t c memo united_states tax_court milo g and sarah e chapman et al petitioners v commissioner of internal revenue respondent docket nos filed date joann k beck for petitioners kathey i shaw for respondent memorandum opinion hamblen judge by four separate notices of deficiency respondent determined deficiencies additions to tax and 1cases of the following petitioners are consolidated herewith david e and gladys a christie docket no and dura-craft inc docket no penalties in regard to petitioners' federal_income_tax as follows milo g and sarah e chapman--docket no year deficiency dollar_figure big_number big_number addition_to_tax and penalties sec_6653 dollar_figure --- --- sec_6662 --- dollar_figure david e and gladys a christie--docket no year deficiency dollar_figure big_number addition_to_tax and penalties sec_6653 dollar_figure --- --- sec_6662 --- dollar_figure dura-craft inc --docket no taxable_year ending deficiency dollar_figure big_number addition_to_tax and penalty sec_6662 sec_6653 --- dollar_figure --- dollar_figure unless otherwise indicated all section references are to the internal_revenue_code as in effect for the years at issue and rule references are to the tax_court rules_of_practice and procedure after concessions the issues for decision are whether petitioners milo and sarah chapman and david and gladys christie received distributions from the dura-craft profit-sharing_plan plan in and pursuant to sec_72 whether petitioners milo and sarah chapman and david and gladys christie received early distributions from the plan in and and therefore are liable under sec_72 for the 10-percent additional tax for early distributions whether petitioners milo and sarah chapman and david and gladys christie constructively received interest_income in from the payments by dura-craft inc dura-craft and springbrook marketing springbrook to the plan whether petitioners david and gladys christie received constructive dividends in from the loan repayments by both dura-craft and springbrook to the plan in amounts greater than those actually owed to the individual petitioners and whether the 5-percent processing fees charged by northwest purchasing inc were allowable as a part of dura- craft's cost_of_goods_sold for fiscal years ending date and background these consolidated cases were submitted without a trial pursuant to rule the stipulation of facts and the attached exhibits are incorporated by this reference and the facts contained therein are found accordingly petitioners milo chapman and sarah chapman collectively hereinafter referred to as the chapmans resided in newberg oregon at the time the petition was filed in docket no and petitioners david christie and gladys christie collectively hereinafter referred to as the christies resided in aurora oregon at the time the petition was filed in docket no dura-craft inc is a c_corporation which maintained its principal_place_of_business in newberg oregon at the time the petition was filed in docket no during the years at issue the chapmans and the christies prepared their respective joint federal individual income_tax returns using the cash_receipts_and_disbursements_method of accounting and dura-craft prepared its federal corporate_income_tax returns using an accrual_method of accounting this case involves three closely held corporations and their shareholders northwest purchasing inc northwest is a subchapter_s_corporation which is owned equally by david christie and milo chapman northwest sells raw materials to dura-craft at northwest's cost plus a 5-percent processing fee during the years at issue dura-craft was owned by milo chapman percent and david christie percent dura-craft manufactures doll house kits and sells these kits exclusively to springbrook during the years at issue springbrook was owned by milo chapman percent and david christie percent springbrook markets the doll house kits to various outside retailers such as fred meyer and payless during the years at issue milo chapman was an employee of springbrook and david christie was both an officer and an employee of dura-craft milo chapman controlled all of the financial decisions of springbrook his responsibilities included signing checks hiring employees and establishing new markets for the dura-craft kits david christie controlled all of the financial decisions of dura-craft his responsibilities included signing checks hiring employees and making all major decisions concerning production and new kit designs office management and bookkeeping for both dura-craft and springbrook were performed at the office of dura-craft by employees of dura- craft a loans on date the chapmans and the christies each requested a loan in the amount of dollar_figure from the dura-craft profit-sharing_plan plan to meet unspecified emergency financial requirements on date the chapmans and the christies each signed separate notes agreeing to pay dollar_figure to the plan plu sec_12 percent interest accruing from date until the principal was paid on date the plan agreed to lend dollar_figure to the chapmans and dollar_figure to the christies pincite percent interest with a repayment date of date collectively hereinafter referred to as plan loans 2nothing in the record indicates how to reconcile the fact that the date that the plan agreed to make the loans was after the date that the individual petitioners signed separate notes agreeing to repay the loans we do not know whether this discrepancy is the result of inadvertence or was intentional although the plan agreed to these loans the plan instead paid dollar_figure to dura-craft on date and dollar_figure to springbrook on date on date dura-craft signed a note agreeing to pay david christie and milo chapman a total of dollar_figure plu sec_12 percent interest and on date springbrook signed a note agreeing to pay david christie and milo chapman dollar_figure plu sec_12 percent interest collectively referred to as corporate loans in dura-craft paid david christie dollar_figure on its dollar_figure corporate loan and springbrook paid milo chapman dollar_figure on its dollar_figure corporate loan at that time dura-craft reduced its loan payable balance reflected in its accounting_records by the dollar_figure it paid to david christie springbrook also reduced its loan payable balance reflected in its accounting_records by the dollar_figure it paid to milo chapman due to an error springbrook included the dollar_figure loan repayment to milo chapman on his form_w-2 neither david christie nor milo chapman reduced his loan balance with the plan in as of date the accounting_records of dura-craft had a loan payable balance to david christie and milo chapman of dollar_figure and the accounting_records of springbrook had a loan payable balance of dollar_figure on date springbrook paid the balance of its corporate loan by issuing a check to the plan in the amount of dollar_figure with the notation princ dollar_figure - int dollar_figure on the same day dura-craft also paid the balance of its corporate loan by issuing a check to the plan for dollar_figure with the notation princ dollar_figure int dollar_figure dura-craft's check register for the dollar_figure check to the plan bears the notation loan payback from milo-dave-pd directly to dura-craft profit share trust springbrook recorded the payment on its accounting_records as follows wage expense interest_expense loan payment paid to profit-sharing_plan dollar_figure big_number big_number big_number at the time of the payment springbrook's accounting_records reflected a loan payable balance of dollar_figure springbrook computed and paid interest to the plan on the full amount of its corporate loan despite the dollar_figure loan payment which springbrook made to milo chapman in accordingly as of the date of its payment springbrook owed to milo chapman and david christie a total of dollar_figure in interest rather than the dollar_figure which was paid dura-craft recorded the dollar_figure repayment on the same date in its accounting_records as follows wage expense interest_expense loan payment paid to profit-sharing_trust dollar_figure big_number big_number big_number at the time of the payment dura-craft's accounting_records reflected a remaining loan payable balance of dollar_figure nonetheless dura-craft computed the interest owed based upon an outstanding loan balance of dollar_figure despite the dollar_figure loan payment which dura-craft made to david christie in accordingly as of the date of its payment dura-craft owed interest to milo chapman and david christie in the amount of dollar_figure rather than the dollar_figure which was paid on date the loan principal and interest due to the plan for each of the plan loans exceeded the statutory limit of dollar_figure pursuant to sec_72 total interest of dollar_figure and dollar_figure accrued on the plan loans during and respectively the chapmans and the christies did not report any income with respect to the corporate or plan loans respondent determined that the chapmans and the christies each received two plan distributions from the plan pursuant to sec_72 in in the amount of the principal balance of dollar_figure and one-half of the accrued interest dollar_figure and in in an amount of one-half of the interest accruing during that year dollar_figure in addition respondent determined that petitioners were liable for an additional 10-percent tax pursuant to sec_72 on each distribution respondent also determined that the chapmans and the christies each received the following amounts of income in dividends from springbrook equal to one-half of the difference between interest of dollar_figure owed by springbrook on its corporate loan and the dollar_figure actually paid_by springbrook to the plan dollar_figure dividends from dura-craft equal to one- half of the difference between the dollar_figure of interest owed by dura-craft on its corporate loan and the dollar_figure actually paid_by dura-craft to the plan dollar_figure interest_income equal to one-half of the interest owed by dura-craft dollar_figure and by springbrook dollar_figure on the respective corporate loans but paid to the plan b northwest northwest was incorporated in as a corporation electing small_business status under subchapter_s and is equally owned by david christie and milo chapman during and northwest had no employees and had the same telephone number business address and office space as dura-craft for its taxable years ending date and dura-craft purchased all of its raw materials from northwest northwest sold dura-craft these raw materials at northwest's cost plus a 5-percent processing fee for the years ending date and dura-craft paid northwest processing fees of dollar_figure and dollar_figure respectively as northwest had no employees all of northwest's orders were placed by dura-craft employees and delivered directly to the dura-craft plant northwest maintained its own set of accounting_records and filed its own tax returns for the taxable years ending date and respondent disallowed the payments dura-craft claimed as cost_of_goods_sold for taxable years ending date and discussion petitioners bear the burden of establishing that respondent's determinations of deficiencies as contained in the statutory notices of deficiency are incorrect rule a 290_us_111 petitioners' briefs refer to several facts which were not included in the parties' stipulation of facts statements in briefs do not constitute evidence and will not be considered by the court rule b 48_tc_704 affd per curiam 413_f2d_1047 9th cir the record of this case was closed prior to the submission of the parties' briefs accordingly we hold that the additional facts contained in petitioners' briefs that were not part of the stipulation of facts or offered at trial are not a part of the record 3examples of statements in petitioners' briefs that are not in the record include northwest was formed by the