internal_revenue_service number release date index number 468a -------------------- ---------------------------------------- ---------------------------------- --------------------------------- ------------------------------------------- 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 b06 plr-117492-06 date date re revised schedule of ruling amounts ------------------------------------------------ taxpayer ------------------------------------------------------------------------------------------- ------------------------ --------------------------------------------- -------------------------------- ----------------------------------------------- ------------------------------------------------------------ ----------------------------------------------------- --------------------------------- ------------------------------------------ plant location commission a commission b commission c station fund dear ------------- this letter responds to the taxpayer s request filed date as modified by submission dated date for a revised schedule of ruling amounts in accordance with sec_1_468a-3 of the income_tax regulations relating to the plant's nuclear decommissioning fund afund taxpayer was previously granted a schedule of ruling amounts on --------------------------- the request for a revised schedule of ruling amounts is the result of commissions a and b reducing the amount of decommissioning costs to be included in cost of service information for the schedule of ruling amounts was submitted on behalf of the taxpayer pursuant to sec_1 468a- h taxpayer represents the facts and information relating to its request for a revised schedule of ruling amounts as follows plr-117492-06 - - situated in location taxpayer has a direct ownership_interest of ----- percent in plant which is plant’s renewed operating license is set to expire on ---------------------- taxpayer is subject_to the jurisdiction of commission a which covers --------percent of taxpayer’s total electric sales commission b which covers -------- percent commission c which covers -------percent for a total of ----------percent the total is slightly above ----- percent due to the fact that each commission determines its jurisdictional percentage at a different point in time these percentages may vary slightly from year to year a portion of taxpayer’s wholesale operations consist of sales to the joint owners of station the rates charged for supplemental sales to the joint owners are set through contractual agreements which were approved by commission c taxpayer maintains its records as prescribed by commission c -------percent of taxpayer’s total electric sales from sales to the joint owners of station and -------percent of taxpayer’s total electric sales from other customers the estimated base cost for decommissioning plant is based on an independent study and is premised on the prompt removal dismantling method in ---------------------------------- commission a included decommissioning costs for taxpayer’s plant in taxpayer’s cost of service for ratemaking purposes in the annual amount of dollar_figure------------- in determining the amount of decommissioning costs commission a determined the total estimated base cost of decommissioning taxpayer’s interest in plant to be dollar_figure----------------- ------- dollars the base cost for decommissioning plant was escalated at the rate of -----percent annually to ------- resulting in an estimated future decommissioning cost of dollar_figure------------------ ------- dollars commission b in ----------------------------included decommissioning costs for taxpayer’s plant in taxpayer’s cost of service for ratemaking purposes in the annual amount of dollar_figure------------- commission c included decommissioning costs for taxpayer’s plant in taxpayer’s cost of service for ratemaking purposes in the annual amount of dollar_figure----------- the funding_period of plant extends from ------- to ------- and the level_funding limitation period for plant extends from ------- through ------ the estimated period for which the fund will be in effect is --- years ------- through ------- the assumed after tax_rate of return expected to be earned by the assets of the fund is -----percent taxpayer has calculated its qualifying percentage to be --- percent sec_468a of the internal_revenue_code provides that a taxpayer may elect to deduct the amount of payments made to a qualified nuclear decommissioning plr-117492-06 - - fund however former ' 468a b limited the amount_paid into the fund for any taxable_year to the lesser_of the amount of nuclear decommissioning costs allocable to the fund that is included in the taxpayer's cost of service for ratemaking purposes for the taxable_year or the ruling_amount applicable to that year sec_468a of the code provides that no deduction shall be allowed for any payment to the nuclear decommissioning fund unless the taxpayer requests and receives from the secretary a schedule of ruling amounts the ruling_amount for any taxable_year is defined under ' 468a d as the amount which the secretary determines to be necessary to fund that portion of nuclear decommissioning costs which bears the same ratio to the nuclear power plant as the period for which the fund is in effect bears to the estimated_useful_life of the plant this term is further defined to include the amount necessary to prevent excessive funding of nuclear decommissioning costs or funding of these costs at a rate more rapid than level_funding taking into account such discount rates as the secretary deems appropriate sec_468a of the code provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of the taxable_year if the payment is made on account of the taxable_year within months after the close of the taxable_year sec_1_468a-1 of the regulations provides that an eligible_taxpayer may elect to deduct nuclear decommissioning costs under ' 468a of the code an eligible_taxpayer as defined under ' 468a-1 b is a taxpayer that has a qualifying interest in a nuclear power plant as defined under ' 468a-1 b a qualifying interest is among other things a direct ownership_interest including an interest held as a tenant in common or joint tenant sec_1_468a-2 of the regulations provides that the maximum amount of cash payments made or deemed made to a nuclear decommissioning fund during any taxable_year shall not exceed the lesser_of i the cost of service amount applicable to the nuclear decommissioning fund for such taxable_year or ii the ruling_amount applicable to the nuclear decommissioning fund for such taxable_year sec_1_468a-3 of the regulations provides that in general a schedule of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that over the taxable years remaining in the funding_period as of the date the schedule first applies will result in a projected balance of the nuclear decommissioning fund as of the last day of the funding_period equal to and in no event more than the amount of decommissioning costs allocable to the fund plr-117492-06 - - sec_1_468a-3 of the regulations provides that each schedule of ruling amounts shall be based on the reasonable assumptions and determinations used by the applicable public_utility commission s in establishing or approving the amount of decommissioning costs to be included in the cost of service for ratemaking purposes taking into account amounts that are otherwise required to be included in the taxpayer's income under ' of the code and the regulations thereunder each schedule of ruling amounts shall be based on the public_utility commission's reasonable assumptions concerning i the after-tax rate of return to be earned by the amounts collected for decommissioning ii the total estimated cost of decommissioning the nuclear power plant and iii the frequency of contributions to the nuclear decommissioning fund for a taxable_year sec_1_468a-3 of the regulations permits the internal_revenue_service to provide a schedule of ruling amounts that is identical to the schedule proposed by the taxpayer but no such schedule shall be provided by the service unless the taxpayer's proposed schedule is consistent with the principles and provisions of this section sec_1_468a-3 of the regulations provides that the ruling_amount specified in a schedule of ruling amounts for any taxable_year in the level_funding limitation period shall not be less than the ruling_amount specified in such schedule for any earlier taxable_year under ' 468a-3 b the level_funding limitation period begins on the first day of the first taxable_year for which a deductible payment is made to the nuclear decommissioning fund and ends on the last day of the taxable_year that includes the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes sec_1_468a-3 of the regulations provides that the funding_period for a nuclear decommissioning fund is the period that begins on the first day of the first taxable_year for which a deductible payment is made or deemed to be made to such nuclear decommissioning fund and ends the later of i the last day of the taxable_year that includes the estimated date on which decommissioning costs of the nuclear power plant to which the nuclear decommissioning fund relates will no longer be included in the taxpayer's cost of service for ratemaking purposes or ii the last day of the taxable_year that includes the estimated date on which the nuclear power plant to which the nuclear decommissioning fund relates will no longer be included in the taxpayer's rate base for ratemaking purposes sec_1_468a-3 of the regulations provides that the amount of decommissioning costs allocable to a nuclear decommissioning fund is the taxpayer's share of the total estimated cost of decommissioning the nuclear power plant multiplied by the qualifying percentage plr-117492-06 - - sec_1_468a-3 of the regulations provides that in general the total estimated cost of decommissioning a nuclear power plant is the reasonably estimated cost of decommissioning used by the applicable public_utility commission in establishing or approving the amount of these costs to be included in cost of service for ratemaking purposes sec_1_468a-3 of the regulations provides that a taxpayer's share of the total estimated cost of decommissioning a nuclear power plant equals the total estimated cost of decommissioning the plant multiplied by the taxpayer's qualifying interest in the plant sec_1_468a-3 of the regulations provides that the qualifying percentage for any nuclear decommissioning fund is equal to the fraction the numerator of which is the number of taxable years in the estimated period for which the nuclear decommissioning fund is to be in effect and the denominator of which is the number of taxable years in the estimated_useful_life of the applicable nuclear power plant sec_1_468a-3 of the regulations provides that the estimated period for which a nuclear decommissioning fund is to be in effect begins on the later of the first day of the first taxable_year for which a deductible payment is made to the nuclear decommissioning fund or deemed made or the first day of the taxable_year that includes the date that the nuclear power plant begins commercial operations as determined by the applicable public_utility commission at the time the plant was first included in the taxpayer's rate base and ends on the last day of the taxable_year that includes the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes according to ' 468a-3 e