t c memo united_states tax_court sam f ford and ingrid d ford petitioners v commissioner of internal revenue respondent docket no filed date kenneth g gordon and mortimer l laski for petitioners shirley m francis for respondent memorandum findings_of_fact and opinion laro judge petitioners petitioned the court to redetermine a dollar_figure deficiency in their federal_income_tax a related dollar_figure addition_to_tax under sec_1 mr gordon and mr laski entered the case on date joseph m wetzel russel a sandor michael c wetzel and darin christensen entered the case on date on petitioners’ behalf but withdrew on date b a and a related time-sensitive addition_to_tax under sec_6653 in an amended answer respondent asserted an increase in the deficiency of dollar_figure a related dollar_figure addition_to_tax under sec_6653 and a related time-sensitive addition_to_tax under sec_6653 we must decide the following five issues as to whether respondent arbitrarily or erroneously determined that petitioners failed to report net capital_gains of dollar_figure we hold that he did not whether petitioners failed to report other income of dollar_figure million from the sale of securities we hold that they did whether petitioners are liable for additions to tax under sec_6653 and b and if so whether sec_6501 applies to annul the 3-year period of limitations under sec_6501 we hold that they are and that sec_6501 annuls the 3-year period of limitations whether respondent’s determination is barred by judicial or equitable_estoppel we hold that it is not and whether petitioner ingrid doorn ford ms ford is entitled under sec_6015 to full or apportioned relief from unless otherwise indicated section references are to the internal_revenue_code applicable to the relevant years and rule references are to the tax_court rules_of_practice and procedure joint_and_several federal_income_tax liability we hold that she is not i overview findings_of_fact some facts are stipulated we incorporate herein by this reference the parties’ stipulations of fact and the exhibits submitted therewith we find the stipulated facts accordingly petitioners resided in eugene oregon when their petition was filed in this court they timely filed a joint federal_income_tax return return sam f ford mr ford has one child marc j ford marc ford who lives in chicago illinois ms ford was born in indonesia but has lived in the united_states since she has no children in ms ford worked as a secretary and bookkeeper at international tillex in new york new york a business owned by her cousin robert doorn mr doorn while there she exercised a stock_option for dollar_figure of international tillex shares which she sold at a profit she also had a brokerage account with yorkton securities inc she met mr ford during and they married on date during the early months of their marriage petitioners rented a house in beverly hills california in mr ford was self-employed ii mr ford’s background mr ford was convicted of securities fraud in and he was convicted of mail fraud in he served years in prison for the second conviction and was released from allenwood federal prison in date approximately months before his release on date mr ford was ordered to disgorge dollar_figure to the securities_and_exchange_commission sec the court directed that the dollar_figure be paid in installments as mr ford was financially able in while trying to renegotiate his payments to the sec mr ford concealed assets and income from the sec by placing assets in the names of his wife and son mr ford represented to the sec that he owned no stocks or bonds that he had gross_income of dollar_figure in that he had a net_worth of negative dollar_figure throughout and and that he was unemployed and trying to avoid filing for bankruptcy each of these statements was false subsequently mr ford was charged with two felonies first mr ford was charged under u s c sec_1001 with making false statements to the sec second mr ford was charged under sec_7206 with filing a false tax_return for he pled guilty on date to both of these felonies in an allocution incident to this plea that he made under oath and while represented by counsel mr ford stated in petitioners’ federal personal income_tax return i failed to include income in excess of dollar_figure million i had received from the sale of securities belonging to me which i had secreted in accounts in the name of my son and others the income however was reported on my son’s personal tax_return and the tax was fully paid through him i had arranged for the income to be reported on his income_tax return specifically to conceal my earnings in short when i filed my federal personal income_tax return i willfully made a return knowing that the return was not true and correct as to material matters iii canadian stock transactions mr ford’s criminal conviction had its genesis in the early 1980s when mr ford purchased and sold international tillex stock through canadian brokerage accounts which were owned by at least seven nominee corporations namely for door investments ltd pooh bear investments ltd bear pebbles investments ltd canadian american aquafarms international ltd solar aquafarms ltd toronado resources and blackbird investments ostensibly these nominee corporations were owned by either ms ford or marc ford but in reality they were controlled by mr ford each of these nominee corporations traded in shares of international tillex and later beverly development these nominee corporations received income totaling more than candollar_figure million from trading in international tillex stock no taxes were paid_by anyone on this income mr ford initially owned big_number shares of international tillex stock which he held in a brokerage account in the name of marc ford mr ford sold those shares at a profit subsequently but prior to his marriage mr ford invested another dollar_figure in shares of international tillex mr ford owned these shares through accounts in the name of marc ford and ms ford using her maiden name of doorn iv petitioners’ control of the nominee brokerage accounts mr ford through his assistant linda hazlett who acted under his direction and control set up and controlled blackbird investments and its corporate trading account ms ford purchased a house in montecito california in and funds from a blackbird investments account were pledged as security for the purchase loan approximately dollar_figure was also taken from a toronado resources account for a downpayment at the time of the purchase blackbird investments had a brokerage account in canada which traded in international tillex stock on date an additional dollar_figure was wired into ms ford’s bank account in blackbird investments for example received more than dollar_figure million canadian from trading in international tillex stock and toronado resources received income of approximately dollar_figure million canadian from trading in international tillex california for the purpose of making home improvements and buying home furnishings mr ford received dollar_figure from the maryland bank in luxembourg secured_by a blackbird investments trading account and from a toronado resources account these funds were used for ms ford’s purchase of the montecito home and to pay taxes which mr ford owed from the 1970s in date mr ford also authorized a withdrawal from a solar aquafarms ltd account which ms ford used to buy fur coats at the pappas fur co in canada mr ford also transferred money from various canadian corporate accounts derived from international tillex stock transactions into his own bank accounts further in date funds were transferred from at least one of the canadian corporate accounts into a bank account in beverly hills california belonging to ms ford v petitioners’ return on petitioners’ return they did not report that they had received any wages salaries or other compensation eg self-employment_income they did not attach any forms w-2 wage and tax statement to their return the return did not include a schedule c profit or loss from business petitioners reported taxable_income of negative dollar_figure stated they had no income_tax_liability and requested a refund for the full amount of their estimated_tax payments of dollar_figure mr ford knew when petitioners were filing their return that they were not reporting all of their income item on schedule b interest and ordinary dividends asked the following question at any time during the tax_year did you have an interest in or a signature or other authority over a financial_account in a foreign_country such as a bank account securities account or other financial_account