chapman and chritie sic families for the purpose of locating and brokering wood products for sale to others david christie oversees the administrative and accounting portions of northwest purchasing while milo chapman locates evaluates and secures the raw materials purchased by northwest for sale the services of northwest's principals are not performed by anyone else i issues loans the questions presented in the first four issues are related to the corporate and plan loans and we discuss them correlatively distributions from a qualified_plan are taxable as provided in sec_402 the tax equity and fiscal responsibility act of tefra publaw_97_248 sec a 96_stat_324 added sec_72 sec_72 generally treats loans from a qualified_employer_plan to plan participants or beneficiaries as taxable_distributions sec_72 provides if during any taxable_year a participant or beneficiary receives directly or indirectly any amount as a loan from a qualified_employer_plan such amount shall be treated as having been received by such individual as a distribution under such plan sec_72 provides an exception to sec_72 applies to any loan from a qualified_employer_plan which was made after date tax equity and fiscal responsibility act of tefra publaw_97_248 sec a 96_stat_324 sec_72 provides in pertinent part exception for certain loans -- a general_rule --paragraph shall not apply to any loan to the extent that such loan when added to the outstanding balance of all other loans from such plan whether made on before or after date does not exceed the lesser of-- i dollar_figure reduced by the excess if any of-- i the highest outstanding balance of loans from the plan continued the general_rule of sec_72 if the following requirements are satisfied the balance of all outstanding continued during the 1-year period ending on the day before the date on which such loan was made over ii the outstanding balance of loans from the plan on the date on which such loan was made or ii the greater of i one-half of the present_value of the nonforfeitable accrued_benefit of the employee under the plan or ii dollar_figure b requirement that loan be repayable within years -- i in general -- subparagraph a shall not apply to any loan unless such loan by its terms is required to be repaid within years c requirement of level amortization --except as provided in regulations this paragraph shall not apply to any loan unless substantially level amortization of such loan with payments not less frequently than quarterly is required over the term of the loan sec_72 was amended by tax_reform_act_of_1986 publaw_99_514 sec a 100_stat_2085 prior to the amendment the statutory limit of dollar_figure in section sec_72 was not reduced by the excess if any of the highest outstanding loan balance during the 1-year period ending on the day before the date of the new loan over the outstanding balance of loans from the plan on the date on which the loan was made this revision to sec_72 applies to loans made renewed renegotiated modified or extended after date id plan loans does not exceed the lesser_of i dollar_figure or ii the greater of dollar_figure or half of the participant's vested_accrued_benefit under the plan and the loan by its terms requires repayment within years sec_72 and b sec_72 was added by the tax_reform_act_of_1986 publaw_99_514 sec b 100_stat_2085 and limits the exception in sec_72 to those loans that are required to be amortized in substantially level installments paid at least quarterly this provision applies to loans made renewed renegotiated modified or extended after date id sec_72 imposes an additional tax on an amount received from a qualified_retirement_plan equal to percent of the portion of such amount that is includable in gross_income sec_72 exempts distributions from the additional tax if the distributions are made inter alia to an employee age 59½ or older to a beneficiary or the estate of the employee on or after the death of the employee on account of disability as part of a series of substantially_equal_periodic_payments made for life to an employee after separation_from_service after attainment of age or as dividends_paid with respect to corporate stock described in sec_404 sec_61 includes as gross_income all income from whatever source derived including inter alia interest and dividends sec_61 sec_316 defines dividends as any distribution_of_property made by a corporation to its shareholders to the extent of earnings_and_profits dividends may be formally declared or they may be constructive 368_f2d_439 9th cir affg tcmemo_1965_84 a substance-over-form argument petitioners do not dispute respondent's calculations of the amounts of the distributions interest or dividends that flow from the plan or corporate loans nor do petitioners challenge the years in which respondent seeks to include the above amounts rather petitioners ask us to ignore the form of the loans and treat the loans as having been made from the plan directly to the corporations petitioners contend that the chapmans and the christies obtained the plan loans for the purpose of advancing the proceeds to dura-craft and springbrook in order for the corporations to avoid the prohibited_transaction provisions pursuant to sec_4975 in other words petitioners argue sec_4975 imposes two levels of excise_tax on any disqualified_person who participates in a prohibited_transaction sec_4975 and b sec_4975 imposes an excise_tax equal to percent of the amount_involved with the prohibited_transaction sec_4975 provides sec_4975 initial taxes on disqualified continued that the series of loans was not bona_fide the effect of petitioners' recharacterization would be to relieve the chapmans and the christies of any income_tax consequences flowing from the loans in addition petitioners seek to characterize the excess_interest payments made by the corporations to or on behalf of milo chapman and david christie as bookkeeping errors subject_to correction pursuant to sec_4975 continued person --there is hereby imposed a tax on each prohibited_transaction the rate_of_tax shall be equal to percent of the amount_involved with respect to the prohibited_transaction for each year or part thereof in the taxable_period the tax imposed by this subsection shall be paid_by any disqualified_person who participates in the prohibited_transaction other than a fiduciary acting only as such sec_4975 imposes an additional excise_tax on the prohibited_transaction equal to percent of the amount_involved if the transaction is not timely corrected the prohibited_transactions enumerated in sec_4975 were designed to guard against over- reaching by persons able to exert influence over the affairs of the plan a prohibited_transaction includes inter alia any direct or indirect lending of money or other extension of credit between a plan and a disqualified_person sec_4975 disqualified persons are defined in terms of certain relationships a person has with a plan sec_4975 those relationships include inter alia fiduciary sec_4975 an employer whose employees are covered by the plan sec_4975 an owner of percent or more of a corporation any of whose employees are covered by the plan sec_4975 a member_of_the_family of any individual described within certain paragraphs in sec_4975 sec_4975 and any officer or director of a corporation which among other things has employees covered by the plan sec_4975 7the parties stipulated that the plan was a profit-sharing_plan and neither party disputed that the plan was a qualified_plan for purposes of sec_401 or a qualified_employer_plan for purposes of sec_72 respondent does not dispute the form in which petitioners have cast the loans in question instead respondent argues that the chapmans and the christies have failed to recognize the income_tax consequences flowing from the corporate and plan loans accordingly we must decide whether petitioners should be permitted to repudiate the loans from the plan to the chapmans and the christies and the loans from milo chapman and david christie to the corporations a taxpayer's ability to disavow the form it has chosen for a transaction is circumscribed 87_tc_1417 59_tc_760 n the supreme court has observed repeatedly that while a taxpayer is free to organize his affairs as he chooses nevertheless once having done so he must accept the tax consequences of his choice whether contemplated or not and may not enjoy the benefit of some other route he might have chosen to follow but did not 417_us_673 417_us_134 it would be quite intolerable to pyramid the existing complexities of tax law by a rule that the tax shall be that resulting from the form of transaction taxpayers have chosen or from any other form they might have chosen whichever is less 284_f2d_322 2d cir affg 32_tc_1297 petitioners' assertion that they used milo chapman and david christie as intermediaries to avoid the excise_tax of sec_4975 is untenable petitioners now are bound by the form of the loans that they have chosen and may not in hindsight recast the transaction in another form 429_us_569 commissioner v national alfalfa dehydrating milling co supra 693_f2d_71 9th cir affg 74_tc_662 petitioners seek to circumvent the above outcome by relying upon example sec_3 and found in c f_r sec 408b- a which they contend support treating the plan loans as prohibited_transactions rather than as participant loans these examples provide in pertinent part example p is a plan covering all the employees of e the employer who established and maintained the plan p f is a fiduciary with respect to p and an officer of e the plan documents governing p give f the authority to establish a participant_loan program in accordance with sec_408 of the employer retirement income security act of act pursuant to an arrangement with e f establishes such a program but limits the use of loan funds to investments in a limited_partnership which is established and maintained by e as general_partner under these facts the loan program and any loans made pursuant to this program are outside the scope of relief provided by sec_408 because the loan program is designed to operate for the benefit of e under the circumstances described the diversion of plan assets for e's benefit would also violate sec_403 and sec_404 of the act example assume the same facts as in example above except that f does not limit the use of loan funds however e pressures his employees to borrow funds under p's participant_loan program and then reloan the loan proceeds to e f unaware of e's activities arranges and approves the loans if the loans meet all the conditions of sec_408 such loans will be exempt under that section however e's activities would cause the entire transaction to be viewed as an indirect transfer of plan assets between p and e who is a party in interest with respect to p but not the participant borrowing from p by coercing the employees to engage in loan transactions for its benefit e has engaged in separate transactions that are not exempt under sec_408 accordingly e would be liable for the payment of excise_taxes under sec_4975 of the code example f is a fiduciary with respect to plan p d is a party in interest with respect to plan p sec_406 of the act would prohibit f from causing p to lend money to d however f enters into an agreement with z a plan participant whereby f will cause p to make a participant_loan to z with the express understanding that z will subsequently lend the loan proceeds to d an examination of z's credit standing indicates that he is not creditworthy and would not under normal circumstances receive a loan under the conditions established by the participant_loan program f's decision to approve the participant_loan to z on the basis of z's prior agreement to lend the money to d violates the exclusive purpose requirements of sec_403 and a in effect the entire transaction is viewed as an indirect transfer of plan assets between p and d and not a loan to a participant