the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes is determined under the ratemaking assumptions used by the applicable public_utility commission in establishing or approving rates during the first ratemaking proceeding in which the nuclear power plant was included in the taxpayer's rate base sec_1_468a-3 of the regulations provides that the estimated_useful_life of a nuclear power plant begins on the first day of the taxable_year that includes the date that the plant begins commercial operations as determined by the applicable public_utility commission at the time the plant was first included in the taxpayer's rate base and ends on the last day of the taxable_year that includes the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes according to ' 468a-3 e the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes is determined under the ratemaking assumptions used by the applicable plr-117492-06 - - public_utility commission in establishing or approving rates during the first ratemaking proceeding in which the nuclear power plant was included in the taxpayer's rate base sec_1_468a-3 of the regulations provides that if two or more public_utility commissions establish or approve rates for electric energy generated by a single nuclear power plant then the schedule of ruling amounts shall be separately determined pursuant to the rules of 468a-3 a through e for each public_utility commission that has determined the amount of decommissioning costs to be included in the cost of service for ratemaking purposes for this plant under ' 468a-3 f this separate determination shall be based on the reasonable assumptions and determinations used by the relevant public_utility commission and shall take into account only that portion of the total estimated cost of decommissioning that is properly allocable to the ratepayer whose rates are established or approved by the public_utility commission according to ' 468a-3 f the ruling amounts for any taxable_year is the sum of the ruling amounts for such taxable_year determined under the separate schedules of ruling amounts sec_1_468a-3 of the regulations provides that the internal_revenue_service shall not provide a taxpayer with a schedule of ruling amounts for any nuclear decommissioning fund unless the public_utility commission that establishes or approves the rates for electric energy generated by the plant to which the nuclear decommissioning fund relates has determined the amount of decommissioning costs to be included in the taxpayer's cost of service for ratemaking purposes and has disclosed the after-tax rate of return and any other assumptions and determinations used in establishing or approving the amount sec_1_468a-3 of the regulations enumerates the information required to be contained in a request for a schedule of ruling amounts filed by a taxpayer in order to receive a ruling_amount for any taxable_year sec_1_468a-3 of the regulations provides that a taxpayer is required to request a revised schedule of ruling amounts for a nuclear decommissioning fund if a any public_utility commission that establishes or approves rates for the furnishing or sale of electric energy generated by a nuclear power plant to which the nuclear decommissioning fund relates increases the proposed period over which decommissioning costs of the nuclear power plant will be included in cost of service for ratemaking purposes adjusts the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes or reduces the amount of decommissioning costs to be included in cost of service for any taxable_year and b the taxpayer's most recent request for a schedule of ruling amounts did not provide notice to the service of such action by the public_utility commission plr-117492-06 - - sec_1_468a-3 of the regulations provides that any taxpayer that has previously obtained a schedule of ruling amounts can request a revised schedule of ruling amounts such a request must be made in accordance with the rules of ' 468a-3 h the internal_revenue_service shall not provide a revised schedule of ruling amounts applicable to a taxable_year in response to a request for a schedule of ruling amounts that is filed after the deemed payment deadline date for such taxable_year we have examined the representations and information submitted by the taxpayer in relation to the requirements set forth in the ' 468a of the code and the regulations thereunder based solely on these representations of the facts we reach the following conclusions commissions a b and c have determined the amount of taxpayer has determined that pursuant to sec_1_468a-3 of the taxpayer has a qualifying interest in the plant and is therefore an eligible taxpayer under sec_1_468a-1 of the regulations decommissioning costs to be included in the taxpayer's cost of service for ratemaking purposes as required by sec_1_468a-3 of the regulations regulations the qualifying percentage is --- percent taxpayer has proposed a schedule of ruling amounts which meets the requirements of sec_1_468a-3 and of the regulations the annual payments specified in the proposed schedule of ruling amounts are based on the reasonable assumptions and determinations used by the commissions and will result in a projected fund balance at the end of the funding_period equal to or less than the amount of decommissioning costs allocable to the fund fund during any taxable_year is restricted to the lesser amount of the decommissioning costs applicable to the fund or the ruling_amount applicable to the fund as set forth under sec_1_468a-2 of the regulations taxpayer subject_to the jurisdiction of three public_utility commissions for ratemaking purposes has calculated its share of the total decommissioning costs allocable to commissions a b and c as required by sec_1_468a-3 of the regulations the maximum amount of cash payments made or deemed made to the plr-117492-06 - - based on the above determinations we conclude that the taxpayer's proposed schedule of ruling amounts satisfies the requirements of sec_468a of the code commissions a b and c1 approved schedule of ruling amounts taxable years ------- through ------- year comm a comm b ------------ comm c-------- total ----------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------ comm c ------------------------------------------------------------------------------------------------------------ --------- ------------------------------------------------------------------------------------------------------------ --------- --------- ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ --------- ------------------------------------------------------------------------------------------------------------ --------- ------------------------------------------------------------------------------------------------------------ --------- ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ --------- ------------------------------------------------------------------------------------------------------------ --------- ------------------------------------------------------------------------------------------------------------ --------- ------------------------------------------------------------------------------------------------------------ --------- amounts for commission c are not specifically reviewed herein and are merely reprinted to arrive at the amount for the total annual ruling_amount for purposes of the review and revision under sec_1_468a-3 of the regulations the date of the schedule of ruling amounts approved by the service on ---------------------------- governs the review period for the commission c ruling amounts plr-117492-06 - - approval of the schedule of ruling amounts is contingent on there being no change in the facts and circumstances known or assumed at the time the current ruling is issued if any of the events described in sec_1_468a-3 of the regulations occur in future years the taxpayer must request a review and revision of the schedule of ruling amounts generally the taxpayer is required to file such a request on or before the deemed payment deadline date for the first tax_year in which the rates reflecting such action became effective when no such event occurs the taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline of the 10th tax_year following the close of the tax_year in which the most recent schedule of rulings amounts was received the approved schedule of ruling amounts is relevant only to those payments made to the fund payments allocable to any funds other than the fund cannot qualify for purposes of the deduction under the provisions of sec_468a of the code effective date amendments were made to sec_468a by the energy tax incentives act of publaw_109_58 119_stat_594 regulations based on these amendments are being developed but have not yet been proposed because the period to which the schedule of ruling amounts above relates began prior to the effective date of these amendments the discussion above is based on the law in effect prior to date however this ruling will be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in the letter_ruling see section dollar_figure of revproc_2006_1 2006_1_irb_1 however when the criteria in section dollar_figure of revproc_2006_1 2006_1_irb_49 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances the ruling is directed only the taxpayer who requested it sec_6110 of the code provides it may not be used or cited as precedent pursuant to sec_1_468a-7 of the regulations a copy of this letter must be attached with the required election statement to the taxpayer's federal_income_tax return for each tax_year in which the taxpayer claims a deduction for payments made to the fund plr-117492-06 - - in accordance with the powers of attorney a copy of this letter_ruling is being sent to your authorized representatives a copy of this letter_ruling also is being sent to the appropriate industry director sincerely yours peter c friedman peter c friedman senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries


internal_revenue_service department of ner quhy ul o washington dc person to contact telephone number refer reply to date t bp ra t4 jan legend employer x i l plan a plan b dear this is june and supplemented by additional correspondence dated in response to your ruling_request submitted on your behalf by your authorized representative dated date date date and january concerns the tax treatment of elective_deferrals to deferred arrangement in coordination with a nonqualified_deferred_compensation_plan the following facts and representations were submitted by your authorized representative in support of the rulings requested date the ruling_request september a cash or employer x currently maintains both plans a and b plan aa a qualified_plan under sec_401 the code employer x represents that plan a was is code established effective january nonstandardized prototype_plan and includes a qualified_cash_or_deferred_arrangement as described under sec_401 code plan b benefit certain highly compensated management employees of an unfunded nonqualified_plan established to by adopting a of the internal revenue of the is -2- employer x both plans a and b operate on a calendar_year basis plan a provides that participants in plan a may make pre- plan a provides that participants may make tax contributions to the plan no after tax contributions may be made to plan a elective_deferral contributions up to of their compensation_for the year elective_deferrals are subject_to the limitations in effect for year under sec_402 and sec_415 of the code and by the actual_deferral_percentage_test and the actual_contribution_percentage_test under sec_401 and sec_401 of the code plan a further provides that a participant's plan a authorizes employer x to make matching_contributions with respect to participant's elective_deferrals under plan a matching_contributions are made for a plan_year at the discretion of employer x participants based on the amount of elective_deferrals pursuant to a discretionary formula plan a also authorizes employer x to make a discretionary profit sharing contribution and if made allocated to plan b provides that participants in plan b may elect to defer up to the lesser_of dollar_figure or of their compensation_for the year employer x would credit the accounts of participants of plan b with matching_contributions based upon the same formula as set forth in plan a unlike plan a however contributions and matching_contributions are not subject_to the limitation of code sec_402 or sec_415 or the limitations imposed by either the actual_deferral_percentage_test or the actual_contribution_percentage_test of sec_401 and sec_401 m of the code all deferrals matching_contributions and earning credits under plan b are general assets of employer x those credits may be maintained as of assets to a rabbi_trust established by employer x a book account or by the allocation under plan b the vesting schedule for contributions other than those contributions made pursuant to an employee deferral election is the same as the vesting schedule of plan a plan b requires that a participant make any election to of the calendar_year proceeding defer on or before december the year for which the compensation to which the salary deferral relates is earned for a new participant an election could be made within thirty days following a participant's initial selection for membership provided the election relates to compensation_for services to be performed subsequent to the election to defer in turn requires the participant to the terms of plan b require eligible participants to indicate their respective deferrals by executing a salary reduction agreement the salary reduction agreement required by the terms of plan b indicate whether he or she authorizes the distribution in cash of the salary deferrals after the close of the plan_year or to have the salary deferrals transferred to plan a plan b requires the participant's salary reduction agreement to be made on or before december of the calendar_year preceding the calendar_year during which the compensation to which the salary deferral relates is earned and after this date agreement becomes irrevocable plan b further provides that the amount subject_to any election to make a contribution to plan a will be equal to the lesser_of the salary reduction code sec_402 the maximum amount of pre-tax deferrals that could be made to plan a for the calendar_year within the limits imposed under a deferral percentage_test under sec_401 and the actual_contribution_percentage_test under code sec_401 or the amount of the base salary and bonuses such participant actually elects to defer under the terms of plan b for the calendar_year the actual b c plan b permits the transfer of pre-tax deferrals plus any related matching_contribution but without earnings gains or losses allocable thereto from plan b to plan a the transfer must be completed before march the year in which the salary deferral was made this transfer provision will enable employer x to calculate for each participant of plan b the maximum permitted contribution under plan a under the limitations of sec_401 sec_401 g of the code of the calendar_year following and o2 it is represented that plan a will be amended to provide that any amount transferred to plan a by plan b will consist only of amounts attributable to plan b deferrals that the participant could have deferred directly to plan a the determination of the amount of pre-tax deferrals transferred from plan b to plan a will be calculated pursuant to the provisions of plan a and plan b as reflected in the election form associated with both plan a and plan b plan b requires employer x to contribute this amount to plan a unless the participant has previously elected to have such amount distributed to himself in the form of cash these provisions preciude employer discretion with respect to the amount of pre- tax deferrals transferred from plan b to plan a on behalf of any participant the election form for plan b also serves as the election form for plan a with respect to the foregoing the following rulings are requested assuming that plan a otherwise satisfies the requirements for a qualified_cash_or_deferred_arrangement and that the elective_deferral and actual_deferral_percentage limitations of sec_402 and sec_401 exceeded elective_deferrals made by participants under plan a that are initially held by the company pursuant to the terms of plan b will be excluded from gross_income under code sec_402 e of the code are not for purposes of satisfying sec_402 of the code elective_deferrals under plan a made by participants for a given plan and calendar_year that are initially held by the company pursuant to the terms of plan b will be treated as having been made in the calendar_year in which they would have been otherwise received as wages by the participants a part of sec_401 of the code provides in pertinent part that a qualified_cash_or_deferred_arrangement is any arrangement which is erisa money purchase plan meets the requirements of sec_401 and under which a covered_employee may elect to have the employer make payments as contributions to a_trust under the plan on behalf of the employee or to the employee directly in cash a profit-sharing or stock_bonus_plan or a rural_cooperative_plan which a pre- f-99001 sec_1 k -1l a i of the income_tax regulations regulations provides that a cash or deferred election is any election or modification of an earlier election by an employee to have the employer either a provide an amount to the employee in the form of cash or some other taxable benefit that is not currently available or trust or provide an accrual or other benefit under a plan deferring the receipt of compensation a cash or deferred election includes a salary reduction agreement between an employee and employer under which a contribution is made under a plan only if the employee elects to reduce cash compensation or to forgo an increase in cash compensation b contribute an amount to a under sec_1 k -1 a ii of the regulations a cash or deferred election can only be made with respect to an amount that is not currently available to the employee on the date of the election under sec_1_401_k_-1 regulations cash or another taxable_amount is currently available to the employee if if the employee is able currently to receive the cash or other taxable_amount at the employee's discretion it has been paid to the employee or iii of the under sec_1_401_k_-1 i of the regulations an of b a the and a date within that plan_year elective contribution is taken into account for purposes of the the is attributable to services performed by the employee in the actual_deferral_percentage_test for a plan_year only if elective contribution is allocated to the employee's account under the plan as elective contribution relates to compensation that either would have been received by the employee in the plan_year but for the employee's election to defer under the arrangement or plan_year and have been received by the employee within two and one-half months after the close of the plan_year an elective contribution is considered allocated as plan_year only if the allocation is not contingent upon the employee's participation in the plan or performance of services on any date subsequent to that date contribution is actually paid to the trust no later than the end of the 12-month_period immediately following the plan_year to which the contribution relates but for the employee's election to defer would a date within the the elective ii and i of e o a part of sec_402 of the code provides in pertinent part that contributions made by an employer on behalf of an employee to a_trust which is arrangement as defined in sec_401 treated as distributed or made available to employee nor as contributions made to a_trust by the employee merely because the arrangement includes provisions under which the employee has an election whether the contribution will be made to the trust or received by the employee in cash a qualified cash or deferred shall not be under sec_402 of the code the elective_deferrals of any individual for any taxable_year are included in such individual's gross_income to the extent the amount of such deferrals for the taxable_year exceeds dollar_figure sec_402 e qualified_cash_or_deferred_arrangement of the code regarding elective_deferrals under a of the code notwithstanding section as adjusted under of the calendar_year preceding with respect to ruling_request one participants may make an irrevocable election to defer compensation under plan a and plan b no later than december the year the compensation to which the salary deferral relates is earned plan b provides for the transfer of salary deferrals plus any related matching_contributions from plan b to plan a the amount to be transferred is determined in accordance with the provisions of plan a and plan b plan a requires employer x to contribute such amount to plan a these provisions preclude employer discretion with respect to the amount of elective_deferrals that will be transferred from plan b to plan a the transfer must be completed on or before march of the calendar_year following the year for which the deferral was made under plan b salary deferral participant authorized to be made to plan a then the difference will be refunded to the participant any refund will be taxable_income for the year with respect to which the deferral was made if participant's plan b salary deferral is more than the in addition for purposes of the actual_deferral_percentage_test under k of the code for a calendar_year plan_year elective_deferrals irrevocably and prospectively elected under plan b made by the participant for a calendar_year plan_year that are initially held in the general assets of employer x and then contributed to plan a will be treated as having been made under plan a in the calendar_year in which the compensation to which the deferrals relate was earned by the participant account by the end of that calendar plan_year and provided that the elective_deferrals are allocated to the participant's the elective_deferrals continue to relate to compensation that either would have been received by the calendar_year plan_year but for the participant's election or is attributable to services performed by the participant in the calendar_year plan and would have been received by the participant within months after the calendar_year plan_year for participant's election an election to make a contribution to plan a meaning of sec_1_401_k_-1 because it under a plan deferring compensation rather than providing an amount in cash to the employee is an election to have employer x provide a benefit a cash or deferred election within the i of the regulations participant in the is accordingly we conclude that assuming plan a otherwise satisfies the requirements for a qualified_cash_or_deferred_arrangement and that the elective_deferral and actual_deferral_percentage limitations