petitioners responded that they did not this was false in addition to the canadian brokerage accounts petitioners each opened foreign bank accounts in at the tsb private bank international s a in luxembourg and maintained them throughout vi respondent’s notice_of_deficiency in respondent’s notice_of_deficiency dated date he determined that petitioners had unreported income for specifically respondent determined that petitioners should have reported all of the long-term and short-term_capital_gains and losses from the canadian brokerage accounts in totaling dollar_figure because mr ford was the beneficial_owner of the stocks traded vii respondent’s increase in deficiency respondent amended his answer in this case to assert additional unreported income of dollar_figure million based on statements made under oath by mr ford in his allocution quoted above as to his failure to include income of more than dollar_figure million from the sale of securities petitioners conceded during this case that this unreported income of more than dollar_figure million was not included in the notice_of_deficiency mr ford used marc ford’s name in many of petitioners’ financial transactions during and mr ford had access to bank accounts which were opened under the name of marc ford and he wrote checks from those accounts mr ford owned assets in marc ford’s name and opened brokerage accounts in marc ford’s name during mr ford owned in marc ford’s name shares of international tillex and beverly development viii ms ford’s financial transactions ms ford signed many financial documents relating to these transactions including some relating to ownership in shares of international tillex in she had multiple brokerage accounts and bank accounts in her name and signed documents relating to them during ms ford purchased several items for large amounts of money for instance she purchased fur coats costing approximately dollar_figure from the pappas fur co in british columbia on or about date she purchased a rolls-royce from gregg motors rolls-royce of beverly hills california for dollar_figure which she paid_by checks in the amounts of dollar_figure and dollar_figure ms ford also transferred large sums of money among her various personal accounts during on date she wrote a check for dollar_figure from her personal account at security pacific national bank made payable to security pacific national bank with a notation that it was for a cashier’s check on date ms ford wrote another check from her security pacific account this time payable to cash for dollar_figure on date ms ford deposited a check for dollar_figure from her brokerage account at yorkton securities inc into her account with the national bank of canada on date ms ford wrote a check for dollar_figure to codowell s a in switzerland less than a year after signing her return on date ms ford sent a handwritten letter to the managing director of the tsb private bank international s a in luxembourg requesting that dollar_figure be placed in a high-yield account for her on or about date ms ford purchased a house in montecito california for dollar_figure ms ford borrowed dollar_figure from the maryland bank international n a in luxembourg to make the purchase signing documents for a deed_of_trust to the maryland bank the downpayment was taken from the canadian brokerage account of one of the nominee corporations and the maryland bank loan was guaranteed by another nominee corporation’s trading account ms ford made no monthly payments as to this house during however on the return petitioners claimed a deduction for home mortgage interest of dollar_figure on schedule a itemized_deductions ms ford was a partner in at least one business venture she purchased an interest in the courtyard by marriott ltd partnership on date for dollar_figure comprising dollar_figure in cash and a limited_partner note of dollar_figure the return listed a dollar_figure loss which had been passed through to ms ford from her ownership_interest in the courtyard by marriott limited_partnership i net capital_gains opinion we decide whether respondent arbitrarily or erroneously determined that petitioners failed to recognize dollar_figure in net capital_gains in attributable to more than dollar_figure million of capital_gains for the year petitioners bear the burden of proving that the amount set forth in the notice_of_deficiency is arbitrary or erroneous respondent is presumed correct once he has put forth some probative evidence linking petitioners with the income-producing activity see rule a 290_us_111 596_f2d_358 9th cir revg 67_tc_672 sec_7491 was added to the internal_revenue_code by the internal_revenue_service restructuring and reform act of continued as a threshold matter respondent must show some income source to support his determination weimerskirch v commissioner supra here respondent has established the existence of income from the canadian brokerage accounts in the form of an exhibit presented at mr ford’s fatico5 hearing this exhibit showed over dollar_figure million in capital_gains for on which no tax was paid respondent has also established that both petitioners controlled these accounts and that these corporations received income totaling more than candollar_figure million from trading in international tillex stock the record shows that both petitioners controlled and received income from the nominee corporations mr ford through his assistant linda hazlett who acted under his direction and control set up and controlled blackbird investments and its corporate trading account he and ms ford received dollar_figure from the maryland bank in luxembourg secured continued publaw_105_206 sec c 112_stat_727 effective for court proceedings arising from examinations commencing after date sec_7491 provides that the burden_of_proof shifts to the commissioner in specified circumstances petitioners make no argument that sec_7491 applies to this case and we conclude that it does not as this case predates the enactment of sec_7491 in u s district_court the parties are given an opportunity to present evidence with respect to sentencing u s sentencing guidelines sec 6a1 this evidentiary hearing is held before the sentencing of a convicted criminal see 579_f2d_707 2d cir by the blackbird investments trading account and from a toronado resources account these funds were used by ms ford to purchase the montecito home and for mr ford’s payment of taxes owed from the 1970s in date mr ford authorized a withdrawal from a solar aquafarms ltd account which ms ford used to buy fur coats at the pappas fur co in canada mr ford also transferred money from various canadian corporate accounts derived from international tillex stock transactions into his own bank accounts further in date funds were transferred from at least one of the canadian corporate accounts into a bank account in beverly hills california belonging to ms ford ms ford purchased a house in montecito california in financed by a mortgage for which funds from a blackbird investments account were pledged as security approximately dollar_figure was also taken from a toronado resources account for a downpayment at the time of the purchase blackbird investments had a brokerage account in canada which traded in international tillex stock on date an additional dollar_figure was wired into ms ford’s bank account in california for the purpose of making home improvements and buying home furnishings these facts show that each petitioner had control and made frequent beneficial use of the income in the canadian accounts based on which respondent determined the deficiency and additions to tax stated in his notice_of_deficiency the court concludes that respondent has met his minimal burden of establishing a source_of_income underlying his determination of deficiency see weimerskirch v commissioner supra petitioners urge that we should find respondent’s determination arbitrary and erroneous because respondent lost some of the evidence upon which it was based petitioners’ only evidence in support of their argument is their own testimony we do not find petitioners credible their testimony was inconsistent and implausible as discussed infra we hold that respondent correctly determined unreported net capital_gains of dollar_figure for ii other unreported income we next decide the correctness of the increased deficiency based upon the dollar_figure million of unreported income asserted by respondent in an amended answer respondent bears the burden_of_proof on this issue rule a in support of his increase respondent points the court to mr ford’s previously quoted allocution and his