internal_revenue_service date number info release date uilc cc psi 1-cor-122437-01 we are responding to your correspondence requesting relief in order to establish date as the effective date for your s_corporation_election it appears that you have stated reasonable_cause for failing to file a timely election although we are unable to respond to to your request as submitted this letter provides useful information relating to your request announcement copy enclosed provides guidance on seeking relief for late s_corporation elections and inadvertent invalid s_corporation elections generally to request relief for a late or invalid s_corporation_election you must request a private_letter_ruling from the national_office the procedures for requesting a private_letter_ruling are set out in revproc_2001_1 copy enclosed in addition revproc_2001_1 requires taxpayers to submit a user_fee along with their ruling_request the standard user_fee for a private_letter_ruling is dollar_figure however taxpayers with gross_income of less than dollar_figure million on their last-filed month tax_return qualify for a reduced user_fee in the amount of dollar_figure if you qualify for the reduced fee you must include a statement certifying your eligibility please review appendix b for a sample format for requesting a private_letter_ruling if you decide to submit a formal request for a private_letter_ruling please include the proper user_fee and refer your request to our office by adding the following to the address attn cc pa t p o box ben franklin station washington dc direct to cc psi room by way of introduction the irs has a new small_business website which provides specific information and various links to useful non-irs sites visit this new site at www irs gov smallbiz additionally you can order a single free copy of the small_business resource guide cd-rom by calling the cd-rom provides critical tax information including forms instructions and publications as well as valuable business information from a variety of government agencies non-profit organizations and educational institutions please keep this letter with your tax records and feel free to provide a copy of it to your authorized representative we hope that the above information proves helpful sincerely yours s dianna k miosi dianna k miosi chief branch associate chief_counsel passthroughs and special industries enclosures announcement revproc_2001_1


office_of_chief_counsel internal_revenue_service memorandum cc corp b06 posts-152340-03 ----------------- number release date uilc date date to ------------------------------ ------------------------------- ------------------ ------------------------------------------- from -------------------------- ------------------------- -------------------- -------------- subject --------------------------------------------- this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 chief_counsel_advice may not be used or cited as precedent moreover this memorandum constitutes field_service_advice and therefore it is not binding on examination or appeals and is not a final case determination legend corporation business individual individual trust trust trust voting_trust year year year year a b c -------------------------------- ----------- ------------------------ ------------------------- -------------------- -------------------------- -------------------- ------------------------------------ ------- ------- ------- ------- -------------- -------------- ----------- posts-152340-03 d e f g h i j k l m aa bb cc dd ee ff gg hh ii jj kk ll mm nn oo pp qq rr -------------- -------------- -------------- -------------- -------------- --------- -------------- -------------- ----------- -------------- ---- ---- ---- ------ ------ ------ ------ ------ ------ ------ ---- ------ ------ ---- ------ ------ ---- ------ i issue whether certain redemptions of stock made in order to pay the tax owed on a prior gift of stock should be treated as not essentially equivalent to dividends or as sales or exchanges under sec_302 of the internal_revenue_code ii facts corporation a large family-owned company engaged in business ha sec_2 classes of stock outstanding voting class a common and nonvoting class b common its shareholders are individual sec_1 and father and mother hereinafter collectively referred to as the taxpayers trust trust and trust collectively referred to herein as the children’s trusts individual 1’s siblings and their issue hereinafter all trusts were established at various times for the benefit of the taxpayers’ children posts-152340-03 referred to as shareholder family and certain management employees and members of corporation’s board_of directors in year corporation’s board_of directors became concerned that the deaths of the taxpayers would cause corporation to either partially liquidate or go public in order to pay the large estate_tax that would be due to protect the company the taxpayers began to make large gifts of shares of their class a common_stock to the children’s trusts which then transferred the gifted stock to a newly-formed voting_trust in year the taxpayers made a gift of a shares of class a common_stock to the children’s trusts in year the taxpayers caused corporation to redeem approximately b shares of their class a common_stock to pay for the gift_tax on this transfer in year the taxpayers caused corporation to redeem an additional c shares of class a common_stock to pay for the income_tax due on the year redemption initially the taxpayers treated the redemptions as dividends but later amended their year and year returns treating the redemptions as sales and exchanges and requested refunds the request was denied and the case is now before an appeals officer prior to the year gift taxpayers held a majority d shares of the voting class a common_stock and e shares of the nonvoting class b common_stock of corporation representing aa of the voting class a and bb of the nonvoting class b stock the children’s trusts held f shares of the voting class a common_stock and no shares of nonvoting class b common_stock and the shareholder family held g shares of nonvoting class b common_stock and the management and board held h of nonvoting class b common_stock of corporation neither the shareholder family nor the management and board held any voting_stock in corporation following the year redemption the taxpayers held i shares of voting class a common_stock and j shares of nonvoting class b common_stock representing cc of the voting class a and dd of the nonvoting class b common_stock the voting_trust held k shares of the voting class a common_stock and no shares of nonvoting class b common_stock the shareholder family held l shares of nonvoting class b common_stock and the management and board held m of nonvoting class b common_stock note that the shareholder family and the management and board each held less stock in corporation immediately after the year redemption than they held immediately before the year gift transfer the trustees of the voting_trust are certain members of the corporate governance committee2 of the board_of directors of corporation no member of the corporation’s corporate governance committee cgc nominates the members of corporation’s board_of directors the cgc has a minimum of and a maximum of members which include sec_1 member of the taxpayers’ family and at large directors one of which can be individual but only if he is not the president of corporation posts-152340-03 taxpayers’ family is eligible to serve as a trustee of the voting_trust the voting_trust trustees hold the legal_title to the voting class a common_stock in the corpus of the voting_trust but the children’s trusts remain the beneficial owners of that stock the voting_trust trustees have all the rights of shareholders except that they must vote for the following persons as directors of corporation individual a second member of the taxpayers’ family but only if the cgc determines that another family_member may serve in addition to individual the president of corporation importantly the president is individual individual but only if he is not the president and up to individuals who are not members of the taxpayers’ family the trust certificate holders ie the children’s trusts have the right to receive any dividends_paid on the shares of voting class a common_stock held in the voting_trust they do not have any power to initiate or cause corporation to engage in major transactions only corporation’s board_of directors have that power but they can veto a vote of the voting_trust trustees if the trustees vote in favor of a major transaction a major transaction is defined as an initial_public_offering ipo of corporation’s stock any transaction that results in less than of corporation stock being held by the members of the taxpayers’ family or more than of the outstanding shares of voting class a common_stock being held by nonfamily members sale of all or substantially_all of corporation’s assets and dissolution or liquidation of corporation the voting_trust will terminate upon the occurrence of any of the following events any closing of any major transaction except an ipo of shares of corporation’s stock or unanimous vote of the voting_trust trustees or an vote of the trust certificate holders to terminate the trust if the book_value of corporation plus any distribution is less than two thirds of corporation’s book_value as of the end of any five preceding fiscal years iii taxpayers’ position the taxpayers argue that the redemptions should be treated as sales or exchanges under sec_302 for the following reasons the taxpayers argue that under 397_us_301 a redemption must result in a meaningful the board_of directors of corporation consists of but can be as many a sec_11 members five directors constitute a quorum if a quorum is attained then an affirmative vote of the majority present constitutes an act of the board posts-152340-03 reduction of the shareholder’s proportionate interest in the corporation in order to avoid dividend equivalency under sec_302 of the code the taxpayers further contend that this determination is made by considering the reduction in their stock interest caused by both the year gift and the year and year redemptions because they were made under a firm and fixed plan the taxpayers posit that there is no direct authority on the treatment of the transfer of shares to a voting_trust in the context of sec_302 the taxpayers indicate that the authorities that exist provide that a determination whether the redeeming shareholder exerts voting control_over the shares transferred must be made based on all the facts and circumstances as an alternative argument the taxpayers argue that the transfer of the voting_stock to the voting_trust should be viewed as converting the voting_stock to nonvoting_stock iv law and analysis firm and fixed plan in determining whether a redemption qualifies for exchange treatment under one of the tests set forth in sec_302 of the code the service and the courts aggregate and treat as one transaction several separate but related transactions that are taken pursuant to a firm and fixed plan see revrul_55_745 1955_2_cb_223 separate transactions treated as one in determining sec_302 issue revrul_75_447 1975_2_cb_113 separate transactions treated as one in determining sec_302 issue revrul_84_114 1984_2_cb_90 separate transactions treated as one in determining whether there was a meaningful reduction of a shareholder’s interest in the corporation for purposes of sec_356 see also 425_f2d_921 2d cir separate transactions which are parts of a single_plan are considered