o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date number release date conex-126126-13 uil 5000a the honorable kenny marchant u s house of representatives washington dc dear mr marchant i am responding to your letter dated date you asked for our review and analysis of the written and oral comments that your constituent ---------------------------- -------------- provided on the proposed_regulations on the requirement to maintain minimum_essential_coverage under sec_5000a of the internal_revenue_code the proposed_regulations were published in the federal_register on date in a written comment submitted on date and in testimony given in the public hearing held on date -------------------- described a situation in which a noncustodial_parent of a child fails to provide health care coverage for the child as required by a court order -------------------- stated that she as the child’s custodial_parent who is allowed to claim the child as a dependent should not be liable for the shared responsibility payment resulting from the noncustodial parent’s failure to comply with a court order instead she requested that the internal_revenue_service hold the noncustodial_parent in this situation liable in general under sec_5000a a taxpayer is responsible for his or her dependents’ health care coverage we understand the difficulties that taxpayers in ----------------------- situation face and appreciate her taking the time to testify at the hearing we will carefully consider her comments as we consider all comments received on these proposed_regulations we note that sec_5000a does provide an exemption under the authority of the department of health and human services hhs for an individual who is determined to have suffered a hardship with respect to the capability to obtain coverage under a qualified_health_plan hhs has released guidance providing that in determining what constitutes a hardship an exchange may consider the circumstance in which a child is conex-126126-13 ineligible for medicaid and the children’s health insurance program chip and a party other than the party who expects to claim the child as a tax dependent is required by court order to provide medical support for your reference i am enclosing a copy of the hhs guidance i hope this information is helpful if you have any questions please contact me or ------------------------ identification_number -------------- at --------------------- sincerely andrew j keyso associate chief_counsel income_tax and accounting enclosure hhs guidance on hardship exemption criteria and special enrollment periods date


internal_revenue_service number release date index number ------------------------- -------------------- -------------------------------------- legend trust 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 b07 plr-139965-06 date date --------------------------------------------------------------------------------------------------- ----------------------- -------- ------------------------------------------------ state grantor --------------------- date ---------------- court date ------------------ child -------------------------- date ----------------------- child --------------------------------- date ------------------ date ----------------------- date --------------------------- statute ------------------------------------------------------------------------------------- dear ----- correspondence requesting income gift and generation-skipping_transfer gst tax rulings with respect to the proposed conversion of trust to a total_return_trust under state law on date at the request of the trustees court divided the irrevocable_trust into four separate trusts on date trust is one of the four trusts created by the date court order and is held for the benefit of child and his descendants at the request of the this letter responds to your letter dated date and subsequent the facts and representations are as follows grantor created an irrevocable_trust under the terms of the original trust agreement and the date court order after under the terms of the original trust agreement and the date court order trust plr-139965-06 trustees court modified the trustee succession provisions with respect to trust on date date date and date are before date no additions actual or constructive have been made to trust since date trust is governed by state law child 1’s death child may direct the payment of up to one-third of the net_income in his last will and testament to his surviving_spouse the balance of the net_income or all of the net_income if none becomes payable to a surviving_spouse shall be paid to child 1’s issue from time to time surviving per stirpes child may by will change the proportion in which his issue shall share in the net_income by exercise of a limited_power_of_appointment if child dies without issue before the termination of trust the trust assets shall be added to the shares of the remaining children in the same proportion that such shares bear to each other shall continue until twenty years after the death of the last surviving of eight named individuals child was the last surviving named individual child died on date upon termination of trust the trust estate shall be paid to the person s then in receipt of the income if a spouse is currently receiving income a share of trust necessary to produce such income shall continue to be held in trust during the spouse’s life but the person s who would have received the income shall immediately have a vested interest in the principal withheld the trustees may choose to purchase an annuity for the spouse and make immediate distribution of the entire trust estate child exercised his right to change the percentage of net_income paid to his issue but did not direct payment of any net_income to a surviving_spouse trust income is currently distributed in accordance with the percentages set out in child 1’s will state statute permits a court to convert a_trust to a total_return_trust or unitrust if the court determines that the conversion will enable the trustee to better carry out the purposes of the trust and that the conversion is in the best interests of the beneficiaries statute provides that following conversion of a_trust to a total_return_trust income in the governing instrument means an annual amount equal to a percentage of the net fair_market_value of the total trust assets averaged over a three-year period finally statute provides that a court has the power to determine the percentage of the total value of the trust assets to be distributed from a total_return_trust trust to a total_return_trust under statute and that court approve a distribution percentage from trust after the conversion the complaint further requests the court the trustees have filed a complaint in court requesting that the court convert child died on date under article three of his will executed on date sec_2511 provides that the tax imposed by sec_2501 applies whether the sec_2501 of the internal_revenue_code imposes a tax on the transfer of plr-139965-06 declare that on termination the trust assets will be distributed to the persons then in receipt of a portion of the unitrust_amount in the same proportions as the unitrust_amount is then being paid after the conversion the unitrust_amount will be divided among the beneficiaries as directed in child 1’s will the trustees have requested rulings that the proposed conversion of trust to a total_return_trust will not cause trust to lose its status as exempt from the gst tax will not cause any beneficiary to have made a gift_for gift_tax purposes and will not cause trust or any beneficiary to realize capital_gain from an exchange of a_trust interest for income_tax purposes ruling sec_1 and property by gift by an individual transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible the date of the gift shall be considered the amount_of_the_gift distribution a taxable_termination and a direct_skip under b a of the tax_reform_act_of_1986 and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the generation-skipping_transfer_tax provisions do not apply to any generation-skipping_transfer under a_trust as defined in sec_2652 that was irrevocable on date however this exemption does not apply if additions actual or constructive are made to the trust after date regulations provides that any trust in existence on date will be considered an irrevocable_trust except as provided in sec_26_2601-1 or c which relate to property includible in a grantor’s gross_estate under sec_2038 and sec_2042 judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax under sec_26_2601-1 or sec_2512 provides that if a gift is made in property the value thereof at sec_2611 defines the term generation-skipping_transfer as a taxable sec_26_2601-1 provides rules for determining when a modification sec_26_2601-1 of the generation-skipping_transfer_tax sec_2601 imposes a tax on every generation-skipping_transfer sec_26_2601-1 provides that a modification of the governing plr-139965-06 hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status in general unless specifically provided otherwise the rules contained in sec_26_2601-1 are applicable only for purposes of determining whether an exempt trust retains its exempt status for generation-skipping_transfer_tax purposes unless specifically noted the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of gain for purposes of sec_1001 instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy sec_26_2601-1 b or c 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 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 to determine whether a modification of an irrevocable_trust will shift a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of the modification is measured against the effect of the instrument in existence immediately before the modification if the effect of the modification cannot be immediately determined it is deemed to shift a beneficial_interest in the trust to a 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 a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust in addition administration of a_trust in conformance with applicable local law that defines the term income as a unitrust_amount or permits a right to income to be satisfied by such an amount or that permits the trustee to adjust between principal and income to fulfill the trustee’s duty_of impartiality between income and principal