exempt under sec_408 z's lack of credit standing would also cause the transaction to fail under sec_408 of the act example f is a fiduciary with respect to plan p z is a plan participant z and d are both parties_in_interest with respect to p f approves a participant_loan to z in accordance with the conditions established under the participant_loan program upon receipt of the loan z intends to lend the money to d if f has approved this loan solely upon consideration of those factors which would be considered in a normal commercial setting by an entity in the business of making comparable loans z's subsequent use of the loan proceeds will not affect the determination of whether loans under p's program satisfy the conditions of sec_408 emphasis added petitioners misconstrue the scope of c f_r sec 408b-1 sec_406 of the employee_retirement_income_security_act_of_1974 erisa publaw_93_406 88_stat_879 generally prohibits loans between a plan and a party-in- interest sec_408 of erisa exempts loans to participants and beneficiaries if the loans meet certain requirements the erisa sec_408 exemption of erisa parallels sec_4975 c f_r sec 408b-1 v the regulation merely explains the circumstances in which these exemptions are available for purposes of erisa sec_408 and sec_4975 the examples in c f_r sec 408b-1 are merely illustrative of those circumstances they do not purport to limit the situations in which sec_72 may apply or to describe the income_tax consequences of loans from a qualified profit-sharing_plan we are satisfied that this is not a case in which petitioners are entitled to avoid the tax consequences arising 8erisa and the code provide an exemption from the prohibited_transaction rules where loans are available to all participants on a reasonably equivalent basis are not available to highly compensated employees in greater amounts bear a reasonable rate of interest and are adequately secured see c f_r sec 408b-1 from their loan agreements on the ground that the loans reflected therein were not as documented petitioners have not acted in accordance with what they argue is the substance of the loans rather petitioners freely admit the purpose of the corporate and plan loans was to permit dura-craft and springbrook to escape the imposition of the excise_tax pursuant to sec_4975 petitioners now seek relief from the unforeseen tax consequences arising from the misrepresentation they deliberately perpetrated petitioners may not disavow their chosen form of the loans on the belated assertion that the entire loan transaction was fictitious and was designed to avoid the prohibited_transaction provisions of sec_4975 one should not be garroted by the tax collector for calling one's agreement by the wrong name 297_f2d_122 9th cir but to allow petitioners to disavow their prior representations under such circumstances would invite similar intentional deceit on the part of other taxpayers seeking to gain a tax_benefit 105_tc_324 103_tc_525 affd 100_f3d_778 10th cir having determined that petitioners may not disavow the form of their loans we turn to consider the tax consequences flowing from that form b tax consequences of loan sec_1 plan loans first we direct our attention to the income_tax consequences of the plan loans sec_72 provides in pertinent part that if during any taxable_year a participant receives directly or indirectly any amount as a loan such amount shall be treated as having been received as a distribution under such plan emphasis added sec_72 carves out an exception permitting the tax-free withdrawal of funds from a qualified_plan by a plan participant in the form of a loan if inter alia the terms of the loan prescribe a repayment period of years or less respondent contends that the legislative_history of sec_72 interprets the statute to provide that any unpaid principal or interest is treated as distributed at the end of the 5-year period the legislative_history of sec_72 states in pertinent part if payments under a loan with a repayment period of less than years are not in fact made so that an amount remains payable at the end of years the amount remaining payable is treated as if distributed at the end of the 5-year period h conf rept pincite 1982_2_cb_600 emphasis added respondent further argues that any interest accruing after the 5-year period but before the loans are repaid is an additional distribution pursuant to sec_72 for clarity we will address separately the applicability of sec_72 to the principal and accrued interest of the plan loans petitioners do not dispute that the distribution of the dollar_figure ie the principal of the plan loans if it is taxable to them at all is taxable in pursuant to the legislative_history of sec_72 as interpreted by respondent accordingly we sustain respondent's determination that the chapmans and the christies each received a distribution from the plan in the amount of dollar_figure in dollar_figure we are not convinced however that congress intended that interest accruing during or after the 5-year period be treated as a taxable_distribution for purposes of sec_72 respondent's argument relies upon the fiction that the accrued interest constitutes an additional loan from the language of sec_72 it is apparent that to be a taxable_distribution the loan amount must be received either directly or 9respondent's argument assumes that milo chapman and david christie were participants in the plan and that the plan loans otherwise satisfied the requirements of the exception in sec_72 petitioners do not challenge these assumptions 10there seems to be a gulf between the language of the statute and the legislative_history in other circumstances we might be concerned about this disparity which indicates legislation by conference_report rather than by concise statements in the statute taxpayers should not be compelled to look at legislative_history to determine the tax consequences of their activities indirectly by the participant or beneficiary the accrued interest does not satisfy the requirement that the loan must be received to be a distribution accordingly we find that for purposes of sec_72 neither milo chapman nor david christie received distributions in or equal to the interest in the amounts of dollar_figure and dollar_figure which accrued on the plan loans sec_72 imposes an additional 10-percent income_tax on amounts received from a qualified_retirement_plan petitioners do not claim to come within one of the enumerated exceptions of sec_72 we sustain respondent's determination that the distributions of dollar_figure are subject_to the 10-percent additional income_tax of sec_72 having decided however that the accrued interest amounts of dollar_figure and dollar_figure are not plan distributions we find that sec_72 does not apply to these amounts corporate loans we first consider whether the chapmans and the christies earned interest_income in from the corporate loans to them it is well settled that if a taxpayer's obligation is paid_by a third party the effect is the same as if the third party had paid the taxpayer who in turn paid his creditor 296_us_1 279_us_732 279_us_716 164_f2d_462 4th cir petitioners concede that dura-craft and springbrook owed interest to milo chapman and david christie in the amounts of dollar_figure and dollar_figure on their respective corporate loans instead of paying the interest directly to the individual petitioners the corporations paid the plan having found that petitioners may not disavow the loans we must also conclude that the dollar_figure in interest owed by the corporations to milo chapman and david christie was paid to the plan for their benefit and used to satisfy their own obligations with respect to the personal loans to them from the plan accordingly we sustain respondent's determination that the chapmans and the christies each received interest_income in the amount of dollar_figure in finally we must determine whether milo chapman and david christie received dividend income in to the extent that the loan payments made by dura-craft and springbrook exceeded the amounts actually owed to milo chapman and david christiedollar_figure petitioners contend that the excess loan payments should not be treated as dividends because those payments were bookkeeping errors which should be corrected pursuant to sec_4975 sec_4975 defines the terms correction and correct to mean with respect to a prohibited_transaction undoing the transaction to the extent possible but in any case placing the plan in a financial position not worse than that in which it 11we note that petitioners did not argue that the dividends exceeded the earnings_and_profits of the corporations would be if the disqualified_person were acting under the highest fiduciary standards emphasis added petitioners' reliance on sec_4975 is misplaced it is evident from the above language that sec_4975 has no relevance to the income_tax imposed upon dividend income arising from a corporation's conferring a benefit upon its shareholders this is apparent from the structure of the code sec_4975 is contained in subtitle d chapter whereas the provisions governing taxation of dividends are found in subtitle a chapter there is no cross-reference between sec_4975 and those provisions petitioners further contend that bookkeeping errors do not give rise to a penalty tax relying upon 780_fsupp_625 d minn in ahlberg the sole beneficiary and administrator misallocated contributions between a pension_plan and profit-sharing_plan the funds of which were maintained in a commingled mutual_fund the district_court granted summary_judgment sua sponte holding that the taxpayer was not subject_to the excise_tax of percent for maintaining a plan with an accumulated_funding_deficiency the court concluded that the misallocations were bookkeeping errors from which the taxpayer did not receive any extra benefit and that no harm came to the plans ahlberg is distinguishable from the instant case unlike the taxpayer in ahlberg milo chapman and david christie did receive a benefit from the bookkeeping errors corporate payments to third parties at the direction of shareholders or in discharge of the shareholders' debts and liabilities may constitute a constructive_dividend 674_f2d_570 6th cir affg tcmemo_1978_434 613_f2d_160 6th cir affg tcmemo_1976_349 521_f2d_160 10th cir noble v commissioner f 2d pincite 277_f2d_879 8th cir affg 32_tc_815 74_tc_1513 73_tc_980 petitioners seek to distinguish the facts in many of the above cases from those in the instant case on grounds that are immaterial to the outcome the basic issue is whether the corporate expenditures were incurred primarily to benefit the corporations' trade_or_business or primarily for the benefit of the shareholders 621_f2d_731 5th cir 577_f2d_1206 5th cir noble v commissioner supra pincite magnon v commissioner supra pincite when a corporation confers an economic benefit upon a shareholder in his capacity as such without an expectation of repayment that economic benefit becomes a constructive_dividend taxable to the shareholder whether or not the corporation intended to confer a benefit upon him loftin woodard inc v united_states supra pincite noble v commissioner supra pincite to the extent that dura-craft and springbrook made payments to the plan in excess of the amounts actually owed on the corporate loans the corporations conferred an economic benefit while dura-craft and springbrook may have mistakenly paid too much principal and interest those payments nonetheless satisfied the plan loans which were the chapmans' and the christies' personal debts due to the plan as such they provided a taxable benefit to the individual petitioners we are satisfied that milo chapman and david christie each received dividend income during in the amount of dollar_figure i issue processing fee finally we must consider whether the 5-percent processing fees paid to northwest and included as a part of