number release date internal_revenue_service 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 b02 plr-148633-05 date date -------- --------------- ---------------- ----------------------------------- ----------------------------------- x x ------------------------------------------ trust ----------------------- ------------------------------------------ a b -------------------------------------------- y dear ------------------- this responds to a letter dated date submitted on behalf of x by x’s authorized representative requesting a ruling that trust meets the requirements to be a qualified_subchapter_s_trust under sec_1361 of the internal_revenue_code corporation and that trust holds stock in x the united_states so far as required or necessary for the proper support and maintenance of b in the event the net_income from trust does not equal y dollars per year the trustee is permitted to draw upon the principal of trust for the purposes of giving b a minimum of y dollars per year and shall have the right to draw upon the principal of trust in additional sums if necessary for emergency purposes trust is to continue in full force a now deceased established trust for b who is an adult resident and citizen of the information submitted indicates that x intends to elect to be treated as an s the trust agreement for trust provides that the net_income of trust shall be used sec_1361 provides that the term s_corporation means with sec_1361 defines a small_business_corporation as a domestic sec_1361 provides that a qualified_subchapter_s_trust qsst whose plr-148633-05 and effect during the lifetime of b and at b’s death trust is to terminate and the trust estate is to be distributed to b’s children the trust agreement for trust does not provide for distributions for anyone other than b during b’s lifetime and it has been represented that under state law no one other than b can receive a distribution of income or corpus from trust during b’s lifetime it has been further represented that trust distributes all of its net_income to b annually respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock beneficiary makes an election under sec_1362 will be treated as a_trust described in sec_1361 and the qsst's beneficiary will be treated as the owner for purposes of sec_678 of that portion of the qsst's s_corporation stock to which the election under sec_1361 applies provides that for purposes of sec_1361 the term qsst means a_trust a the terms of which require that i during the life of the current income_beneficiary there shall be only one income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current beneficiary in the trust shall terminate on the earlier of the beneficiary's death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to that beneficiary and b all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to one individual who is a citizen or resident_of_the_united_states of a_trust meet all the requirements under sec_1_1361-1 depends on the terms of the trust instrument and the applicable local law all the net_income of trust continues to be distributed currently to b we conclude that trust meets the requirements of sec_1362 of the code based on the terms governing trust and the representations made and provided sec_1_1361-1 provides that the determination of whether the terms sec_1361 and sec_1_1361-1 of the income_tax regulations plr-148633-05 except as specifically ruled upon above no opinion is expressed concerning the federal_income_tax consequences of the facts of this case under any other provision of the code specifically we express no opinion on whether x is otherwise qualified to be an s_corporation this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file a copy of this letter is being sent to x’s authorized representative sincerely j thomas hines chief branch associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


third party communication none date of communication not applicable office_of_chief_counsel internal_revenue_service memorandum number release date cc pa mehara postf-116085-15 uilc date date to associate area_counsel denver large business international cc lbi from blaise dusenberry senior technician reviewer branch procedure administration cc pa subject timeliness of rejected amended e-filed return this memorandum responds to your request for assistance this advice may not be used or cited as precedent taxpayer a b c d e date date date date date date date partner statement ---------------------------------------- ------------ ----------- ------------ -------- -------- ---------------------------- ---------------------------- ---------------------------- ---------------------------- ---------------------------- ------------------- ---------------------------- ------------------------------------------------------------ ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ postf-116085-15 issue under the unique facts of this case did the taxpayer timely file it sec_2010 amended federal_income_tax return conclusion yes under the unique facts of this case the taxpayer timely filed it sec_2010 amended federal_income_tax return because the amended_return would have been timely filed at the time the electronic amended_return was transmitted to the internal_revenue_service service and rejected and the paper amended_return was postmarked within ten days of the date of the service’s e-file rejection notice although in general taxpayers should contact the e-help desk and make a waiver request when filing an amended_return on paper no waiver request is required for an amended form_1120 where the service no longer can accept such a return electronically background return adjustments the taxpayer files a consolidated form_1120 u s_corporation income_tax return on a calendar_year basis the taxpayer’s federal_income_tax return for is currently under audit by exam during the audit the taxpayer submitted adjustments to exam for it sec_2012 tax_return the taxpayer’s adjustments for included the use of sec_41 research_credit carryforwards from it sec_2010 and sec_2011 amended returns specifically the taxpayer is claiming that it is entitled to carry forward dollar_figurea of research credits to from the taxpayer is also claiming that it is entitled to carry forward dollar_figureb out of a total of dollar_figurec of research credits from to in addition the taxpayer increased its alternative_minimum_tax amt credit carryforward to by dollar_figured due to the amendment of it sec_2010 return finally the taxpayer decreased its net_operating_loss carryforward to by dollar_figurea due to the amendment of it sec_2010 return the taxpayer received a six month extension to file it sec_2010 form_1120 the extended due_date was date the taxpayer filed it sec_2010 original return electronically on date amended_return adjustments the taxpayer filed it sec_2010 amended_return to claim research credits in the amount of dollar_figurea based on the alternative simplified_method under sec_1_41-9t under this method no deduction was allowed for certain research expenses equal to the amount of the credit therefore the taxpayer increased its taxable_income by dollar_figurea on the amended_return this increase to taxable_income resulted in an increase of the taxpayer’s net_operating_loss utilized by dollar_figurea and triggered additional amt tax of dollar_figured the amended paper return included a payment of dollar_figuree related to the changes in tax due from these adjustments postf-116085-15 filing of the amended_return the taxpayer attempted to file a amended_return electronically on date the taxpayer received notification that the electronically submitted return was rejected the amended_return was rejected because when the taxpayer attempted to file its return the modernized e-file platform was no longer accepting returns me-f accepts the current_year form_1120 and two prior years as a result the taxpayer then mailed the amended_return via certified mail on date included with the mailed return was a statement that the electronic transmission was rejected and therefore the taxpayer was filing a paper return the taxpayer also included a copy of the rs electronic_filing reject view with the paper return the amended paper return was received by the ogden service_center on date service_center actions the ogden service_center determined that the taxpayer’s statute_of_limitations on assessment for expired on date which was three years from the filing_date of the original return because the ogden service_center received the taxpayer’ sec_2010 amended paper return with additional tax_liability due on date which was after the date statute it rejected the amended_return and posted the payment of dollar_figuree to the taxpayer’s account but did not make an assessment the taxpayer’s transcript shows a payment of dollar_figuree posted on date in rejecting the return it appears the ogden service_center was relying on the reasoning provided in issue of service_center advice memoranda on date the ogden service_center sent the taxpayer a letter 2765c the letter appears to contain numerous errors including the tax period the letter refers to rather than and date of correspondence from the taxpayer the letter refers to date rather than date however it appears that the intent of the letter was to inform the taxpayer that it sec_2010 amended_return was rejected and the payment of dollar_figuree was untimely the letter indicates that as a result the service will not assess tax for the ogden service_center and the tefra technical unit are relying on service_center advice memoranda the sca in concluding that the taxpayer’ sec_2010 amended paper return was not timely filed and therefore the irs may not make the assessment among the issues in the sca was issue which was whether the service_center can make assessments for amended returns mailed on or before the expiration of the period of limitation but received after the period has expired the conclusion to issue was that service centers cannot make assessments based on amended returns received after the period of limitations has run even if the amended_return was mailed on or before the expiration date this conclusion was reached because sec_7502 applies