beneficiaries will not be considered to shift a beneficial_interest in the trust if applicable local law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust and meets the requirements of sec_1_643_b_-1 of the income_tax regulations that is otherwise exempt from the gst tax because it was irrevocable prior to sec_26_2601-1 example considers a situation where a_trust sec_26_2601-1 provides that for purposes of this section a the trustees represent that trust was irrevocable on date and the facts in this case are similar to those set forth in example of sec_26 plr-139965-06 date provides that trust income is payable to a for life and upon a’s death the remainder is to pass to a’s issue per stirpes state x the situs of the trust then amends its income and principal statute to define income as a unitrust_amount of of the fair_market_value of the trust assets valued annually the example concludes that the administration of the trust in accordance with the state statute defining income to be a unitrust_amount will not be considered to shift a beneficial_interest in the trust therefore the trust will not be subject_to the provisions of chapter further under the facts of the example no trust_beneficiary will be treated as having made a gift_for federal gift_tax purposes and neither the trust nor any trust_beneficiary will be treated as having made a taxable_exchange for federal_income_tax purposes that there were no additions to trust after date b i e which provides that the conversion of an income_interest to a unitrust_interest pursuant to state statute will not be considered to shift a beneficial_interest in a_trust for gst purposes example further concludes that no trust_beneficiary will be treated as having made a gift_for federal gift_tax purposes and neither the trust nor any trust_beneficiary will be treated as having made a taxable_exchange for federal_income_tax purposes provided the proposed conversion meets the requirements of state statute and an order from state court approving the conversion is obtained we conclude that the conversion of the income_interest in trust to a unitrust_interest will not be considered to shift any beneficial_interest in trust and therefore will not cause trust to lose its status as exempt from the gst tax we further conclude that the proposed modification will not result in any beneficiary being treated as having made a taxable gift_for federal gift_tax purposes ruling whatever source derived including gains derived from dealings in property and income from an interest in an estate_or_trust shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis provided in such section for determining loss over the amount_realized under sec_1_1001-1 of the income_tax regulations the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially in_kind or in extent is treated as income or loss sustained under sec_1001 of the code gain from the sale_or_other_disposition of property sec_61 and provides that gross_income means all income from sec_1001 provides that the amount_realized from the sale or other sec_1_1001-1 provides that a loss is not ordinarily sustained prior to the plr-139965-06 disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property shall be recognized sale_or_other_disposition of the property for the reason that until such sale_or_other_disposition occurs there remains the possibility that the taxpayer may recover or recoup some of the adjusted_basis of the property until some identifiable_event fixes the actual sustaining of a loss and the amount thereof the loss is not taken into account an exchange of property results in the realization of gain_or_loss under sec_1001 if the properties are materially different 499_us_554 properties exchanged are materially different if the properties embody legal entitlements different in_kind or extent or if the properties confer different rights and powers id pincite 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 interests in the 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 sec_1_643_b_-1 provides a comprehensive definition of income as that term applies to trusts_and_estates it provides in part that items such as dividends interest and rents are generally allocated to income and proceeds from the sale_or_exchange of trust assets are generally allocated to principal however an allocation of amounts between income and principal pursuant to applicable local law will be respected if local law provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust for the year including ordinary and tax- exempt_income capital_gains and appreciation for example a state statute providing that income is a unitrust_amount of no less than and no more than of the fair_market_value of the trust assets whether determined annually or averaged on a multiple year basis is a reasonable apportionment of the total return of the trust sec_1_643_b_-1 further provides that a switch between methods of determining trust income authorized by state statute will not constitute a recognition event for purposes of sec_1001 beneficiaries of the trust will have the same property interests and legal entitlements as a result of the proposed conversion under state statute a conversion to a total_return_trust may be made upon the court's determination that the conversion will enable the trustee to better carry out the purposes of the trust in addition and under the facts in the present case the preliminary question is whether the trustees and except as expressly provided herein no opinion is expressed or implied plr-139965-06 presented there is to be no material_change in property interests or legal entitlements for trust the trustees or the beneficiaries if the conversion to a total_return_trust does not result in a material_change in property interest or legal entitlements there is no occasion for realizing taxable gain_or_loss under sec_1001 therefore under the facts presented the conversion will not trigger realization of gain_or_loss for the taxpayers for federal_income_tax purposes concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter 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 provides that it may not be used or cited as precedent being sent to the taxpayer’s representatives pursuant to the power_of_attorney on file with this office a copy of this letter is this ruling is directed only to the taxpayer s requesting it sec_6110 the rulings contained in this letter are based upon information and sincerely melissa c liquerman melissa c liquerman senior technician reveiwer branch passthroughs special industries enclosure copy for sec_6110 purposes


department of the treasury_department of the treasury int ernal revenue service int ernal revenue service washington d c washington d c o f f i c e o f o f f i c e o f c h i e f c o u n s e l c h i e f c o u n s e l date number release date cc te_ge eoeg eo2 tl-n-114-00 uilc internal_revenue_service national_office service_center advice memorandum for area_counsel cc te_ge pccm pacific coast and central mountain area tax exempt and government entities from assistant chief_counsel cc te_ge eoeg exempt_organizations employment_tax government entities office of division counsel associate chief_counsel tax exempt and government entities subject significant service_center advice this responds to your request for significant advice dated date in connection with a question posed by the submission processing center ospc function of the ogden service_center issue whether a service_center that converts a form_990 return of organization exempt from income_tax filed by a sec_501 organization that has not filed for recognition of tax-exempt status and is not required to file form_1023 application_for recognition of exemption under sec_501 or form_1024 application_for recognition of exemption under sec_501 to a form_1120 u s_corporation income_tax return can proceed without an examination to issue a statutory_notice_of_deficiency if the organization refuses to sign the return conclusion if service_center converts a form_990 filed by a sec_501 organization that has not filed and is not required to file for recognition of tax-exempt status to a form_1120 the service cannot proceed without an examination to issue a statutory_notice_of_deficiency if the organization refuses to sign the return in addition we question whether treatment of these returns as unpostable form 990s by the service_center is appropriate tl-n-114-00 facts the ogden service_center has a recurring problem with organizations that file form_990 return of organization exempt from income_tax but have not filed form_1023 application_for recognition of exemption under sec_501 or form_1024 application_for recognition of exemption under sec_501 these returns are unpostable because these organizations have not filed for recognition of exempt status and therefore the organizations are not included on the master_file the service_center proposes to solve this problem by substituting form_1120 u s_corporation income_tax return for the form_990 based on the assumption that these organizations are not tax exempt because they have filed neither form_1023 nor form_1024 law and analysis organizations described in sec_501 are generally required by sec_508 to apply for recognition of their tax-exempt status by using form_1023 certain sec_501 organizations are not required by sec_508 and sec_1_508-1 to seek recognition of tax-exempt status but may elect to do so the organizations exempt from this filing requirement include churches their integrated_auxiliaries and conventions and associations of churches organizations that are not private_foundations and have gross_receipts not normally exceeding dollar_figure subordinate organizations other than private_foundations to another tax-exempt_organization that are covered by a group_exemption_letter and for certain purposes only sec_4947 trusts which were organized before date sec_501 organizations described in paragraphs other than sec_501 generally are not required to notify the service that they are seeking tax- exempt status however sec_505 and sec_1_505_c_-1t require that sec_501 voluntary employees’ beneficiary associations and sec_501 trusts forming part of a plan providing for the payment of supplemental_unemployment_compensation_benefits must apply to the service for recognition of their tax-exempt status using form_1024 because sec_501 organizations other than