dura-craft's cost_of_goods_sold are allowable sec_61 includes gross_income derived from business in its general definition of gross_income sec_61 gross_income from business means total sales less cost_of_goods_sold plus any income from investments and from incidental or outside operations or sources sec_1_61-3 income_tax regs 12we express no opinion here as to any liability with respect to the excise_tax of sec_4975 with regard to the plan loans respondent disallowed the processing fees on the grounds that the transactions were shams lacking a business_purpose and economic_substance petitioners however argue that the separate corporate entity status of northwest should be recognized citing the test in 319_us_436 and the line of cases resting thereon we are not required to find northwest was a sham in order to uphold respondent's determinations the notice_of_deficiency focuses on the sham nature of the transactions rather than the sham nature of the corporation a sham_transaction is one that lacks economic_substance beyond the creation of tax benefits 364_us_361 924_f2d_1018 11th cir affg 91_tc_733 petitioners bear the burden of proving that the challenged transactions were not shams rule a 94_tc_738 alternatively petitioners appear to argue that the proper test for sustaining the deduction of the processing fee is the test in 77_tc_1221 in grodt we set forth eight factors by which to determine whether the benefits_and_burdens_of_ownership have passed and a sale has occurred between contracting partiesdollar_figure while the shifting of benefits_and_burdens_of_ownership is a key indicator of the presence or a lack of economic_substance it is only one of several considerations 88_tc_386 affd 868_f2d_851 6th cir the u s court_of_appeals for the ninth circuit the circuit in which this case is appealable 54_tc_742 affd 445_f2d_985 10th cir determines whether a transaction is a sham by the following two-part test has the taxpayer shown a business_purpose for engaging in the transaction other than tax_avoidance a subjective test and has the taxpayer shown that the transaction had economic_substance beyond the creation of tax benefits an objective test 909_f2d_1360 9th cir citing 820_f2d_1543 9th cir affg t c memo affg tcmemo_1987_628 this two-part test however is not 13the factors included whether legal_title passes how the parties treat the transaction whether an equity was acquired in the property whether the contract creates a present obligation on the purchaser to make payments whether the right of possession is vested in the purchaser which party pays the property taxes which party bears the risk of loss or damage to the property and which party receives the profits from the sale of the property 77_tc_1221 citations omitted to be used as a rigid two-step analysis id pincite instead business_purpose and economic_substance are simply more precise factors to be considered in the application of the traditional sham analysis that is whether the transaction had any practical economic effects other than the creation of income_tax losses 843_f2d_351 9th cir the business_purpose factor often involves an examination of the subjective factors which motivated a taxpayer to enter into the transaction at issue bail bonds by marvin nelson inc v commissioner supra pincite the economic-substance factor involves a broader examination of whether the substance of a transaction reflects its form and whether from an objective standpoint the transaction was likely to produce economic benefits aside from a tax deduction id dura-craft and northwest both of which acted under the effective_control or direction of milo chapman and david christie were related parties in determining whether the form of a transaction between related parties has substance we compare their actions with what would have occurred if the transaction had occurred between parties who were dealing at arm's length 95_tc_107 the question of whether an expense is lacking in economic_substance is essentially a factual determination 320_us_467 631_f2d_642 9th cir affg 66_tc_1024 tax laws affect the shape of many business transactions the parties to a transaction are entitled to take into account and to maximize favorable tax results so long as the transaction is compelled or encouraged by nontax business reasons 435_us_561 87_tc_905 affd 899_f2d_905 10th cir we agree with respondent however that the payments of the processing fees by dura-craft to northwest were shams dura-craft is a subchapter_c_corporation and northwest is a subchapter_s_corporation as defined in sec_1361 the profits of a c_corporation are subject_to corporate_income_tax sec_11 and any distributions to shareholders are then subject_to the shareholders' personal income_tax sec_61 sec_316 the profits of a subchapter_s_corporation however are generally not subject_to a corporate tax sec_1371 but pass through to be taxed on the individual shareholders' returns sec_1366 thereby eliminating the double_taxation of distributions to the shareholders of c corporations moreover petitioners have failed to show that dura-craft had a business_purpose in making the payments furthermore the payments served no purpose other than the generation of tax benefits by shifting money and income between dura-craft and northwest the record is devoid of evidence that services were provided or value was added by northwest while the tax benefits are quite apparent northwest had no employees during the years at issue moreover dura-craft employees placed all of the orders in dura-craft office space and received all of the raw materials directly at the dura-craft plant simply there was no arm's-length reason beyond these tax benefits for dura-craft to compensate northwest based upon the entire record in this case we conclude that dura-craft is not entitled to include the 5-percent processing fees paid to northwest as part of its cost_of_goods_sold for its taxable years ending date and we have considered all of the other arguments made by petitioners and to the extent we have not addressed them find them to be without merit to reflect the foregoing and concessions by the parties decisions will be entered under rule


t c summary opinion united_states tax_court kenneth russell laremore petitioner v commissioner of internal revenue respondent docket no 15737-12s filed date kenneth russell laremore for himself edward j laubach jr for respondent summary opinion gustafson judge this case was heard pursuant to the provisions of sec_7463 in effect when the petition was filed pursuant to sec_7463 sec_1 unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as in effect for the year in issue codified in u s c and referred to herein as the code 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 shall not be treated as precedent for any other case the internal_revenue_service irs determined a deficiency of dollar_figure in the federal_income_tax of petitioner kenneth laremore the issue for decision is whether mr laremore may deduct as alimony dollar_figure that he paid to his former spouse during in satisfaction of a judgment we hold that he may not because his obligation under the divorce instrument would not have terminated upon his ex-wife’s death for purposes of sec_71 findings_of_fact the parties submitted this issue fully stipulated pursuant to rule reflecting their agreement that the relevant facts could be presented without a trial the stipulation of facts filed date and the attached exhibits are incorporated herein by this reference mr laremore resided in pennsylvania at the time he filed his petition property settlement agreement mr laremore married linda gonsowski in and they were granted a judgment of divorce in the state of new york in as part of the judgment of divorce mr and mrs laremore agreed to a stipulation of settlement which was entered of record during a court hearing maintenance payments the stipulation of settlement provided for mr laremore to make monthly maintenance payments of dollar_figure to his ex-wife commencing date and continuing until mrs laremore’s death or remarriage specifically the parties agreed that the payments of dollar_figure will be taxable of course to the wife tax deductible to the husband pursuant to irs rules there is no dispute in this case that mr laremore may deduct those amounts for income_tax purposes other_property pursuant to the stipulation of settlement mr and mrs laremore made several agreements regarding the division of their marital assets they agreed to sell their residence and split the net_proceeds equally they also agreed to divide their joint bank accounts equally with mr laremore agreeing to give mrs laremore of the funds in a bank account he held individually also in the stipulation of settlement and pertinent to this case the couple agreed to divide equally their retirement accounts so that the net result is that they would end up with equal dollars emphasis added the stipulation of settlement provided the value of mr laremore’s ira’s over mrs laremore’s is dollar_figure the agreement is that she will get half of that sum for dollar_figure via a qdro being placed on mr laremore’s traditional_ira so that that amount will be transferred to her and the end result is that the parties will have equally shared these retirement accounts emphasis added during a brief discussion held off the record the parties realized that their respective numbers for the various retirement accounts did not precisely match addressing the matter on the record divorce counsel for mr laremore stated we’re recognizing that the numbers on the ira’s or retirement accounts may be slightly off but the concept here is that whatever was in those accounts at commencement plus the growth on them equally belongs to the parties and so to the extent that we need to look at statements and do a little tweaking on the number we will but the concept of what we’re doing is there emphasis added divorce decree the stipulation of settlement was incorporated by reference into the divorce decree in which it was-- a qdro is a qualified_domestic_relations_order as defined in sec_414 which is issued in the context of a divorce or separation a qdro permits a portion of a tax-advantaged retirement_plan such as an individual_retirement_account ira see sec_408 to be transferred from one divorcing spouse to the other without the transferring spouse’s incurring a tax_liability on the amount transferred thereafter the receiving spouse owns the portion transferred and will owe any income_tax_liability arising from withdrawals of funds out of the account ordered and adjudged that the stipulation of settlement dated date entered into between the parties a copy of the transcript of which is attached to and incorporated in this judgment by reference shall survive and shall not be merged in this judgment and the parties hereby are directed to comply with every legally enforceable term and provision of such stipulation as if such term or provision were set forth in its entirety herein after the divorce was finalized mr laremore moved to pennsylvania payments under the stipulation of settlement if events had proceeded as agreed roughly dollar_figure would have been rolled over from mr laremore’s ira managed by vanguard funds vanguard -- without tax_liability accruing to him--into an ira owned by mrs laremore thereafter she would have borne the income_tax_liability on withdrawals of that money but events did not proceed entirely as agreed mr laremore did pay mrs laremore her maintenance payments which in totaled dollar_figure however although their divorce was final in mrs laremore did not receive the agreed-upon sum of dollar_figure for the equal division of their retirement accounts until from to mrs laremore’s counsel attempted on three occasions-- but at an apparently slow pace--to file the qdros yet all three attempts had various defects rather than continuing her attempts to file a