of sec_402 the code are not exceeded elective_deferrals made by the participants under plan a that are initially held by employer xx pursuant to the terms of plan b will be excluded from gross_income under sec_402 of the code when contributed to plan a provided such contribution is timely paid and allocated and g k e of with respect to ruling_request two the participant will make an irrevocable election to have his maximum permissible contribution to plan a transferred from plan b the amount permitted to be transferred from plan b exceeds the permissible contribution that the participant authorized to be contributed to plan a distributed to the participant the amount distributed will be taxable_income in the year it was earned rather than the year it was actually distributed if the maximum permissible deferral under plan a is contributed to plan a the g limitation applicable to the year when it was earned rather the year in which it was contributed to plan a then the excess_amount will be it would be subject_to to plan a if accordingly with respect to ruling_request two we conclude that for purposes of satisfying the limitations of sec_402 by employer x on behalf of the participants assuming that such contributions are timely made and timely allocated to participant's account under plan a which are initially of the code contributions made to plan a held by employer x pursuant to the terms of plan b will be treated as deferrals under plan a having been made in the year in which they would have been taxable to the participant but for the election under plan b plan a to have such salary contributed to the above rulings are based on the assumption that at all a is qualified under of the code and its cash or deferred times relevant to these rulings plan a sec_401 arrangement is qualified under sec_401 of the code and that the required amendments as proposed by the taxpayer's authorized representative in his above mentioned correspondence are made to the respective plans employer x established plan a by adopting a nonstandardized prototype_plan amending plan a to provide for the transfer of elective_deferrals from plan b may affect the prototype status of plan a no opinion is expressed as to the prototype status of plan a k title i of employee_retirement_income_security_act_of_1974 is within the jurisdiction of the department of labor erisa accordingly we express no opinion as transactions comply with title i is expressed as plan b and participating in it except as expressly herein of erisa finally no opinion to the income_tax consequences of establishing to whether the subject stated this ruling is directed only to the taxpayer that requested it and applied only with respect to plan a as submitted with this request sec_6110 private_letter_ruling may not be used or cited as precedent of the code provides that this a the original of this letter_ruling has been sent to your authorized representative in accordance with a power_of_attorney on file in this office sincerely yo dhe gc aeaorle g riddle jr manager employee_plans technical group tax_exempt_and_government_entities_division enclosures deleted copy of the letter notice czle


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 plr-108012-18 date date legend company ----------------------------------------------------------- ------------------------ a b ------------------------ ------------------------- -------------------- ------------------------- c ---------------------- ------------------------- state -------------- date -------------------------- date ---------------------- date ------------------- date -------------------- date ---------------------- dear ------------------ plr-108012-18 this letter responds to a letter dated date and subsequent correspondence submitted on behalf of company by its authorized representative requesting a ruling under sec_1362 of the internal_revenue_code facts company was incorporated in state on date effective date a company’s sole shareholder elected to terminate company’s s election in date a died a’s estate held a’s company stock until it disbursed the stock to a’s beneficiaries b and c on date b and c want company to be an s_corporation and request permission for company to re-elect to be an s_corporation effective date date is prior to the expiration of the five-year waiting_period imposed by sec_1362 law and analysis sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect to be an s_corporation sec_1362 provides that an election under sec_1362 may be terminated by revocation sec_1362 provides that if a small_business_corporation has made an election under sec_1362 and if such election has been terminated under sec_1362 the corporation and any successor_corporation shall not be eligible to make an election under sec_1362 for any taxable_year before its fifth taxable_year which begins after the first taxable_year for which the termination is effective unless the secretary consents to the election sec_1_1362-5 of the income_tax regulations provides that absent the commissioner’s consent an s_corporation whose election has terminated or a successor_corporation may not make a new election for five taxable years as described in sec_1362 the commissioner however may permit the corporation to make a new election before the 5-year period expires the corporation has the burden of establishing that under the relevant facts and circumstances the commissioner should consent to a new election the fact that more than percent of the stock in the corporation is owned by persons who did not own any stock in the corporation on the date of the termination tends to establish that consent should be granted conclusion based solely on the facts submitted and representations made we conclude that company has met its burden under sec_1_1362-5 we grant permission for company to re-elect to be an s_corporation effective date accordingly provided that company makes an election to be an s_corporation by filing a completed form_2553 election by a plr-108012-18 small_business_corporation with the appropriate service_center effective date within days following the date of this letter then such election will be treated as timely made for company’s taxable_year beginning date a copy of this letter should be attached to the form_2553 except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether company is otherwise eligible to be an s_corporation in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to company’s authorized representative this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination sincerely laura c fields laura c fields senior technician reviewer branch passthroughs and special industries enclosures copy of this letter letter for sec_6110 purposes cc


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp 1-plr-167289-01 date date legend distributing controlled llc shareholder a shareholder b shareholder c trust d trust e trust f trust g trust h trust i trust j trust k state l state m business x business y operation z dear we respond to your letter dated date in which you requested rulings as to the federal_income_tax consequences of a proposed transaction specifically you requested rulings under sec_355 and sec_1361 of the internal plr-167289-01 revenue code additional information was received in a letter dated date the information submitted for consideration is summarized below distributing is an s_corporation incorporated in state l distributing is a calendar_year taxpayer and utilizes the accrual_method of accounting for book and tax purposes distributing has outstanding voting common_stock and non-voting common_stock shareholder a and trust d a_trust for the benefit of shareholder a’s children own of the outstanding voting and nonvoting distributing stock shareholders b and c together with trusts e f g h i j and k which are trusts for the benefit of shareholder b’s and shareholder c’s children own of the outstanding voting and nonvoting distributing stock distributing is principally engaged in business x and also conducts business y distributing conducts business x at several sites including operation z which possesses certain features that the other sites at which distributing conducts business x do not possess distributing has submitted financial information indicating that business x as operated by distributing has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years distributing wholly owns controlled a qualified_subchapter_s_subsidiary qsub incorporated in state m for the purpose of consummating the proposed transaction controlled has two classes of outstanding common_stock voting and nonvoting all of which is owned by distributing controlled will file its federal_income_tax returns on a calendar_year basis and will use the accrual_method of accounting distributing also wholly owns llc a state m limited_liability_company formed for the purpose of consummating the proposed transaction shareholders a b and c have disagreed on a number of fundamental business matters including the allocation of corporate resources to operation z the conflicts between the shareholders are having an adverse effect on the day-to-day operations of distributing distributing has proposed the transaction described below which will allow shareholder a to focus on business x at operation z thus eliminating the shareholder disputes proposed transaction distributing will contribute to llc the operation z assets and liabilities as well as an additional_amount for use as working_capital in operation z which will be determined by a formula apportioning distributing’s working_capital between operation z and its other operations distributing will transfer its ownership_interest in llc to controlled along with certain other assets and liabilities the transfers distributing will distribute all the controlled stock to shareholder a and trust d in exchange for all of their distributing stock the distribution plr-167289-01 within days following the distribution distributing will prepare its consolidated balance_sheet effective as of the date of the distribution within days after the distribution distributing may transfer additional assets to llc or llc may return assets to distributing as necessary to comply with the formula in step above true- up provision distributing controlled and llc generally will agree to indemnify each other for certain liabilities that include tax_liabilities for periods up to and including the tax_year of the distribution as specified in the tax_matters_agreement and plan_of_reorganization and certain non-tax liabilities specified in the plan_of_reorganization this provision is hereinafter referred to as indemnification agreement including liabilities created by shareholder breaches under the plan_of_reorganization certain environmental liabilities liabilities assumed as part of the proposed transaction and other shared contingent liabilities representations the taxpayer has made the following representations concerning the transfers and the distribution a b c d e f the fair_market_value of controlled stock and other consideration to be received by shareholder a and trust d in the distribution will be approximately equal to the fair_market_value of distributing stock surrendered by shareholder a and trust d in the exchange no part of the consideration to be distributed by distributing will be received by shareholder a or trust d as a creditor employee or in any other capacity other than that of a shareholder of