those described in sec_501 sec_501 and sec_501 are not required to obtain recognition from the service of their tax-exempt status these organizations qualify for exemption if they meet the requirements of the internal_revenue_code nevertheless most of these organizations may voluntarily file form_1024 it is appropriate for the service to strongly encourage these organizations to apply for exemption to decrease the uncertainty of their tax status sec_1 a - a notes that i n order to establish its exemption it is necessary that every such organization claiming exemption file an application form publication tl-n-114-00 tax-exempt status for your organization rev date page states that organizations seeking recognition of exemption from federal income must use application forms however requiring the application to establish or seek recognition of an organization’s exempt status is different from saying an organization is not exempt without the approval of an application by the service joint_committee on taxation overview of present-law rules and description of certain proposals relating to disclosure of information by tax-exempt organizations with respect to political activities jcx-59-00 date page states that sec_501 organizations other than sec_501 sec_501 and sec_501 organizations are not required to notify the service that they are seeking tax-exempt status under sec_501 other than sec_501 sec_501 and sec_501 organizations are legally exempt under sec_501 if they are described in those sections regardless of whether they applied to the service for recognition of that status tax-exempt organizations generally are required by sec_6033 to file an annual information_return usually a form_990 return of organization exempt from income_tax with the service an organization that has not obtained recognition from the service but claims tax-exempt status under sec_501 is subject_to the same annual reporting requirements and exceptions as organizations that have had their tax-exempt status recognized by the service sec_6033 and sec_1_6033-2 provide that this annual information_return requirement does not apply to several categories of tax-exempt organizations including churches their integrated_auxiliaries conventions or associations of churches certain organizations other than private_foundations the gross_receipts of which in each taxable_year are normally not more than dollar_figure exclusively religious activities of any religious_order sec_501 instrumentalities of the united_states sec_501 trusts described in erisa section an interchurch organization of local units of a church certain mission societies and certain church-affiliated elementary and high schools we believe form 990s are filed each year for organizations that are not required to file and that have elected not to file for recognition of tax-exempt status under sec_501 these organizations qualify for exemption if they meet the requirements of the internal_revenue_code upon the receipt of a form_990 service_center procedures require a check of the organization’s employer_identification_number ein to determine whether the organization has been recognized as exempt from taxation by the service irm chapter ep eo processing function handbook provides that unpostable conditions occur when transactions cannot post to the master_file the business_master_file and the employee_plans master_file because of invalid data irm chapter aims special processing procedures exhibit provides that the business_master_file bmf is a magnetic tape file of business_entity and return data including eo entity and return data exhibit defines substitute for return as a procedure used when the organization refuses or is tl-n-114-00 unable to file appropriate return s even though the information received indicates that return s should have been filed irm provides that in an agreed_case in which a form_990 is converted to form_1120 the can be posted to the master_file for an unagreed_case irm provides that the form_1120 substitute for return should be placed in the case folder the form_1120 should neither be forwarded to the service_center for processing to the mf nor should an account be established on the audit information management system aims the case should be closed to appeals in the normal manner these irm provisions do not support the immediate issuance of a statutory_notice_of_deficiency in an unagreed_case in which a form_1120 has been substituted for a form_990 the organization that filed the form_990 may satisfy the requirements for tax-exempt status in the internal_revenue_code and have not been required to file form_1023 or form_1024 therefore we agree with your conclusion that the ogden service_center should not issue a statutory_notice_of_deficiency if the taxpayer refuses to either submit a form_1120 or to sign a form_1120 prepared by the service however we disagree with your recommendation that all unpostable form 990s should undergo examination instead we question the whole concept of treating these returns as unpostable form 990s most of these organizations are probably not required to file for recognition of tax-exempt status and qualify for exemption if they meet the requirements of the internal_revenue_code we suggest as a possible solution that these returns could be posted to a modified system perhaps a separate system or classification for form 990s filed by organizations that have not applied for recognition of tax-exempt status if an audit program is undertaken perhaps there could be a random selection of a number of these unpostable returns for examination to determine if a larger program is warranted if you have any further questions please call sylvia hunt pincite-6010 or me pincite-6070 mary oppenheimer assistant chief_counsel exempt_organizations employment_tax government entities office of division counsel associate chief_counsel tax exempt and government entities by __________________________ paul accettura senior technician reviewer exempt_organization branches


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 fip b02 plr-112777-16 date date legend taxpayer llc property city state state_agency date year year year year amount amount ------------------------------------------------------------- ---------------------------------------------- -------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------- - ----------------------------------------- ----------------------------- -------------- --------------------------------------------------------- ------------------------ ------- ------- ------- ------- ---------------- ---------- ---------------- ---- ---- plr-112777-16 amount a b dear ----------------- this is in reply to a letter dated date submitted on behalf of taxpayer by its authorized representative taxpayer requests a ruling under sec_856 with respect to the qualification under sec_856 of certain interest_income received by taxpayer facts taxpayer is a domestic limited_liability_company that elected to be treated as a corporation for federal_income_tax purposes as of date taxpayer elected on its year federal_income_tax return to be treated as a real_estate_investment_trust reit under sec_856 as of date first reit taxable_year taxpayer is the sole owner of llc a domestic limited_liability_company that is disregarded as separate from taxpayer for federal_income_tax purposes llc is the owner of property located in city on property llc is constructing a large residential rental building the building with at least a percent of the units designated as affordable or low_income_housing taxpayer represents that once completed the building will be real_property within the meaning of sec_856 and the rental income from units in the building will be qualifying_income under sec_856 and taxpayer also represents that based on the cost of constructing the building and the market economics of real_estate development in city taxpayer must utilize financing options offered by state_agency to finance the construction of the building state_agency is offering bonds to the public from year through year state_agency will issue both tax-exempt_bonds and taxable bonds each of the bonds issued by state_agency will have a term of b years llc will receive the proceeds of the bonds issued by state_agency pursuant to a loan agreement between llc and state_agency state agency’s loan to llc is secured_by the land and improvements on property as part of state agency’s resolution authorizing the issuance of the bonds state_agency can direct that a portion of the bond proceeds it receives from the public be held by a trustee in a special account the account and invested at state agency’s direction until the funds are needed by llc to finance construction of the building llc must pay state_agency interest on all of the bond proceeds however the earnings on the bond proceeds held in the account will be applied to reduce the debt service on the bonds plr-112777-16 state_agency has the sole ability to control how the money in the account is invested and treats the money in the account as its own for purposes of state regulations that restrict the types of investments made by government agencies for accounting purposes llc treats income from the account as a reduction in interest_expense on its loan from state_agency although neither llc nor taxpayer holds legal_title to the account and the ein on file for the account is not that of llc or taxpayer llc received a form_1099 for year issued by state_agency for amount of interest earned from the account of this amount approximately amount represents interest earned after date and thus constitutes gross_income to taxpayer for its first reit taxable_year llc paid a total of amount to state_agency as interest on the bonds between date and the end of year amount is significantly more than amount the amount of interest earned on the account after date since date taxpayer has also had a relatively minimal amount of qualifying_income for purposes of the income test in sec_856 of the code taxpayer does not expect to have a significant portion of the building complete and producing rental income that qualifies under sec_856 prior to the end of year taxpayer requests a ruling that the income received by taxpayer as interest earned from the account in its first reit taxable_year year and year constitutes qualifying_income for purposes of the income test in sec_856 of the code law and analysis