only to returns required to be filed the sca reasoned that sec_7502 does not apply to timely mailed amended returns that show additional tax due because these returns are not required to be filed by any internal revenue law we question the conclusion reached in sca that sec_7502 does not apply to timely mailed amended returns that show additional tax due because these returns are not required to be filed by any internal revenue law although citing 73_tc_610 the sca ignores the holding in that case that provided postf-116085-15 the additional income reported and the payment will be returned to the taxpayer in a separate letter the letter also states that the law requires the service to deduct from the amount of the payment any other debts the taxpayer may owe exam sent out an email inquiry to the manager from the ogden service_center who signed the letter to confirm that the letter relates to the amended_return request for advice exam requested associate area_counsel lbi assistance as to whether rejection of the amended paper return is proper and if so whether the payment of dollar_figuree should be returned to the taxpayer specifically exam inquired as to how sec_7502 sec_7503 and notice_2010_13 2010_4_irb_327 apply exam has also asked whether the taxpayer may carry forward its research credits from to future years if the amended paper return is rejected and the dollar_figuree payment is returned to the taxpayer finally exam asked about the proper treatment of the amt credit carryforward and the net_operating_loss carryforward if the amended paper return is rejected and the dollar_figuree payment is returned to the taxpayer in considering these issues associate area_counsel lbi asked exam if the taxpayer contacted the e-help desk for assistance in correcting the rejected electronic return before filing a paper return and whether the taxpayer got authorization to file it sec_2010 amended_return by paper associate area_counsel lbi also asked whether the taxpayer received a case number from the e-help desk exam contacted the taxpayer for information related to these questions the taxpayer’s representative partner responded as follows statement on date exam emailed the ogden service_center and requested that no further correspondence be sent to the taxpayer with respect to it sec_2010 tax_year and that the payment not be returned to the taxpayer until a determination was made as to the timeliness of the amended_return on date associate area_counsel lbi also emailed the ogden service_center and requested that the payment not be released until a determination was made respondent contends that sec_7502 is not applicable to amended returns the plain language of the statute indicates otherwise sec_7502 encompasses any return required to be filed by a prescribed date but which is delivered subsequent to that date emphasis supplied respondent has not offered any authority for his position nor does the legislative_history of sec_7502 support such a narrow reading h rept 89th cong 2d sess 1966_2_cb_803 we hold that any return means just that and the absence of language explicitly mentioning amended returns does not foreclose petitioner's use of this section id pincite citations omitted postf-116085-15 law and analysis filing_date of taxpayer’s original return income_tax returns of corporations made on the basis of the calendar_year must be filed by the 15th day of march following the close of the calendar_year sec_6072 corporations are allowed an automatic six-month extension of time to file income_tax returns if certain specified requirements are met sec_6081 sec_1 in general the period of limitations on assessment is within three years after the return was filed sec_6501 in the case of an amended_return showing additional tax due that is filed within the 60-day period ending on the day on which the time for assessment would otherwise expire the period for assessment of such additional_amount shall not expire before the day days after the day on which the irs receives the amended_return sec_6501 a return filed on an extension is treated as filed on the day it is received in the case of a return received on or before the extended due_date or on the postmark date in the case of a return mailed before but received after the extended due_date see eg 669_f2d_1342 9th cir 73_tc_249 in this case the original due_date of the taxpayer’ sec_2010 return was date since the taxpayer received a six month extension the extended due_date was date the taxpayer electronically filed its original return which was received by the service on date under first financial corp and pace oil the date of filing of the original return was date timely filing of rejected e-filed returns the taxpayer attempted to electronically file it sec_2010 amended_return on date which was prior to the three year expiration on the assessment statute the taxpayer received notice that the electronic transmission was rejected the taxpayer’s representative has asserted that the e-help desk was contacted but the taxpayer does not have a record unless an exception applies a return is typically considered filed on the date the irs receives it see eg 103_tc_520 aff’d 250_f3d_696 9th cir one exception is if a return is received by the service before the original due_date ignoring extensions in that case the return is deemed filed on the due_date rather than the date received sec_6501 sec_301_6501_b_-1 another exception is if a return is postmarked on or before the due_date including extensions but the service receives it after the due_date in that case the return is deemed filed on the date of mailing sec_7502 sec_301_7502-1 a third exception is when the last day prescribed for performing an act under the internal_revenue_code falls on saturday sunday or a legal_holiday in that case the performance of such act shall be considered timely if it is performed on the next succeeding day which is not a saturday sunday or legal_holiday sec_7503 as a result when the due_date for a return including extensions falls on a weekend or holiday and a taxpayer mails a return on the next day that is not a weekend or holiday the date of mailing is the deemed filing_date postf-116085-15 of the contact or a case number the taxpayer mailed the amended_return on date and the irs received it on date notice_2010_13 and publication notice_2010_133 provides rules regarding the timely filing of rejected e-filed returns notice_2010_13 provides that if the return required to be filed electronically is transmitted on or before the due_date including extensions and is rejected but the electronic return originator or the filer comply with certain requirements for timely submission of the return the return will be considered timely filed and any elections attached to the return will be considered valid notice_2010_13 provides that for returns filed on or after date the service will allow the filer calendar days from the date of first transmission to perfect the return for electronic resubmission if the electronic return cannot be accepted for processing electronically the filer must file a paper return with the service_center where it would normally be filed in order for the paper return to be considered timely it must be postmarked by the u s postal service or delivered to the service by the later of the due_date of the return including extensions or calendar days after the date the service last gives notification to the filer that the return has been rejected as long as the first transmission was made on or before the due_date of the return including extensions and the last transmission was made within calendar days of the first transmission notice_2010_13 provides that the paper return must be completed consistent with the instructions to file the return corporations partnerships and tax-exempt organizations that are required to e-file must contact the e-help desk for assistance in correcting rejected returns before filing a paper return if the taxpayer cannot correct the rejected return errors they must receive authorization from the e-help desk prior to filing a paper return notice_2010_13 also provides that if the paper return is postmarked after its due_date including extensions then the paper return should include an explanation of why the return is being filed after the due_date and include a copy of the service’s final rejection 2010_4_irb_327 under notice_2010_13 the return may also be postmarked by a foreign postal service or in the case of private delivery services designated by notice_2004_83 have a postmark date as determined by notice_97_26 in this case however the taxpayer is not otherwise required to complete a request for waiver of the electronic_filing requirement postf-116085-15 notification similarly if the paper return is being submitted by a corporation partnership or tax-exempt_entity that is required to e-file the return then the return should include an explanation of why the return is being filed in paper form and include a copy of the service’s final rejection notification a paper return filed in accordance with the above procedures will be considered timely filed any elections attached to the return will be considered valid and no penalty will be imposed for failing to e-file the return similarly publication modernized e-file mef information for authorized irs e- file providers for business returns rev restates the rules regarding rejected e-filed returns and provides that for those returns to be considered timely filed the paper return must be postmarked by the later of the due_date of the return including extensions or calendar days after the date the service last gives notification the return was rejected publication advises filers to follow the following steps to ensure that the paper return is identified as a rejected electronic return and the taxpayer is given credit for the date of the first rejection within the 10-day transmission perfection period the taxpayer must call the irs e-help desk to advise that they have not been able to have their return accepted the e-help desk will provide an e-case number to the taxpayer the taxpayer should prepare the paper return and include the following an explanation of why the paper return is being