t c memo united_states tax_court nellwyn a buck petitioner v commissioner of internal revenue respondent docket no filed date jeffrey a dickstein for petitioner michael j o'brien for respondent memorandum opinion armen special_trial_judge this case is before the court on petitioner's motion to recover administrative and litigation cost sec_1 pursuant to sec_7430 and rule although petitioner's motion is styled motion for litigation costs we are satisfied that petitioner intended to move for an award of administrative costs as well as litigation costs unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable_year in issue however all references to sec_7430 are to the internal_revenue_code in effect at the time that the petition was filed we decide the matter before us based on the pleadings petitioner's motion respondent's response to petitioner's motion petitioner's reply to respondent's response and respondent's response to petitioner's reply as well as the various exhibits attached thereto background petitioner nellwyn a buck petitioner resided in texas city texas at the time that the petition was filed with the court at all relevant times petitioner was married to and resided with pittman a buck jr mr buck petitioner and mr buck prepared a document purporting to be a joint federal_income_tax return for the taxable_year the purported return petitioner and mr buck mailed the purported return to respondent on date and respondent received it days later on date the purported return was not signed by either petitioner or mr buck rather the purported return contained the statement fifth_amendment in the spaces provided for petitioner's and mr buck's signatures all rule references are to the tax_court rules_of_practice and procedure an asterisk placed opposite each of the fifth_amendment statements served to reference certain documents attached to the purported return one such document in the form of a legal opinion expressed the view that liability for filing returns and paying income_tax with respect to federal individual income taxes applies only to third parties who have withheld taxes for continued line of the purported return reported total_tax in the amount of dollar_figure line of the purported return claimed total payments in the amount of dollar_figure consisting of withheld tax in the amount of dollar_figure and estimated_tax payments in the amount of dollar_figure line of the purported return reported a balance due in the amount of dollar_figure ie dollar_figure less dollar_figure a check for such amount was enclosed with the purported return and was apparently negotiated by respondent respondent did not process the purported return as a return rather respondent assessed a frivolous_return penalty pursuant to sec_6702 on date respondent issued a 30-day_letter to petitioner with respect to petitioner's taxable_year on date petitioner mailed a letter to respondent protesting the adjustments proposed in the 30-day_letter and requesting administrative review in her letter dated december continued another another such document in the form of a letter signed by mr buck stated that by invoking the fifth_amendment at the jurat location we specifically intend to exercise our rights under the first fourth and fifth amendments to the constitution petitioner and mr buck unsuccessfully challenged the assessment of the frivolous_return penalty by first filing an administrative claim_for_refund and thereafter an action in district_court see sec_6703 their appeal to the court_of_appeals for the fifth circuit was equally unsuccessful petitioner informed respondent that she had already paid her taxes for the taxable_year by notice_of_deficiency dated date respondent determined a deficiency in petitioner's income_tax in the amount of dollar_figure respondent also determined that petitioner was liable for additions to tax under sec_6651 and sec_6654 in the amounts of dollar_figure and dollar_figure respectively on or about date petitioner and mr buck submitted a joint federal_income_tax return for the taxable_year which respondent processed as a return the filed return the filed return was virtually identical to the purported return except that petitioner and mr buck signed the filed return under penalties of perjury in the spaces provided for their signatures the filed return also differed from the purported return in terms of the extraneous material attached thereto thus in lieu of the legal opinion and the letter signed by mr buck a lengthy affidavit signed by petitioner and mr buck and a newspaper article concerning petitioner and mr buck were attached to the filed return the affidavit which was entitled affidavit concerning the affiants' coerced signing of the attached irs form_1040 concluded as follows plainly our consciences cannot be awakened and appealed to when we are compelled to sign a prescribed document or jurat premised upon political dogma that we do not believe and may not be required to believe as individuals acting in our personal capacities and believing that wages and earned pensions are not income profit or gain we cannot fill in lines regarding wages and 17a regarding pensions and annuities of form_1040 and willfully sign its jurat without committing continued in the top right corner of the first page of the filed return mr buck's social_security_number was entered in the space entitled your social_security_number petitioner's social_security_number was entered immediately below mr buck's in the space provided for spouse's social_security_number on date petitioner filed a petition for redetermination the petition in respect of the notice_of_deficiency dated date on that same day petitioner designated oklahoma city oklahoma as the place of trial of this case the petition contains an allegation that the purported return was accepted by respondent for all purposes the petition contains a further allegation that assessment of any deficiency against petitioner for the taxable_year is barred by the 3-year statute_of_limitations under sec_6501 respondent filed an answer the answer to the petition on date the answer contains affirmative allegations regarding the statute_of_limitations on assessment thus the answer alleges that the purported return was not a valid_return continued perjury hence the coercing of our signatures to the unbelieved form_1040 is not meaningful but illicit and renders them null and void it is nature's law that each person must live with his or her own conscience in peace or in conflict we choose to live in peace with ours emphasis in the original although petitioner resided in texas city texas at the time that the petition was filed petitioner's counsel maintains his office in tulsa oklahoma and that as a consequence the statute_of_limitations does not bar the assessment of any deficiency against petitioner for the answer was prepared by an attorney in respondent's district_counsel office in houston texas the attorney attempted to locate the filed return which was mentioned in the petition however by the time the answer was due the filed return could not be obtained and it was therefore not available to respondent's attorney in preparing the answer on date respondent transferred petitioner's case to respondent's district_counsel office in oklahoma city oklahoma for trial preparation as previously indicated oklahoma city had been designated by petitioner as the place of trial of this case on date respondent's counsel in the oklahoma city district_counsel office respondent's counsel discussed this case with petitioner's counsel and immediately thereafter contacted the irs service_center in austin texas the austin service_center in order to obtain the filed return respondent's counsel learned that the filed return was located under mr buck's account apparently because mr buck's taxpayer as previously mentioned petitioner resided in texas city texas at the time that the petition was filed texas city is located about miles southeast of houston not far from galveston identification_number tin was the primary tin and petitioner's tin was the spousal tin respondent's counsel received the filed return from the austin service_center in late date after reviewing the filed return respondent's counsel ordered transcripts of account in order to verify the correctness of the information contained in the filed return on date petitioner filed a reply the reply to the affirmative allegations pleaded in the answer the reply concludes by alleging that the purported return was 'accepted' for all purposes in accordance with governing case law and is deemed to be a return for the purpose of the running of the statute_of_limitations upon receiving the transcripts of account in respect of the filed return in date respondent's counsel conceded that petitioner had paid her tax_liability for and apparently also conceded that petitioner was not liable for the addition_to_tax under sec_6654 in contrast respondent's counsel continued to pursue the addition_to_tax under sec_6651 however on date respondent's counsel conceded such addition see 91_tc_1019 for a discussion concerning the significance of these terms no later than date respondent's counsel mailed an agreed form of decision the form of decision to petitioner's counsel for his signature on date the court entered a decision in this case the decision utilizing the form of decision furnished by the parties the decision reflected the parties' agreement that petitioner's income_tax_liability for is as follows deficiency without taking into consideration the assessment subsequent to the mailing of notice_of_deficiency on date dollar_figure tax paid dollar_figure deficiency to be paid none the decision also reflected the parties' agreement that petitioner was not liable for any addition_to_tax under either sec_6651 or sec_6654 the amount of the deficiency reflected in the decision without taking into consideration the assessment subsequent to the mailing of notice_of_deficiency on date was equal to the tax reported on the filed return on date petitioner filed her motion for costs thereupon the court vacated the decision and filed the form of decision as a stipulation of settlement see rule f discussion sec_7430 provides that the prevailing_party may be awarded a judgment for reasonable_administrative_costs incurred in connection with an administrative_proceeding within the internal_revenue_service and reasonable_litigation_costs incurred in connection with a court_proceeding congress enacted sec_7430 in the tax equity and fiscal responsibility act of publaw_97_248 sec a 96_stat_572 and as relevant to the present case amended it by the technical_and_miscellaneous_revenue_act_of_1988 tamra publaw_100_647 sec a 102_stat_3342 applicable to proceedings commenced after date because both the administrative_proceeding and the court_proceeding in this case were commenced after date and before date we apply sec_7430 as amended by tamra a judgment for costs may only be awarded under sec_7430 if a taxpayer is the prevailing_party where the taxpayer seeks litigation costs has exhausted the