination of additives that target the reduction of nox and mercury in the case of nox the companies understand that additive is believed to cause a portion of the nox to adhere to or react with the additive so that it can be captured and is not emitted in the case of mercury the companies understand that additive is believed to react with the elemental mercury in the feedstock coal so that it is converted into a chemical species of mercury mercury oxide that can be effectively captured by particulate control devices emissions reduction testing for purposes of determining emissions reductions under sec_45 each of company a company b and company c will arrange for pilot-scale combustion testing and laboratory analysis for redetermination purposes and will not rely on any continuous emissions monitoring system or other field testing the companies engaged the research center of a prominent university the center to conduct tests at its pilot-scale combustion test facility ctf to determine the emission reductions associated with burning the refined_coal compared to the feedstock coal center reports described below state plr-139361-14 the ctf has been extensively used to research and investigate sox and nox emissions and the transformation of toxic trace metals hg mercury as and pb during the combustion of coal and other fuels or waste materials the ctf is capable of producing gas and particulate samples that are representative of those produced in industrial- and full-scale pulverized coal pc -fired boilers the ctf is capable of producing gas and particulate samples that are representative of those produced in industrial and full-scale pulverized coal boilers and has several pollution control devices that may be used to reduce emissions including an electrostatic precipitator or fabric filter baghouse for particulate control a selective catalytic reduction column for nox control and a wet scrubber for control of sulfur emissions for purposes of qualifying the refined_coal produced at the facilities center conducted pilot-scale combustion tests at its ctf on dates and on feedstock coal of the type typically burned at plant a plant b and plant c respectively center issued reports with respect to each of those tests which are referred to as test rep test rep and test rep collectively the test reports each test report explains that combustion gas analysis is provided by continuous emissions monitors cems at two locations the furnace exit which is used to monitor and maintain a specified excess air level for all test periods and the outlet of the particulate control device which is used to assess any air inleakage that may have occurred so that emissions of interest sampled at the back end of the system can be corrected for the dilution caused by the inleakage flue gas analyses were obtained from the duct at the outlet of the electrostatic precipitator flue gas mercury measurements were obtained separately by a continuous mercury monitor located at the flue gas ducting at the exit of the electrostatic precipitator center conducted a series of tests on the feedstock and refined_coal blend measuring the emissions with these devices each test report states that the test results indicate that the blend of coal and additives achieved the required reductions in both nox and total mercury emissions both determined on a lb btu basis to satisfy the requirements of at least nox reduction and at least mercury reduction each test report also states that it is expected the emissions reduction reported would be achieved at full scale using the additive levels tested tested coal the plants currently burn subbituminous coal obtained from various mines located in state e within source region a each of company a company b and company c produce refined_coal using this coal and sell that refined_coal to utility which burns it in the plants to generate electricity from steam plr-139361-14 taxpayer requested that center test a blend of coal that represents the coal to be used at the plants the tested coal the reports issued by center state that the emission reduction requirements outlined in sec_45 for nox and mercury were satisfied when comparing the results of burning the endpoint fuel to the results of burning the feedstock coal taxpayer expects to continue to operate with the blend and additive levels discussed in the center reports which would be consistent with long-term patterns for coal consumed at the plant to that end samples will be taken for redetermination testing within six months after the last emissions test satisfying the qualified_emission_reduction requirement thereafter within six months after such date another set of samples will be taken for redetermination testing in each case samples will be collected and prepared in accordance with sampling and testing procedures set forth in taxpayer’s operating protocols although testing and preliminary reporting is done timely the center often is not able to issue the final report until after the six-month period although taxpayer does not currently anticipate making changes to its coal feedstock or additive levels or using other coal sources or ranks additional testing will be conducted prior to acquiring coal feedstock from a different coal source region or of a different rank than reflected in the tested coal in the case of a change in the additive levels tests will also be run at the new minimum levels of additive as the qualified expert advises is necessary to conclude that a qualified emissions reduction will be expected for the new levels of additive rulings requested based on the foregoing you have requested that we rule as follows the refined_coal produced by using the process constitutes refined_coal within the meaning of sec_45 of the code provided that such refined_coal is produced from feedstock coal that is the same source or rank as the tested coal and provided further that the refined_coal satisfies the qualified_emission_reduction test stated in sec_45 of the code provided that the feedstock coals used to produce refined_coal during any determination_period are from the same coal source regions and of the same ranks as the tested coal all feedstock coal that satisfies that criteria shall be treated as feedstock coal of the same source and rank for purposes of section dollar_figure of notice_2010_54 regardless of the mines from which such feedstock coal is purchased testing by center for qualified emissions reduction as set forth in its test reports satisfies the requirements of notice_2010_54 taxpayer may rely on the pilot scale testing conducted at center and subsequent permitted laboratory testing as plr-139361-14 required for a redetermination described in section a or b of notice to satisfy the qualified_emission_reduction test of sec_45 of the code pursuant to section b of notice_2010_54 taxpayer may satisfy the redetermination requirement of section dollar_figure of notice_2010_54 by laboratory analysis establishing that the sulfur and mercury content of both the feedstock coal and the refined_coal on average do not vary by more than ten percent below the bottom of nor more than ten percent above the top of the range of sulfur content and the range of mercury content of the feedstock coal and the refined_coal used in the most recent determination that meets the requirements of section dollar_figure of notice_2010_54 the results set forth by the center in a redetermination test report for production may be relied upon after the date of the testing even if the report is not received until after the six month period specified in section i of notice_2010_54 provided a facility was placed_in_service prior to date within the meaning of sec_45 relocation of a facility to a different location after date or replacement of part of a facility after that date will not result in a new placed_in_service_date for the facility for purposes of sec_45 provided the fair_market_value of the used_property is more than twenty percent of the facility’s total value the cost of the new property plus the value of the used_property at the time of relocation or replacement provided a facility was placed_in_service prior to date within the meaning of sec_45 a change in ownership of a facility after date will not result in a new placed_in_service_date for the facility for purposes of sec_45 law and rationale sec_45 of the code generally provides a credit against federal_income_tax for_the_use_of renewable or alternative resources to produce electricity or fuel for the generation of steam sec_45 of the code provides that in the case of a producer of refined_coal the credit available under sec_45 of the code for any taxable_year shall be increased by an amount equal to dollar_figure5 per ton of qualified refined_coal i produced_by_the_taxpayer at a refined_coal_production_facility during the 10-year period beginning on the date that the facility was originally placed_in_service and which is ii sold by the taxpayer to an unrelated_person during such 10-year period and such taxable_year for purposes of sec_45 of the code section dollar_figure of notice_2010_54 provides that the term refined_coal means a fuel which - i is a liquid gaseous or solid fuel including feedstock coal mixed with an additive or additives produced from coal including lignite or high carbon fly ash including such fuel used as a feedstock ii is sold by the taxpayer with the reasonable expectation