office_of_chief_counsel internal_revenue_service memorandum number release date cc intl migilman postn-149469-05 uilc date date to ---------------------------- ----------- cc lm f man from ginny y chung assistant to the branch chief cc intl subject availability of foreign tax_credits for purported sale of shares of foreign_corporation this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend taxpayer ------------------------------------------ seller ------------------------ hedge fund ------------------------------ shares -------------------------------------------------- options ------------------------------------------------------------------------------------------------------- ------------------------------------------------------- issuer -------------------- country x --------- country y --------------- year ------- postn-149469-05 year ------- date ----------------------- date --------------------- date ----------------- amount ------------------ amount -------------- amount ------------------ amount ------------------ amount ----------------- amount -------------------------- amount ---------------------------- amount ------------------ amount -------- amount -------- amount ------------------ amount -------------- amount -------------- amount -------------- amount ---------- amount ------ amount ------------- amount -------------- amount -------------------------- amount ------------- amount ----------------- employee ------------------------ employee ----------------- disregarded entities -------------------------------------------------------------------------------------- ------------------------ issue whether taxpayer may claim foreign tax_credits arising from a multi-step transaction in which taxpayer purported to acquire from seller ownership of disregarded entities that held shares in a foreign_corporation hedged its risk on the shares by executing options with seller and transferred title to the shares back to seller when those options expired approximately two months later conclusion no taxpayer’s purported acquisition of the disregarded entities should be disregarded under the economic_substance and step transaction doctrines the substantial record developed to date indicates that taxpayer had no business_purpose or reasonable expectation of profit with respect to the transaction apart from the substantial foreign_tax_credit benefits in addition the facts indicate that taxpayer’s disposition of the shares postn-149469-05 was prearranged from the outset and taxpayer had no interest in retaining its transitory interest in the shares under these circumstances the transaction undertaken by taxpayer should be disregarded for u s tax purposes and therefore the foreign tax_credits arising from the transaction should be disallowed facts this memorandum analyzes a series of interrelated transactions undertaken by taxpayer and seller in which taxpayer purportedly acquired from seller legal_title to certain disregarded entities caused the disregarded entities to sell shares of stock in a foreign_corporation to seller which triggered a foreign tax on built-in_gain on the stock and claimed foreign tax_credits of amount taxpayer and seller are both u s_corporations engaged in the financial services business in connection with the audit of this transaction the service interviewed representatives of both taxpayer and seller taxpayer’s acquisition of the disregarded entities from seller prior to the transaction involving taxpayer seller acquired a substantial portfolio_interest in shares of issuer a publicly-traded country x corporation on behalf of hedge fund an unrelated foreign hedge fund seller held the legal_title to a series of special purpose disregarded entities that held the shares but passed all of the economic benefits_and_burdens_of_ownership in the shares to hedge fund through a series of options seller granted each of the options to hedge fund for a premium equal to the entire purchase_price of the shares plus a fee and hedge fund had the right to exercise each option for one penny upon exercise hedge fund would receive the shares and an amount equal to dividends that accrued during the term of the exercised option the options also provided that hedge fund would generally bear the cost of the country x taxes incurred by the option seller in connection with the exercise of the option any subsequent sale of the shares and subsequent conversion of the proceeds of such sale to u s dollars and remittance to an account outside country x one of these options issued in october of year provided that seller would bear the first amount of country x income taxes a copy of an e-mail provided by seller indicates that this term was adopted to transfer to hedge fund some of the economic benefit of seller’s ability to claim foreign tax_credits with respect to country x taxes imposed on a sale of the shares after the shares had appreciated seller undertook what it described as a series of bed and breakfast transactions in which it purported to transfer and immediately reacquire the shares at their appreciated value seller explained that one of its employees constantly used it the phrase bed and breakfast the e-mail states in relevant part that seller agrees to pass on to the fund the net return on the issuer shares plus an amount equal to the benefit received by seller of any_tax credits resulting from the payment of country x tax_liabilities on the gains on the shares up to a maximum of amount of country x tax in year the tax department is not yet in a position to determine what the seller’s tax_credit capacity position is for year and no representations to any future tax_credit capacity has been made to the fund postn-149469-05 transaction to refer to a transaction where you are not incurring economic risk yet you are triggering a tax on certain appreciation in the asset by the end of year however seller indicated that it was concerned about its ability to continue to claim credits for country x taxes due to the foreign_tax_credit_limitation it also expressed increasing doubt that the foreign taxes attributable to the bed and breakfast transactions were properly creditable for u s tax purposes accordingly subsequent options provided that hedge fund would bear all of the costs of such taxes in december of year after seller had concluded that it was not in a position to claim additional foreign tax_credits that would arise from the sale of the shares it approached taxpayer and proposed the transaction that is the focus of this memorandum seller contacted employee an employee of taxpayer who worked as she described it in taxpayer’s derivative business and financing business where taxpayer is not taking any volatility risk on the underlying stocks taxpayer considered the proposal over the next two months during which time employee discussed the u s tax ramifications of the transaction with both inside and outside counsel the proposal was ultimately brought before and approved by taxpayer’s new products committee which included the heads of the major departments within taxpayer by february of year taxpayer and seller reached agreement on the terms of the proposal and executed the transaction on date the first leg of the transaction was a purported sale on date from seller to taxpayer of seventeen disregarded entities that indirectly held the shares for amount an internal taxpayer memorandum indicates that the purchase_price was derived by valuing the shares at amount and subtracting a country x tax_liability of amount that would be imposed when the built-in_gain in the shares was recognized for country x tax purposes employee was trained in accounting and had significant prior work experience in the international tax department of taxpayer and another u s -based multinational financial services provider taxpayer indicated that it had obtained an opinion from a major u s law firm on the u s tax ramifications of the transaction but did not provide a copy of the opinion on the grounds that the opinion was protected by the attorney-client_privilege the amount value was based on a valuation of each share at amount in country x currency taxpayer did not adequately explain how it derived the amount per share valuation the shares were publicly traded on the country x stock exchange at the time and taxpayer indicated that the closing price of the shares immediately prior to the transaction was amount per share which was approximately less than amount taxpayer noted that volumes on the exchange were sometimes too low to accurately value shares and did not reflect the value of a large block of shares such as the one sold by the disregarded entities however taxpayer offered no documentation or further explanation of how either of these factors might have affected the price used by the parties it appears that the shares represented approximately one percent of the outstanding shares of issuer at the time of the transaction in addition taxpayer did not explain why the amount valuation used to acquire the disregarded entities substantially exceeded the exercise price of the options discussed below which taxpayer claimed reflected the forward price of the shares at the time of the original purported sale taxpayer also produced a memorandum from its research department opining that the market_value of the shares was likely to fall in the foreseeable future postn-149469-05 put and call options the second leg of the transaction also executed on date was a pair of options entered into by subsidiaries of seller and taxpayer both options were cash-settled european-style options exercisable on date approximately six weeks after the purported sale of the disregarded entities taxpayer acquired a put option that gave it the right to a payment from seller of the excess of amount over the value of the shares at exercise less any dividends accrued over the term of the option seller acquired the call option that gave it the right to a payment from taxpayer of any excess of the value of the shares at exercise over amount plus any dividends accrued over the term of the option both options put taxpayer in the economic position of selling the shares back to seller for amount if the shares were worth less than amount on the exercise date seller would make taxpayer whole for any such reduction in value less accrued dividends under the put option and conversely if the shares were worth more than amount taxpayer would make seller whole for their increase in value plus accrued dividends under the call option in addition at taxpayer’s request both options included a provision that the parties referred to as a knockout or collar under taxpayer’s put option this feature reduced the amount payable to taxpayer by the amount of any country x tax savings associated with a sale of the shares at exercise for less than amount per share similarly under seller’s call option the