filed after the due_date a copy of the reject notification and a brief history of actions taken to correct the electronic return write in red at the top of the first page of the paper return - rejected electronic return - date the date will be the date of first rejection within the 10-day transmission perfection timeframe the paper return must be signed by the taxpayer the pin that was used on the electronically filed return that was rejected may not be used as the signature on the paper return if the return is rejected it is recommended that the following documents are retained a copy of the submission receipt received from irs transmitter a copy of the rejected transmission file transmitter a copy of the rejected acknowledgement everyone pub pincite rev id pincite postf-116085-15 taxpayer had an electronic_filing requirement under sec_301_6011-5 if a taxpayer is required to file their form_1120 electronically then they generally must file their amended_return electronically the service’s modernized e-file platform however will only accept returns for the most recent tax_year and two prior tax years for that reason in cases where the me-f platform will no longer accept an amended form_1120 no waiver is needed to file the amended_return on paperdollar_figure in this case the taxpayer mailed a paper return to the ogden service_center within calendar days after the date the service gave notification the return was rejected included with the mailed return was a statement that the electronic transmission was rejected and therefore the taxpayer was filing a paper return the taxpayer also included a copy of the rs electronic_filing reject view with the paper return it is not clear whether the taxpayer or its authorized e-file provider contacted the e-help desk neither the taxpayer nor the service has a record of obtaining an e-case number for the paper filed return although in general taxpayers should contact the e-help desk to obtain help in perfecting their e-filed return to obtain an e-case number and receive permission to paper file their returns such an attempt would be fruitless in this case when the modernized e-file platform could not accept the amended_return moreover guidance on the irs website advises that no waiver request is required for an amended form_1120 where the me-f platform no longer accepts amended_return sec_301_6011-5 generally require corporations with dollar_figure million or more in total assets and that file or more returns a year to electronically file their form_1120 and form 1120x the return preparer mandate under sec_301_6011-7 does not apply because that mandate only applies to the form_1040 see sec_301_6011-7 sec_301_6011-5 see irs web frequently asked question page faq b14 http www irs gov businesses e-file-for- large-and-mid-size-corporations-frequently-asked-questions-corporations-required-to-e-file-tax-year- faq b14 states if the corporation is required to file their form_1120 1120s or 1120-f under td are they also required to e-file any amended or superseding tax returns yes if the taxpayer is required to file electronically based on the regulations then they must also electronically file their ty2012 and amended and superseding returns a taxpayer must receive an approved waiver to file that particular return on paper in processing year mef will process ty2012 and returns only those tax years may be filed electronically in processing year ty and prior returns cannot be filed electronically after date any amended ty return must be filed on paper since the mef system can no longer process these returns no waiver is needed to file the amended ty2011 on paper emphasis added postf-116085-15 although contacting the e-help desk would have ensured that the paper return is identified as a rejected electronic return and the taxpayer is given credit for the date of the first rejection within the 10-day transmission perfection period in our view the failure to do so in this case should not deprive the taxpayer of the administrative grace afforded in notice_2010_13 and publication of the additional 10-day period to timely file a return when a taxpayer is unable to e-file a return due to technological barriers no waiver request was required the taxpayer substantially complied with the requirements of notice_2010_13 and publication and the failure by the taxpayer to electronically file their amended return was caused by the service’s failure to accept an amended_return during a period which would have been timely for paper filed returns accordingly it is our view that under the unique facts of this case the taxpayer timely filed it sec_2010 amended federal_income_tax return because the amended_return would have been timely filed at the time the electronic amended_return was transmitted to the service and rejected and the paper amended_return was postmarked within ten days of the date of the service’s e-file rejection notice please call if you have any further questions pub pincite


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 ------------------------ ----------------------- telephone number --------------------- refer reply to cc psi b04 plr-103694-08 date date legend grantor_trust spouse date company company trustee trustee exchange exchange dear ------------- ------------------------------------------------------- --------------------------------------------------------------------- -------------------------- -------------------------- ------------------------------------------------------ -------------------------- ----------------------- ---------------------- ------------ -------- this is in response to your date letter and other correspondence requesting income gift and estate_tax rulings concerning the proposed exercise of a power of substitution the facts submitted are as follows on date grantor executed trust trustee and trustee were appointed as initial trustees of trust sec_1 1a of trust provides that if grantor is living the trustee may distribute to grantor’s wife spouse as much of the trust property as the trustee determines for any reason not prohibited by trust if grantor is not living the trustee shall distribute to spouse as much of the trust property as trustee determines for her health maintenance and support and may distribute as much additional trust plr-103694-08 property as trustee determines for any reason not prohibited by trust any income not distributed within days of the end of a calendar_year shall be added to principal sec_1 1b of trust provides that in addition the trustee shall distribute trust property to any one or more of grantor’s issue in such amount or proportions and upon such terms conditions or trust as spouse appoints by a writing containing an express reference to this lifetime limited_power_of_appointment provided however in no event may the trustee make a distribution that is in lieu of any obligation of spouse to support any person sec_1 of trust provides that upon the death of spouse the trustee shall distribute the trust property to any one or more persons or entities excluding spouse’s creditors her estate and the creditors of her estate in such amounts or proportions and upon such terms conditions or trusts as spouse appoints by will containing an express reference to this power_of_appointment the trustee shall distribute any unappointed trust property to grantor’s issue per stirpes if none of grantor’s issue is then living the trustee shall distribute the trust property equally among grantor’s siblings who are then living or to the issue per stirpes of any sibling who is then deceased sec_2_1 of trust provides in relevant part that during the period hereinafter described spouse may withdraw an amount equal to the amount of each qualifying contribution a qualifying contribution is a contribution of principal from grantor to the trust to the extent that when added to all prior contributions from grantor during the calendar_year the total does not exceed the lesser_of i the amount of the annual exclusion under sec_2503 of the internal_revenue_code then available to grantor with respect to grantor’s wife for such calendar_year and ii the maximum amount that may lapse under sec_2514 and sec_2041 without constituting the release of a general_power_of_appointment promptly upon receipt of a qualifying contribution the trustee shall notify spouse of her right to withdraw under this section the right to withdraw shall terminate upon the expiration of days after the receipt of such notice spouse shall exercise this right of withdrawal by written advice delivered to a trustee under article vi of trust the trustees have broad powers to invest dispose_of and otherwise deal with property in trust whether originally contributed to trust acquired by trust or previously substituted into the trust by grantor without the approval or consent of any other person section of trust provides that grantor may acquire any or all property constituting trust principal by substitution of other_property of equivalent value to the property acquired measured at the time of substitution the trust provides that for purposes of section property with equal value for federal gift_tax purposes be deemed to be property of equivalent value grantor’s power to acquire trust property may only be exercised in a fiduciary capacity action in a fiduciary capacity means plr-103694-08 action that is undertaken in good_faith and in the best interests of the trust and its beneficiaries subject_to fiduciary standards imposed under applicable state law grantor proposes to exercise his power of substitution by transferring shares of company stock that he currently holds in exchange for shares of company stock that the trust currently holds in addition if necessary grantor will transfer to or withdraw from trust cash or cash equivalents in an amount necessary to make the total value of the assets transferred to the trust equal to the total value of the assets withdrawn from the trust as a result of the substitution it is represented that trustee sec_1 and are not descendants of grantor and are not otherwise related or subordinate to him within the meaning of sec_672 further under article viii any vacancy in the office of trustee must be filled by a