together in applying the dividend equivalency test of sec_302 neidermeyer v commissioner 62_tc_280 aff’d 535_f2d_500 9th cir separate transactions treated as one in determining sec_302 issue 77_tc_679 separate transactions treated as one in determining sec_302 issue the taxpayers argue that in determining whether certain transactions are parts of a firm and fixed plan the courts apply the following test the firm and fixed plan should i be communicated to all interested parties ii impose obligations on the parties to fulfill the plan and iii be in writing although this is not an absolute requirement 72_tc_751 aff’d 647_f2d_169 9th cir the taxpayers argue that the year gift and the year and year redemptions are clearly parts of a firm and fixed plan because the transactions meet all the requirements of the test from the information we have reviewed we agree with the taxpayers that it was clearly their intention that both the year gift of stock and the year sec_3 and redemptions be parts of a single_plan to transfer control of the company to the taxpayers’ children posts-152340-03 therefore we conclude that the gift and the redemptions were parts of a firm and fixed plan and therefore should be aggregated and treated as one transaction no direct authority on transfers to voting trusts the taxpayers argue that voting control is determinative in the application of the dividend equivalency test for example in revrul_85_106 1985_2_cb_116 a redemption was treated as equivalent to a dividend in the ruling although the redemption substantially reduced the redeemer’s dividend and liquidation rights it did not reduce the taxpayer’s right to control the corporation ie he could still control the corporation by acting in concert with other shareholders relying on control as the key factor in determining dividend_equivalence the taxpayers here argue that the transfer of their voting_stock to the voting_trust reduced their constructive control interest in corporation from ee4 to cc well within the reduction envisioned by code sec_302 and davis in further support of their contention that they no longer control corporation the taxpayers argue that the voting_trust provides elaborate corporate governance rules under which outside trustees permanently control the voting power of the stock the taxpayers contend that because the trustees are sophisticated business leaders and due to their fiduciary duties these trustees are unlikely to be influenced by the taxpayers moreover there is no evidence that the voting_trust trustees are or would be subject_to undue influence by the taxpayers and thus would fail in their fiduciary duties revrul_71_262 1971_1_cb_110 holds that the holder of a voting_trust certificate the beneficiary of the voting_trust and not the trustee of the voting_trust was the owner of the shares for purposes of sec_302 of the code this ruling appears to be a stumbling block to the taxpayers nonetheless the taxpayers attempt to distinguish the ruling they argue that it involved a transaction tested only under sec_302 the taxpayers note that the service has expanded the application of the ruling to sec_302 transactions but has not applied it to sec_302 transactions taxpayers argue that the expansion of the ruling to sec_302 transactions is unwarranted because the test under sec_302 is a facts_and_circumstances_test which is unlike the mechanical tests of sec_302 and b we agree with the taxpayers’ assertion that control is a key factor in determining whether there has been a meaningful reduction of a shareholder’s proportionate interest we take issue with the taxpayers’ assertion that they owned ee of the voting_stock immediately prior to the year transfer of a shares to the children’s trusts taxpayers’ own chart shows ee owned directly and pp percent owned by attribution furthermore taxpayers fail to account for the qq of the voting_stock owned by the shareholder family which appears to have been redeemed sometime prior to the year gift transfer by our calculations the taxpayers owned directly and by attribution of the voting_stock immediately prior to the year gift transfer posts-152340-03 in a corporation for purposes of sec_302 of the code see revrul_85_106 1985_2_cb_116 nonetheless we do not agree with the taxpayers’ argument that the transfer of their voting_stock to the children’s trusts and the subsequent retransfer to the voting_trust reduced their voting control in corporation from ee to cc instead we conclude that the transfers to the voting_trust did not reduce their voting control in corporation at all the taxpayers’ assertion ie the dividend equivalency test differs from the mechanical ownership tests of code sec_302 and b because the dividend equivalency test is a facts and circumstances determination of the redeemer’s loss of ownership rights and control power whereas the mechanical ownership tests measure ownership percentage before and after the redemption and therefore require a bright- line rule as to who is the owner of particular shares is reminiscent of the taxpayer’s argument in davis see davis u s pincite there the taxpayer in asserting that sec_318 does not apply to determinations under sec_302 argued the result under sec_302 should be different because there is no explicit reference to stock ownership as there is in paragraphs and u s pincite the u s supreme court rejected this argument stating that the attribution_rules of sec_318 are applicable to the entire sec_302 including b u s pincite the court went on to state t he attribution_rules of sec_318 do apply and for the purposes of deciding whether a distribution is not essentially_equivalent_to_a_dividend under sec_302 taxpayer must be deemed the owner of all big_number shares of the company’s common_stock u s pincite emphasis added in so holding the court merely reinforced the notion that ownership of voting_stock is central to a sec_302 determination here the thrust of the taxpayers’ main argument is that applying a mechanical approach to determine dividend equivalency is anathema to the facts and circumstances approach of sec_302 of the code we disagree and note that the supreme court in davis applied the mechanical rules of sec_318 to determine that the taxpayer did not experience a meaningful reduction in his proportionate interest in the corporation as a result of the redemption of his stock u s pincite applying both the mechanical rules of sec_318 and the supreme court’s reasoning to the case here we conclude that the taxpayers must be deemed the owners of all the shares of the voting class a common_stock held by the voting_trust the children’s trusts constructively own the class a common_stock including the voting attributes of that stock and thus the control inherent in the stock held by the voting_trust is attributed to the children’s trusts sec_318 of the code as beneficiaries of the children’s trusts the taxpayers’ children constructively own the class a common_stock and voting rights that the children’s trusts are deemed to posts-152340-03 own id the taxpayers constructively own the class a common_stock and voting rights constructively owned by their children sec_318 of the code accordingly the taxpayers’ control of corporation both directly and by attribution is both before and after the transfer to the voting_trust having established that ownership is central to any code sec_302 determination the attribution_rules of sec_318 apply to sec_302 determinations and the taxpayers constructively own the voting class a common_stock held in the voting_trust the only way the taxpayers can hereinafter prevail is if the application of the attribution_rules of sec_318 were somehow barred or mitigated in this instance they are not the service’s position is that there are no exceptions to the application of the attribution_rules of sec_318 in the context of sec_302 determinations other than sec_318 and c and sec_302 we note that in one post-davis case the first circuit_court of appeals concluded that family_hostility is a factor mitigating the constructive_ownership rules of sec_318 in determining dividend equivalency under sec_302 robin 510_f2d_43 1st cir we further note however that the service has stated that it will not follow the first circuit's decision in robin haft trust revrul_80_26 1980_1_cb_67 35_tc_950 nonacq the tax_court and the fifth circuit_court of appeals have also refused to follow robin haft trust 87_tc_1 contra to robin haft trust metzger trust v commissioner 693_f2d_459 5th cir contra to robin haft trust cert_denied 463_us_1207 regarding the taxpayers’ argument that it would be inappropriate to apply the holding of revrul_71_262 to determinations under sec_302 of the code we note that the language of the ruling does not limit its application only to sec_302 and b transactions the language provides the holder of a voting_trust certificate is the owner of his shares of stock held by a voting_trust and is the redeeming shareholder for purposes of sec_302 of the code emphasis added thus the literal language of the ruling clearly manifests that it applies to all sec_302 determinations including determinations made under sec_302 moreover determinations under sec_5 we note that the taxpayers would most likely concede that they constructively own the stock in the voting_trust but would nonetheless argue that the terms of the voting_trust indenture effectively cut off the voting attributes from the underlying stock thus they constructively own the stock but not the voting attributes we disagree we conclude that although the words control and ownership are not synonymous nonetheless ownership is control likewise beneficial_ownership is control if you own it you control it posts-152340-03 b b and b are made with the same purpose whether the transaction should be treated as a sale_or_exchange or should be accorded dividend treatment thus we see no reason why the ruling should not be extended to the current case transfer to trust causes the voting_stock to become nonvoting_stock alternatively the taxpayers argue that the voting_trust effectively transmogrifies the voting class a common_stock to nonvoting class a common_stock if the taxpayers are right they are not then the only voting_stock outstanding is the cc held by them directly following the logic train of taxpayers’ argument immediately prior to the transfer all shares of voting class a common_stock held by the children’s trusts to the voting_trust the taxpayers owned of voting class a stock outstanding cc directly and rr by attribution immediately_after_the_transfer the taxpayers owned of voting class a common_stock directly and zero by attribution we fail to see how this argument helps the taxpayers moreover although the taxpayers cite no authorities in the sec_302 context they do cite to several analogous authorities in support of their argument that the transfer to the voting_trust converts the voting_stock to nonvoting_stock they cite to revrul_72_72 1972_1_cb_104 and argue that the ruling stands for the proposition that stock placed in a voting_trust for five years with no power by the beneficiary to remove the stock was not voting_stock in the hands of the acquirer of such stock taxpayers also cite to alumax v commissioner 165_f2d_822 11th cir taxpayers did not have voting control of its subsidiary for purposes of sec_1504 because the corporation’s certificate of incorporation conferred veto power to minority shareholders on matters traditionally decided by a majority vote of the board and 118_tc_32 denial of cfc status because significant powers granted to minority non-u s shareholders after reviewing the rulings