testimony before this court both of which were under oath and made while represented by counsel during his allocution mr ford acknowledged that he had failed to include income in excess of dollar_figure million i had received from the sale of securities belonging to me which i had secreted in accounts in the name of my son and others in this court petitioners conceded that respondent’s notice_of_deficiency did not include this dollar_figure million while petitioners now claim in their brief that respondent erred in calculating this amount we conclude to the contrary mr ford’s words which were spoken under oath on at least two occasions while represented by counsel are clear and unambiguous we conclude that petitioners failed to report this other dollar_figure million from the sale of securities iii fraud we decide whether petitioners are liable for the above- mentioned additions to tax for fraud under sec_6653 and b respondent must prove his determination of fraud by our decision as to this dollar_figure million and the approximately dollar_figure million above is also consistent with our finding that the nominee corporations controlled by petitioners failed to recognize income totaling more than candollar_figure million in relevant part sec_6653 provides in general --if any part of any underpayment as defined in subsection c of tax required to be shown on a return is due to fraud there shall be added to the tax an amount equal to the sum of-- a percent of the portion of the underpayment which is attributable to fraud and b an amount equal to percent of the interest payable under sec_6601 with respect to such portion for the period beginning on the last day prescribed by law for payment of such underpayment determined without regard to any extension and ending on the date of the assessment of the tax or if earlier the date of the continued clear_and_convincing evidence see sec_7454 rule b 80_tc_1111 respondent must prove that petitioners fraudulently intended to underpay their tax see 252_f2d_56 9th cir 94_tc_316 respondent must meet his burden through affirmative evidence because fraud is never imputed or presumed see 55_tc_85 whether fraud exists in a given situation is a factual determination that must be made after reviewing the particular facts and circumstances of the case 96_tc_858 affd 959_f2d_16 2d cir if respondent establishes that some part of an underpayment was due to fraud the entire underpayment is treated as attributable to fraud unless petitioners prove otherwise sec continued payment of the tax determination of portion attributable to fraud if the secretary establishes that any portion of an underpayment is attributable to fraud the entire underpayment shall be treated as attributable to fraud except with respect to any portion of the underpayment which the taxpayer establishes is not attributable to fraud special rule for joint returns in the case of a joint_return this subsection shall not apply with respect to a spouse unless some part of the underpayment is due to the fraud of such spouse b the fraud_penalty may be applied against a spouse only where some part of the underpayment is due to the fraud of the spouse sec_6653 a underpayment_of_tax mr ford has acknowledged under oath and while represented by counsel that petitioners’ return does not report all of their income for and that this unreported income was subject_to significant federal_income_tax this testimony conclusively establishes the existence of a knowing underpayment by petitioners see 683_f2d_1285 9th cir b intent to evade tax fraudulent intent may be proven by circumstantial evidence because direct proof of a taxpayer’s intent is rarely available reasonable inferences may be drawn from the relevant facts 317_us_492 79_tc_995 affd 748_f2d_331 6th cir fraud requires a clear_and_convincing showing that the taxpayer intended to evade a tax known or believed to be owing by conduct intended to conceal mislead or otherwise prevent the collection of tax 398_f2d_1002 3d cir while a conviction under sec_7206 does not in and of itself establish fraudulent intent it is a factor from which we may properly infer fraud where it is combined with other badges_of_fraud considine v united_states supra 301_f2d_51 9th cir affg tcmemo_1959_117 we often rely on certain indicia of fraud in deciding the existence of fraud the presence of several indicia is persuasive circumstantial evidence of fraud beaver v commissioner supra pincite the badges_of_fraud include understatement of income maintenance of inadequate records failure_to_file tax returns implausible or inconsistent explanations of behavior concealment of income or assets and failure to cooperate with tax authorities spies v united_states supra 279_f3d_767 9th cir vacating and remanding 111_tc_57 796_f2d_303 9th cir affg tcmemo_1984_601 we discuss each of the badges as it may relate to our case understatement of income understating income is indicative of fraudulent intent bradford v commissioner supra the existence of an understatement of income was clearly and convincingly established by mr ford’s guilty plea by his testimony in both his criminal case and in this case and by our findings concerning petitioners’ unreported taxable_income for the evidence also establishes that ms ford played an integral part in this understatement of income ms ford testified that she had no knowledge of the understatement but she owned several of the nominee corporations at issue in this case she also recognized the corporate names of pooh bear investments ltd bear pebbles investments ltd for door investments ltd and solar aquafarms ltd ms ford’s recognition of these names and their history she testified that for door was a combination of the names doorn and ford and that pooh bear as well as bear pebbles was named for petitioners’ dogs makes her testimony that she had no knowledge of mr ford’s activities less than credible the court concludes that ms ford had knowledge of and involvement in the fraudulent financial transactions of this factor weighs against petitioners maintenance of inadequate records lack of records is indicative of fraudulent intent id mr ford acknowledged during his testimony in this case that petitioners kept few records as to the subject transactions the records in this case consist of handwritten letters some canceled checks a few banking records from domestic and international accounts and a stock_option exercise agreement by ms ford those records show direct control and management of the canadian accounts by both petitioners this factor weighs against petitioners failure_to_file a tax_return failing to file tax returns is indicative of fraudulent intent bradford v commissioner supra although petitioners did file a tax_return the mere filing of that return does not necessarily weigh in favor of petitioners where as here the return was admittedly filed with an understatement of income and requested a full refund of the dollar_figure paid in estimated_taxes this factor weighs against petitioners implausible or inconsistent explanations of behavior giving implausible or inconsistent explanations of behavior is indicative of fraud id mr ford testified before this court that the canadian accounts held money owned by mr doorn the record however shows that mr ford controlled the accounts in question and repeatedly received financial benefit from them by his own admission taking up to dollar_figure million in this sum was never repaid and there was never an accounting between petitioners and mr doorn the court finds his explanation implausible because the evidence establishes petitioners’ ownership and control of the canadian money ms ford claimed that she did not even notice petitioners’ negative income on their tax_return when she signed it this is not credible given her expenditures in she wrote over dollar_figure in checks to cash purchased a dollar_figure million home purchased a rolls-royce automobile and purchased dollar_figure in canadian furs ms ford testified she did not know why the house in montecito was titled only in her name but it was and she signed multiple documents to make it so she also claimed to have no knowledge as to where she found the money to buy the house in montecito or whether she borrowed money from the maryland bank in luxembourg in fact she personally signed a mortgage on the montecito home with the maryland bank in luxembourg ms ford testified that she does not know where she found the money to write a check to cash for dollar_figure or how the cash was used when asked whether the amount of dollar_figure was wired to her domestic bank account from an account