that it will be used for the purpose of producing steam and iii is certified by the taxpayer as resulting when used in the plr-139361-14 production of steam in a qualified_emission_reduction section dollar_figure of the notice provides that the term qualified_emission_reduction means in the case of refined_coal produced at a facility placed_in_service after date a reduction of at least twenty percent of the emissions of nitrogen oxide and at least forty percent of the emissions of either sulfur dioxide or mercury released when burning the refined_coal excluding any dilution caused by materials combined or added during the production process as compared to the emissions released when burning the feedstock coal or comparable coal predominantly available in the marketplace as of date sec_45 of the code generally provides that the term refined_coal_production_facility means a facility which is placed_in_service after date and before date section dollar_figure of notice_2010_54 generally provides that a qualified emissions reduction does not include any reduction attributable to mining processes or processes that would be treated as mining as defined in sec_613 a c or i if performed by the mine owner or operator accordingly in determining whether a qualified_emission_reduction has been achieved the emissions released when burning the refined_coal must be compared to the emissions that would be released when burning the feedstock coal feedstock coal is the product resulting from processes that are treated as mining and are actually applied by a taxpayer in any part of the taxpayer’s process of producing refined_coal from coal sec_613 of the code describes treatment processes that are not considered as mining unless they are provided for in sec_613 or are necessary or incidental to a process provided for in sec_613 any cleaning process such as a process that uses ash separation dewatering scrubbing through a centrifugal pump spiral concentration gravity concentration flotation application of liquid hydrocarbons or alcohol to the surface of the fuel particles or to the feed slurry provided such cleaning does not change the physical or chemical structure of the coal and drying to remove free water provided such drying does not change the physical or chemical identity of the coal will be considered as mining section of the notice provides in part that emissions reduction may be determined using continuous emission monitoring system cems field testing section a provides in part that cems field testing is testing that meets all the following requirements i the boiler used to conduct the test is coal-fired and steam-producing and is of a size and type commonly used in commercial operations ii emissions are measured using a cems iii if epa has promulgated a performance standard that applies at the time of the test to the pollutant emission being measured the cems must conform to that standard iv emissions for both the feedstock coal and the refined_coal are measured at the same operating conditions and over a period of at least hours during which the boiler is operating at a steady state at least percent of full load and plr-139361-14 v a qualified_individual verifies the test results in a manner that satisfies the requirement of section b section of the notice provides that methods other than cems field testing may be used to determine the emission reduction the permissible methods include a testing using a demonstration pilot-scale combustion furnace if it establishes that the method accurately measures the emission reduction that would be achieved in a boiler described in section a i and a qualified_individual verifies the test results in a manner that satisfies the requirements of section c i ii v and vi of the notice and b a laboratory analysis of the feedstock coal and the refined_coal that complies with a currently applicable epa or astm standard and is permitted under section b i or ii section of the notice provides that a taxpayer may establish that a qualified_emission_reduction determined under section dollar_figure applies to production from a facility by a determination or redetermination that is valid at the time the production occurs a determination or redetermination is valid for the period beginning on the date of the determination or redetermination and ending with the occurrence of the earliest of the following events i the lapse of six months from the date of such determination or redetermination ii a change in the source or rank of the feedstock coal that occurs after the date of such determination or redetermination or iii a change in the process of producing refined_coal from the feedstock coal that occurs after the date of such determination or redetermination section of the notice provides that in the case of a redetermination required because of a change in the process of producing refined_coal from the feedstock coal the redetermination required under section dollar_figure must use a method that meets the requirements of section in any other case the redetermination requirement may be satisfied by laboratory analysis establishing that - a the sulfur s or mercury content of the amount of refined_coal necessary to produce an amount of useful energy has been reduced by at least percent percent in the case of facilities placed_in_service after date in comparison to the s or mercury content of the amount of feedstock coal necessary to produce the same amount of useful energy excluding any dilution caused by materials combined or added during the production process b the s or mercury content of both the feedstock coal and the refined_coal do not vary by more than percent from the s and mercury content of the feedstock coal and refined_coal used in the most recent determination that meets the requirements of the notice section dollar_figure of the notice provides that the certification requirement of sec_3 c of the notice is satisfied with respect to fuel for which the refined_coal credit is claimed only if the taxpayer attaches to its tax_return on which the credit is claimed a certification that contains the following a statement that the fuel will result in a qualified emissions reduction when used in the production of steam a statement indicating whether cems field testing was used to determine the emissions reduction plr-139361-14 if cems field testing was not used to determine the emissions reduction a description of the method used a statement that the emissions reduction was determined or redetermined within the six months preceding the production of the fuel and that there have been no changes in the source or rank of the feedstock coal used in the process of producing refined_coal from feedstock coal since the emissions reduction was most recently determined or redetermined and a declaration signed by the taxpayer in the following form under penalties of perjury i declare that i have examined this certification and to the best of my knowledge and belief it is true correct and complete finally sec_45 of the code provides that a refined_coal_production_facility must be placed_in_service within certain timeframes for purposes of the refined_coal credit allowable with respect to refined_coal other than steel_industry_fuel the facility must be placed_in_service after date and before date section dollar_figure of notice_2010_54 provides that the year in which property is placed_in_service is determined under the principles of sec_1_46-3 of the regulations ie when the property is placed in a condition or state of readiness and availability for a specifically assigned function section dollar_figure of notice_2010_54 provides that a refined_coal_production_facility will not be treated a placed_in_service after date if more than percent of the facility’s total value the cost of the new property plus the value of the used_property is attributable to property placed_in_service on or before date notice_2010_54 also states that the irs will not issue private letter rulings relating to when a refined_coal_production_facility has been placed_in_service with respect to the first issue the process starts with several chemical additives being added to the feedstock coal prior to its combustion in a furnace the additives provide the chemical structure that results in the reduction of emissions of nitrogen oxide and mercury during combustion section dollar_figure of the notice provides generally that a qualified emissions reduction does not include any reduction attributable to mining processes or processes that would be treated as mining if performed by the mine owner or operator in the instant case the process is not a mining process further section dollar_figure of the notice clarifies sec_45 of the code and specifically provides that refined_coal includes feedstock coal mixed with additives thus additive processes that mix certain chemicals or other additives with the coal in order to achieve emissions reductions may qualify for the refined_coal production_tax_credit additionally section dollar_figure defines comparable coal as coal that is of the same rank as the feedstock coal and that has an emissions profile comparable to the emissions profile of the feedstock coal accordingly we conclude that the coal produced by using the process constitutes a refined_coal within the meaning of sec_45 of the code provided that the refined_coal i is produced from feedstock coal that is the same