and cases cited by the taxpayers we nonetheless disagree with their conclusions as stated above we believe that revrul_71_262 stands for the proposition that the holder of a voting_trust certificate is the owner of his shares of stock as well as all their attributes held by a voting_trust for code sec_302 purposes more importantly by its terms the definition of control for sec_302 purposes is more expansive than in the other areas eg sec_368 sec_1504 cited by the taxpayer in enacting sec_302 congress was concerned that taxpayers could easily avoid its mandate by making transfers to related parties while retaining effective_control of the we note that revrul_72_72 does not itself mention a voting_trust it does provide however that the seller of the voting_stock entered into an arrangement with the purchasers whereby he would retain an irrevocable right for years to vote the stock the voting restriction was printed on the stock certificates issued to the purchasers the service ruled that for purposes of sec_368 of the code the arrangement effectively was an issuance of nonvoting_stock that automatically converted to voting_stock at the end of years posts-152340-03 corporation thus congress made application of the attribution_rules of sec_318 mandatory to sec_302 determinations this was an important signal that transfers made to related parties are suspect and this explains the holding of revrul_71_262 in the reorganization area sec_318 is inapplicable thus control for reorganization purposes is determined solely based on what the holder owns in certain circumstances if the holder of stock does not hold the vote associated with the stock such stock is not treated as voting_stock see revrul_72_72 the rule_of revrul_72_72 however is not extended to all situations for example in revrul_75_95 1975_1_cb_114 two shareholders are treated as the owners of stock for purposes of determining whether the continuity-of-interest requirement of sec_1 is met even though they transferred the voting rights associated with the stock to a voting_trust revrul_75_95 seems to apply the sec_318 attribution concept in the context of sec_368 determination from the authorities cited by the taxpayers and the authorities we have found the conclusion seems to be that voting_stock remains voting_stock even if the voting rights to the stock are transferred to a party related to the shareholder see revrul_71_262 and revrul_75_95 if however there is true alienation of the voting attributes the voting_stock may be treated as nonvoting_stock see revrul_72_72 alumax and framatone connectors usa inc supra in the current case the transfer of the stock_rights was made to a related_party ie a_trust albeit a voting_trust therefore we conclude that the transfer does not cause the voting_stock to become nonvoting additionally in determining whether the taxpayers experienced a meaningful reduction of their proportionate interest in corporation we must not look only at the number of shares the taxpayers had redeemed but we must also take into account redemptions of stock held by other shareholders those whose shares are not attributable to the taxpayers during the same period we do this in order to compare the taxpayers’ proportionate interest in corporation at the beginning of this period to the taxpayers’ proportionate interest in corporation at the end of the period during the period from the day immediately prior to the year gift transfer to the day after the year redemption the other shareholders experienced a drop in their proportionate stock interest in corporation from ff to gg compare that with the taxpayers who during this same period experienced an increase in their proportionate stock interest both direct and by attribution in corporation from hh of the total corporation stock outstanding both voting and nonvoting to ii thus despite a transfer and two redemptions of their proportionate interest of the voting_stock the taxpayers’ actual proportionate interest in the total stock of corporation both voting and nonvoting increased see 61_tc_398 immediately before the year the taxpayers directly owned jj of corporation’s total stock outstanding and by attribution the stock owned by their children kk and the children’s trusts ll thus they owned directly and constructively hh jj kk ll hh of corporation’s total stock outstanding immediately after the year redemption the taxpayers directly owned mm of posts-152340-03 remanded 510_f2d_43 1st cir supplemental opinion 62_tc_145 imposing dividend treatment where percentage ownership increased from dollar_figure percent to dollar_figure percent after attribution_rules were applied due to concurrent redemptions from other shareholders see also 61_tc_109 imposing dividend treatment where interest increased after a redemption from percent to percent moreover these same facts show the taxpayers experienced as a result of the redemptions an increase in two of the three himmel8 factors - the right to participate in corporation’s current earnings and accumulated surplus and the right to share in the net assets on corporation’s liquidation in revrul_75_502 1975_2_cb_111 to determine what constitutes a meaningful reduction of interest for purposes of sec_302 of the code the service defined the shareholder’s interest in a corporation to be the right to vote and thereby exercise control the right to participate in current earnings and accumulated surplus and the right to share in net assets on liquidation accordingly under a facts_and_circumstances_test of sec_302 of the code the taxpayers cannot be said to have experienced a meaningful reduction of their proportionate interest in corporation v conclusion the year and year redemptions to pay the gift_tax on the year gift should be treated as essentially equivalent to dividends under sec_302 because the taxpayers did not experience a meaningful reduction in their proportionate interests in corporation their ownership direct and by attribution of the voting class a common_stock immediately before the year gift transfer was their ownership direct and by attribution of the voting class a common_stock immediately after the year redemption likewise was this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call -----------------------or --------------------------at --------------------- if you have any further questions corporation’s total stock outstanding and by attribution the stock owned by their children nn and the children’s trusts oo thus they owned directly and constructively ii dd nn oo ii of corporation’s total stock outstanding note that all the stock held by the voting_trust is attributable to the taxpayers under code sec_318 even assuming the voting_trust affects a relinquishment of the voting attributes of stock ownership reference to the factors set forth in 338_f2d_815 2d cir


department of the treasury internal_revenue_service washington d c t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n contact person identification_number telephone number number release date se t eo ra t date date uil number employer_identification_number legend r s a xx f dear ------------------- you request a ruling under sec_509 of the internal_revenue_code facts on date you were recognized as exempt under sec_501 of the code and described in sec_509 you were organized to i promote the development of the private sector of the country of r including small businesses the agricultural sector and joint ventures with united_states through loans grants equity investments feasibility studies technical assistance training insurance guarantees and other measures and ii to carry out all other purposes and policies of s pursuant to the s you were designated as an organization eligible to receive grants from a between and a transferred millions of dollars to you to facilitate the achievement of your mandate under s the transfer of these funds was made pursuant to a grant agreement between you and a in your board_of directors determined you had accomplished many of your objectives after a period of consultations with various countries and entities your winding up and liquidation plan was approved which provided that i between and you would make annual distributions to the treasury of a certain country ii a new entity f would be established to advance the purposes of s and build upon your programs and iii you would enter into a grant agreement with f whereby over the course of three years you would make large annual distributions to f accordingly your board began the process of winding down and you completed the transfer of the entire dollar_figurexx million to f currently you maintain a small portfolio of micro loans which pay dividend and interest_income you continue to liquidate most of your other holdings in order to permit you to make additional transfers to your endowment you continue to monitor and review the operations of f issue sec_1 you are not a private_foundation within the meaning of sec_509 of the code because the annual receipt of dividend and interest_income from your debt and equity investments in r are treated as gross_receipts your income generated by the annual receipt of interest_income from investments undertaken pursuant to the winding up and liquidation plan should be treated as gross_receipts pursuant to sec_509 of the code based on the gross_receipts earned by you between and you are currently not a private_foundation within the meaning of sec_509 of the code because you are described in sec_509 law sec_509 of the code requires an organization described in sec_509 must normally receive more than one-third of its support in each taxable_year from any combination of i gifts grants contributions or membership fees and ii gross_receipts from an activity that is not an unrelated_trade_or_business within the meaning of sec_513 exclusive of receipts from any person or from any governmental agency in any taxable_year to the extent such receipts exceed the greater of dollar_figure or one percent of the organization’s support in such taxable_year sec_1_509_a_-3 of the income_tax regulations provides that in distinguishing the term gross_receipts from the term grants whether from a governmental_unit a nonprofit organization or a profit making organization the term gross_receipts means amounts received from an activity that is not an unrelated_trade_or_business if a specific service facility or product is provided to serve the direct and immediate needs of the payor rather than primarily to confer a direct benefit upon the general_public in general payments made primarily to enable the payor to realize or receive some economic or physical benefit as a result of the service facility or product obtained will be treated as gross_receipts with respect to the payee sec_509 a -3 m of the regulations provides for purposes of sec_509 of the code where the charitable purpose of an organization described in sec_501 is accomplished through the furnishing of facilities for a rental fee or loans to a particular class of persons such as aged sick or needy persons the support received from such persons will be considered 'gross receipts' within the meaning of sec_509 from an activity which is not an unrelated_trade_or_business rather than 'gross investment_income ' however if such organization also furnishes facilities or loans to persons who are not members of such class and such furnishing does not contribute importantly to the accomplishment of such organization's exempt purposes aside from the need of such organization for income or funds or the use it makes of the profits derived the support received from such furnishing will be