department of the treasury internal_revenue_service washington d c tax exempt ans jul uniform issue list se tep ca ta legend taxpayer a_trust b individual c trust d date e date f date g irax iray ira z dear this letter is in response to a request for a letter_ruling dated tesrererssenras submitted on your behalf by your authorized representative in which you request a tuling as to whether a proposed method of calculating distributions from ira x owned by trust b are part of a series of substantially_equal_periodic_payments and are therefore not subject_to the percent additional tax imposed under sec_72 of the internal_revenue_code code on early distributions and whether the method for determining such distributions from ira x will not be subject_to the percent additional tax on early distributions under sec_72 of the code regardless of whelher similar distributions are made from ira y or any other individual_retirement_account which is maintained for taxpayer a’s benefit and the account balance of ira y or any other individual_retirement_account which is maintained for taxpayer a's benefit need not be considered when caiculating the amounts of annual distributions from ira x the following facts and representations have been submitted under penalty of perjury in support of the rulings requested individual c established ira z during his lifetime to receive lump sum distributions from his employer's retirement_plan prior to his death individual c executed a_trust agreement ‘trust d which was partially funded by ira z individual c died on date e at which time trust d became irrevocable and pursuant to the beneficiary designation for ira z the undistributed balance of ira z remaining at individual c’s death became payable to trust d the undistributed balance of ira z in trust d and the other assets of trust d were divided into separate trusts for the benefit of certain of individual c's descendants including taxpayer a_trust b received a interest in ira z on date f the trustees of trust b elected to treat the entire share of the undistributed balance of ira z payable to trust b as a separate ira ira y which is subject_to the distribution_requirements of sec_408 of the code then in effect and sec_1_408-2 ii of the treasury regulations the regulations in a private_letter_ruling dated date g the internal_revenue_service service ruled that under sec_408 of the code in effect on the date of individual c’s death as applied with respect to trust b taxpayer a is the individual for whose benefit ira y is maintained for purposes of determining a when distributions from ira y must be made or commence b the measuring life for installment distributions from ira y and c the applicability of the additional premature withdrawal tax with respect to ira y the trustees of trust b propose to divide ira y into two separate individual_retirement_accounts this will be accomplished by transferring a portion of the assets held by ira y in an investment account into a new individual_retirement_account ira x which will also continue to be owned by trust b following such division the trustees of trust b propose to begin making annual distributions from ira x to taxpayer a age the proposed annual distribution amount will be determined each year by dividing the account balance of ira x as of december of the prior year by an annuity factor which is equal to the present_value of a dollar_figure per year single-life annuity with such annuity factor based on taxpayer a's age in that distribution year calculated using an assumed interest rate equal to of the federal_mid-term_rate as of december of the prior year and the mortality_table in appendix b of revrul_2002_62 although the annual distrioution amount for each year will be recalculated the method by which the amount will be determined will remain the same from year to year based on the above facts and representations you request that the service rule that the method described above for determining the annual distributions from ira x constitutes a series of substantially_equal_periodic_payments pursuant to revrul_2002_62 and thus will not be subject_to the additional tax on early distributions under sec_72 t of the code and the method for determining the annual distributions from ira x will not be subject_to the additional tax noted in regardless of whether similar distributions are made from ira y or any maintained for taxpayer a’s benefit and the account balance of ira y or any other individual_retirement_account which is maintained for taxpayer a's benefit need not be considered when calculating the amounts of the annual distributions from ira x and other individual_retirement_account which is the generation-skipping_transfer_tax provisions do not apply to trust b pursuant to section b of the tax_reform_act_of_1986 and sec_26 b 1xi of the regulations and neither the proposed transfer of part of the investment account of ira y to ira x nor the proposed annual distributions from ira x to trust b and from trust b to taxpayer a will cause trust b to become subject_to the generation-skipping_transfer_tax provisions pursuant to sec_26 b4 of the regulations sec_408 of the code prior to its amendment by sec_521 of the deficit retirement act of ‘defra’ provided that the entire_interest of an individual for whom an individual_retirement_account is maintained must be distributed to the individual not later than the close of the taxable_year in which such individual attains age or must be distributed commencing before the close of such taxable_year in accordance with regulations prescribed by the secretary over a the life of such individual or the lives of such individual and his spouse or b period not extending beyond the life expectancy of such individual or the life expectancy of such individual and his spouse sec_408 a of the code prior to its amendment by sec_521 of defra provided that if an individual for whose benefit an individual_retirement_account was maintained died before such individual's entire_interest had been distributed to him or her the entire_interest or the remaining part of such interest if distribution had commenced must within five years after such individual's death be distributed to or applied to purchase an immediate_annuity for the beneficiary thereof sec_1_408-2 ii of the regulations permitted a beneficiary of a decedent's individual_retirement_account to treat his or her interest to be subject_to the distribution tules of sec_408 of the code in effect prior to its amendment by sec_521 of defra ' sec_408 of the code provides except as otherwise provided in sec_408 d any amount_paid or distributed aut of an ira shall be included in gross_income by the payee or distributes as the case may be in the manner provided under sec_72 of the code sec_72 of the code provides rules for determining how amounts received as annuities endowments or life_insurance contracts and distributions from qualified_plans are to be taxed sec_72 of the code provides for the imposition of an additional percent tax on early distributions from qualified_plans including iras the additional tax is imposed ‘on that portion of the distribution that is includible in gross_income sec_72 t a i of the code provides that sec_72 shall not apply to distributions made on or after the date on which the employee attains age sec_72 a iv of the code provides that sec_72 t shall not apply to distributions that are part of a series of substantially_equal_periodic_payments not less frequently than annually made for the life or life expectancy of the employee or joint lives or joint life expectancies of such employee and his designated_beneficiary sec_72 of the code imposes the additional limitation on distributions excepted from the percent tax by sec_72 a iv that if the series of payments is subsequently modified other than by reason of death or disability before the later of the close of the 5-year period beginning with the date of the first payment and the employee's attainment of age then the taxpayer's tax for the first taxable_year in which such modification occurs shall be increased by an amount determined under regulations equal to the tax that would have been imposed except for the sec_72 t a iv exception plus interest for the deferral_period sec_72 of the code provides that for purposes of sec_72 the term employee includes any participant and in the case of an individual_retirement_plan the individual for whose benefit such pian was established thus the regulations under sec_408x7 of the code allow a beneficiary of an individual who died before the effective dats of sec_521 of defra le years beginning after date to defer distributions from the individual_retirement_account unti such beneficiary attained age as provided in sec_408 a of the code then in effect in this context the beneficiary becomes the individual for whose benefit the individual_retirement_account is maintained for purposes of the distribution rules for individual_retirement_accounts under sec_408 of the code sec_1_401_a_9_-9 of the regulations provides tables that are to be used in connection with computations under sec_72 and the regulations thereunder included in this section are tables giving life expectancies for one life q a-1 and joint life and last survivor expectancies for two lives q a-3 notice_89_25 c b which was published on date provided guidance in the form of questions and answers on certain provisions of the tax_reform_act_of_1986 tra_'86 in the absence of regulations on sec_72 of the code this notice provides guidance with respect to the exception to the tax on premature distributions provided under sec_72 axiv q a-12 of notice_89_25 provides three methods of determining substantially_equal_periodic_payments for purposes of sec_72 a iv of the code revrul_2002_62 r b which was published on date modifies q a-12 of notice_89_25 revrul_2002_62 provides among other things that payments are considered to be substantially_equal_periodic_payments within the meaning of sec_72 if they are made in accordance