source or rank as the tested coal and ii satisfies the qualified_emission_reduction test stated in sec_45 of the code with respect to the second issue the emissions profile of the refined_coal product is compared to the emissions profile of either the feedstock coal or a comparable coal plr-139361-14 predominantly available in the marketplace as of date section dollar_figure of the notice provides that a comparable coal is defined as coal that is of the same rank as the feedstock coal and that has an emissions profile comparable to the emissions profile of the feedstock coal section dollar_figure of provides that a determination or redetermination of a qualified emissions reduction is valid until the occurrence of the earliest of the following events i the lapse of six months from the date of such determination or redetermination ii a change in the source or rank of the feedstock coal that occurs after the date of such determination or redetermination or iii a change in the process of producing refined_coal from the feedstock coal that occurs after the date of such determination or redetermination accordingly we conclude that provided that the feedstock coals during any determination_period are from the same coal source regions and of the same ranks as the tested coal all feedstock coal that satisfies that criteria shall be treated as feedstock coal of the same source and rank for purposes of section dollar_figure of notice_2010_54 regardless of the mines from which such feedstock coal is purchased with respect to the third issue section of the notice provides that any permissible testing method provided for in the notice can be used in emission testing for any pollutant that is a taxpayer can use different testing methods for each of nitrogen oxide sulfur dioxide or mercury provided the method used for any pollutant is a permissible method section provides that an emission test establishing a qualified_emission_reduction qualifies the refined_coal for a six-month period provided there is no change in the process for producing the refined_coal or in the source or rank of the feedstock coal therefore a taxpayer must redetermine the emission reductions to qualify for the succeeding six-month period using one or more approved methods in the instant case taxpayer will arrange for pilot-scale combustion testing and will not rely on any continuous emissions monitoring system or other field testing which is permitted under section dollar_figure of the notice specifically taxpayer will arrange with the center to conduct testing including redetermination testing at its ctf to determine the emissions reductions associated with burning the refined_coal product compared to the feedstock for purposes of qualifying the refined_coal produced at the facility the center has conducted pilot-scale combustion tests at its ctf as documented in the test reports in conducting such tests the center conducted tests on the feedstock and then mixed a separate sample of the feedstock with the additives so that it could conduct tests on the refined_coal product in each of its reports the center reported that the test results indicated that the blend of coal and additives achieved the required emissions reductions based on the foregoing we conclude that testing by the center for qualified emissions reductions as set forth in its test reports including interim reports satisfies the requirements of notice_2010_54 qualified emissions reduction through testing by the center at its combustion research facility or similar pilot-scale combustion testing facilities under notice_2010_54 may be relied upon plr-139361-14 with respect to the fourth issue section of notice_2010_54 provides in part that in the case of a redetermination required because of a change in the process of producing refined_coal from the feedstock coal the redetermination required under section dollar_figure must use a method that meets the requirements of section in any other case the redetermination requirement may be satisfied by laboratory analysis establishing that the sulfur and mercury content of both the feedstock coal and the refined_coal do not vary by more than percent from the sulfur and mercury content of the feedstock coal and refined_coal used in the most recent redetermination that meets the requirements of the notice accordingly we conclude that taxpayer may satisfy the redetermination requirement of section dollar_figure of notice_2010_54 by laboratory analysis establishing that the sulfur and mercury content of both the feedstock coal and the refined_coal on average do not vary by more than ten percent below the bottom of nor more than ten percent above the top of the range of sulfur content and the range of mercury content of the feedstock coal and the refined_coal used in the most recent determination that meets the requirements of section dollar_figure of notice_2010_54 with respect to the fifth issue it is intended that taxpayer will engage in redetermination testing every six months or more frequently if required pursuant to notice_2010_54 however the center is not always able to issue the written report required by section a of notice_2010_54 within the six month period thus although redetermination testing is completed within the six month period the report may be received after the six month period nonetheless the center informs taxpayer of the results of the test shortly after the tests so that it is able to take into account the results of the redetermination within the six month period nevertheless the delay by the center in issuing its report cannot be indefinite accordingly we conclude that the results set forth by the center in a redetermination test report for production may be relied upon after the date of testing even if the report is not received until after the six- month period specified in section i of notice_2010_54 so long as taxpayer receives the written report within days from the date of testing the new six-month period will begin on the date the redetermination was completed not the date of receipt of the report with respect to the sixth issue each of the facilities was relocated from state b to state d and during the life of the facilities taxpayer may decide to relocate a facility again and it may be necessary to replace certain major components in the event of relocation or replacement of a component there should be no change in the placed_in_service_date of the facility as long as the test described in section dollar_figure of notice_2010_54 has been met based on the foregoing we conclude that provided a facility was placed_in_service prior to date within the meaning of sec_45 relocation of a facility to a different location after date or replacement of part of a facility after that date will not result in a new placed_in_service_date for the facility for purposes of sec_45 provided the fair_market_value of the used_property is more than twenty percent of the facility’s total value the cost of the new property plus the value of the used_property at the time of relocation or replacement plr-139361-14 with respect to the seventh issue as discussed above sec_45 provides that a refined_coal facility must be placed_in_service within certain time frames section dollar_figure of notice_2010_54 provides that the year in which property is placed_in_service is determined under the principles of sec_1_46-3 ie when the property is placed in a condition or state of readiness and availability for a specifically assigned function the placed_in_service language of sec_45 focuses on the facility and does not by its terms require the facility to have been placed_in_service by the entity that owns and operates the facility and claims the credit for such production at a later date accordingly we conclude that a change in ownership of the facilities subsequent to their placed-in-service dates will not affect the placed-in-service dates of the facilities for purposes of sec_45 this ruling expresses no opinion regarding any issue not specifically addressed in this ruling letter including whether any person has sold refined_coal to an unrelated_person or when the facility was placed_in_service in particular we express or imply no opinion that taxpayer has sufficient risk or rewards of the production activity to qualify as the producer of the refined_coal the service may challenge an attempt to transfer the credit to a taxpayer who does not qualify as a producer including transfers structured as partnerships sales or leases that do not also transfer sufficient risks and rewards of the production activity in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative a copy of this ruling must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling this ruling is directed only to the taxpayer who requested it sec_6110 k of the code provides that it may not be used or cited as precedent we are sending a copy of this letter_ruling to the industry director sincerely peter c friedman senior technician reviewer branch office of associate chief_counsel passthroughs special industries