qdro mrs laremore sued mr laremore in suffolk county new york and on date a judgment was entered against mr laremore mrs laremore directed that the judgment be transferred to mr laremore’s home state of pennsylvania in order to enforce it against him on date vanguard paid her dollar_figure including dollar_figure in penalty interest from mr laremore’s non-ira accounts in full satisfaction of the judgment notice_of_deficiency on his form_1040 u s individual_income_tax_return mr laremore claimed an alimony deduction of dollar_figure for his payments to his ex-wife in respondent concedes that dollar_figure of this amount consists of the separate_maintenance payments provided for in the stipulation of settlement and is deductible as alimony by a statutory_notice_of_deficiency dated date the irs disallowed the remaining dollar_figure of mr laremore’s claimed alimony deduction which consisted of his payment of the judgment and determined a dollar_figure deficiency in mr laremore’s federal_income_tax opinion i burden_of_proof as a general_rule the irs’s determination is presumed correct and taxpayers generally bear the burden to prove their entitlement to any deductions they claim rule a 290_us_111 the submission of a case under rule does not alter that burden see 95_tc_82 aff’d 943_f2d_22 8th cir taxpayers must satisfy the specific requirements for any deduction claimed see 503_us_79 mr laremore seeks to deduct as alimony the dollar_figure he paid to mrs laremore in order to do so he must prove it was in fact a payment of alimony ii definition of alimony sec_215 allows a deduction to the paying spouse for the alimony or separate_maintenance payments made during the paying spouse’s tax_year that are includible in the recipient spouse’s gross_income under sec_71 the characterization of payments in a decree as alimony or property settlement is not controlling see baker v commissioner tcmemo_2000_164 whether a payment constitutes alimony within the meaning of sec_71 and sec_215 is determined by reference to sec_71 which provides sec_71 alimony or separate_maintenance payments defined --for purposes of this section-- in general --the term alimony_or_separate_maintenance_payment means any payment in cash if-- a such payment is received by or on behalf of a spouse under_a_divorce_or_separation_instrument b the divorce_or_separation_instrument does not designate such payment as a payment which is not includible in gross_income under this section and not allowable as a deduction under sec_215 c in the case of an individual legally_separated from his spouse under a decree of divorce or of separate_maintenance the payee spouse and the payor spouse are not members of the same household at the time such payment is made and d there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment in cash or property as a substitute for such payments after the death of the payee spouse in congress enacted sec_71 in its current form specifically to eliminate the subjective inquiries into intent and the nature of payments that had plagued the courts in favor of a simpler more objective test 102_f3d_842 6th cir aff’g tcmemo_1995_183 if all four of these conditions are met then a payment is deductible_alimony if any one or more of them is not met then the payment is not deductible_alimony jaffe v commissioner tcmemo_1999_196 slip op pincite iii liability to make payment after death under sec_71 the parties do not dispute whether mr laremore’s payment satisfies sec_71 but the commissioner contends that he fails to meet the other three requirements of the statute in subparagraphs a b and d we need not address all three of these because we hold that mr laremore did remain liable to make the payment in the event of his ex-wife’s death the payment therefore did not meet the requirement of sec_71 and did not qualify as deductible_alimony the parties do not raise sec_408 which provides that a transfer of an individual’s ira to a former spouse pursuant to a divorce or separation agreement is not a taxable transfer for sec_408 to apply t here must be a transfer of the ira participant’s ‘interest’ in the ira to his spouse or former spouse and such transfer must have been made under a sec_71 divorce_or_separation_instrument 114_tc_259 because the payment by mr laremore was in cash from a non-ira account instead of being in the form of a transfer of half his interest in the ira via a qdro sec_408 does not apply however mr and mrs laremore’s clear shared intent at the time of the stipulation of settlement was that the transfer be from mr laremore’s ira this fact influences our construction of the stipulation of settlement and supports the conclusion that the agreement provides for a transfer to mrs laremore that would be non-taxable to her and that would take place even if she died after the divorce and before the transfer in deciding whether payments qualify as alimony under sec_71 we examine the terms of the divorce_or_separation_instrument to ascertain whether it contains a condition that terminates the paying spouse’s liability upon the death of the recipient spouse and if it does not whether state law applies such a condition in cases where the instrument is silent see hoover v commissioner f 3d pincite accordingly sec_71 is satisfied if the liability ceases upon the death of the payee spouse by operation of law 129_tc_92 citing notice_87_9 c b respondent argues that mr laremore’s obligation to pay would not terminate at death because t here is no statute or caselaw in either new york or pennsylvania which would render a judgment for monetary damages void if the judgment creditor dies in the event of the death of the judgment holder the judgment inures to the benefit of the judgment holder’s heirs emphasis added mr laremore counters with the argument for which he cites no authority that his liability to pay mrs laremore or her estate in the event of her death would depend on whether she had previously given the executor of her estate permission to transfer the obligation at her death but both these contentions addressing whether the judgment against mr laremore would have survived mrs laremore’s death stray from the real issue whether mr laremore’s obligation under the stipulation of settlement would have survived her death to determine whether an obligation terminates at the payor’s death the court turns first to the plain language of the stipulation of settlement in webb v commissioner tcmemo_1990_540 tax ct memo lexi sec_594 the court was asked to decide whether an obligation containing the phrase the husband shall pay created an obligation which survived the death of the recipient spouse highlighting the fact that the statute speaks in terms of ‘liability’ we held that the above-quoted phrase u nquestionably created a liability which would have been enforceable by the former spouse’s estate had she died after the execution of the agreement but before the payments were actually made id tax_court memo lexi sec_594 at similarly the stipulation of settlement between mr and mrs laremore provided the value of mr laremore’s ira’s over mrs laremore’s is dollar_figure the agreement is that she will get half of that sum for dollar_figure she will get that dollar_figure via a qdro being placed on mr laremore’s traditional_ira so that that amount will be transferred to her and the end result is that the parties will have equally shared these retirement accounts emphasis added the language creating the obligation-- she will get and that amount will be transferred to her --imposes a liability on mr laremore that is not made conditional on death or remarriage and that is not qualified in any way by another provision as in webb the above-quoted language--without qualification or language indicating termination at death--stands in sharp contrast to a later section of the stipulation of settlement providing for maintenance payments where the agreement expressly states that the maintenance payments would terminate in the event of mrs laremore’s death or remarriage see webb v commissioner tax_court memo lexi sec_594 at paragraph of the agreement stands in sharp contrast it specifically provides for termination of the dollar_figure annual payments in the event of the ‘death of the wife’ when the stipulation of settlement was recorded mr laremore agreed to be bound by the agreement he acknowledged that he understood the binding implication of the stipulation that it settled the matter and that it was in lieu of a decision issued by the court therefore pursuant to the stipulation of settlement and the divorce decree mr laremore’s obligation to make the payment at issue survives the death of mr laremore’s divorce counsel stated on the record i just wanted to clarify that if mrs laremore dies god forbid or remarries maintenance ends mrs laremore and that payment was not alimony under sec_71 or deductible under sec_215 iv mr laremore’s additional argument pursuant to the terms of the stipulation of settlement mr laremore’s obligation should have been satisfied under a qdro by a tax-free transfer from his ira leaving still available to him his non-ira funds which he was free to withdraw without the tax_liability that would accompany ira withdrawals and under those terms mrs laremore would have owed tax at such time as she withdrew the ira-derived funds that had been transferred to her instead because mr laremore had to pay the judgment out of non-ira funds mrs laremore received non-ira money on which she did not have to pay tax and mr laremore’s non-ira funds have been depleted upon withdrawing equivalent funds from his ira he will have to pay tax that should have been borne by mrs laremore mr laremore thus understandably complains that the tax effects of the divorce settlement have been distorted to his disadvantage and he seems to contend in effect that this distortion should be cured by allowing him to deduct the payment as alimony however sympathetic mr laremore’s circumstance may be and however appealing his proposed cure might seem it is not warranted under sec_71 if the amount he was obligated to pay was not alimony and it was not then it does not become deductible simply because the tax incidents of the transfer were worse for him than they should have been under the agreement that he and his ex-wife had reached any inequities in the divorce settlement would have to be addressed by the divorce court and the tax_court cannot address them by making equitable adjustments to mr laremore’s tax_liability not called for in the internal_revenue_code to reflect the foregoing decision will be entered for respondent mr laremore also seems to suggest that mrs laremore should be held liable for income_tax on the dollar_figure that was paid to her pursuant to the judgment and in this connection he cites sec_1041 which provides rules for gain loss and basis when property is transferred incident to a divorce however mrs laremore’s liability is not before us and we therefore do not attempt to analyze her side of the transfers at issue


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi - plr-149202-02 date date legend x a d1 year dear this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on d1 a the president and sole shareholder of x represents that x was intended to be an s_corporation effective for x’s year taxable_year however no form_2553 election by a small_business_corporation was timely filed for x sec_1362 of the code provides that if -- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective for its year taxable_year accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of plr-149202-02 -2- this letter then such election will be treated as timely made for x effective for its year taxable_year a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being forwarded to x’s authorized representative sincerely yours carolyn hinchman gray senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