with the required_minimum_distribution method the fixed amortization methad or the fixed annuitization method the three methods described in q a-12 of notice the fixed annuitization method provides that the annual payment for each year is determined by dividing the account balance by an annuity factor that is the present_value of an annuity of one dollar dollar_figure per year beginning at the taxpayer's age and continuing for the life of the taxpayer or the joint lives of the individual and beneficiary the annuity factor is derived using the mortality_table in appendix b of revrul_2002_62 and using the chosen interest rate under this method the account balance the annuity factor the chosen interest rate and the resulting annual payment are determined once for the first distribution year and the annual payment is the same amount in each succeeding year section dollar_figure of revrul_2002_62 contains rules that apply to each of the three methods of calculating a series of substantially_equal_periodic_payments section dollar_figure provides in general that payments will constitute a series of substantially_equal_periodic_payments if the payments are determined by using a the uniform lifetime table in appendix a of revrul_2002_62 the single life expectancy table in sec_1 ax -9 q a-1 of the regulations or the joint and last survivor table in sec_1 a -9 q a-3 of the regulations b an interest rate that is not more than percent of the federal_mid-term_rate and c a reasonable manner of determining the account balance in this case taxpayer a proposes to determine the annual payments from ira x in accordance with the fixed annuitization method as described in section dollar_figure c of revrul_2002_62 except that rather than receiving a fixed annual payment the amount of the annual payment will amount will be determined by dividing the ira x account balance as of december of the prior year by an annuity factor which is equal to the present_value of a dollar_figure per year single-life annuity with such annuity factor based on taxpayer a’s age in that distribution year calculated using an assumed interest rate equal to percent of the be recalculated each year the annual distribution federal_mid-term_rate as of december of the prior year and the mortality_table in appendix b of revrul_2002_62 the mortality_table and interest rate used are such that they do not result in the circumvention of the requirements of sec_72 t 2ay iv and t of the cade through the use of an unreasonable high interest rate or an unreasonable high mortality_table or any other individual_retirement_account which is maintained for taxpayer accordingly with respect to ruling_request number one we conclude that the proposed method as modified of determining periodic_payments results in substantially_equal_periodic_payments within the meaning of sec_72 of the code and such payments will not be subject_to the ten percent additional tax of sec_72 unless the requirements of sec_72 are not met sec_72 t a iv of the code does not require that plans be aggregated to calculate a series of substantially_equal_periodic_payments accordingly with respect to ruling_request number two we conclude that the annual distributions from ira x calculated using the method described above are not subject_to the ten percent additional tax of sec_72 regardless of whether similar distributions are made from ira y or any other individual retirement a’s benefit and that the account balance of ra y account which is maintained for taxpayer a's benefit need not be considered when calculating the amounts of the annual distributions from ira x necessary under sec_72 2kaxiv at this point it is taxpayer a's option to begin receiving substantially_equal_periodic_payments that are based on the proposed method described above please note however that pursuant to code sec_72 the substantially_equal_periodic_payments must not be subsequently modified other than by reason of death or disability before taxpayer a attains age in order for taxpayer a to avoid imposition of the ten percent additional tax of sec_72 since ruling_request number three falls within an area of the code that is outside the jurisdiction of employee_plans technical this ruling is being handled by the office of associate chief_counsel passthroughs and special industries cc psi fo this letter is directed only to the taxpayer who requested it sec_61 k of the code provides that it may not be used or cited as precedent a copy of this letter has been sent to your authorized representative in accordance with power_of_attorney on file in this office if you wish to inquire about this ruling please contact rtttterttseetttre government identification_number - by phone at - or by fax at please address all correspondence to se t ep ra t1 sincerely carton a writing carlton a watkins manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose


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 corp b04 plr-133554-17 date date legend parent ------------------------ ------------------------------------------------------------ subsidiary x ------------------------- ------------------------------------------------------------ subsidiary y ------------------------------------------------------------ ----------------------------------------------- date date -------------------- --------------------------- company official ------------------------------------------------------------ ----------------------------- tax professional -------------------------------------------------------- ---------------------------------- dear --------------- this letter responds to a letter dated date submitted on behalf of parent requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to make an election the extension is being requested for parent group as defined below to make an election under sec_1 a to file a consolidated federal_income_tax return for the tax_year ended on date plr-133554-17 the election the material information submitted for consideration is summarized below parent became the common parent of a new affiliated_group parent group as the result of the acquisition of subsidiary x which owned all of the stock of subsidiary y on date such acquisition terminated the affiliated_group of which subsidiary x was the common parent parent group intended to file a consolidated_return for the tax_year ended on date but for various reasons a valid election was not timely filed immediately after discovery of this parent submitted this request for an extension of time under sec_301_9100-3 to file a valid election parent group has represented that it is not attempting to alter a return position taken for which an accuracy-related_penalty has been or could be imposed under sec_6662 the period of limitations on assessment under sec_6501 has not expired for the tax_year ended on date or any subsequent tax_year under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1 a therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for parent group to file the election provided parent establishes it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent company official and tax professional explain the circumstances that resulted in the failure to timely file a valid election the information establishes that parent reasonably relied on a qualified_tax professional who failed to make or advise parent to make the election and that the request for relief was filed before the failure to timely make the election was discovered by the internal_revenue_service see sec_301_9100-3 and v based on the facts and information submitted including the representations made we conclude that parent has shown it acted reasonably and in good_faith the requirements plr-133554-17 of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly provided that parent group qualifies substantively to file a consolidated_return for the tax_year ended date an extension of time is granted under sec_301_9100-3 until days from the date on this letter for parent to file the election parent group having already filed a consolidated_return for the tax_year must amend the return by attaching a copy of this letter to the return or if parent group files its returns electronically parent group may satisfy this requirement by attaching a statement to its return that provides the date on and the control number plr-133554-17 of this letter_ruling the above extension of time is conditioned on parent group’s tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers’ tax_liability for the years involved a determination thereof will be made by the director’s office upon audit of the federal_income_tax returns involved we express no opinion as to the tax effects or consequences of filing the election or the return late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-3 we relied on certain statements and representations made by parent company official and tax professional however the director should verify all essential facts moreover notwithstanding that an extension is granted under sec_301_9100-3 to file the election penalties and interest that would otherwise be applicable if any continue to apply this letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file in the office copies of this letter are being sent to your authorized representatives sincerely ___________________ ken cohen 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 b03 plr-135784-07 date january legend ------------------------------------- x ----------------------------------------------------------- state date dear -------------------- ----------------------- ------------- this letter responds to a letter dated date submitted on behalf of x by x’s authorized representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election to be treated as an association_taxable_as_a_corporation under sec_301_7701-3 effective date facts x was organized on date under the laws of state as a limited_partnership x intended to make an election to be treated as an association_taxable_as_a_corporation effective date however due to inadvertence x failed to timely file form_8832 entity classification election law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 plr-135784-07 sec_301_7701-3 provides that except as provided in sec_301 b unless the entity elects otherwise a domestic eligible_entity is i a partnership if it has two or more members or ii disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301 c i will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed sec_301_9100-1 provides that the commissioner in exercising the commissioner’s discretion may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 sets forth the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file form_8832 with the appropriate service_center and to elect to be classified as an association_taxable_as_a_corporation for federal tax purposes effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose plr-135784-07 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 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representatives 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 s william p o'shea associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