office_of_chief_counsel internal_revenue_service memorandum number release date cc tege eoeg et1 postn-144129-05 uilc date date to director submission processing cincinnati oh attn entity unit from office of division counsel associate chief_counsel tax exempt government entities ------------------------------------- subject railroad_retirement_tax_act status in accordance with the coordination procedure established between the service and the railroad retirement board rrb the rrb has provided us with its opinion that the following business became an employer under the railroad retirement act and the railroad unemployment insurance act effective ------------------- --------------------------------------------------- we have reviewed the opinion of the rrb and based upon the information submitted to us by the rrb we also conclude that --------------------------------------became an employer under the railroad_retirement_tax_act effective ------------------- please take the appropriate action regarding this business cc ---------------------------- ---------------------------------------- ____________________________ janine cook


t c memo united_states tax_court christine c peterson and roger v peterson petitioners v commissioner of internal revenue respondent docket nos filed date mitchell i horowitz and micah g fogarty for petitioners andrew m tiktin and timothy a sloane for respondent memorandum findings_of_fact and opinion foley judge after concessions the issues for decision are whether retirement_plan contributions of dollar_figure dollar_figure and dollar_figure relating to and respectively are deductible pursuant to sec_404 and unless otherwise indicated all section references are to the internal continued whether distributions petitioners received during are subject_to self- employment_tax pursuant to sec_1401 findings_of_fact in mrs peterson began working as an independent beauty consultant for mary kay inc mary kay mrs peterson sold mary kay products and recruited other individuals to join the company she was extremely successful and on date entered into a national sales director nsd agreement with mary kay mrs peterson earned commissions on wholesale purchases of mary kay products by her network of independent beauty consultants sales directors and nsds on date and date mrs peterson and mary kay entered into a family security program fsp agreement and a great futures program gfp agreement respectively both agreements provided that mary continued revenue code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure mary kay is a wholesale_distributor of cosmetics toiletries skin care and related products national sales director is the highest mary kay sales position mary kay had the authority to amend modify or terminate either continued kay would make distributions to mrs peterson after her completion of five years of nsd service and retirement from the company pursuant to the fsp agreement mrs peterson was entitled to a monthly distribution based on an applicable_percentage of her final average commissions ie an average of her three highest commission years during the five years prior to her retirement pursuant to the gfp agreement mrs peterson was entitled to a monthly distribution based on an applicable_percentage of certain prospective wholesale purchases the applicable_percentage pursuant to both agreements was based on mrs peterson’s age at retirement effective date mary kay amended the fsp and the gfp agreements to expressly provide that each program was intended to be a non-qualified deferred_compensation arrangement and was intended to meet the requirements of sec_409a of the code and shall be construed and interpreted in accordance with such intent petitioners on date entered into the christine peterson defined_benefit_plan and trust cp plan designated themselves as trustees and designated mrs peterson as the employer in date petitioners formed nsd interests l p nsd interests a georgia limited_partnership petitioners continued agreement at any time and in any manner were limited partners of nsd interests and their wholly owned entity was the general_partner mrs peterson attempted to assign her mary kay commissions to nsd interests the assignment however was ineffective because mary kay did not consent on date nsd interests entered into an adoption_agreement relating to the nsd interests l p defined_benefit_plan and trust nsd plan the adoption_agreement provided that it was an amendment and restatement of a previously established qualified_plan of the employer which was originally effective date ie the cp plan the nsd plan designated nsd interests as the employer and petitioners as trustees mrs peterson received nonemployee compensation from mary kay of dollar_figure dollar_figure and dollar_figure relating to and respectively in mrs peterson retired from mary kay and received nonemployee compensation pursuant to the fsp and the gfp agreements of dollar_figure petitioners timely filed their and years in issue federal_income_tax returns on schedules c profit or loss from business petitioners reported other expenses equaling mrs peterson’s nonemployee compensation nsd interests timely filed federal_income_tax returns relating to the years in issue and reported gross_receipts of dollar_figure dollar_figure dollar_figure and dollar_figure ie the same amounts reported on petitioners’ schedules c nsd interests claimed deductions of dollar_figure dollar_figure and dollar_figure for retirement contributions to the nsd plan relating to and respectively respondent on date sent petitioners a notice_of_deficiency relating to and and on date sent petitioners a notice_of_deficiency relating to and collectively notices in the notices respondent determined that petitioners were subject_to self-employment_tax relating to their distributive shares of net partnership income reported by nsd interests and were liable pursuant to sec_6662 for accuracy-related_penalties on date and date petitioners while residing in florida timely filed petitions with the court in amendments to answers filed on august and date respondent determined that nsd interests was not engaged in a trade_or_business during the years in issue deductions claimed by nsd interests were not ordinary and necessary expenses nsd interests was disregarded as a partnership for federal_income_tax purposes all items of income reported by nsd interests were properly allocable to mrs peterson nsd interests did not qualify as an employer pursuant to sec_401 and mrs peterson’s nonemployee mary kay compensation was subject_to self-employment_tax after concessions the remaining issues for decision are whether retirement_plan contributions that nsd interests made relating to and are deductible pursuant to sec_404 and whether distributions petitioners received during pursuant to the fsp and the gfp agreements are subject_to self-employment_tax opinion respondent contends that nsd interests was not engaged in a trade_or_business and therefore was not pursuant to sec_404 entitled to deduct contributions to the nsd plan respondent bears the burden_of_proof because he raised this theory for the first time in his amendments to answers see rule nsd interests’ contributions may be deductible pursuant to sec_404 if they are expenses which would be deductible under sec_162 relating to trade_or_business_expenses or relating to expenses for production_of_income but only to the extent that they are ordinary and necessary expenses see sec_404 sec_1_404_a_-1 income_tax regs a partnership activity does not constitute a trade_or_business unless the partnership engages in the activity with the predominant purpose and intention of making a profit 80_tc_914 in determining whether nsd interests was engaged in a trade_or_business all relevant facts and circumstances must be taken into account see 81_tc_210 petitioners concede that nsd interests was not engaged in a trade_or_business in and was merely the passive recipient of income mrs peterson readily acknowledged that nsd interests was merely a structure to hold her mary kay earnings and that it was created for the tax savings furthermore petitioners concede that during and nsd interests had no income and that the income reported on its returns should have been reported on petitioners’ returns in sum nsd interests was not engaged in a trade_or_business during and see flowers v commissioner t c pincite 76_tc_759 accordingly nsd interests is not entitled to deduct retirement_plan contributions relating to these years see sec_404 surloff v commissioner t c pincite sec_1 a - b income_tax regs respondent further contends that mrs peterson was not an employer and therefore is not pursuant to sec_404 entitled to deduct retirement contributions to the nsd plan respondent concedes that the nsd plan is valid mrs peterson was engaged in carrying on a mary kay business during the taxable years and and certain expenses that were originally reported on the form_1065 for nsd interests are allowable as deductions and are reportable on schedule s c of petitioners’ form s mrs peterson formed the cp plan and was designated as the employer pursuant to it on date nsd interests amended and restated the cp plan the nsd plan defined an employer as the entity specified in the adoption_agreement any successor which shall maintain this plan and any predecessor which has maintained this plan mrs peterson ie a predecessor who maintained the plan was an employer pursuant to the nsd plan and the retirement contributions were expenses which would be deductible under sec_162 see sec_1 a - b income_tax regs accordingly mrs peterson is entitled to deduct pursuant to sec_404 the retirement contributions relating to and petitioners contend that the distributions they received during