considered 'rents' or 'interest' and therefore will be treated as 'gross investment income' within the meaning of sec_509 unless such income is included in computing the tax imposed by sec_511 the provisions of this paragraph may be illustrated by the following example example x an organization described in sec_501 is organized and operated to provide living facilities for needy widows of deceased servicemen x charges such widows a small rental fee for_the_use_of such facilities since x is accomplishing its exempt_purpose through the rental of such facilities the support received from the widows is considered 'gross receipts' within the meaning of sec_509 however if x rents part of its facilities to persons having no relationship to x's exempt_purpose the support received from such rental will be considered 'gross investment income' within the meaning of sec_509 unless such income is included in computing the tax imposed by sec_511 revrul_74_587 1974-2c b held that an organization that devoted its resources to programs to stimulate economic development in economically depressed high density urban areas inhabited mainly by low-income minority or other disadvantaged groups qualified for exemption under sec_501 the organization made loans and purchased equity interests in businesses unable to obtain funds from conventional sources because of financial risks associated with their location and or because of being owned by members of a minority other disadvantaged group the organization established that its investments were not undertaken for profit but to advance its charitable goals funds for its program were obtained from foundation grants and public contributions rationale you were created to make loans and invest in r you received sec_501 exempt status because you were lessening the burdens of government see revrul_74_587 supra an exempt_organization such as you that makes loans and purchases equity interests in various businesses will receive dividend and interest_income as a result of the performance of its exempt_function sec_1_509_a_-3 of the regulations describes the income you received from to as gross_receipts because the amounts you received are from an activity that is not an unrelated_trade_or_business and is the result of your provision of a specific service or product that serves the direct and immediate needs of the payor see also sec_509 a -3 m of the regulations that provides for purposes of sec_509 of the code where the charitable purpose of an organization described in sec_501 is accomplished through loans to a particular class of persons such as aged sick or needy persons the support received from such persons will be considered gross_receipts accordingly this support would allow you to be described in sec_509 of the code because you normally receive more than one-third of your support from gross_receipts conclusion accordingly based on the information furnished we rule as follows you are not a private_foundation within the meaning of sec_509 of the code because the annual receipt of dividend and interest_income from your debt and equity investments in r are treated as gross_receipts your income generated by the annual receipt of interest_income from investments undertaken pursuant to the winding up and liquidation plan should be treated as gross_receipts pursuant to sec_509 of the code based on the gross_receipts earned by you between and you are currently not a private_foundation within the meaning of sec_509 of the code because you are described in sec_509 this ruling is based on the understanding there will be no material changes in the facts upon which it is based this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described this ruling is directed only to the organization that requested it sec_6110 of the code provides it may not be used or cited as precedent if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative sincerely s debra j kawecki esq manager exempt_organizations technical group


internal_revenue_service number release date index number ----------------------------------------------------------- ---------------------------------- ------------------------------- --------------------------- ------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-138313-13 date date x -------------------------------------------------------------------------------------------------------------------------- country ------------ date --------------------------- dear ------------ this responds to a letter dated date and subsequent information submitted on behalf of x requesting that the service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to file an election to be treated as a partnership the information submitted states x is an entity organized on date under the laws of country by several owners with limited_liability x intended to be treated as a partnership for federal tax purposes effective date however x did not timely file a form_8832 entity classification election sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes under sec_301_7701-3 except as provided in sec_301_7701-3 unless it elects otherwise a foreign eligible_entity is classified as an association if all members have limited_liability sec_301_7701-3 provides that for purposes of sec_301_7701-3 a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member plr-138313-13 sec_301_7701-3 provides that an election under sec_301_7701-3 will be effective on the date specified on form_8832 or on the date filed if no such date is specified on the form the effective date specified on form_8832 cannot be more than days prior to the date the form is filed and cannot be more than months after the date on which the form is filed sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 sets forth the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect to be treated as a partnership for federal tax purposes effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose this ruling is contingent upon x and its owner filing within days of this letter any and all required federal_income_tax and information returns consistent with the requested relief being effective date a copy of this letter should be attached to any such returns except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code plr-138313-13 this ruling is directed only to the taxpayer requesting 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 x’s authorized representative sincerely associate chief_counsel passthroughs special industries by ____________________________ bradford r poston senior counsel branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


number release date id office uilc cca-211229-10 -------------- from --------------------- sent thursday date pm to ------------------- cc --------------------- subject re question --------- i think corp c and corp d are related under a here is why under e brother's wife stock ownership in corp c is attributable to her husband brother thus brother own sec_50 of both corp c and corp d and sister own sec_50 of corp c and corp d too so individuals brother and sister each equally own of both corp c and corp d and together brother and sister own more than of these corps a sec_1563 requires is that how you see it too i am assuming brother and brother's wife are still married and not separated see e language where it talks about a spouse if they are not legally_separated or under a decree of separate_maintenance etc


internal_revenue_service number release date index number department of the treasury washington dc person to contact telephone number refer reply to cc psi 2-plr-117423-00 date date x a b d1 year dear this responds to your letter dated date written on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on d1 of year a represents that x’s shareholders intended for x to be treated as an s_corporation for federal tax purposes as of year x's first taxable_year a and b x’s founding shareholders instructed and relied upon x’s attorney and accountant to file a timely form_2553 election by a small_business_corporation for x for year however due to a miscommunication between x’s attorney and accountant each assumed that the other had filed the form_2553 for x as a result a timely form_2553 was not filed for x for year a represents that x and x’s shareholders filed their tax returns for year consistent with the treatment of x as an s_corporation sec_1362 of the code provides that if a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year plr-117423-00 based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation for x’s first taxable_year accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x’s year taxable_year a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x sincerely yours j thomas hines chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n contact person identification_number number release date uil uil uil uil dollar_figure date dear ------------ ruling on the proper treatment of contributions of business holdings by a disqualified_person which ultimately results in a combined ownership in excess of the permitted holdings under sec_4943 of the internal_revenue_code employer_identification_number contact number this is in response to a letter from a’s authorized representative who has requested a the information submitted shows that on date a was recognized as exempt from federal_income_tax under sec_501 of the code as an organization described in sec_501 and is a private_foundation within the meaning of sec_509 b and c are both founding and current directors of a they serve as uncompensated foundation managers due to their status as class one directors they will be substantial if not sole contributors to a b and c wish to contribute -- to --- percent of their interests in two partnerships to a c both d and e derive more than --- of their gross incomes from passive sources eg owns a --- percent interest in d b and c each own a ------ interest in e interest_income dividend income gain from sale of marketable equity securities and investment land and rental income sec_4943 of the code imposes on excess holdings of any private_foundation in a business_enterprise during any taxable_year which ends during the taxable_period a tax equal to percent of the value of such holdings sec_4943 defines the term excess_business_holdings to mean with respect to the holdings of any private_foundation in any business_enterprise the amount of stock or other interest in the enterprise which the foundation would have to dispose_of to a person other than a disqualified_person in order for the remaining holdings of the foundation in such enterprise to be permitted holdings business_enterprise which is not incorporated shall be determined under regulations prescribed by the secretary such regulations shall be consistent in principle with paragraphs and except that a in the case of a partnership or joint_venture profits interest shall be substituted for voting_stock and capital interest shall be substituted for nonvoting_stock b in the case of a proprietorship there shall be no permitted holdings and c in any other case beneficial_interest shall be substituted for voting_stock sec_4943 states that the term business_enterprise does not include a a functionally_related_business as defined in sec_4942 or b a trade_or_business at least percent of the gross_income of which is derived from passive sources to the foundation sec_4946 defines disqualified_person as including a substantial_contributor sec_4943 states that the permitted holdings of a private_foundation in any sec_4946 defines substantial_contributor as a person described in section sec_507 defines