amount payable by taxpayer was reduced by any additional country x tax associated with a sale of the shares at exercise for more than amount per share the collar had the effect of eliminating taxpayer’s exposure to changes in the country x tax_liability imposed on a sale of the shares for less than amount or more than amount the options also provided that seller would make taxpayer whole for any costs incurred in converting the proceeds from the sale of the shares from country x currency to u s dollars and transferring such amounts outside country x settlement of the options and sale of the shares back to seller prior to the expiration of the options seller informed taxpayer that it had identified a buyer willing to purchase the shares for amount and taxpayer accepted that price as the value of the shares for purposes of settling the call option which seller in taxpayer’s case the entity that executed the options was a wholly-owned controlled_foreign_corporation resident in country y for purposes of this memorandum unless otherwise indicated references to taxpayer and seller include their respective wholly-owned subsidiaries the original expiration date of the options date was extended to date after taxpayer discovered that selling the shares on date would result in certain country x tax penalties postn-149469-05 exercised on date accordingly taxpayer was obligated to pay seller the excess of amount plus accrued dividends over the amount strike_price taxpayer also agreed to sell the shares on the exercise date of the option for amount by causing the disregarded entities to transfer the shares to the buyer which was a wholly-owned subsidiary of seller taxpayer indicated that it understood that the shares were purchased for the benefit of an unidentified client of seller following the transfer of the shares the disregarded entities paid country x income taxes on the sale of the shares of amount and taxpayer repatriated the balance of the funds remaining in the disregarded entities taxpayer’s representative stated in the interview that taxpayer planned to liquidate the disregarded entities following the repatriation of the net_proceeds but had not yet done so because it determined that a liquidation was more costly than maintaining the disregarded entities as shell companies taxpayer also indicated that the disregarded entities have not engaged in any business activities since the transaction at issue was executed both taxpayer and seller indicated that they expected from the outset that taxpayer would sell and seller would repurchase the shares when the options expired both also indicated that they were not generally in the business of taking volatility risks on securities and that both seller and taxpayer would have been exposed to such risks if taxpayer did not sell the shares and seller did not repurchase the shares or an equivalent number of shares of issuer when the options expired moreover taxpayer indicated that it believed the shares were more likely to fall in value and therefore did not expect to retain the shares after the options expired taxpayer also indicated that prior to entering the transaction the only exit strategy it considered was a sale of the shares rather than a sale of its interests in the disregarded entities that owned the shares similarly a document prepared by taxpayer that purported to estimate taxpayer’s expected profit from the transaction described more fully below assumes that a country x tax would be imposed on a sale of the shares by the disregarded entities upon expiration of the options finally seller indicated that it had negotiated with hedge fund prior to taxpayer’s transaction such that hedge fund would pay seller for the country x taxes to be imposed on the subsequent sale of the shares by an unrelated party because that tax would only be incurred if seller repurchased the the value of the shares on the country x stock exchange on date was approximately percent less than amount because taxpayer’s pre-u s tax_return increased in inverse relationship to the price of the shares taxpayer should have had an interest in assuring that the shares were not sold for more than their fair_market_value taxpayer however did not exercise its right under the call option to solicit additional bids when taxpayer subsequently had difficulty repatriating the proceeds from country x employee wrote that taxpayer might declare the ending value of the shares under the options to be something less than the amount previously agreed but that would create a huge relationship problem with seller one might infer from that discussion that the value used by the parties may have been influenced by factors other than the fair_market_value of the shares at the time of the transaction a representative of seller explained at the interview that hedge fund had agreed to reimburse seller for amount of country x tax expense because it was a cost in connection with the holding of the issuer shares my guess is that it wasn’t clear in the derivative contract that we would be entitled to that postn-149469-05 shares seller’s negotiation with hedge fund to be compensated for the country x tax payment indicates that it planned to repurchase the shares from the outset of the transaction taxpayer claimed foreign tax_credits of amount for the country x taxes paid_by the disregarded entities upon the sale of the shares to seller taxpayer was in an excess limitation position in year and used the credits to offset u s tax on unrelated foreign_source_income economic consequences of the transaction based upon the terms of the original purported transfer of the disregarded entities and the options taxpayer was ensured that it would receive a net payment of amount prior to satisfying its country x tax_liability on the sale of the shares taxpayer had paid amount to purchase the disregarded entities therefore the only variable potentially affecting taxpayer’s return on the transaction prior to u s tax consequences were the amount of country_x_income_tax on the sale of the shares back to seller and any country y tax imposed on the option proceeds as noted above the amount of country x tax depended in the first instance on the price at which seller reacquired the shares but the collar imposed under the options limited taxpayer’s exposure to country x taxes to between amount and amount dollar_figure therefore the economic_effect of the transaction after taking into account taxpayer’s payment of the country x tax_liability was fixed from the outset of the transaction to be between a positive amount and a negative_amount the amount of the country y tax exposure depended on the amount received by taxpayer under its put option similar to the country x tax any country y tax would further reduce the possible profit from the transaction prior to taking into account its u s tax consequences taxpayer provided a copy of a document titled explanation of probabilities used in analyzing the transaction prepared sometime prior to the audit of the years at issue which purported to analyze the probabilities and expected_return from the reimbursement so he had to negotiate that with hedge fund to clarify that he is about to do this taxpayer trade there is going to be a country x tax basis step up which is good for everybody but there is going to be a cost we are going to have to pay taxpayer i don’t actually think he mentioned taxpayer or mentioned the price but because of the cost he has got to get a payment from hedge fund and he in fact got a payment from hedge fund seller’s representative suggested that the amount of the reimbursement from hedge fund was negotiated in advance of the transaction with taxpayer but it appears more likely that hedge fund simply agreed to reimburse seller based on whatever amount of tax was subsequently imposed on the sale of the shares in this connection we noted that when the amount reimbursement is added to the amount of tax expense that seller agreed to absorb in one of the options the total amount very closely approximates the amount of country x tax that taxpayer paid and claimed as a credit the collar had the effect of hedging taxpayer’s exposure to any country x taxes attributable to sales for less than amount or more than amount per share because the shares had an average country x tax basis of approximately amount per share the minimum and maximum_tax exposure based on the country x tax_rate of amount was as little as approximately amount and as much as amount postn-149469-05 transactiondollar_figure taxpayer characterized this document as the culmination of all of its prior analysis and the basis for its decision to undertake the transaction the document states that taxpayer determined there was a chance that the shares would sell for amount or less in which case taxpayer would earn a cash profit after country x tax of up to amount dollar_figure the document also indicates that these probabilities were derived by using a lognormal distribution with a mean of amount share the closing price of the shares the day prior to trade_date and an historic volatility of as noted above however the amount price was the price of the shares on the country x exchange immediately prior to the transaction and taxpayer and seller valued the shares approximately above the exchange price in addition although not explicitly stated in taxpayer’s analysis it follows from that analysis that even accepting the assumptions used by taxpayer taxpayer also had a probability of an economic loss on the transaction by applying the methodology used by taxpayer to estimate its possible profit the maximum possible loss on the transaction was amount ie more than four times as much as taxpayer’s maximum possible profit in the aggregate therefore taxpayer’s own analysis appears to indicate that it anticipated an economic loss from the transaction before u s tax benefits were taken into accountdollar_figure when asked whether it would have entered the transaction if it had not been able to claim foreign tax_credits taxpayer indicated it may be that the transaction would not have met the required return law and analysis the courts have long recognized the primacy of substance over form when interpreting the internal_revenue_code see 308_us_252 in the field of taxation administrators of the laws and the courts are concerned with substance and realities and formal written documents are not rigidly binding in gregory v helvering the supreme court established that taxpayers are not permitted to reduce their income_tax by undertaking an operation having no business or corporate purpose -- a mere device which put on the form of a corporate_reorganization as a disguise for concealing its real character and the sole object and accomplishment of which was the consummation of a preconceived plan 293_us_465 the doctrine_of gregory v helvering means that in construing words