sec_856 provides that in order for a corporation to qualify as a reit at least percent of the corporation's gross_income excluding gross_income from prohibited_transactions must be derived from sources that include dividends interest rents_from_real_property gain from the sale_or_other_disposition of stock securities and real_property other than sec_1221 property abatements and refunds of taxes on real_property income and gain derived from foreclosure_property commitment_fees and gain from certain_sales or other dispositions of real_estate_assets sec_856 provides that in order for a corporation to qualify as a reit at least percent of the corporation's gross_income excluding gross_income from prohibited_transactions must be derived from rents_from_real_property interest on obligations secured_by mortgages on real_property or interests_in_real_property gain from the sale_or_other_disposition of real_property other than sec_1221 property dividends from reit stock and gain from the sale of reit stock abatements and refunds of taxes on real_property income and gain derived from foreclosure_property commitment_fees to make loans secured_by mortgages on real_property or to purchase or lease real_property gain from certain_sales or other dispositions of real_estate_assets and qualified_temporary_investment_income plr-112777-16 sec_856 provides that to the extent necessary to carry out the purposes of part ii of subchapter_m of the code the secretary is authorized to determine solely for purposes of such part whether any item_of_income or gain which i does not otherwise qualify under sec_856 or c may be considered as not constituting gross_income for purposes of sec_856 or c or ii otherwise constitutes gross_income not qualifying under sec_856 or c may be considered as gross_income which qualifies under sec_856 or c the legislative_history underlying the tax treatment of reits indicates that a central concern behind the gross_income restrictions is that a reit's gross_income should largely be composed of passive_income for example h_r rep no 86th cong 2d sess pincite 1960_2_cb_819 pincite states o ne of the principal purposes of your committee in imposing restrictions on types of income of a qualifying real_estate_investment_trust is to be sure the bulk of its income is from passive_income sources and not from the active_conduct_of_a_trade_or_business although the interest earned from the account as gross_income that is derived from interest is qualifying_income for purposes of sec_856 it is not qualifying_income for purposes of sec_856 pursuant to sec_856 the secretary has the authority to determine whether income that does not otherwise qualify under sec_856 or c may be considered as either not constituting gross_income under sec_856 or c or as qualifying gross_income under those provisions taxpayer represents that the building being constructed on property will be real_property within the meaning of sec_856 when completed additionally taxpayer represents that after completion of construction the rental income from the building will be qualifying_income for purposes of sec_856 and furthermore taxpayer represents that the economics of the type of large-scale residential construction_project being undertaken by taxpayer in city generally requires the use of state_agency bond financing the terms of the financing_transaction with state_agency require that the bond proceeds be placed in the account which is held by a trustee the proceeds of the account must be used by taxpayer to construct the building and interest_income earned on the account must be used by taxpayer to pay debt service on the bonds issued by state_agency the interest_income that taxpayer receives from the account is therefore inextricably linked to the development of the building which is real_property that will generate qualifying rental income under these circumstances treating the interest_income from the account as qualifying_income in its first reit taxable_year year and year does not interfere with or impede the objectives of congress in enacting sec_856 conclusion plr-112777-16 based on the facts and representations submitted we rule that pursuant to sec_856 interest_income received by taxpayer from the account in its first reit taxable_year year and year will be treated as qualifying_income for purposes of sec_856 except as specifically ruled upon above no opinion is expressed concerning any federal_income_tax consequences relating to the facts herein under any other provision of the code specifically we do not rule whether taxpayer qualifies as a reit under part ii of subchapter_m of chapter of the code this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely andrea m hoffenson andrea m hoffenson branch chief branch office of the associate chief_counsel financial institutions and products


department of the treasury internal_revenue_service washington d c tax exempt and eee torn tities may one uniform issue list numbers 7-epv k4a-tl brk ikke kerr kk kier eere re rrr kek rrr kr rr rk kk kr brk tor kk rto i tor rr rik ak atin 84k rrr rr rerkkkekkekkekk kk erk k legend employer plan x plan y exchange zz trust rrr foi rk ir rr rior rk e iii iii iii ioi ii iii iii kkk kkk rrr rk ke iii io ak fir i cir riiioi ici ir icroii iioiiciioici ici t ci ioi icici ici de dete tee foci iii iii iori iii iii ioi ii iir ioi oi iiia i a ede foro iii roi iii ioi tti iori rr re foi iiit toi ito rrr kkk aker ere kek ii ioi toi i ioi io ik fio icici roi i ioi iii ii oi iii io a i ae ladies and gentlemen this is in response to a letter dated date submitted on behalf of the above-named employer by its authorized representa- tive and supplemented by additional correspondence dated february june and date in that correspondence your authorized representative requests private letter rulings on your behalf under sec_162 sec_401 sec_402 sec_415 and sec_4972 of the internal_revenue_code_of_1986 code with regard to certain transactions pertaining to plan x and plan y together the plans of the employer furtherance of these private ruling requests you provide the following facts statements and representations in the employer has established and maintains two retirement plans plan x is for the benefit of salaried employees and their beneficiaries plan y is for the benefit of hourly employees and their beneficiaries the plans are cash or deferred_compensation arrangements generally described and authorized under sec_401 a hhi ki kr kr rrr rik ikk kkk eker and k of the code kxkeee keke the internal_revenue_service service has determined that the plans are qualified_plans under code sec_401 and sec_401 by letters issued to the employer on plan x and eeeee eee plan y the plans participate in a master_trust trust maintained by the employer for various plans the trust maintains several investment funds including a fund where employees may elect to invest in the employer's common_stock the employer stock fund shares of employer common_stock are publicly traded each participant is entitled under the plans to self-direct the prior to the events giving rise to this ruling investment of his or her account including any investment in the employer stock fund request each participant also was entitled to change his or her investment options on a daily basis through a voice-response and internet system under accounting procedures adopted by the employer for the plans investment changes in the employer stock fund were to be made based on the stock's price at the close of trading on exchange z in effect on the date the participant made an investment election change the employer utilized the summary_plan_description of each of the plans to notify participants of their authority to direct their account investments and the procedures by which their investment decisions would be implemented during and tke eh a nonhighly compensated the participant in plan x made numerous investment changes with respect to the investment of his account in the employer stock fund thinly traded nature of the employer's stock related delays in effecting actual purchase and sale transactions in the employer stock fund the amounts this particular participant directed into and out of the fund and the frequency of such transfers during this period all resulted in significant differences in the values extended to this participant based on the price of the employer's stock at the end of a particular trading day from his investment direction and the value of the employer's stock when actually purchased or sold it was not physically possible for the plan's fiduciaries to complete purchases and sales of the employer's stock either according to the terms of the plan or pursuant to the procedures described in the plans' summary plan descriptions activity on the employer stock fund was to cause its unit value to be inappropriately reduced and inaccurate this administrative failure was discovered in ee after which a full and complete audit of the employer stock fund was conducted by the employer the audit concluded that the fund's unit value was inappropriately reduced and inaccurate during this period for the reasons set forth above however the plans summary plan descriptions did not explain to participants any risk or potential risk of investment logses under the employer's plans that might arise from excessive trading by another participant in the employer stock fund the effect of the participant's investment ror ikk rr ikk iahr eer ike kr eee zu0z30044 after receipt of additionally after the audit of the employer stock fund was the valuation problems in the employer stock fund were first raised by several participants in tkeh eee their monthly account statements these participants requested an explanation as to the discrepancies in their employer stock fund values complete and the amount and extent of the administrative failure determined the labor_union representing participants in plan y insisted that the employer restore any lost employer stock fund values to affected participant accounts plans and trust in the belief that the payments were necessary and appropriate not only to make participants whole but to forestall and avoid litigation with participants and with the union based on a breach of fiduciary duty claim which would have resulted if the employer had taken no action the employer made payments to the in order to correct the inaccurate unit values in the employer