substantial_contributor in part as a person who contributed an aggregate amount of more than dollar_figure if it is more than percent of the annual total contributions further any person who is a substantial_contributor on any date shall remain a substantial_contributor for all subsequent periods d foundation sec_4946 defines foundation_manager as a disqualified_person sec_4946 defines foundation_manager as including an officer or director of the sec_4946 defines a disqualified_person as an owner of more than of i the total combined voting power of a corporation ii the profits interest of a partnership or iii the beneficial_interest of a_trust or unincorporated rated enterprise which is a substantial_contributor to the foundation sec_4946 defines a disqualified_person as a member_of_the_family of any individual described in subparagraph a b or c sec_4946 f and g defines a disqualified_person as a corporation a partnership or trust in which a persons described in subparagraph a b c or d holds more than percent of the voting power profit interests or beneficial_interest a has requested a ruling stating that the acceptance of the partnership interests from disqualified parties will not cause a to be subject_to the excess_business_holdings_excise_tax imposed by sec_4943 of the code due to the passive nature of gross_income received by each partnership b and c are disqualified persons with respect to a by serving as foundation managers and due to their roles as substantial if not sole contributors to a b and c wish to initially fund a with the donation of partial_interests in d and e the contribution of these partnership interests will result in combined business holdings in excess of the percent limit imposed by sec_4943 of the code however the gross_income of both partnerships is derived from passive sources eg interest_income dividend income gain from the sale of marketable equity securities and investment land and rental income thus the partnership interests will be excluded from the calculation of excess business holding in light of the definition of a business_enterprise as provided in sec_4943 of the code the definition excludes a trade_or_business at least percent of the gross_income of which is derived from passive sources as being considered a business_enterprise accordingly we rule that the acceptance by a of the partnership interests from disqualified parties will not cause a to be subject_to the excess_business_holdings_excise_tax imposed by sec_4943 of the code due to the passive nature of gross_income received by each partnership this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to foundation’s authorized representative a copy of this letter should be kept in foundation’s permanent records if there are any questions about this ruling please contact the person whose name and telephone are shown in the heading of this letter sincerely robert c harper jr manager exempt_organizations technical group


t c no united_states tax_court estate of algerine allen smith deceased james allen smith executor petitioner v commissioner of internal revenue respondent docket nos filed date during through decedent received royalties from exxon which she reported as income in exxon was ordered to make restitution for overcharging its customers exxon made restitution and in filed suit in district_court against decedent and other royalty interest owners for reimbursement of the portion of the royalties attributable to exxon's overcharges decedent contested exxon's claim decedent died on date on date the district_court determined that the royalty interest owners were liable to exxon for restitution of the portion of royalties based on exxon's overcharges the district_court referred the calculation of the amount of this liability to a special master in date exxon claimed that p owed a total of dollar_figure on its federal estate_tax_return filed date p claimed a deduction for dollar_figure pursuant to sec_2053 i r c on date p and exxon entered into a settlement agreement which resolved exxon's claim for a total amount of dollar_figure r determined that p's sec_2053 i r c deduction was limited to dollar_figure as a result of paying exxon an amount that decedent had previously reported as income p is entitled to tax relief pursuant to the provisions of sec_1341 i r c r determined that the income_tax benefit derived by p through application of sec_1341 i r c was an asset includable in the gross_estate held exxon's claim against decedent was uncertain and unenforceable as of the date of decedent's death p's deduction pursuant to sec_2053 i r c is limited to the amount_paid in settlement of the claim held further the income_tax benefit derived by p as a result of the application of sec_1341 i r c is an asset includable in the gross_estate p's deduction pursuant to sec_2053 i r c of its liability to exxon and its sec_1341 i r c relief based on payment of that liability are so inextricably linked that it would be inappropriate to consider one in the determination of the taxable_estate while excluding the other michael c riddle and harold a chamberlain for petitioner carol bingham mcclure for respondent opinion ruwe judge in docket no respondent determined an estate_tax deficiency of dollar_figure and an accuracy-related_penalty under sec_6662 a in the amount of dollar_figure in 1unless otherwise indicated all section references are to the internal_revenue_code in effect as of the date of decedent's death and all rule references are to the tax_court rules of continued docket no respondent determined a deficiency of dollar_figure in petitioner's federal_income_tax for the deficiency determined in docket no represents an alternative position taken by respondent to protect the government's interest in the event its position in docket no is not sustained after concessions the issues remaining for decision are whether petitioner's sec_2053 deduction for a claim against the estate is limited to the amount for which the claim was settled following decedent's death if petitioner is entitled to a sec_2053 deduction for the entire amount claimed on the federal estate_tax_return whether petitioner realized discharge_of_indebtedness income pursuant to sec_61 when it settled the claim in question for a lesser amount and whether the income_tax benefit derived by petitioner as a result of the application of sec_1341 is an asset which increases the gross_estate background this case was submitted fully stipulated pursuant to rule the stipulation of facts supplemental stipulation of continued practice and procedure 2respondent has conceded the accuracy-related_penalty under sec_6662 facts and stipulation of settled issues are incorporated herein by this reference algerine allen smith decedent died testate on date in texas james allen smith decedent's son is the executor of the estate mr smith resided in larchmont new york at the time he filed the petition in this case on date decedent as lessor entered into an oil gas and mineral lease with humble oil refining co humble pursuant to this lease agreement decedent retained a royalty interest in oil_and_gas production obtained from an 80-acre tract of land in wood county texas on date jessamine and frankie allen decedent's aunts also entered into oil_and_gas leases with humble pursuant to which they retained royalty interests from the oil_and_gas production obtained from certain tracts of land in wood county humble was subsequently acquired by exxon corporation exxon jessamine and frankie allen died in and respectively and decedent served as the independent executrix of both estates upon jessamine's death decedent inherited a portion of jessamine's interest in the leased property upon frankie's death decedent inherited all frankie's interest in the leased property as well as the remaining portion of jessamine's interest which frankie had previously inherited decedent's frankie's and jessamine's interests in the wood county property were part of a unit formation known as the hawkins field unit hfu the texas railroad commission which regulates oil_and_gas operations in texas approved the hfu for unitization on date in a unit agreement effective date interest owners in the area utilized oil_and_gas rights pertaining to the unitized formation the unit agreement embraces interests of approximately big_number royalty interest owner sec_3 and working_interest owners exxon is the sole unit operator of the hfu and possesses the exclusive right to conduct hfu operations pursuant to a unit operating_agreement between exxon and the other working_interest owners during the early operation of the hfu the federal government acting initially through the federal energy administration and later through the department of energy doe regulated the price of domestic_crude_oil through the application of two-tier price regulations under c f_r secs dollar_figure and dollar_figure producers were required to sell old crude_oil at the lower tier price and were allowed to sell new crude_oil at a higher price in date the doe filed suit against exxon as operator of the hfu the doe contended that exxon had misclassified crude_oil produced from the hfu which resulted in overcharges in violation of the doe's petroleum price regulations exxon 3decedent jessamine and frankie were royalty interest owners 4exxon was the hfu's largest working_interest owner vigorously defended against the doe's allegations nevertheless on date exxon announced to the hfu interest owners that it would begin to withhold amounts owed to the interest owners under exxon's posted prices for the oil produced in justification for tendering less than the amount due under exxon's classification of the oil exxon stated that it desired to create a fund for payment of any liability it might eventually have to the doe the amounts withheld represented the difference between the higher price charged by exxon and the lower price the doe contended was the maximum lawful selling_price exxon withheld these amounts from date to date the date on which oil prices in the united_states were decontrolled in response certain hfu royalty interest owners filed suit against exxon in date in the u s district_court for the district of texas tyler division arguing that exxon was required to pay them the full amount of their royalty jarvis christian college v exxon corp docket no ty-80-432-ca the jarvis christian litigation on date decedent individually and as executrix for the estate of jessamine allen along with frankie and other members of the allen family the allen parties filed a motion to intervene as party plaintiffs in the jarvis christian litigation on date the district_court filed an order granting leave to intervene on date the u s district_court for the district of columbia ruled that exxon had violated the two-tier pricing regulations 561_fsupp_816 d d c exxon i the district_court entered judgment in favor of the doe and ordered exxon to make restitution to the u s treasury treasury of the full amount of hfu overcharges plus interest arising from sales of hfu crude_oil for the period date through date the total amount of the judgment exceeded dollar_figure million on date the temporary emergency court_of_appeals affirmed the district_court 773_f2d_1240 temp emer ct app on date exxon paid the judgment which amounted to just under dollar_figure billion with interest the amount_paid consisted of dollar_figure in overcharges dollar_figure in prejudgment_interest and dollar_figure in postjudgment interest on date exxon filed suit in the u s district_court for the eastern district of texas tyler division against the owners of royalty