distributing the five years of financial information submitted on behalf of distributing is representative of distributing's present operation and with regard to such corporation there have been no substantial operational changes since the date of the last financial statements submitted following the transaction distributing and controlled will each continue the active_conduct of its business independently and with its separate employees the active_conduct of its share of all the integrated activities of business x conducted by distributing prior to consummation of the transaction the distribution of the stock of controlled is carried out for the following corporate business_purpose to enable the corporation to resolve management systemic and other problems that are exacerbated by distributing’s operation of its current businesses under unified ownership the distribution of the stock of controlled is motivated in whole or substantial part by this corporate business_purpose distributing is an s_corporation within the meaning of sec_1361 controlled will elect to be an s_corporation pursuant to sec_1362 on the first available date after the distribution and there is no plan or intent to revoke or otherwise terminate the s_corporation_election of either distributing or controlled plr-167289-01 g h i j k l m n o there is no plan or intention by the shareholders or security holders of distributing to sell exchange transfer by gift or otherwise dispose_of any of their stock in or securities of either distributing or controlled after the transaction there is no plan or intention by either distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the transaction other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 there is no plan or intention to liquidate either distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the transaction except in the ordinary course of business the total adjusted bases and the fair_market_value of the assets transferred to controlled by distributing each equals or exceeds the liabilities assumed as determined under sec_357 by controlled the liabilities assumed as determined under sec_357 in the transaction and the liabilities to which the transferred assets are subject were incurred in the ordinary course of business and are associated with the assets being transferred for purposes of this representation the contingent liabilities under the true-up provision and the indemnification provisions included in the plan_of_reorganization and the tax_matters_agreement are not treated as assumed_liabilities no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution of controlled stock except for the true-up provision the contingent indemnification obligations that appear in the plan_of_reorganization and the tax_matters_agreement and the continuing transactions between distributing and controlled payments made in connection with all continuing transactions if any between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length no two parties to the transaction are investment companies as defined in sec_368 and iv no distributing shareholder will hold immediately after the distribution disqualified_stock within the meaning of sec_355 which constitutes a percent or greater interest in distributing or controlled the distribution is not part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the combined voting power of all classes of stock entitled to vote of either distributing or controlled or stock possessing percent or more of the total value of all classes of stock of either distributing or controlled plr-167289-01 rulings for federal tax purposes llc will be disregarded as an entity separate from its owner provided that no election will be made to treat the llc as a corporation sec_301_7701-2 a all of the assets liabilities and items of income deduction and credit of controlled a qsub will be treated as assets liabilities and items of income deduction and credit of distributing accordingly the transfers will be disregarded for federal_income_tax purposes sec_1_1361-4 the transfers followed by the distribution will be a reorganization within the meaning of sec_368 distributing and controlled will each be a party to the reorganization within the meaning of sec_368 sec_1_1361-5 example distributing will recognize no gain_or_loss upon the transfer of assets subject_to liabilities to controlled in exchange for the stock of controlled sec_361 and sec_357 no gain_or_loss will be recognized by controlled upon the receipt of the assets from distributing in exchange for the stock of controlled sec_1032 the basis of each of the assets received by controlled in the transaction will equal the basis of such assets in the hands of distributing immediately prior to the transfers sec_362 the holding_period of each of the assets to be received by controlled in the transaction will include the period during which such assets were held by distributing sec_1223 no gain_or_loss will be recognized by distributing upon the distribution sec_361 no gain_or_loss will be recognized by shareholder a or trust d upon the distribution sec_355 the basis of the controlled stock to be received by shareholder a and trust d will be the same as the basis of the distributing stock surrendered by each in exchange therefor sec_358 the holding_period of the controlled stock received by shareholder a and trust d will include the holding_period of the distributing stock surrendered in exchange therefor provided that the distributing stock is held as a capital_asset on the date of the exchange sec_1223 proper allocation of earnings_and_profits between distributing and controlled will be made under sec_312 and sec_1_312-10 plr-167289-01 payments made by distributing to controlled or llc or by controlled or llc to distributing under the true-up provision will be treated as occurring immediately before the distribution at a time when controlled was a qsub payments made by distributing to controlled or llc or by controlled or llc to distributing under the tax_matters_agreement and plan_of_reorganization regarding tax_liabilities that i have arisen or will arise for a taxable_period ending on or before the distribution or for a taxable_period beginning before and ending after the distribution and ii will not become fixed or ascertainable until after the distribution will be treated as occurring immediately before the distribution at a time when controlled was a qsub controlled will be subject_to sec_1374 with respect to any asset transferred to controlled to the same extent distributing was subject_to sec_1374 with respect to such asset for purposes of sec_1374 the recognition_period for controlled will be reduced by the portion of distributing’s recognition_period that expired prior to the transfer of these assets to controlled sec_1374 and ann 1986_51_irb_22 the distribution of controlled to shareholder a and trust d will terminate the qsub election with respect to controlled sec_1361 treas reg a iii controlled may without requesting the commissioner’s consent make an s election before the expiration of the five year period described in sec_1361 and treas reg c provided that i immediately following the termination controlled is otherwise eligible to make an s election and ii the election is made effective immediately following the termination of the qsub election sec_1_1361-5 and sec_1 c example any momentary ownership by distributing of the stock of controlled on the day of termination of the qsub election in connection with a corporate separation to which sec_368 applies will not require distributing to consent to controlled’s s election terminate controlled’s s election under sec_1362 or prohibit controlled from being eligible under sec_1361 to make an s election under sec_1362 provided controlled satisfies the other requirements for making an election no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings specifically we express or imply no opinion concerning whether distributing is a valid s_corporation or whether controlled is otherwise eligible to be an s_corporation we express no opinion concerning the tax treatment of non-tax indemnification payments made under the indemnification agreement plr-167289-01 this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely yours mark s jennings chief branch office of associate chief_counsel corporate cc


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 b01 plr-131793-10 date date legend trust --------------------------------------------------- -------------------------------------------- x --------------------------------------------------- ----------------------------------------------- date date date date a b ---------------------- -------------------------- ---------------------- ------------------- ------------------------ ---------------------- c ----------------------------------------------------- --------------------------------------------------------------- d ----------------------------------------------------- ------------------------------- plr-131793-10 dear ----------------- this responds to your letter dated date and subsequent correspondence submitted on behalf of x c d and trust requesting a ruling under sec_1361 of the internal_revenue_code the code facts x incorporated on date a a shareholder of x died on date pursuant to a’s will trust become a shareholder in x x made an s_corporation_election effective date b the income_beneficiary of trust made an election to treat trust as a qualified_subchapter_s_trust qsst effective date b died on date upon b’s death trust’s assets were divided into two shares the income from one share is required to be paid to c and the income from the other share is required to be paid to d during the life of each of c and d the income beneficiaries the income and principal from one beneficiary’s share can only be paid to that income_beneficiary neither income_beneficiary has a claim against the income and principal of the other beneficiary’s share since date the income from each share of trust has been distributed to the income_beneficiary of that share neither beneficiary has affirmatively refused to consent to the qsst election made for trust on date a ruling is requested that each share qualifies as a separate share under sec_663 each share qualifies as a qsst within the meaning of sec_1362 and c and d are successive income beneficiaries under sec_1361 of the code such that c and d are not required to file qsst elections for trust’s qsst election and x's s_corporation status to continue law and analysis sec_1361 of the code provides that a small_business_corporation means a domestic_corporation which is not an ineligible_corporation for such year and which does not among other limitations 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_1361 sec_1361 of the code provides that in the case of a qsst with respect to which a beneficiary makes an election under sec_1361 such trust shall be treated as a_trust described in sec_1361 and for purposes of sec_678 the beneficiary of such trust shall be treated as the owner of that portion of the trust which consists of stock in the s_corporation with respect to which the election under sec_1361 is made plr-131793-10 sec_1361 of the code provides that if a qsst election is made with respect to any beneficiary an election under this paragraph shall be treated as made by each successive beneficiary unless such beneficiary affirmatively refuses to consent to such election sec_1361 