department of the treasury internal_revenue_service washington d c mar tax_exempt_and_government_entities_division uniform issue list 201kr25025 ieee te set tj ep rat legend taxpayer a ira b company c company d financial_institution e bank f account g amount amount dear this is in response to your request for a private_letter_ruling dated date from your authorized representative in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested page taxpayer a represents that she received a distribution of amount from ira b taxpayer a asserts that her inability to accomplish a rollover within the 60-day period prescribed by sec_408 was due to a failure of a representative of company d to follow taxpayer b’s instructions that amount be placed in an ira taxpayer a further represents that amount has not been used for any other purpose taxpayer a maintained ira b with company c taxpayer a also maintained a non-ira money market account with company c on date taxpayer a spoke with a representative of company d regarding his company's management of taxpayer a’s ira and money market account and investing them in like accounts at financial_institution e based on these discussions taxpayer a decided to hire the services of company d to manage her investments on date taxpayer a received a distribution check for amount from ira b as well as another check representing the majority of her money market fund account with company c both of these checks were deposited into her checking account with bank f on date taxpayer a wrote a check for amount payable to financial_institution e and mailed it to the representative of company d instead of following taxpayer a’s instructions and depositing amount into an ira at financial_institution e and the balance in a non-ira account the representative deposited the entire amount into a non-ira account with financial_institution e account g the error was not discovered until when taxpayer a received a deficiency_notice from the internal_revenue_service she immediately contacted the representative of company d who admitted the error the ruling_request is accompanied by a letter from company d acknowledging the broker's error based on the facts and representations you request a ruling that the internal_revenue_service waive the 60-day rollover requirement contained in sec_408 of the code with respect to the distribution of amount sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if ’ page i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred ’ page the information presented and documentation submitted by taxpayer a are consistent with her assertion that her inability to accomplish a timely rollover of amount was due to the failure by a representative of company d to follow taxpayer a’s instructions that amount be placed in an ira therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount from ira b taxpayer a is granted a period of days from the issuance of this letter_ruling to transfer an amount not to exceed amount into a rollover ira provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contribution the contribution will be considered a rollover_contribution within the meaning of sec_408 of the code this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter_ruling has been sent to your authorized representative if you wish to inquire about pursuant to a power_of_attorney on file in this office this ruling please contact i d ator sincerely yours chim a walbine manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose cc


t c memo united_states tax_court layne e preslar and sue f preslar petitioners v commissioner of internal revenue respondent docket no filed date ron lewis for petitioners pamelya p herndon for respondent memorandum findings_of_fact and opinion swift judge respondent determined a deficiency in petitioners' joint federal_income_tax of dollar_figure and an addition_to_tax under sec_6651 of dollar_figure unless otherwise indicated all section references are to the internal_revenue_code in effect for and all rule references are to the tax_court rules_of_practice and procedure after concessions by petitioners the primary issue for decision is whether petitioners received discharge_of_indebtedness income upon settlement of their liability on a bank loan findings_of_fact many of the facts have been stipulated and are so found at the time the petition was filed petitioners resided in cloudcroft new mexico all references to petitioner are to layne e preslar in early petitioner a real_estate agent of years began negotiations for the purchase of a big_number acre ranch near cloudcroft new mexico known as the mccracken-rinconada ranch the ranch petitioner wanted to develop the ranch as a sportsmen's resort petitioner planned to subdivide and develop acres of the ranch and to sell to 2-acre lots on which cabins or vacation homes could be built cabin lots each cabin lot would be sold for approximately dollar_figure and petitioner projected gross revenue from sales of cabin lots of approximately dollar_figure the remaining big_number acres on the ranch that were not to be sold as cabin lots would be used for hunting and other outdoor recreation after initial contact with owners of the ranch regarding its possible purchase petitioner at the owners' request conducted all discussions regarding purchase of the ranch with a representative of first city national bank of hobbs new mexico later known and hereinafter referred to as moncor bank moncor bank held a perfected security_interest in the ranch as a result of a loan made to the owners of the ranch moncor bank's security_interest however was subordinate to those of two other banks which also had made loans to the owners of the ranch and which had perfected security interests in the ranch as collateral for their loans the owners of the ranch had filed petitions in the u s bankruptcy court for the district of new mexico under chapter and moncor bank as a secured creditor was assisting the owners in selling the ranch in lieu of foreclosure on date after months of negotiations with representatives of moncor bank petitioners agreed to purchase the ranch for a stated purchase_price of dollar_figure million to be financed percent by a loan from moncor bank bank loan petitioners executed in favor of moncor bank a promissory note with a stated total principal_amount of dollar_figure million nominally payable in annual installments with interest pincite percent per annum and a final payment stated to be due on date on date moncor bank paid dollar_figure of the stated dollar_figure million loan proceeds to the two other banks which held security interests in the ranch moncor bank did not pay to petitioners nor to the former owners the dollar_figure balance of the bank loan rather the dollar_figure balance of the bank loan was reflected on moncor bank's records as a substitution of petitioners' stated debt to moncor bank for the debt of the former owners of the ranch to moncor bank moncor bank agreed to allow petitioners to repay the dollar_figure million stated principal_amount of the bank loan through petitioners' transfer or assignment to moncor bank of the written installment contracts entered into by purchasers of the cabin lots upon each cabin lot sale the written contract for sale of the lot would be assigned and physically transferred by petitioners to moncor bank and petitioners' stated principal debt obligation to moncor bank on the bank loan would be credited with an amount equal to percent of the stated contract_price regardless of actual payments received or to be received by moncor bank from purchasers of the cabin lots upon each sale of a cabin lot moncor bank received a security_interest in each cabin lot in the event the purchaser defaulted on the installment_payment obligations agreed to in the purchase of the cabin lot between date and date petitioner sold cabin lots and assigned all of the cabin lot sales contracts to moncor bank moncor bank credited percent of the total stated contract_price reflected on the cabin lot sales contracts that were assigned to it against the dollar_figure million stated principal_amount of the bank loan petitioners owed to moncor bank moncor bank apparently received a total of dollar_figure in installment payments from purchasers of cabin lots on date the u s comptroller of the currency declared moncor bank insolvent and the federal deposit insurance corporation fdic became the receiver of moncor bank by letter dated date the fdic informed petitioners of moncor bank's insolvency and advised petitioners to make payments on the bank loan to the fdic as receiver of moncor bank the fdic refused to accept any further assignment from petitioners of cabin lot sales contracts as repayment on the bank loan and ordered petitioners to suspend sales of cabin lots petitioners complied with the fdic's suspension order