of a tax statute which describes commercial or industrial transactions we are to understand the service asked taxpayer who prepared this document and when and why it was prepared taxpayer responded that it believed employee a former employee who worked on the transaction and had a tax law background prepared the document the document clearly was prepared at least several months after the shares were purportedly sold back to seller because a footnote in the document references the price of the shares two months after the date of that sale taxpayer did not explain the timing or its rationale for preparing such an analysis after the transaction was completed the document states that the after-country x tax profit i sec_23 percent of the country x tax at the bottom end of the collar because as explained at n the tax expense at the bottom end of the collar would be approximately amount the cash profit would necessarily be approximately amount when interviewed about the transaction employee indicated that the transaction provided a minimum return of amount this return however reflected the profit from the transaction to taxpayer after taking into account foreign tax_credits postn-149469-05 them to refer to transactions entered upon for commercial or industrial purposes and not to include transactions entered upon for no other motive but to escape taxation comm’r v transport trading terminal corp f 2d 2d cir the courts employ a variety of closely related doctrines eg economic_substance business_purpose step transaction and sham_transaction in applying these principles but common to each of these inquiries is whether the transaction or step in a series of transactions presented the taxpayer with a real potential for profit apart from its purported tax benefits see eg 330_fsupp2d_122 d conn aff’d per curiam u s app lexis 2d cir date the terminology used whether sham profit motivation or economic_substance is not critical rather the analysis evaluates both the subjective business_purpose of the taxpayer for engaging in the transaction and the transaction’s objective economic_substance for the reasons discussed below we conclude that under the economic_substance and step transaction doctrines the foreign tax_credits claimed by taxpayer from the transaction at issue should be disallowed economic_substance the assessment of a transaction’s economic_substance generally turns on two related inquiries - whether the taxpayer had a bona_fide business_purpose and whether the transaction had any economic effects other than the creation of tax benefits see eg 820_f2d_1543 9th cir 752_f2d_89 4th cir the subjective business_purpose determination focuses on whether the taxpayer was motivated to derive an economic advantage apart from securing a tax_benefit see eg 364_f2d_734 2d cir aff’g 44_tc_284 the tax_court was justified in concluding that petitioner entered into the transactions ‘solely’ in order to secure a large interest_deduction the inquiry into the transaction’s objective economic_substance examines whether the transaction offers a reasonable opportunity for economic profit that is profit exclusive of tax benefits 933_f2d_143 2d cir long-term capital holdings f_supp 2d pincite emphasizing critical objective measurement demonstrating the taxpayer could not reasonably have expected to recoup his investment dollar_figure the courts have also held that transactions whose sole function is to produce tax deductions are substantive shams regardless of the motive of the taxpayer see several courts have explained that both the subjective and objective prongs of the economic_substance test should be considered see eg gilman f 2d pincite approving examination of both subjective and objective tests in light of flexible nature of the analysis in long term capital holdings the district_court concluded that the application of the two prongs of the test should be flexible and that particularly in a case involving a sophisticated investor the absence of a reasonable expectation of profit illuminates the taxpayers’ subjective motivation f_supp 2d pincite regardless of whether taxpayers are required to prove one or both prongs of the economic_substance test we conclude that this transaction lacked economic_substance because we believe that taxpayer had neither a subjective business_purpose nor an objective reasonable expectation of profit postn-149469-05 808_f2d_1219 6th cir inquiry is whether transaction has any practical economic effects beyond the creation of tax benefits 649_f2d_1168 5th cir unit b transactions that have no economic_effect other than creation of tax losses are shams 86_tc_1009 where transactions serve no ‘purpose substance or utility apart from their anticipated tax consequences’ they are disregarded for tax purposes 82_tc_492 interest_expenses incurred in silver straddles disallowed under sec_162 because transactions served no economic purpose beyond generating interest deductions cf 435_us_561 where there is a transaction imbued with tax-independent considerations and not shaped solely by tax-avoidance features the transaction is not a sham a pair of circuit_court decisions addressed the appropriate method of measuring pre- tax economic profit in cases involving foreign tax_credits see 277_f3d_778 5th cir ies indus inc v united_states 253_f3d_350 8th cir these decisions reversed the tax_court and district_court respectively and concluded it was inappropriate to deduct the cost of foreseeable foreign taxes imposed on the transaction in determining the expected pre-tax profit of a transaction neither the supreme court nor any other circuit_court has considered this issue taxpayer had no reasonable expectation of economic profit based on the substantial factual record developed to date we conclude that taxpayer did not have a realistic expectation of profit before u s tax benefits are taken into account as noted above taxpayer produced a document that purported to describe its probable return on the transactions and which taxpayer conceded represented the culmination of all of its analysis even if the assumptions used in that document are accepted at face value the analysis described in the document indicates that taxpayer expected to suffer a loss on the transaction before u s tax benefits were taken into account that is the document indicates that taxpayer had a chance of earning an economic profit of up to approximately amount if taxpayer had a chance of earning a pre-u s tax profit it necessarily follows that taxpayer also had a chance of earning a pre-u s tax loss moreover an examination of the possible outcomes from the sale of the shares and the options reveals that the maximum possible loss on the transaction was likely at least four times as large as the maximum possible profitdollar_figure a rational investor plainly would not have engaged in the transaction given a negative expected_return if it were not for the substantial benefit conferred by the foreign_tax_credit taxpayer’s representative all but conceded this point in its interview by acknowledging that but for the u s tax benefits arising from the transaction it may be that the transaction would not have met the required return the maximum loss on the transaction would be incurred if the shares were sold at or above amount ie the upper value used in the collar feature of the options at that price the gain recognized on the sale of the shares reduced by the country x tax expense and the amount owed by taxpayer under the call option would have been a loss of approximately amount postn-149469-05 it also appears that taxpayer’s analysis of the expected_return from the transaction may have materially understated the expected loss arising from the transaction for at least two reasons first taxpayer’s document indicates that the probability that the value of the shares would fall enough for taxpayer to earn a net profit was derived based on a starting value of the shares of amount per share rather than the substantially higher amount value used to determine the actual purchase_price of the disregarded entities we believe that if the taxpayer’s methodology were applied using the higher value the probability that the value of the shares would fall below amount by the expiration of the options would necessarily be lower and in turn the expected loss would necessarily be larger second the calculations in taxpayer’s analysis included only the anticipated country x tax in determining the pre-u s tax profit from the transaction even though substantial country y taxes would have been imposed in any fact pattern in which taxpayer might have recognized a pre-u s tax profitdollar_figure taxpayer did not quantify those taxes but it appears that they may have substantially reduced if not eliminated any possible pre-u s tax profit arising from the transaction for these reasons we conclude that taxpayer failed to establish that it reasonably expected to earn a pre-u s tax profit from the transaction and therefore it failed the objective prong of the economic_substance test in reaching this conclusion we note that taxpayer resides in the second circuit which is not bound to follow the portions of the fifth and eighth circuit decisions in compaq and ies that conclude that for purposes of the economic_substance analysis the pre- tax profit should be determined without taking into account the cost of the expected foreign tax on the transaction the failure of those courts to subtract the economic cost to the taxpayer of the foreign tax undermines the test’s purpose of determining whether the taxpayer had a real potential for profit apart from the transaction’s u s tax benefits ie the foreign_tax_credit in determining whether a taxpayer had a reasonable possibility of economic profit all of a taxpayer’s items of income and expense must be taken into account economically a foreign tax is no different from any other expense and therefore foreign taxes are properly treated as a cost that reduces economic profit if a taxpayer’s return is negative before u s tax consequences are taken into account as is the case here it necessarily follows that the benefit of the foreign_tax_credit motivated the transaction ignoring foreign taxes as a cost in determining the pre-u s tax_return on a transaction would deprive the economic_substance test of the very measure it is designed to illuminate - the return on the transaction prior to the claimed u s tax benefits additionally it is noteworthy that the bulk of taxpayer’s own analysis taxpayer’s opportunity to earn an economic profit arose only in cases where the gain on the put option exceeded the losses from the other elements of the transaction as a consequence of those relationships taxpayer’s after-country x profit would increase as the ending value of the shares decreased and conversely it would suffer larger losses as the ending value of the shares increased