uniform issue list jun legend individual r company m amount a amount b amount c amount d amount e investment_company h plan x dear this is in response to correspondence dated date as supplemented by correspondence dated date and date in which you requested a waiver of the 60-day rollover requirement contained in sec_402 of the internal_revenue_code the code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested individual r was an employee of company m and participated in plan x a plan sponsored by company m for the benefit of its employees in june terminated individual r’s employment in mid-september a distribution of his total accrued_benefits in plan x individual r’s total accrued_benefits in plan x were amount a the total accrued_benefits amount a reduced by federal_income_tax withholding amount b were mailed to individual r in the form of a check the amount of the check was amount c amount c was deposited in a credit_union on company m individual r requested page to roll over the distribution into an individual at the time of the distribution you thought that you had until the due_date for filing your federal_income_tax return fo retirement arrangement ira although your intent was to eventually roll over this distribution into an ira due to the extended hospitalization of your son the time involved in selling your house and individual r’s severance_from_employment with company m you wanted to wait until the due_date of your return to consummate the rollover since you were concerned that the distribution might need to be used for other family_expenses in fact during the time in which the plan x distribution was held in the credit_union you used amount d for daily living and medical_expenses you did not receive specific information from company m regarding the necessity to roll over the distribution within days when you spoke with the third-party administrator of plan x to request the distribution although the representative stated that there was a time limit to roll over the funds he did not specifically state what that time limit was you thought hat since an individual may make contributions to an ira until april of the folla wing calendar_year that was the last day on which an ira would accept a rollover individual r went to a bank with the express purpose of establishing an on april ira the bank refused to establish an ira stating that the 60-day rollover period had elapsed soon after this the bank accepted the funds and placed them in an ira set up with investment_company h amount c was placed into the ira established by investment_company h based on these facts and representations you request a ruling that the service waive the 60-day rollover requirement contained in sec_402 of the code with respect to the distribution from plan x sec_402 of the code provides that except as otherwise provided in this section any amount actually distributed to any distributee by any employees’ trust described in sec_401 which is exempt from tax under sec_501 shall be taxable to the distributee in the taxable_year of the distributee in which distributed under sec_72 of the code sec_402 of the code defines and provides the rules applicable to rollovers from exempt trusts sec_402 of the code provides that if- a any portion of the balance_to_the_credit of an employee in a qualified_trust is paid to the employee in an eligible_rollover_distribution b the distributee transfers any portion of the property received in such distribution to an eligible_retirement_plan and c in the case of a distribution_of_property other than money the amount so transferred consists of the property distributed then such distribution to the extent so transferred shall not be inciudible in gross_income for the taxable_year in which paid page sec_402 of the code provides that the transfer must be made within days of receipt in general sec_402 provides that sec_402 shall not apply to any transfer made after the day following the day on which the distributee received the property distributed sec_402 of the code provides that the secretary may waive the 60-day requirement under sec_402 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_402 of the code revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_402 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 you presented demonstrates that you did not receive specific information from either employer m or the plan x third-party administrator regarding the necessity to roll over the distribution from plan x within days although your intent was to effect a rollover of the plan x distribution you thought that you had until date to do so therefore pursuant to sec_402 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount e which is amount a less amount d you are granted a period of days from the issuance of this ruling letter to contribute amount e into a rollover ira provided all other requirements of sec_402 of the code except the 60-day requirement are met with respect to such contributions these amounts will be considered rollover_contributions within the meaning of sec_402 of the code please note that this letter_ruling authorizes the rollover of amount e amount a less amount d amount e is less than amount c the difference between amount c and amount e may not be rolled over pursuant to this letter_ruling 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 expresses no opinion as to whether pian x satisfies the requirements for qualification under sec_401 of the code 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 page if you wish to inquire about this ruling please contact please address all correspondence to sincerely yours pons shon employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose


internal_revenue_service department of the treasury number release date index no p o box ben franklin station washington dc person to contact telephone number refer reply to cc dom p si - plr-113223-99 date date re legend trust grantor spouse trustee son grandchild grandchild grandchild grandchild grandchild grandchild date date date state dear this is in response to your letter dated date and prior correspondence in which you requested rulings concerning the estate and generation-skipping_transfer gst tax consequences of a proposed exercise of a power_of_appointment plr-113223-99 on date grantor created trust trust is for the benefit of the issue of son on date trust was amended in its entirety paragraph a of article iii of the trust provides that trustee is to pay the net_income for the health education and support in reasonable comfort from time to time to or for the benefit of issue of son who are living at the inception of trust or thereafter born as trustee determines in his discretion paragraph b of article iii of the trust provides that trustee may pay such amounts of principal of trust to any beneficiary if trustee determines such beneficiary is in need of additional funds to provide adequately for his or her health education and support in reasonable comfort paragraph c of article iii of the trust states notwithstanding the provisions relating to distribution enumerated in the previous two paragraphs all or any portion of the balance remaining in the trust estate shall be distributed to among or for the benefit of such members of a class consisting of the issue of son in such shares or proportions whether outright or to be continued in this or any other trust and at such time or times as son may at any time or from time to time designate and appoint in and by a written instrument signed by son acknowledged by him before a notary public and delivered to trustee during his lifetime or by his will which in either case specifically refers to such limited_power_of_appointment with respect to any such remaining balance to be continued in this or any other trust trustee shall distribute to and among such specific separate trust shares or separate trusts for such issue of son such specific assets of the trust estate dollar amounts shares or proportions as son may designate or appoint under the terms of this limited_power_of_appointment in no event however shall son have the power to appoint to or for the benefit of himself his creditors his estate or the creditors of his estate article iv of the trust provides that if son does not exercise the above described power_of_appointment then upon the death of son trustee is to divide trust into equal shares for each child of son then living and for each child of son deceased leaving issue then living each share for a child or other issue will be held in trust until age a beneficiary may withdraw all or a part of his trust at age paragraph h of article v of the trust provides that trust and any trust created by the exercise of the power_of_appointment pursuant to paragraph c of article iii shall not continue for more than years after the last to die of the grantor son and the issue of son in being at the date the trust becomes irrevocable article ix of the trust provides that trust becomes irrevocable upon the death of grantor or spouse whichever is the first to die on date spouse died and trust became irrevocable grandchildren living on date were grandchild grandchild grandchild grandchild and grandchild grandchild died prior to date and was not survived by issue grandchild grandchild grandchild plr-113223-99 grandchild and grandchild had no issue as of date it is represented that no additions have been made to trust since it became irrevocable son proposes to create separate trusts for each of his now living children son will initially fund each trust with property having nominal amount of value it is represented that son will allocate to each trust a portion of his gst_exemption available under sec_2631 of the internal_revenue_code that will be equal to the value of the property transferred to each trust it is also represented that except for the beneficiary the provisions of each of these trusts will be the same and that each trust will have a separate trustee article ii of each child’s trust provides that during son’s life trustee has discretionary authority to pay or apply income to the child or the child’s issue during child’s life for health education support or maintenance any income not paid or applied is to be added to principal article iii provides that upon son’s death trustee has discretionary authority to pay or apply income and principal to child or the child’s issue for health education support and maintenance paragraph e of article iii provides that if a child dies prior to the termination of the trust the income and principal is to be distributed to then living issue of the child per stirpes paragraph e of article iii provides that if a child leaves no then surviving issue such income and principal is to be distributed to then surviving issue per stirpes of such child’s nearest ancestor leaving issue then surviving who is a descendant of son paragraph of article iii provides that if there is no beneficiary eligible to receive income and principal of any trust the income and principal is to be distributed to persons then living who would have inherited the estate of son if son had then died intestate under the laws of state paragraph of article iii provides that any trust created shall terminate twenty years after the death of the last life in being who is an issue of son and who was alive on date the date grantor’s trust became irrevocable son also proposes to execute a codicil to his will in which he will exercise the power_of_appointment granted to him pursuant to paragraph c of article iii of trust and appoint the property from the trust in equal shares to each child’s trust if one or more of the children predecease son without leaving issue the child’s share is to be allocated equally to the other trusts for then living children or then living issue of children who predecease son son has requested the following rulings son’s proposed exercise of the power_of_appointment