person who is not related or subordinate to grantor as defined in sec_672 it is represented that company is publicly traded on exchange and company is publicly traded on exchange it is further represented that whenever shares of company company or any other publicly traded stock are transferred into or out of trust each share will be valued at the mean between the highest and lowest quoted selling_price on the exchange on which the share is principally sold on the date of the transfer in accordance with sec_25_2512-2 of the gift_tax regulations finally it is represented that the independent_trustee has a duty to ensure that the value of the assets being acquired is equivalent to the value of the assets that are substituted by grantor you have requested the following rulings the retention by grantor of the power of substitution will not cause trust property to be included in grantor’s gross_estate for federal estate_tax purposes under sec_2033 sec_2036 sec_2038 or sec_2039 the exercise by grantor of the power of substitution will not constitute a gift to trust for gift_tax purposes if the total value of assets transferred to trust equals the total value of assets transferred from trust for purposes of determining whether grantor will be making a gift_for gift_tax purposes by exercising the power of substitution the gift_tax value of the company stock and the company stock will be determined by valuing each stock at the mean between its highest and lowest quoted selling_price on exchange or exchange respectively on the date of substitution in accordance with sec_25_2512-2 trust is a grantor_trust under sec_671 in its entirety with respect to grantor neither grantor nor trust will recognize any income or loss by reason of the exercise of the power of substitution plr-103694-08 ruling sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2033 provides that the value of the gross_estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in the case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income from the property sec_2038 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for adequate_and_full_consideration in money_or_money's_worth by trust or otherwise where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power either by the decedent alone or in conjunction with any person to alter amend or revoke or where the decedent relinquished any such power during the 3-year period ending on the date of the decedent's death sec_2039 provides that the value of the gross_estate shall include the value of an annuity_or_other_payment receivable by any beneficiary by reason of surviving the decedent under any form of contract or agreement if under such contract or agreement an annuity_or_other_payment was payable to the decedent during life in 65_tc_92 acq 1977_1_cb_1 under the terms of an inter_vivos_trust created by the decedent the decedent reserved the power to substitute other_securities or property for those held by the trustee provided that the property substituted was of equal value to the property replaced the court held that the decedent's reserved power to substitute other_securities or property of equal value was not a power to alter amend or revoke the trust within the meaning of sec_2038 rather the court concluded that the requirement that the substituted property be equal in value to the assets replaced indicated that the substitution power was held in trust and thus was exercisable only in good_faith and subject_to fiduciary standards such that the decedent was accountable in equity to the trust beneficiaries accordingly the decedent could not exercise the power to deplete the trust or to shift trust benefits among the beneficiaries see also revrul_2008_22 plr-103694-08 2008_16_irb_796 considering the estate_tax consequences of the retention of a nonfiduciary power to substitute assets of equivalent value in this case under section of trust grantor has retained the power to acquire trust property by substituting other_property of equivalent value to the property acquired measured at the time of substitution under the terms of trust the grantor's power to acquire trust property under this section may only be exercised in a fiduciary capacity accordingly based on the facts presented and the representations made we conclude that the retention by grantor of the power of substitution will not cause trust property to be included in grantor’s estate for estate_tax purposes under sec_2033 sec_2036 sec_2038 or sec_2039 ruling and 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 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_and_full_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 to be a gift and is included in computing the amount of gifts made during the calendar_year however under sec_25_2512-8 a transaction which is bona_fide at arm's length and free from any donative_intent will be considered as made for an adequate_and_full_consideration in money_or_money's_worth under sec_25_2512-1 the value of property for gift_tax purposes is the price at which such property would change hands between a willing buyer and willing seller neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts sec_25_2512-2 provides that in general if there is a market for stocks or bonds on a stock exchange in an over-the-counter market or otherwise the mean between the highest and lowest quoted selling prices on the date of the gift is the fair_market_value per share or bond in this case under the terms of trust grantor may substitute property of equivalent value for trust property grantor proposes to transfer shares of company stock that he currently holds in exchange for shares of company stock that the trust currently holds in addition if necessary grantor will transfer to or withdraw from trust cash or cash equivalents in an amount necessary to make the total value of the assets transferred to the trust equal to the total value of the assets withdrawn from the trust plr-103694-08 as a result of the substitution it is represented that the value of the company stock and the company stock subject_to the proposed exchange will be determined in accordance with sec_25_2512-2 as of the date of the exchange in addition to the extent necessary grantor either will transfer to trust or withdraw from trust cash or cash equivalents in an amount necessary such that the total value of the assets grantor is transferring to trust will equal the total value of the assets grantor is acquiring from the trust incident to the substitution based on the facts presented and the representations made we conclude that the exercise by grantor of the power of substitution will not constitute a gift to trust for gift_tax purposes if the total fair_market_value of assets transferred to trust equals the total fair_market_value of assets transferred from trust ruling sec_4 and sec_671 provides that where it is specified in subpart e of part i of subchapter_j that the grantor or another person shall be treated as the owner of any portion of a_trust there shall then be included in computing the taxable_income and credits of the grantor or the other person those items of income deductions and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under chapter in computing taxable_income or credits against the tax of an individual sec_677 provides that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under sec_674 whose income without the approval or consent of any adverse_party is or in the discretion of the grantor or a nonadverse_party or both may be distributed to the grantor or the grantor’s spouse sec_678 provides that a person other than the grantor is treated as the owner of any portion of a_trust with respect to which the person has a power exercisable solely by that person to vest the corpus or the income therefrom in that person or the person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would within the principles of sec_671 to inclusive subject a grantor of a_trust to treatment as the owner thereof sec_678 provides that sec_678 shall not apply with respect to a power over income as originally granted or thereafter modified if the grantor of the trust is otherwise treated as the owner under the provisions of subpart e other than sec_678 revrul_85_13 1985_1_cb_184 concludes that if a grantor is treated as the owner of a_trust the grantor is considered to be the owner of the trust assets for federal_income_tax purposes a grantor’s receipt of the corpus of a_trust in exchange for an unsecured promissory note was treated as an unsecured borrowing of the trust corpus which caused the grantor to be treated as the owner of the trust under sec_675 the plr-103694-08 transfer of the trust assets in exchange for the note was not recognized as a sale for federal income purposes based solely on the facts and representations submitted we conclude that the trust will be a grantor_trust all of which is treated as owned by grantor under sec_671 and sec_677 because all of the income and principal of trust may be distributed to spouse in the discretion of a nonadverse trustee therefore grantor’s exercise of the power to substitute trust assets will not result in the recognition of any gain_or_loss by grantor or trust for federal_income_tax purposes in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives 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 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 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely george l masnik chief branch office of the associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter


office_of_chief_counsel 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 washington d c date number info release date conex-112226-05 cc tege eoeg et2 uil ----------------------------------- ----------------------------- ------------------------------------------------- -------------------------- reference --------------------- dear -------------------- this letter is in response to your inquiry dated date on behalf of your constituent --------------------- he asks why his disability_income is subject_to percent income_tax_withholding even though he is in the lowest bracket of income_taxation he also requests suggestions of ways he can reduce amount of income_tax withheld the facts of ---------------case are not entirely clear from our file but it appears that he receives disability payments through health or accident insurance his employer funded this health or accident insurance a third party the insurance_company makes these payments to your constituent as an agent of the employer the insurance_company treats these payments as supplemental_wages and withholds income_tax on the payments using a flat rate of percent if your constituent must include the payments he receives from the insurance_company in gross_income under sec_105 of the internal_revenue_code the code or sec_1 a of the income_tax regulations and the insurance_company is an agent of the employer as that term is defined in sec_31_3401_a_-1 of the employment_tax regulations the regulations then those payments are supplemental_wages the agent is entitled to withhold on these payments as though tax had been withheld from the employee’s regular wages unless the agent is also an agent for purposes of withholding_tax from the employee’s regular wages this means that the law permits the insurance_company to use the flat rate method of withholding however the insurance_company also has the option of using the aggregate method of withholding which would more closely approximate your constituent’s actual tax_liability for a given year apart from legislative action your constituent’s only recourse is to persuade the insurance_company to use the aggregate method instead of the flat rate method i hope the following general information on withholding requirements is helpful sec_3402 of the code provides that except as otherwise provided in sec_3402 every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with tables or computational procedures prescribed by the secretary_of_the_treasury code sec_3402 specifically provides for the percentage_method of withholding and the wage_bracket_method of withholding sec_31_3401_a_-1 of the regulations provides that withholding is required on all amounts paid under accident or health_plans if those amounts are includible in gross_income under code sec_105 and income_tax regulations sec_1 a relating to amounts attributable to employer contributions sec_31_3402_g_-1 of the regulations provides that an employee’s remuneration may consist of wages paid for a payroll_period and supplemental_wages such as bonuses commissions and overtime pay paid for the same or a different period or without regard to a particular period when such supplemental_wages are paid whether or not at the same time as the regular wages the amount of the tax required to be withheld under sec_3402 the percentage_method or under sec_3402 the wage_bracket_method shall be determined in accordance with sec_31 g - a or b see also revrul_82_200 1982_2_cb_239 regulations sec_31_3401_a_-1 provides that payments made under accident or health_plans are considered made by the employer if a third party makes the payments as an agent of the employer under regulations sec_31 a - b i b payments made by such agents are supplemental_wages as defined in regulations sec_31_3402_g_-1 if supplemental_wages are paid together with regular wages and the amount of each is not specifically indicated the supplemental_wages are aggregated with the regular wages and withholding is determined as if the total were a single payment for a regular payroll_period if supplemental_wages are separately paid from regular wages or if the amount of the supplemental_wages is specifically indicated in a payment combining regular and supplemental payments two different methods of calculating the amount of income_tax_withholding on the supplemental_wages can be used see sec_31_3402_g_-1 of the regulations under the first method the supplemental_wages are aggregated with the wages paid or to be paid within the same calendar_year for the last preceding payroll_period or for the current payroll_period the amount of tax is determined as if the aggregate of the supplemental_wages and the regular wages constituted a single wage payment for the regular payroll_period under the second method of withholding on separate payments of supplemental_wages provided in sec_31_3402_g_-1 of the regulations as amended by section of macro form rev department of the treasury - internal_revenue_service the omnibus_budget_reconciliation_act_of_1993 pub_l_no and sec_101 of the economic_growth_and_tax_relief_reconciliation_act_of_2001 pub_l_no the employer may determine the tax to be withheld from supplemental_wages by using a flat percentage rate of percent without allowance for exemption and without reference to any regular wages this second method can only be used if tax has been withheld from the employee’s regular wages an agent subject_to regulations sec_31_3401_a_-1 making payments of supplemental_wages may deem tax to have been withheld from the employee’s regular wages unless the agent is also an agent for purposes of withholding_tax from the employee’s regular wages consequently the agent may determine the tax to be withheld from supplemental_wages by using a flat percentage rate of percent as provided in regulations sec_31_3402_g_-1 if the supplemental wage payment is made separately from the regular wage payment and federal_income_tax has not been withheld from the regular wages of the employee the supplemental wage payment is aggregated with the regular wages paid for the current payroll_period or the last preceding payroll_period the amount of withholding_tax is determined as if the aggregate of the supplemental_wages and the regular wages constituted a single wage payment for the regular payroll_period again i hope this information is helpful please contact me or --------------------------------- ---------------------------------------------------------------------------------------------------------------of my staff at if we can assist you further sincerely lynne a camillo chief employment_tax branch division counsel associate chief_counsel tax exempt and government entities macro form rev department of the treasury - internal_revenue_service


t c memo united_states tax_court alton f emerson petitioner v commissioner of internal revenue respondent docket no filed date alton f emerson pro_se felicia l branch for respondent memorandum findings_of_fact and opinion parr judge respondent determined deficiencies in and accuracy-related_penalties on petitioner's federal income taxes as follows accuracy-related_penalty year deficiency sec_6662 a dollar_figure -- big_number dollar_figure big_number big_number - the issues for decision are ' whether petitioner's automobile drag racing activity was engaged in with the intent to make a profit we hold it was not whether long-term disability payments received by petitioner in taxable years and are includable in gross_income we hold they are whether individual_retirement_account ira_distributions received by petitioner in taxable years and as well as pension and annuity distributions received by petitioner in taxable_year are includable in gross_income we hold they are whether petitioner is liable for the 10-percent additional tax under sec_72 on ira_distributions totaling dollar_figure and dollar_figure in taxable years and respectively we hold he is whether petitioner is liable for an accuracy- related penalty pursuant to sec_6662 for taxable years and we hold he is ‘the notice_of_deficiency contains adjustments to itemized_deductions for taxable years and and disallows a net_operating_loss_carryback to related to the operations of petitioner's automobile drag racing activity in these are computational adjustments which will be affected by the outcome of the issues to be decided and we do not separately address them unless otherwise indicated all section references are to the internal_revenue_code in effect for the years at issue - - findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time the petition herein was filed petitioner resided in orlando florida petitioner timely filed his federal_income_tax returns in and in petitioner reported on his federal_income_tax return that he received dollar_figure as nontaxable sick_pay and dollar_figure as nontaxable ira_distributions respondent determined that dollar_figure of the ira_distributions were attributable to petitioner's disability on schedule c profit and loss from business of his tax_return petitioner reported deductions of dollar_figure from his automobile drag racing activity named emerson racing enterprises petitioner reported no income from this activity resulting in a dollar_figure loss related to this loss in petitioner carried back a dollar_figure net_operating_loss_deduction to taxable_year which resulted in a refund to petitioner of dollar_figure at the end of petitioner was age in petitioner reported nontaxable income of dollar_figure as sick_pay dollar_figure in total ira_distributions and dollar_figure in total pensions and annuities respondent determined that the dollar_figure in total pensions and annuities was attributable to petitioner's disability petitioner reported zero income or loss from the automobile drag racing activity in on his return petitioner stated this automobile drag racing activity sic still in existence is operating at a loss but since there were no winnings all expenses are being absorbed as if they were hobby_losses and as such have no effect on adjusted_gross_income schedule at the end of petitioner was age the sick_pay petitioner received was from a long-term disability insurance_policy petitioner's former employer ecc international paid the premiums on the long-term disability policy petitioner retired from ecc international after experiencing medical problems during the years in issue petitioner engaged in an automobile drag racing activity named emerson enterprise racing the only asset of emerson enterprise racing was a race car purchased by petitioner in petitioner located his race car a two-door batwing chevy el camino by placing an advertisement in an orlando florida newspaper the previous owner of the car was a farmer who had stored the car in a barn when petitioner went to look at the car in the farmer's barn it could barely run but he decided to purchase it by spending