as indicated in taxpayer’s analysis taxpayer would have earned a net profit after country x tax only if the ending price of the shares fell below amount the gain on the put option in any such profitable outcome would have been subject_to country y tax because the put option was held by taxpayer’s country y subsidiary postn-149469-05 of its probable return from the transaction subtracted the country x tax in determining its expected cash profit taxpayer had no business_purpose taxpayer provided only minimal and self-serving evidence of the requisite business_purpose employee asserted that taxpayer entered the transaction to make money but the only evidence provided by taxpayer of its probability of making money apart from u s tax benefits was the document described above for the reasons explained in connection with the objective test the analysis in that document only serves to undermine taxpayer’s self-serving explanation rather than demonstrating that taxpayer expected to make money it establishes that taxpayer expected to lose money apart from the claimed tax benefits the facts of this case are analogous to those in goldstein in which the taxpayer claimed deductions for the prepaid_interest on certain loans used to fund the acquisition of treasury bonds the second circuit upheld the disallowance of the interest deductions on the ground that the transaction had no substance or purpose aside from the taxpayer’s desire to obtain the tax_benefit of the interest_deduction and a good example of such purposeless activity is the borrowing of funds pincite in order to purchase property that returns less than and holds out no prospect of appreciation sufficient to counter the unfavorable interest rate differential f 2d pincite emphasis added in this case the taxpayer purported to acquire the disregarded entities based on its valuation of the shares on date at amount however taxpayer simultaneously committed to put itself in the economic position of selling the shares back to seller six weeks later for amount ie approximately percent less than amount just as one would not purposely borrow pincite to earn interest pincite one would not rationally buy an asset with a value of amount and simultaneously commit to sell it for substantially lessdollar_figure such a transaction is the kind of purposeless activity that the tax code was not intended to reward on the contrary taxpayer’s purported acquisition of the disregarded entities and its agreement to put the parties in the position of selling the shares back to seller for less than the value at which they were purchased is best understood as a payment for tax benefits either the purchase_price of the disregarded entities or the exercise price of the options or both must have failed to reflect their fair_market_value see also rice’s toyota world t c pincite purported down payment for asset based on inflated purchase_price recharacterized as fee to purchase tax savings this also further distinguishes the transaction from those addressed in compaq and ies the compaq and ies courts placed significant weight on the taxpayers’ exposure to the risks of ownership of the adrs even if only for a brief period see compaq f 3d pincite ies f 3d pincite in this transaction however taxpayer hedged its risk with respect to the shares by synthetically committing to sell the shares for the consideration stated in the options by fixing the exercise price for the sale of the shares under the options and agreeing to make seller whole for any dividends declared in the interim taxpayer relinquished both the benefits_and_burdens_of_ownership of the shares from the outset of the transaction postn-149469-05 transaction was inconsistent with the purpose of the foreign_tax_credit taxpayer’s attempt to claim the foreign tax_credits arising from the transaction fails the fundamental test identified by the supreme court in gregory -- whether what was done apart from the tax motive was the thing that the statute intended u s pincite the foreign_tax_credit was intended to alleviate double_taxation in order to prevent taxes from unduly changing taxpayers’ business behavior see 316_us_450 285_us_1 during the floor debate surrounding the enactment of the foreign_tax_credit the chairman of the ways_and_means_committee explained the credit’s rationale as follows that is not only a just provision but a very wise one it is wise from the standpoint of the commerce of the united_states of the expansion of business in the united_states we would discourage men from going out after commerce and business in different countries if we maintained this double_taxation they would take their corporations that are american corporations and reorganize them getting their charters in such foreign countries if we did not do this and we might not be able to tax their income and profits at all another thing if we did not do that a man would become a citizen of another country instead of retaining his citizenship here in order to escape the large and double_taxation imposed cong rec app statement of mr kitchin congress thus intended the foreign_tax_credit to reduce the influence of taxes on business decisions the foreign_tax_credit was never intended to motivate taxpayers to engage in transactions that are expected to result in an economic loss similarly the court in 90_tc_1054 stated that t he investment_tax_credit was not intended to serve as a substitute for economic profit and i t would be a distortion of congressional intent to conclude that it was intended that petitioner be induced to engage in a paper transaction that did not in any way affect the market instead the foreign_tax_credit was intended to allow taxpayers to evaluate various business options based on their economic merits without considering the possibility of double_taxation the credit was thus meant to reduce tax distortion of profit-oriented transactions not to encourage purely tax-motivated transactions like this one as the second circuit in goldstein explained with respect to the interest_deduction to allow a deduction for interest_paid on funds borrowed for no purposive reason other than the securing of a deduction from income would frustrate sec_163’s purpose allowing it would encourage transactions that have no economic utility and that would not be engaged in but for the system of taxes imposed by congress postn-149469-05 f 2d pincite taxpayer’s transaction falls well outside the intended purpose of the foreign_tax_credit rather than using the foreign_tax_credit to mitigate the double_taxation of its income taxpayer and seller separated the foreign tax_credits from the income to which they related shifted the foreign_tax_credit to a party willing and able to claim the credits and passed part of the value of such credits to hedge fund congress did not intend the foreign_tax_credit to encourage investments in foreign companies by non-u s persons therefore the transaction undertaken by taxpayer was not the thing the statute intended gregory u s pincite taxpayer’s attempt to secure foreign tax_credits in this case is defective because the transaction lacked a bona_fide business_purpose a reasonable expectation of profit apart from tax benefits and was contrary to the legislative purpose of the foreign_tax_credit regime accordingly taxpayer should be treated for u s tax purposes as if it had not undertaken the transaction and therefore taxpayer should not be entitled to claim any foreign tax_credits arising from the transaction step transaction under the step_transaction_doctrine a particular step in a transaction is disregarded for tax purposes if the taxpayer could have achieved its objective more directly but instead included the step for no other purpose than to avoid u s taxes 251_f3d_210 d c cir cf 302_us_609 the preliminary distribution to the stockholders was a meaningless and unnecessary incident in the transmission of the fund to the creditors all along intended to come to their hands so transparently artificial that further discussion would be a needless waste of time whether invoked as a result of the ‘binding commitment ’ ‘interdependence ’ or ‘end result’ tests the doctrine combines a series of individually meaningless steps into a single transaction 90_tc_171 aff’d 886_f2d_1318 7th cir rejecting application of step_transaction_doctrine to public tender followed by redemption on the basis that respondent has pointed to no meaningless or unnecessary steps that should be ignored the courts have applied three distinct formulations of the step_transaction_doctrine the end result test the mutual_interdependence_test and the binding_commitment_test under the end result test a series of transactions are stepped together if they are prearranged parts of a single transaction intended from the outset to reach a specific end result 88_tc_1415 the end result test focuses on the actual intent of the parties at the beginning of the series of transactions greene v united_states f 3d 2d cir under the end result test the step_transaction_doctrine will be invoked if it appears that a series of separate transactions were prearranged parts of what was a single transaction cast from the outset to postn-149469-05 achieve the ultimate result under the mutual_interdependence_test the separate steps are analyzed to determine if the legal relationships created by one transaction would be fruitless without the completion of the entire series of transactions 630_f2d_1169 7th cir 450_us_913 under the binding_commitment_test a series of transactions will be stepped together if there is a binding commitment to undertake the later steps 391_us_83 in long-term capital holdings f_supp 2d pincite the district_court applied the step_transaction_doctrine and held that a purported acquisition of interests in a partnership subject_to a put option to dispose_of those interests was properly disregarded under the end result test the court concluded that the transactions at issue were conceived solely to transfer a substantial built-in capital_loss to the taxpayer from a foreign_entity unable to utilize such losses this was effected by the contribution of the built-in_loss_property to the partnership in return for the partnership interests the execution of a put option to dispose_of those interests approximately fifteen months thereafter and a subsequent sale of the interests to the prior owners of the partnership the court also concluded that in light of the absence of any non-tax motives for the foreign entity’s investment in the partnership and the put option insuring the foreign entity’s ability to dispose_of its interests promptly the ultimate disposition of the partnership interests was part of a pre-arranged plan to transfer the built-in_loss_property to the partnership in return the net_proceeds paid to the foreign_entity id pincite the second circuit affirmed the district court’s application of