pursuant to the fsp and the gfp agreements are not subject_to self-employment_tax we disagree sec_1401 imposes a tax on a taxpayer’s self-employment_income self-employment_income consists of gross_income derived by an individual from any trade_or_business carried on by that individual see sec_1402 and b mrs peterson formerly carried on a trade_or_business therefore mary kay’s distributions pursuant to the fsp and the gfp agreements are subject_to self- employment_tax if they were derived from mrs peterson’s business ie ‘tied pursuant to sec_401 an individual who owns the entire_interest in an unincorporated trade_or_business shall be treated as his own employer to the quantity or quality of her prior labor’ see 108_tc_130 quoting 38_f3d_1094 9th cir rev’g t c memo the mary kay distributions were tied to the quantity and quality of mrs peterson’s prior labor see id pursuant to the fsp agreement mrs peterson’s distributions were based on her average commissions over the five years prior to her retirement pursuant to the gfp agreement mrs peterson’s distributions were based on the postretirement wholesale volume of her network ie how well the network performed based on her prior services in addition mary kay’s distributions pursuant to both plans were based on mrs peterson’s age at retirement and minimum years_of_service moreover the fsp and the gfp agreements expressly provided that the distributions were deferred_compensation ie related to mrs peterson’s prior labor petitioners failed to adduce proof sufficient to alter the construction of these unambiguous agreements or show that they were unenforceable see 168_f3d_1279 11th cir aff’g tcmemo_1997_386 378_f2d_771 3d cir vacating and remanding 44_tc_549 accordingly the fsp and gfp distributions are subject_to self-employment_tax pursuant to sec_1401 contentions we have not addressed are irrelevant moot or meritless to reflect the foregoing decisions will be entered under rule


tcmemo_2013_185 united_states tax_court michael schlussel petitioner v commissioner of internal revenue respondent docket no filed date michael schlussel for himself patrick f gallagher for respondent memorandum opinion gustafson judge the internal_revenue_service irs determined deficiencies of federal_income_tax for and along with additions to tax and penalties of petitioner michael schlussel pursuant to sec_6213 the matter is currently before the court on a motion for summary_judgment filed pursuant to rule by respondent the commissioner of the irs the issues for decision are whether mr schlussel is liable for the income_tax deficiencies that the irs determined and whether he is liable for the fraudulent failure-to- file addition_to_tax under sec_6651 the failure-to-pay addition_to_tax under sec_6651 and the failure-to-pay-estimated-tax addition_to_tax under sec_6654 we hold that he is liable in all respects and we will grant summary_judgment in the commissioner’s favor background the commissioner has made a showing of the following facts that showing is supported principally by deemed admissions resulting from mr schlussel’s failure_to_file a reply to the commissioner’s answer as discussed below and mr schlussel has not disputed the commissioner’s asserted facts the false invoicing scheme in the years and mr schlussel participated in a criminal scheme by which he sent false invoices in the names of various shell companies for unless otherwise indicated all section references are to the internal_revenue_code_of_1986 u s c in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure goods that were never delivered and were never in existence unwitting payors paid the invoices supposing they were legitimate by this means mr schlussel received checks in the aggregate amounts of dollar_figure in and dollar_figure in as a result of the false invoicing scheme in date mr schlussel was found guilty of two criminal counts--mail fraud and conspiracy to commit mail fraud he received concurrent sentences of nine years in prison on each count non-compliance with filing and paying requirements although mr schlussel had filed tax returns for prior years he filed none for the pre-suit year nor for the years at issue and his failure_to_file was knowing and fraudulent he kept no books_or_records of his false invoicing activity mr schlussel failed to make estimated_tax payments for or or payments of tax for either year and he had no reasonable_cause for his failure administrative proceedings on date the irs issued to mr schlussel a notice_of_deficiency pursuant to sec_6213 determining for and the following deficiencies year deficiency additions to tax sec_6651 sec_6651 dollar_figure big_number dollar_figure dollar_figure dollar_figure tbd sec_6654 dollar_figure dollar_figure on date the irs prepared for mr schlussel corresponding forms sec_6020 certification as substitutes for returns sfrs on those sfrs the irs included the income from the false invoicing scheme along with relatively small amounts of other income_tax court proceedings on date mr schlussel timely mailed his petition to this court at that time he resided in massachusetts where he is incarcerated the petition alleges i disagree with the irs determination because i did not make the money they claim i made their figures are erroneous and incorrect i don’t know how they derived at their figures i am under the impression that they took the figures from the funds that were mentioned at my trial but if they review the records properly and they would go over the discovery info provided by the government they will notice that the checks was legally deposited by the collection company a valid new york corporation and that the company used it to pay employees wages taxes 941s fica rent printing postage telephone charges etc all in the normal day to day operations of a business the funds were used legally and at no time did i deposit the funds into my personal account nor did i draw on the funds i in fact did not make any income in year and i was hospitalized and subsequently taken care of by my girl friend who earned her salary legally as well i am presently incarcerated on a nine year sentence and am years old i in fact suffered multiple capital loses from the forced sale of my house cars and all my personal_property all my personal funds were exhausted or stolen from me i therefore want the charges expunged from taxes at the earliest possible the commissioner filed his answer to the petition on date and that answer not only denied mr schlussel’s allegations but also made its own affirmative allegations in paragraph recounting the criminal scheme mr schlussel’s profit derived from it and his fraudulent_failure_to_file tax returns mr schlussel filed no reply so on date the commissioner filed a motion under rule c requiring him to do so by order of date the court directed mr schlussel as follows under rule a mr schlussel is required to file a reply either admitting or denying the irs’s affirmative allegations but he did not do so therefore on date the irs filed a motion under rule c asking the court to issue an order stating that the allegations in the answer that mr schlussel did not deny should be deemed admitted by mr schlussel upon due consideration it is ordered that on or before october mr schlussel shall file a reply as required by rule a and b of the tax_court rules_of_practice and procedure if mr schlussel does not file a reply as directed herein then the court will grant the irs’s motion and will deem for purposes of this case that mr schlussel has admitted the affirmative allegations set forth in the answer emphasis added mr schlussel filed no reply and in its order of date the court stated as of this date the court has received no reply from mr schlussel upon due consideration and for cause it is ordered that the irs’s motion for entry of order that the undenied allegations in paragraph of its answer be deemed admitted as set forth is granted those affirmative allegations in the irs’s answer are deemed admitted by mr schlussel on date the commissioner filed his motion for summary_judgment making factual assertions on the basis of mr schlussel’s deemed admissions and on that same date the court ordered as follows this case is scheduled to be tried at the court’s session in boston beginning date however on date respondent the irs filed a motion for summary_judgment the irs’s motion asserts that no trial is necessary in this case because the irs says no relevant facts are in dispute the motion contends that on the basis of the undisputed facts the case can be decided in the irs’s favor the court will order petitioner michael schlussel to file a response to the irs’s motion if mr schlussel disagrees with the facts set out in the irs’s motion then his response should point out the specific facts in dispute if he disagrees with the irs’s argument as to the law then his response should also set out his position on the disputed legal issues q as that the court has prepared on the subject what is a motion for summary_judgment how should i respond to one are available at ustaxcourt gov taxpayer_info_start htm start40 and are printed on the page attached to this order mr schlussel should note that tax_court rule d provides if the adverse_party ie mr schlussel does not so respond to a motion for summary_judgment then a decision if appropriate may be entered against such party --ie against mr schlussel to resolve the irs’s motion