department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date uil code contact person identification_number contact number employer_identification_number form required to be filed tax years dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 and sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions you should follow the instructions in notice if you agree with our deletions you do not need to take any further action lf you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter about your federal_income_tax status and responsibilities please contact irs customer service at if you have any questions letter cg catalog number 47632s or the irs customer service number for businesses the irs customer service number for people with hearing impairments is sincerely lois g lerner director exempt_organizations enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter letter cg catalog number 47632s department of the treasury internal_revenue_service washington d c contact person identification_number contact number fax number employer_identification_number uil tax_exempt_and_government_entities_division date date legend b state c date d dollar amount e dollar amount f dollar amount g dollar amount h number dear we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 or sec_501 the basis for our conclusion is set forth below issue e do you qualify for exemption under sec_501 of the internal_revenue_code no for the reasons given below alternate issue e do you qualify for exemption under sec_501 of the code no for the reasons given below letter cg catalog number 47628k facts you were incorporated in the state of b on c date your articles of incorporation states your mission is to be a gathering place where local growers producers and community members can mutually benefit from the direct marketing of local goods you support local farmers promote land stewardship and sustainable agriculture you will educate consumers on the value of buying locally produced foods healthy eating and environmental issues membership is open to vendors who are in good standing current on dues and non- vendors who simply support your operation to be on your board one must have been a member for at least a year three of your four current board members are listed as vendors at your market on a weekly basis between may and october you provide a farmers market you will manage the market and promote market and advertise the goods sold there by your vendors this is your primary activity to which you devote of your time and resources during your operational season you offer a local master gardener program to educate interested individuals on the growing of flowers and vegetables at a single session in august you bring in a specialist from the university of b to provide training to local vendors and community members on proper canning techniques for produce in conjunction with a local energy specialist you provide a training session about energy usage and how to reduce dependence on energy to the local community each november you provide an annual training program or session to vendors on how to enhance and improve the quality of their products this training includes but is not limited to the proper storage of vegetables proper processing techniques for baked and canned goods and new regulations affecting their industry you are supported by annual vendor membership fees and daily stall fees season vendor dues are d dollars for the vendor membership only then a weekly stall fee of e dollars per day or f dollars for a total season payment which includes the d dollars membership and g dollars season stall fee the market is limited to h vendors any vendor may apply as long as they agree to be subject_to your market and sales rules if selling at your market the primary seller at the market must be the owner listed on the application to sell at the market all applications are reviewed and approved by your governing body you reserve the right to limit vendors offering similar products so there is appropriate balance at the market your letter cg catalog number 47628k governing body reserves the right to limit the number of craft vendors crafts will be judged by the governing body to determine their appropriateness for the market vendors must grow or produce the products services they sell all products must be grown or produced within a mile radius of the market location purchasing items for resale is not allowed vendors must have liability insurance that covers the products sold at the market they the vendors must also obtain the proper licensing inspection and certifications that are necessary vendors of nonfood items must have a sales_tax identification_number as well vendors must also be current on fees dues in order to participate law - sec_501 sec_1_501_c_6_-1 of the income_tax regulations states in part is an association of persons having some common business_interest the purpose of which is to promote such common interest it is an organization of the same general class as a chamber of commerce or board_of trade thus its activities should be directed to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons a business league revrul_58_224 held that an organization which operated a trade_show as its sole activity primarily for the purpose of rendering particular services to individual persons was not entitled to exemption as a business league under sec_501 of the code the organization’s sole activity consisted of staging an annual merchandise show primarily exhibits by manufacturers under the sponsorship of the chamber of commerce the ruling concluded that the activities of the organization substantially served the exhibitors and retailers as a convenience and economy in the conduct of their businesses by providing selling opportunities for the distributors which was found to be considered rendering particular services for individuals as distinguished from the improvement of business conditions generally revrul_68_264 defined a particular service for the purpose of sec_501 of the code as including an activity that serves as a convenience or economy to members of the organization in the operation of their own businesses in revrul_73_411 the history of sec_501 was described while discussing the exempt status of a shopping center in the case of a chamber of commerce or similar organization the common business_interest is usually the general economic welfare of a community an organization seeking exemption as a chamber of commerce must be one whose efforts are directed at promoting the common economic letter cg catalog number 47628k interests of all commercial enterprises in a given trade community the ruling also stresses that membership in sec_501 organization is voluntary and open generally to all businesses and professional persons in the community law - sec_501 sec_1_501_c_5_-1 of the regulations describes organizations covered by code sec_501 as labor_agricultural_and_horticultural_organizations that have no net_earnings inuring to the benefit of any member and have as their object the betterment of the conditions of persons engaged in those pursuits the improvement of the grade of their products and the development of a higher degree of efficiency in their respective occupations revrul_66_105 held that an organization composed of agricultural producers whose principal activity is marketing livestock as an agent for its members does not qualify for exemption the sale of members’ products with the return to them of the sale proceeds is neither an object nor an activity within the ambit of sec_501 of the code thus exemption was denied in revrul_74_195 a nonprofit organization formed to manage graze and sell its members' cattle did not of itself better the conditions of those engaged in agricultural pursuits improve the grade of their products or develop a higher degree of efficiency in their operations within the meaning of sec_501 of the code the principal purpose of the organization was to provide a direct business service for its members’ economic benefit the organization was denied exemption under sec_501 of the code application of law - sec_501 you do not meet the qualifications under sec_1_501_c_6_-1 of the regulations as your activities are not aimed at the improvement of business conditions of one or more lines of business but rather you are performing particular services for members by operating and marketing a venue under which a member may sell their products you are providing a direct service to that member also operating a market for selected vendors does not improve business conditions of any industry or line_of_business but rather serves only as a convenience to those vendors chosen to sell at that market based on the information submitted your primary purpose is to provide a sales facility for your members similar to the organization in revrul_58_244 an activity such as this is providing a particular service to individuals the facility serves as a convenience and economy to anyone who uses the marketplace to sell their products letter cg catalog number 47628k serving your members in this manner provides a convenience and economy in the conduct of their businesses by providing selling opportunities they otherwise would not have revrul_68_264 defines this as providing a particular service to members performing services for members constitutes a prohibited activity under c thereby disqualifying you from exemption under this code section the information you submitted indicates that your members have no common business_interest other than a mutual desire to have a location to increase their individual sales your marketplace activities are not directed at the improvement of business conditions of one or more lines of business but rather to the promotion of the private interests of those producers who rent stalls at your market the facts you submitted indicate that you are not promoting the general welfare of the community or promoting the common economic interests of all of the commercial enterprises in a given trade community rather you are simply providing a convenient place for individuals to market their products for their exclusive benefit as noted in revrul_73_411 by providing such service you are not considered to be the type of organization contemplated by sec_501 of the code therefore you do not qualify for exemption as an