at the maryland bank in luxembourg she responded that it was possible but she could not recall she testified that she did not remember whether in she had an account with the maryland bank in luxembourg or whether she had money wired to her from overseas but the evidence shows she was involved in international money transfers in that year at least one of them from her personal trading account at yorkton securities inc into her personal bank account in california ms ford testified that she does not recall having worked for international tillex in having exercised an international tillex stock_option while there or even what a stock_option is after she was shown a copy of a tillex option agreement she signed on date she testified that she did not recall a relationship with the company she further claimed that she was not aware of mr ford’s criminal charges until sometime after his fatico sentencing hearing ms ford testified that she did not read the question on schedule b of the return which asked whether she had an interest in or signature or other authority over a foreign bank account and she could not confirm whether the question was answered truthfully the record evidence shows that she did have several bank and brokerage accounts overseas in and she even admitted in testimony that she had a bank account at tsb private bank international s b in luxembourg ms ford’s testimony was not truthful she testified under oath that she had no financial experience but she did she testified under oath that she never looked at anything her husband gave her to sign but she did-she later admitted that she knew the names of the nominee corporations and even from where they were derived she stated on the return that she had no overseas bank accounts but she did the court finds ms ford’s testimony inconsistent and implausible because her claims of ignorance are not credible when viewed against her complex and numerous financial dealings in this factor weighs against petitioners concealment of income or assets concealing income or assets is indicative of fraud 796_f2d_303 9th cir mr ford admitted under oath that he secreted securities belonging to him in accounts in the name of my son and others further examination by respondent uncovered money hidden in canadian brokerage accounts which respondent determined belonged to petitioners ms ford played a critical role in mr ford’s concealment of assets taking sole title to their montecito home and to their rolls-royce she also was listed as the owner of several of the nominee corporations at issue and she owned in her own name many investments including shares of international tillex had these assets been owned by mr ford he would have been unable to represent to the sec that he owned no stocks or bonds that he had gross_income of dollar_figure in that he had a net_worth of negative dollar_figure throughout and and that he was unemployed and trying to avoid filing for bankruptcy on the basis of mr ford’s own testimony and upon the evidence before the court the court concludes that petitioners concealed assets from the sec and from respondent ms ford played a sophisticated role in petitioners’ concealment of assets she was not financially naive her testimony to the contrary is flatly contradicted by all the evidence before this court in she was a business partner in the courtyard by marriott limited_partnership a personal investment which indicates some business knowledge on her part that same year she received money from her yorkton securities inc brokerage account and deposited it into her personal bank account she also took title to and paid for a rolls-royce and dollar_figure in canadian furs and she wrote a cashier’s check and a check to cash totaling over dollar_figure these transactions establish that ms ford personally benefited from the fraudulent scheme of which she now claims utter ignorance she sent a handwritten letter to an international banker in luxembourg less than a year after she signed the fraudulent return instructing him in detail to open an overseas bank account in her name such evidence of actions subsequent to the act at issue is admissible where it shows knowledge intent or absence of mistake fed r evid b 485_us_681 the conditional relevancy of subsequent acts is determined by a preponderance_of_the_evidence 69_f3d_1057 10th cir conditionally relevant evidence that criminal defendant charged with possession of marijuana with intent to distribute still had some marijuana in his car over a year after the alleged crime held admissible the court concludes that ms ford was directly involved in the financial transactions of and finds her testimony to the contrary not credible this factor weighs against petitioners cooperation with authorities failure to cooperate with authorities is indicative of fraud mr ford was less than forthcoming with the sec and we do not find any evidence that petitioners were helpful in reconstructing the transactions underlying respondent’s notice_of_deficiency we find this factor weighs against petitioners conclusion on the basis of the above analysis we find that all of the badges_of_fraud weigh against both petitioners we therefore conclude that petitioners intended to evade tax known or believed to be owing c portion of underpayment attributable to fraud respondent has proven clearly and convincingly that a portion of petitioners’ underpayment is attributable to fraud thus the whole underpayment is attributable to fraud except to the extent petitioners prove otherwise sec_6653 petitioners testified that mr doorn and other unnamed europeans owned the money in the canadian accounts mr ford allegedly viewed his role as that of an agent for the europeans and testified that his only interest in the canadian accounts was a 50-percent profit participation once the europeans’ original investment was recouped thus he testified the moneys which petitioners used from these accounts were loans repayable to mr doorn and the europeans mr ford admitted under oath and while represented by counsel that petitioners have no documents or other evidence to support these assertions he attempted to rationalize this lack of records by saying that it was family it was informal contrary to mr ford’s testimony the evidence shows a consistent pattern of ownership and control of these funds by both petitioners as discussed above at trial mr ford testified that he received at least a few hundred thousand dollars and perhaps as much as a million dollars in purported loans from the canadian accounts which he admittedly never repaid he also testified that there was never an accounting between petitioners and mr doorn petitioners did not call mr doorn marc ford or any of their accountants as witnesses it is well established that the failure of one party to introduce evidence within his or her possession leads to the inference that the information if produced would be favorable to the opposing party 6_tc_1158 affd 162_f2d_513 10th cir see also 89_tc_1063 failure of witness to testify to fact peculiarly within his knowledge suggests that testimony would have been unfavorable affd 886_f2d_1237 9th cir on the basis of this evidence and his lack of credibility while testifying the court is not persuaded by mr ford’s testimony and finds that petitioners have failed to show that any of the underpayment_of_tax was not due to fraud d period of limitations under sec_6501 after a return is filed the commissioner generally ha sec_3 years within which to assess a deficiency in a civil tax case sec_6501 however in the case of a false_or_fraudulent_return that is filed with the intent to evade tax the tax may be assessed at any time sec_6501 since we conclude that petitioners’ return was such a return we also conclude the period for assessment remains open id see also considine v united_states f 2d pincite iv estoppel petitioners urge in their opening brief that the court apply judicial or equitable_estoppel to overturn respondent’s determination neither estoppel argument is timely presented rule requires that all affirmative defenses be set forth in the pleadings 105_tc_436 rule b requires that concise assignments of error be stated in the initial pleadings for each error asserted and states that any issue not raised in the assignments of error shall be deemed to be conceded because petitioners have failed properly to raise the issue of judicial or equitable_estoppel we decline to allow them to raise it now v sec_6015 relief ms ford requests sec_6015 relief from joint_and_several_liability spouses filing a joint federal_income_tax return are generally jointly and severally liable