granted in the trust will not cause the property to be includible in his estate under sec_2041 assets appointed from the trust to each child’s trust will be exempt from generation- skipping transfer_tax under sec_2601 plr-113223-99 ruling_request sec_2041 of the code provides that the value of the gross_estate shall include the value of all property to the extent of any property with respect to which the decedent has at the time of death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released such a power_of_appointment by a disposition which is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent’s gross_estate under sec_2035 to inclusive sec_2041 provides that the term general_power_of_appointment means a power which is exercisable in favor of the decedent his estate his creditors or the creditors of his estate under sec_2041 a power to consume invade or appropriate property for the benefit of the decedent which is limited by an ascertainable_standard relating to health education support or maintenance of the decedent is not a general_power_of_appointment sec_20_2041-1 of the estate_tax regulations provides that a power_of_appointment is not a general power if by its terms it is either a exercisable only in favor of one or more designated persons or classes other than the decedent or his creditors or the decedent's_estate or the creditors of his estate or b expressly not exercisable in favor of the decedent or his creditors or the decedent's_estate or the creditors of his estate in the present case the power_of_appointment granted to son under paragraph c of article iii of the trust is exercisable only in favor of such members of a class consisting of the issue of son thus under sec_2041 and sec_20_2041-1 son’s power_of_appointment is not a general_power_of_appointment accordingly based on the representations made and the facts represented we conclude that son’ s proposed testamentary exercise of the power_of_appointment will not cause the property to be includible in son’s estate under sec_2041 ruling_request sec_2601 imposes a tax on every generation-skipping_transfer made by a transferor to a skip_person a person assigned to a generation that i sec_2 or more generations below the generation assignment of the transferor after date under a of the tax_reform_act_of_1986 the generation-skipping_transfer_tax is generally applicable to generation-skipping transfers made after date however under b a of the tax_reform_act_of_1986 and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the tax does not apply to a transfer from a_trust if the trust was irrevocable on date and no addition actual or constructive was made to the trust after that date under sec_26_2601-1 any trust in existence on date will be considered irrevocable unless the settlor possessed a power that would have caused the trust to be included in the settlor’s gross_estate under sec_2038 or sec_2042 if the settlor had died on date sec_26_2601-1 provides a special rule for certain powers of appointment this section provides that the release exercise or lapse of a power_of_appointment other than a general_power_of_appointment as defined in sec_2041 will not be treated as an addition to a plr-113223-99 trust if such power_of_appointment was created in an irrevocable_trust that is not subject_to chapter under sec_26_2601-1 and in the case of an exercise such power_of_appointment is not exercised in a manner that may postpone or suspend the vesting absolute ownership or power of alienation of an interest in property for a period measured from the date of creation of the trust extending beyond any life in being at the date of creation of the trust plus a period of years the perpetuities period sec_2631 provides that every individual is allowed a gst_exemption of dollar_figure adjusted for inflation under sec_2631 which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made is irrevocable sec_2652 provides generally that 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 is treated as transferring any property with respect to which the individual is the transferor sec_2654 provides that for chapter the portions of a_trust attributable to transfers from different transferors shall be treated as separate trusts sec_26_2654-1 provides that if there is more than one transferor with respect to a_trust the portions of the trust attributable to the different transferors are treated as separate trusts for purposes of chapter in the present case son proposes to create five separate trusts one for each of his children son will initially fund each of the trusts with property that has a nominal amount in value and will allocate a portion of his gst_exemption available under sec_2631 that will be equal to the value of the property transferred to each trust son will be treated as the transferor with respect to the value of the property transferred to the trusts sec_2652 in addition trust became irrevocable before date and no additions either actual or constructive have been made to trust since that date son intends to execute a codicil to his will in which he will exercise the power_of_appointment granted in paragraph c of article iii of trust by appointing the property in equal shares to each trust established for his children each child’s trust shall terminate twenty years after the death of the last life in being who is an issue of son and who was alive on date the date trust became irrevocable thus son is not proposing to exercise his power_of_appointment in a manner that may postpone or suspend the vesting absolute ownership or power of alienation of an interest in property for a period measured from the date trust became irrevocable extending beyond any life in being at that date plus a period of years accordingly based on the representations made we conclude that the assets appointed from the trust to each child’s trust will be exempt from generation-skipping_transfer_tax under sec_2601 except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code plr-113223-99 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours branch james f hogan acting assistant to the branch chief enclosure copy for sec_6110 purposes cc


internal_revenue_service p o box cincinnati of number release date date date ‘legend organization m n corporation y grant program department of the treasury euployer identification_number contact person - contact telephone number id number uil -4945 at least one an accredited of the code and that it is classified as a private of the internal_revenue_code dear we have considered your request for advance approval of your employer-related grant-making program under sec_4945 dated august our records indicate that m was xecognized as exempt from federal_income_tax under section dollar_figure c foundation as defined in sec_509 your letter indicates that m will operate a grant-making program to award scholarsaip grants to employees former employees and the children or immediate_family members of curren and former employees of n m expects to award scholarship qrante annually so long as suitable candidate of quality can be identified for study at secondary school_college_or_university scholarship grants recipient will be chosen from among those qualified individuals who have submitted applications detailing their academic and financial backgrounds as well as their proposed plans of study individuals will consist of those individuals who awarding of ammediace family members of current and former employees of n currently enxolled at for admission at located in the united_states n for a minimum period an individual need not be or her children or immediate_family of time in ordez for him or her members to be scholarship grants will not be used to recruit employees to seek employment at induce employees to continue their employment at or otherwise compel in addition m's employees to follow any course of action sought by n scholarship grants will not be limited to certain individuals based on any employment-related factors such as a current or fozmer employee's position services or duties ii an accredited secondary school_college_or_university are employees former employees and the children or are or who have applied to and meet the minimum standards an eligible recipient of the scholarship grants or have been employed at at the time of the qualified a grant and his and m's i with m of ii in selecting scholarship recipients the m will publicize the availability of the scholarship grants and solicit application_for the scholarship grants in company newsletters and through general email communications as well as on the company website of n glearly identified as the grantor of the scholarship grants in addition announcements of the names of the scholarship grant recipients will be published in company newsletters and through general email communications as well as posted on the company website of n again with m clearly identified as the grantor of the scholarship grants a selection committee of at least three persons who are independent of both m and n and who have knowledge in the education field sufficient to evaluate applicants’ potential will select scholarship grant recipients based on academic achievement demonstrated leadersbip significant extracurricular accomplishments and financial need selection committee may consider academic transcripts aptitude test scores personal recommendations from instructors or othex independent sources conclusions drawn from personal interviews and any other information the commitzee deems germane in assessing an applicants qualifications all scnolarsnip grant recipients will pe selected on an objective and non- discriminatory basis without regard to race national origin or gender the selection committee may select one or more acholarship recipients each year from the class of eligible individuals but the selection committee is not required te select minimum number of scholarship recipients each year in accordance with sec_4 of revproc_76_47 as clarified by revproc_45_51 the total number of scholarship grants awarded in any given year to children and inmediate family members of employees of n the number of eligible children and will not exceed either i immediate_family members who applied for the grants and were considered by of the mumber of employees’ children and the selection committee or immediate_family members who can be shown to be eligible for grants also in accordance with revproc_76_47 the total number of scholarship qrants awarded in any given year to employees of n will not exceed of the number of eligible employees who applied for the grants and were considered by the selection conmittee the selection committee may forward the list of selected scholarship grant recipients to m’s board_of directors for the sole purpose of permitting the board to verify the eligibility requirements and selection criteria followed by the selection committee in considering the eligible recipients and in making its selections m's board_of directors must award scholarship grants in the order recommended by the selection committee the board_of directors may reduce but may not increase the number of scholarship grant recipients selected by the selection committee each scholarship grant will have a one-year term recipient may annually reapply for an additional scholarship grant for each subsequent year of the scholarship grant recipient's secondary school undergraduate or postgraduate education an initial scholarship grant will not be terminated or an application_for an additional scholarship grant declined solely because the recipient ox or her parent or guardian his terminated employment with n subsequent to the awarding of the initial the in addition by accepting a scholarship grant from m scholarship grant scholarship grant recipient is not obligated to pursue any particular course of study and may pursue any course of study of his or her own choosing using