for summary_judgment it is ordered that no later than date mr schlussel shall file with the court and serve on the irs a response to the irs’s motion for summary_judgment on date mr schlussel filed a motion for a 180-day extension the motion stated i am requesting the court to allow me days adjournment due to the fact that i have been stricken by a stroke and subsequently had a seizure where my heart stopped beating and due to the proximity of competent medical staff i was promptly revived back to life i have been fitted with a pacemaker which was finally implanted into my chest to keep me alive i have had a few seizures in the middle of the night where i fell out of bed on a concrete floor i am presently attempting to get back to full health i want you to know that i do not have any of my tax records with me at this medical ctr its for that reason that i am requesting a continuance of this case for at least days just so that i can get back to health and be able to represent myself competently i thank you in advance for prompt reply to my request by order of date we granted mr schlussel’s request and we stated as follows the court will grant mr schlussel’s motion even though doing so will require taking this case off of the upcoming calendar and may complicate further proceedings and even though an extension of days ie six months is an extraordinary extension even for persons who are incarcerated and who are sick the irs is required to perform its duties imposed by law and the court is obliged to process the cases on its docket sick or incarcerated persons are entitled to reasonable accommodations but they are not entitled to indefinite exemption from the tax laws six months should certainly suffice and mr schlussel is warned that he should not expect any further extension he should immediately begin to obtain his records and if fortunate circumstances allow him to respond earlier he should certainly do so rather than risk an adverse turn of events and find himself unable to act in date if mr schlussel were unable to obtain his records and to prepare his response in that six-month period then it would be hard to assume that any further extension would actually facilitate a response rather than just delaying the case indefinitely which the court would not do it is therefore ordered that mr schlussel’s motion for an extension is granted and that he shall file a response to respondent's motion no later than date as of this date mr schlussel has filed no response discussion i standard for summary_judgment under rule the tax court’s analog to rule of the federal rules of civil procedure the court may grant summary_judgment where there is no genuine dispute of any material fact and a decision may be rendered as a matter of law the moving party here the commissioner bears the burden of showing that no genuine dispute of material fact exists and the court will view any factual material and inferences in the light most favorable to the nonmoving party here mr schlussel 85_tc_812 cf 477_us_242 same standard under fed r civ p the opposing party ie mr schlussel is to be afforded the benefit of all reasonable doubt and any inference to be drawn from the underlying facts contained in the record must be viewed in a light most favorable to the party opposing the motion for summary_judgment 78_tc_412 the commissioner may carry his burden_of_proof as to fraud by relying on a petitioner’s deemed admissions arising under rule c as a result of the petitioner’s failure_to_file a reply to specific allegations of fraud 77_tc_334 it therefore follows that a party moving for summary_judgment may rely on such deemed admissions to support the factual predicate for his motion however the non-moving party may not sit on his hands he is required by rule d to set forth specific facts showing that there is a genuine dispute for trial if the adverse_party does not so respond then a decision if appropriate may be entered against such party despite having this requirement called to his attention mr schlussel failed to make any response to the irs’s motion for summary_judgment ii mr schlussel’s liability a income_tax proceeds of a criminal activity are taxable_income the supreme court has given a liberal construction to the broad phraseology of the ‘gross income’ definition statutes in recognition of the intention of congress to tax all gains except those specifically exempted 366_us_213 in james the supreme court held that wrongful appropriations are includible in gross_income id pincite the commissioner has shown and mr schlussel has not contradicted that in and mr schlussel received income from his criminal activity and other sources for which he owes federal_income_tax in the amounts determined in the notice_of_deficiency b fraudulent failure-to-file addition_to_tax the commissioner has also shown that mr schlussel’s failure_to_file returns for and was fraudulent sec_6651 provides sec_6651 increase in penalty for fraudulent_failure_to_file --if any failure_to_file any return is fraudulent paragraph of subsection a shall be applied-- by substituting percent for percent each place it appears and by substituting percent for percent the cross-referenced paragraph of subsection a is sec_6651 which provides in case of failure-- to file any return required under authority of subchapter_a of chapter on the date prescribed therefor determined with regard to any extension of time for filing unless it is shown that such failure is due to reasonable_cause and not due to willful neglect there shall be added to the amount_required_to_be_shown_as_tax on such return percent of the amount of such tax if the failure is for not more than month with an additional percent for each additional month or fraction thereof during which such failure continues not exceeding percent in the aggregate emphasis added thus for the period of mr schlussel’s non-filing he owes an additional per month up to a total of mr schlussel has not made any defense and he is liable for this addition_to_tax c failure to pay sec_6651 imposes an addition_to_tax for failure to pay the amount of tax shown on a return and the commissioner contends that mr schlussel is liable for this addition for the two years at issue the addition_to_tax under sec_6651 applies only when an amount of tax is shown on a return 120_tc_163 and the commissioner has the burden of production to show the filing of a return ie to show an amount shown as tax on a return sec_6651 a return made by the secretary under sec_6020 b --ie an sfr--is treated as the return filed by the taxpayer for purposes of determining the amount of the addition under sec_6651 sec_6651 the commissioner’s motion shows that the irs did prepare sfrs for mr schlussel in compliance with sec_6020 cf 127_tc_200 aff’d 521_f3d_1289 10th cir the commissioner has thus carried his burden of production under sec_7491 to show that mr schlussel is liable for the addition_to_tax under sec_6651 mr schlussel has not made any defense and he is liable for the failure-to-pay addition_to_tax d failure to pay estimated_tax sec_6654 imposes an addition_to_tax on an individual taxpayer who underpays his estimated_tax the commissioner determined this addition for mr schlussel’s and years a taxpayer has an obligation to pay estimated_tax for a particular year if he has a required_annual_payment for that year sec_6654 a required_annual_payment is defined in sec_6654 in pertinent part as the lesser of-- i percent of the tax_shown_on_the_return for the taxable_year or if no return is filed percent of the tax for such year or ii if the individual filed a return_for_the_preceding_taxable_year then percent of the tax_shown_on_the_return of the individual for the preceding_taxable_year thus the commissioner’s burden of production under sec_7491 requires him to produce for each year for which the addition is asserted evidence that the taxpayer had a required_annual_payment under sec_6654 and in order to do so he must demonstrate the tax shown on the taxpayer’s return for the preceding year or that the taxpayer filed no return for the year the preceding_taxable_year is for the year the preceding_taxable_year is and for neither of these preceding_taxable_year s did mr schlussel file a return consequently the commissioner carried his burden of production to show that mr schlussel is liable for the sec_6654 addition for and and he made no defense he is therefore liable for this addition for failure to pay estimated_tax iii failure to respond the foregoing discussion resolves this case on its merits in the alternative we would reach the same outcome by dismissing the case on our own motion for mr schlussel’s failure to comply with our orders of november and date directing him to file a response to the commissioner’s motion for summary_judgment as we advised him in our order tax_court rule d provides if the adverse_party ie mr schlussel does not so respond to a motion for summary_judgment then a decision if appropriate may be entered against such party --ie against mr schlussel in addition rule default and dismissal provides a default if any party has failed to plead or otherwise proceed as provided by these rules or as required by the court then such party may be held in default by the court either on motion of another party or on the initiative of the court thereafter the court may enter a decision against the defaulting party upon such terms and conditions