stock fund the employer made a payment of approximately sdollar_figure to the plans and the trust in xee x the payment was made in order to restore the affected nonhighly compensated participant accounts that were invested in the employer stock fund during this period to their correct values contingent upon receipt of a favorable ruling the employer also proposes to make a payment or a contribution of employer stock estimated to be approximately dollar_figure oy eee shares to the plans and the trust accounts of affected highly compensated employees that were invested in the employer stock fund to their appropriate valuations this latter payment will restore the based on foregoing facts statements and representations the employer requests a ruling that the payments to the plans and trust constitute a restoration payment and as such will not constitute a contribution or other payment subject_to the provisions of either code sec_404 or code sec_4972 pursuant to either code sec_401 not adversely affect the qualified status of the plans or code sec_415 not when made to the plans result in taxable_income to affected plan participants pursuant to code sec_402 and be deductible in full by the employer pursuant to code sec_162 with regard to your first three ruling requests sec_401 of the code generally provides that contributions or benefits provided under a retirement_plan qualified under code sec_401 may not discriminate in favor of highly compensated employees as defined in code sec_414 sec_404 of the code generally provides that contributions made by an employer to or under a stock bonus pension profit- sharing or annuity plan shall be deductible under sec_404 subject_to the limitations contained therein khir hth kk erk ree eer ker eee fe sec_415 of the code provides in pertinent part that a_trust which is part of a profit-sharing or stock_bonus_plan shall not constitute a qualified_trust under sec_401if-in the case of a defined contribution plan-contributions and other additions under the plan with respect to any participant for any taxable_year exceed the limitations of subsection c sec_1 b i of the income_tax regulations regs for defined_contribution_plan limitation generally provides that years beginning after date the term annual_addition means the sum credited to a participant's account in any limitation_year of employer contributions employee contributions and forfeitures such annual_additions may include excess_deferrals sec_1 b of the regs provides that the term annual_addition includes employer contributions which are made under the plan contributions under a qualified_cash_or_deferred_arrangement are treated as employer contributions and are therefore includible ina participant's annual_addition under sec_415 sec_1 k -1 a provides that elective code sec_4972 imposes on an employer an excise_tax on nondeductible_contributions to a qualified_plan sec_4972 defines nondeductible_contributions as the excess if any of the amount contributed for the taxable_year by the employer to or under such plan over the amount allowable as a deduction under sec_404 for such contributions determined without regard to subsection e thereof and the amount determined under subsection c for the preceding year reduced by the sum of the portion of the amount so determined returned to the employer during the taxable_year and the portion of the amount so determined deductible under sec_404 for the taxable_year determined without regard to subsection e thereof code sec_402 generally provides that amounts held in a_trust that is exempt from tax under code sec_501 a and that is part of a plan that meets the qualification requirements of code sec_401 will not be taxable to participants until such time as such amounts are actually distributed to distributees under such plan neither the code nor the regulations promulgated thereunder provide guidance as to whether the employer's replacement payment should constitute contributions for purposes of the above-referenced sections of the code generally amounts contributed to a retirement_plan qualified within the meaning of code sec_40l a are subject_to the requirements and limitations of code sec_401 a an appropriate case plan constitutes a restorative payment and to the requirements and limitations of code sec_401 a and the service may determine that a payment toa and as such is not subject however in fir roo iii ii ro ke -s- payments to a plan made by an employer pursuant to a payments made to a plan by an employer in order to restore value to the plan that was lost due to actions which place the employer under a reasonable risk of liability for breach of fiduciary duty will not be subject_to the limitations of the code sections referenced above department of labor order a court-approved settlement or a court judgment would generally be treated as restorative payments and not subject_to the code sections referenced above however in general payments made by an employer to a plan to make up for lost value due to general market fluctuations would not be treated as restorative payments also payments made by an employer to a plan which result in different treatment for similarly situated plan participants would not be treated as restorative payments a determination as to whether plan payments in other circumstances may be treated as restorative payments will be based on all the facts presented the resulting improper valuations of the in this case the thinly traded nature of the employer's stock made it impossible for the plans fiduciaries to complete trades in the employer stock fund at the end of each business_day as required by the plans' terms employer stock fund and the fact that employees were not apprised of the potential for harm to their accounts placed the employer at risk of liability for breach of fiduciary duty with respect to its plans moreover amounts were repaid into the accounts of the employer's bargaining-unit employees under direct threat from their union of litigation against the employer for fiduciary breach such payments must therefore be considered restorative in nature rather than an attempt to make up the employees' losses arising from general market fluctuations further in order to assure similar treatment for plan participants similarly situated as investors in the employer stock fund the employer proposes to make additional restorative payments to the accounts of nonunion employees who suffered losses from the improper fund valuations accordingly based on the facts and circumstances present in this case the service has determined that payments made and to be made by the employer to correct improper valuations in the employer stock fund constitute restorative payments further based on the above we rule with respect to your first three ruling requests that the restorative payments described above will not constitute a contribution or other payment subject_to the provisions of either code sec_404 or code sec_4972 will not adversely affect the qualified status of plan xx or plan y pursuant to either code sec_401 or code sec_415 and did not and will not when paid into either plan xx or plan y constitute an actual distribution of plan assets to affected participants or beneficiaries within the meaning of code sec_402 and bk rik rrr rr rrr rior tr ir or or thus such payments did not and will not when paid into either plan x or plan y result in taxable_income to those participants or their beneficiaries with respect to your fourth ruling_request code sec_162 a provides that there shall be allowed as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business in general payments made in settlement of lawsuits or potential lawsuits are deductible if the acts that give rise to the litigation were performed in the ordinary conduct of the taxpayer's business see eg revenue_ruling rev_rul 1978_1_cb_39 and revrul_69_491 c b states taxpayer claimed entitlement to deduct dollar_figure in attorney fees as a business_expense because they were incurred to defend a lawsuit brought by a former partner for an accounting attorney fees deductible because the lawsuit proximately resulted from the taxpayer's business also see kornhauser v united in which the the court held the vii-2 c b u s to determine whether the acts that gave rise to the litigation were ordinary thus giving rise to deductible payments one must look to the origin and character of the claim with respect to which a settlement is made rather than to the claim's potential consequences on the taxpayer's business operation hotels corp u s 397_us_572 427_f2d_429 cir cert_denied u s in united_states v gilmore u s the court held that the origin and character of the claim with respect to which an expense was incurred is the controlling test of whether the expense was a deductible business_expense the deductibility of an expense depends not on the consequences that may or may not result from the payment but on whether the claim arises in connection with a taxpayer's business or profit-seeking activities see united_states v hilton in general all facts pertaining to the controversy are examined to determine the true nature of the settlement payments commissioner t c may be proper to allocate a portion of the settlement payment to claims that were only threatened as well as those claims that were actually advanced in litigation under the origin of claim test it boagni v no court case has been found which deals with the treatment of payments by an employer to reimburse a defined_contribution_plan for losses suffered by the plan arising from breach of fiduciary responsi- bility however there have been many cases with similar fact patterns in which business_expense deductions were allowed to taxpayers c b allowed to deduct a payment in settlement of a suit arising out of an officer and director of a bankrupt corporation was in butler v commissioner 17_tc_1 acq frr iii or ro bk kk io ror io io a z2u00z40044 profits made by his wife from sales of the corporation's bonds the court held that the payment by the taxpayer of attorney fees and an additional_amount to a bondholders' committee pursuant to the consent judgment was deductible the payment was made to avoid unfavorable publicity and protect the payer's business reputation in devito v commissioner t c memo the taxpayer was permitted to deduct a payment in settlement of a lawsuit for breach of a covenant_not_to_compete and breach of