organization described in sec_501 of the code application of law - sec_501 you do not meet the qualifications under sec_1_501_c_5_-1 of the regulations as your activities are not aimed at the overall betterment of conditions within the farming industry you operate to aid vendors included in your marketplace to sell goods since you are providing in return for related fees and dues marketing and advertising of member goods to generate sales of those goods you are in turn acting as a sales agent for your members where members would otherwise have to market and sell their goods themselves you are relieving them of this responsibility by providing the service of operating the market where a service merely relieves members of work they would either have to perform themselves or have performed for them or where the principal purpose of the organization is to act as a sales agent for its members an organization will not qualify as an sec_501 organization in revrul_66_105 an organization acting as an outlet for the sales of members products where the proceeds are returned to the members does not qualify an organization under sec_501 you are similar to this organization in that you provide the market place for members to sell their wares were they receive the sales proceeds this is further demonstrated in revrul_74_195 in that ruling providing an outlet for sales of members’ products along with managing and grazing their animals was considered a direct business service for the members’ economic benefit which precluded exemption under sec_501 of the code by providing a similar service letter cg catalog number 47628k an outlet for sales of member products you are not bettering the conditions of those engaged in agricultural pursuits improving the grade of their products or developing a higher degree of efficiency in their operations while you do provide some training sessions that would in turn generate enhanced quality of vendor products your main activity is operating the market thus you do not qualify as an organization described in sec_501 of the code applicant’s position you reported that all of your activities and expenditures are for the benefit of consumers by providing a centralized location local community members can learn to understand and appreciate the benefits of buying locally produced foods without having to track down each individual provider if a community member attempted to obtain the diversity of vendors ranging from sales of homemade breads and home grown vegetables to organic meats and eggs available at the market most would get frustrated and give up you feel that the local gathering allows vendors to reach a larger group of consumers without receiving any direct services from you the advertising for your market alerts consumers of product availability but does not promote any one vendor you consider the farmers market a place that allows the ‘improvement of business conditions of one or more lines of business as distinguished from performance of a particular service for individual persons’ you contend that you do not directly sell or provide any services directly to members but exist to educate consumers on the value of buying locally produced foods and environmental issues it is your belief that you qualify for exemption under sec_501 of the code as do chambers_of_commerce who strive to encourage consumers to buy from local businesses that are members lastly you feel that based on the information provided and your understanding of sec_501 of the code you should also be able to meet the standards of exemption under that section if we deny your request under sec_501 of the code service response to applicant’s position although you do have some minimal activities aimed at educating the community and improving products for sale and your intention of helping the community understand and appreciate the benefits of purchasing locally produced foods and wares is admirable your educational pursuits are incidental to your overall activity your primary activity is operating a farmers market since you currently promote the market solicit membership based on participation in the market and spend most of your meeting time planning and letter cg catalog number 47628k discussing the market your primary activity is providing particular services in the form of providing a marketplace to the member vendors there is minimal evidence that any of your operations are aimed at improving any line_of_business rather your operations are clearly aimed at performing a particular service to individual members i e providing a marketplace for their wares your support and operation of the farmers market provides selling opportunities for the member vendors this serves as a convenience for the economy of the members vendors in the operation of their own businesses which is clearly contrary to exemption under sec_501 of the code thus you do not meet the standards of exemption under sec_501 of the code you are formed to regularly promote and market your members’ products this is a direct business service that economically benefits your members your role is as a marketing sales agent which makes all the necessary arrangements for members to present their products for sale to the general_public you create an environment the farmers market for the sale of members' products the sale of members’ products does not provide for the betterment of conditions for the farmers nor improve the grade of their products your organization operates for the convenience of members and the production_of_income by operating in this manner you are not considered to be the type of organization contemplated in sec_501 of the code thus you do not meet the standards of exemption under this section of the code either conclusion based on the information provided we conclude that you are not operated as a business league described in sec_501 of the internal_revenue_code your operations provide specific services to members and allow a convenience and private economic benefit you do not improve business conditions along one or more lines of business or of a certain area but instead provide services for the convenience of your members therefore you do not qualify for exemption under sec_501 in addition we conclude that you are not primarily operated as described in sec_501 of the code you were not formed to improve the grade of member products but rather to provide a direct business service for your members’ economic benefit accordingly you do not qualify for recognition of exemption under sec_501 of the internal_revenue_code you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter letter cg catalog number 47628k we will consider your statement and decide if that information affects our determination lf your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues types of information that should be included in your appeal can be found on page of publication under the heading regional_office appeal item must be declared true under penalties of perjury to the appeal the following signed declaration this may be done by adding the statement of facts under penalties of perjury declare that have examined the statement of facts presented in this appeal and in any accompanying schedules and statements and to the best of my knowledge and belief they are true correct and complete your appeal will be considered incomplete without this statement if an organization’s representative submits the appeal a substitute declaration must be included stating that the representative prepared the appeal and accompanying documents and whether the representative knows personally that the statements of facts contained in the appeal and accompanying documents are true and correct an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process to be represented during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so for more information about representation see publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not intend to protest this determination you do not need to take any further action if we do not hear from you within days we will issue a final adverse determination_letter to you that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to the applicable address letter cg catalog number 47628k mail to deliver to internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you may also fax your statement using the fax number shown in the heading of this letter letter to confirm that he or she received your fax if you fax your statement please call the person identified in the heading of this if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely lois lerner director exempt_organizations enclosure publication letter cg catalog number 47628k


department of the treasury washington dc person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc psi b04 - plr-169997-03 date april internal_revenue_service number release date index number ---------------------- --------------------------- ----------------------------------------------- -------------------------------------------- ------------------------------ in re --------------------------- ------------------------ - legend legend husband ---------------------- date ----------------------- wife ------------------- daughter ------------------------------------ daughter’s spouse ------------------------------------ --------------------------------------------------------------- grandchild ----------------------------------- ----------------------------------------------------- grandchild ------------------------------------- ------------------------------------------------------ husband’s will --------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- date -------------------------- wife’s will --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- trust ------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------- --------- date ------------------- husband’s brother --------------------- foundation ------------------------------------------- plr-169997-03 charity -------------------------------------- charity ---------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------- --------- bank -------------------------------------------------------- great grandchild ---------------------------------- great grandchild --------------------------------- great grandchild --------------------------------- great grandchild ----------------------------- great grandchild ------------------------ ----- state ---------- date -------------------------- --------- agreement --------------------------------------------------------- bank ------------------------------------------ individual -------------------------------- date -------------------------- date ------------------------------ --------- court -------------------------------------------------------------------------------------- --------------------------------------------------- state’s unitrust statute ---------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- dear ----------------- correspondence requesting rulings regarding the income and generation-skipping_transfer gst tax consequences of proposed modifications of a_trust facts testate on date survived by wife daughter daughter’s spouse grandchild and grandchild the two children of daughter and daughter’s spouse trust fund a over which wife held a testamentary general_power_of_appointment and trust fund b wife died testate on date prior to date survived by daughter daughter’s spouse grandchild and grandchild in wife’s will wife bequeathed her residuary_estate to trust a revocable_trust created by wife during her husband’s will provided for the residue of his estate to be placed in two trusts the facts submitted and representations made are as follows husband died this is in response to a letter dated date and other plr-169997-03 lifetime in addition wife exercised her power_of_appointment over trust fund a by appointing the trust fund a corpus to trust no additions have been made to trust after date under the terms of trust after wife’s death one-tenth of the net_income was to be distributed to daughter’s living children and the balance of the net_income was to be distributed to daughter trust provides that upon daughter’s death with living children surviving her the net_income is to be distributed in equal shares per stirpes to and among such living child or children and the issue of any predeceased child or children trust further provides that i f in the course of events daughter’s spouse or husband’s brother are the sole survivors of wife then the net_income will be paid to daughter’s spouse for life and then to husband’s brother trust will terminate upon the death of the last survivor among husband daughter daughter’s spouse husband’s brother grandchild and grandchild at that time the trust property will be distributed to the children of grandchild and grandchild or to the issue of a deceased child if there are no living descendants of daughter when trust terminates the trustee of trust will set_aside all of the assets of trust in foundation the trustee will pay one-half of the income of foundation to charity and one-half to charity a successor_in_interest of bank grandchild husband’s brother predeceased daughter daughter’s spouse grandchild and grandchild are still living grandchild 1’s one child great grandchild is now an adult grandchild now has two adult children great grandchild and great grandchild and two children who are still minors great grandchild and great grandchild of trust since daughter’s death bank was named as the original trustee of trust the current trustee is bank grandchild and grandchild have each received percent of the net_income daughter died on date survived by daughter’s spouse grandchild and on date after date agreement was executed to modify trust agreement was signed by bank as the trustee of trust daughter’s spouse grandchild and grandchild as the current income beneficiaries of trust great grandchild great grandchild and great grandchild as the adult contingent income and remainder beneficiaries of trust individual as guardian ad litem for the minor unborn and not-yet-adopted contingent income and remainder beneficiaries of trust and charity and charity agreement makes three modifications to trust first under agreement as amended by the parties the amendment the right of the income beneficiaries to receive the trust net_income will be converted pursuant to state’s unitrust statute into second under agreement the provision designating foundation as the final plr-169997-03 the right to receive proportionate shares of a unitrust_amount the total annual return amount the total annual return amount is computed by multiplying a a fraction the numerator of which is the sum of the fair market values of the trust corpus on the first business_day of the current calendar_year and on the first business days of the immediately preceding two calendar years less any trust liabilities for such preceding years including any undistributed amounts of income attributable to such preceding years and the denominator of which will be three by b dollar_figure percent however for the first two calendar years the total annual return amount will be dollar_figure percent of the fair_market_value of the trust corpus on the first business_day of the current calendar_year contingent_remainder beneficiary will be changed to provide that the corpus will be paid directly to charity and charity third agreement creates an investment advisory committee that will approve or reject the trustee’s recommendations regarding investment decisions the trustee must notify the committee of a proposed action and the committee must respond within a specified time if the committee does not respond the trustee may proceed with the proposed action however the trustee may sell assets without being subject_to these notification and approval requirements to the extent necessary to pay the total annual return amount authorized trustee fees and other reasonable trust expenses the committee can also direct the trustee to buy sell exchange or retain assets but the trustee need not follow these directions the initial committee will be comprised of grandchild and grandchild the court to issue an order approving the modifications to trust under agreement conditioned upon the trustee’s receipt of a favorable private_letter_ruling from the internal_revenue_service each of the parties to the agreement received notice of the petition and consented to the request on date court issued the requested order requesting the court to issue an order granting approval of the modification to trust under the amendment to agreement each of the parties to the agreement and the amendment will receive notice of the petition and consent to the request will not cause trust to lose its status as a_trust that is exempt from the gst tax by reason of b a of the tax_reform_act_of_1986 and sec_26_2601-1 the proposed modifications to trust under agreement and the amendment on or about date bank as trustee filed a petition with the court requesting it is represented that bank as trustee will file a petition with the court the taxpayers have requested the following rulings the proposed modifications to trust under agreement and the amendment plr-169997-03 will not cause the beneficiaries of trust or the trust to realize gain_or_loss or income under sec_61 or sec_1001 ruling_request sec_2601 imposes a tax on each generation-skipping_transfer made by a transferor to a skip_person 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 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 b ii any trust in existence on date will be considered irrevocable unless the settlor had a power that would have caused inclusion of the trust in his or her gross_estate under sec_2038 or sec_2042 if the settlor had died on date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax will not cause the trust to lose its exempt status the regulation provides that the rules contained in the paragraph are generally applicable only for purposes of determining whether an exempt trust retains its exempt status for generation-skipping_transfer_tax purposes unless noted otherwise the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a modification will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust in addition administration of a_trust in conformance with applicable local law that defines the term income as a unitrust_amount or permits a right to income to be satisfied by such an amount or that permits the trustee to adjust between principal and income to fulfill the trustee's duty_of impartiality between income and principal beneficiaries will not be considered to shift a beneficial plr-169997-03 interest in the trust if applicable local law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust and meets the requirements of sec_1_643_b_-1 of the income_tax regulations sec_1_643_b_-1 provides that for purposes of determining the meaning of the term income as used in various internal_revenue_code sections relating to the income_taxation of trusts an allocation of amounts between income and principal pursuant to applicable local law will be respected if local law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust for the year under the regulation a state statute providing that income is a unitrust_amount of no less than and no more than of the fair_market_value of the trust assets whether determined annually or averaged on a multiple year basis is a reasonable apportionment of the total return of the trust sec_26_2601-1 example considers a situation where a_trust administered under the laws of state x that is otherwise exempt from the gst tax provides that trust income is payable to a for life and upon a's death the remainder is to pass to a's issue per stirpes in the state x amends its income and principal statute to define income as a unitrust_amount of of the fair_market_value of the trust assets valued annually for a_trust established prior to the statute provides that the new definition of income will apply only if all the beneficiaries who have an interest in the trust consent to the change within two years after the effective date of the statute the statute provides specific procedures to establish the consent of the beneficiaries a and a's issue consent to the change in the definition of income within the time period and in accordance with the procedures prescribed by the state statute the example concludes that administration of the trust in accordance with the state statute defining income to be a unitrust_amount will not be considered to shift any beneficial_interest in the trust therefore the trust will not be subject_to the provisions of chapter of the internal_revenue_code further