and did not sell any more cabin lots but petitioners did not make any subsequent payments on the bank loan in september of petitioners filed a lawsuit against the fdic for breach of contract contesting their liability to the fdic for the dollar_figure principal_amount allegedly due on the bank loan dollar_figure million less dollar_figure in actual payments received by moncor bank equals dollar_figure and seeking to require the fdic to accept assignment of cabin lot installment_sales contracts as payment on the bank loan pursuant to petitioners' agreement with moncor bank on date petitioners and the fdic settled their dispute over petitioners' remaining liability on the bank loan for dollar_figure petitioners borrowed this dollar_figure from first national bank of alamogordo in alamogordo new mexico and paid the dollar_figure to the fdic as a result of the settlement between petitioners and the fdic a total of dollar_figure was actually paid on the bank loan petitioners' dollar_figure settlement payment to the fdic plus the dollar_figure in installment payments received by moncor bank equals dollar_figure petitioners' accountant prepared petitioners' joint federal_income_tax return with their tax_return petitioners filed a form_4868 requesting an automatic_extension of time to file their tax_return until date on date respondent received petitioners' joint federal_income_tax return and their form_4868 on their tax_return petitioners did not include as discharge_of_indebtedness income the dollar_figure unpaid portion of the stated principal_amount of the bank loan dollar_figure million stated principal_amount of the bank loan less dollar_figure paid on the loan equals dollar_figure instead petitioners filed with their tax_return a form electing under sec_108 to reduce their tax basis in the ranch by dollar_figure on audit respondent charged petitioners with dollar_figure in discharge_of_indebtedness income relating to the settlement between the fdic and petitioners of their indebtedness on the the dollar_figure represents petitioners' calculation of the basis_adjustment to be made under sec_108 bank loan effectively reversing their dollar_figure reduction in their tax basis in the ranch respondent also determined an addition_to_tax under sec_6651 for petitioners' failure to timely file their joint federal_income_tax return discharge_of_indebtedness income opinion taxpayers generally are required to include cancellation or discharge_of_indebtedness income in income sec_61 the discharge however of a liability that is indefinite or contingent will not trigger discharge_of_indebtedness income 85_tc_855 affd 854_f2d_1001 7th cir also where the nature and amount of a liability are contested in a good_faith dispute and where a compromise settlement is reached the excess of the stated principal_amount of the alleged debt over the amount for which the liability is settled will not be treated as discharge_of_indebtedness income 307_f2d_238 10th cir 40_bta_1263 mertens law of federal income_taxation sec dollar_figure petitioners argue that the economic realities of the transaction before us reflect that the dollar_figure million stated purchase_price for the ranch was inflated that it did not accurately reflect the fair_market_value of the ranch and effectively that because of the unusual payment arrangement with moncor bank relating to petitioners' assignment of the installment contracts petitioners should not be considered liable for the total dollar_figure million stated principal_amount of the bank loan respondent argues that the fair_market_value of the ranch was dollar_figure million that petitioners were liable for the entire dollar_figure million stated principal_amount of the bank loan and that the payment arrangement between petitioners and moncor bank should not be regarded as limiting petitioners' liability for the full dollar_figure million stated principal_amount of the bank loan respondent therefore argues that no exception applies to preclude petitioners' recognition of discharge_of_indebtedness income in the instant case the unusual payment arrangement between petitioners and moncor bank relating to the bank loan casts significant doubt on petitioners' liability for the total dollar_figure million stated principal_amount of the bank loan with every sale of a cabin lot petitioners and moncor bank reduced the stated principal_amount due on the bank loan by an amount equal to percent of the cabin lot sales contract regardless of the receipt by moncor bank of any actual installment payments from purchasers of the cabin lots when the fdic refused to honor this payment arrangement with regard to the bank loan a legitimate dispute arose regarding the nature and amount of petitioners' liability on the bank loan the dispute over petitioners' liability on the bank loan was settled in when the fdic accepted a dollar_figure payment in complete satisfaction of petitioners' liability only at the time of that settlement was the amount of petitioners' liability on the bank loan finally established for the above reasons we conclude that petitioners' liability on the promissory note to moncor bank was sufficiently indefinite in nature and amount to avoid triggering any discharge_of_indebtedness income when the settlement with the fdic was reached only at the time of the settlement did petitioners' liability on the bank loan become fixed and definite and equal to the dollar_figure figure agreed to by petitioners and the fdic we conclude that petitioners are not to be treated as having realized the discharge_of_indebtedness income in dispute herein sec_6651 addition_to_tax sec_6651 imposes an addition_to_tax for the failure to timely file a federal_income_tax return if a taxpayer can show that the failure to timely file is due to reasonable_cause and not to willful neglect the addition_to_tax will not be imposed sec_6651 the burden of proving that their income_tax return was timely filed is on petitioners rule 290_us_111 to be effective requests for automatic extensions to file federal_income_tax returns must be filed on or before the date prescribed for filing the returns raskin v commissioner tcmemo_1981_153 affd 685_f2d_436 8th cir sec_1 a income_tax regs petitioners contend that because they filed a form_4868 their tax_return was not due until date and that the complicated nature of their tax_return qualifies as reasonable_cause for failure to timely file because respondent did not receive petitioners' form_4868 until date the automatic_extension that petitioners sought was not triggered and petitioners' tax_return was due to be filed on date further petitioners have not established reasonable_cause for failure to timely file their federal_income_tax return the mere fact that preparation of their return was complicated and that additional time was required to work on the return does not establish reasonable_cause for petitioners' late filing to reflect the foregoing decision will be entered under rule


t c no united_states tax_court charles h addis and cindi addis petitioners v commissioner of internal revenue respondent docket no filed date ps claimed charitable_contribution deductions for their payments to nhf of dollar_figure in and dollar_figure in nhf in turn paid those amounts as premiums on a so-called charitable split-dollar_life_insurance policy on the life of p-w nhf was entitled to receive percent and ps’ family_trust was entitled to receive percent of the death_benefit provided by the policy nhf was not required to pay the premiums for that policy however ps reasonably expected nhf to do so because ps’ continued payments to nhf and nhf’s receipt of a death_benefit depended on nhf’s paying the premiums nhf provided ps with receipts for their payments which stated that nhf did not provide any goods or services to ps in return for the payments ps claimed charitable_contribution deductions for the entire amount of their payments to nhf -- - held no part of ps’ payments to nhf is deductible as a charitable_contribution to nhf because ps did not meet the substantiation requirements of sec_170 i r c and sec_1_170a-13 income_tax regs steven toscher and michel r stein for petitioners lorraine wu for respondent colvin judge respondent determined deficiencies in petitioners’ federal_income_tax of dollar_figure for and dollar_figure for petitioners claimed charitable_contribution deductions for their payment to the national heritage foundation nhf of dollar_figure in and dollar_figure in which nhf used to pay premiums on a life_insurance_policy for the life of petitioner cindi addis mrs addis the insurance_policy for mrs addis was a so-called charitable split-dollar_life_insurance contract under which nhf was entitled to receive percent of the death_benefit and petitioners’ family_trust was entitled to receive percent respondent disallowed petitioners’ charitable_contribution deductions for all of their payments to nhf - - the sole issue for decision is whether petitioners may deduct their payments to nhf as charitable_contributions ’ we hold that they may not unless otherwise indicated section references are to the internal_revenue_code rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and are so found a petitioners petitioners lived in bakersfield california when they filed their petition in this case charles h addis petitioner has been a farm labor contractor in the bakersfield area for the last years b petitioners’ family_trust and foundation the addis family_trust on date petitioners formed the charles h addis family_trust addis family_trust petitioners are the trustors first designee trustees and initial beneficiaries of the addis family_trust under the trust instrument petitioner’s children and mrs addis’ parents or siblings become beneficiaries of the addis family_trust upon the deaths of petitioner and mrs addis ' petitioners contend that sec_7491 requires respondent to bear the burden_of_proof on all issues in the case we need not decide petitioners’ contention because