the step_transaction_doctrine long-term capital holdings v u s u s app lexis 2d cir date in notice_2004_20 2004_1_cb_608 treasury and the service identified as a listed_transaction a fact pattern in which a domestic_corporation claims foreign tax_credits arising from its transitory ownership of certain foreign assets the transaction described in the notice involves a series of prearranged steps under which the intermediary corporation midco acquires shares in a foreign_entity and shortly thereafter sells the assets of the foreign_entity to an unrelated purchaser recognizing no gain for u s tax purposes but triggering a foreign_income_tax on the asset sale for which midco claims foreign tax_credits the notice states the service will challenge the purported tax results to midco of the transaction described in this notice by applying principles of existing law see notice_2001_16 2001_1_cb_730 announcing that the service may challenge the purported tax consequences of a purported sale of stock to a tax-indifferent intermediary corporation that then purports to sell the target's assets for example the service may challenge the purported tax results to midco under the step_transaction_doctrine or the substance_over_form_doctrine postn-149469-05 based on the substantial record developed to date taxpayer’s purported acquisition of legal_title to the disregarded entities is substantially_similar to the facts of long-term capital and notice 2004-dollar_figure like those cases the facts in this instance indicate a pre- arranged plan to dispose_of the shares at the expiration of the options both parties conceded that they expected taxpayer to sell the shares upon expiration of the options and that the failure to realize that expectation would have been inconsistent with both parties’ established business practice of avoiding volatility risks on their investments generally taxpayer also indicated that even if it were inclined in limited instances to take an unhedged position on an investment this would not be such a case because taxpayer‘s research department had opined that the shares were expected to fall in value taxpayer also stated that before agreeing to enter the transaction it determined its probable return from the transaction by assuming it would pay country x taxes on the sale of the shares upon expiration of the options seller had also engaged in similar sale and repurchase transactions involving the shares prior to the transfer to taxpayer and in this case negotiated in advance with hedge fund to be made whole for country x taxes incurred on the subsequent repurchase of the shares from taxpayer therefore the evidence strongly supports the conclusion that taxpayer’s sale of the shares was prearranged at the time of the initial transfer of title indeed in various respects the facts in this case present a more compelling case than those in long-term capital holdings or notice_2004_20 for disregarding taxpayer’s transitory acquisition of the disregarded entities and the shares the district_court in long-term capital holdings cited the put option as evidence of pre-arrangement but taxpayer’s transaction involved a pair of put and call options with identical exercise prices the presence of both put and call options is significant because it essentially guaranteed that either seller or taxpayer would exercise its right to effectively sell the shares at the expiration of the optionsdollar_figure therefore taxpayer’s intent to dispose_of the shares is substantially clearer on these facts we also believe it is significant that one controlled_group - seller and its wholly-owned affiliates - was both the seller and the end-purchaser in the transaction at issue as noted above seller had engaged in similar sale repurchase transactions before undertaking the transaction at issue and approached an unrelated party taxpayer only after determining it could not claim the foreign tax_credits from another such sale the fact that the same controlled_group was involved in the beginning and ending steps in the transaction strongly suggests that the ultimate outcome was planned from the outset cf frank lyon co u s pincite respecting intermediary’s sale-leaseback where there is a genuine multi-party transaction accordingly we conclude that the end result test is satisfied under these facts taxpayer did not disclose the transaction on its year tax_return however year preceded the effective date of disclosure obligations for transactions described in notices and and under the brief asset holding_period rules see sec_1_6011-4 the only circumstance in which exercise might not occur would be if the value of the shares was exactly equal to the strike_price on the exercise date we believe that the probability of that event was trivial postn-149469-05 we also conclude that the mutual_interdependence_test is satisfied under these facts neither taxpayer nor seller had any interest in making a real investment in issuer seller’s interest was limited to holding the shares for the benefit of hedge fund and taxpayer’s interest in the shares was offset by its position under the options neither party would have undertaken the original transfer of the disregarded entities without the subsequent sale and repurchase of the shares because the failure to complete the transaction would have exposed both parties to unwanted investment risks seller was compelled to reacquire the shares or the same number of shares of issuer upon expiration of the options to maintain its hedged position relative to hedge fund and similarly taxpayer was compelled to dispose_of the shares to avoid taking an unhedged position in the shares once the options expired taxpayer also indicated that it believed that the shares were a poor investment at the time it acquired legal_title to the disregarded entities therefore the record indicates that taxpayer would not have purchased the disregarded entities which held the shares unless it was also going to dispose_of the shares at the expiration of the options under these circumstances taxpayer’s initial acquisition of title to the disregarded entities and the transfer of title to the shares to seller approximately two months later were mutually interdependent therefore under either the end result or mutual interdependence tests the substance of the transaction was a transfer of title to the shares from the disregarded entities owned by seller at the time to one of seller’s wholly-owned affiliates taxpayer’s sole purpose for its transitory participation in the transaction was to obtain foreign tax_credits attributable to the foreign taxes imposed on the transfer of the shares within the seller’s controlled_group because taxpayer in substance did not acquire the disregarded entities that held the shares it cannot claim any foreign tax_credits for the country x taxes imposed on the disregarded entities u s law assigns the right to claim credits to the taxpayer with legal liability for the tax under foreign law sec_1_901-2 country x viewed the disregarded entities as the party with legal liability for the taxes because taxpayer did not in substance acquire the disregarded entities it is not eligible to claim the credits for the country x tax imposed on the disregarded entitiesdollar_figure case development hazards and other considerations --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- no inference is intended as to whether seller may claim any u s tax benefits arising from its transfer of the shares from the disregarded entities to its affiliate as noted above seller had no economic_interest in the shares under its options with hedge fund and therefore is not generally regarded as the owner of the shares for u s tax purposes see revrul_82_150 option acquired for of value of underlying shares amounted to purchase of underlying stock for tax purposes postn-149469-05 --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------- postn-149469-05 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 if you have any further questions _____________________________ ginny y chung assistant to the branch chief branch office of associate chief_counsel international


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division jun uniform issue list legend taxpayer a ira x iray amount a financial_institution f dear this is in response to your request dated date as supplemented by correspondence dated date date and date in which you requested a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code taxpayer a represents that she received a distribution from ira x totaling amount a taxpayer a asserts that her failure to accomplish a rollover of amount a within the day period prescribed by sec_408 of the code was due to financial_institution error taxpayer a further represents that amount a has not been used for any other purpose page2 the following facts and representations have been submitted under penalties of perjury in support of the ruling requested on date taxpayer a visited financial_institution f to inquire about rolling over the balance of ira x into another ira taxpayer a asked how long she would have to accomplish the transfer in order to avoid having to include the amount in taxable_income the taxpayer represents that the employee of financial_institution f informed her that she would have up to two years to transfer the distribution into another ira based on this advice taxpayer a took a distribution of amount a from ira x and left amount a on deposit in a non-ira account at financial_institution f with the intention of rolling over amount a later taxpayer a represents that she had no intent to use amount a for any purpose other than to rollover to another ira taxpayer a did not discuss this transaction with any other person until january when she informed her spouse taxpayer a's spouse informed her that the two-year period to accomplish a rollover cited by the financial_institution f representative was likely incorrect thereafter taxpayer a attempted to deposit amount a into another ira at financial_institution f because the 60-day period had expired financial_institution f would not permit a rollover of amount a however financial_institution f permitted taxpayer a to contribute dollar_figure into a roth_ira the maximum contribution allowable for the and calendar years based on the facts and representations you request a ruling that the internal_revenue_service the service waive the day rollover requirement contained in sec_408 of the code with respect to the distribution of amount a sec_408 of the code provides that except as otherwise provided in sec_408 of the code any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the 60th day after the day on which the individual receives the payment or distribution or page ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 of the code sec_408 of the code provides that sec_408 of the code does not