for the tax_shown_on_the_return or found to be owing sec_6013 114_tc_276 in certain cases however an individual filing a joint_return may avoid joint_and_several_liability for tax including interest penalties and other_amounts by qualifying for relief under sec_6015 the three types of relief prescribed in that section are full or apportioned relief under sec_6015 full or apportioned relief proportionate relief under sec_6015 proportionate relief and equitable relief under sec_6015 equitable relief ms ford claims entitlement only to relief under sec_6015 ms ford bears petitioners would still not prevail even if these issues were properly before us contrary to petitioners’ assertions on this issue the fact that marc ford may have paid tax on the referenced dollar_figure million does not mean that respondent is estopped from determining the dollar_figure million is rightfully taxed to petitioners nor would a finding that petitioners were prevented by respondent’s actions from filing an amended_return for on which they would have reported the disputed income serve to estop respondent from now asserting fraud a taxpayer who files a fraudulent return does not purge the fraud by a subsequent voluntary disclosure 464_us_386 the burden of proving that claim see 119_tc_306 affd 101_fedappx_34 6th cir see also rule a sec_6015 provides relief from joint_and_several_liability to the extent that the liability is attributable to an understatement_of_tax to be eligible for this relief a requesting spouse needs to satisfy the following five elements of sec_6015 a a joint_return has been made for a taxable_year b on such return there is an understatement_of_tax attributable to erroneous items of individual filing the joint_return c the other individual filing the joint_return establishes that in signing the return he or she did not know and had no reason to know that there was such understatement d taking into account all the facts and circumstances it is inequitable to hold the other individual liable for the deficiency in tax for such taxable_year attributable to such understatement and e the other individual elects in such form as the secretary may prescribe the benefits of this subsection the requesting spouse’s failure to meet any one of these requirements prevents him or her from qualifying for sec_6015 relief alt v commissioner supra pincite respondent concedes that the elements of subparagraphs a and e have been satisfied and focuses on the remaining subparagraphs respondent argues that ms ford meets none of these requirements we consider only the second of these three subparagraphs because we agree with respondent that its requirements have not been met we conclude that ms ford knew or had reason to know of the underpayment at the time she signed the return so as to be precluded from receiving her requested relief under sec_6015 credible_evidence shows that ms ford was intimately involved in the convoluted financial transactions which transpired in that she played a crucial role in the utilization of nominee corporations and brokerage accounts and that she played a crucial role in the concealment of assets acquired in as previously discussed the previously discussed inconsistencies in her testimony piled one upon the next also make her testimony not credible to the court ______________________________ all of the parties’ arguments have been considered we have rejected as meritless those not discussed herein accordingly decision will be entered under rule


internal_revenue_service number release date index number ---------------------------------------------------------- ----------------------- ------------------------------------------------ --------------------------------------- ----------------------------- in re ruling_request 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 b05 plr-105704-11 date august taxpayer -------------------------------------------------- ------------------------------------------------ llc -------------------------------------------------- -------------------------------------------------- llc -------------------------------------------------- -------------------------------------- state ------------------------------------------- grant program ------------------------------------ department ------------------------------------------------------------------------- date date date ------------------ ------------------- -------------------- building ------------------------------------------------------------------------------------------------------------ ---------------- addresses ------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ a --------------- plr-105704-11 dear ---------------- this letter responds to a letter dated date submitted on behalf of taxpayer requesting a ruling under sec_118 of the internal_revenue_code taxpayer represents the following taxpayer is the parent_corporation of an affiliated_group_of_corporations that files a consolidated federal_income_tax return and is the single-member owner of llc a disregarded_entity for federal_income_tax purposes llc is the single-member owner of llc a disregarded_entity for federal_income_tax purposes state established the grant program run by department for the purpose of securing job-creating economic development opportunities including the expansion or preservation of existing industry and the attraction of economic development prospects within state department and llc entered into a contract governing the terms and conditions of a grant under the grant program on date the terms and conditions included that llc use the grant for construction and renovation costs engineering architecture costs subject_to limitations and for the purchase of office furniture fixtures machinery and equipment as part of llc 2’s plan to centralize and expand its business operations at addresses llc could not use the grant for any other activities without first obtaining consent from department on date llc submitted a payment request to department requesting reimbursement of costs incurred in the construction of building at one of the approved addresses in the amount of a which amount is equal to the full amount of the grant awarded on date department made the grant payment of a to llc taxpayer requests a ruling that the grant payment of a received from state pursuant to the contract entered into between the parties is a nonshareholder contribution_to_capital under sec_118 which is excludable from taxpayer’s gross_income under sec_61 sec_61 provides that except as otherwise provided in subtitle a income taxes gross_income means all income from whatever source derived sec_1_61-1 of the income_tax regulations provides that gross_income means all income from whatever source derived unless excluded by law gross_income includes income realized in any form whether in money property or services the supreme court in 348_us_426 held that gross_income includes instances of undeniable accessions to wealth clearly realized and over which the taxpayers have complete dominion plr-105704-11 the supreme court in 292_us_435 held that w hether and to what extent deductions shall be allowed depends on legislative grace and only as there is clear provision therefor can any particular deduction be allowed obviously therefore a taxpayer seeking a deduction must be able to point to an applicable statute and show that he comes within its terms id sec_118 provides that in the case of a corporation gross_income does not include any contribution_to_the_capital_of_the_taxpayer sec_1_118-1 provides the following in the case of a corporation sec_118 provides an exclusion_from_gross_income with respect to any contribution of money or property to the capital of the taxpayer thus if a corporation requires additional funds for conducting its business and obtains such funds through voluntary pro_rata payments by its shareholders the amounts so received being credited to its surplus account or to a special account such amounts do not constitute income although there is no increase in the outstanding shares of stock of the corporation in such a case the payments are in the nature of assessments upon and represent an additional price paid for the shares of the stock held by the individual shareholders and will be treated as an addition to and as a part of the operating capital of the company sec_118 also applies to contributions to capital made by persons other than shareholders for example the exclusion applies to the value of land or other_property contributed to a corporation by a governmental_unit or by a civic group for the purpose of inducing the corporation to locate its