over dollar_figure during the years he engaged in this activity petitioner revamped the car into a bright red dragster that could legally be driven on streets as well as for racing the car was - - featured on the front cover of two magazines in hot street cars and bracket racing usa petitioner raced automobiles when he was younger but he had to discontinue the activity because it was too costly between and petitioner lost over dollar_figure on the automobile drag racing activity in this case petitioner did receive a small number of cash prize awards in the hundreds of dollars from the activity however except for reporting dollar_figure of winnings in petitioner never reported any income from this activity on his tax returns petitioner maintained no written records related to races or how he had placed in any races petitioner did not maintain a separate checking account for this activity petitioner had no business plan for his automobile drag racing activity and made no forecasts of income or expenses although he tried to find one petitioner had no sponsor or other financial backers to finance his activity petitioner stopped the racing activity in or since his departure from racing petitioner has tried to sell his race car although petitioner has over dollar_figure invested in the race car the highest offer he has received for the car is dollar_figure which he rejected petitioner devoted about hours per week to the automobile drag racing activity which included working on the race car and racing the car two to three nights a week at a race track - - petitioner employed a mechanic on a contract labor basis to do some of the work on the race car during and petitioner was retired disabled and did not have any other employment petitioner's source of advice for the activity was industry publications that provided ways of improving his race car to make it more competitive in addition petitioner received advice regarding improving his car from other drivers who had faster race cars the only type of business or operating license required for racing was a drag strip license nhra license which petitioner does have however because of petitioner's heart condition his nhra license has speed restrictions which limit his ability to drive his race car competitively because of the restrictions placed on petitioner's nhra license and his health condition to have any chance of winning the money races petitioner's son has had to drive petitioner's car opinion issue l whether petitioner's automobile drag racing activity was engaged in with the intent to make a profit sec_162 allows deductions for all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business in the case of an activity_not_engaged_in_for_profit sec_183 generally limits allowable deductions attributable to the activity to the extent of gross_income generated by the activity see sec_183 the test for determining whether an individual is carrying on an activity for profit is whether the taxpayer's actual and honest objective in engaging in the activity is to make a profit see 62_f3d_356 11th cir affg in part and revg in part tcmemo_1993_519 81_tc_210 78_tc_642 affd without published opinion 702_f2d_1205 d c cir sec_1_183-2 income_tax regs while a taxpayer's expectation of profit need not be reasonable there must be a good-faith expectation of making a profit see 72_tc_28 sec_1_183-2 income_tax regs sec_1_183-2 income_tax regs provides a nonexclusive list of factors to be considered in determining whether an activity is engaged in for profit those factors include the manner in which the taxpayer carried on the activity the expertise of the taxpayer or his advisors the time and effort expended by the taxpayer in carrying on the activity the expectation that assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer's history of income or loss with respect to the --- - activity the amount of occasional profit if any which is earned the financial status of the taxpayer and whether elements of personal pleasure or recreation are involved no single factor controls see osteen v commissioner supra 722_f2d_695 llth cir affg 78_tc_471 sec_1_183-2 income_tax regs manner of carrying on activity the manner in which the taxpayer carries on the activity is one indication of a profit objective see sec_1_183-2 income_tax regs elements relevant to this factor include whether the taxpayer maintained complete and accurate books_and_records whether the activity was conducted in a manner substantially_similar to comparable businesses that are profitable and whether changes were attempted in order to improve profitability see 72_tc_659 petitioner maintained no written records he had no business plan for his activity and he made no predictions of income or expenses petitioner had no sponsor for the activity although he did unsuccessfully attempt to obtain one while petitioner hoped to make large amounts of money from this activity he understood that without the big money of a sponsor to buy big expensive parts a person can't win the races without a sponsor --- - petitioner had no control_over the income from this activity because in his own words at any given time the race car engine could just flip off at the line in the event such an engine failure occurred petitioner did not have the financial resources to replace his race car's engine quickly and continue this activity we find that petitioner did not operate the activity ina businesslike manner this factor weighs against petitioner expertise of taxpayer or advisers preparation for the start of an activity through extensive study of its accepted business economic and scientific practices or consultation with those who are experts therein indicates that a taxpayer has entered into an activity for profit see sec_1_183-2 income_tax regs petitioner read car-racing magazines and consulted with mechanics and other racers however there is no evidence that the persons with whom petitioner consulted had made a profit in car racing or advised petitioner on how to make one or that they were other than racing fans or hobbyists accordingly we find this factor does not help petitioner time and effort expended in activity the time and effort expended by the taxpayer in carrying on the activity is an indication of whether a profit objective existed particularly if there are no substantial personal or -- - recreational elements associated with the activity see sec_1_183-2 income_tax regs petitioner devoted hours a week to the activity including working on his race car and two to three nights attending races at the same time petitioner found automobile drag racing extremely enjoyable in spite of a serious heart condition petitioner described competitively driving the race car as a stressful exhilarating experience that he enjoyed repeating therefore on balance this factor neither supports nor detracts from petitioner's position expectation that assets may appreciate an expectation that assets used in the activity may appreciate in value may be an indication of a profit objective see sec_1_183-2 income_tax regs during his involvement in the automobile drag racing activity petitioner spent over dollar_figure on the sole asset of the activity the race car petitioner thought that he might be able to sell the race car for dollar_figure to dollar_figure therefore petitioner had no expectation that the race car would appreciate in value in fact the highest offer petitioner has received for the race car is dollar_figure and he realizes that used race cars don't bring in money accordingly this factor weighs against petitioner taxpayer's success in other activities the success of the taxpayer in carrying on other activities can be some indication of whether the taxpayer had a profit objective for the activity in question see sec_1_183-2 income_tax regs if petitioner had engaged in similar activity profitably in the past it might indicate that the activity in question was entered into for profit even though the activity is presently unprofitable see id petitioner raced automobiles when he was younger but had to discontinue the activity because it was too costly accordingly this factor suggests that petitioner did not engage in the activity for profit history of income or losses from activity a history of income losses and occasional profits with respect to an activity can be indicative of whether a profit_motive exists see sec_1_183-2 income_tax regs the presence of losses in the formative years of a business is not inconsistent with an intention to achieve a later profitable level of operation bearing in mind however that the goal must be to realize a profit on the entire operation which presupposes not only future net_earnings but also sufficient net_earnings to recoup losses that have been incurred in the intervening years see 45_tc_261 affd 379_f2d_252 2d cir petitioner began the automobile drag racing activity in during the years he operated the activity petitioner received only small cash awards however he spent over dollar_figure on the activity generating losses in each year including the dollar_figure loss petitioner reported in given petitioner's record of losses we see no possibility that petitioner could recoup his expenditures therefore we find this factor weighs against petitioner amount of occasional profits barned if any the amount and frequency of occasional profits earned from the activity may also be indicative of a profit objective see sec_1_183-2 income_tax regs other than occasional small cash awards about which petitioner was vague and of which he kept no records petitioner's automobile drag racing activity produced no income however the opportunity to earn a substantial ultimate profit ina highly speculative venture is ordinarily sufficient to indicate that the activity is engaged in for profit even though losses or only occasional small profits are actually generated id there is no doubt that the automobile drag racing activity was a highly speculative venture however petitioner has not convinced us that he ever had an opportunity to earn a substantial ultimate profit from the activity the small cash awards petitioner received were minuscule in relation to both the losses he incurred and his total investment