and mineral_interests in the hfu exxon v arnold docket no ty-88-110-ca e d tex date exxon's suit was consolidated with the jarvis christian litigation at docket no ty-80-432-ca consolidated action exxon sought reimbursement from the interest owners of the 5hereinafter we shall refer to this consolidated action as the jarvis christian litigation amounts which it had paid to the treasury as a result of the doe litigation decedent individually and as the executrix of the estate of jessamine allen and frankie were parties to the suit the jarvis christian defendants vigorously contested exxon's claims on date the jarvis christian defendants filed a motion for judgment for lack of federal statutory or common_law claims asserting that neither federal statutory law nor common_law authorized any of exxon's claims against them on date the district_court issued an order granting an oral motion for reverse bifurcation the district_court ordered that the trial on the damages issue in the case would precede trial on the liability issue by order dated date the district_court directed the parties to file any motions for summary_judgment with respect to the issue of whether exxon had suffered any damages pursuant to this order on date the royalty and working_interest owners filed a joint motion for summary_judgment and memorandum in support of their motion against exxon in their accompanying memorandum the interest owners denied that any amounts were owed to exxon regardless of whether any liability under law could attach to them because exxon had not in fact suffered any loss in paying the approximately dollar_figure billion judgment 6the allen parties expressly adopted the joint motion for continued decedent died on date on date the district_court issued an order determining in part that the royalty interest owners were liable to exxon under federal common_law for restitution of overcharges received by them on account of the misclassified oil despite its previous order bifurcating the issues the district_court rendered summary_judgment on both the liability and damages issues the district_court then referred the calculation of damages to a special master in date michael riddle decedent's attorney for estate_tax purposes and james knowles her attorney in the jarvis christian litigation attended a meeting with representatives of exxon in houston texas at which exxon presented its calculation of the amounts owed by the allen parties exxon claimed a total of dollar_figure from decedent's_estate which included interest exxon had sought prejudgment_interest beginning in date and postjudgment interest beginning in date with respect to the amounts it had paid to the treasury in exxon i however in its date order the district_court in the jarvis christian litigation determined that exxon was only entitled to prejudgment_interest continued summary_judgment filed on date 7the amount claimed by exxon included amounts sought from jessamine's and frankie's interests which the decedent had inherited beginning on the date exxon paid the judgment in exxon i date and continuing until the judgment date in the jarvis christian litigation and thereafter for postjudgment interest on date the executor of decedent's_estate filed a united_states estate and generation-skipping_transfer_tax return form_706 on the return the entire dollar_figure sought by exxon was deducted as a claim against the estate pursuant to sec_2053 on date the special master in the jarvis christian litigation issued an order regarding the procedures to be followed in determining the damages if any concerning each defendant on date the allen parties filed a response to the special master's order wherein they objected to exxon's damage calculations on date petitioner and exxon entered into a settlement agreement with respect to the litigation pursuant to the settlement petitioner paid exxon dollar_figure and surrendered to exxon for a period of years frankie allen's royalty interest in the hfu which had a fair_market_value of approximately dollar_figure when assigned petitioner thus resolved exxon's disputed claim for a total amount of dollar_figure on date exxon and the allen parties filed a stipulation of dismissal on date the district_court ordered that all claims presented by the parties with respect to the litigation were dismissed discussion the first issue we must decide is whether petitioner is entitled to a deduction pursuant to sec_2053 in the amount reported on the estate_tax_return dollar_figure or in the amount ultimately paid to exxon in settlement of the relevant claim dollar_figure to do so we must determine whether events subsequent to the date of decedent's death are to be taken into account in establishing the amount of the deduction to which petitioner is entitled the internal_revenue_code imposes a federal estate_tax on the transfer of the taxable_estate of a decedent who is a citizen or resident_of_the_united_states sec_2001 and sec_2002 sec_2053 allows a deduction from the gross_estate for claims against the estate that are allowable by the laws of the jurisdiction under which the estate is administered sec_20_2053-4 estate_tax regs provides that the amounts that may be deducted as claims against a decedent's_estate are such only as represent personal obligations of the decedent existing at the time of his death only claims enforceable against the decedent's_estate may be deducted sec_20_2053-1 estate_tax regs disallows a deduction that is taken upon the basis of a vague or uncertain estimate petitioner argues that it is entitled to a deduction pursuant to sec_2053 for the entire amount reported on the estate_tax_return petitioner relies upon 279_us_151 in which the supreme court ruled that for purposes of determining the value of the deduction for a charitable_remainder a life tenant's premature death could not be substituted for the actuarial computation of the life tenant's life expectancy as of the date of the decedent's death the supreme court stated that the estate so far as may be is settled as of the date of the testator's death id petitioner contends that the supreme court's rationale in ithaca trust supports petitioner's position in the instant case in 78_tc_728 affd 720_f2d_1114 9th cir we reviewed the case law in this area and determined that the principle articulated in ithaca trust is generally applicable in cases involving the valuation of a claim that is valid and fully enforceable on the date of the decedent's death see 94_tc_829 on the other hand 8in 94_tc_829 and 78_tc_728 affd 720_f2d_1114 9th cir we reviewed the case law in this area and noted that all the cases dealing with postdeath events are not easily reconciled we see no need to continued postdeath events warrant consideration where the decedent's creditor has only a potential unmatured contingent or contested claim which requires further action before it becomes a fixed obligation of the estate estate of van horne v commissioner supra pincite where a claim is disputed contingent or uncertain as of the date of the decedent's death the estate is not entitled to a deduction until the claim is resolved and it is determined what amount if any will be paid it is this latter amount that is allowed as a deduction see eg 680_f2d_1248 9th cir 39_tc_371 affd sub nom 320_f2d_874 1st cir estate of cafaro v commissioner tcmemo_1989_348 in estate of cafaro v commissioner supra for instance the taxpayer claimed several deductions pursuant to sec_2053 which exceeded the amounts for which the estate ultimately settled the claims in issue and the commissioner disallowed these deductions to the extent they exceeded the amounts of the settlements this court found that the settlement of the claims indicates that rather than being a continued review all these prior cases in order to resolve the instant case 9one claim was settled before the taxpayer filed its federal estate_tax_return while the other was settled after the return had been filed estate of cafaro v commissioner tcmemo_1989_348 claim for a sum certain legally enforceable at the date of the decedent's death the claim was potential unmatured contested or contingent at the date of the decedent's death id as a result we concluded that postdeath events--ie the future settlements of the claims--had to be taken into account in determining the proper amounts of the deductions to which the estate was entitled in estate of taylor v commissioner t c pincite a husband and wife had entered into a separation agreement requiring the husband to pay dollar_figure a month to his wife for her life or until she remarried upon the husband's death the wife made a demand upon the executors for continuation of the monthly payments the estate refused the wife's claim on the ground that it was the intention of the parties to the separation agreement that the payments would cease with the death of the husband while the matter was in litigation the estate took a deduction of dollar_figure on its federal estate_tax_return which represented the present_value of the wife's right to receive dollar_figure monthly until she died or remarried the following year the wife remarried and approximately years thereafter the supreme judicial court of massachusetts ruled that the estate was liable for payments for the period up to the wife's remarriage pursuant to this decree the estate paid to the wife dollar_figure in satisfaction of her claim we upheld the commissioner's determination that the estate was only entitled to a deduction of dollar_figure ie the amount it actually paid we stated that because of the uncertainty as to whether the estate would ever pay any amount to alice the decedent's wife on her disputed claim the estate's liability was contingent and the outcome of such dispute must be looked to before the estate would be entitled to a deduction clearly the contesting of alice's claim was not a frivolous or capricious act but was based upon legal arguments which the estate deemed of sufficient importance to merit the attention of the highest court of massachusetts the value of the claim for deduction purposes was not reasonably ascertainable until the litigation ended and the estate finally recognized its liability to alice id pincite citations omitted on brief petitioner argues that exxon's claim was certain and enforceable on the date of decedent's death thereby entitling petitioner to deduct the entire amount of the claim in determining the value of decedent's taxable_estate petitioner posits several arguments in support of its position we shall address each one in turn first petitioner contends that the hfu interest owners' liability for the overcharges was the actual basis for the litigation in exxon i which was decided in petitioner asserts that exxon was required to make restitution only because it was deemed necessary for the effective enforcement of the oil pricing regulations thus petitioner maintains that exxon's claim was enforceable at the time of decedent's death we disagree the record clearly indicates that the issue in exxon i was whether exxon had overcharged its crude_oil purchasers for oil produced in the hfu contrary to petitioner's argument exxon i did not consider whether exxon had overpaid its royalty and working_interest owners in the hfu while exxon attempted to join the jarvis christian plaintiffs as indispensable parties its efforts were unsuccessful rather the jarvis christian plaintiffs were invited to intervene in exxon i if they desired 'an earlier determination' of their claims that exxon should continue paying them royalties based on the higher price under the two-tier system