as the court may deem proper b dismissal for failure of a petitioner properly to prosecute or to comply with these rules or any order of the court the court may dismiss a case at any time and enter a decision against the petitioner as we have noted the commissioner has the burden_of_proof on the issue of fraud but where as here his answer alleges specific facts sufficient to sustain a finding of fraud a decision of default can be entered pursuant to rule a against a petitioner who has failed to plead or otherwise proceed see 91_tc_1049 aff’d 926_f2d_1470 6th cir likewise where fraud is at issue a petition can be dismissed for failure properly to prosecute or to comply with these rules or any order under rule b where the commissioner come s forward either in the pleadings or at trial with sufficient facts to sustain a finding of fraud fifer v commissioner tcmemo_1993_44 the court explained to mr schlussel the nature of the commissioner’s motion for summary_judgment and the proper manner for responding to the motion and then showed extraordinary leniency by allowing him an additional six months to file his response--though that allowance substantially delayed decision in this case and consequently by operation of sec_6213 delayed the assessment against mr schlussel of the tax at issue having been granted the allowance he requested mr schlussel then made no filing in response to the court’s order he thus induced delay in these proceedings for no purpose this circumstance warrants dismissal of the case for failure to comply with the court’s order conclusion the commissioner is entitled to summary_judgment to reflect the foregoing an appropriate order and decision will be entered


internal_revenue_service number release date index number ---------------------------- ------------------------------ ------------------------------------------------------ ------------------- -------------------------------- ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number -------------------- refer reply to cc tege eb hw plr-128320-09 date october legend taxpayer ---------------------------------------------------------- ------------------------------------------------------- state county -------------------- --------------------------- trust -------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------------------- plan ---------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ------------------------ dear -------------- this is in reply to your letter dated date and subsequent correspondence in which you request various rulings on behalf of taxpayer with respect to plan and trust facts taxpayer is a special purpose district organized and existing under the laws of state taxpayer is organized to operate a waterworks and sewer system for county and plr-128320-09 various municipalities within county as a body corporate and politic of state taxpayer is a political_subdivision of state taxpayer established the plan and adopted trust to provide health and dental benefits to its eligible retirees and their spouses taxpayer is the sole employer participating in plan taxpayer is authorized to amend_or_terminate plan plan currently provides all benefits through insurance contracts eligibility under plan is based on hire date years_of_service with taxpayer upon retirement and medicare eligibility benefits under plan are offered only to retired employees of taxpayer and their spouses the taxpayer’s liability for the cost of benefits for retirees depends on the retiree’s years_of_service with taxpayer a retiree is required to pay for spousal coverage taxpayer represents that there are no pre-tax salary reduction elections under plan in addition taxpayer represents that plan does not permit a cash-out of unused amounts or conversion of sick or vacation days to retiree health benefits taxpayer does not provide benefits to individuals who do not qualify as a retiree or spouse taxpayer created trust as a vehicle for funding retiree health benefits under plan currently trust assets consist of contributions made by taxpayer and investment_income trust assets are to be used exclusively for benefits under plan and for all reasonable and necessary expenses of administering trust private interests do not participate in trust no part of trust may be diverted to purposes other than the exclusive benefit of the participants and their beneficiaries taxpayer will have exclusive authority and discretion to manage and control the assets of trust but will delegate investment management of trust’s assets to the trustee pursuant to the terms of the trust agreement trust provides that taxpayer may amend trust at any time taxpayer may terminate trust only upon the payment of all trust obligations and expenses any remaining trust assets may be distributed in accordance with the direction of taxpayer taxpayer will amend trust agreement to provide that in no case will assets be distributed to an entity that is not a state a political_subdivision of a state or an entity the income of which is excluded from gross_income under sec_115 of the internal_revenue_code the code law and analysis sec_115 of the code provides that gross_income does not include income derived from any public_utility or the exercise of any essential government function and accruing to a state or any political_subdivision thereof plr-128320-09 in revrul_77_261 1977_2_cb_45 income from an investment fund established under a written declaration of trust by a state for the temporary investment of cash balances of the state and its participating political subdivisions was excludable from gross_income for federal_income_tax purposes under sec_115 the ruling indicated that the statutory exclusion was intended to extend not to the income of a state or municipality resulting from its own participation in activities but rather to the income of a corporation or other entity engaged in the operation of public_utilities or the performance of some governmental function that accrued to either a state or municipality the ruling points out that it may be assumed that congress did not desire in any way to restrict a state’s participation in enterprises that might be useful in carrying out projects that are desirable from the standpoint of a state government and which are within the ambit of a sovereign to properly conduct in addition pursuant to sec_6012 and the underlying regulations the investment fund being classified as a corporation that is subject_to taxation under subtitle a of the code was required to file a federal_income_tax return each year in revrul_90_74 1990_2_cb_34 the service determined that the income of an organization formed funded and operated by political subdivisions to pool various risks casualty public liability workers’ compensation and employees’ health is excludable from gross_income under sec_115 of the code in revrul_90_74 private interests neither materially participate in the organization nor benefit more than incidentally from the organization trust provides health benefits to retired employees of taxpayer a political_subdivision of state providing health benefits to current and former employees constitutes the performance of an essential government function based upon revrul_90_74 and revrul_77_261 trust performs an essential_governmental_function within the meaning of sec_115 of the code the income of trust accrues to taxpayer taxpayer is the sole participating employer in plan no private interests participate in or benefit from the operation of trust any distribution of remaining funds in trust to participating retirees upon the dissolution of trust satisfies an obligation the taxpayer has assumed with respect to providing health benefits to its retirees the benefit to the participating retirees is incidental to the public benefit see revrul_90_74 sec_61 of the code and sec_1_61-21 of the income_tax regulations provide that except as otherwise provided in subtitle a of the code gross_income includes compensation_for services including fees commissions fringe_benefits and similar items sec_106 of the code provides that gross_income of an employee does not include employer-provided coverage under an accident_or_health_plan plr-128320-09 sec_1_106-1 of the regulations provides that gross_income of an employee does not include contributions which his employer makes to an accident_or_health_plan for compensation through insurance or otherwise to the employee for personal injuries for sickness incurred by him his spouse or his dependents as defined in sec_152 the employer may contribute to an accident_or_health_plan either by paying the premium or a portion of the premium on a policy of accident_or_health_insurance covering one or more of his employees or by contributing to a separate trust or fund including a fund referred to in sec_105 which provides accident and health benefits directly or through insurance to one or more of his employees however if the insurance_policy trust or fund provides other_benefits in addition to accident or health sec_106 applies only to the portion of the contributions allocable to accident or health benefits coverage provided under an accident_and_health_plan to former employees and their spouses and dependents is excludable from gross_income under sec_106 see revrul_62_199 1962_2_cb_32 revrul_82_196 1982_2_cb_53 sec_105 provides that except as otherwise provided in sec_105 amounts received by an employee