fiduciary duties see also revrul_69_581 1969_2_cb_25 which concluded that payment of liquidated_damages and attorney fees under the fair labor standards act were deductible by the employer revrul_73_226 1973_1_cb_62 provides that payments made to avoid extended controversy and to avoid unfavorable publicity and injury to the taxpayer's business reputation are currently deductible this is the rule even though there is serious doubt as to the taxpayer's legal liability in the present case the facts are clear the restorative payments made and to be made by the employer to the plans and trust were intended to avoid having the union initiate litigation over the issue of breach of fiduciary duty and they are intended to resolve any potential legal claims of nonunion participants by providing relief that places them in a situation relative to the employer stock fund that is similar to their unionized co-workers breach of fiduciary duty under the employer's plans arose in the ordinary course of employer's business in the process of attempting to provide retirement benefits for employees question of its business origin there is no serious the issue of accordingly with respect to your fourth ruling_request we hold that the restorative payments made and the proposed restorative payments described above will be deductible in full by the employer pursuant to code sec_162 as a result of their being paid into the plans this ruling letter assumes that the plans meet the applicable qualification requirements of code sec_401 and that their related master_trust is tax-exempt within the meaning of determination as within the jurisdiction of the manager employee_plans determinations programs cincinnati ohio and the appropriate area office of the employee_plans examination_division to whether a plan is qualified under sec_401l a sec_50l a the is additionally this ruling letter is based on the employer's representations that it made or will make restorative payments in order to resolve any potential claims of breach of fiduciary duty_of certain plan participants and the threat of litigation by the union representing the employer's bargaining unit employees to the replacement payment the employer becomes entitled to if subsequent hk kr ik rrr rk kkk ere kr kkk kr rik reimbursement for all or a portion of the replacement payment from an insurer or any other source then the employer should include in income the amount of the reimbursement in accordance with its method_of_accounting the representations herein like all factual representations made to the internal_revenue_service in applications for rulings are subject_to verification on audit by service field personnel furthermore no opinion is expressed as to the federal tax treatment of the above-referenced transactions and proposed transactions under sections of the code and regulations not specifically cited in this ruling letter expressed as to the tax treatment of any conditions existing at the time of transactions that are not specifically covered by this ruling letter a copy of this ruling letter should be attached to the appropriate federal_income_tax return s for the taxable_year s in which the restorative payments are paid into the plans or effects resulting from the transactions or proposed additionally no opinion is this ruling is directed only to the taxpayer that requested it of the code provides that it may not be used or sec_6110 cited by others as precedent copies of this ruling have been sent to your authorized representative in accordance with a power_of_attorney on file in this office should you have any questions pertaining to this letter you may contact kkekke exxekehx government identification_number ig etexe eke ee ehrhk this office at sincerely donzell h littlejohn acting manager employee_plans technical group t ep ra t1 attachments deleted copy of this private_letter_ruling copy of cover letter to the taxpayer's authorized representative notice 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 intl b01 plr-104318-15 date date legend taxpayer --------------------------------------------------------------------- ----------------------------------- llc country x entity date date date date year a dear ----------------------- --------------------------- ---------------------------------------------- ------------------------ ------------------------ -------------------------- -------------------- ------------------------------------------------------------ this replies to a letter dated date from your authorized representative in which you request an extension of time pursuant to sec_301_9100-1 and sec_301_9100-3 to file a form_8848 consent to extend time to assess the branch_profits_tax under regulations sec_1_884-2t and c plr-104318-15 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 taxpayer a country x entity was an eligible_entity that pursuant to sec_301_7701-3 was classified as an association_taxable_as_a_corporation for u s tax purposes all of the taxpayer’s shareholders were foreign individuals as of the beginning of year a taxpayer held interests in a domestic limited_liability_company llc that was classified as a partnership for u s tax purposes llc in turn owned a u s real_property interest within the meaning of sec_897 of the code on date of year a llc sold its u s real_property interest at a gain pursuant to sec_897 taxpayer’s distributive_share of such gain is treated as effectively_connected_income under sec_882 pursuant to sec_1_1446-3 llc withheld percent income_tax under sec_1446 on taxpayer’s allocable share of that gain taxpayer filed a form_8832 entity classification election to elect to be classified as a partnership under sec_301_7701-3 effective on date pursuant to sec_301_7701-3 as a consequence of the election taxpayer was deemed to have distributed all of its assets and liabilities to its shareholders in liquidation and immediately thereafter the individual shareholders were deemed to have contributed all of the distributed assets and liabilities to a newly formed partnership pursuant to sec_301_7701-3 the taxpayer’s deemed liquidation occurred immediately before the close of date ie the day before the date entity classification election effective date date accordingly was the last day of its fiscal_year taxpayer’s return preparer was unaware that the failure_to_file form_8848 as an attachment to the taxpayer’s form 1120f u s income_tax return of a foreign_corporation for year a on or before the return’s due_date including extensions in accordance with sec_1_884-2t and sec_1_884-2 rendered unavailable the complete termination exception to the branch_profits_tax under sec_1_884-2t pursuant to the advice of legal counsel taxpayer subsequently filed its form 1120f for year a with an attached form_8848 on date a date within months of the return’s due_date and included a disclosure statement informing the service that it would be seeking relief for its untimely filing of form_8848 under sec_301_9100-1 and sec_301_9100-3 taxpayer now requests that relief taxpayer represents as required by sec_1_884-2t plr-104318-15 as of the close of date taxpayer held no u_s_assets neither taxpayer nor a related corporation within the meaning of sec_1_884-2t has used or will use directly or indirectly in the conduct_of_a_trade_or_business in the united_states at any time during the three-year period following date of year a a any of the u_s_assets of the terminated u s trade_or_business b any property attributable to those assets or c any property attributable to effectively_connected_earnings_and_profits of taxpayer for year a taxpayer did not have and will not have any income that is or is treated as effectively_connected_income during the three-year period following date sec_1_884-2 provides that the waiver referred to in sec_1_884-2t must be executed on form_8848 on or before the date including extensions prescribed for filing the foreign corporation's income_tax return for the year of complete termination and extend the period of assessment of the branch_profits_tax for the year of complete termination to a date not earlier than the close of the sixth taxable_year following that taxable_year sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the standards set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement sec_301_9100-3 provides standards for extensions of time for making regulatory elections when the deadline for making the election is other than a due_date prescribed by statute sec_301_9100-3 provides that requests for relief subject_to this section 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 based on the facts and circumstances of this case we conclude that taxpayer satisfies sec_301_9100-3 and is granted an extension of time to file form_8848 accordingly taxpayer is granted an extension of time until days from the date of this ruling letter to file its form_8848 since taxpayer already filed a form_8848 on date taxpayer should amend the year a return by attaching a copy of this ruling letter to plr-104318-15 such return or if the taxpayer files the return electronically by attaching a statement to the return that provides the date and the control number of this ruling letter 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 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 representatives sincerely ___________________ elizabeth u karzon chief branch office of associate chief_counsel international