administrative remedies available to the taxpayer within the internal_revenue_service and does not unreasonably protract the proceedings sec_7430 b sec_7430 was amended most recently by the taxpayer bill of right sec_2 publaw_104_168 secs 110_stat_1452 applicable to proceedings commenced after date in order to qualify as the prevailing_party a taxpayer must establish that the position_of_the_united_states in the proceeding was not substantially justified the taxpayer has substantially prevailed with respect to the amount in controversy or the most significant issue or set of issues presented and the taxpayer satisfies the applicable net_worth requirements sec_7430 we understand respondent to concede that petitioner has satisfied the applicable net_worth requirements and that petitioner has not unreasonably protracted the judicial proceeding finally if a taxpayer qualifies as the prevailing_party only administrative and litigation costs that are reasonable may be awarded sec_7430 c and we begin with whether respondent's position was substantially justified petitioner bears the burden of proving that respondent's position was not substantially justified rule e 94_tc_708 ganter v commissioner 92_tc_192 affd 905_f2d_241 8th cir as originally enacted sec_7430 required that a taxpayer establish that the position_of_the_united_states was unreasonable in congress adopted the standard applicable to the equal_access_to_justice_act eaja u s c sec by changing unreasonable to not substantially justified tax_reform_act_of_1986 publaw_99_514 100_stat_2752 see h conf rept at ii-801 1986_3_cb_1 the purpose of the amendment was to conform sec_7430 more closely to eaja h rept supra at ii-801 1986_3_cb_801 we have consistently held that the substantially justified standard is not a departure from the reasonableness standard e g 92_tc_760 n 89_tc_79 affd 861_f2d_131 5th cir a position is substantially justified if the position is justified to a degree that could satisfy a reasonable person 487_us_552 construing similar language in eaja a position that merely possesses enough merit to avoid sanctions for frivolousness will not satisfy this standard rather the position must have a reasonable basis both in law and fact id as relevant herein the position_of_the_united_states that must be examined against the substantial justification standard with respect to the administrative_proceeding is the position taken by the commissioner as of the date of the notice_of_deficiency sec_7430 the position_of_the_united_states that must be examined against the substantial justification standard with respect to the judicial proceeding is the position taken by the commissioner in her answer to the petition 930_f2d_759 9th cir affg an unpublished decision of this court 861_f2d_131 5th cir affg 89_tc_79 in deciding whether the commissioner's position was substantially justified the court will consider not only the basis of the commissioner's legal position but also the manner in which the commissioner maintained that position 86_tc_962 in assessing the commissioner's position in each of the proceedings we may consider inter alia whether the commissioner used the costs and expenses of litigation to extract unjustified concessions from the taxpayer whether the commissioner pursued litigation to harass or embarrass the taxpayer or whether the commissioner's pursuit of the litigation was politically motivated 88_tc_1329 85_tc_927 in the present case respondent's position both at the time she issued the notice_of_deficiency and at the time she filed the answer was that petitioner was liable for a deficiency in income_tax and additions to tax for it is respondent's agreement that petitioner paid her total income_tax_liability for in date that forms the basis of petitioner's claim for administrative and litigation costs in other words petitioner posits that she is a prevailing_party within the meaning of sec_7430 on the ground that respondent's position was not substantially justified either at the time the notice_of_deficiency was issued or the answer was filed because at both times petitioner had already paid her tax_liability for in contrast respondent maintains that her position was substantially justified throughout the administrative and judicial proceedings respondent contends that petitioner was liable for income_tax for and that respondent was forced to issue a notice_of_deficiency in order to assess such liability because petitioner did not file a valid_return respondent also contends that the 6-month period between the time that the answer was filed and the time that respondent agreed to settle the entire case was a reasonable period of time for respondent to locate the return filed by petitioner and mr buck on date and to verify the information set forth on such return thus respondent maintains that her position remained substantially justified throughout the judicial proceeding the administrative_proceeding we begin with petitioner's contention that respondent's position was not substantially justified at the time that the notice_of_deficiency was issued this court has previously set forth the essential elements of a return first there must be sufficient data to calculate a tax_liability second the document must purport to be a return third there must be an honest and reasonable attempt to satisfy the requirements of the tax law and fourth the taxpayer must execute the return under penalties of perjury 82_tc_766 affd 793_f2d_139 6th cir on date petitioner and mr buck mailed the purported return to respondent the purported return was not signed by either petitioner or mr buck rather the purported return contained the statement fifth_amendment in the spaces provided for petitioner's and mr buck's signatures this court has specifically held that the submission of an unsigned document purporting to be a return does not constitute the filing of a return beard v commissioner supra pincite- 72_tc_818 joseph v commissioner tcmemo_1996_77 where form_1040 contained the statement 5th in the space provided for the taxpayer's signature the court held that such form was not a valid_return and did not start the running of the statute_of_limitations see 102_tc_137 affd 53_f3d_799 7th cir see also sec_6061 sec_1_6061-1 income_tax regs thus the purported return submitted by petitioner and mr buck on date did not constitute a return as relevant herein the term deficiency is defined by sec_6211 as the excess of the amount of tax actually due over the amount shown as tax by the taxpayer upon the return if the taxpayer made a return showing an amount of tax due sec_6211 because petitioner did not file a return before the notice_of_deficiency was issued a deficiency existed in an amount equal to the entire tax due see sec_6211 olmstead v commissioner tcmemo_1993_216 where the taxpayer paid taxes through withholding but failed to file a return the court held that the amount of the deficiency was equal to the amount of tax due schneiker v commissioner tcmemo_1989_ where the taxpayer submitted an invalid return the court held that the amount shown as the tax by the taxpayer upon his return was zero a taxpayer's liability for a deficiency becomes fixed or accrues by an assessment of the tax see sec_6201 sec_6203 if a taxpayer fails to file a return then in order to assess a tax_liability the commissioner generally must issue a notice_of_deficiency sec_6212 it is for this reason that respondent issued the notice_of_deficiency to petitioner who had not previously filed a return because petitioner was liable for income_tax for and because she did not self-assess such liability by filing a valid_return for that year before the mailing of the notice_of_deficiency we hold that respondent was substantially justified in issuing the notice_of_deficiency the judicial proceeding petitioner further contends that respondent's position was not substantially justified at the time respondent filed the answer because respondent had information available to her at that time demonstrating that petitioner had satisfied her income_tax_liability in date as previously indicated respondent filed the answer on date approximately months after petitioner and mr buck submitted the filed return respondent contends that she was not able to obtain the filed return and verify the information on such return before she filed the answer specifically respondent asserts that the filed return was not readily available to her houston district_counsel office because the filed return had only recently been filed and the filed return was difficult to locate because it was located under mr buck's account rather than petitioner's apparently because mr buck's tin was the primary tin and petitioner's tin was the spousal tin we have no reason to question respondent's explanation we also note that the petition contained an allegation that the purported return was accepted by respondent for all purposes and that assessment of any deficiency against petitioner for the taxable_year was barred by the 3-year statute_of_limitations rule obligated respondent to address this matter in the answer by way of affirmative allegations if respondent wished to preserve the issue accordingly we conclude that respondent's position on date ie that petitioner was liable for income_tax for was substantially justified finally petitioner contends that respondent took an unreasonable amount of time to verify the information on the filed return and settle the case here we recall that petitioner's case was transferred from respondent's district_counsel office in houston to respondent's district_counsel office in oklahoma city for trial preparation because petitioner had designated oklahoma city as the place of trial thereafter the record demonstrates that respondent acted reasonably promptly in settling the case thus shortly after being assigned the defense of this case respondent's counsel contacted petitioner's counsel thereafter respondent's counsel acted promptly to retrieve the filed return from the austin service_center upon receiving the filed return respondent's counsel again acted promptly in ordering transcripts of account in order to verify the correctness of the return after those transcripts were received in date respondent's counsel immediately conceded that petitioner had paid her tax_liability for and apparently also conceded that petitioner was not liable for the addition_to_tax under sec_6654 respondent's counsel conceded the balance of the case on date and no later than date he mailed the form of decision to petitioner's counsel for his signature thus this case was completely settled months after respondent filed the answer in this regard we observe that some delay in the settlement process in and of itself does not make respondent's position unreasonable see sokol v commissioner t c pincite and cases cited therein although one might wish that settlement had come even quicker the present case is not one in which respondent adopted an inflexible attitude concerning settlement or attempted in an unfair manner to cause petitioner to compromise her