apply to any amount described in sec_408 of the code received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 of the code from an ira which was not includible in gross_income because of the application of sec_408 of the code sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 of the code do not apply to any amount required to be distributed under sec_408 of the code sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 of the code and d of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 i r s date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a is consistent with her assertion that her failure to accomplish a timely rollover was caused by the incorrect advice she received from financial_institution f regarding the permissible period of time to accomplish the rollover of amount a into another ira therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount a from ira x taxpayer a is granted a period of days from the issuance of this ruling letter to page4 contribute amount a into ira y a traditional_ira set up for the purpose of receiving the rollover from ira x provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contribution the contribution will be considered a rollover_contribution within the meaning of sec_408 of the code this ruling does not authorize the rollover of amounts that are required to be distributed by sec_408 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter 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 if you wish to inquire about this ruling please contact id at please address all correspondence to se t ep ra t3 sincerely yours l laura b warshawsky manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose


t c summary opinion united_states tax_court renard halliburton petitioner v commissioner of internal revenue respondent docket no 13967-06s filed date renard halliburton pro_se lisa r woods for respondent haines judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and unless otherwise indicated all section references are to the internal_revenue_code as amended amounts are rounded to the nearest dollar this opinion shall not be treated as precedent for any other case respondent determined a deficiency in petitioner’ sec_2002 federal_income_tax of dollar_figure as well as additions to tax under sec_6651 and of dollar_figure and dollar_figure respectively and sec_6654 of dollar_figure after concessions the issues for decision are whether petitioner failed to report a taxable_distribution and other income of dollar_figure and dollar_figure respectively in and whether petitioner is liable for additions to tax under sec_6651 and sec_6654 background the parties’ stipulation of facts and the attached exhibits are incorporated herein by this reference petitioner resided in saint paul minnesota when he filed this petition on date petitioner received dollar_figure from amex financial corp amex in settlement of a class action racial discrimination suit against amex amex mailed petitioner a form 1099-misc miscellaneous income stating it paid petitioner the dollar_figure in during petitioner also received a taxable_distribution of dollar_figure from the national finance center thrift_savings_plan national respondent concedes that petitioner is not liable for the sec_6651 addition_to_tax petitioner did not contend that the dollar_figure was not included in gross_income under sec_104 on date respondent filed a substitute for return for petitioner and on date assessed the tax shown thereon on date petitioner filed his form_1040 u s individual_income_tax_return for return in which he failed to report receiving the dollar_figure from amex and the dollar_figure from national respondent treated the return as an amended_return on date respondent mailed petitioner a notice_of_deficiency for the notice_of_deficiency was mailed before respondent could take into consideration petitioner’ sec_2002 return using third-party payor information respondent determined petitioner owed dollar_figure in federal_income_tax on the basis of wage income of dollar_figure from the xerox corporation dollar_figure from labor ready midwest inc and dollar_figure from the doherty employment group a taxable_distribution of dollar_figure from national and other income of dollar_figure from amex in the notice_of_deficiency respondent calculated tax using married_filing_separately rates and allowed a standard_deduction one personal_exemption a self-employment_tax deduction of dollar_figure and an adjustment to prepayment credit of dollar_figure petitioner filed an amended petition with the court on date petitioner’s original petition was timely filed with the court on date on date respondent mailed petitioner a letter asking whether he received dollar_figure from amex and dollar_figure from national in petitioner responded on date in a letter stating he received dollar_figure from amex in and reported the income on his form 1040x amended u s individual_income_tax_return for amended_return because amex’s form misc reported it paid him the dollar_figure in the letter also stated that petitioner received the dollar_figure distribution in discussion petitioner admits he received dollar_figure from amex and dollar_figure from national in and failed to report the income in petitioner contends however that because he reported the dollar_figure on his amended_return he was not required to report it in sec_451 provides that the amount of any item_of_gross_income shall be included in the gross_income for the taxable_year in which received by the taxpayer unless under the method_of_accounting used in computing taxable_income such amount is to be properly accounted for as of a different period 125_tc_248 although petitioner reported the dollar_figure in because the form 1099-misc was mistakenly dated he received the amount in petitioner produced no evidence to show he used a method_of_accounting requiring him to report the dollar_figure in a period other than the period ending date accordingly the court holds that petitioner was required to report the dollar_figure in respondent determined that petitioner is liable for additions to tax under sec_6651 and sec_6654 respondent bears the burden of production with respect to petitioner’s liability for the additions to tax sec_7491 116_tc_438 to meet his burden of production respondent must come forward with sufficient evidence indicating it is appropriate to impose the additions to tax higbee v commissioner supra pincite sec_6651 imposes an addition_to_tax for failure_to_file a return on the date prescribed determined with regard to any extension of time for filing unless the taxpayer can establish that such failure was due to reasonable_cause and not willful neglect the parties stipulated that petitioner did not timely file the return respondent has met his burden of production petitioner did not show reasonable_cause for failing to timely file a return for sec_6651 therefore the court holds that petitioner is liable for the sec_6651 addition_to_tax for sec_6654 imposes an addition_to_tax on an individual taxpayer who underpays his estimated_tax the addition_to_tax is calculated with respect to four required_installment payments of the taxpayer’s estimated_tax liability sec_6654 and c each installment is equal to percent of the required_annual_payment sec_6654 the required_annual_payment is generally equal to the lesser_of percent of the tax shown on the individual’s return for that year or if no return is filed percent of his or her tax for such year or if the individual filed a return for the immediately preceding_taxable_year percent of the tax shown on that return sec_6654 127_tc_200 heers v commissioner tcmemo_2007_10 respondent introduced evidence to show petitioner was required to file a federal_income_tax return for failed to report income for and failed to make estimated_tax payments for with the exception of the withheld tax in order to permit the court to make the analysis required by sec_6654 respondent must introduce evidence showing whether petitioner filed a return_for_the_preceding_taxable_year and if so the amount of tax shown on that return see wheeler v commissioner supra pincite respondent did not do so without that evidence this court cannot identify the number equal to percent of the tax shown on petitioner’ sec_2001 return complete the comparison required by sec_6654 and conclude petitioner had a required_annual_payment for that was payable in installments under sec_6654 therefore the court finds respondent failed to meet his burden of production accordingly respondent’s determination regarding the sec_6654 addition_to_tax is not sustained in reaching these holdings the court has considered all arguments made and to the extent not mentioned concludes that they are moot irrelevant or without merit to reflect the foregoing decision will be entered for respondent as to the deficiency and the addition_to_tax under sec_6651 and for petitioner as to the additions to tax under sec_6651 and sec_6654


internal_revenue_service department of the treasury number release date index number washington dc re person to contact telephone number refer reply to cc psi 9-plr-101478-02 date date legend decedent date date executors spouse dear this responds to your letter dated date and subsequent correspondence requesting an extension of time under sec_301_9100-1 of the procedure and administration regulations to make a reverse qualified_terminable_interest_property qtip_election under sec_2652 of the internal_revenue_code decedent died on date survived by spouse and children decedent’s will provided for the creation of three trusts family_trust marital trust a and marital trust b section decedent’s will provides for the creation of a marital portion from decedent’s residuary_estate under section of decedent’s will the marital portion is to consist of the maximum portion of decedent’s taxable gross_estate eligible for the marital_deduction that would reduce decedent’s taxable_estate to the lowest possible amount section of decedent’s will provides that the marital portion shall be apportioned into two trusts marital trusts a and b marital trust a is to be funded with that portion of the marital trust assets equal to decedent’s available generation-skipping gst tax exemption after allocation of this exemption to the assets contained in the family_trust established under section of decedent’s will marital trust b is to be funded with the balance of the marital portion section b of decedent’s will provides that the executor is authorized to exercise the special deemed_transferor election provided under a of the internal revenue plr-101478-02 code as to the property in the marital trust a under this instrument with the result that the property as to which the election is made is held in an exempt trust as that term is defined in this instrument section of decedent’s will provides