of the code defines a qsst as a_trust all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to one individual who is a citizen or resident_of_the_united_states in addition the terms of the trust must require that i during the life of the current income_beneficiary there shall be only one income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of such beneficiary's death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to such beneficiary sec_1361 of the code further provides that a substantially separate and independent share of a_trust within the meaning of sec_663 shall be treated as a separate trust for purposes of sec_1361 and c sec_663 of the code provides that for the sole purpose of determining the amount of distributable_net_income in the application of sec_661 and sec_662 in the case of a single trust having more than one beneficiary substantially separate and independent shares of different beneficiaries in the trust shall be treated as separate trusts the existence of such substantially separate and independent shares and the manner of treatment as separate trusts including the application of subpart d shall be determined in accordance with regulations prescribed by the secretary sec_1_663_c_-1 of the income_tax regulations provides that if a single trust has more than one beneficiary and if different beneficiaries have substantially separate and independent shares their shares are treated as separate trusts for the sole purpose of determining the amount of distributable_net_income allocable to the respective beneficiaries under sec_661 and sec_662 the separate_share_rule the regulations further provide in sec_1_663_c_-1 that the separate_share_rule may be applicable even though separate and independent accounts are not maintained and are not required to be maintained for each share on the books of account of the trust and even though no physical segregation of assets is made or required sec_1_663_c_-3 provides that the applicability of the separate_share_rule generally depends on whether trust distributions are to be made in substantially the same manner as if separate trusts had been created conclusion plr-131793-10 accordingly based on the information submitted and the representations made we conclude that the shares of trust created upon the death of b are substantially separate and independent shares within the meaning of sec_663 of the code and therefore that each share is treated as a separate trust for purposes of sec_1361 we further conclude that provided that all the net_income for each share is distributed currently to the applicable income_beneficiary and each share is administered as a qsst each share of trust will qualify as a qsst under sec_1361 during the life of the income_beneficiary for that share in addition provided that trust’s qsst election is valid and not otherwise terminated the income_beneficiary of each share of trust is a successive income_beneficiary under sec_1361 of the code and therefore is not required to file a qsst election with respect to his or her respective separate share for trust’s qsst election and x’s s_corporation_election to continue except as specifically ruled above we express or imply no opinion concerning the federal tax consequences of the transaction described above under any other provision of the code specifically we express or imply no opinion regarding whether x is otherwise eligible to be an s_corporation or whether trust and its separate shares are otherwise eligible to be qssts further if trust is divided into separate trusts this ruling is null and void this ruling is directed only to the taxpayers that requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being furnished to the authorized representatives for x c d and trust sincerely faith p colson faith p colson senior counsel branch office of associate chief_counsel passthroughs special industries


t c memo united_states tax_court victor a and marion w prieto petitioners v commissioner of internal revenue respondent docket no filed date gregg m anderson and richard w craigo for petitioners peter c rock for respondent memorandum findings_of_fact and opinion vasquez judge respondent determined the following deficiencies in and penalties on petitioners’ federal_income_tax penalties year deficiencies sec_6662 a dollar_figure dollar_figure big_number big_number all section references are to the internal_revenue_code in effect - - for the years in issue and all rule references are to the tax_court rules_of_practice and procedure after concessions ’ the issues for decision are whether petitioners’ horse activity was an activity engaged in for profit and whether petitioners are liable for penalties pursuant to sec_6662 for negligence findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts the supplemental stipulation of facts the stipulation of facts with respect to subsequent years the stipulation of settled issues and the attached exhibits are incorporated herein by this reference at the time they filed the petition victor prieto dr prieto and marion prieto mrs prieto resided in san mateo california i dr prieto’s medical practice dr prieto is an orthopedic surgeon since dr prieto has been in private practice in the partnership of jensen watson light jwl hired him at a salary of dollar_figure per year in dr prieto made partner at jwl at this time his salary increased to between dollar_figure and dollar_figure per year since dr prieto has run his own successful medical practice in san francisco california mrs prieto also worked in her husband’s medical practice she spends a considerable ' respondent concedes that sec_469 is not applicable_amount of time working in the medical practice dr prieto’s medical practice employed lori sasaki as a bookkeeper from through petitioners had no substantial income-producing assets or any other substantial source_of_income other than dr prieto’s medical practice petitioners reported the following net profit from dr prieto’s schedule c profit or loss from business for his orthopedic medical practice year net profit dollar_figure big_number big_number big_number big_number big_number big_number big_number total big_number from through the net profit of dr prieto’s medical practice averaged dollar_figure il the horse activity a background from the age of to mrs prieto rode horses on the farm where she lived from the age of to mrs prieto owned a horse that was an ex-barrel racer none of these horses were show jumpers since she was a teenager mrs prieto had wanted to be involved in the horse field mrs prieto always enjoyed horses - - and had a strong interest in horses dr prieto also enjoyed horses petitioners have two children jill and claire jill was born on date and claire was born on date as parents petitioners were actively involved in their daughters’ activities some of the activities petitioners’ daughters participated in included swimming and dancing petitioners would organize dance troops transport children to events and arrange for obtaining uniforms in when jill was and claire wa sec_5 jill and claire began riding horses whatever activity petitioners and their family got involved with they did it percent petitioners’ daughters became interested in horses so petitioners and their family got deeply involved with horses jill and claire’s involvement with horses became a family event where mrs prieto would often be ringside organizing lunches and dinners and dr prieto would do his medical charts and watch jill and claire ride the horses as with swimming and dancing petitioners’ children became deeply involved with horseback riding by petitioners owned three ponies for their daughters to ride prior to date the date the activity in question commenced jill and claire competed in horse shows petitioners became interested in starting the horse activity because of the recreational riding and showing activities that - claire and jill had participated in since prior to when jill and claire got involved with horses mrs prieto had no experience with show jumpers or showing horses petitioners told jill and claire if they wanted to participate in horseback riding and perhaps compete on a high level then petitioners would start the horse activity b startup starting in date petitioners engaged in a horse activity under the name fordham farms that included purchasing training showing and selling hunter jumper and egquitation horses none of the horses in the horse activity were held for breeding or bred hunter is a category of horse competition that grades each horse on its form style and technique as the horse competes on a course of multiple hurdles jumper is a category of horse competition that grades the horse and rider on their ability to jump fences cleanly and guickly the courses have tight turns and angled fences making the jumps more difficult than those in the hunter category grand prix jumper is a category of horse competition that also grades each horse on its ability to jump fences cleanly and guickly however the courses are of a higher difficulty than in the jumper category higher fences multiple hurdles etc equitation is a category of horse competition -- - that grades each rider on his form petitioners’ daughters mostly competed in equitation events petitioners used the same ponies that their children rode for pleasure to start the horse activity at the start of the horse activity petitioners purchased welsh ponies for the horse activity they chose welsh ponies because that was the type of horse their daughters were riding when they first started the horse activity petitioners talked to veterinarians trainers and other owners and read periodicals about hunter and jumper horses petitioners also owned books about ponies hunters and jumpers petitioners attended seminars clinics and award banquets put on by horse organizations cc employees hired by petitioners around date petitioners hired joe norick to be the horse activity’s trainer in the middle of petitioners hired nicole shahinian nicole to ride their horses shortly thereafter petitioners decided to replace mr norick with a new trainer one of the reasons petitioners decided to replace mr norick was because jill and claire could not ride the horses petitioners owned petitioners replaced mr norick with nicole at this time nicole was responsible for training the horses giving their daughters lessons and supervising all aspects of the horse activity including supervising people - j- petitioners hired to clean the stalls and groom braid and feed the horses nicole’s background was as a junior rider she had no experience as a trainer or running a business at this time nicole had just turned years old petitioners hired other people besides mr norick and nicole to work in the horse activity petitioners hired scott wilson as an assistant trainer bill nissen as veterinarian ms sasaki as bookkeeper patrick hurley as accountant for the horse activity ’ and carlos soriano as a groom at horse shows when the horse activity needed extra help petitioners hired people to braid the horses horseshoers and a night watchman petitioners sent the horse activity’s records to ms sasaki to sort the records into separate file folders and each year petitioners received a box from ms sasaki with the records sorted ms sasaki also inputted the financial records of the horse activity onto a computer petitioners reviewed the books_and_records of the horse activity and their tax returns d how petitioners conducted the