t c memo united_states tax_court raymond n rosenthal and peggy s rosenthal petitioners v commissioner of internal revenue respondent docket no filed date raymond n rosenthal and peggy s rosenthal pro sese steven m roth for respondent memorandum findings_of_fact and opinion scott judge respondent determined deficiencies in petitioners' federal income taxes and accuracy-related_penalties for the calendar years and as follows penalty year deficiency sec dollar_figure dollar_figure big_number big_number the issues for decision are whether petitioners are entitled to deductions for alimony pursuant to sec_71 and sec_215 in the amounts of dollar_figure in and dollar_figure in and whether petitioners are liable for the accuracy-related_penalty under sec_6662 findings_of_fact some of the facts have been stipulated and are found accordingly at the time of the filing of the petition in this case petitioners had a legal residence in encino california petitioners filed joint federal_income_tax returns for the taxable years and on date mr raymond rosenthal petitioner and his ex-wife ruth rosenthal executed a marital settlement agreement in connection with the dissolution of their marriage the settlement agreement section of the settlement agreement provided in part as follows husband shall pay to wife as and for spousal support commencing date and continuing on the all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated petitioners concede that dollar_figure of the dollar_figure claimed as an alimony deduction for is not alimony but is a payment in connection with a property settlement - first day of each month thereafter the sum of twenty- five hundred dollar_figure dollars per month to and including date said spousal support shall terminate following the forty-eight payments to be covered for the period date to and including date said spousal support shall be non-modifiable as to term that is the forty-eight months and the amount of twenty-five hundred dollar_figure dollars per month or the total sum of one hundred and twenty thousand dollar_figure dollars the marriage of wife or death of husband or wife shall not terminate the respondent's obligation to pay support no court shall retain jurisdiction to modify any term pertaining to spousal support including but not limited to amount term duration or termination or any matter pertaining thereto exhibit a attached to the settlement agreement incorporated into the agreement additional terms and provisions including the following the payments to be made by husband to wife are intended to be made by husband to wife tax-free to wife and non tax reportable since the payments are as and for the equal division of community_property except for spousal support payments which shall be reportable by wife and deductible by husband petitioners deducted as alimony dollar_figure and dollar_figure for the taxable years and respectively respondent determined in her notice_of_deficiency that the amounts petitioners deducted were not alimony because they did not terminate on the death of the recipient petitioners contend that the amounts were properly deductible because of the language in the settlement agreement that the payments were reportable by wife and deductible by husband - opinion sec_215 allows a deduction for alimony payments which meet the definition of sec_71 82_tc_128 the parties do not dispute that the requirements under sec_71 through c have been met the issue therefore is whether under the settlement agreement the payments meet the requirement of sec_71 sec_71 provides that for payments to be considered alimony there must be no liability to make any payment for any period after the death of the payee spouse and no liability to make any payment in cash or property as a substitute for such payments after the death of the payee spouse section of the settlement agreement provides that sec_71 alimony and separate_maintenance payments purposes of this section-- b alimony or separate_maintenance payments defined -- for maintenance payment means any payment in cash if-- in general --the term alimony or separate spouse under_a_divorce_or_separation_instrument a such payment is received by or on behalf of a b the divorce_or_separation_instrument does not designate such payment as a payment which is not includible in gross_income under this section and not allowable as a deduction under sec_215 maintenance the payee spouse and the payor spouse are not members of the same household at the time such payment is made and c in the case of an individual legally_separated from his spouse under a decree of divorce or of separate liability to make any payment in cash or property as a substitute for such payments after the death of the payee spouse d there is no liability to make any such payment for any period after the death of the payee spouse and there is no - petitioner is to pay a certain number of payments for a specific length of time it is clear that section imposes liability on petitioner for a period after the death of the payee spouse petitioner contends that the language in exhibit a of the settlement agreement which states the payments are reportable by petitioner's former wife and deductible by petitioner makes the settlement agreement ambiguous and thus parol evidence should be examined to determine the intent of the parties we are not persuaded by petitioner's argument it is clear that the requirement under sec_71 was not satisfied in this case whether or not the parties intended for the payments to be deductible to petitioner we must focus on the legal effect of the agreement in determining whether the payments meet the criteria under sec_71 since sec_71 is not met the payments are not considered alimony for federal_income_tax purposes as we stated in webb v commissioner tcmemo_1990_540 the current sec_71 was enacted to prevent the type of litigation now before us the house committee stated the purpose of the current sec_71 as follows the committee believes that a uniform federal standard should be set forth to determine what constitutes alimony for federal tax purposes this will make it easier for the internal_revenue_service the parties to a divorce and the courts to apply the rules to the facts in any particular case and should lead to less litigation the committee bill attempts to define alimony in a way that would conform to general notions of what type of payments constitute alimony as - distinguished from property_settlements and to prevent the deduction of large one-time lump-sum property_settlements in order to prevent the deduction of amounts which are in effect transfers of property unrelated to the support needs of the recipient the bill provides that a payment qualifies as alimony only if the payor or any person making a payment on behalf of the payor has no liability to make any such payment for any period following the death of the payee spouse h rept part see webb v commissioner supra the same conclusion reached in webb v commissioner supra has been reached in sroufe v commissioner tcmemo_1995_256 heffron v commissioner tcmemo_1995_253 and hoover v commissioner tcmemo_1995_183 here the agreement is clear that the payments to petitioner's former wife would continue after the death of either party to the settlement agreement in fact petitioner's testimony shows that he understood that the payments were to continue beyond the death of the payee spouse petitioner testified the court well you read the settlement agreement didn't you the witness i read it but i don't--didn't know what it meant they told me--my lawyers said this is what we've agreed to sign it so i signed it the court so-- the witness i was more concerned with the numbers than the fine print - the court well but you must have had some understanding of whether--if she remarried or if she died you would still have to pay this for a full forty-eight months the witness i had that under--we never discussed remarriage at all but they said i'm going to have to pay for forty-eight months this the court whether she lived or died the witness yes the provision in the settlement agreement that the spousal support was reportable by wife and deductible by husband is merely an attempt to agree to a legal conclusion that is contrary to the necessary legal conclusion following from the provision for the payments to continue after petitioner's former wife's death an incorrect understanding of the law by the parties to that agreement does not change the law applicable to petitioner's case also at issue is whether petitioners are liable for the accuracy-related_penalties under sec_6662 under sec_6662 a 20-percent addition_to_tax is imposed on the portion of the underpayment that is attributable to one or more of the following negligence or disregard of the rules or regulations substantial_understatement of tax valuation_overstatement overstatement_of_pension_liabilities and estate or gift_tax valuation understatements respondent concedes that only negligence and substantial_understatement of tax would have application to the facts in this case - negligence includes any careless reckless or intentional disregard of rules or regulations any failure to make a reasonable attempt to comply with the provisions of the law and any failure to exercise ordinary and reasonable care in the preparation of a tax_return 85_tc_934 under sec_6662 an understatement is substantial if the understatement exceeds the greater of percent of the tax required to be shown on the return for the taxable_year or dollar_figure dollar_figure in the case of a corporation other than an s_corporation or a personal_holding_company an understatement_of_tax is the excess of the amount required to be shown on the return over the amount shown on the return reduced by any rebates sec_6664 provides that no penalty shall be imposed with respect to any portion of an underpayment if it is shown that there was a reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion the record here shows that at the time the divorce agreement was signed petitioner had two attorneys he asked one of these attorneys in the presence of the other whether under the agreement he would be entitled to deduct the payments made to his ex-wife as alimony stating that he would sign the agreement if the alimony was deductible by him his attorney assured him that the payments would be deductible by him under the agreement - and his other attorney and the attorney representing petitioner's ex-wife agreed that he was entitled to deduct the payments to his ex-wife as alimony and that the payments would be taxable to his ex-wife petitioner testified that one of his attorneys had been a judge and he considered him very knowledgeable with respect to interpreting the agreement for him under these circumstances it appears to us that petitioner had reasonable_cause for deducting the dollar_figure he paid to his ex-wife in and dollar_figure of the amount of the alimony deduction claimed in even though the advice petitioner received was incorrect considering all the circumstances of this case we conclude that petitioner has shown reasonable_cause for the deduction claimed as alimony in and for dollar_figure of the deduction claimed as alimony in there has been no reasonable_cause shown for the claim as an alimony deduction of the other dollar_figure claimed in and the claiming of that deduction was negligent we therefore hold that petitioner is not liable for the accuracy-related_penalty under sec_6662 for the year and is only liable for the accuracy-related_penalty on dollar_figure of the amount deducted as alimony for the year petitioner has failed to show that he had any reasonable_cause for taking this dollar_figure alimony deduction decision will be entered under rule