business in a particular community or for the purpose of enabling the corporation to expand its operating facilities however the exclusion does not apply to any money or property transferred to the corporation in consideration for goods or services rendered or to subsidies paid for the purpose of inducing the taxpayer to limit production see sec_362 for the basis_of_property acquired by a corporation through a contribution to its capital by its stockholders or by nonstockholders emphasis added the legislative_history to sec_118 indicates that the exclusion_from_gross_income for nonshareholder contributions to capital of a corporation was intended to apply to those contributions that are neither gifts because the contributor expects to derive indirect benefits nor payments for future services because the anticipated future_benefits are too intangible the legislative_history also indicates that the provision was intended to codify existing law that had developed through administrative and court decisions on the subject h_r rep no 83d cong 2d sess s rep no 83d cong 2d sess plr-105704-11 the legislative_history of sec_118 provides in part the following this sec_118 in effect places in the code the court decisions on this subject it deals with cases where a contribution is made to a corporation by a governmental_unit chamber of commerce or other association of individuals having no proprietary interest in the corporation in many such cases because the contributor expects to derive indirect benefits the contribution cannot be called a gift yet the anticipated future_benefits may also be so intangible as to not warrant treating the contribution as a payment for future services emphasis added s rep no 83d cong 2d sess one of the court decisions on this subject referred to in the committee reports is detroit edison co v commissioner 391_us_98 the facts involved the payment of cash to the taxpayer by prospective customers to cover the estimated cost of construction of the extension of the taxpayer’s electric utility service facilities to the prospective customers the taxpayer contended that the payments were gifts or contributions to capital the court disagreed holding that t he payments were to the customers the price of the service id pincite the court reasoned that it overtaxes the imagination to regard the farmers and other customers who furnished these funds as makers either of donations or contributions to the company the transaction neither in form nor in substance bore such a semblance id pincite another court decision on this subject is 339_us_583 the facts involved the payment of cash and the transfer of other_property to the taxpayer by certain community groups as an inducement to the location or expansion of the taxpayer’s factory operations in the communities the taxpayer contended that the properties so acquired were gifts or contributions to capital the court agreed holding that the assets transferred to petitioner by the community groups represented ‘contributions to capital ’ id pincite the court reasoned that t he contributions to petitioner were provided by citizens of the respective communities who neither sought nor could have anticipated any direct service or recompense whatever their only expectation being that such contributions might prove advantageous to the community at large id pincite in 412_us_401 the court in determining whether a taxpayer was entitled to depreciate the cost of certain facilities that had been funded by the federal government held that the governmental subsidies were not contributions to the taxpayer’s capital the court recognized that the holding in detroit edison co had been qualified by its decision in brown shoe co the court in chicago burlington quincy railroad co found that the distinguishing characteristic between those two cases was the differing purpose motivating the respective transfers the court stated that plr-105704-11 it seems fair to say that neither in detroit edison nor in brown shoe did the court focus upon the use to which the assets transferred were applied or upon the economic and business consequences for the transferee corporation instead the court stressed the intent or motive of the transferor and determined the tax character of the transaction by that intent or motive thus the decisional distinction between detroit edison and brown shoe rested upon the nature of the benefit to the transferor rather than to the transferee and upon whether that benefit was direct or indirect specific or general certain or speculative these factors of course are simply indicia of the transferor’s intent of motive id pincite the court reconciles detroit edison and brown shoe on the ground that in the former the transferor intended no contribution to the transferee’s capital whereas in the latter the transferors did have that intent see id pincite in addition the court stated that other characteristics of a contribution_to_capital are implicit in the two cases that do focus upon the use to which the assets transferred were applied or upon the economic and business consequences for the transferee corporation the court listed the following characteristics of a nonshareholder contribution_to_capital it certainly must become a permanent part of the transferee’s working_capital structure it may not be compensation such as a direct payment for a specific quantifiable service provided for the transferor by the transferee it must be bargained for the asset transferred foreseeably must result in benefit to the transferee in an amount commensurate with its value and the asset ordinarily if not always will be employed in or contribute to the production of additional income and its value assured in that respect id pincite in the present case all the requirements of chicago burlington quincy railroad have been met accordingly we conclude the grant payment of a received from state pursuant to the contract entered into between the parties is a nonshareholder contribution_to_capital under sec_118 which is excludable from taxpayer’s gross_income under sec_61 no opinion is expressed or implied regarding the application of any other provisions of the code or regulations this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent plr-105704-11 in accordance with the power_of_attorney on file a copy of this letter is being sent to taxpayer’s authorized representatives sincerely yours nicole r cimino senior technician reviewer branch office of associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes 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 plr-147899-09 date date re ---------------------------------------------- ---------------------------------------------------------- -------------- legend ----------------- ------------- ------- ------------------------- ---------------------------- ---------------------------- ------------------------- -------------------------------- ------------------------ --------------------- ---------------------------------- --------------------------------------------------------------------------------- ----------------------------------------------------------- ------------------------------------------------------ decedent state x year spouse child child child grandchild grandchild grandchild grandchild trust charity charity ----------------------------------------------------------- year year greatgrandchild --------------------------------- greatgrandchild ---------------------------- greatgrandchild ------------------------------ greatgrandchild ------------------------------------------ greatgrandchild ----------------------------- greatgrandchild ------------------------------ greatgrandchild ------------------------- year ------- ------- -------- trust -------------------------------------------------------------------------------- plr-147899-09 -------------------------------------------------------------- -------------------------------------------------- trust -------------------------------------------------------------- -------------------------------------------------- trust -------------------------------------------------------------- -------------------------------------------------- trust ----------------------------------------------------------------- -------------------------------------------------- date state y ----------------- -------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- dear --------------- this responds to a letter dated date and other correspondence requesting rulings regarding the income gift and generation-skipping_transfer gst tax consequences of a proposed judicial construction of trust to permit