that the family_trust shall consist of that portion of decedent’s residuary_estate that is not part of the marital portion under section a of decedent’s will the family_trust is to be held as a single trust to benefit spouse and any child under age years section a of decedent’s will provides that upon spouse’s death and when all of decedent’s children reach age years the family_trust shall be divided into as many individual trusts as there are then living children and deceased children survived by then living descendants per stirpes section a of decedent’s will provides that percent and any undistributed_income of each trust shall be distributed free of trust to that trust’s beneficiary when the beneficiary reaches age years the remaining principal and any undistributed_income shall be distributed free of trust to the trust’s beneficiary when the beneficiary reaches age years the united_states estate and generation-skipping_transfer_tax return form_706 was filed on date however the form_706 as filed did not include a schedule r reflecting an allocation of decedent’s gst tax exemption and a reverse_qtip_election as contemplated by the terms of decedent’s will set forth above a qtip_election was made on the form_706 for the assets contained in marital trusts a and b you have represented that at decedent’s death decedent had sufficient unused gst tax exemption that if applied to the assets of the family_trust and marital trust a both trusts would have an inclusion_ratio of zero for gst tax purposes you have requested an extension of time under sec_301_9100-3 to make the reverse_qtip_election pursuant to sec_2652 for marital trust a law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2056 provides that for purposes of the tax imposed by sec_2001 the value of the taxable_estate is to be determined by deducting from the value of the gross_estate an amount equal to the value of any interest in property that passes or has passed_from_the_decedent to the surviving_spouse sec_2056 provides in pertinent part that no deduction shall be allowed under sec_2056 where on the lapse of time on the occurrence of an event or contingency or on the failure of an event or contingency to occur an interest passing to the surviving_spouse will terminate or fail plr-101478-02 sec_2056 provides that in the case of qualified_terminable_interest_property the entire property shall be treated as passing to the surviving_spouse for purposes of sec_2056 and no part of such property shall be treated as passing to any person other than the surviving_spouse for purposes of sec_2056 sec_2056 provides that the term qualified_terminable_interest_property means property i which passes from the decedent ii in which the surviving_spouse has a qualifying_income_interest_for_life and iii to which an election under sec_2056 applies sec_2056 provides that an election under sec_2056 with respect to any property shall be made by the executor on the return of tax imposed by sec_2001 such an election once made shall be irrevocable under sec_2044 any property in which the decedent had a qualifying_income_interest_for_life and for which a deduction is allowed under sec_2056 is includible in the decedent’s gross_estate sec_2044 provides that for purposes of chapter and chapter property includible in the gross_estate of the decedent under sec_2044 shall be treated as property passing from the decedent sec_2601 imposes a tax on every generation-skipping_transfer made after date sec_2611 provides that the term generation-skipping_transfer means a taxable_distribution a taxable_termination and a direct_skip sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst tax exemption of dollar_figure which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor unde r sec_2631 any allocation under sec_2631 once made shall be irrevocable sec_2632 provides that any allocation by an individual of his gst tax exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual's estate determined with regard to extensions regardless of whether such a return is required to be filed sec_2632 provides that in general any portion of an individual's gst tax exemption which has not been allocated within the time prescribed by sec_2632 shall be deemed to be allocated as follows-- a first to property which is the subject of a direct_skip occurring at such individual's death and b second to trusts with respect to which such individual is the transferor and from which a taxable_distribution or a taxable_termination might occur at or after such individual's death plr-101478-02 sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides in pertinent part that no automatic allocation of gst tax exemption is made to a_trust that will have a new transferor with respect to the entire trust prior to the occurrence of any gst tax with respect to the trust sec_2652 provides in pertinent part that for purposes of chapter the term transferor means-- a in the case of any property subject_to the tax imposed by chapter the decedent and b in the case of any property subject_to the tax imposed by chapter the donor an individual shall be treated as transferring any property with respect to which such individual is the transferor sec_2652 provides that in the case of-- a any trust with respect to which a deduction is allowed to the decedent under sec_2056 by reason of subsection b thereof and b any trust with respect to which a deduction to the donor spouse is allowed under sec_2523 by reason of subsection f thereof the estate of the decedent or the donor spouse as the case may be may elect to treat all of the property in such trust for purposes of this chapter as if the election to be treated as qualified_terminable_interest_property had not been made sec_26_2652-2 provides that an election under sec_2652 is made on the return on which the qtip_election is made under sec_301_9100-1 the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than 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_9100-2 provides an automatic_extension of time for making certain elections sec_301_9100-3 provides in pertinent part that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 must be made under the rules of requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government sec_301_9100-3 provides that except as provided in sec_301_9100-3 through iii a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer i requests relief under this section before the failure to make the regulatory election is discovered by the internal_revenue_service ii failed to make the election because of intervening events beyond the taxpayer's control iii failed to make the election because after exercising reasonable diligence taking into account the taxpayer's experience and the complexity of the return or issue the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of plr-101478-02 the internal_revenue_service or v reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election sec_301_9100-3 provides in pertinent part that the commissioner will grant a reasonable extension of time to make a regulatory election only when the interests of the government will not be prejudiced by the granting of relief as a result of the qtip_election made on the decedent’s form_706 the property in marital trusts a and b is includible in spouse's gross_estate pursuant to sec_2044 spouse accordingly is considered the transferor of the property for gst tax purposes therefore decedent’s remaining gst tax exemption may not be allocated to marital trust a’s assets however if a reverse_qtip_election under sec_2652 is made for marital trust a decedent will be treated as the transferor of marital trust a’s assets and the automatic allocation rules of sec_2632 will apply decedent’s remaining gst tax exemption to this property based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly an extension of time of days from the date of this letter is granted to file an amended form_706 making the reverse_qtip_election for marital trust a except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely paul f kugler associate chief_counsel passthroughs and special industries enclosure copy for sec_6110 purpose


t c summary opinion united_states tax_court helen guterman petitioner v commissioner of internal revenue respondent docket no 15780-02s filed date helen guterman pro_se frank j jackson for respondent pajak special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed unless otherwise indicated section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax this court must decide whether a deduction allowed under sec_216 for real_estate_taxes paid in connection with a cooperative_housing_corporation is an adjustment for purposes of the alternative_minimum_tax amt this case was submitted fully stipulated pursuant to rule all of the facts stipulated are so found petitioner resided in new york new york at the time she filed her petition sec_7491 does not apply because this case involves a legal issue during taxable_year petitioner was a tenant- shareholder of a cooperative_housing_corporation in connection with the cooperative_housing_corporation petitioner was entitled to deduct real_estate_taxes in the amount of dollar_figure as her proportionate share of such taxes paid_by the cooperative petitioner deducted this amount on schedule a itemized_deductions as co-op real_estate_taxes under other miscellaneous deductions petitioner did not include the dollar_figure as an adjustment for taxes on the form_6251 alternative_minimum_tax - individuals attached to her return respondent contends that the amount at issue was improperly characterized as a miscellaneous deduction but that regardless where deducted on schedule a a deduction allowed under sec_216 for real_estate_taxes paid in connection with a cooperative_housing_corporation is an adjustment for purposes of computing the amt thus respondent recalculated and increased petitioner’s amt in the amount of dollar_figure sec_216 allows a tenant-stockholder to deduct amounts not otherwise deductible paid_or_accrued to a cooperative_housing_corporation within the taxable_year to the extent that such amounts represent the tenant-stockholder’s_proportionate_share of the real_estate_taxes allowable as a deduction to the corporation under sec_164 sec_216 sec_1 a income_tax regs sec_164 allows a deduction for real_property_taxes paid_or_accrued within the taxable_year sec_164 sec_1_164-1 income_tax regs sec_55 imposes an alternative_minimum_tax amt on taxpayers in addition to any other income_tax imposed an individual’s amt is determined by a recomputation of the individual’s taxable_income which results in a new tax_base the amt income sec_55 in determining the amt income certain adjustments are required and no deduction is allowed for any miscellaneous itemized_deduction as defined in sec_67 or for any taxes described in sec_164 or except for a non-pertinent exception sec_56 we have held previously that the text of the amt statute is unambiguous klaassen v commissioner tcmemo_1998_241 affd without published opinion 182_f3d_932 10th cir it is clear from sec_56 that the deduction allowed for real_estate_taxes paid is an adjustment for purposes of calculating amt income sec_216 incorporates by reference sec_164 and sec_164 is specifically enumerated as an adjustment under sec_56 accordingly we sustain respondent’s determination petitioner also contends that she was entitled to claim the deduction allowed under sec_216 as a miscellaneous deduction sec_67 and respectively exclude from miscellaneous_itemized_deductions the deduction under sec_164 relating to taxes and the deduction under sec_216 relating to deductions in connection with cooperative housing corporations because sec_67 specifically excludes any sec_216 deduction from miscellaneous_itemized_deductions petitioner improperly characterized that deduction as a miscellaneous deduction reviewed and adopted as the report of the small_tax_case division decision will be entered for respondent