united_states v exxon corp f 2d pincite n in affirming the decision of the district_court in exxon i the temporary emergency court_of_appeals stated that the decision in no way affected any rights or responsibilities of other interest owners in the hfu see id pincite in addition the date joint motion for summary_judgment filed by the defendants in the jarvis christian litigation and adopted by the allen parties recognized as much in stating that the courts in exxon i explicitly said that exxon's liability was predicated solely upon its own misconduct and not upon any notion of vicarious liability arising out of obligations owed by other interest owners to the government petitioner argues that there is no doubt here about the legal enforceability of exxon's contractual claims for reimbursement of the overpayment of its oil royalties under the provisions of the leases during the price regulation under texas law petitioner's argument represents a dramatic shift from the position taken by the allen parties in the jarvis christian litigation in count ii of its complaint in that litigation exxon alleged that the hfu interest owners had breached their contractual obligations to exxon by refusing to restore the amounts of their overcharges however the allen parties denied any contractual breach on the part of the interest owners and contended that exxon was not entitled to any recovery from them the allen parties also adopted the date motion for summary_judgment and accompanying memorandum filed by the defendants in the jarvis christian litigation which stated that exxon mocks the fundamental equitable principles underlying this proceeding by even asking for restitution of the hfu overcharges when claims under a contract are contested as were exxon's in the instant case the claims are not enforceable within the meaning of sec_20_2053-4 estate_tax regs until it is eventually determined whether and to what extent the claims have ripened into enforceable claims deductible pursuant to sec_2053 see estate of van horne v commissioner t c pincite estate of taylor v commissioner t c pincite on date the district_court in the jarvis christian litigation issued an order determining in part that the royalty interest owners were liable to exxon under federal common_law for restitution of overcharges received by them with respect to the misclassified oil the district_court then referred the calculation of damages to a special master for determination on date exxon and the allen parties entered into a settlement agreement pursuant to which petitioner agreed to pay exxon dollar_figure in settlement of the litigation prior to the district court's order on date it was uncertain whether the royalty interest owners had any liability to exxondollar_figure prior to the settlement agreement on date the amount if any of petitioner's liability pursuant to the district court's order was also uncertaindollar_figure prior to the settlement petitioner did not accept or acknowledge any liability to exxon under any of exxon's theories and petitioner strenuously resisted exxon's claims in maintaining 10even then the district court's determination was subject_to appeal 11indeed we note that a substantial portion of the amount claimed by exxon during its settlement conference with the decedent's attorneys in date represented interest exxon was seeking prejudgment_interest beginning in date and postjudgment interest beginning in date with respect to the amounts it had paid to the treasury in satisfaction of the judgment in exxon i however in its date order the district_court in the jarvis christian litigation had determined that exxon was only entitled to prejudgment_interest beginning on date and ending on the date of judgment in the jarvis christian litigation and thereafter for postjudgment interest that it owed exxon nothingdollar_figure petitioner cannot now switch hats and attempt to show how meritorious exxon's claims actually were instead the settlement agreement of date serves as both exxon's and petitioner's assessment of the value of the now compromised claims petitioner further alleges that certain provisions of the unit and unit operating agreements provided exxon with an enforceable lien against the allen parties' interests in the hfu and entitled exxon to restitution of the overcharges cf propstra v united_states f 2d pincite4 we disagree the relevant provisions petitioner refers to address the relationship between exxon as operator of the hfu and the other working_interest owners in the hfu thus neither provision is applicable to the allen parties who in contrast were royalty interest owners in the hfu in addition we note that no provision of the unit operating_agreement is applicable to royalty interest owners as the agreement only addresses the relationship between exxon and the other working_interest owners in the hfu we also reject petitioner's attempt to find a lien within the allen parties' oil_and_gas leases the relevant provision in the leases stated in pertinent part 12for instance shortly after filing its federal estate_tax_return in date petitioner filed a document with the special master in the jarvis christian litigation objecting to exxon's damage calculations lessor hereby warrants and agrees to defend the title to said land and agrees that lessee at its option may discharge any_tax mortgage or other lien upon said land either in whole or in part and if lessee does so it shall be subrogated to such lien with right to enforce same and apply rentals and royalties accruing hereunder toward satisfying same this provision addresses a situation where the lessor would be responsible for a third-party lien eg where the lessor failed to discharge a tax or mortgage obligation under those circumstances exxon as lessee would be entitled to satisfy the third-party lien and become subrogated to the third-party's rights against the lessor thus the provision does not contemplate a situation such as the instant one indeed we note that in the complaint filed against the interest owners in the jarvis christian litigation exxon never claimed that the provision was applicable to the litigation finally petitioner contends that the opinion of the court_of_appeals for the ninth circuit in propstra v united_states supra supports its position that it is entitled to a deduction on its federal estate_tax_return in the amount claimed in propstra at the time of his death the decedent's property had been encumbered by liens of the salt river valley water users association association for past due assessments and penalties the association's bylaws denied it the power to adjust the claims the estate's executrix deducted decedent's one-half share of the liens on the federal estate_tax_return twenty-two months later the association's bylaws were amended to permit the settlement of outstanding claims for less than the full amount owed the estate ultimately settled the claim for less than the amount originally sought and reported by the estate on its return id pincite the court_of_appeals for the ninth circuit found that the association's lien claims were certain and enforceable when the decedent died the court_of_appeals noted that at the time of the decedent's death the association lacked the authority to settle claims for less than their full amount in addition the estate lacked even a colorable defense against the association's claims the court_of_appeals ruled that when claims are for sums certain and are legally enforceable as of the date of death post-death events are not relevant in computing the permissible deduction id pincite the estate was entitled therefore to a deduction for the claim in the amount reported on its estate_tax_return petitioner's reliance on propstra is misplaced in propstra the court_of_appeals explained that the threshold determination to be made under sec_2053 is whether the claim in question was certain and enforceable at the time of the decedent's death see id pincite the court_of_appeals precluded consideration of postdeath events only where a claim was found to be certain and enforceable on the date of death id pincite see also estate of van horne v commissioner f 2d pincite7 moreover the court_of_appeals acknowledged that the law is clear that post-death events are relevant when computing the deduction to be taken for disputed or contingent claims propstra v united_states supra pincite the validity and enforceability of exxon's claim against decedent in the instant case were uncertain as of the date of her death as a result we hold that petitioner's sec_2053 deduction in connection therewith is limited to the amount ultimately paid in settlement of that claim thus we sustain respondent's determinationdollar_figure the next issue for decision is whether the income_tax benefit derived by petitioner as a result of the application of sec_1341 is an asset includable in the gross_estate sec_2031 provides that the value of the gross_estate of the decedent shall be determined by including to the extent provided for in this part the value at the time of his death of all property real or personal tangible or intangible wherever situated sec_2033 provides that the value of the gross_estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death in the instant case the parties have stipulated that all hfu royalties paid to decedent from exxon for the calendar years 13given our disposition of this issue we need not consider respondent's alternative argument that petitioner must recognize discharge_of_indebtedness income pursuant to sec_61 in connection with petitioner's settlement of exxon's claim through were reported as income on her federal_income_tax returns for those years and that petitioner is entitled to sec_1341 relief to the extent that these previously taxed royalties were repaid to exxon in sec_1341 provides relief to taxpayers who are forced to repay an amount previously taken into income under a claim of right the reduction in the taxpayer's tax_liability attributable to a repayment is the greater of the amounts calculated under two approaches pursuant to the first approach the taxpayer computes his tax_liability for the year of repayment after having deducted the amount of the repaymentdollar_figure sec_1341 under the second approach rather than a deduction in the year of repayment the taxpayer receives a reduction ie a credit in his tax_liability for the year of repayment which is equal to the reduction in tax that would have occurred for the prior year had the amount received under a claim of right been excluded from income sec_1341 if the reduction in tax under the second approach is greater than the taxpayer's income_tax_liability for the year of repayment the excess is refundable or credited just as with any overpayment_of_tax sec_1341dollar_figure 14the amount of the deduction to which the taxpayer is entitled as a result of a repayment must exceed dollar_figure sec_1341 15petitioner concedes that the computation of its sec continued on brief petitioner contends that the gross_estate is not increased by the amount of its sec_1341 relief because decedent's right to such relief did not exist at the time of her death on date petitioner maintains that it was not entitled to any sec_1341 relief until it repaid exxon pursuant to the terms of the date settlement agreement this agreement was not entered into until almost months after decedent's death respondent on the other hand argues that petitioner's sec_1341 relief necessarily augments the gross_estate neither party has cited nor have we found any case law squarely on point in support of his position respondent relies on