the scholarship grant funds each scholarship grant will be and course-related fees books supplies and equipment at the applicable secondary school coblege or university committee may decide to approve an additional_amount that is sufficient to fund part or all of in an amount not to exceed the cost of tuition the selection room board and housing-related expenses at each scholarship grant to exceptional cases the i i ii iv over iii to the extent to m's officers in a position to derive a rent utilities and housing- to substantial contributors of m v any other necessary living or the members of the selection committee will be entitled to secondary school_college_or_university if the scholarship grant recipient obtains institution-provided housing related expenses if the scholarship grant recipient does not obtain institution-provided housing iii travel_expenses to and from the scholarship grant recipient's residence to the secondary school_college_or_university a computer and other technology-related expenses if needed by the scholarship recipient and educational expenses_incurred by the scholarship grant recipient in the case of tuition course-related fees books supplies and equipment and room board and housing-related expenses m will pay possible the scholarship grant funds directly to the applicable secondary school_college_or_university that the scholarship grant recipient is attending in the case of travel computer and other necessazy living and educational expenses m will either pay the application vendor or service provider directly or will reimburse the scholarship grant recipient once he or she has substantiated the expenses_incurred with receipts or other supporting documentation the members of the selection committee will not be private benefit directly or indirectly if certain potential scholaxship grant recipients are recommended or selected as the case may be others reimbursement of reasonable out-of-pocket expenses_incurred in connection with their attendance at meetings of the selection committee such as travel and lodging costs no scholarship grants will be made defined in code sec_507 who are individuals mis board_of directors person with respect to'm within the meaning of code sec_4946 menber of the selection committee or to any family members of any of the persons listed in clauses i through v scholarship grants will be made for a purpose that is inconsistent with the charitable purposes of m each scholarship grant recipient will be required to submit to m on an annual basis report of the recipient’s courses taken and the grades such a report received in each academic semester during the report period must be verified by the secondary school_college_or_university attended by the scholarship grant recipient and must contain a statement by the recipient that the scholarship grant funds received have not been diverted for a upon purpose inconsistent with m's charitable and educational_purposes completion of a scholarship grant recipient's study at the accredited institution for which the scholarship was granted the recipient will be required to submit a final report to m containing the same information required in the annual reports and describing the recipient’s accomplishments with respect to the scholarship grant m may not consider it necessary to obtain reports described above if grant is a scholarship subject_to the provisions of code sec_117 is an educational_institution which normally maintains a regular faculty and curriculum and normally has a reqularly- organized body of students in attendance at the place where its educational activities are carried on to the applicable_educational_institution and the educational_institution agrees to use the scholarship grant funds to defray the recipient’s tuition and course-related fees books supplies and equipment expenses ox pay grant funds to the recipient only if he or she is enrolled at the educational_institution and his or her standing at such institution is consistent with the purposes and conditions of the scholarship grant m elects to pay the scholarship grant directly te any other disqualified to any v in addition no to be used for study at as to members of the and above iv ii vi a written letter of agreement between m and the scholarship grant in the event that a scholarship grant recipient fails to comply with the terms and conditions of the scholarship grant including the requirement to submit a report annually with respect to any academic year in which the scholarship grant recipient has received a scholarship grant as set forth in recipient m will conduct an investigation and take all reasonable and appropriate steps to recover any funds that the scholarship grant recipient has used for an improper purpose m will maintain all records relating to all scholarship grants for a period of four years after each scholarship grant is awarded or declined records will include a showing the name an address of each scholarship grant recipient and a description of the educational and living_expenses funded by the scholaxship qrants and c a list showing the name and address of each applicant who did not receive a scholarship grant sec_4945 a and expenditures made by a private_foundation of the code provides that the term taxable_expenditure sec_4945 means any amount_paid or incurred by a private_foundation as a grant to an individual for travel or other similar purposes by such individual unless such grant satisfies the requirements of subsection g sec_4945 of the code provides that sec_4945 shall not apply to individual grants awarded on pursuant to an objective and nondiscriminatory basis is demonstrated that of the code impose certain excise_taxes on taxable a procedure approved in advance if it all acholarship grant applications a list study these b b i and is or talent of the grantee to achieve a specific objective produce if the recipient of such prize or award of the regulations provides that to secure approval sec_53_4945-4 a private_foundation must demonstrate that the grant constitutes a scholarship or fellowship_grant which is subject_to the provisions of sec_117 to be used for study at an educational_organization described in sec_170 ap le the grant constitutes a prize or award which is subject_to the provisions of sec_74 is selected from the general_public or the purpose of the grant is report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar capacity skill tts grant procedure includes an objective and nondiscriminatory selection process such procedure is reasonably calcviated to result in performance by grantees of the activities that the grants are intended to finance and the foundation plans to obtain reports to determine whether the grantees performed activities that the grants are intended to finance revproc_76_47 sets forth guidelines to be used in determining whether a grant made by a private_foundation under an employer- related program to a child of an employee of the particular employer to which the program relates is as that section read before the tax reform act of sec_117 a scholarship grant that meets the provisions of of the code c b i3i ii it if proc the grants will not be used as percent percentage_test of section dollar_figure applicable to or the mmber of grants awarded under the program in any the recipient wili not be restricted in a course of study that a private foundation’s program satisfies the seven conditions set proc and meets the the service will assume the grants forth in sections dollar_figure through dollar_figure of rev percentage_test described in sec_4 meet the provisions of sec_117 as that section read before the tax_reform_act_of_1986 you have agreed that procedures in awarding grants undex your program will be without in compliance with sections dollar_figure through dollar_figure of rev regard to the amendments to sec_117 made by the tax reform act of in particular the selection of individual grant recipients will be made by a selection committee the members of which are totally independent and separate from the private_foundation the foundation’s creator and the relevant employer a means of inducement to recruit employees nor will a grant be terminated if the employee leaves the employer would be of particular benefit to the relevant employer or to the foundation proc provides a percentage_test guideline section dollar_figure of rev a program that awards grants to children of employees states in the case of a particular employee the program meets the percentage_test if either of of the following tests are met the number of grants awarded under that program in any year to such children do not exceed percent of the number of employees’ children who were eligible were applicants for such grants and were considered by the selection committee in selecting the recipients of grants in that year year to such children does not exceed percent of the number of employees’ children who can be shown to be eligible for grants whether or not they submitted an application in that year you have agreed that your program will meet the requirements of either the percent or a program that awards grants to children of employees of records should be maintained to show that you meet the applicable_percentage test of section dollar_figure this determination is issued with the understanding that in applying the percent test applicable to employees’ children set forth in rev you will include as eligible only those children who meet the eligibility standards described in rev this determination will remain in effect as long as the procedures in awarding grants under your program remain in compliance with sections dollar_figure through of rev_proc without regard to the amendments to sec_117 made by the tax_reform_act_of_1986 program covering the same individuals the percentage_test of revproc_76_47 most be met in the aggregate based on the information submitted and assuming your award programs will be conducted as proposed your procedures for granting the awards conply with the requirements contained in sec_4945 of the code and that awards granted in accordance with such procedures will not constitute taxable_expenditures within the meaning of sec_4945 - in addition we have determined that awards made under your procedures are excludable from the gross_income of the recipients subject_to the limitations provided by sec_117 this determination is conditioned on the understanding that there will be no material_change in the facts upon which it is based conditioned on the premise that no grants will be awarded to foundation managers or members of the selection committee or inconsistent with the purpose described in sec_170 b if you enter into any other for a purpose that is a particular employer b of the code of the code is further proc proc it a one-time the approval of your employer-related grant-making program is approval this determination only covers the grant programs described above thus approval shall apply to subsequent grant programs only as long as the standards and procedures under which they are conducted do not differ materially from those described in your request any funds you distribute to individuals must be made on basis in furtherance of the purposes for which you are organized therefore you should maintain adequate_records and histories so that any or all grant distributions can be substantiated upon request by the internal_revenue_service this determination is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as precedent you must report any future changes in your grant making procedures keep a copy of this letter in your permanent records we have sent a copy of this letter to your representative as indicated in your power of attozney if you have any questions please contact the person whose nane and telephone number are shown above a true charitable please a sincerely yours robert choi dixector exempt_organizations rulings and agreements