through accident_or_health_insurance for personal injuries or sickness shall be included in gross_income to the extent such amounts are attributable to contributions by the employer which were not includible in the gross_income of the employee or are paid_by the employer sec_105 provides that except in the case of amounts attributable to and not in excess of deductions allowed under sec_213 relating to medical_expenses for any prior taxable_year gross_income does not include amounts referred to in subsection a if such amounts are paid directly or indirectly to the taxpayer to reimburse the taxpayer for expenses_incurred by him for the medical_care as defined in sec_213 of the taxpayer his spouse and his dependents as defined in sec_152 of the code based on the information submitted and representations made we conclude as follows as of the effective date of the proposed amendment to trust as described above trust income will be derived from the exercise of an essential_governmental_function and will accrue to a state or political_subdivision thereof for purposes of sec_115 accordingly trust’s income will be excludable from gross_income under sec_115 of the code contributions paid to plan and payments made from plan which are used exclusively to pay for the accident or health coverage of retired employees and their spouses are excludable from the gross_income of retired employees and spouses under sec_106 and sec_105 of the code plr-128320-09 no opinion is expressed concerning the federal tax consequences of plan or trust under any other provision of the code other than those specifically stated herein no opinion is expressed as to the classification of trust as a_trust for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely harry beker chief health welfare branch office of division counsel associate chief_counsel tax exempt and government entities


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 b2 plr-103990-14 date date legend x a ----------------------------------- ------------------------ ------------------- --------------------------------- trust --------------------------------------------------- ---------------------------- state -------------- date date date ----------------------- ---------------------- ---------------------- dear -------------------- this responds to a letter dated date submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated in state on date and elected to be treated as an s_corporation effective date trust a_trust that was treated under subpart e of part i of subchapter_j of chapter of the code as entirely owned by a became a shareholder of x on date on date trust’s grantor_trust status terminated trust qualified under sec_1361 as an eligible x shareholder after date x represents that trust was eligible to be an electing_small_business_trust esbt plr-103990-14 within the meaning of sec_1361 effective date however the trustee of trust failed to properly file the esbt election as a result trust was not a permissible shareholder and x’s s_corporation_election terminated on date x represents that the failure_to_file the esbt election for trust and the resulting termination of x’s s_corporation_election was not motivated by tax_avoidance or retroactive tax planning x represents that after it discovered the possible terminating event x initiated corrective action x and its shareholders have agreed to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such 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 the ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary based solely on the facts submitted and the representations made we conclude that the termination of x’s s_corporation_election on date was inadvertent within the meaning of sec_1362 accordingly pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from date and thereafter provided x’s s_corporation_election was valid and provided that the election was not otherwise terminated under sec_1361 this ruling is contingent on the trustee of trust filing an electing_small_business_trust esbt election pursuant to the procedures in sec_1 m with an effective date of date with the appropriate service_center within days of the date of this letter a copy of this letter should be attached to the esbt election if x or its shareholders fail to treat themselves as described above this letter shall be null and void except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the code specifically we express no opinion as to whether x is otherwise eligible to be treated as an s_corporation or trust is eligible to be treated as an esbt plr-103990-14 this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely bradford r poston senior counsel branch passthroughs special industries


t c summary opinion united_states tax_court robert e austin jr petitioner v commissioner of internal revenue respondent docket no 12118-04s filed date robert e austin jr pro_se michael d zima for respondent couvillion special_trial_judge this case was heard pursuant to sec_7463 in effect when the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority some of the facts were stipulated those facts with the annexed exhibits are so found and are incorporated herein by 1unless otherwise indicated subsequent section references are to the internal_revenue_code as amended reference at the time the petition was filed petitioner was a legal resident of leesburg florida petitioner seeks a review under sec_6320 of the filing of a notice of lien under sec_6323 with respect to his federal income taxes for the years and as of date petitioner’s unpaid tax_liabilities were dollar_figure dollar_figure and dollar_figure respectively for and prior to respondent’s issuance of the tax_lien notice petitioner had made an offer_in_compromise for settlement of these liabilities however that offer was not considered because petitioner was not compliant in the filing of hi sec_2002 federal_income_tax return and additionally had not made estimated_tax payments for the year petitioner filed federal_income_tax returns for the years at issue for the year petitioner filed as a single_person petitioner married carolyn bair during and they filed joint federal_income_tax returns for the other years at issue and petitioner’s spouse is not a party in this proceeding petitioner is an attorney and is engaged in the practice of law no notices of deficiency were issued with respect to the years at issue the unpaid taxes arise from underpayments by petitioner of the taxes shown on his income_tax returns following issuance by respondent’s notice of the filing of a tax_lien with respect to the years at issue and petitioner timely requested a hearing that hearing was conducted by telephone between respondent’s appeals officer and petitioner’s certified_public_accountant mr shaw a notice_of_determination was thereafter issued based upon the failure to make payments on the amounts due and the failure to offer a viable collection alternative however in the course of the contacts between petitioner’s representative and the appeals officer the appeals officer believed that petitioner was having financial difficulties and requested that petitioner provide him with financial information by a certain date that information however was never provided and the appeals officer noted in the notice_of_determination since i received no financial information i could not determine a collection alternative the appeals officer concluded that issuance of the notice_of_determination was appropriate and petitioner thereafter filed his petition in this court timely petitioner did not challenge the underlying tax_liability with the appeals officer petitioner contends he is entitled to a carryover of net operating losses that his spouse sustained in a real_estate activity prior to their marriage and that these losses offset the tax_liabilities that are the subject of this case petitioner therefore challenges the underlying deficiencies for the years at issue respondent however takes exception to petitioner’s claim as noted earlier there were no notices of deficiency issued to petitioner for the years at issue and sec_6330 states b underlying liability --the person may also raise at the hearing challenges to the existence or amount of the underlying tax_liability for any_tax period if the person did not receive any statutory_notice_of_deficiency for such tax_liability or did not otherwise have an opportunity to dispute such tax_liability petitioner did not avail himself of the opportunity to challenge the lien and the tax_liability with the appeals officer in fact the appeals officer left the door open for such a challenge as he indicated a belief in his determination notice that petitioner may have been experiencing financial difficulties and held the door open for that specific reason at that time petitioner would have had the opportunity to challenge the underlying liabilities he failed to do that the underlying tax_liabilities therefore are not properly at issue when as here the underlying liability is not at issue this court reviews the commissioner’s determination for abuse_of_discretion 114_tc_604 accordingly the court holds that there was no abuse_of_discretion by respondent in determining that collection could proceed with respect to petitioner’s liabilities for the years in question reviewed and adopted as the report of the small_tax_case division decision will be entered for respondent