proposed sales of remainder interests in trust facts the facts submitted and representations made are as follows decedent a resident of state x died testate in year a date prior to article sixth of decedent's will created trust to benefit child child and his issue child and her issue and spouse under the will upon the termination of trust the trustee will distribute the corpus and undistributed_income to charity and charity trust will terminate upon the last to die of spouse child child child grandchild grandchild grandchild grandchild greatgrandchild greatgrandchild and greatgrandchild spouse child child and child are deceased child had no issue child is survived by grandchild grandchild grandchild and grandchild collectively grandchildren and eleven greatgrandchildren collectively greatgrandchildren which includes greatgrandchildren through under the will grandchildren and greatgrandchildren are the current income beneficiaries of trust this private_letter_ruling request pertains to the proposed sales of interests in trust by greatgrandchild greatgrandchild greatgrandchild and greatgrandchild the will also contains a spendthrift_clause which provides that each beneficiary hereunder is hereby restrained from anticipating encumbering alienating or in any other manner assigning his or her interest or estate in either principal or income and is without power to do so nor shall such interest or plr-147899-09 estate be subject_to his or her liabilities or obligations nor to judgment or other legal process bankruptcy proceedings or claims of creditors or others all income and principal or either of them shall be payable and deliverable only and personally to the respective beneficiaries entitled thereto in year pursuant to a year court order and year settlement among the parties charity sold its remainder_interest in trust to greatgrandchildren for purposes of this ruling after the sale greatgrandchild greatgrandchild and greatgrandchild each owned a percent remainder_interest in trust and greatgrandchild owned a percent remainder_interest in trust in year pursuant to a court order greatgrandchild sold a percent remainder_interest in trust to other relatives the year court order stated that the spendthrift_clause of trust does not prohibit the sales because the clause applies only to beneficial interests arising under the terms of decedent’s will and does not apply to interests acquired after decedent’s death under the year settlement greatgrandchild greatgrandchild and greatgrandchild each propose to sell all or part of his or her percent remainder_interest in trust to trust trust and trust respectively trust trust and trust are trusts that were previously established by grandchild to benefit greatgrandchild greatgrandchild and greatgrandchild respectively greatgrandchild proposes to sell all or part of her percent remainder_interest in trust to trust trust was previously established by grandchild to benefit greatgrandchild on the date of the proposed sales of the remainder interests in trust all of the assets of trust will be marketable_securities with the fair_market_value of the trust assets determined by prices listed on an established exchange each proposed seller intends to sell his or her remainder_interest in trust for a sales_price equal to i the fair_market_value of trust property as of the date of sale multiplied by ii the sec_7520 actuarial remainder factor then in effect and multiplied again by iii the fraction representing the portion of the entire remainder subject_to the sale the purchase_price will be paid to the respective greatgrandchild in cash under the terms of trust trust and trust each greatgrandchild is the primary beneficiary of his or her respective trust during his or her life subject_to certain withdrawal rights each trustee may in the trustee’s uncontrolled discretion at any time or times and for any reason pay any part of the income and principal of the trust to any among the primary beneficiary and the primary beneficiary’s issue whenever born moreover the trustee may add the spouse of the primary beneficiary or the spouse of any of the primary beneficiary’s issue to whom net_income and or principal may be paid any net_income not distributed will be added to the principal of the trust a primary beneficiary is granted a testamentary special power to appoint the trust property to any persons in a specified class trust trust and trust will terminate unless sooner terminated upon the first to occur of the death of the primary beneficiary and all of his plr-147899-09 or her issue whenever born or the expiration of ninety years beginning on date upon termination the trustee shall distribute the remaining principal of the trust in accordance to the primary beneficiary’s exercise of the special_power_of_appointment or in default of such exercise to the then living issue of the primary beneficiary by right of representation if there are no living issue of the primary beneficiary then to the living issue of grandchild by right of representation under the terms of trust greatgrandchild is the primary beneficiary of trust during her life the trustee shall pay so much or all of the income and principal of a primary beneficiary’s trust to the primary beneficiary for the health support and maintenance in reasonable comfort and education of the primary beneficiary during the primary beneficiary’s lifetime a primary beneficiary is granted a testamentary special power to appoint in trust that beneficiary’s share to any persons and organizations in a specified class any part of that share the primary beneficiary fails to appoint will be divided per stirpes among the primary beneficiary’s living descendants or if none then per stirpes among the living descendants of the nearest ancestor of the primary beneficiary who is a descendant of grandchild who has one or more descendants then living or if also none then per stirpes among grandchild 4’s then living descendants if there are no living descendants of grandchild then the remaining trust assets will be distributed to a class of named nieces and nephews or charities as the trustee shall choose trust is subject_to state y law which does not follow the common_law rule_against_perpetuities it is represented that no additions constructive or otherwise have been made to trust subsequent to date and that other than the earlier court order and settlement_trust has not been amended or otherwise altered in any manner since date the trustee of trust petitioned the appropriate court for an order that construes the spendthrift provision of trust to permit the proposed sales the court‘s order states that the spendthrift_clause of trust does not prohibit the proposed sales of the purchased remainder interests because the spendthrift_clause does not apply to the interests acquired after decedent’s death under the year settlement but only to beneficial interests arising under the terms of decedent’s will itself the trustee has requested the following rulings the court construction of the spendthrift_clause and the provisions of trust to allow the proposed sales of remainder interests in trust will not affect the exempt status of trust for gst tax purposes the proposed sales of remainder interests in trust will not affect the exempt status of trust for gst tax purposes plr-147899-09 the proposed sales of remainder interests in trust will not result in any taxable_gifts for federal gift_tax purposes as to the buyers or sellers of such interests the court approval of the proposed sales of remainder interests in trust will not result in the recognition of gain_or_loss to trust or any trust beneficiaries a gain_or_loss for each of the proposed sales will equal the difference between the amount_realized for the remainder_interest and the adjusted_basis of the remainder_interest law and analysis ruling sec_1 sec_2601 of the internal_revenue_code imposes a tax on each generation- skipping transfer which includes under sec_2611 a taxable_distribution a taxable_termination and a direct_skip sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption amount which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable under sec_2652 for purposes of chapter the term transferor means the decedent in the case of any property subject_to tax imposed by chapter and the donor in the case of any property subject_to tax imposed by chapter the individual with respect to whom property was most recently subject_to federal estate or gift_tax is the transferor of that property for purposes of chapter sec_26_2652-1 of the generation-skipping_transfer_tax regulations thus an individual may