activity petitioners created a logo for the horse activity and had business cards and stationery that bore this logo petitioners also used envelopes bearing the name fordham farms junior refers to riders under years old petitioners had a separate accountant jay witt who prepared their individual income_tax returns --- - petitioners did not have a written business plan or make a budget for the horse activity petitioners did not have bills of sale for every horse they owned some of the bills of sale for horses were in petitioners’ names rather than the name of the horse activity petitioners insured only some of their horses petitioners would not force people to pay money owed to them jill and claire advised petitioners which horses to purchase and sell the horse activity’s opening balance_sheet for listed several horses as assets that had been reported as sold or as dying in this opening balance_sheet also listed cody williams as an asset cody williams is not a horse he is a person petitioners placed an advertisement in a horse show program that pictured jill and claire riding horses wished them good luck in and congratulated them on their equitation medals and participation in the marshal-sterling children’s jumper league petitioners also placed one advertisement ina publication called horse’s international petitioners kept records called business goals for and petitioners came up with these goals these goals were informal ideas that petitioners hoped to implement some of the goals for were leasing or selling make believe selling fashion page developing desire me and - selling it for either dollar_figure as a pre-green or dollar_figure to dollar_figure as a first year green hunter and selling rising sun for dollar_figure to dollar_figure other goals were more general such as purchasing and developing a grand prix horse and a junior jumper increasing the number of horses shown and increasing the use of trucks to transport horses petitioners did not sell fashion page in petitioners did sell make believe desire me and rising sun in the sale price and petitioners’ original purchase_price of each of these horses was as follows horse purchase_price sale price make believe dollar_figure dollar_figure desire me big_number big_number rising sun big_number petitioners' goals for were more general than those for they included increasing hauling income increasing their client base developing their horses purchasing junior jumper and equitation horses getting their horses to the shows and having nicole stay on as their trainer eb boarding the horses the horses and all other items necessary for the horse activity were maintained at the following locations all located in california date sec_5 -- - -- - -- - boarding facility portola valley training center pebble beach equestrian center portola valley training center hidden valley ranch location portola valley pebble beach portola valley hidden valley category entry fees show costs the boarding facility in portola valley was a 30-minute drive from petitioners’ home in san mateo california the boarding facility in pebble beach was a1 to 2-hour drive from home petitioners’ rather than drive to pebble beach petitioners rented a house near pebble beach california where petitioners and their children would stay on weekends they visited the boarding facility hidden valley is in southern california and was not near petitioners home nicole recommended to petitioners that they move their horses from northern california to southern california when petitioners moved their horses to southern california in date nicole moved in with her then boyfriend and future husband who at the time lived in southern california f expenses losses agi the total entry fees and show costs reported by petitioners for the horse activity were as follows dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number reimbursements big_number big_number big_number big_number big_number big_number big_number big_number big_number excluding the average yearly entry fee and show cost expense of the horse activity was dollar_figure during the years in issue petitioners showed the horses they owned at least times in petitioners’ horses that were serviceable were in the ring at shows petitioners attended in petitioners’ horse named fran’s guy was in the ring at horse shows one to two times per show attended and was in the ring at least times over the course of the year this meant that during petitioners entered their horses in at least shows petitioners reported the following ordinary_income and losses from the horse activity year ordinary_income loss dollar_figure big_number big_number big_number big_number big_number big_number petitioners incurred dollar_figure of losses through and dollar_figure of losses through during these years the loss from the horse activity averaged dollar_figure excluding the losses averaged dollar_figure petitioners reported the following adjusted_gross_income agi after excluding the losses horse activity from through dollar_figure g during the years in issue year year petitioners petitioners’ agi dollar_figure big_number big_number big_number big_number big_number big_number big_number and ordinary_income reported by the readjusted agi is as follows readjusted agi petitioners’ dollar_figure big_number big_number big_number big_number big_number big_number attempts to cut costs readjusted agi averaged petitioners spoke with nicole about cutting the horse activity’s costs and increasing its income petitioners however fact that the horse activity was losing money informed nicole of the amount of the losses hundreds of thousands of dollars only discussed with nicole the petitioners never which totaled h personal nature of activity elements of pleasure during the years in issue petitioners and their children spent almost every weekend with the horses dr prieto mrs prieto jill and claire used the weekends spent with the horses as their time to unwind jill and claire would ride and take lessons on the horses jill and claire enjoyed riding horses mrs prieto also rode the horses in addition to watching their daughters compete at the horse shows petitioners attended hospitality tents located at the horse shows in date petitioners sold a horse named browning in a letter thanking the purchaser of browning for buying the horse petitioners wrote that they would be using the money from this transaction to purchase a quality junior jumper for their daughter jill dr prieto only did simple tasks for the horse activity he felt that his college and medical education entitled him not to muck the stalls during the years in issue mrs prieto claire and jill were members of the following horse organizations the american horse shows association the pacific horse show association the california professional horsemen’s association the united_states equestrian team and the norcal hunter jumper association in to muck means to clear of manure or filth merriam webster’s collegiate dictionary 10th ed order for claire and jill to compete in horse shows they had to be members of these organizations i source of money for the activity initially petitioners had a sufficient amount in savings accumulated to fund the startup of the horse activity at times however the horse activity had cash shortages and petitioners needed extra money to purchase horses on these occasions petitioners borrowed money from dr prieto’s medical practice line of credit and transferred funds out of the medical practice bank accounts to provide working_capital for the horse activity j end of the activity as of date petitioners were closing up the horse activity at that time jill was and was in belgium since date working with horses and claire was opinion the horse activity sec_183 provides generally that if an activity is not engaged in for profit no deduction attributable to such activity shall be allowed except as provided in sec_183 sec_183 defines an activity_not_engaged_in_for_profit as any activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 or under paragraph or of sec_212 the u s court_of_appeals for the ninth circuit to which an - appeal in this case would lie has held that for a deduction to be allowed under sec_162 or sec_212 or a taxpayer must establish that he engaged in the activity with the primary predominant or principal purpose and intent of realizing an economic profit independent of tax savings see 4_f3d_709 9th cir affg tcmemo_1991_212 781_f2d_724 9th cir affg lahr v commissioner tcmemo_1984_472 the expectation of profit need not have been reasonable but it must be bona_fide see 72_tc_411 affd without published opinion 647_f2d_170 9th cir sec_1_183-2 income_tax regs whether the requisite profit objective exists is determined by looking to all the surrounding facts and circumstances golanty v commissioner supra pincite sec_1_183-2 income_tax regs greater weight is given to objective facts than to a taxpayer's mere after-the-fact statement of intent indep elec supply inc v commissioner supra 84_tc_1244 affd 792_f2d_1256 4th cir sec_1_183-2 income_tax regs petitioners bear the burden_of_proof rule a cf sec_7491 effective for court proceedings arising in connection with examinations commencing after date continued -- - sec_1_183-2 income_tax regs provides a list of factors to be considered in the evaluation of a taxpayer's profit objective the manner in which the taxpayer carries on the activity the expertise of the taxpayer or his advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer's history of income or loss with respect to the activity the amount of occasional profits if any from the activity the financial status of the taxpayer and elements of personal pleasure or recreation this list is nonexclusive and the number of factors for or against the taxpayer 1s not necessarily determinative but rather all facts and circumstances must be taken into account and more weight may be given to some factors than to others see sec_1_183-2 income_tax regs cf 70_tc_715 affd 615_f2d_578 2d cir the evidence submitted to the court establishes that petitioners’ primary predominant or principal motive for engaging in the horse activity was not for profit continued petitioners do not contend that their examination began after date or that sec_7491 is applicable to their case a manner in which the activity is conducted petitioners hired professionals to keep books_and_records and to prepare their returns they also hired professionals to work in the horse activity as grooms braiders horseshoers and veterinarian while these facts weigh in petitioners favor they are not the only facts presented to the court while petitioners did keep records they did not have bills of sale for all their horses and the records appear to be faulty dr prieto could not explain why the show costs and entry fees were so low for mrs prieto testified that they understated the horse activity’s show costs for we agree even though they had records reporting substantial losses petitioners never developed a written business plan or made a budget dr and mrs prieto testified that the business plan of the horse activity was to buy train develop show and sell horses this is not a plan this is merely a statement of what the horse activity did while petitioners wrote out business goals for and they never developed a plan to achieve these goals petitioners claimed to have hired other riders such as annalee bennet to show the horses the horse show entry forms for and list only petitioners’ daughters and nicole as we note that the likely effect of this understatement was to create the appearance of a profit for the horse activity for when none in fact existed -- - riders of petitioners’ horses ms bennet was not called as a witness we infer that her testimony would not have been favorable to petitioners see 6_tc_1158 affd 162_f2d_513 10th cir petitioners did not attempt to collect debts owed to them additionally when petitioners fired mr norick they replaced him with nicole who was years old at the time and although she had been a junior rider had no experience as a trainer or running a business furthermore petitioners decided which horses to buy and sell based upon which horses their daughters wanted petitioners further rely on the testimony of russell stewart to support the conclusion that they conducted the horse activity in a businesslike manner mr stewart was qualified as an expert in his knowledge of and in judging grand prix jumper hunter and egquitation horses subsequent to the years in issue mr stewart rode petitioners’ horses and transported petitioners’ horses he did not review petitioners’ books_and_records furthermore all the facts for mr stewart’s report were supplied by petitioners or their representatives the purpose of expert testimony is to assist the trier of fact to understand evidence that will determine the fact in issue see 92_tc_101 we do not find mr stewart’s conclusory report to be of any assistance to the court and accordingly disregard it on the whole we conclude that this factor weighs against petitioners b expertise of petitioners and their advisers dr prieto had no significant experience with horses prior to starting the horse activity mrs prieto’s only experience with horses was riding them as a child and a teenager petitioners claimed to have talked with many professionals before entering the horse activity these conversations however mainly focused on the fact that a person could make a lot of money or lose a lot of money buying and selling horses petitioners did not discuss how to conduct the horse activity to make it profitable how to train the horses or how to manage the horse activity other than being advised to get a trainer petitioners received no useful advice before beginning the horse activity this factor also weighs against petitioners cc time and effort expended by petitioners mrs prieto claimed to work hours a week and dr prieto claimed to work to hours a week in the horse activity other than petitioners’ self-serving conclusory statements there is no evidence to support this assertion dr prieto is an orthopedic surgeon mrs prieto works in his office and spends a considerable amount of time doing so according to nicole - - during the workweek petitioners were not usually with the horses accordingly we do not accept petitioners’ testimony see 338_f2d_602 9th cir affg 41_tc_593 87_tc_74 accordingly this factor also weighs against petitioners d the activity’s history of income or loss a record of substantial losses over several years may be indicative of the absence of a profit_motive golanty v commissioner t c pincite as was noted by the court on the record at trial the losses are large enough to be described as substantial or huge the only year petitioners did not report a loss is this appears to be due to the incorrect reporting of expenses for that year and as we noted supra the likely effect of the understatement of expenses was to create the appearance of a profit for the horse activity when none in fact existed petitioners’ losses from through averaged well over dollar_figure per year furthermore petitioners’ history of losses belies any notion that it was operated for profit while a person may start out with a bona_fide expectation of profit even if it is unreasonable there is a time when in light of the recurring losses the bona fides of that expectation must cease see 224_f3d_16 1st cir affg tcmemo_1999_92 this factor also weighs against petitioners --- - eb petitioners’ financial status substantial income from sources other than the activity in guestion particularly if the activity's losses generate substantial tax benefits may indicate that the activity is not engaged in for profit sec_1_183-2 income_tax regs from through petitioners’ net profit from dr prieto’s medical practice averaged dollar_figure this factor weighs against petitioners fe brlements of personal pleasure the absence of personal pleasure or recreation relating to the activity in question may indicate the presence of a profit objective sec_1_183-2 income_tax regs petitioners and their children derived substantial amounts of pleasure from the horse activity based on the facts of this case we find that this factor weighs against petitioners g additional facts the following additional facts also support our conclusion that the horse activity was not entered with the primary predominant or principal purpose of making a profit the evidence established that petitioners’ daughters mainly rode the horses in equitation competitions equitation competitions grade the rider and not the horse dr prieto also testified that he went to the horse shows to watch his daughters compete dr prieto testified that petitioners never purchased horses -- - for their children and that they never told anyone that the horses were for their children his testimony however was impeached by a letter petitioners wrote in which they state that they were using money specifically to buy a horse for jill the fact that petitioners did not purchase horses in their daughters’ names is unpersuasive additionally within months of jill’s leaving the country and claire’s turning petitioners terminated the horse activity h conclusion after reviewing the entire record we conclude that petitioners did not engage in the horse activity with the primary predominant or principal purpose and intent of making a profit within the meaning of sec_183 sec_6662 penalty sec_6662 imposes a penalty on an underpayment_of_tax required to be shown on a return sec_6664 provides that no penalty shall be imposed if it is shown that there was reasonable_cause for the underpayment and that the taxpayer acted in good_faith the determination of whether a taxpayer acted with reasonable_cause and in good_faith depends upon the facts and circumstances see sec_1_6664-4 income_tax regs reliance on the advice of an accountant may demonstrate reasonable_cause and good_faith see id - - respondent argues that petitioners’ treatment of the horse activity’s expenditures as business expenditures was negligent or an intentional disregard of rules or regulations we conclude that petitioners reasonably and in good_faith relied on their accountants to determine whether petitioners as a legal matter were entitled to deduct the horse activity’s expenses ’ accordingly petitioners are not liable for the accuracy-related_penalties for and in reaching all of our holdings herein we have considered all arguments made by the parties and to the extent not mentioned above we find them to be irrelevant or without merit to reflect the foregoing decision will be entered under rule ’ mr hurley the accountant for the horse activity specialized in preparing tax returns for people who operated horse activities petitioners gave him all the records prepared by the horse activity’s bookkeeper and all the relevant facts so that mr hurley could prepare the tax returns for the horse activity


t c memo united_states tax_court edwin e and bertalina alvarez petitioners v commissioner of internal revenue respondent docket no 13286-02l filed date edwin e alvarez and bertalina alvarez pro sese irene scott carroll for respondent memorandum findings_of_fact and opinion goeke judge the petition in this case was filed under sec_6330 d in response to a notice_of_determination concerning collection action s under sec_6320 and or the notice_of_determination the issue for decision is whether 1unless otherwise indicated all section references are to the internal_revenue_code currently in effect the filing of a notice_of_federal_tax_lien nftl was appropriate findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioners resided in bell gardens california at the time their petition was filed on date respondent issued a notice_of_deficiency to petitioners determining a deficiency in federal_income_tax and an accuracy-related_penalty for the taxable_year petitioners filed a petition with this court in response to the notice_of_deficiency however petitioners’ case was ultimately dismissed by the court for lack of jurisdiction on the ground that the petition was not timely filed petitioners’ return was also audited but they consented to the assessment of a tax_deficiency for that year on date respondent sent to petitioners a notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 for their taxable years and on date petitioners requested a sec_6330 hearing stating that they objected to the filed nftl because they never received an audit notice did not receive a notice_of_deficiency and would like an opportunity to dispute the tax_liability on date the appeals_office issued the notice_of_determination the notice states that a hearing was held but that the only challenge was to the existence or amount of the tax_liability for the appeals officer ultimately determined that the filing of the nftl was appropriate opinion under sec_6320 and sec_6330 a taxpayer is entitled to notice and an opportunity for a hearing after an nftl is filed by the commissioner in the process of collecting unpaid federal taxes sec_6330 designates the issues that the taxpayer may raise at the appeals hearing in lien actions the taxpayer is allowed to raise any relevant issue relating to the unpaid tax including spousal defenses challenges to the appropriateness of the nftl filing and alternatives to collection sec_6330 sec_301_6320-1 proced admin regs the taxpayer may also raise at the hearing challenges to the existence or amount of the underlying tax_liability if the taxpayer did not receive a notice_of_deficiency or did not otherwise have an opportunity to dispute the tax_liability sec_6330 sec_301_6320-1 proced admin regs where the existence or amount of the underlying tax_liability is properly at issue in the hearing we review the matter de novo 114_tc_604 114_tc_176 where the existence or amount of underlying tax_liability is not properly at issue we review the determination for abuse_of_discretion sego v commissioner supra pincite goza v commissioner supra pincite with respect to tax_year petitioners received a notice_of_deficiency as reflected by the fact that they attached the first page of that notice to their prior petition to this court accordingly petitioners are not entitled to challenge their underlying tax_liability for petitioners consented to the assessment of their tax and are not challenging their underlying liability for that year therefore we review the appeals officer’s determination for abuse_of_discretion the notice_of_determination states that the only challenge at the hearing was to the existence or amount of the tax_liability at trial petitioners did not dispute this statement and no collection alternatives challenges to the appropriateness of the nftl filing or spousal defenses were raised at the hearing or at the trial accordingly we hold that the appeals officer’s determination that the filing of the nftl was appropriate was not an abuse_of_discretion decision will be entered for respondent