t c summary opinion united_states tax_court leedreau llc leonia m boudreau sole member petitioner v commissioner of internal revenue respondent docket no 30376-08s filed date leonia m boudreau for petitioner molly h donohue for respondent armen special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any unless otherwise indicated all subsequent section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure other court and this opinion shall not be treated as precedent for any other case the instant case arises from a petition for judicial review filed in response to a notice_of_determination concerning collection action s under sec_6320 and or the issue presented is whether respondent may proceed with the collection action as so determined before us now is respondent’s motion for summary_judgment background leonia m boudreau ms boudreau resided in the state of massachusetts when the petition was filed during the periods at issue leedreau llc the llc was a single-member limited_liability_company validly created under massachusetts law ms boudreau was the sole member of the llc during the periods at issue she did not elect to have the llc treated as a corporation for federal_income_tax purposes all references to petitioner refer to the llc and its sole member ms boudreau who are treated as a single_taxpayer under the regulations as discussed below petitioner’s tax_liability the llc failed to file form sec_941 employer’s quarterly federal tax_return for tax periods ended june september and date and march june september and date in addition the llc failed to file a form_940 employer’s annual federal unemployment futa_tax return for the tax period ended date respondent generated substitutes for return pursuant to sec_6020 for these tax periods and consistent with existing procedures assessed the taxes due final notices of intent to levy on date respondent issued a final notice--notice of intent to levy and notice of your right to a hearing with regard to each of the tax periods at issue except the tax period ended date on date petitioner timely submitted a form request for a collection_due_process or equivalent_hearing in respect of all of the tax periods at issue including the tax period ended date petitioner requested the hearing only on the basis that ms boudreau was not a responsible_officer of the llc on date respondent issued a final notice-- notice_of_intent_to_levy and notice of your right to a hearing with regard to the tax period ended date on date petitioner timely submitted a form for the tax period ended date again stating only that ms boudreau was not a responsible_officer of the llc administrative developments a settlement officer from respondent’s appeals_office was assigned to petitioner’s collection case for all of the tax periods at issue by letter dated date sent to both petitioner and petitioner’s authorized representative the settlement officer scheduled a telephone conference for date this letter also stated that in order for the settlement officer to consider a collection alternative petitioner was required to submit a collection information statement signed tax returns for designated tax periods and proof of federal tax deposits for one tax period neither petitioner nor petitioner’s representative contacted the settlement officer at the scheduled time for the conference call in addition petitioner did not submit the requested information to the settlement officer ultimately on date respondent’s appeals officer issued a notice_of_determination concerning collection action s under sec_6320 and or sustaining respondent’s proposed levy petition on date ms boudreau filed the petition in the petition ms boudreau states that she disagrees with the notice_of_determination on the basis that the liability is not her liability as she was not a responsible_officer of the llc and the operation was leased to a third party on date respondent filed the answer to the petition respondent’s motion for summary_judgment on date respondent filed the motion for summary_judgment that is presently before the court hearing on respondent’s motion for summary_judgment the court calendared for hearing respondent’s motion for summary_judgment on date both parties appeared and were heard at the hearing petitioner filed an objection to respondent’s motion respondent argues that because the llc did not elect to be treated as a corporation for federal tax purposes ms boudreau as the sole member is personally liable for the llc’s tax_liabilities ms boudreau argues that she should not be personally liable for the llc’s tax_liabilities because she was not a responsible_officer of the llc ms boudreau contends that the llc was leased to a third party who was permitted to use the taxpayer_identification_number of the llc ms boudreau further contend sec_2 in petitioner’s objection to respondent’s motion for summary_judgment petitioner conceded that ms boudreau was a responsible_officer for the period of date through date that this lessee is responsible for the tax_liabilities of the llc pursuant to their lease agreement discussion a summary_judgment summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials fla peach corp v commissioner 90_tc_678 summary_judgment may be granted with respect to all or any part of the legal issues in controversy if the pleadings answers to interrogatories depositions admissions and any other acceptable materials together with the affidavits if any show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law rule a and b after carefully reviewing the record we are satisfied that there is no genuine issue as to any material fact and a decision may be rendered as a matter of law accordingly we shall grant respondent’s motion for summary_judgment b respondent’s proposed levy sec_6330 generally provides that the commissioner cannot proceed with collection by levy until the taxpayer has been given notice and the opportunity for an administrative review of the matter in the form of an appeals_office hearing and if dissatisfied with judicial review of the administrative determination see 115_tc_35 114_tc_176 sec_6330 prescribes the matters that a taxpayer may raise at an appeals_office hearing in sum sec_6330 provides that a taxpayer may raise collection issues such as spousal defenses the appropriateness of the commissioner's intended collection action and possible alternative means of collection sec_6330 provides that the existence and amount of the underlying tax_liability can be contested at an appeals_office hearing only if the person did not receive a notice_of_deficiency for the tax in question or did not otherwise have an earlier opportunity to dispute the tax_liability see 114_tc_604 goza v commissioner supra pincite sec_6330 grants the court jurisdiction to review the appeals office’s determination to proceed with collection action via levy after the hearing when rendering a judgment as a matter of law the standard of review makes no difference we must reject erroneous views of the law 124_tc_56 although petitioner was given the opportunity for an administrative hearing neither petitioner nor petitioner’s representative called the settlement officer at the appointed time petitioner has not alleged any spousal defenses challenged the appropriateness of collection actions or proposed any collection alternatives any such issue is now deemed to be conceded see rule b any issue not raised in the assignments of error shall be deemed to be conceded ms boudreau’s only contention is that she is not liable for the taxes owed by the llc because she was not a responsible_officer of the llc c check-the-box_regulations sec_301_7701-1 through proced admin regs check-the-box_regulations provide rules for the classification of business entities for federal tax purposes these regulations provide rules and procedures for taxpayers to choose the tax treatment of their business_entity upon formation a business_entity such as a limited_liability_company with two or more members is treated as a partnership unless it elects to be treated as a corporation sec_301_7701-3 proced admin regs however a business_entity with only one member is treated as a disregarded_entity unless it elects to be treated as a corporation separate from its owner sec_301_7701-3 proced admin regs a single-member entity must make an affirmative election on a form_8832 entity classification election in order to be treated as a corporation separate from its owner comensoli v commissioner tcmemo_2009_242 petitioner does not challenge the validity of the check-the- box regulations in any event this court has previously held those regulations to be valid in this context see med practice solutions llc v commissioner t c __ for employment_taxes related to wages paid on or after date a disregarded_entity is treated as a corporation for purposes of employment_tax reporting and liability sec_301_7701-2 e proced admin regs see med practice solutions llc v commissioner supra at __ slip op pincite this amendment does not apply to the instant case during all of the taxable periods at issue ms boudreau was the sole member of the llc ms boudreau never filed a form_8832 to have the llc treated as a corporation for federal tax purposes accordingly the llc is disregarded as an entity separate from ms boudreau pursuant to sec_301 b ii proced admin regs thus ms boudreau is personally liable for the taxes owed by the llc it is irrelevant that ms boudreau allowed a third party to use the taxpayer_identification_number associated with her solely owned llc respondent is thereby authorized to collect the llc’s unpaid taxes from ms boudreau by means of the levy to reflect the foregoing an order granting respondent’s motion for summary_judgment and decision for respondent will be entered