the example states that under these facts no trust_beneficiary will be treated as having made a gift_for federal gift_tax purposes and neither the trust nor any trust_beneficiary will be treated as having made a taxable_exchange for federal_income_tax purposes finally the example states that the conclusions in this example would be the same if the beneficiaries' consent was not required or if the change in administration of the trust occurred because the situs of the trust was changed to state x from a state whose statute does not define income as a unitrust_amount or if the situs was changed to such a state from state x represented that no additions actual or constructive were made to trust after that date in the present case trust was irrevocable on date it is regarding the modification under agreement and the amendment converting the annual distribution to be made to the trust beneficiaries from net_income to a unitrust_amount state’s unitrust statute generally authorizes the conversion of an income trust a_trust that describes the amount to be distributed to a beneficiary by referring to plr-169997-03 the trust’s income to a total return unitrust generally a_trust that pays out a unitrust_amount computed as a percentage of the fair_market_value of the trust the unitrust rate that is the percentage of the fair_market_value of the trust to be distributed must be no less than percent and no more than percent in the present case the trustee the beneficiaries and the guardian ad litem for minor unborn and not-yet-adopted contingent income and remainder beneficiaries of the trust have agreed in writing to the conversion of the trust from an income trust into a dollar_figure percent unitrust further the trustee will petition the appropriate state probate_court for approval of this conversion in the instant case state’s unitrust statute meets the requirements of sec_1_643_b_-1 therefore in accordance with sec_26_2601-1 the conversion and administration of the trust pursuant to state’s unitrust statute as described above does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust see sec_26_2601-1 example finally the proposed modification substituting charity and charity for foundation as contingent_remainder beneficiaries does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust the modification creating an investment advisory committee is administrative in nature provided the proposed conversion meets the requirements of state’s unitrust statute we conclude that the proposed modifications to trust under agreement and the amendment will not cause trust to lose its status as a_trust that is exempt from gst tax by reason of b a of the tax_reform_act_of_1986 and sec_26 b i accordingly based on the facts submitted and the representations made and ruling_request sec_61 provides that gross_income includes gains derived from dealings in property under sec_1_61-1 of the income_tax regulations gross_income means all income from whatever source derived unless excluded by law gross_income includes income realized in any form whether in money property or services under sec_1001 gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in such section for determining loss over the amount_realized under sec_1_1001-1 the gain_or_loss realized from the conversion of property into cash or from the exchange of plr-169997-03 property for other_property differing materially in_kind or in extent is treated as income or loss sustained sec_1001 provides that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained sec_1_1001-1 provides that a loss is not ordinarily sustained prior to the sale_or_other_disposition of the property for the reason that until such sale_or_other_disposition occurs there remains the possibility that the taxpayer may recover or recoup some of the adjusted_basis of the property until some identifiable_event fixes the actual sustaining of a loss and the amount thereof it is not taken into account the proposed modifications under agreement to substitute charity and charity as remote contingent_remainder beneficiaries in place of foundation and to create an investment advisory committee will not be treated as a taxable_exchange for federal_income_tax purposes by either the trust or the beneficiaries the third proposed modification under agreement and the amendment will convert pursuant to state’s unitrust statute the income beneficiaries’ income interests into the right to receive their proportionate shares of a unitrust_amount as discussed above under state’s unitrust statute a trustee may convert an income trust to a unitrust without court approval if the unitrust percentage is no less than percent nor more than percent if the rate is agreed upon in writing by the trustee and the beneficiaries here the trustee and beneficiaries have agreed in writing to the conversion of the trust from an income trust into a dollar_figure percent unitrust and this agreement will be presented to the appropriate state probate_court for approval in example of sec_26_2601-1 an income trust was converted to a unitrust under a state statute authorizing such conversions the example concludes that neither the trust nor any trust_beneficiary will be treated as having made a taxable_exchange for federal_income_tax purposes accordingly based on the facts submitted and the representations made and provided the proposed conversion meets the requirements of state’s unitrust statute we conclude that no gain_or_loss will recognized under sec_61 or sec_1001 by trust or any beneficiary of trust as a result of the proposed modifications this ruling is directed only to the taxpayer who requested it sec_6110 plr-169997-03 except as specifically ruled herein we express no opinion on the federal tax consequences of the proposed modifications of trust under the cited provisions or under any other provisions of the code provides that it may not be used or cited as precedent branch office of associate chief_counsel enclosure copy for sec_6110 purposes cc passthroughs and special industries george masnik chief _________________________ sincerely yours


internal_revenue_service number release date index number ----------------------- ------------------------------ ---------------------------- -------------------------------- ----------------------------------------------- ------------------------ ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ----------------- ----------------------------------------------------- telephone number ---------------------- refer reply to cc psi b03 plr-112242-17 date date legend x ------------------------------------------ ---------------------------- y ------------------------------------------- ----------------------------------------------------- a ------------------------------------------- ------------------------------ b -------------------- state1 ------- state2 ----------- date1 ---------------------------- date2 ---------------------- date3 ------------------- date4 ---------------------- dear -------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x and y requesting that the service grant x an extension of time plr-112242-17 under sec_301_9100-3 of the procedure and administration regulations to file an entity classification election and requesting that the service grant relief to y under sec_1362 of the internal_revenue_code code the information submitted states that x was formed as a limited_liability_company under the laws of state1 on or about date1 x has been wholly owned by a since its date of formation and therefore x is eligible to be treated as disregarded as an entity separate from its owner for federal tax purposes the information submitted further states that y had been formed as a limited_liability_company under the laws of state2 on date2 and was reconstituted as a limited_liability_company under the laws of state1 on date3 at the time of its formation y had two individuals as members a and b y filed an election to be treated as an s_corporation beginning on date2 based on advice from a’s accountant a transferred a’s interests in y to x after x’s formation on date1 in addition based on the advice of a’s accountant x filed an election to be treated as an s_corporation effective date4 however a’s accountant failed to advise a x or y that the s_corporation_election by x which is also a deemed entity classification election to treat x as an association_taxable_as_a_corporation for federal tax purposes would cause the s_corporation_election of y to terminate since x would be an ineligible s_corporation shareholder the information submitted further states that y and y’s shareholders including a indirectly through x have filed tax returns consistent with y being an s_corporation since date4 y further represents that the circumstances resulting in the termination of y’s s_corporation_election were inadvertent and were not motivated by tax_avoidance or retroactive tax planning y and each person who was or is a shareholder of y including a indirectly through x at any time since date4 agree to make any adjustments consistent with the treatment of y as an s_corporation as may be required by the secretary with respect to such period sec_301_7701-2 generally provides that a business_entity is any entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code sec_301_7701-3 provides that an eligible_entity with at least two members may elect to be classified as either an association and thus a corporation under sec_301_7701-2 or as a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner plr-112242-17 sec_301_7701-3 further provides that so long as a business_entity is not classified as a corporation under sec_301_7701-2 or an eligible_entity it may elect its classification for federal tax purposes sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to seventy-five days prior to the date the form is filed or up to twelve months after the date on which the form is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that a small_business_corporation means a domestic_corporation that is not an ineligible_corporation and that does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation a termination of an s_corporation_election under sec_1362 is effective on or after the date of cessation plr-112242-17 sec_1362 provides that if an election under sec_1362 by any corporation was terminated under sec_1362 or