our findings and analysis do not depend on which party bears the burden_of_proof nhfe nhf is a sec_501 organization and is eligible to receive tax-deductible contributions under sec_170 the addis family_foundation on date petitioners established a fund within nhf called the addis family_foundation the purpose of the addis family_foundation is to fund christian organizations and programs and individual evangelists mrs addis paid dollar_figure to nhf to establish the addis family_foundation the life_insurance_policy on mrs addis on date petitioner wrote to dr j t houk the president of nhf stating that the addis family_trust intended to buy an insurance_policy on the life of mrs addis and would grant nhf an option to acquire an interest in that policy on date the commercial union life_insurance co of america commercial union life issued a life_insurance_policy on the life of mrs addis the life_insurance_policy or the policy to petitioner mrs addis wa sec_44 years old at that time petitioners owned the policy through the addis family_trust ’ the life_insurance_policy had a dollar_figure annual premium and an initial death_benefit of dollar_figure petitioners possess rights in the insurance_policy solely through the addis family_trust --- - the death_benefit option agreement on date petitioner as trustee of the addis family_trust and nhf entered into a death_benefit option agreement dboa relating to the life_insurance_policy on the life of mrs addis petitioner agreed to pay dollar_figure of the dollar_figure annual premium on the life_insurance_policy petitioner and nhf agreed that if nhf paid dollar_figure of the annual premium nhf would become entitled to dollar_figure of the death_benefit under that policy the dboa provides that the addis family_trust and nhf each own a separate interest in the life_insurance_policy the dboa remained in effect throughout petitioners’ payments to nhf and commercial union life around date petitioners sent a check for dollar_figure to nhf for their family_foundation petitioner’s letter to nhf stated that nhf was not required to use the payment to pay the premium on the life_insurance_policy but that petitioner expected nhf to use the dollar_figure payment to pay those premiums on date petitioners paid commercial union life their dollar_figure portion of the dollar_figure annual premium on date nhf credited dollar_figure to the addis family_foundation account simultaneously nhf debited the addis family_foundation account dollar_figure to pay nhf’s portion of the the dboa is also referred to as a charitable split--dollar life_insurance transaction -- - life_insurance_policy premium also on that day nhf paid its dollar_figure portion of the life_insurance_policy premium to commercial union life nhf sent a receipt for the contribution on behalf of the addis family_foundation which stated in accordance with irs regulations the national heritage foundation did not provide any goods or services to the donor in return for the contribution on date petitioners paid dollar_figure to nhf the payment was in form unrestricted also on that day petitioners paid commercial union life their dollar_figure portion of the life_insurance_policy premium on date nhf credited the addis family_foundation account with dollar_figure and debited the account in the same amount to pay nhf’s portion of the premium for the life_insurance_policy also on that day nhf paid its dollar_figure portion of the life_insurance_policy premium to commercial union life nhf provided petitioners with a receipt which stated that nhf provided no goods or services to petitioners in exchange for the payment petitioners would have stopped making payments to nhf if nhf had not used petitioners’ dollar_figure payments to pay the premiums for the life_insurance_policy on mrs addis rights under the commercial union life_insurance_policy a nhf’s rights the life_insurance_policy had an initial death_benefit of dollar_figure under the dboa nhf became entitled to dollar_figure of that amount when it paid the dollar_figure premium to commercial union life in nhf’s portion of the death_benefit was fixed at dollar_figure even if the total death_benefit increased under the policy under the dboa nhf was guaranteed to receive either dollar_figure when mrs addis died or the termination account or cash_surrender_value of the insurance_policy if the policy was terminated before mrs addis died nhf was guaranteed to receive the termination account value upon termination of the policy i1 e the cumulative amount of premiums_paid by nhf less the cumulative cost of insurance that nhf was charged for its share of the death_benefit b the addis family trust’s rights in petitioners’ family_trust was entitled to receive dollar_figure of the death_benefit under the dboa the addis family_trust could borrow against the life_insurance_policy only to the lawrence d cronin the president of cronin insurance services testified that petitioners’ family_trust was entitled to receive dollar_figure the initial death_benefit was dollar_figure nhf was entitled to receive dollar_figure of that amount and petitioners’ family_trust was entitled to receive the remainder the difference between dollar_figure and dollar_figure is dollar_figure - - extent that the policy’s cash_surrender_value exceeded the termination account value the policy’s cash_surrender_value did not exceed its termination account value during the years in issue under the dboa as long as the annual premium of dollar_figure was paid the addis family_trust was entitled to receive a death_benefit of dollar_figure plus any increase in the death_benefit from the initial death_benefit of dollar_figure under the dboa the addis family_trust was required to pay the premiums on the policy if the cumulative premiums were inadequate to fund nhf’s cost of insurance enactment of sec_170 in petitioners stopped making payments to nhf after nhf no longer participates in charitable split-dollar_life_insurance arrangements because of the enactment in of sec_170 f which requires charities to pay a 100-percent excise_tax on certain life_insurance premium payments a policy’s cash_surrender_value is its total gross cash_value less any surrender charges imposed by the insurer on the surrender of the policy sec_170 f was added to the code by sec_537 of the ticket to work and work incentives improvement act of publaw_106_170 113_stat_1860 generally effective for transfers after date cc petitioners’ tax returns and the notice_of_deficiency petitioners claimed deductions for charitable_contributions to nhf of dollar_figure in and dollar_figure in respondent determined in the notice_of_deficiency that petitioners are not entitled to those deductions opinion respondent contends that petitioners may not deduct any of their payments to nhf because petitioners received a benefit from nhf and that petitioners may not deduct any of their payments to nhf because petitioners did not comply with the substantiation requirement of sec_170 and sec_1_170a-13 f income_tax regs respondent contends that the contemporaneous written acknowledgment by nhf of petitioners’ payments incorrectly states that nhf provided no goods or services in exchange for petitioners’ payments and contains no description or good_faith estimate of the value of the benefits petitioners received to prevail on the charitable_contributions issue petitioners must overcome both of respondent’s arguments we will first consider respondent’s second argument a substantiation requirement under sec_170 a taxpayer may not deduct any contribution of dollar_figure or more unless he or she substantiates the contribution with a contemporaneous written acknowledgment of the contribution by the -- - donee organization that meets the requirements of sec_170 b ’ sec_170 f a the donee’s written acknowledgment must state the amount of cash and describe other_property contributed indicate whether the donee organization provided any goods or services in consideration for the contribution and provide a description and good_faith estimate of the value of any goods or services provided by the donee organization sec_170 b sec_170 f provides in part a general_rule --no deduction shall be allowed under subsection a for any contribution of dollar_figure or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization that meets the requirements of subparagraph b b content of acknowledgment --an acknowledgment meets the requirements of this subparagraph if it includes the following information the amount of cash and a description but not value of any property other than cash contributed whether the donee organization provided any goods or services in consideration in whole or in part for any property described in clause a description and good_faith estimate of the value of any goods or services referred to in clause ii goods or services include cash property services benefits and privileges sec_1_170a-13 income_tax regs b definition of consideration under sec_1_170a-13 income_tax regs petitioners contend that they did not receive consideration for 1ie that they did not receive goods or services in exchange for their dollar_figure payments to nhf because nhf was not required to use those payments to pay the premiums on the life_insurance_policy petitioners contend that the fact that they expected nhf to invest in the life_insurance_policy was not consideration for purposes of sec_170 we disagree a donee organization provides goods or services in consideration for a taxpayer’s payment if at the time the donor makes the payment to the donee organization the taxpayer receives or expects to receive goods or services in exchange for that payment sec_1_170a-13 income_tax regs provides in consideration for a donee organization provides goods or services in consideration for a taxpayer’s payment if at the time the taxpayer makes the payment to the donee organization the taxpayer receives or expects to receive goods or services in exchange for that payment sec_1_170a-13 income_tax regs is in keeping with the traditional view that a charitable_contribution is one for which the donor has ‘ no expectation of any quid pro quo’ 490_us_680 quoting s rept 83d cong 2d sess h rept 83d cong 2d sess a44 the legislative_history defines a gift as a payment made with no expectation of a financial return commensurate with the amount_of_the_gift see also 477_us_105 the sine qua non of a charitable_contribution is a transfer of money or property without adequate_consideration nhf used petitioners’ dollar_figure payments to pay the premiums on the life_insurance_policy dollar_figure or percent of the death_benefits of which petitioners’ family_trust was entitled to receive as beneficiary petitioners point out that nhf was not required and did not promise to use their contributions to pay the premiums on the insurance_policy on the life of mrs addis however nhf provided consideration for petitioners’ payments because at the time petitioners made payments to nhf they expected to receive percent of the death_benefit under the policy petitioners expected nhf to use their dollar_figure contributions to pay nhf’s portion of the premiums on the life_insurance_policy in and sec_1_170a-13 f income_tax regs petitioners’ expectation that nhf would pay the premiums on the life_insurance_policy was reasonable because it was in nhf’s financial interest to pay premiums on petitioners’ life_insurance_policy in return for a guaranteed death_benefit of dollar_figure cc whether nhf’s receipts for petitioners’ payments comply with sec_170 and sec_1_170a-13 income_tax regs petitioners contend that nhf’s receipts comply with sec_170 and were contemporaneous written acknowledgments of their contributions they further contend that the receipts were accurate because they received no benefits in exchange for their payments to nhf petitioners’ contention fails to take into account the definition of consideration in sec_1 170a- income_tax regs as stated above under that regulation a donee organization provides goods or services in consideration for a taxpayer’s payment if at the time the taxpayer makes the payment to the donee organization the taxpayer receives or expects to receive goods or services in exchange for that payment nhf did not state in its receipts that nhf paid premiums for the insurance_policy on the life of mrs addis under which petitioners would receive percent of the death_benefits nhf failed to make a good_faith estimate of the value of those benefits as required by sec_170 f b the legislative_history accompanying the enactment of sec_170 states organizations that provide goods or services in consideration for payments from donors often do not inform their donors that all or a portion of the amount_paid by the donor may not be deductible as a charitable_contribution h rept pincite 1993_3_cb_167 congress enacted the substantiation requirements of sec_170 to require charitable organizations that receive quid pro quo contributions e payments made partly as a contribution and partly in consideration for goods or services provided to the donor by the donee organization to inform their donors that the deduction under sec_170 is limited to the amount by which the payment exceeds the value of goods or services provided by the charity id petitioners and nhf designed a scheme purporting to provide no benefits to petitioners in exchange or consideration for petitioners’ payments however petitioners received substantial benefits from nhf under the life_insurance_policy in the documents structuring this transaction petitioners and nhf avoided stating any obligation of nhf and made it appear that petitioners made an outright gift to nhf with no quid pro quo however petitioners expected and they told nhf that they expected nhf to use their contributions for both their and nhf’s benefit petitioners and nhf both had incentives to proceed under this scheme with the pot sweetened by charitable_contribution deductions it was in both parties’ interests for nhf to continue to pay the insurance premiums and for petitioners to continue to make payments to nhf nhf would be entitled to - - the dollar_figure death_benefit only if it paid the premiums for the life_insurance_policy we conclude that the nhf receipts do not comply with the substantiation requirement of sec_170 and sec_1_170a-13 income_tax regs because nhf incorrectly stated in the receipts that petitioners received no consideration for their payments d consequence of failure to comply with sec_170 sec_170 disallows a charitable_contribution_deduction in circumstances such as these where the donee organization’s contemporaneous written acknowledgment is erroneous and is not a good_faith estimate of the value of goods or services it provided and where the taxpayer unquestioningly and self-servingly uses that erroneous statement to claim a charitable_contribution larger than the one to which he or she would be entitled under sec_170 sec_1_170a-13 f 170a-1 h income_tax regs the written acknowledgments by nhf did not meet the requirements of sec_170 and sec_1_170a-13 income_tax regs thus petitioners may not deduct their contributions to nhf of dollar_figure in and dollar_figure in to reflect the foregoing decision will be entered for respondent


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 tege eoeg eo plr-115392-12 date date legend board ------------------------------------------------------------- district ----------------------------------- trust ---------------------------------------------------- company --------------------------------------------------- state -------------- date ------------------ dear ----------- this letter responds to a letter from your authorized representatives dated date submitted on behalf of the board requesting a ruling that the trust’s income is excludable from gross_income under internal_revenue_code irc sec_115 the board represents the facts as follows facts the board a political_subdivision of state operates the district the board established the trust on date by an agreement with company acting as the initial trustee the purpose of the trust is to provide health care and life_insurance benefits to eligible former employees of the district and their dependents as defined by sec_152 these benefits may be provided through commercial insurance or by self- funding as determined by the board the trust’s income will be solely from contributions by the board and from investment_income and will be used solely to provide for post-employment health and welfare benefits and to pay the reasonable expenses of the trust plr-115392-12 the board is responsible for the administration of the trust it may designate an agent for administrative matters and a manager for investment purposes the board may dismiss the trustee at any time with written notice unless the board deems that immediate dismissal is necessary to protect the trust the board may appoint a successor trustee the board may amend_or_terminate the trust at any time and for any reason upon termination any assets remaining after satisfaction of all outstanding liabilities will be returned to the board law analysis sec_115 provides that gross_income does not include income derived from any public_utility or the exercise of any essential government function and accruing to a state or any political_subdivision thereof revrul_77_261 1977_2_cb_45 holds that income generated by an investment fund that is established by a state to hold revenues in excess of the amounts needed to meet current expenses is excludable from gross_income under sec_115 because such investment constitutes an essential_governmental_function the ruling explains that the statutory exclusion is intended to extend not to the income of a state or municipality resulting from its own participation in activities but rather to the income of an entity engaged in the operation of a public_utility or the performance of some governmental function that accrues to either a state or political_subdivision of a state the ruling points out that it may be assumed that congress did not desire in any way to restrict a state’s participation in enterprises that might be useful in carrying out projects that are desirable from the standpoint of a state government and that are within the ambit of a sovereign to conduct revrul_90_74 1990_2_cb_34 holds that the income of an organization formed funded and operated by political subdivisions to pool various risks eg casualty public liability workers’ compensation and employees’ health is excludable from gross_income under sec_115 because the organization is performing an essential_governmental_function in revrul_90_74 private interests neither materially participate in the organization nor benefit more than incidentally from the organization the trust provides health care and life_insurance benefits to retired employees of the district and their covered dependents providing such health and welfare benefits to former public employees constitutes the performance of an essential_governmental_function within the meaning of sec_115 see revrul_77_261 and revrul_90_74 the income of the trust accrues to the board a political_subdivision of the state no private interests participate in or benefit from the operation of the trust other than as plr-115392-12 providers of goods or services the dedication of the assets of the trust for the exclusive benefit of retiree participants and their covered dependents satisfies an obligation of the board to provide health and welfare benefits to its retired employees the benefit to retired employees of the district is incidental to the public benefit the board represents that no assets of the trust will be distributed to an entity other than a state a political_subdivision of a state or an entity the income of which is excluded from gross_income under sec_115 see revrul_90_74 based solely on the facts and representations submitted on behalf of the board we conclude that because the income of the trust is derived from the exercise of an essential_governmental_function and will accrue to a state or a political_subdivision thereof the trust’s income is excludable from gross_income under sec_115 no opinion is expressed concerning the federal tax consequences under any irc provision other than the one specifically cited in the immediately preceding paragraph this ruling concerns only the federal tax treatment of the trust’s income and may not be cited or relied upon as to any matter relating to the taxation of accident or health contributions or benefits more explicitly no opinion is expressed regarding whether contributions or premiums_paid on behalf of or benefits received by employees former employees retirees spouses dependents or others will or will not be taxable except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer who requested it sec_6110 provides that this ruling may not be used or cited as precedent in accordance with the power_of_attorney on file with this office your authorized representative will receive a copy of this letter sincerely kenneth m griffin chief exempt_organizations branch_tax exempt government entities enclosure cc


t c memo united_states tax_court estate of daphne baynham white deceased kemble white independent executor petitioner v commissioner of internal revenue respondent docket no filed date kemble white for petitioner valerie l makarewicz for respondent memorandum opinion whalen judge this case is before the court to decide a motion filed on behalf of the estate of daphne baynham white hereinafter the estate entitled petitioner’s motion for costs and attorney’s fees in which the estate seeks litigation costs in the amount of dollar_figure the estate’s motion is governed by sec_7430 of the internal_revenue_code hereinafter all section references are to such code unless stated otherwise and by rules of the tax_court rules_of_practice and procedure hereinafter all rule references are to such rules the estate’s motion was filed at the same time the parties filed a stipulation of settled issues in which they dispose_of all of the other issues in the case see rule c the stipulation of settled issues is further discussed below neither party requested an evidentiary hearing and we decide the estate’s motion without one see rule a background the petition in this case asks the court to redetermine the income_tax deficiency and additions to tax determined by the commissioner in the income_tax of ms daphne baynham white ms white died on date at that time she was a resident of ojai california she is referred to herein as ms white the executor of her estate also resided in ojai california at the time the instant petition was filed respondent determined the subject tax_deficiency after receiving reports from various payors of payments made to ms white the following is a list of the payors and the income they reported paying to ms white during payor type of income amount thorn partnership_interest thorn partnership real_estate thorn building interest thorn building real_estate branch banking dividends the phoenix group llc rental dollar_figure big_number big_number big_number based upon these reports respondent determined a tax_deficiency in ms white’ sec_2001 income_tax of dollar_figure an addition_to_tax for failure_to_file under sec_6651 of dollar_figure an addition_to_tax for failure to pay under sec_6651 of dollar_figure and an addition_to_tax for failure to pay estimated income_tax under sec_6654 of dollar_figure after the estate’s petition for redetermination was filed in this court respondent filed a motion to extend the time within which to answer the petition on the ground that additional time was needed to locate respondent’s administrative files the court granted respondent’s motion over the estate’s objection soon thereafter respondent filed a second motion to extend the time within which to answer hereinafter referred to as second motion the estate did not object to the second motion because respondent advised the court in that motion that the parties had agreed that there is no deficiency due from ms white for taxable_year and that respondent conceded the additions to tax determined in the notice_of_deficiency respondent’s second motion also stated that the parties had entered into a stipulation of settled issues that would resolve all issues raised in the notice_of_deficiency respondent’s second motion stated that the stipulation of settled issues would be filed pursuant to rule c at the time the estate’s motion for litigation costs was filed respondent’s second motion was filed approximately days after the petition was filed respondent never filed an answer in this case shortly thereafter the court received the stipulation of settled issues mentioned in respondent’s second motion in that document the parties agreed that ms white was not required to file an income_tax return for taxable_year they also agreed that the income reported by the payors who are listed above had been reported on income_tax returns filed on behalf of the estate in that document respondent again conceded that there is no deficiency in income_tax due from ms white for and that the additions to tax determined in the notice_of_deficiency are not due from ms white the positions of the parties the estate’s position the estate’s motion for costs and attorney’s fees asserts that the estate is entitled to an award of reasonable_litigation_costs pursuant to sec_7430 in support thereof the executor of the estate argues that the purpose of section sic is to compensate taxpayers who are put to unnecessary expense by having to resist unreasonable positions taken by the government in administrative or judicial proceedings the executor argues that the attorney’s fees and costs claimed in this sic were caused by the respondent’s failure to follow normal administrative procedures in light of this conduct respondent should not be heard to say that his position was reasonable emphasis supplied the executor argues that respondent was put on notice of ms white’s death when the estate applied for an employer_identification_number and when the estate filed income_tax returns using that employer_identification_number the executor complains that when respondent received forms in the name of ms white respondent did not run a matching program on sic data and did not attempt to reconcile the discrepancies by sending explanation requests to the taxpayer the executor further complains that respondent did not issue a 30-day_letter or follow normal administrative procedures that would have resulted in an explanation that would have ended the case the executor asserts that respondent’s performance did not improve after a petition was filed according to the executor respondent lost the administrative file and made numerous requests for extension to file an answer the executor also asserts that after all relevant tax returns were sent to respondent’s counsel the estate was advised that the items could not be reconciled that the case would need to be referred to appeals and that it would take a year to get the case resolved the estate argues that this caused petitioner to waste a lot of time preparing a motion for summary_judgment we note that no motion for summary_judgment was filed on behalf of the estate the executor acknowledges that there are court opinions holding that for purposes of deciding claims for litigation costs the position_of_the_united_states is determined in the government’s answer the executor argues that the commissioner should not be given a free pass because the position_of_the_united_states is that taken in an answer the executor also argues that those cases are distinguishable from this case because in those cases the judicial proceedings were preceded by administrative proceedings in which the taxpayers failed to come forward with the evidence needed to resolve the contested issues the executor does not specify the cases to which he refers according to the executor in this case the estate was denied any administrative appeal and the opportunity to end the case with a letter because respondent failed to work the case in a timely manner the executor also argues that the government’s litigating position includes pre- litigation proceedings and cites 111_f3d_1252 5th cir revg tcmemo_1994_550 respondent’s position respondent concedes that the estate substantially prevailed with respect to the amount in controversy and with respect to the most significant issue presented as required by sec_7430 to qualify as a prevailing_party respondent also concedes that the estate meets the net_worth requirement of u s c section d b as required by sec_7430 respondent argues that the estate is not the prevailing_party and is not eligible for an award of litigation costs under sec_7430 because the position_of_the_united_states in this proceeding was substantially justified within the meaning of the exception to the definition of prevailing_party set forth in sec_7430 in support of that position respondent asserts that the position_of_the_united_states was substantially justified both at the time the notice_of_deficiency was issued and at the time he conceded the case respondent also asserts that no answer was filed in this case and therefore respondent did not take a position in the court_proceeding that was adverse to petitioner according to respondent this means that the estate cannot qualify as the prevailing_party for the reasons explained in fla country clubs inc v commissioner 122_tc_73 affd 404_f3d_1291 11th cir or it means that respondent’s position was substantially justified finally respondent argues that the attorney’s fees requested by the estate exceed the amount specified as reasonable by sec_7430 the estate’s motion for attorney’s fees seeks an award of dollar_figure in fees for hours of attorney’s time that total is composed of hours at dollar_figure per hour dollar_figure and hours at dollar_figure per hour dollar_figure the motion does not explain why different rates are used in computing the fees respondent points out that an award of attorney’s fees incurred during is limited under sec_7430 to dollar_figure per hour see revproc_2004_71 2004_2_cb_970 respondent notes that the estate has not shown that any of the special factors enumerated in sec_7430 apply in this case discussion under the exception set forth in sec_7430 a party is not treated as the prevailing_party if the united_states establishes that its position in the proceeding was substantially justified see sec_7430 the commissioner's position is substantially justified if it has a reasonable basis in both fact and law and is justified to a degree that could satisfy a reasonable person see huffman v commissioner 978_f2d_1139 n 9th cir citing 487_us_552 defining substantially justified in the context of the equal_access_to_justice_act u s c sec d affg in part revg in part and remanding tcmemo_1991_144 939_f2d_874 9th cir affg in part and revg in part tcmemo_1989_390 106_tc_76 rosario v commissioner tcmemo_2002_247 sec_301_7430-5 proced admin regs the determination of the reasonableness of the commissioner’s position is based upon the available facts that formed the basis for the position as well as any controlling legal precedent see 108_tc_430 94_tc_685 the phrase position_of_the_united_states is defined by sec_7430 as the position taken by the united_states in a judicial proceeding see sec_7430 and the position taken in an administrative_proceeding as of the earlier of the date on which the taxpayer receives the notice of the decision of the internal_revenue_service office of appeals or the date of the notice_of_deficiency see sec_7430 based upon the plain language of this definition we held in huffman v commissioner tcmemo_1991_144 that the position_of_the_united_states in the administrative proceedings was unjustified whereas the position_of_the_united_states in the judicial proceeding was not substantially unjustified in effect we held that the united_states can take two positions in a particular case one position in the prelitigation administrative proceedings and another position in the judicial proceedings and each position must be evaluated separately to determine whether it was substantially justified this is the so-called bifurcated approach used in determining whether the position_of_the_united_states is substantially justified for purposes of sec_7430 see eg 458_f3d_1025 9th cir huffman v commissioner f 2d pincite8 maggie mgmt co v commissioner supra swanson v commissioner supra the estate’s motion seeks only litigation costs therefore we need examine only respondent’s position in this judicial proceeding see sec_7430 in most cases the position_of_the_united_states in a deficiency proceeding in this court is the position set forth in the commissioner’s answer to the petition see eg huffman v commissioner supra 861_f2d_131 5th cir affg 89_tc_79 maggie mgmt co v commissioner supra goertler v commissioner tcmemo_2003_136 rosario v commissioner supra in this case respondent never filed an answer the position_of_the_united_states was established in respondent’s second motion to extend time within which to answer in that motion respondent made a full concession of the tax_deficiency and additions to tax determined in the notice_of_deficiency as mentioned above the second motion was filed approximately days after the petition we agree with respondent that this was reasonable cf 854_f2d_263 7th cir affg tcmemo_1987_52 concession some months after answer filed after respondent had an opportunity to verify information held reasonable 842_f2d_1005 8th cir affg tcmemo_1986_277 concession days after filing of answer although it took several months to draft the stipulation of settlement held reasonable 740_f2d_843 11th cir 11-month delay in conceding case not unreasonable 740_f2d_836 11th cir government's concession of issue months after issue raised held reasonable 92_tc_760 goertler v commissioner supra commissioner’s concession approximately days after receiving documentation sufficient to substantiate the deduction in question held reasonable st john v united_states aftr 2d w d mich an award of attorney’s fees not warranted where the government conceded the issues in count i of a refund_suit within a relatively short_period after being served with the complaint and prior to answering it and the taxpayer conceded the issues in count ii but months passed before the concessions were memorialized in a stipulation w s distrib inc v united_states aftr 2d ustc par big_number e d mich government’s concession of refund_suit for employment_taxes approximately days after the complaint and before answering held reasonable even though the government’s pre-litigation position was unreasonable 830_fsupp_1315 c d cal if the government concedes the petitioner’s case in its answer its conduct is reasonable fn ref omitted furthermore we are not persuaded by the arguments advanced on behalf of the estate that the position_of_the_united_states was not substantially justified sec_7430 the estate’s first argument as mentioned above is that respondent failed to follow normal administrative procedures according to the estate respondent was put on notice of ms white’s death when the estate applied for and was assigned an ei number and when it used that number on income_tax returns signed by the executor the estate complains that when respondent received a form_1099 in the name of ms white respondent failed to follow normal administrative procedures which would have resolved any discrepancies and ended the case with a letter in effect the estate is asking the court to take into account respondent’s actions during the prelitigation administrative proceedings in determining whether the position_of_the_united_states was substantially justified in this judicial proceeding this would be contrary to the bifurcated approach described above under that approach the analysis of the reasonableness of the government’s position is bifurcated into an analysis of the position_of_the_united_states in the administrative proceedings and a separate analysis of its position in the judicial proceedings see kenney v united_states supra pincite huffman v commissioner f 2d pincite8 108_tc_430 106_tc_76 see also church of scientology w united_states v united_states 995_f2d_230 9th cir unpublished opinion thus while conduct prior to the initiation of litigation may color a court’s determination as to whether the position_of_the_united_states was substantially justified the government’s position in the judicial proceeding must be determined with reference only to actions taken after a complaint or petition has been filed according to the estate 111_f3d_1252 5th cir revg tcmemo_1994_550 on remand tcmemo_1998_176 affd 200_f3d_351 5th cir holds that the government’s litigating position includes pre-litigation proceedings our reading of estate of cervin v commissioner supra does not reveal any such holding in any event even if estate of cervin v commissioner supra could be so read we believe that under the decisions of the court to which an appeal of this case would be taken the united_states court_of_appeals for the ninth circuit as under our own decisions sec_7430 requires a bifurcated approach in determining whether the position_of_the_united_states in a judicial proceeding is substantially justified for purposes of sec_7430 see eg kenney v united_states supra huffman v commissioner supra maggie mgmt co v commissioner supra swanson v commissioner supra furthermore we cannot distinguish the cases utilizing the bifurcated approach on the ground that in each of those cases the judicial proceedings were preceded by administrative proceedings in which the taxpayers failed to come forward with the evidence needed to resolve the contested issues the bifurcated approach was formulated because of the language of the statute particularly the definition of position_of_the_united_states set forth in sec_7430 taken as a whole sec_7430 refers to administrative proceedings separately from judicial proceedings and it provides for the possibility that the united_states can take two positions one in the administrative proceedings and another in the judicial proceedings each of which must be separately evaluated see huffman v commissioner supra we do not dispense with the bifurcated approach required by sec_7430 based upon the facts of the case see kenney v united_states supra huffman v commissioner supra the estate also argues that respondent’s performance did not improve after a petition was filed according to the estate respondent lost the administrative file and made numerous requests for extension to file an answer as we see it respondent made one extension request and made a full concession before filing an answer in a second extension request filed days after the petition as stated above we believe that respondent’s position in these judicial proceedings was reasonable for the foregoing reasons petitioner’s motion for litigation costs will be denied


number release date id office uilc cca_2009120821210741 ---------------------------- from ------------------- sent tuesday december pm to ----------------------- cc -------------------- subject re informal sec_6656 imposes a mandatory penalty of of the amount of the underpayment when a taxpayer fails to timely deposit tax due absent reasonable_cause revrul_75_191 provides that the sec_6656 penalty does not apply in the case of failure to deposit taxes which should have been withheld from compensation paid to employees but which were not withheld according to the rev_rul the sec_6656 penalty will only apply to the extent of the employer’s failure to deposit the employer’s share of the fica_taxes the 7th circuit in 547_f3d_773 provides a good discussion of the application of the penalty but interestingly does not cite the rev_rul nor does it limit the penalty to the employer's share is this the type of authority you were looking for if you provide some additional facts i can try to help _____________________________________________