in the activity and without a sponsor petitioner never had an opportunity to earn a substantial ultimate profit accordingly this factor suggests that petitioner did not operate his automobile drag racing activity for profit taxpayer's financial status the lack of substantial income from sources other than the activity in question may indicate the existence of a profit objective see sec_1_183-2 income_tax regs the rationale for this rule is that a taxpayer with substantial income unrelated to the activity can more easily afford to operate the activity as a hobby in petitioner received dollar_figure in disability pay dollar_figure in ira_distributions attributable to his disability and dollar_figure in premature ira_distributions at trial petitioner stated that the automobile racing activity is almost like gambling to support his addiction to this activity petitioner withdrew dollar_figure in ira_distributions prematurely in addition he used part of the money designated for his disability to fund the activity petitioner had substantial income unrelated to the automobile racing activity accordingly this factor does not favor petitioner elements of personal pleasure the absence of personal pleasure or recreation relating to the activity indicates the presence of a profit objective see sec_1_183-2 income_tax regs there is no question that petitioner enjoyed and obtained pleasure from his automobile drag racing activity although this factor standing alone does not indicate that petitioner did not engage in this activity for profit the combination of factors is fatal to petitioner's case although petitioner's testimony was frank and generally credible it was also vague and unsubstantiated he had no records and testified from memory on the basis of the record we find that petitioner did not engage in the automobile drag racing activity for profit accordingly respondent is sustained on this issue and petitioner is not allowed to deduct schedule c expenses associated with this activity in issue whether long-term disability payments received by petitioner in and are includable in gross_income sec_61 provides that gross_income means all income from whatever source derived certain income however may be specifically exempted from inclusion in gross_income see sec_61 gross_income does not include amounts received through accident_or_health_insurance for personal injuries or sickness other than amounts received by an employee to the extent such amounts are attributable to contributions by the employer which were not includable in the gross_income of the employee or paid for by the employer see sec_104 in 34_tc_407 we held that disability_income received through accident_or_health_insurance for personal -- - injuries or sickness is within the meaning of sec_104 hence the provisions in sec_104 and sec_105 dealing with amounts received through health insurance are used to determine whether petitioner's disability benefits constitute taxable_income sec_105 provides except as otherwise provided in this section amounts received by an employee through accident_or_health_insurance for personal injuries or sickness shall be included in gross_income to the extent such amounts are attributable to contributions by the employer which were not includible in the gross_income of the employee or are paid_by the employer the parties stipulated that petitioner's former employer ecc international funded the long-term disability plan and paid all the premiums additionally petitioner presented no evidence that the sick_pay he received from the long-term disability plan maintained by his previous employer was excludable from his gross_income therefore we sustain respondent's determination that the disability payments received by petitioner are includable in his gross_income pursuant to sec_105 issue whether ira_distributions received by petitioner in taxable years and as well as pension and annuity distributions received by petitioner in are includable in gross_income annuities and pensions are specifically included in gross_income see sec 6l1 a in addition under sec_408 a distribution from an ira is generally included in the gross_income of the distributee in the year of distribution -- - in general sec_72 deals with the tax treatment of distributions from pensions annuities and ira's see sec_72 e d sec_1_72-1 income_tax regs provides that sec_72 prescribes rules relating to the inclusion in gross_income of amounts received under a life_insurance endowment or annuity_contract unless such amounts are specifically excluded from gross_income under other provisions of chapter of the code the burden is on petitioner to demonstrate that the payments in question fall into a specific statutory exclusion see 348_us_426 in this case petitioner received ira_distributions of dollar_figure and dollar_figure in and respectively additionally petitioner received dollar_figure in total pension and annuity plan distributions in petitioner provided no evidence nor have we found anything in the record suggesting that any part of the ira or pension and annuity plan distributions are excludable from gross_income accordingly we conclude that petitioner received gross_income of dollar_figure in and dollar_figure in in the notice_of_deficiency respondent determined that petitioner received dollar_figure from ira_distributions in however the parties stipulated that petitioner received dollar_figure in total ira_distributions and dollar_figure in total pension and annuity plan distributions in the parties stipulation does not affect the total deficiency determined against petitioner issue whether petitioner is liable for the 10-percent additional tax under sec_72 on ira_distributions totaling dollar_figure and dollar_figure in and respectively under sec_408 a distribution from an ira is taxable to the distributee in the year of distribution in the manner provided under sec_72 sec_72 provides for a 10-percent additional tax on early distributions from qualified_retirement_plans sec_72 excludes qualified_retirement_plan distributions from the 10-percent additional tax if the distributions are made on or after the date on which the employee attains the age of made to a beneficiary or to the estate of the employee on or after the death of the employee attributable to the employee's being disabled within the meaning of sec_72 part of a series of substantially_equal_periodic_payments not less freguently than annually made for the life or life expectancy of the employee or the joint lives or joint life expectancies of the employee and his designated_beneficiary made to an employee after separation_from_service after attainment of age dividends_paid with respect to stock of a corporation which are described in sec_404 a limited exclusion is also available for distributions made to an employee for medical_care expenses see sec_72 b this provision codified at sec_72 a v is not applicable to early ira_distributions see sec_72 a - - at the times he received the distributions in question petitioner was age sec_57 and sec_58 respectively although respondent determined that petitioner had received some moneys on account of a disability in and petitioner presented no evidence that the ira_distributions in question were attributable to that disability in fact petitioner presented no evidence that any of the exceptions to the 10-percent additional tax listed above apply accordingly we sustain respondent's determination and hold that petitioner is liable for the 10-percent additional tax in relation to ira_distributions totaling dollar_figure and dollar_figure in and respectively issue whether petitioner is liable for an accuracy-related_penalty pursuant to sec_6662 for taxable years and the last issue for decision is whether petitioner is liable for an accuracy-related_penalty pursuant to sec_6662 sec_6662 imposes a penalty of percent of the portion of the underpayment which is attributable to negligence or disregard of rules or regulations see sec_6662 negligence is the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances see 85_tc_934 the term disregard includes any careless reckless or intentional disregard sec_6662 no penalty shall be imposed if it is shown that there was reasonable_cause for such portion of the - - underpayment and the taxpayer acted in good_faith with respect to the underpayment see sec_6664 it is well established that petitioner bears the burden_of_proof on this issue see 58_tc_757 petitioner has not sustained his burden in petitioner claimed losses from the automobile drag racing activity aggregating dollar_figure with no apparent expectation that the activity would ever become profitable petitioner's participation in this activity was predominantly for pleasure and recreation additionally we have found that the income petitioner reported as nontaxable in and should have been included in his gross_income petitioner offered no basis at trial for his decision to report the income as nontaxable accordingly we sustain respondent on this issue and hold that petitioner is liable for the accuracy-related_penalty pursuant to sec_6662 in and decision will be entered for respondent