the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified under sec_1362 agrees to make the adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary for that period then notwithstanding the circumstances resulting in such termination the corporation shall be treated as an s_corporation during the period specified by the secretary based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center to elect to be treated as a disregarded_entity effective date4 a consequence of this late election will be to render the s_corporation_election of x previously made to be effective on date4 ineffective because x will not have satisfied the requirements to be an s_corporation as of that date a copy of this letter should be attached to the form_8832 in addition based solely on the facts submitted and the representations made we conclude that y’s s_corporation_election terminated on date4 due to x’s election to be an s_corporation effective on that date we conclude that this termination was inadvertent within the meaning of sec_1362 pursuant to the provisions of sec_1362 y will be treated as continuing to be an s_corporation on date4 and thereafter unless y’s s_corporation_election otherwise terminated under sec_1362 for reasons not stated in this letter this ruling is contingent upon x filing a late entity classification election to be treated as a disregarded_entity effective on date4 as provided above if this condition is not met then this letter_ruling is null and void furthermore if this condition is not met y must send a notification that its s election has terminated to the service_center with which y’s s election was filed except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied regarding y’s eligibility to be an s_corporation or the validity of its s_corporation_election the rulings contained in this letter are based upon information and representations submitted by the taxpayers and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the plr-112242-17 material submitted in support of the request for a ruling it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent pursuant to powers of attorney on file with this office we are sending copies of this letter to x’s and y’s authorized representatives sincerely associate chief_counsel passthroughs special industries by ______________________________ bradford r poston senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court benness m richards and jane richards petitioners v commissioner of internal revenue respondent docket no filed date robert alan jones for petitioners milton j carter jr for respondent supplemental memorandum opinion this opinion supplements our previous memorandum opinion in richards v commissioner tcmemo_1997_149 filed date although luis c decastro esq continues to be listed as counsel of record in docket no he did not participate in the filing or prosecuting of the motion that is the subject of this opinion beghe judge in richards v commissioner tcmemo_1997_ the court denied petitioners' motion for leave to file motion to vacate decision this matter is now before the court on petitioners' motion for reconsideration and attached motion to consolidate background2 petitioners' case on or about date benness m richards and jane richards filed a joint federal_income_tax return for reporting adjusted_gross_income of dollar_figure taxable_income of dollar_figure and tax due of dollar_figure in computing their taxable_income petitioners claimed an interest_deduction attributable to their participation in certain programs managed by henry kersting because petitioners' tax_return is not part of the record in this case we are unable to determine the specific amount of the kersting-related interest_deduction that petitioners claimed on their return on date following an undercover investigation the internal_revenue_service irs searched mr kersting's offices pursuant to a search warrant issued by the u s district_court for the district of hawaii among the materials seized during the search were lists identifying by name and address although the background of this case is set forth in richards v commissioner tcmemo_1997_149 for the sake of completeness and convenience we will repeat the background here approximately big_number of mr kersting's clients and schedules showing the amount of interest purportedly paid_by each client to one of several kersting companies during the taxable years and the circumstances of the search of mr kersting's offices are described in the court's opinion in 90_tc_237 dixon i on date respondent issued a joint notice_of_deficiency to petitioners determining a deficiency in their federal_income_tax for in the amount of dollar_figure and an addition_to_tax under sec_6653 a in the amount of dollar_figure the notice_of_deficiency a form of notice apparently issued to a number of taxpayers with kersting-related adjustments states that respondent was disallowing dollar_figure in interest deductions that petitioners purportedly paid to any entity owned associated with or controlled either directly or indirectly by henry kersting section references are to the internal_revenue_code as amended rule references are to the tax_court rules_of_practice and procedure the notice_of_deficiency was issued approximately days prior to the expiration of the normal 3-year period of limitations applicable to the assessment of federal income taxes sec_6501 a simple arithmetical calculation reveals that respondent computed petitioners' tax_deficiency by applying a tax_rate of percent which was the highest tax_rate imposed for on date lu n nevels jr esq filed a joint petition for redetermination assigned docket no on behalf of a large group of taxpayers including petitioners who had received notices of deficiency with kersting-related adjustments disputing the dollar_figure figure used in the notice_of_deficiency the petition includes an allegation that the interest_deduction reported on petitioners' income_tax return attributable to their participation in kersting programs was only dollar_figure in addition the petition includes an allegation that the notice_of_deficiency issued to petitioners is arbitrary and capricious on date respondent filed an answer to the petition specifically respondent denied for lack of sufficient information the allegation respecting the specific amount of the inasmuch as there were no other adjustments in the notice_of_deficiency and assuming that the adjusted_gross_income that petitioners reported is correct respondent erred in computing petitioners' tax_liability for using a 70-percent tax_rate which was only applicable with respect to taxable_income exceeding dollar_figure for joint filers petitioners resided in woodland hills california at the time the petition was filed the petition identifies the payees as atlas funding corp fargo acceptance corp federated finance co forbes acceptance corp and mahalo acceptance corp interest_deduction reported on petitioners' tax_return and denied without qualification the allegation that the notice_of_deficiency is arbitrary and capricious on date luis c decastro esq mr decastro filed an entry of appearance on behalf of petitioners in docket no in the interim on date respondent's counsel assigned to the kersting project kenneth mcwade esq mr mcwade had mailed mr decastro a letter enclosing proposed decision documents for petitioners and several other taxpayers with cases before the court involving kersting-related adjustments on date mr decastro executed a stipulated decision on behalf of petitioners which states that petitioners are liable for a deficiency in income_tax for the taxable_year in the amount of dollar_figure and that petitioners are not liable for additions to tax under sec_6653 or sec_6621 on the same date mr decastro mailed a check to mr mcwade signed by petitioners and made payable to the irs in the amount of dollar_figure representing dollar_figure in tax and dollar_figure in interest mr mcwade executed the stipulated decision on date and mailed the document to the court on date mr mcwade filed a motion to sever petitioners' case from docket no shortly thereafter the court granted the motion severed petitioners' case from docket no and assigned the case docket no on date the court entered the parties' stipulated decision as described above in docket no petitioners did not file a notice of appeal or a timely motion to vacate or revise the decision entered date consequently the decision became final on date days after the decision was entered sec_7481 the test cases during the period that petitioners' case was docketed with the court dockets and eight petitioners with kersting-related adjustments were selected as test cases for trial on date during the same period that mr decastro was negotiating petitioners' settlement the test case taxpayers filed a motion for leave to file an amendment to their petitions to raise various evidentiary issues based upon their contention that the search of mr kersting's offices was illegal on date the court granted the test case taxpayers' motion for leave to file the evidentiary issues raised in the amendment to petition were resolved in the court's opinion in dixon i in 90_tc_237 the test case taxpayers argued that the search of mr kersting's office was illegal that the materials seized during the search should be suppressed in the test case proceedings and that the burden_of_proof and burden of going forward with the evidence should be shifted to respondent the court rejected these contentions on the ground that the test case taxpayers failed to establish continued mr mcwade served as respondent's lead counsel during the trial of the test cases one of the taxpayers selected as a test case john thompson was represented by mr decastro at trial the kersting test cases went to trial in date in hawaii following the trial the court issued its memorandum opinion in dixon v commissioner tcmemo_1991_614 dixon ii sustaining virtually all of respondent's determinations in each of the test cases the court's decision in dixon ii subsequently was vacated and remanded on appeal to the court_of_appeals for the ninth circuit in 26_f3d_105 9th cir specifically in response to respondent's posttrial admission that prior to the trial of the test cases mr mcwade had entered into secret settlement agreements with two of the test case taxpayers john thompson and john cravens the court_of_appeals remanded the test cases to this court with instructions to conduct an evidentiary hearing to determine the full extent of the admitted wrong done by the government trial lawyers id pincite the court_of_appeals citing 499_us_279 directed the court to consider whether the continued standing to contest the search and seizure in question we further note that mr kersting's claims that the search and seizure were illegal have been repeatedly rejected by the u s district_court for the district of hawaii see 865_fsupp_669 d haw extent of the misconduct rises to the level of a structural defect voiding the judgment as fundamentally unfair or whether despite the government's misconduct the judgment can be upheld as harmless error id in carrying out this mandate we also were directed to consider on the merits all motions of intervention filed by parties affected by dixon ii id upon remand the court gave effect to the direction of the court_of_appeals regarding intervention by allowing a number of non-test-case taxpayers who had previously signed stipulations to be bound by the decision in dixon ii to participate in the evidentiary hearing robert alan jones esq mr jones entered his appearance on behalf of a group of non-test-case taxpayers allowed to participate in this fashion during the evidentiary hearing which was held at a special trial session of the court in los angeles in may-date mr jones expressed concern that in addition to the settlement with john thompson mr mcwade may have entered into settlements with other clients of mr decastro on terms more favorable than the standard kersting project settlement offer in this regard mr jones requested respondent's counsel mary elizabeth wynne esq ms wynne to disclose the details of settlements entered into the appellate panel in 26_f3d_105 9th cir vacating and remanding dixon v commissioner tcmemo_1991_614 issued an order stating that the panel would retain jurisdiction over any subsequent appeal with mr decastro's clients including petitioners in a letter to mr jones dated date ms wynne attempted to explain that petitioners did not receive special treatment from mr mcwade in the settlement of their case as follows as we discussed on the telephone i have received authorization from mr and mrs richards to disclose the attached copy of the computer transcript of the richards' account for as you are aware neither the government nor the richards has a copy of the richards' return but the information on the enclosed transcript reflects the following information concerning the return filed by the richards the tax_return was filed date and showed an income_tax_liability of dollar_figure advance or estimated payments of dollar_figure were credited to the account on date on date a refund of dollar_figure was generated to the richards along with interest of dollar_figure on date the richards's account was credited with a tax payment of dollar_figure and interest of dollar_figure the tax of dollar_figure and interest of dollar_figure were assessed on date which date was within days of the date the tax_court decision became final in addition to showing the above information the enclosed transcript also shows that the richards's reported adjusted_gross_income of dollar_figure on their return and taxable_income of dollar_figure the maximum_tax rate in was percent but that rate did not apply until taxable_income reached dollar_figure for joint filers accordingly even without allowance of the kersting related deductions the richards's taxable_income in was not high enough to trigger the maximum_tax rate of percent that was used in the notice_of_deficiency thus any comparison of the amount asserted in the notice with the amount on decision must be made after adjusting for the proper tax_rate as the court noted during the hearing the petition filed on behalf of the richards alleged that kersting related deductions were only dollar_figure assuming the petition is correct the tax on taxable_income of dollar_figure dollar_figure per the return and dollar_figure disallowed kersting deductions is dollar_figure which produces a deficiency of dollar_figure dollar_figure less the dollar_figure reported on the return a seven percent reduction of this deficiency results in a deficiency of dollar_figure far less than the deficiency in the decision of dollar_figure the explanation for this discrepancy lies in the fact that several kersting participants received notices of deficiency based on a reconstruction of records obtained from mr kersting's office in for the year the statute_of_limitations would have expired in thus the notice may have been issued without access to the original return whatever the reason for the discrepancy it is clear that the richards did not receive any kind of special treatment from mr mcwade on date mr jones filed an entry of appearance on behalf of petitioners and a motion for leave to file motion to vacate decision motion for leave on that same date the court lodged petitioners' motion to vacate decision and set_aside settlement and petitioners' memorandum of points and authorities petitioners' motion to vacate decision was based upon the theory that the notice_of_deficiency issued to petitioners was invalid under 814_f2d_1363 9th cir revg 81_tc_855 and therefore the court lacked jurisdiction to enter the stipulated decision in their case on date the court issued a notice of filing directing respondent to file an objection if any to petitioners' motion for leave on or before date on date respondent filed a motion to extend time to file respondent's objection to petitioners' motion for leave in an order dated date the court granted respondent's motion and extended the date for respondent to file an objection to january dollar_figure on date the court filed respondent's response in opposition to petitioners' motion for leave on date the court filed its memorandum opinion richards v commissioner tcmemo_1997_149 richards i rejecting petitioners' scar argument and denying petitioners' motion for leave mr jones subsequently was served with the court's memorandum opinion as well as respondent's response to petitioners' motion for leave on date the court filed petitioners' motion for reconsideration with attached motion to consolidate and petitioners' memorandum of points and authorities petitioners contend that the court should reconsider its denial of petitioners' motion for leave on the grounds that the court misinterpreted petitioners' motion to vacate decision and the court incorrectly denied petitioners' motion for leave without first allowing petitioners to file their motion to vacate decision conduct necessary discovery and have a hearing petitioners maintain that the court misinterpreted their motion to vacate decision insofar as the court treated the motion the court's date order expressly directed that the order be served on mr jones as an attempt to challenge the validity of the notice_of_deficiency under scar v commissioner supra petitioners assert that their motion to vacate decision was based upon the theory that the stipulated decision entered in their case was the result of a fraud upon the court petitioners also contend that the court incorrectly allowed respondent to file a response in opposition to petitioners' motion for leave without serving petitioners with the response and allowing petitioners to file a reply to the same in conjunction with their motion for reconsideration petitioners contend that their case should be consolidated with dixon v commissioner docket no 9382-83--the group of cases that the court previously consolidated pursuant to the mandate of the court_of_appeals for the ninth circuit in 26_f3d_105 9th cir petitioners argue that it is an abuse_of_discretion under the circumstances of the kersting cases including the massive and continuing fraud committed and condoned by representatives of respondent and its office_of_chief_counsel for the office_of_chief_counsel and this honorable court to further attempt to split off and contain the illegal and improper fraudulent conduct of respondent by attempting to deal with the overall conspiracy by ruling on improper actions one at a time thus preventing their consolidation into a single action which may be properly ruled upon by the panel of united_states court_of_appeals for the ninth circuit which has retained jurisdiction over these matters in an order dated date the court directed respondent to file a response to petitioners' motion while allowing robert patrick sticht esq mr sticht counsel for non-test-case taxpayers participating in the dixon evidentiary hearing and joe alfred izen jr esq mr izen counsel for test-case and non-test-case taxpayers participating in the dixon evidentiary hearing to file a response to petitioners' motion in their discretion on date respondent filed a response in opposition to petitioners' motion for reconsideration with attached motion to consolidate on date pursuant to the court’s order dated date mr sticht filed a response in opposition to petitioners' motion insofar as petitioners seek to have their case consolidated with the dixon group of cases mr izen did not file a response to petitioners' motion discussion petitioners' motion for leave to file motion to vacate decision sec_7481 provides the general_rule that a decision of the tax_court becomes final upon expiration of the time to file a notice of appeal sec_7483 provides that a notice of appeal generally must be filed within days after a decision is entered however the 90-day appeal period may be extended if the taxpayer files a timely motion to vacate or revise the decision fed r app p a pursuant to rule a motion to vacate or revise a decision must be filed within days after the decision is entered unless the court allows otherwise petitioners did not file a notice of appeal or a timely motion to vacate or revise the stipulated decision that was entered in this case on date and the decision became final on date see sec_7459 sec_7481 as a consequence petitioners were required to file a motion for leave to file their motion to vacate the stipulated decision entered in their case petitioners' assertion that the court incorrectly denied their motion for leave without first permitting petitioners to file their motion to vacate decision conduct necessary discovery and have a hearing is misconceived in deciding whether to grant or deny a motion for leave to file a motion to vacate a final_decision it is ordinarily the court’s practice to consider the merits of the underlying lodged motion to vacate decision to determine whether the moving party has alleged sufficient facts to properly question the validity of the decision see 69_tc_999 see also 52_tc_295 vacated on another issue 441_f2d_930 9th cir 387_f2d_689 7th cir campbell v commissioner tcmemo_1988_105 however the disposition of a motion for leave to file a motion to vacate or revise a decision lies within the sound discretion of the court 872_f2d_245 8th cir affg tcmemo_1987_1 in the present case the court thoroughly considered the arguments contained in petitioners' supporting memorandum of points and authorities as reflected in the detailed analysis set forth in the court's memorandum opinion in richards i specifically based upon petitioners' clear reliance on scar v commissioner supra the court analyzed the controlling case law applied the law to the relevant facts and concluded that the notice_of_deficiency issued to petitioners is valid implicit in the court's analysis is the determination that petitioners failed to allege sufficient facts to properly question our jurisdiction to enter the stipulated decision in this case brannon's of shawnee inc v commissioner supra petitioners also complain that they were not timely served with respondent's response to their motion for leave and that the court denied their motion for leave without first allowing them to reply thereto any prejudice to petitioners occasioned by the delay in service of respondent's response which was made in accordance with rule b has been obviated by our consideration of petitioners' motion for reconsideration articulating their position respecting respondent's response to their motion for leave to which we now turn petitioners' motion for reconsideration the tax_court generally lacks jurisdiction to vacate a final_decision 859_f2d_115 9th cir affg 86_tc_1319 235_f2d_97 9th cir affd per curiam 352_us_1027 the court will vacate a final_decision only in certain narrowly circumscribed situations for instance this court and some courts of appeals including the court_of_appeals for the ninth circuit have ruled that this court may vacate a final_decision if that decision is shown to be void or a legal nullity for lack of jurisdiction over either the subject matter or the party see 868_f2d_1081 9th cir 90_tc_103 brannon's of shawnee inc v commissioner supra pincite or if the decision was obtained through fraud upon the court see abatti v commissioner supra 511_f2d_929 n 2d cir 464_f2d_368 3d cir toscano v commissioner f 2d pincite kenner v commissioner supra casey v commissioner tcmemo_1992_672 as previously mentioned in richards i we rejected petitioners' contention that the notice_of_deficiency issued to them was invalid and that the court lacked jurisdiction to enter the stipulated decision in their case in so holding we determined that the notice_of_deficiency issued to petitioners was not invalid on its face we see no benefit to revisiting that issue in any detail here petitioners contend that we should reconsider our decision denying their motion for leave to file motion to vacate decision on the ground that we misinterpreted the basis for the motion although we are confident that we did not misinterpret the basis for petitioners' motion we nevertheless will address petitioners' motion for reconsideration insofar as they now contend that the stipulated decision entered in their case should be vacated due to fraud upon the court in particular we will consider the merits of petitioners' allegations that the stipulated decision entered in their case is the result of fraud upon the court we will grant petitioners' motion for leave only petitioners' motion for leave to file motion to vacate decision states that the holding in 814_f2d_1363 9th cir establishes that the notice_of_deficiency issued to petitioners was wrongfully and fraudulently issued any ambiguity with respect to the ground for petitioners' motion for leave was eliminated by petitioners' memorandum of points and authorities which contains multiple references to the scar case and states it is abundantly clear that the tests set forth in scar v c i r supra were not met by the respondent when petitioners' statutory notice was issued for we submit that no determination of deficiency was made by the commissioner in the case of petitioners' tax_return if we are satisfied that petitioners have alleged sufficient facts to support further inquiry into the matter in abatti v commissioner supra pincite the court_of_appeals for the ninth circuit defined the phrase fraud on the court as an unconscionable plan or scheme which is designed to improperly influence the court in its decision or a fraudulent act that prevents the opposing party from fully and fairly presenting his case see toscano v commissioner supra pincite kenner v commissioner supra pincite a party moving to vacate a final_decision of the tax_court bears a heavy burden of particularized pleading and proof 113_f3d_670 ___ 7th cir affg tcmemo_1995_209 and cases cited therein abatti v commissioner supra pincite petitioners' allegations of fraud upon the court are summarized in petitioners' memorandum of points and authorities in support of petitioner's motion for reconsideration as follows respondent committed fraud upon the united_states tax_court by a series of actions as set out in paragraphs herein beginning by conducting an illegal search and seizure of the promoter henry kersting's offices and records in date1 then she utilized the seized materials to without rational basis issue statutory notices of deficiency to fraudulently toll the statute_of_limitations respecting the tax_liabilities of petitioners and many other taxpayers similarly situated respondent and her office_of_chief_counsel then deliberately concealed their actions from petitioners and other taxpayers they then forced the many taxpayers so affected into settlement or trial without revealing that respondent had fraudulently obtained jurisdiction over them the same counsel for respondent who obtained the fraudulent settlement from petitioners kenneth mcwade also with others committed a further series of frauds on the court in the related consolidated kersting test cases of petitioners thompsons and cravens and the settlement of the cases of non-test case petitioner denis alexander the fraud on the court regarding the specifics pertaining to petitioners richards was undiscovered until the facts were partially admitted in a letter from irs special trial attorney to petitioner's counsel on date petitioners do not agree with judge goffe's decision regarding kersting investors' standing under the fourth_amendment to contest the illegal search and seizure 90_tc_237 however these motions do not per se include any claim of petitioners' fourth_amendment rights being violated mr jones' affidavit in support of petitioners' motion for reconsideration includes a statement that mr jones is attempting to obtain an affidavit submitted by an irs employee to the court in a related proceeding purportedly stating that the materials seized from mr kersting were not used in the preparation of notices of deficiency issued to kersting investors--a statement that would be inconsistent with statements made in ms wynne's letter dated date we have considered petitioners' various contentions and we are not persuaded that they have satisfied their heavy burden of particularized pleading and proof that the stipulated decision entered in their case is the result of a fraud upon the court we will address each of petitioners' allegations of fraud in turn petitioners first assert that respondent conducted an illegal search and seizure in mr kersting's office in date we note however that mr kersting's various challenges to the legality of the date search and seizure have been repeatedly rejected by the u s district_court for the district of hawaii see 865_fsupp_669 d hawaii in addition in dixon i the court rejected the kersting test case taxpayers' arguments that the search of mr kersting's office was illegal that the materials seized during the search should be suppressed in the test case proceedings and that the burden_of_proof and burden of going forward with the evidence should be shifted to respondent specifically the court held that the test case taxpayers failed to establish standing to contest the search and seizure in question although petitioners state that they disagree with the court's holding in dixon i they also state that they do not assert that their fourth_amendment rights were violated in sum we are left with nothing more than a bald assertion that the kersting search was illegal under the circumstances we fail to see how the kersting search and seizure should be considered as an element of a fraud perpetrated upon the court in connection with the case at hand which was disposed of by decision entered upon the stipulation of the parties petitioners further allege that respondent used the materials that were seized from mr kersting to issue statutory notices of deficiency to kersting investors including petitioners without a rational basis and thereby fraudulently tolled the statute_of_limitations we find it necessary to break this allegation down into its component parts it has been evident for some time that the materials that were seized from mr kersting's offices were made available to respondent's agents for purposes of conducting civil audits of kersting investors see dixon v commissioner t c pincite for the sake of argument we will assume that respondent's agents used such materials in preparing the notice_of_deficiency issued to petitioners in april dollar_figure notwithstanding this assumption we are unable to conclude that the notice_of_deficiency issued to petitioners lacks a rational basis sec_7602 authorizes the secretary to examine any books papers records or other data that may be relevant for the purpose of ascertaining the correctness of any_tax return in the absence of any allegations of fact that would support a finding that the kersting search was illegal respondent's use of the materials seized from mr kersting in preparing the notice_of_deficiency issued to petitioners is not per se illegal or fraudulent nor would it render the notice_of_deficiency invalid see eg 73_tc_600 petrie v commissioner tcmemo_1990_168 consistent with the foregoing the production of the document referred to in mr jones' affidavit is not necessary for the disposition of petitioners' motion for reconsideration normally an allegation that a notice_of_deficiency lacks a rational basis is tantamount to an argument that the notice is arbitrarydollar_figure however petitioners' argument that the notice_of_deficiency issued to them lacks a rational basis when considered in conjunction with petitioners' argument that the notice served to fraudulently toll the period of limitations indicates that petitioners continue to assert that the notice_of_deficiency is invalid we rejected this contention in richards i where we observed that the notice_of_deficiency concerns petitioners' tax_liability for and that the deficiency is attributable to respondent's determination to disallow an interest_deduction in the amount of dollar_figure with respect to petitioners' participation in kersting programs petitioners do not dispute that they reported a kersting-related interest_deduction on their income_tax return consequently we find that respondent considered information relating to petitioners' tax_liability in preparing the notice_of_deficiency scar v commissioner f 2d pincite in addition unlike scar the notice does not contain a statement that respondent issued the notice without examining petitioners' tax_return in order to protect the government's interest under the circumstances the notice_of_deficiency does not reveal on its face that respondent failed to make a determination with respect to petitioners' tax_liability and we so hold richards v commissioner tcmemo_1997_149 slip op pincite a finding that a notice_of_deficiency was issued on an arbitrary basis does not render the notice invalid see 875_f2d_1396 9th cir and would not per se constitute a fraud upon the court in sum in richards i we held that the notice_of_deficiency issued to petitioners is facially valid petitioners have offered no evidence to the contrary although petitioners' motion for reconsideration does not clearly state the proposition we assume that petitioners seek discovery and an evidentiary hearing in part to attempt to develop evidence that the notice_of_deficiency is invalid however to permit the use of such procedures under the circumstances presented would run counter to the well-settled principle that we generally will not look behind a notice_of_deficiency to examine the evidence used by the commissioner in the determination_of_a_deficiency scar v commissioner f 2d pincite 62_tc_324 and cases cited therein considering that the disputed notice_of_deficiency is facially valid and in light of petitioners' failure as discussed above to allege any facts that would support a finding that respondent's agents engaged in unconstitutional conduct we will not look behind the notice_of_deficiency in this case because we reject petitioners' argument that the notice_of_deficiency lacks a rational basis it follows that petitioners' contention that the notice_of_deficiency served as the means for respondent to fraudulently toll the period of limitations likewise fails the remaining elements of petitioners' theory of fraud upon the court merit little discussion petitioners assert that respondent deliberately concealed that respondent had fraudulently obtained jurisdiction over kersting investors including petitioners and then forced the many taxpayers so affected into settlement or trial as discussed above we reject the notion that respondent fraudulently obtained jurisdiction over petitioners we have no reason to doubt that all information necessary for petitioners to contest the validity of the notice_of_deficiency ie petitioners' tax_return and the notice_of_deficiency was readily available to petitioners at the time the notice_of_deficiency was issueddollar_figure finally it is evident that any misconduct of mr mcwade in arranging settlements with messrs thompson cravens and alexander as part of the test case proceedings bears no relation to the stipulated settlement that petitioners entered into in this case indeed mr nevels included allegations in the petition that the notice_of_deficiency was arbitrary further allegations were raised in the test cases that the notices of deficiency issued to the test case taxpayers were invalid due to the use of materials seized from mr kersting at the same time that mr decastro was engaged in settlement negotiations with mr mcwade respecting petitioners' case although the record does not disclose whether mr decastro pursued this particular point with mr mcwade we note that petitioners do not allege and there is no evidence in the record that the issue was not raised because of any collusion or fraud the stipulated decision that mr decastro executed on petitioners' behalf is now final petitioners have failed to persuade us that the stipulated decision entered in their case was the result of an unconscionable plan or scheme that was designed to improperly influence the court in its decision or that any act was committed that prevented petitioners from fully and fairly presenting their case to the court consequently it follows that we lack jurisdiction to vacate the decision in this case we now turn to petitioners' motion to consolidate their case with the dixon et al group of cases petitioners argue that their case should be consolidated with the dixon cases so that all cases involving respondent's alleged improper and illegal conduct in the handling of the kersting tax_shelter project may be presented to the court_of_appeals for the ninth circuit in one appeal it is worth noting that petitioners did not request such consolidation at the time they filed their motion for leave to file motion to vacate decision in any event having denied petitioners' motion for leave to file motion to vacate decision on the ground that we lack jurisdiction to vacate the decision entered in this case it follows that we likewise lack jurisdiction to consolidate petitioners' case with the dixon cases therefore we will deny petitioners' request for consolidation to reflect the foregoing an order will be issued denying petitioners' motion for reconsideration with attached motion to consolidate


internal_revenue_service number release date index number --------------------------------------------- -------------------------------------- ---------------------------- ------------------------------------------ ------------------------------------------ ------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------ telephone number --------------------- refer reply to cc ita b06 plr-128939-16 date march legend taxpayer --------------------------------------------- date --------------------------- year ------- date -------------------------- dear --------------- this letter responds to taxpayer’s request dated date for an extension of time under sec_301_9100-1 of the procedure and administration regulations to file a form_3115 application_for change in accounting_method for year taxpayer failed to file its form_3115 by the due_date date and instead submitted it to this office with this request for an extension of time taxpayer would like to obtain permission to change its overall_method_of_accounting from the cash_receipts_and_disbursements_method to an accrual_method of accounting for year the accounting_method change that taxpayer proposes to make requires an adjustment under sec_481 of the internal_revenue_code generally a taxpayer that fails to make an election timely may submit a request for relief under sec_301_9100-1 through -3 to obtain an extension of time to make the desired election for this purpose sec_301_9100-1 defines an election as including a request to adopt change or retain an accounting_method to obtain an extension of time to make a regulatory election that does not meet the requirements of sec_301_9100-2 automatic extensions such as in the instant case a taxpayer must satisfy the requirements set forth in sec_301_9100-3 a request for relief subject_to sec_301_9100-3 is granted when the taxpayer demonstrates to the satisfaction plr-128939-16 of the commissioner of the internal revenue that it acted reasonably and in good_faith and that granting the relief will not prejudice the interests of the government see id special rules apply for determining whether the government’s interests are prejudiced when a taxpayer seeks relief with respect to an accounting_method regulatory election see sec_301_9100-3 if the taxpayer’s intended election is subject_to the advance consent procedure described in sec_1_446-1 of the income_tax regulations or requires an adjustment under sec_481 the government's interests are deemed to be prejudiced except in unusual and compelling circumstances see id the information furnished by taxpayer demonstrates to the satisfaction of the commissioner that it acted reasonably and in good_faith and that granting an extension of time to make the desired regulatory election would not prejudice the interests of the government accordingly the form_3115 that taxpayer submitted with its request for an extension of time under sec_301_9100-1 will be considered as timely filed for year except as expressly provided herein no opinion is expressed or implied as to the application of any provisions of the code or the regulations that may be applicable to the transaction the extension of time to file a form_3115 granted in this ruling is not a determination that taxpayer will be permitted to change its accounting_method as proposed that determination will be made separately upon the review of taxpayer’s form_3115 this ruling is directed only to taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to taxpayer’s authorized representative the ruling contained in this letter is based upon information and representations submitted by taxpayer and accompanied by the appropriate penalty of perjury statements while this office has not verified any of the material submitted in support of plr-128939-16 the request for this ruling all information and representations is subject_to verification on examination sincerely cheryl l oseekey senior counsel branch office of associate chief_counsel income_tax accounting enclosure copy for sec_6110 purposes cc