case similarly petitioner has not shown that respondent advanced a position that respondent knew to be factually or legally incorrect further petitioner has not shown that respondent pursued her position for purposes of harassment or embarrassment or out of political motivation or for any other improper purpose in addition and as we have already noted the petition contained an allegation that the purported return was accepted by respondent for all purposes and that assessment of any deficiency against petitioner for the taxable_year was barred by the 3-year statute_of_limitations petitioner ultimately abandoned this position as demonstrated by the fact that the form of decision reflects a deficiency in the amount of dollar_figuredollar_figure under these circumstances we are unable to conclude that respondent acted unreasonably in not settling the entire case before date in summary petitioner has not established that respondent's position either in the administrative_proceeding or in the see sec_7459 which provides that if the assessment of any_tax is barred by any statute_of_limitations then this court's decision to that effect shall be considered as its decision that there is no deficiency in respect of such tax judicial proceeding was unreasonable and therefore not substantially justifieddollar_figure consequently petitioner does not qualify as a prevailing_party within the meaning of sec_7430 we therefore hold that petitioner is not entitled to an award of administrative or litigation costs in order to reflect the foregoing an appropriate order and decision will be entered we therefore need not decide whether petitioner substantially prevailed exhausted administrative remedies or unreasonably protracted the administrative_proceeding or whether the costs incurred by petitioner were reasonable


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b09 plr-145441-02 date date legend trust grantor date beneficiary court date trustee trustee child child foundation state dear this letter responds to your letter dated date submitted on behalf of trust requesting a ruling under sec_2601 of the internal_revenue_code grantor created trust an irrevocable_trust on date for the benefit of beneficiary trust was modified by court on date date is before date trustee and trustee collectively the trustees are currently the trustees of trust plr-145441-02 the first subparagraph of paragraph second a of trust provides in relevant part that the trustees are authorized and empowered to pay to or for the benefit of beneficiary or any of her descendants in the sole and absolute discretion of the trustees in the event of illness accident or other misfortune or in the event of any emergency or if in the judgment of the trustees it is necessary or advisable for the comfortable maintenance support or education of any such person such sum or sums from time to time out of the income derived from the trust estate after date whether or not accumulated as the trustees in their sole judgment deem necessary in determining the existence of any such circumstances trustee may rely upon the determination and certification of trustee acting in his fiduciary capacity as to the existence of such need or condition provided further however that if trustee should ever be a beneficiary hereunder the determination as to the existence of such need or condition will be made by trustee the second subparagraph of paragraph second a provides that twenty years after the death of the survivor of grantor’s children beneficiary child and child trust will terminate and the trustees shall transfer the trust assets to the descendants of beneficiary per stirpes who do not have a living ancestor who is a descendant of beneficiary the third subparagraph of paragraph second a provides that in the event there are no descendants of beneficiary living at the time of trust’s termination the principal of the trust estate and undistributed_income shall be distributed free and clear to the descendants of grantor per stirpes or in the event there are no descendants living at that time to foundation the trustees of trust propose to modify the first subparagraph of paragraph second a of trust in accordance with state law the new subparagraph would provide in relevant part that the income shall be accumulated invested and reinvested by the trustees provided however without intending to vest any enforceable right in any beneficiary the trustees are further authorized and empowered in the sole and absolute discretion of the trustees in the event of illness accident or other misfortune or in the event of any emergency or if in the judgment of the trustees it is necessary or advisable for the comfortable maintenance support or education of any person hereinafter described to pay to or for the benefit of beneficiary or any of beneficiary’s descendants such sum or sums from time to time out of the income derived from the trust estate after date whether or not accumulated as the trustees in their sole judgment deem necessary pay to or for the benefit of any of plr-145441-02 beneficiary’s descendants who would be entitled to receive distributions upon the termination of the trust as hereinafter provided if the trust terminated at the time of any such payment such sum or sums from time to time out of the principal of the trust estate as defined below as the trustees in their sole judgment deem necessary in determining the existence of any such circumstances trustee may rely upon the determination and certification of trustee acting in his fiduciary capacity as to the existence of such need or condition provided further however that if trustee should ever be a beneficiary hereunder the determination as to the existence of such need or condition will be made by trustee the trustees of trust have requested a ruling that the proposed modification to trust will not cause trust to lose its status as exempt from the generation-skipping_transfer_tax sec_2601 imposes a tax on every generation-skipping_transfer sec_2611 defines the term generation-skipping_transfer to include a taxable_distribution 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 but only to the extent that such transfer is not made out of corpus added to the trust after date or out of income attributable to corpus so added sec_26_2601-1 provides that except as provided in sec_26_2601-1 or c any trust in existence on date is 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 in the present case trust is considered to have been irrevocable on date because neither sec_2038 nor sec_2042 applies sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax under sec_26_2601-1 or hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status 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 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 capital_gain for purposes of sec_1001 plr-145441-02 sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy sec_26_2601-1 b or c of this section by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided in the original trust furthermore 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 a shift in a beneficial_interest in a_trust in this case trust currently provides for discretionary distributions of income to beneficiary and beneficiary’s descendants but does not provide for any distributions mandatory or discretionary of principal the proposed modification will allow the trustees to make discretionary distributions of principal to beneficiary’s descendants who would receive principal if the trust terminated on the date of the distribution the proposed modification therefore will not shift a beneficial_interest 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 in addition the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided in the original trust based on the facts submitted and representations made we conclude that the proposed modification will not affect trust’s status as exempt from the generation-skipping_transfer_tax except as expressly provided herein no opinion is expressed or implied concerning the federal 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 pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to trustee plr-145441-02 this ruling is directed only to the taxpayer s requesting it sec_6110 provides that it may not be used or cited as precedent sincerely melissa c liquerman chief branch office of associate chief_counsel passthroughs and special industries enclosures copy of letter for sec_6110 purposes


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 b6 plr-129662-12 date february ---------------------------------- legend taxpayer --------------------------------------------------- investor parent business a company a company b company c company d company e individual a individual b individual c individual d utility licensor state a state b state c state d state e state f plant date date date date --------------------------------------------- ----------------------------------------------- ------------------------ --------------------------------------- --------------------------------------- --------------------------------- ------------------------------------ ---------------------------------- -------------------- ------------------------ ------------------- ----------------------- --------------------------------------- ----------------------- -------------- ------------- --------------------- -------------- ------------------- ------------------- -------------------------------------- ------- ------- ---------------------- --------------------------- --------------------- ---------------------------- ----------------- ------------------ ---------------------------- ---------------------- ---------------------- ------------------------ ------------------------------------------------------------------------------------------ ----------- ------------------------------------------------------------------------------------------ ---------------------------- ---------------------------- ------------------------------ ---------------------- ------ ------ plr-129662-12 date date date date date date additive additive center test rep source region a source region b x y dear ----------------- test rep ----------------------------------------------------------------------------------------- this is in response to your request for rulings submitted by your authorized representative concerning the federal_income_tax consequences of the transaction described below facts taxpayer a state a limited_liability_company calendar_year taxpayer employs the accrual_method of accounting for both book and tax purposes and is treated as a partnership for federal_income_tax purposes the members of taxpayer are investor and company a a state a limited_liability_company the ultimate principal owners of company a are individual a individual b individual c and individual d those individuals have worked and invested together in various projects since at least date some of their prior projects included the development construction and operation of synthetic_fuel production facilities and waste coal processing facilities commencing in date the principals agreed to develop a new refined_coal business including that conducted by taxpayer investor is a state a limited_liability_company and wholly owned indirect subsidiary of parent a publicly traded state a corporation that is primarily engaged through its subsidiaries in business a investor is classified as an association_taxable_as_a_corporation for u s federal tax purposes plr-129662-12 taxpayer was organized on date to construct a facility for the production of refined_coal that was placed_in_service at a mine site in state b on or about date and produced and sold refined_coal with the expectation that it would be burned to produce steam however due to unforeseen difficulties in identifying customers willing to enter into long-term_contracts to purchase refined_coal taxpayer did not continue producing refined_coal after date subsequently on date taxpayer entered into contracts with utility as described below to locate a refined_coal_production_facility on a site adjacent to the plant in state c and to sell refined_coal produced in that facility to utility because its existing facility did not meet the functional requirements for producing refined_coal at this new location taxpayer arranged for the construction of a new facility and assigned the original facility to company c no portion of the original facility was used to construct the new facility in anticipation of the transaction with investor described below the initial members undertook a reorganization of taxpayer on date pursuant to that reorganization the membership interests in taxpayer were recapitalized into class a and class b interests the class a interests were contributed to company a and the class b interests were contributed to company b subsequently the interests in company b were contributed to company c which then contributed such interests to company d each of company a and company c are classified as partnerships and each of company b and company d are disregarded as separate entities from company c on date investor acquired all of the class b membership interests in taxpayer from company b in a transaction treated as a taxable sale_or_exchange of an interest in a partnership for u s federal_income_tax purposes simultaneously investor and company a entered into a limited_liability agreement with respect to taxpayer setting forth their agreement regarding the respective rights and obligations of the class a and class b interest in taxpayer the management and related decision-making of taxpayer and certain related matters pursuant to its agreements with utility taxpayer purchases coal feedstock from utility the coal supply agreement does not prohibit taxpayer from purchasing coal feedstock from third parties and does not prohibit taxpayer from purchasing more feedstock coal than the utility would expect to buy from taxpayer in the form of refined_coal the feedstock coal purchased by taxpayer typically is coal that the utility itself purchased from third party vendors consistent with its coal specifications taxpayer uses the process as described below to produce refined_coal that it sells to the utility pursuant to a refined_coal sales agreement all of the refined_coal produced in the facility is expected to be used as a fuel at the plant to produce steam for the generation plr-129662-12 of electricity however any refined_coal not purchased by utility can be sold to one or more third parties taxpayer has no employees rather it entered into an operations and maintenance agreement with company e a state a limited_liability_company and affiliate of company a pursuant to that agreement company e will operate repair and maintain the facility in accordance with an agreed operating plan will make arrangements to coordinate delivery of spare parts and supplies will coordinate deliveries of coal feedstock purchases and sales of refined_coal and will perform certain administrative functions in support thereof in addition company e will arrange for testing of refined_coal as described below the facility is capable of being relocated without affecting its capability to produce refined_coal in the future the facility may be disassembled and relocated to another location such relocations of refined_coal facilities are a routine exercise that can be accomplished with only limited duplication of certain common equipment and civil works and foundations which are relatively minor in the context of these projects in the event of any relocation of the facility all of the essential components of the facility will be relocated and retained description of the process the process at issue for production of refined_coal currently employed at the facility involves the mixing of proprietary chemicals additives with feedstock coal prior to combustion the process the patent for the process is owned by licensor and is licensed to taxpayer licensor is entitled to certain per ton royalties based on production for_the_use_of its technology test results have shown that when mixed with coal the proprietary additives result in reduced nox so2 and mercury emissions during combustion different chemicals are targeted at specific pollutants based on the characteristics of the feedstock coal burned at the plant taxpayer has chosen a combination of additives that target the reduction of nox and mercury in the case of nox taxpayer understands that additive is believed to cause a portion of the nox to adhere to or react with the additive so that it can be captured and is not emitted in the case of mercury taxpayer understands that additive is believed to react with the elemental mercury in the feedstock coal so that it is converted into a chemical species of mercury mercury oxide that can be effectively captured by particulate control devices a by-product of the process is a valuable fly ash that can be used in a diverse array of applications in the steel mining and cement industries emissions reduction testing for purposes of determining emissions reductions under sec_45 taxpayer will arrange for pilot-scale combustion testing and laboratory analysis for redetermination purposes and will not rely on any continuous emissions monitoring system or other field testing taxpayer engaged the research center of a prominent university the plr-129662-12 center to conduct tests on behalf of taxpayer at its pilot-scale combustion test facility ctf to determine the emission reductions associated with burning the refined_coal compared to the feedstock coal center reports described below state the ctf has been extensively used to research and investigate sox and nox emissions and the transformation of toxic trace metals hg mercury as and pb during the combustion of coal and other fuels or waste materials the ctf is capable of producing gas and particulate samples that are representative of those produced in industrial- and full-scale pulverized coal pc -fired boilers for purposes of qualifying the refined_coal produced at the facility center conducted pilot-scale combustion tests at its ctf on date on a blend of feedstock coal consisting of x source region a coal and y source region b coal which blend represented the anticipated blend to be used at the plant more recently on date the center conducted another pilot-scale combustion test at its ctf on a similar blend for purposes of determining the appropriate application rates for the subsequent six month period each of test rep and test rep explains that combustion gas analysis is provided by continuous emissions monitors cems at two locations the furnace exit which is used to monitor and maintain a specified excess air level for all test periods and the outlet of the particulate control device which is used to assess any air inleakage that may have occurred so that emissions of interest sampled at the back end of the system can be corrected for the dilution caused by the inleakage flue gas analyses were obtained from the duct at the outlet of the electrostatic precipitator esp flue gas mercury measurements were obtained separately by a continuous mercury monitor located at the flue gas ducting at the exit of the particulate control device center conducted a series of tests on the feedstock and refined_coal blend measuring the emissions with these devices each of test rep and test rep states that the test results indicate that the blend of coal and additives achieved the required reductions in both nox and total mercury emissions both determined on a lb btu basis to satisfy the requirements of at least nox reduction and at least mercury reduction each report also states that it is expected the emissions reduction reported would be achieved at full scale using the additive levels tested tested coal plant currently burns a blend of bituminous coal from a number of mines located in state d state e and state f within source region a and source region b the partnership produces refined_coal using a blend of these coals and sells that refined_coal to plant which burns it to generate electricity from steam the rank of the coal burned at the plant is classified by the american society of testing materials astm as plr-129662-12 bituminous coal with a gross calorific value of big_number to big_number btu lb variations in the coal blend result from the supply and availability of the coals and the needs of the plant taxpayer requested that center test a blend of coal that represents the range of coal blends to be used at the plant the tested coal the report issued by center states that the emission reduction requirements outlined in sec_45 for nox and mercury were satisfied when comparing the results of burning the endpoint fuel to the results of burning the feedstock coal taxpayer expects to continue to operate with the blend and additive levels discussed in the center reports which would be consistent with long-term patterns for coal consumed at the plant if so samples will be taken for redetermination testing within six months after the last emissions test satisfying the qualified_emission_reduction requirement thereafter within six months after such date another set of samples will be taken for redetermination testing in each case samples will be collected and prepared in accordance with sampling and testing procedures set forth in taxpayer’s operating protocols although testing and preliminary reporting is done timely occasionally the center is not able to issue the final report until after the six-month period although taxpayer does not currently anticipate making changes to its coal feedstock or additive levels or using other coal sources or ranks additional testing will be conducted prior to acquiring coal feedstock from a different coal source region or of a different rank than reflected in the tested coal in the case of a change in the additive levels tests will also be run at the new minimum levels of additive as the qualified expert advises is necessary to conclude that a qualified emissions reduction will be expected for the new levels of additive rulings requested based on the foregoing you have requested that we rule as follows the refined_coal produced by using the process constitutes refined_coal within the meaning of sec_45 of the code provided that such refined_coal is produced from feedstock coal that is the same source or rank as the tested coal and provided further that the refined_coal satisfies the qualified_emission_reduction test stated in sec_45 of the code provided that the feedstock coals used to produce refined_coal during any determination_period are from the same coal source regions and of the same rank as the tested coal all feedstock coal that satisfies that criteria shall be treated as feedstock coal of the same source and rank for purposes of section dollar_figure of notice_2010_54 regardless of the mines from which such feedstock coal is purchased plr-129662-12 testing by center for qualified emissions reduction as set forth in its test reports satisfies the requirements of notice_2010_54 pilot scale testing conducted at center and subsequent permitted laboratory testing as required for a redetermination described in section a or b of notice may be relied upon to satisfy the qualified_emission_reduction test of sec_45 of the code pursuant to section b of notice_2010_54 the redetermination requirement of section dollar_figure of notice_2010_54 may be satisfied by laboratory analysis establishing that the sulfur and mercury content of both the feedstock coal and the refined_coal on average do not vary by more than ten percent from the sulfur and mercury content of the feedstock coal and the refined_coal used in the most recent determination that meets the requirements of section dollar_figure of notice_2010_54 the results set forth by the center in a redetermination test report for production may be relied upon after the date of the testing even if the report is not received until after the six month period specified in section i of notice_2010_54 provided the facility was placed_in_service prior to date within the meaning of sec_45 relocation of the facility to a different location after date or replacement of part of a facility after that date will not result in a new placed_in_service_date for the facility for purposes of sec_45 provided the fair_market_value of the used_property is more than twenty percent of the total fair_market_value of the relocated facility at the time of relocation or replacement law and rationale sec_45 of the code generally provides a credit against federal_income_tax for_the_use_of renewable or alternative resources to produce electricity or fuel for the generation of steam sec_45 of the code provides that in the case of a producer of refined_coal the credit available under sec_45 of the code for any taxable_year shall be increased by an amount equal to dollar_figure5 per ton of qualified refined_coal i produced_by_the_taxpayer at a refined_coal_production_facility during the 10-year period beginning on the date that the facility was originally placed_in_service and which is ii sold by the taxpayer to an unrelated_person during such 10-year period and such taxable_year for purposes of sec_45 of the code section dollar_figure of notice_2010_54 provides that the term refined_coal means a fuel which - i is a liquid gaseous or solid fuel including feedstock coal mixed with an additive or additives produced from coal including lignite or high carbon fly ash including such fuel used as a feedstock ii is sold by the taxpayer with the reasonable expectation that it will be used for the purpose of producing steam and iii is certified by the taxpayer as resulting when used in the production of steam in a qualified_emission_reduction section dollar_figure of the notice provides that the term qualified_emission_reduction means in the case of refined_coal produced at a facility placed_in_service after date a reduction of at least plr-129662-12 twenty percent of the emissions of nitrogen oxide and at least forty percent of the emissions of either sulfur dioxide or mercury released when burning the refined_coal excluding any dilution caused by materials combined or added during the production process as compared to the emissions released when burning the feedstock coal or comparable coal predominantly available in the marketplace as of date sec_45 of the code generally provides that the term refined_coal_production_facility means a facility which is placed_in_service after date and before date section dollar_figure of notice_2010_54 generally provides that a qualified emissions reduction does not include any reduction attributable to mining processes or processes that would be treated as mining as defined in sec_613 a c or i if performed by the mine owner or operator accordingly in determining whether a qualified_emission_reduction has been achieved the emissions released when burning the refined_coal must be compared to the emissions that would be released when burning the feedstock coal feedstock coal is the product resulting from processes that are treated as mining and are actually applied by a taxpayer in any part of the taxpayer’s process of producing refined_coal from coal sec_613 of the code describes treatment processes that are not considered as mining unless they are provided for in sec_613 or are necessary or incidental to a process provided for in sec_613 any cleaning process such as a process that uses ash separation dewatering scrubbing through a centrifugal pump spiral concentration gravity concentration flotation application of liquid hydrocarbons or alcohol to the surface of the fuel particles or to the feed slurry provided such cleaning does not change the physical or chemical structure of the coal and drying to remove free water provided such drying does not change the physical or chemical identity of the coal will be considered as mining section of the notice provides in part that emissions reduction may be determined using continuous emission monitoring system cems field testing section a provides in part that cems field testing is testing that meets all the following requirements i the boiler used to conduct the test is coal-fired and steam-producing and is of a size and type commonly used in commercial operations ii emissions are measured using a cems iii if epa has promulgated a performance standard that applies at the time of the test to the pollutant emission being measured the cems must conform to that standard iv emissions for both the feedstock coal and the refined_coal are measured at the same operating conditions and over a period of at least hours during which the boiler is operating at a steady state at least percent of full load and v a qualified_individual verifies the test results in a manner that satisfies the requirement of section b plr-129662-12 section of the notice provides that methods other than cems field testing may be used to determine the emission reduction the permissible methods include a testing using a demonstration pilot-scale combustion furnace if it establishes that the method accurately measures the emission reduction that would be achieved in a boiler described in section a i and a qualified_individual verifies the test results in a manner that satisfies the requirements of section c i ii v and vi of the notice and b a laboratory analysis of the feedstock coal and the refined_coal that complies with a currently applicable epa or astm standard and is permitted under section b i or ii section of the notice provides that a taxpayer may establish that a qualified_emission_reduction determined under section dollar_figure applies to production from a facility by a determination or redetermination that is valid at the time the production occurs a determination or redetermination is valid for the period beginning on the date of the determination or redetermination and ending with the occurrence of the earliest of the following events i the lapse of six months from the date of such determination or redetermination ii a change in the source or rank of the feedstock coal that occurs after the date of such determination or redetermination or iii a change in the process of producing refined_coal from the feedstock coal that occurs after the date of such determination or redetermination section of the notice provides that in the case of a redetermination required because of a change in the process of producing refined_coal from the feedstock coal the redetermination required under section dollar_figure must use a method that meets the requirements of section in any other case the redetermination requirement may be satisfied by laboratory analysis establishing that - a the sulfur s or mercury content of the amount of refined_coal necessary to produce an amount of useful energy has been reduced by at least percent percent in the case of facilities placed_in_service after date in comparison to the s or mercury content of the amount of feedstock coal necessary to produce the same amount of useful energy excluding any dilution caused by materials combined or added during the production process b the s or mercury content of both the feedstock coal and the refined_coal do not vary by more than percent from the s and mercury content of the feedstock coal and refined_coal used in the most recent determination that meets the requirements of the notice section dollar_figure of the notice provides that the certification requirement of sec_3 c of the notice is satisfied with respect to fuel for which the refined_coal credit is claimed only if the taxpayer attaches to its tax_return on which the credit is claimed a certification that contains the following a statement that the fuel will result in a qualified emissions reduction when used in the production of steam a statement indicating whether cems field testing was used to determine the emissions reduction if cems field testing was not used to determine the emissions reduction a description of the method used a statement that the emissions reduction was determined or redetermined within the six months preceding the production of the fuel plr-129662-12 and that there have been no changes in the source or rank of the feedstock coal used in the process of producing refined_coal from feedstock coal since the emissions reduction was most recently determined or redetermined and a declaration signed by the taxpayer in the following form under penalties of perjury i declare that i have examined this certification and to the best of my knowledge and belief it is true correct and complete finally sec_45 of the code provides that a refined_coal_production_facility must be placed_in_service within certain timeframes for purposes of the refined_coal credit allowable with respect to refined_coal other than steel_industry_fuel the facility must be placed_in_service after date and before date section dollar_figure of notice_2010_54 provides that the year in which property is placed_in_service is determined under the principles of sec_1_46-3 of the regulations ie when the property is placed in a condition or state of readiness and availability for a specifically assigned function section dollar_figure of notice_2010_54 provides that a refined_coal_production_facility will not be treated a placed_in_service after date if more than percent of the facility’s total value the cost of the new property plus the value of the used_property is attributable to property placed_in_service on or before date notice_2010_54 also states that the irs will not issue private letter rulings relating to when a refined_coal_production_facility has been placed_in_service with respect to the first issue the process starts with several chemical additives being added to the feedstock coal prior to its combustion in a furnace the additives provide the chemical structure that results in the reduction of emissions of nitrogen oxide and mercury during combustion section dollar_figure of the notice provides generally that a qualified emissions reduction does not include any reduction attributable to mining processes or processes that would be treated as mining if performed by the mine owner or operator in the instant case the process is not a mining process further section dollar_figure of the notice clarifies sec_45 of the code and specifically provides that refined_coal includes feedstock coal mixed with additives thus additive processes that mix certain chemicals or other additives with the coal in order to achieve emissions reductions may qualify for the refined_coal production_tax_credit additionally section dollar_figure defines comparable coal as coal that is of the same rank as the feedstock coal and that has an emissions profile comparable to the emissions profile of the feedstock coal accordingly we conclude that the coal produced by using the process constitutes a refined_coal within the meaning of sec_45 of the code provided that the refined_coal i is produced from feedstock coal that is the same source or rank as the tested coal and ii satisfies the qualified_emission_reduction test stated in sec_45 of the code with respect to the second issue the emissions profile of the refined_coal product is compared to the emissions profile of either the feedstock coal or a comparable coal predominantly available in the marketplace as of date section dollar_figure of the notice provides that a comparable coal is defined as coal that is of the same rank as the feedstock coal and that has an emissions profile comparable to the emissions profile plr-129662-12 of the feedstock coal section dollar_figure of provides that a determination or redetermination of a qualified emissions reduction is valid until the occurrence of the earliest of the following events i the lapse of six months from the date of such determination or redetermination ii a change in the source or rank of the feedstock coal that occurs after the date of such determination or redetermination or iii a change in the process of producing refined_coal from the feedstock coal that occurs after the date of such determination or redetermination accordingly we conclude that provided that the feedstock coals during any determination_period are from the same coal source regions and of the same rank as the tested coal all feedstock coal that satisfies that criteria shall be treated as feedstock coal of the same source and rank for purposes of section dollar_figure of notice_2010_54 regardless of the mines from which such feedstock coal is purchased with respect to the third issue section of the notice provides that any permissible testing method provided for in the notice can be used in emission testing for any pollutant that is a taxpayer can use different testing methods for each of nitrogen oxide sulfur dioxide or mercury provided the method used for any pollutant is a permissible method section provides that an emission test establishing a qualified_emission_reduction qualifies the refined_coal for a six-month period provided there is no change in the process for producing the refined_coal or in the source or rank of the feedstock coal therefore a taxpayer must redetermine the emission reductions to qualify for the succeeding six-month period using one or more approved methods in the instant case pilot-scale combustion testing will be arranged for and there will be no reliance on any continuous emissions monitoring system or other field testing which is permitted under section dollar_figure of the notice specifically the center will conduct testing including redetermination testing at its ctf to determine the emissions reductions associated with burning the refined_coal product compared to the feedstock for purposes of qualifying the refined_coal produced at the facilities the center has conducted pilot-scale combustion tests at its ctf as documented in test rep and test rep in conducting such tests the center conducted tests on the feedstock and then mixed a separate sample of the feedstock with the additives so that it could conduct tests on the refined_coal product in each of its reports the center reported that the test results indicated that the blend of coal and additives achieved the required emissions reductions based on the foregoing we conclude that testing by the center for qualified emissions reductions as set forth in its test reports including interim reports satisfies the requirements of notice_2010_54 qualified emissions reduction through testing by the center at its combustion research facility or similar pilot-scale combustion testing facilities under notice_2010_54 may be relied upon with respect to the fourth issue section of notice_2010_54 provides in part that in the case of a redetermination required because of a change in the process of producing refined_coal from the feedstock coal the redetermination required under section dollar_figure must use a method that meets the requirements of section in any other case the redetermination requirement may be satisfied by laboratory analysis plr-129662-12 establishing that the sulfur and mercury content of both the feedstock coal and the refined_coal do not vary by more than percent from the sulfur and mercury content of the feedstock coal and refined_coal used in the most recent redetermination that meets the requirements of the notice accordingly we conclude the redetermination requirement of section dollar_figure of notice_2010_54 may be satisfied by laboratory analysis establishing that the sulfur and mercury content of both the feedstock coal and the refined_coal on average do not vary by more than percent from the sulfur and mercury content of the feedstock coal and refined_coal used in the most recent determination that meets the requirements of section dollar_figure of notice_2010_54 with respect to the fifth issue it is intended that redetermination testing will occur every six months or more frequently if required pursuant to notice_2010_54 however the center is not always able to issue the written report required by section a of notice_2010_54 within the six month period thus although redetermination testing is completed within the six month period the report may be received after the six month period nonetheless the center informed the interested parties of the results of the test on the day of the tests so that it was able to take into account the results of the redetermination within the six month period nevertheless the delay by the center in issuing its report cannot be indefinite accordingly we conclude that the results set forth by the center in a redetermination test report for production may be relied upon after the date of testing even if the report is not received until after the six-month period specified in section i of notice_2010_54 so long as the written report is received within days from the date of testing the new six month period will begin on the date the redetermination was completed not the date of receipt of the report with respect to the sixth issue we understand that the facility may be relocated to another location in the future in that case all of the essential components of the facility will be relocated and retained similarly during the life of the facility it may be necessary to replace certain major components in the event of relocation or replacement of a component there should be no change in the placed_in_service_date of the facility as long as the test described in section dollar_figure of notice_2010_54 has been met based on the foregoing we conclude that provided the facility was placed_in_service prior to date within the meaning of sec_45 relocation of the facility to a different location after date or replacement of part of the facility after that date will not result in a new placed_in_service_date for the facility for purposes of sec_45 provided the fair_market_value of the used_property is more than percent of the facility’s total fair_market_value at the time of relocation or replacement this ruling expresses no opinion about any issue not specifically addressed in this ruling letter including whether any person has sold refined_coal to an unrelated_person or when the facility was placed_in_service in particular we express or imply no opinion that the taxpayer has sufficient risks and rewards of the production activity to qualify as the producer of the refined_coal the service may challenge an attempt to transfer the credit to a taxpayer who does not qualify as a producer including plr-129662-12 transfers structured as partnerships or leases that do not also transfer sufficient risks and rewards of the production activity in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representatives a copy of this ruling must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides it may not be used or cited as precedent we are sending a copy of this letter_ruling to the industry director sincerely peter c friedman senior technician reviewer branch office of associate chief_counsel passthroughs special industries


office_of_chief_counsel internal_revenue_service memorandum number release date cc ita b01 ------------- presp-138493-07 uilc date date -------------------------------------------- to kenneth a hochman associate area_counsel ft lauderdale small_business self-employed from christopher f kane branch chief branch income_tax accounting subject florida disaster relief this memorandum responds to your request for assistance this advice may not be used or cited as precedent issue whether refunds of state taxes are taxable if the taxpayer has benefited from a deduction for the payment of such taxes in a prior tax_year conclusion generally taxpayers who receive a reimbursement of real_property tax or sales_tax and who deducted the real_property tax or sales_tax on their federal_income_tax return for a prior year must include the amount of the reimbursement in income up to the extent they benefited from the prior income_tax deduction facts residents of the state of florida may apply to their county property appraiser for a sales_tax reimbursement of up to dollar_figure if they purchased a mobile home to replace a mobile home that suffered major damage from tornados that occurred on date and date and the mobile home was their permanent residence presp-138493-07 residents of the state of florida may apply to their county property appraiser for a property_tax reimbursement of up to dollar_figure if their home was uninhabitable for days or more as a result of damage from a tornado that occurred on date discussion the following language is a suggestion for a news_release on the federal_income_tax consequences of state refunds of sales and property taxes in the state of florida tornado relief in the form of reimbursements of real_property_taxes or sales_taxes paid to a state_or_local_government may be subject_to federal_income_tax generally taxpayers who receive a reimbursement of real_property tax or sales_tax and who deducted the real_property tax or sales_tax on their federal_income_tax return for a prior year must include the amount of the reimbursement in income up to the extent they benefited from the prior income_tax deduction taxpayers who receive tornado relief during in the form of reimbursements of real_property_taxes or sales_taxes that they paid in and who deducted those property taxes or sales_taxes on a form_1040 federal_income_tax return should ensure that their tax reimbursement is properly reported when filing their federal_income_tax returns taxpayers who did not deduct real_property_taxes or sales_taxes paid during on a form_1040 are not required to report the reimbursement of those taxes on their federal_income_tax returns similarly taxpayers who properly filed a form 1040ez or form 1040a federal_income_tax return are not required to report reimbursements of real_property and sales_taxes paid during on their federal_income_tax returns taxpayers should note that if they receive a reimbursement during for a real_property tax or sales_tax paid during the amount of state and local_government tax that they may deduct on their federal_income_tax return must be reduced by the amount of the reimbursement for more information on reimbursements see the topic of recoveries under the miscellaneous income section of irs publication taxable and nontaxable income for general tax information on disasters see irs publication casualties disasters and thefts the irs publications and additional information can be found on www irs gov the irs toll-free number for general tax questions is


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-111374-00 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


internal_revenue_service number release date index no 2654-dollar_figure department of the treasury p o box ben franklin station washington dc person to contact telephone number refer reply to cc psi - plr-157950-02 date september re legend wife husband date date revocable_trust agreement child child child child state y x state z court dear this is in response to a letter dated date and subsequent correspondence requesting an extension of time under sec_301_9100-1 of the procedure and administration regulations to sever marital trust ii into three trusts pursuant to sec_26_2654-1 of the generation-skipping_transfer gst tax regulations and plr-157950-02 requesting a ruling that the subsequent severance of one of the trusts will be a qualified_severance under sec_2642 of the internal_revenue_code facts the facts submitted and representations made are as follows wife died on date in survived by husband child child child and child under the terms of wife’s revocable_trust agreement at her death the trust assets are first to be divided between marital trust i to be funded under a formula taking into account the maximum marital_deduction amount allowable in state and marital trust ii to be funded under a formula taking into account the minimum amount necessary to eliminate federal estate_tax after taking into account available credits against estate_tax and the value of marital trust i under the terms of marital trust i during his life husband is to receive all of the net_income at least quarterly as much principal as the trustee deems necessary or desirable for husband’s support comfort maintenance or benefit and any amount of principal husband requests husband is granted a testamentary general_power_of_appointment over the trust assets remaining at his death any assets that husband does not appoint pass under the provisions for distributing the remainder of marital trust ii under the terms of marital trust ii during his life husband is to receive all of the net_income at least quarterly and as much principal as the trustee deemed necessary or desirable for husband’s support comfort maintenance or benefit at husband’s death one-fifth of the remaining trust assets is to be distributed pursuant to the terms of article vii as discussed below to three designated charities and four-fifths of the remaining trust assets are to be distributed to family_trust discussed below the residue of the trust assets is to be divided into two parts one part designated as charities’ part is to be funded with one-fifth of the residue under the terms of article vii of wife’s revocable_trust agreement the charities’ part and income attributable to that part from wife’s date of death is to be distributed outright to three specified charities the remaining four-fifths of the residue is to pass to family_trust under the terms of family_trust contained in article vi b of the trust agreement during husband’s life the independent_trustee is to pay to any among husband and wife’s issue living from time to time any amount of income that trustee determines and any amount of principal that trustee deems necessary or desirable for such beneficiaries’ support comfort maintenance education or benefit at husband’s death the remaining assets of family_trust are to be held in further trust and divided into equal shares one share for each of wife’s then-living children or deceased children who are survived by issue plr-157950-02 during a child’s life the trustee can accumulate the income of each child’s share until the child reaches age when all of the income from that share must be distributed to the child at least quarterly the independent_trustee may distribute to the child as much of the principal of the child’s share as that trustee deems necessary or desirable for the child’s support comfort maintenance education or benefit upon reaching age a child may withdraw from the child’s share an aggregate of percent of the principal and upon reaching age a child may withdraw an aggregate of percent of the remaining principal the rights of withdrawal are cumulative if a child dies then that portion of the corpus with respect to which immediately prior to death the child possessed a right of withdrawal may be appointed by the child pursuant to the exercise of a testamentary general_power_of_appointment the balance of the deceased child’s share in addition to any part over which the child failed to exercise the power will be held in trust for the child’s then-living issue or if none will be distributed equally among the deceased child’s then-living siblings or if none the then-living issue of a deceased sibling when any individual among a deceased child’s issue who are income beneficiaries dies that individual’s share will be paid outright by right of representation to that individual’s then living issue or if none in equal shares to that individual’s siblings then living or if none by right of representation to the then living issue of the donor on the schedule m of wife’s form_706 united_states estate and generation- skipping transfer_tax return the executor checked the box to elect qualified_terminable_interest_property qtip treatment for marital trust ii on part line of the schedule m the executor reported the entire date of death value of marital trust ii as dollar_figurex describing this amount as the date of death value of the trust after the deduction of dollar_figurey for state estate_taxes and before the payment of federal and state estate_taxes from marital trust ii on part line of the schedule m the executor reported that dollar_figurez in federal and state estate_taxes was paid on the schedule r the executor made a reverse_qtip_election under sec_2652 for all of the property in marital trust ii and allocated wife’s dollar_figure million gst_exemption to marital trust ii because wife’s available lifetime unified_credit had been exhausted by other bequests the residuary bequests to family_trust and charities’ part were not funded at the time of wife’s death on date in husband died testate survived by child child child and child in his will husband exercised his general_power_of_appointment over marital trust i by appointing to his estate an amount equal to the estate_taxes generated by the inclusion in his gross_estate of marital trust i and marital trust ii in accordance with wife’s revocable_trust agreement the assets remaining in marital trust i after the exercise of husband’s general power were combined with the assets remaining in marital trust ii pursuant to the trust agreement one-fifth of the combined assets was distributed to charities’ part and paid outright to the three designated plr-157950-02 charities four-fifths of the combined assets were distributed to the family_trust pursuant to the trust agreement the family_trust was further divided into four equal separate trusts for child child child and child respectively each among child child child and child has attained the age of and each has exercised in full that child’s rights of withdrawal over the child’s trust thus each child has withdrawn of the principal of the child’s respective trust no discretionary distributions have been made from any of these trusts the trustees under the revocable_trust agreement propose to request an order from the appropriate state court severing marital trust ii effective as of wife’s date of death into three separate subtrusts the charities trust the trust and the trust the charities trust will consist of one-fifth of the value of marital trust ii at wife’s date of death after the payment of dollar_figurez in estate_taxes paid with respect to the wife’s estate the trust will consist of percent of the remaining four-fifths of the value of marital trust ii at wife’s date of death after the payment of such estate_taxes the trust will consist of percent of the remaining four-fifths of the value of marital trust ii at wife’s date of death after the payment of such estate_taxes each of the three subtrusts will provide that the trust assets will be held for husband’s benefit during his life under the same terms as those governing the original marital trust ii and that any distributions of principal be made pro_rata from each of the three subtrusts the charities trust will provide that at husband’s death the assets remaining in that trust will be distributed under the terms of article vii of revocable_trust agreement to the specified charities the trust will provide that at husband’s death the remaining trust assets will be divided into equal shares for each of wife’s four children and held as separate trusts during a child’s life all of the income from the child’s trust must be distributed to the child at least quarterly the independent_trustee may distribute to the child as much of the principal of the child’s trust as that trustee deems necessary or desirable for the child’s support comfort maintenance education or benefit upon reaching age a child may withdraw from the child’s trust an aggregate of one-half of the principal and upon reaching age a child may withdraw the balance a child who has a right of withdrawal but who dies before exercising it may appoint by will any part of the child’s trust subject_to that withdrawal right any part of the trust over which the child failed to exercise that power will be held in trust for the child’s then-living issue or if none will be distributed equally among the deceased child’s then-living siblings or if none the then-living issue of a deceased sibling the trust will provide that at husband’s death the remaining trust assets will be divided into equal shares for each of wife’s four children and held as separate_share_trusts during a child’s life all of the income from the child’s trust must be distributed to the child at least quarterly the independent_trustee may distribute to the child as much of the principal of the child’s trust as that trustee deems necessary or desirable for the child’s support comfort maintenance education or benefit at the child’s death the child’s trust will be divided among the deceased child’s then-living issue and held in further trust under the terms of wife’s revocable_trust agreement plr-157950-02 under the court order the distribution that was made after husband’s death to the designated charities under the terms of article vii of wife’s revocable_trust agreement to the extent attributable to marital trust ii assets will be treated as having been distributed from charities trust the assets that were distributed to child child child and child after husband’s death pursuant to the exercise of their withdrawal rights with respect to family_trust to the extent attributable to marital trust ii assets will be treated as having been distributed from the trust the balance of the marital trust ii assets that after husband’s death were distributed to the four separate trusts established for child child child and child will fund the trust which will be divided into four separate trusts one for the benefit of each of child child child and child each child’s trust will be further severed into two separate subtrusts the exempt subtrust with an inclusion_ratio of zero and the nonexempt subtrust with an inclusion_ratio of the exempt subtrust will consist of of the value of the assets of each child’ sec_49 trust on the date of severance the nonexempt subtrust will consist of the balance of the assets of each child’s trust under the court order the property comprising marital trust i at the time of husband’s death but after husband’s exercise of his testamentary_power_of_appointment will be treated as passing to a separate trust after husband’s death with respect to which husband is the transferor for gst tax purposes under sec_2652 this separate trust will then be severed effective as of husband’s date of death in the same manner as described above regarding the marital trust ii property the trustees request rulings that an extension of time is granted under sec_301_9100-1 to sever marital trust ii into three subtrusts as proposed under sec_26_2654-1 after severance of marital trust ii wife's available gst_exemption under sec_2631 is treated as allocated in total to the trust after severance of marital trust ii each of the separate trusts held for child child child and child under the trust will have an inclusion_ratio of the proposed severance of the trust into the exempt subtrust and the nonexempt subtrust will be a qualified_severance under sec_2642 thus after that severance the exempt subtrust will have an inclusion_ratio of zero and the nonexempt subtrust will have an inclusion_ratio of law and analysis plr-157950-02 sec_2601 imposes a tax on every generation-skipping_transfer gst within the meaning of subchapter_b a gst is defined under a as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the gst tax is determined by multiplying the taxable_amount by the applicable_rate sec_2641 provides that the term applicable_rate means with respect to any gst transfer the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer under sec_2642 the inclusion_ratio with any property transferred in a generation- skipping transfer is generally defined as the excess of over the applicable_fraction the applicable_fraction as defined in a is a fraction the numerator of which is the amount of gst_exemption under allocated to the trust or to property transferred in a direct_skip and the denominator is the value of the property transferred reduced by the sum of any federal estate_tax or state death_tax actually recovered from the trust attributable to such property and any charitable deduction allowable under sec_2055 or sec_2522 with respect to such property sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under c which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under a once made shall be irrevocable sec_2632 provides that any allocation by an individual of his or her gst_exemption under a may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual's estate determined with regard to extensions regardless of whether such a return is required to be filed sec_2632 provides that in general any portion of an individual's gst_exemption which has not been allocated within the time prescribed by a shall be deemed to be allocated as follows a first to property which is the subject of a direct_skip occurring at such individual's death and b second to trusts with respect to which such individual is the transferor and from which a taxable_distribution or a taxable_termination might occur at or after such individual's death under sec_2642 if a_trust is severed in a qualified_severance the trusts resulting from such severance will be treated as separate trusts for purposes of generation-skipping_transfer_tax sec_2642 provides that a qualified_severance means the division of a single trust and the creation by any means available under the governing instrument or local law of two or more trusts if the single trust was divided on a fractional basis and the terms of the new trusts in the aggregate provide for the same succession of interests of beneficiaries as are provided in the original trust if a_trust has an inclusion_ratio of greater than zero and less than a severance is a qualified_severance only if the single trust is divided into two trusts one of which receives a fractional share of the total value of all trust assets equal to the applicable_fraction of the single trust immediately before the severance in such case plr-157950-02 the trust receiving such fractional share will have an inclusion_ratio of zero and the other trust will have an inclusion_ratio of under sec_2642 a qualified_severance may be made at any time sec_2642 was enacted as part of the taxpayer relief act of and is effective in the case of severances occurring after date sec_26_2654-1 provides rules that were applicable prior to the enactment the qualified_severance rules under sec_2642 under which the severance of a_trust that is included in the transferor's gross_estate into two or more trusts will be recognized for gst tax purposes under the regulation if the governing instrument does not require severance the trust must be severed pursuant to discretionary authority granted either under the governing instrument or under local law the severance must occur or a reformation proceeding be commenced prior to the date prescribed for filing the federal estate_tax_return for the estate of the transferor the trusts must either be severed on a fractional basis or a pecuniary basis if so required by the governing instrument if severed on a fractional basis the separate trusts need not be funded with a pro_rata portion of each asset held by the undivided trust under sec_2652 for purposes of chapter the term transferor means the decedent in the case of any property subject_to tax imposed by chapter and the donor in the case of any property subject_to tax imposed by chapter the individual with respect to whom property was most recently subject_to federal estate or gift_tax is the transferor of that property for purposes of chapter sec_26_2652-1 of the generation-skipping_transfer_tax regulations thus an individual may be a transferor even though there is no transfer of property under local law at the time the federal estate or gift_tax applies sec_26_2652-1 states that for purposes of chapter a transfer is subject_to federal gift_tax if a gift_tax is imposed under sec_2501 without regard to exemptions exclusions deductions and credits under sec_26_2654-1 if there is more than one transferor with respect to a_trust the portions of the trust attributable to the different transferors are treated as separate trusts for purposes of chapter sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the plr-157950-02 taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election in this case we have determined that relief under sec_301_9100-1 should be granted consequently an extension of time is granted until days from the date of this letter for commencing the court_proceeding to sever marital trust ii as proposed under sec_26_2654-1 we also rule that if severance occurs as a result of the court_proceeding in view of the allocation of gst_exemption that was made by wife’s estate prior to promulgation of sec_26_2654-1 wife’s available gst_exemption under sec_2631 is treated as allocated in total to the trust further after severance of marital trust ii each of the separate trusts held for child child child and child under the trust will have an inclusion_ratio of finally we rule that the proposed severance of the trust into the exempt subtrust and the nonexempt subtrust will be a qualified_severance under sec_2642 thus after that severance the exempt subtrust will have an inclusion_ratio of zero and the nonexempt subtrust will have an inclusion_ratio of the election under sec_26_2654-1 must be made by attaching a statement to a copy of the schedule r filed by wife’s estate the statement must indicate that a proceeding has been commenced to sever marital trust ii and describe the manner in which marital trust ii is proposed to be severed a copy of the petition filed must also be attached further for purposes of the qualified_severance provisions under sec_2642 a statement must also be submitted pursuant to sec_2642 describing the manner in which the resulting trust is proposed to be severed in accordance with sec_2642 and with this letter a copy of this letter must also be attached to the statements and is enclosed for this purpose the statements and attachments should be filed with the cincinnati service_center -- stop internal_revenue_service cincinnati oh except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code plr-157950-02 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely heather c maloy associate chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes copy of this letter cc