the decision of the district_court for the eastern district of michigan in estate of 208_fsupp_521 e d mich in estate of good the decedent had been overpaid by his employer in salary and expense reimbursements these amounts were reported by decedent on his income_tax returns for the years received the employer notified the decedent that he would be liable for repayment and filed a claim against the decedent's_estate when the decedent died prior to repayment continued a relief is limited to the amount_paid to settle exxon's claim against decedent individually petitioner is not entitled to sec_1341 relief for amounts paid in satisfaction of exxon's claims against jessamine and frankie the parties also appear to agree that a credit pursuant to sec_1341 would provide petitioner a greater benefit than a deduction under sec_1341 after the estate repaid the employer it claimed a deduction on its federal estate_tax_return as well as a credit pursuant to sec_1341 on its fiduciary income_tax return in the commissioner's view because the decedent and his estate were separate taxpayers sec_1341 relief was unavailable see revrul_67_355 1967_2_cb_296 revoked by revrul_77_322 1977_2_cb_314 the district_court rejected the commissioner's argument and concluded that sec_1341 relief was appropriate the district_court analyzed the estate and income_tax consequences that would have resulted had the decedent repaid the amount in issue prior to his death the district_court explained that the gross_estate would have been decreased by the amount repaid and increased by the amount of the sec_1341 credit to which the estate was entitled estate of good v united_states supra pincite since both parties acknowledged that the sec_1341 credit if available would increase the gross_estate the district_court found that the government would not be prejudiced in the collection of the estate_tax by the estate's claiming both an estate_tax deduction and an income_tax_credit on the same transaction id pincite the district_court in estate of good reasoned that the provisions of sec_1341 should be available to an estate in order to ensure the same income_tax consequences regardless of whether a taxpayer repays income prior to his death or the estate makes the restoration after his deathdollar_figure similarly in the instant case the relevant estate_tax consequences should not vary where the estate rather than decedent makes the payment upon which sec_1341 relief is predicateddollar_figure the right to sec_1341 relief clearly would have been includable in the gross_estate had exxon's claim been settled and paid prior to decedent's death we see no reason why decedent's contingent right to sec_1341 relief should not be included in her gross estatedollar_figure 16the district_court stated when congress passed sec_1341 it did not intend to recognize a debt of the government to the taxpayer during his lifetime and deny the same obligation to his personal_representatives and to his estate estate of 208_fsupp_521 e d mich see also nalty v united_states aftr 2d ustc par 37_tc_945 17while we recognize that the parties in estate of good v united_states supra pincite agreed that the gross_estate would be increased by the amount of any sec_1341 relief we nevertheless find the reasoning in the district court's opinion persuasive 18in 346_f2d_213 5th cir the decedent paid a deficiency in his federal income taxes and the attorney for his estate filed a claim_for_refund following his death after the refund claim was disallowed the estate filed suit the refund litigation was eventually settled and a refund was paid in the interim the estate had filed its estate_tax_return listing the income_tax claim as having no value but requesting that the estate_tax liability be held in abeyance pending the outcome of the claim the commissioner determined that the claim was includable in the decedent's_estate and valued the claim at the amount of the settlement although the estate conceded that the claim was includable in the gross_estate it contended that the claim had no value at the time of the decedent's death continued in 74_tc_540 the decedent who was an attorney executed an agreement with another attorney which provided that the decedent would receive a stated percentage of any attorney's_fees that might be awarded in a list of docketed cases pending before the indian claims commission commission any award of attorney's_fees in these cases was contingent upon an ultimate recovery on behalf of the plaintiffs and would be measured by the extent of the recovery at the time of the decedent's death of the cases remained in various unresolved stages of litigation before the commission following the decedent's death the estate received attorney's_fees in connection with this litigation the commissioner determined that the contractual right to share in future attorney's_fees was an interest in property includable in the decedent's gross_estate in estate of curry v commissioner supra pincite the taxpayer argued that the contingent legal fees were not continued after trial the district_court submitted the issue of valuation to the jury which found that the claim had no value at the time the decedent died the court_of_appeals for the fifth circuit reversed holding that there was no rational basis for the jury's finding the court_of_appeals stated when the decedent died his 'property' included the claim_for_refund of federal income taxes id pincite the court_of_appeals determined that postdeath facts and circumstances were to be taken into account for purposes of valuing the estate's claim and found the amount for which the claim was eventually settled to be highly indicative but not determinative of such value id pincite includable in the gross_estate because the decedent was not entitled to any fees at the time of his death ie any fees were contingent upon events that had not yet occurred as of the date of death we explained the fact that the legal fees we are concerned with were contingent upon future recovery is a critical consideration in trying to determine what the contract right was worth as of the date of death however the contingent nature of the contract right must bear on the factual question of valuation it cannot as a matter of law preclude the inclusion of the interest in the decedent's gross_estate or command that the value be fixed at zero although uncertainty as to the value of a contract right may postpone the inclusion of the income until it is actually realized for income_tax purposes for estate_tax purposes the value of an asset must be determined in order to close the estate id pincite this analysis is equally applicable to a contingent statutory right to relief under sec_1341 in the instant case the right to sec_1341 relief was contingent at the date of decedent's death the contingency centered on decedent's dispute over exxon's claim however the fact that this right to relief was contingent does not prevent its inclusion in the gross_estate see 346_f2d_213 5th cir estate of curry v commissioner supra pincite the facts giving rise to petitioner's sec_2053 deduction and its right to sec_1341 relief are inextricably linked at the time of decedent's death exxon was claiming that decedent was obligated to repay royalties which decedent had previously reported as taxable_income therefore at the time of her death decedent had statutory rights pursuant to sec_1341 to receive tax benefits based on whatever amount she ultimately had to pay exxon petitioner is entitled to an estate_tax deduction in the amount_paid to satisfy exxon's claim as well as sec_1341 relief for payment of the same claim exxon's claim decreases the estate's assets while the right to sec_1341 relief increases the estate's assets under these circumstances it would be inappropriate to consider one in the determination of the taxable_estate while excluding the other the amount for which a claim is ultimately settled is evidence of its value see united_states v simmons supra pincite finding the amount for which a claim was eventually settled to be highly indicative of the value of the claim in the instant case there was no evidence introduced to show that the value of the contingent right to sec_1341 relief at decedent's death was less than the amount that will actually be received on brief petitioner confined its argument to whether the contingent right to sec_1341 relief was or was not an asset includable in the gross_estate petitioner did not argue that in the event we find the right to sec_1341 relief includable in the gross_estate the value of this right for estate_tax purposes is anything less than the amount of the benefit ultimately received for the foregoing reasons we hold that the taxable_estate must be increased by the amount of sec_1341 relief that is attributable to the amount petitioner paid to exxon in settlement of its claim decision will be entered under rule in docket no decision will be entered for petitioner in docket no


department of the treasury internal_revenue_service washington d c t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n form tax years employer_identification_number number release date se t eo date date uil index dear ------------ this letter constitutes a final adverse_ruling with respect to your claim of exemption from federal income_taxation under sec_501 of the internal_revenue_code we make our ruling for the following reason s identification_number telephone number contact person you have failed to establish that you are operated exclusively for one or more exempt purposes described in sec_501 of the code more than an insubstantial part of your activities serves private interests yo u have failed to establish that your net_earnings will not inure to the benefit of private shareholders or individuals you have failed to establish that you will engage primarily in activities which accomplish exempt purposes specified in sec_501 even if you qualified for exemption as an organization described in sec_501 we have determined that you would be a private_foundation under sec_509 donors may not deduct contributions to your organization under sec_170 of the code the code and the regulations issued thereunder require that you file federal_income_tax returns based upon the financial information that you furnished you should file returns on the form and for the tax years indicated above within days from the date of this letter unless you request and are granted an extension of time to file the returns you should attach a copy of this letter to the returns you file questions concerning the filing of returns should be directed to the ohio tax exempt and government entities te_ge office pincite-5500 a toll free number if you decide to contest this ruling under the declaratory_judgment provisions of sec_7428 of the code you must initiate a suit in the united_states tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia before the 91st day after the date that we mailed this ruling to you contact the clerk of the appropriate court for rules for initiating suits for declaratory_judgment the filing of a declaratory_judgment suit under sec_7428 does not stay the processing of income_tax returns and assessment of any taxes in accordance with sec_6104 of the code we will notify the appropriate state officials of this action this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice if you have any questions concerning the reasons for this ruling please contact the person whose name and telephone number appear in the heading of this letter enclosure notice martha sullivan director exempt_organizations leonard j henzke sincerely