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom corp plr-109276-99 date date distributing controlled year family shareholder a shareholder b shareholder c shareholder d shareholder e shareholder f shareholder g shareholder h shareholder i business a business b business c business d j k l m n p q r s t w v x dollar_figureaa we respond to your letter dated date in which rulings are requested regarding the federal_income_tax consequences of a proposed transaction the information submitted is summarized below distributing is the common parent of a group of corporations filing consolidated_returns distributing was incorporated in year primarily to consolidate the various business activities of the family distributing thus currently is engaged directly and through its various subsidiaries in business b business c and business d one subsidiary controlled is engaged in business a the shareholders of distributing currently hold their stock as follows common_stock class a preferred class b preferred shareholder a shareholder b shareholder c shareholder d shareholder e shareholder f shareholder g shareholder h shareholder i distributing esop j j j k l m m n n p p q distributing and the family propose to undertake a combination of sales and exchanges in order to resolve shareholder disputes regarding the proper management of the businesses of distributing in particular distributing and the family propose to take the following steps i ii the distributing esop will purchase x shares of the distributing common_stock held by each of shareholder d and shareholder e shareholder b will purchase all of the class a preferred distributing stock held by each of shareholder d shareholder e shareholder f and shareholder g iii iv v shareholder a will exchange all of his class a preferred distributing stock for controlled stock shareholder c will exchange all of her class b preferred distributing stock for controlled stock shareholder d and shareholder e each will exchange his remaining shares of distributing common_stock for controlled stock and a promissory note in the principal_amount of dollar_figureaa following the completion of the sales and the exchanges described above the present and former shareholders of distributing will hold shares of distributing and controlled as follows controlled common_stock distributing common_stock distributing distributing class a class b shareholder a shareholder b shareholder c shareholder d shareholder e shareholder f shareholder g shareholder h shareholder i distributing esop r s t t u v p p the taxpayer has made the following representations in connection with the proposed transaction a b indebtedness owed by controlled to distributing if any after the distribution will not constitute stock_or_securities the stock of controlled will be distributed to distributing shareholder a shareholder c shareholder d and shareholder e on a non pro_rata basis according to the fair_market_value of the shares based on appraised value the fair_market_value of the controlled stock to be received by shareholder a shareholder c shareholder d and shareholder e of distributing will be approximately equal to the fair_market_value of the distributing stock surrendered by those shareholders in the exchange c no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity d e f g h i j other than that of a shareholder the five years of financial information submitted on behalf of distributing and its subsidiaries including controlled is representative of each corporation’s present operations and with regard to each corporation there have been no substantial operational changes since the date of the last financial statements submitted immediately after the distribution at least percent of the fair_market_value of the gross assets of distributing will consist of the stock and securities of controlled corporations that are engaged in the active_conduct_of_a_trade_or_business as defined in sec_355 following the transaction distributing and controlled each will continue the active_conduct of its business independently and with its separate employees the distribution of the controlled stock is carried out for the following corporate business purposes to resolve various issues relating to day-to- day management and long term objectives as well as problems arising from shareholder disputes differences of opinion as to strategic goals and the problems of operating business a in conjunction with the other different businesses within the same affiliated_group the distribution of the stock of controlled is motivated in whole or substantial part by this corporate business_purpose shareholder b will purchase at the appraised value all of the preferred class a stock owned by each of shareholder d shareholder e shareholder f and shareholder g otherwise there is no plan or intention by any shareholder of distributing to sell exchange transfer by gift or otherwise dispose_of any stock in or securities of either distributing or controlled after the transaction the distributing esop will purchase a portion of each of shareholder d’s and shareholder e’s distributing common_stock in conjunction with the transaction otherwise there is no plan or intention by either distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the transaction other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 there is no plan or intention to liquidate either distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the transaction except in the ordinary course of business k l m n o no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the proposed distribution immediately before the distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_32_irb_6 and as currently in effect sec_1_1502-13 as published by t d further distributing will not have an excess_loss_account with respect to the controlled stock immediately before the distribution see sec_1_1502-19 payments made in connection with all continuing transactions between distributing and controlled if any will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm's length no two parties to the transaction are investment companies as defined in sec_368and iv the distribution of controlled stock is not part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the total combined voting power of all classes of stock of either distributing or controlled p neither distributing or controlled is an s_corporation within the meaning of sec_1361 and there is no plan or intention by either distributing or controlled to make an s_corporation_election pursuant to sec_1362 based solely on the information submitted and on the representations set forth above we hold as follows no gain_or_loss will be recognized to distributing upon the distribution of controlled stock to shareholder a and shareholder c and controlled stock and promissory notes to shareholder d and shareholder e in exchange for their distributing stock sec_355 no gain_or_loss will be recognized to and no amount will be included in the income of shareholder a and shareholder c upon their receipt of the stock of controlled from distributing in exchange for all of their stock in distributing sec_355 shareholder d and shareholder e each will recognize gain if any but not loss on his receipt of controlled stock and a promissory note in exchange for all of his distributing common_stock but not in excess of the fair_market_value of the promissory note received sec_356 revrul_93_62 c b the holding_period of the controlled stock received by shareholder a shareholder c shareholder d and shareholder e will include each shareholder’s holding_period of their distributing stock exchanged therefor provided that such distributing stock is held as a capital_asset on the date of the transaction sec_1223 the basis of the controlled stock in the hands of shareholder a and shareholder c received in the transaction will be the same as the basis of the distributing stock surrendered by each in exchange therefor immediately before the transaction sec_358 shareholder d’s and shareholder e’s basis in the stock of controlled after the exchange will equal the basis of the distributing stock surrendered by each decreased by the fair_market_value of the promissory note received by each and increased by the amount of gain that each recognized on the exchange sec_358 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made under sec_1_312-10 we express no opinion on the tax treatment of shareholder b’s purchase of all of the class a preferred distributing stock held by each of shareholder d shareholder e shareholder f and shareholder g we express no opinion regarding whether the distributing esop’s purchase of x shares of the distributing common_stock held by each of shareholder d and shareholder e will be treated as a sale_or_exchange under sec_1001 a distribution of a dividend under sec_301 or a redemption of stock under sec_302 and whether shareholder d’s and shareholder e’s exchange of part of their distributing common_stock for promissory notes will have the effect of a distribution of a dividend within the meaning of sec_356 or a distribution_in_redemption_of_stock under sec_302 furthermore we express no opinion about the tax treatment of the transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above rulings this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter should be attached to the federal_income_tax returns of the taxpayers involved for the taxable_year in which the transaction covered by this ruling letter is consummated in accordance with the power_of_attorney on file in this office a copy of this letter is being sent to the taxpayer sincerely yours assistant chief_counsel corporate by filiz a serbes assistant to chief branch


internal_revenue_service department of the treasury index no number info release date washington dc person to contact john t sapienza jr id no telephone number refer reply to cc dom it a - cor-111372-00 date date dear commissioner rossotti asked me to respond to your letter concerning obesity and weight-loss programs you asked the internal_revenue_service to issue a revenue_ruling allowing obese individuals to deduct the costs of weight-loss programs as medical_care expenses under sec_213 of the internal_revenue_code the current irs position on weight-loss programs is stated in revrul_79_151 1979_1_cb_116 this ruling holds that if participation in the program was to improve the participant’s appearance general health and sense of well-being the expenses of the program are not for medical_care and therefore are not deductible of course the expenses of a weight-loss program prescribed to treat a specific disease are for medical_care and are deductible we appreciate your suggestion and the references you provided to studies on obesity each year the irs and the department of the treasury review the many suggestions for revenue rulings and other forms of guidance to be published the projects selected are announced in the annual priority guidance plan input such as you have provided is helpful to us in selecting projects for the priority guidance plan i hope this information is helpful please call john t sapienza jr at the number above if you have any questions sincerely deputy assistant chief_counsel income_tax accounting by robert a berkovsky chief branch