be a transferor even though there is no transfer of property under local law at the time the federal estate or gift_tax applies sec_26_2652-1 provides that for purposes of chapter a transfer is subject_to federal gift_tax if a gift_tax is imposed under sec_2501 without regard to exemptions exclusions deductions and credits under a of the tax_reform_act_of_1986 act the generation-skipping_transfer_tax is generally applicable to generation-skipping transfers made after date under b a of the act and sec_26_2601-1 the tax does not apply to any generation-skipping_transfer from a_trust if the trust was irrevocable on date and no addition actual or constructive was made to the trust after that date under sec_26_2601-1 any trust in existence on date will be considered irrevocable unless the settlor had a power that would have caused inclusion of the trust in his or her gross_estate under sec_2038 or sec_2042 if the settlor had died on date plr-147899-09 sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax will not cause the trust to lose its exempt status sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy paragraph b i a b or c of this section by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer in the present case trust is not subject_to gst tax because it became irrevocable before date it is represented that no additions constructive or otherwise have been made to trust subsequent to that date the court construction of the spendthrift_clause and the provisions of trust to allow the proposed sales of remainder interests in trust and the proposed sales of remainder interests in trust will not shift any beneficial interests in trust to a lower generation and will not extend the time for vesting of any beneficial_interest in trust beyond the period provided for in the original trust accordingly based upon the facts submitted and the representations made and pursuant to sec_26_2601-1 we conclude that the court construction of the spendthrift_clause and the provisions of trust to allow the proposed sales of remainder interests in trust will not affect the exempt status of trust for gst tax purposes further the proposed sales of remainder interests in trust will not affect the exempt status of trust for gst tax purposes we note that under sec_2652 grandchild is the transferor of trust trust and trust and grandchild is the transferor of trust for gst tax purposes ruling sec_2501 imposes a tax on the transfer of property by gift by an individual sec_2511 provides that the tax imposed by sec_2501 applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible plr-147899-09 sec_2512 provides that if a gift is made in property the value thereof at the date of the gift shall be considered the amount_of_the_gift sec_2512 provides that where property is transferred for less than an adequate_consideration in money or money’s worth then the amount by which the value of the property exceeded the value of the consideration is deemed a gift under sec_25_2512-5 of the gift_tax regulations in general the fair_market_value of remainders transferred by gift is the present_value of the remainders determined by use of the appropriate sec_7520 actuarial factor sec_7520 provides that the value of an annuity any interest for life or a term of years or any remainder_interest or reversionary_interest is determined under tables prescribed by the secretary and by using an interest rate rounded to the nearest two-tenths of one percent equal to percent of the applicable federal midterm rate for the month in which the valuation_date falls in the proposed sales of remainder interests in trust the sales_price of the remainder interests will equal the fair_market_value of trust assets on the date of sale multiplied by the sec_7520 actuarial remainder factor then in effect and then multiplied by the fraction representing that portion of the remainder_interest subject_to the sale the sales_price will be paid in cash based upon the facts submitted and the representations made we conclude that the proposed sales of remainder interests in trust will not result in any taxable_gifts for federal gift_tax purposes as to the buyers or sellers of such interests ruling sec_61 provides that gross_income means all income from whatever source derived sec_61 provides that gross_income includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in such section for determining loss over the amount_realized sec_1001 provides that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received sec_1001 provides that except as otherwise provided in subtitle a the entire amount of the gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized plr-147899-09 sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or as loss sustained an exchange of property results in the realization of gain_or_loss under sec_1001 if the properties are materially different 499_us_554 in cottage savings the supreme court held that mortgage loans made to different obligors and secured_by different homes embody distinct legal entitlements and that the taxpayer realized losses when it exchanged participation interests in different loans id in defining what constitutes a material difference for purposes of sec_1001 the court stated that properties are different in the sense that is material to the code so long as their respective possessors enjoy legal entitlements that are different in_kind or extent id pincite the issue for purposes of this ruling is whether the remaindermen of trust would have the same property interests and legal entitlements as a result of the court’s determination that the spendthrift_clause does not prohibit the proposed sales of the remainder interests it is represented that the court has entered a preliminary order determining that the spendthrift_clause does not prohibit the proposed sales the court’s preliminary order becomes effective only upon the issuance of the requested letter_ruling because the court’s construction of the spendthrift_clause does not change the property interests and legal entitlements of the remaindermen the court’s construction of the spendthrift_clause does not give rise to a realization of income to the remaindermen or trust under sec_61 or sec_1001 ruling sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in such section for determining loss over the amount_realized sec_1001 provides that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received sec_1001 provides that except as otherwise provided in subtitle a the entire amount of the gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sec_1001 provides that in determining gain_or_loss from the sale_or_other_disposition of a term_interest_in_property that portion of the adjusted_basis of such plr-147899-09 interest which is determined pursuant to sec_1014 sec_1015 or sec_1041 to the extent that such adjusted_basis is a portion of the entire adjusted_basis of the property shall be disregarded the term term_interest_in_property means a life interest in property an interest in property for a term of years or an income_interest in a_trust sec_1_1001-1 provides that the term term_interest_in_property does not refer to remainder or reversionary interests in the property itself or other interests in property which will ripen into ownership of the entire property upon termination or failure of a preceding term_interest sec_1012 generally provides that the basis_of_property shall be the cost of the property sec_1_1012-1 defines cost to be the amount_paid for the property in cash or other_property in the present case greatgrandchild greatgrandchild greatgrandchild and greatgrandchild purchased their remainder interests in trust from an unrelated third party charity consequently under sec_1012 the basis of each of their respective interests is the amount that each paid for the property each would recognize gain from the sale of the remainder_interest equal to the difference between the amount_realized over the adjusted_basis of the remainder_interest we express no opinion on whether the proposed sales are authorized under trust or applicable state laws 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 the ruling s in this letter pertaining to the federal estate and or generation-skipping_transfer_tax apply only to the extent that the relevant sections of the internal_revenue_code are in effect during the period at issue 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 the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative plr-147899-09 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely lorraine e gardner senior counsel branch passthroughs special industries enclosures cc