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-123682-06 date date re request for extension of time to make elections not to deduct additional first re request for extension of time to make elections not to deduct additional first year depreciation and to use the alternative_depreciation_system taxpayer parent ----------------------------------------------------------------------------------------------------------------- date date lmsb official dear ---------------- -------------------------------------------------------------- --------------------------------------------------------------------------------- -------------------------- -------------------------- ---------------------- this letter responds to a letter dated date and supplemental correspondence submitted by parent on behalf of taxpayer requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make two elections the extension is being requested to make elections under sec_168 of the internal_revenue_code not to deduct the additional first year depreciation for all qualified_property and all 50-percent bonus_depreciation property placed_in_service by taxpayer in the taxable_year ended date and under sec_168 to use the alternative_depreciation_system ads for all tangible depreciable_property placed_in_service by taxpayer in the taxable_year ended date facts parent represents that the facts are as follows taxpayer is a member_of_an_affiliated_group of corporations that is headed by parent and that files consolidated federal_income_tax returns plr-123682-06 parent relied on a qualified_tax professional to prepare its consolidated federal_income_tax return for the taxable_year ended date on this timely filed return parent did not make the elections under sec_168 not to deduct the additional first year depreciation for all qualified_property and all 50-percent bonus_depreciation property placed_in_service by taxpayer and under sec_168 to use the ads for all tangible depreciable_property placed_in_service by taxpayer accordingly taxpayer determined its depreciation deduction for the taxable_year ended date by using the general depreciation system under sec_168 instead of the ads and by deducting the percent additional first year depreciation for all qualified_property and the 50-percent additional first year depreciation for all 50-percent bonus_depreciation property parent's consolidated federal_income_tax return for the taxable_year ended date reported a consolidated net_loss further that return reported that the taxable_year ended date was the last taxable_year to which the net_operating_loss for the taxable_year ended date could be carried over subsequent to the filing of parent's consolidated federal_income_tax return for the taxable_year ended date another tax preparer reviewed that return the new preparer discovered that the original tax preparer did not advise parent of the availability of and consequences of making the elections under sec_168 and sec_168 specifically if these elections were made by taxpayer parent would have reported taxable_income for the taxable_year ended date and as a result would have used a portion of the net_operating_loss_carryover from date to reduce any resulting tax_liability ruling requested taxpayer requests an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the elections under sec_168 not to deduct the additional first year depreciation with respect to all qualified_property and all 50-percent bonus_depreciation property placed_in_service by taxpayer in the taxable_year ended date and under sec_168 to use the ads for all tangible depreciable_property placed_in_service by taxpayer in the taxable_year ended date law and analysis sec_167 provides that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion wear_and_tear and obsolescence of property used in the taxpayer's trade_or_business service after generally is determined under sec_168 sec_168 prescribes two methods_of_accounting for determining depreciation allowances one method is the general depreciation system in sec_168 and the other method is the alternative the depreciation deduction provided by sec_167 for tangible_property placed in sec_168 provides a 30-percent additional first year depreciation plr-123682-06 depreciation system in sec_168 under either depreciation system the depreciation deduction is computed by using a prescribed depreciation method recovery_period and convention sec_168 permits a taxpayer to elect for any class of property for any taxable_year to use the ads for determining depreciation for all property in that class placed_in_service during that taxable_year however in the case of nonresidential_real_property the election is made separately with respect to each property an election to use ads is irrevocable sec_301 t a provides that the election under sec_168 must be made for the taxable_year in which the property is placed_in_service sec_301 7t a i further provides that this election must be made by the due_date including extensions of the tax_return for the taxable_year for which the election is to be effective sec_301_9100-7t provides that the election under sec_168 is made by attaching a statement to the tax_return for the taxable_year for which the election is to be effective deduction for the taxable_year in which qualified_property is placed_in_service by a taxpayer sec_168 provides a 50-percent additional first year depreciation deduction for the taxable_year in which 50-percent bonus_depreciation property is placed_in_service by a taxpayer percent additional first year depreciation for any class of property placed_in_service during the taxable_year the term class of property is defined in sec_1_168_k_-1 of the income_tax regulations as meaning in general each class of property described in sec_168 for example 5-year_property instead of 50-percent additional first year depreciation for any class of property that is 50-percent bonus_depreciation property placed_in_service during the taxable_year if this election is made sec_1_168_k_-1 provides that the allowable additional first year depreciation deduction is determined as though the class of property is qualified_property under sec_168 sec_1_168_k_-1 further provides that a taxpayer may elect not to deduct both 30-percent and 50-percent additional first year depreciation for any class of property that is 50-percent bonus_depreciation property placed_in_service during the taxable_year year depreciation must be made by the due_date including extensions of the federal tax_return for the taxable_year in which the property is placed_in_service by the taxpayer sec_1_168_k_-1 provides that the election not to deduct additional first sec_168 provides that a taxpayer may elect not to deduct the sec_168 provides that a taxpayer may elect to deduct 30-percent plr-123682-06 sec_1_168_k_-1 provides that the election not to deduct additional first year depreciation must be made in the manner prescribed on form_4562 depreciation and amortization and its instructions the instructions to form_4562 for the taxable_year ended date provided that the election not to deduct the additional first year depreciation is made by attaching a statement to the taxpayer's timely filed tax_return indicating that the taxpayer is electing not to deduct the additional first year depreciation and the class of property for which the taxpayer is making the election sec_1_168_k_-1 further provides that the election is made separately by each person owning qualified_property or 50-percent bonus_depreciation property for example for each member of a consolidated_group by the common parent of the group by the partnership or by the s_corporation extension of time under the rules set forth in and to make a regulatory election under sec_301_9100-1 the commissioner has discretion to grant a reasonable sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of ' sec_301_9100-3 provides that requests for relief under ' 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 the grant of relief will not prejudice the interests of the government conclusions based solely on the facts and representations submitted we conclude that the requirements of and have been satisfied accordingly taxpayer is granted calendar days from the date of this letter to make the election not to deduct the additional first year depreciation under sec_168 for all property placed_in_service by taxpayer during the taxable_year ended date that qualifies for the additional first year depreciation and the election under sec_168 to use the ads for determining depreciation for all tangible depreciable_property placed_in_service by taxpayer during the taxable_year ended date these elections must be made by parent filing an amended consolidated federal_income_tax return for the taxable_year ended date with a statement indicating that taxpayer is electing not to deduct the additional first year depreciation for all property placed_in_service by taxpayer during the taxable_year ended date and that taxpayer is electing to use the ads for all tangible depreciable_property placed_in_service by taxpayer during the taxable_year ended date parent also must file amended consolidated federal_income_tax returns for any affected succeeding taxable years plr-123682-06 except as specifically set forth above we express no opinion concerning the federal_income_tax consequences of the facts described above under any other provisions of the code specifically no opinion is expressed or implied on whether any item of depreciable_property placed_in_service by taxpayer in the taxable_year ended date is eligible for the additional first year depreciation deduction or is required to use the ads pursuant to sec_168 through d in accordance with the power_of_attorney we are sending copies of this letter to taxpayer’s authorized representatives we are also sending a copy of this letter to the appropriate lmsb official this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely william p o'shea william p o’shea associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes